UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE TRANSITION PERIOD FROM _______ TO
Commission file number 000-24389
_____________________________________
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||
(Address of Principal Executive Offices) (Zip Code)
(312 ) 766-4001
(Registrant’s telephone number, including area code)
_____________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||||||||||||
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 x No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
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 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 | o | x | ||||||||||||
| Non-accelerated filer | o | Emerging growth company | ||||||||||||
| Smaller reporting company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
There were 37,991,056 shares of Common Stock, $0.001 par value per share, outstanding at October 24, 2024.
OneSpan Inc.
Form 10-Q
For the Quarter Ended September 30, 2024
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
OneSpan Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
| September 30, | December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses | |||||||||||
| Contract assets | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net of accumulated amortization | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Deferred revenue | |||||||||||
| Accrued wages and payroll taxes | |||||||||||
| Short-term income taxes payable | |||||||||||
| Other accrued expenses | |||||||||||
| Deferred compensation | |||||||||||
| Total current liabilities | |||||||||||
| Long-term deferred revenue | |||||||||||
| Long-term lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity | |||||||||||
Preferred stock: | |||||||||||
Common stock: $ | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost: | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
3
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Product and license | $ | $ | $ | $ | |||||||||||||||||||
| Services and other | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Product and license | |||||||||||||||||||||||
| Services and other | |||||||||||||||||||||||
| Total cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating costs | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Restructuring and other related charges | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Total operating costs | |||||||||||||||||||||||
| Operating income (loss) | ( | ( | |||||||||||||||||||||
| Interest income, net | |||||||||||||||||||||||
| Other income (expense), net | ( | ( | |||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Net income (loss) per share | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Cumulative translation adjustment, net of tax | ( | ||||||||||||||||||||||
| Pension adjustment, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
For the Nine Months Ended September 30, 2024:
| Description | Common Stock | Treasury - Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax payments for stock issuances | ( | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Pension adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax payments for stock issuances | ( | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Pension adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax payments for stock issuances | ( | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Pension adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
6
For the Nine Months Ended September 30, 2023:
| Description | Common Stock | Treasury - Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax payments for stock issuances | ( | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale-securities | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Pension adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax payments for stock issuances | ( | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale-securities | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Pension adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax payments for stock issuances | ( | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | ( | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Pension adjustment, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
7
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) from operations to net cash used in operations: | |||||||||||
| Depreciation and amortization of intangible assets | |||||||||||
| Write-off of intangible assets | |||||||||||
| Write-off of property and equipment, net | |||||||||||
| Impairments of inventories, net | |||||||||||
| Deferred tax (benefit) expense | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Provision for credit losses, net | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories, net | ( | ||||||||||
| Contract assets | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Income taxes payable | ( | ||||||||||
| Accrued expenses | ( | ( | |||||||||
| Deferred compensation | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Other assets and liabilities | |||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Maturities of short-term investments | |||||||||||
| Additions to property and equipment | ( | ( | |||||||||
| Additions to intangible assets | ( | ( | |||||||||
| Cash paid for acquisition of business | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Contingent payment related to acquisition | ( | ||||||||||
| Tax payments for restricted stock issuances | ( | ( | |||||||||
| Repurchase of common stock | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | |||||||||||
| Net increase (decrease) in cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
8
OneSpan Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us,” refer to OneSpan Inc. and its subsidiaries.
Note 1 – Description of the Company and Basis of Presentation
Description of the Company
Description of the Company
OneSpan provides security, identity, electronic signature (“e-signature”) and digital workflow solutions that protect and facilitate digital transactions and agreements. The Company delivers products and services that automate and secure customer-facing and revenue-generating business processes for use cases ranging from simple transactions to workflows that are complex or require higher levels of security. The Company’s solutions help its customers ensure the integrity of the people and records associated with digital agreements, transactions, and interactions in industries including banking, financial services, healthcare, and professional services. OneSpan has operations in Austria, Australia, Belgium, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K.), and the United States (U.S.).
Business Transformation
In December 2021, the Company's Board of Directors approved a restructuring plan (the "restructuring plan") designed to advance the Company's operating model, streamline its business, improve efficiency, and enhance its capital resources. The first phase of this restructuring plan began and was substantially completed during the three months ended March 31, 2022. In May 2022, the Company's Board of Directors announced a three-year strategic transformation plan that began on January 1, 2023 (the "2022 strategic plan"). In conjunction with the 2022 strategic plan and to enable a more efficient capital deployment model, effective with the quarter ended June 30, 2022, the Company began reporting under the following two
During the quarter ended June 30, 2023, the Company determined that it was unlikely to achieve the revenue growth levels set forth in its 2022 strategic plan within the contemplated three-year timeframe. A number of factors contributed to the challenges achieving the originally planned growth levels, particularly in Digital Agreements, on the timeframes set forth in the 2022 strategic plan.
In response to these challenges, the Company modified its strategy to focus more heavily on improving profitability margins across the business. To this end, in August 2023, the Company’s Board approved cost reduction actions (the “2023 Actions”) to seek to drive higher levels of profitability while maintaining the Company’s long-term growth potential.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of OneSpan and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
9
Estimates and Assumptions
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation and Transactions
Note 2 – Summary of Significant Accounting Policies
There have been no changes to the significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 6, 2024 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.
Restricted Cash
The Company is party to lease agreements that require letters of credit to secure the obligations which totaled $0.4 0 and $0.1 million at September 30, 2024 and December 31, 2023, respectively. The restricted cash related to the letters of credit and the payroll vendor cash guarantee is recorded in "Restricted cash" on the condensed consolidated balance sheets.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures, to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not expect the adoption of the new standard to have a material impact on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision usefulness of income tax disclosures. Public business entities are required to adopt for annual fiscal periods beginning after December 15, 2024 and early adoption is permitted. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.
Note 3 – Segment Information
Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the
10
chief operating decision maker (CODM), in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.
•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include OneSpan Sign e-signature, OneSpan Notary, and Identity Verification. This segment also includes costs attributable to our transaction cloud platform.
•Security Solutions. Security Solutions consists of our broad portfolio of software products, software development kits (SDKs) and Digipass authenticator devices that are used to build applications designed to defend against attacks on digital transactions across online environments, devices, and applications. The software products and SDKs included in the Security Solutions segment are largely on-premises software products and include multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.
Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue, sales and marketing, research and development expenses, amortization expense, and restructuring and other related charges that are incurred directly by a segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not directly attributable to a particular segment.
The tables below set forth information about the Company’s reportable operating segments for the three and nine months ended September 30, 2024 and 2023, along with the items necessary to reconcile the segment information to the totals reported in the accompanying condensed consolidated financial statements.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands, except percentages) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Digital Agreements | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit (1) | $ | $ | $ | $ | |||||||||||||||||||
| Gross margin | % | % | % | % | |||||||||||||||||||
| Operating income (loss) (2) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Security Solutions | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit (3) | $ | $ | $ | $ | |||||||||||||||||||
| Gross margin | % | % | % | % | |||||||||||||||||||
| Operating income (4) | $ | $ | $ | $ | |||||||||||||||||||
| Total Company: | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| Gross margin | % | % | % | % | |||||||||||||||||||
| Statements of Operations reconciliation: | |||||||||||||||||||||||
| Segment operating income | $ | $ | $ | $ | |||||||||||||||||||
| Corporate operating expenses not allocated at the segment level | |||||||||||||||||||||||
| Operating income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Interest income, net | |||||||||||||||||||||||
| Other income (expense), net | ( | ( | |||||||||||||||||||||
| Income (loss) before income taxes | $ | $ | ( | $ | $ | ( | |||||||||||||||||
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(1) Digital Agreements gross profit includes intangible asset write-off of $0.8 million and internal capitalized software write-off of $0.7 million (see Note 7, Intangible Assets and Note 8, Property and Equipment, net ) for the nine months ended September 30, 2024.
(2) Digital Agreements operating income (loss) includes $0.6 million and $1.9 million of amortization of intangible assets expense for the three and nine months ended September 30, 2024, respectively, and $0.6 million and $1.7 million of amortization of intangible assets expense for the three and nine months ended September 30, 2023, respectively.
(3) Security Solutions gross profit includes $1.6 million of inventory impairments related to discontinuation of investments in our Digipass CX product for the nine months ended September 30, 2023 (see Note 5, Inventories, net).
The following tables illustrate the disaggregation of revenues by category and services, including a reconciliation of the disaggregated revenues to revenues from the Company’s two
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (In thousands) | Digital Agreements | Security Solutions | Digital Agreements | Security Solutions | |||||||||||||||||||
| Subscription | $ | $ | $ | $ | |||||||||||||||||||
| Maintenance and support | |||||||||||||||||||||||
| Professional services and other (1) | |||||||||||||||||||||||
| Hardware products | |||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (In thousands) | Digital Agreements | Security Solutions | Digital Agreements | Security Solutions | |||||||||||||||||||
| Subscription | $ | $ | $ | $ | |||||||||||||||||||
| Maintenance and support | |||||||||||||||||||||||
| Professional services and other (1) | |||||||||||||||||||||||
| Hardware products | |||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||||||||
The Company allocates goodwill by reporting unit, in accordance with Accounting Standards Codification (ASC) 350 – Goodwill and Other. Asset information by segment is not reported to or reviewed by the CODM to allocate resources, and therefore, the Company has not disclosed asset information for the segments.
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Note 4 – Revenue from Contracts with Customers
The following tables present the Company’s revenues disaggregated by major products and services, geographical region and timing of revenue recognition.
Revenue by major products and services
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Subscription | $ | $ | $ | $ | |||||||||||||||||||
| Maintenance and support | |||||||||||||||||||||||
| Professional services and other (1) | |||||||||||||||||||||||
| Hardware products | |||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||||||||
(1) Professional services and other includes perpetual software licenses revenue, which was less than 1 1
Revenue by location of customer
We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes North, Central, and South America; and 3) Asia Pacific (APAC), which includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands, except percentages) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| EMEA | $ | $ | $ | $ | |||||||||||||||||||
| Americas | |||||||||||||||||||||||
| APAC | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| % of Total Revenue | |||||||||||||||||||||||
| EMEA | % | % | % | % | |||||||||||||||||||
| Americas | % | % | % | % | |||||||||||||||||||
| APAC | % | % | % | % | |||||||||||||||||||
Timing of revenue recognition
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Products and licenses transferred at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Services transferred over time | |||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||||||||
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Contract balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of September 30, 2024 and December 31, 2023:
| September 30, | December 31, | ||||||||||
| (In thousands) | 2024 | 2023 | |||||||||
| Receivables, inclusive of trade and unbilled | $ | $ | |||||||||
| Contract Assets (current and non-current) | $ | $ | |||||||||
| Contract Liabilities (Deferred Revenue current and non-current) | $ | $ | |||||||||
Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings. These contract assets are transferred to receivables when the right to bill occurs over a 2 - to 5 -year period. The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services. Revenue is recognized for these services over time.
As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component when it is expected, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. Extended payment terms are not typically included in contracts with customers.
Revenue recognized during the nine months ended September 30, 2024 included $58.1 million that was included on the December 31, 2023 consolidated balance sheet in contract liabilities. Deferred revenue decreased in the same period due to timing of annual renewals.
Transaction price allocated to the remaining performance obligations
Remaining performance obligations represent the revenue that is expected to be recognized in future periods related to performance obligations that are unsatisfied, or partially unsatisfied, as of the end of the period. The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2024:
| (In thousands) | 2024 | 2025 | 2026 | Beyond 2026 | Total | ||||||||||||||||||||||||
| Future revenue related to current unsatisfied performance obligations | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The Company applies practical expedients and does not disclose information about remaining performance obligations (a) that have original expected durations of one year or less, or (b) where revenue is recognized as invoiced.
Costs of obtaining a contract
The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. The Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of up to 7 years, which is the determined benefit period based on the transfer of goods or services. The Company determined the period of benefit by taking into consideration the customer contracts, its technology and other factors, including customer attrition. Commissions are earned upon invoicing to the customer. For contracts with multiple year payment terms, because the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. Commissions and amortization expense are included in “Sales and Marketing” expense in the condensed consolidated statements of operations.
As a practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less. These costs are included in “Sales and Marketing” expense in the condensed consolidated statements of operations.
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The following tables provide information related to the capitalized costs and amortization recognized in the current and prior period within "Other current assets" and "Other assets" on the condensed consolidated balance sheets:
| (In thousands) | September 30, 2024 | December 31, 2023 | |||||||||
| Capitalized costs to obtain contracts, current | $ | $ | |||||||||
| Capitalized costs to obtain contracts, non-current | $ | $ | |||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Amortization of capitalized costs to obtain contracts | $ | $ | $ | $ | |||||||||||||||||||
Note 5 – Inventories, net
Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method.
Inventories, net consist of the following:
| (In thousands) | September 30, 2024 | December 31, 2023 | |||||||||
| Component parts (1) | $ | $ | |||||||||
| Finished goods | |||||||||||
| Total | $ | $ | |||||||||
Note 6 – Goodwill
The following table presents the changes in goodwill during the nine months ended September 30, 2024:
| (In thousands) | Digital Agreements | Security Solutions | Total | ||||||||||||||
Net balance at December 31, 2023 | $ | $ | $ | ||||||||||||||
| Foreign currency exchange rate effect | |||||||||||||||||
Net balance at September 30, 2024 | $ | $ | $ | ||||||||||||||
Note 7 – Intangible Assets
Intangible assets as of September 30, 2024 and December 31, 2023 consist of the following:
| As of September 30, 2024 | As of December 31, 2023 | ||||||||||||||||||||||||||||
| (In thousands) | Useful Life (in years) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||||
| Acquired technology | $ | $ | $ | $ | |||||||||||||||||||||||||
| Customer relationships | |||||||||||||||||||||||||||||
| Patents, trademarks, and other | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
Amortization expense was $0.6 million and $2.0 million for the three and nine months ended September 30, 2024, respectively, compared to $0.7 million and $2.0 million for the three and nine months ended September 30, 2023, respectively. Amortization expense includes cost of sales amortization expense directly related to delivering cloud subscription revenue of $0 and $0.2 million for the three and nine months ended September 30, 2024, respectively, and
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$0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. Costs are recorded in "Services and other cost of goods sold" on the condensed consolidated statements of operations.
Certain intangible assets are denominated in functional currencies besides the U.S. dollar and are subject to currency fluctuations.
In connection with the continued execution of cost reductions, during the quarter ended June 30, 2024, the Company decided to stop any incremental development investments supporting its previously acquired blockchain technology and related commercial efforts (see Note 16, Restructuring and Other Related Charges). This asset contributed no revenue as it was still in its investment stage. As a result, the Company wrote-off $0.8 million associated with the remaining unamortized value of this intangible asset in "Services and other cost of goods sold" on the condensed consolidated statements of operations for the nine months ended September 30, 2024.
There were no other write-offs or impairments of intangible assets recorded during the nine months ended September 30, 2024 and 2023.
Note 8 – Property and Equipment, net
The following table presents the major classes of property and equipment, net, as of September 30, 2024 and December 31, 2023:
| (In thousands) | September 30, 2024 | December 31, 2023 | |||||||||
| Office equipment and software | $ | $ | |||||||||
| Leasehold improvements | |||||||||||
| Furniture and fixtures | |||||||||||
| Capitalized software | |||||||||||
| Total | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense was $1.4 million and $4.1 million for the three and nine months ended September 30, 2024, respectively, compared to $1.0 million and $2.5 million for the three and nine months ended September 30, 2023, respectively. Depreciation expense includes cost of sales depreciation expense directly related to delivering cloud subscription revenue of $0.7 million and $2.2 million for the three and nine months ended September 30, 2024, respectively, and $0.4
In connection with the continued execution of cost reductions, the Company decided to stop any incremental development investments supporting its previously acquired blockchain technology and related commercial efforts. As a result, the Company wrote-off the internal capitalized software used to build out connection points for its blockchain technology and its e-signature product (see Note 16, Restructuring and Other Related Charges). The total write off amounted to $1.0 million within property and equipment, net, of which $0.7 million was recognized in "Services and other cost of goods sold" on the condensed consolidated statements of operations for the nine months ended September 30, 2024. The remaining write-off amount of $0.3 million was recognized in "Restructuring and other related charges" on the condensed consolidated statements of operations for the nine months ended September 30, 2024.
As part of the Company's decision to discontinue investments in its Digipass CX product (see Note 16, Restructuring and Other Related Charges), write-offs of $1.4 million for capitalized software were recorded in "Restructuring and other related charges" on the condensed consolidated statements of operations for the nine months ended September 30, 2023.
In conjunction with the Company's Chicago office lease abandonment (see Note 16, Restructuring and Other Related Charges), write-offs of $0.6 million for leasehold improvements and $0.1 million for office equipment and software were recorded in "Restructuring and other related charges" on the condensed consolidated statements of operations for the nine months ended September 30, 2023.
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Due to the Company's Brussels office lease termination (see Note 16, Restructuring and Other Related Charges), $0.6
Note 9 – Fair Value Measurements
The fair values of cash equivalents, accounts receivables, and accounts payable approximate their carrying amounts due to their short duration. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing base upon its own market assumptions.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies, as defined in ASC 820, Fair Value Measurements. The fair value hierarchy consists of the following three levels:
•Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
•Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived primarily from or corroborated by observable market data.
•Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The following tables summarize the Company’s financial assets by level in the fair value hierarchy, which are measured at fair value on a recurring basis, as of September 30, 2024 and December 31, 2023:
| Fair Value Measurement at Reporting Date Using | |||||||||||||||||||||||
| (In thousands) | September 30, 2024 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money Market Funds | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurement at Reporting Date Using | |||||||||||||||||||||||
| (In thousands) | December 31, 2023 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money Market Funds | $ | $ | $ | $ | |||||||||||||||||||
The Company classifies its investments in debt securities as available-for-sale. The Company reviews available-for-sale debt securities for impairments related to losses and other factors each quarter. The unrealized gains and losses on the available-for-sale debt securities were not material as of September 30, 2024 and December 31, 2023. The Company did not
Note 10 – Allowance for Credit Losses
In accordance with accounting standards updates ("ASU") No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” the Company evaluates its allowance based on expected losses rather than incurred losses, which is known as the current expected credit loss (“CECL”) model. The
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allowance is determined using the loss rate approach and is measured on a collective (pool) basis when similar risk characteristics exist. Where financial instruments do not share risk characteristics, they are evaluated on an individual basis. The allowance is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The changes in the allowance for credit losses during the nine months ended September 30, 2024 were as follows:
| (In thousands) | |||||
| Balance at December 31, 2023 | $ | ||||
| Provision for (recovery of) | ( | ||||
| Write-offs | ( | ||||
| Net foreign currency translation | |||||
| Balance at September 30, 2024 | $ | ||||
Note 11 – Leases
Operating lease cost details for the three and nine months ended September 30, 2024 and 2023 are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Building rent | $ | $ | $ | $ | |||||||||||||||||||
| Automobile rentals | |||||||||||||||||||||||
| Total net operating lease costs | $ | $ | $ | $ | |||||||||||||||||||
At September 30, 2024, the Company’s weighted average remaining lease term for its operating leases is 5.5 years, and the weighted average discount rate for its operating leases is 6 %.
During the nine months ended September 30, 2024, there were $1.9 million of operating cash payments for lease liabilities and $2.8 million of right-of-use assets obtained in exchange for new lease liabilities.
In October 2023, the Company signed a lease agreement to lease new office space in Brussels. The lease agreement consisted of a nine-year lease and commenced in the second quarter of 2024.
As part of its multi-year restructuring plan (see Note 16, Restructuring and Other Related Charges), the Company vacated its Chicago office space and abandoned the underlying leases during June 2023. The Company accrued a $1.4 million early lease termination fee, which is reflected on the condensed consolidated statements of operations for the nine months ended September 30, 2023 in "Restructuring and other related charges". The underlying lease right-of-use asset for the Chicago leased office space were written off, and a $0.3 million gain related to rent concessions and tenant improvement allowances was recorded on the condensed consolidated statement of operations for the nine months ended September 30, 2023 in "Restructuring and other related charges". In August 2024, the Company finalized its early termination agreement with the landlord to terminate and release any further obligations for either party.
In September 2023, the Company vacated its Brussels office and terminated the lease as of September 30, 2023. The Company accrued a $0.3 million early lease termination fee, which is reflected on the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 in "Restructuring and other related charges". The underlying lease right-of-use asset and lease liability for the Brussels leased office space were written off, and a $0.6
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Maturities of the Company’s operating leases as of September 30, 2024 are as follows:
| (In thousands) | As of September 30, 2024 | ||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Later years | |||||
| Less imputed interest | ( | ||||
| Total lease liabilities | $ | ||||
Note 12 – Income Taxes
The Company’s estimated annual effective tax rate for 2024, before discrete items and excluding entities with a valuation allowance, is expected to be approximately 16 %. The Company’s global effective tax rate is lower than the U.S. statutory tax rate of 21 % primarily due to the release of valuation allowances for the current year earnings for companies with a valuation allowance, offset by nondeductible expenses. In addition, the Company received a favorable response in connection with its Mutual Agreement Procedure ("MAP") request related to a Belgium audit concluded in 2020. A tax benefit of $1.2 million was recorded for the nine months ended September 30, 2024. The ultimate tax expense will depend on the mix of earnings in various jurisdictions. Income taxes, net of refunds, of $2.5 million and $4.4 million were paid during the nine months ended September 30, 2024 and 2023, respectively.
Management assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of negative evidence such as 3-year cumulative losses are considered. Management also reviews reversal patterns of temporary differences to determine if the Company would have sufficient taxable income due to the reversal of temporary differences to support the realization of deferred tax assets.
Certain operations have incurred net operating losses (NOLs), which are currently subject to a valuation allowance. These NOLs may become deductible to the extent these operations become profitable. For each of its operations, the Company evaluates whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, the Company considers evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain operations record a loss, the Company does not recognize a corresponding tax benefit, thus increasing its effective tax rate, or decreasing its effective tax rate when reporting income in a jurisdiction that has a valuation allowance. Upon determining that it is more likely than not that the NOLs will be realized, the Company will reduce the tax valuation allowances related to these NOLs, which will result in a reduction of its income tax expense and its effective tax rate in the period.
Note 13 – Long-Term Compensation Plan and Stock Based Compensation
Under the OneSpan Inc. 2019 Omnibus Incentive Plan, the Company awards restricted stock units subject to time-based vesting, restricted stock units which are subject to the achievement of future performance criteria and restricted stock units that are subject to the achievement of market conditions. The Company also awards a small amount of cash incentive awards under the 2019 Omnibus Incentive Plan, as shown in the table below.
The Company awarded 0.4 million restricted stock units during the nine months ended September 30, 2024, subject to time-based vesting. The fair value of the unissued time-based restricted stock unit grants was $5.0 million at the dates of grant and the grants are being amortized over the vesting periods of to three years .
The Company awarded restricted stock units subject to the achievement of service and future performance criteria during the nine months ended September 30, 2024, which allows for up to 0.1 million shares to be earned if the performance criteria are achieved at the target level. The fair value of these awards was $1.6 million as the dates of grant
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and the awards are being amortized over the requisite service period of to three years . The Company currently believes that approximately 100 % of these shares are expected to be earned.
The Company awarded restricted stock units subject to the achievement of service and market conditions during the three and nine months ended September 30, 2024, which allows for up to 0.3 3.7 million as the dates of grant and the awards are being amortized over the requisite service period of to four years . The Company currently believes that approximately 100 % of these shares are expected to be earned.
The following table summarizes stock-based compensation expense and other long-term incentive plan compensation expense for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Stock-based compensation (1) | $ | $ | $ | $ | |||||||||||||||||||
| Other long-term incentive plan compensation (2) | |||||||||||||||||||||||
| Total compensation | $ | $ | $ | $ | |||||||||||||||||||
(1) Stock-based compensation increased for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, and was primarily due to awards granted to the former interim CEO upon accepting the permanent role of President and CEO. For the nine months ended September 30, 2024, stock-based compensation declined as compared to the nine months ended September 30, 2023, which was largely due to the departure of the former CEO and forfeitures reversed upon his termination and timing of annual grants, lower awards granted for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, offset by awards granted to the CEO in the current quarter.
Note 14 – Earnings per Share
Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of common stock equivalents to the extent they are not anti-dilutive. Because the Company was in a net loss position for the three and nine months ended September 30, 2023, diluted net loss per share for the period excludes the effects of common stock equivalents, which are anti-dilutive.
The details of the earnings per share calculations for the three and nine months ended September 30, 2024 and 2023 are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands, except per share data) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Incremental shares with dilutive effect: | |||||||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
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Note 15 – Legal Proceedings and Contingencies
The Company is subject to certain legal proceedings and claims that have arisen in the ordinary course of business. The Company currently does not anticipate that these matters, if resolved against the Company, will have a material adverse impact on its financial results or financial condition.
The Company accrues loss contingencies when losses become probable and are reasonably estimable. As of September 30, 2024, the Company has recorded an accrual of $0.8 million for loss contingencies associated with employment-termination benefits.
Note 16 – Restructuring and Other Related Charges
In December 2021, the Company's Board approved a restructuring plan (“Plan”) designed to advance the Company’s operating model, streamline its business, improve efficiency, and enhance its capital resources. As part of the first phase of the Plan, the Company reduced headcount by eliminating positions in certain areas of its organization. The first phase of the Plan began and was substantially completed during the three months ended March 31, 2022.
In May 2022, the Board approved additional actions related to the Plan through the year ending December 31, 2025. This second phase of the Plan consisted primarily of headcount-related reductions and was designed to achieve the same objectives as the first phase of the Plan.
On August 3, 2023, the Board approved the 2023 Actions to seek to drive higher levels of Adjusted EBITDA while maintaining the Company's long-term growth potential. The Company has incurred and expects to continue to incur restructuring charges in connection with the 2023 Actions, and anticipates that these charges will consist primarily of charges related to employee transition and severance payments, with a significantly smaller amount of charges relating to vendor contract termination and rationalization actions.
In connection with the Plan (including the 2023 Actions), the Company recorded $0.7 million and $5.5 million in restructuring charges for the three and nine months ended September 30, 2024 of which less than $0.1 million and $1.5 million is recorded in "Services and other cost of goods sold" in the condensed consolidated statements of operations for the three and nine months ended September 30, 2024, respectively, and $0.7 million and $3.9 million is recorded in “Restructuring and other related charges” in the condensed consolidated statements of operations for the three and nine months ended September 30, 2024, respectively. The Company recorded $6.5 million and $13.1 million for the three and nine months ended September 30, 2023, respectively, in “Restructuring and other related charges” in the condensed consolidated statements of operations.
The main categories of charges are in the following areas:
•Employee costs – include severance, related benefits and retention pay costs incurred as a result of eliminating positions in certain areas of the Company. For the three and nine months ended September 30, 2024 employee costs were $0.7 million and $3.4 million, respectively. For the three and nine months ended September 30, 2023, employee costs were $5.1 million and $8.2 million, respectively. In total, there were approximately 330 employees, across multiple functions, whose positions were made redundant. The $1.8 million current portion of the restructuring liability at September 30, 2024 is included in "Accrued wages and payroll taxes" in the consolidated balance sheet and is expected to be paid within the next 12 months.
•Real estate rationalization costs – includes costs to align the real estate footprint with the Company’s needs. During 2023, the Company vacated its Chicago and Brussels office spaces, which resulted in the abandonment and termination of the underlying leases. As of September 30, 2024, the Company continued to accrue contract termination fees of $0.5 million for the Chicago office, which are included in "Current lease liabilities" in the condensed consolidated balance sheet and is expected to be paid
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within the next 12 months. In August 2024, the Company finalized its early termination agreement with the Chicago office landlord to terminate and release any further obligations for either party. In conjunction with the abandonment and termination of the Chicago and Brussels office leases, the underlying right-of-use assets and liabilities were written off and a $0.3 million gain and $0.1 million loss, respectively, were recorded related to rent concessions and tenant improvement allowances for restructuring. The Company wrote off $0.7 million and $0.6 million of fixed assets in its Chicago and Brussels leased office space, respectively (see Note 8, Property and Equipment, net). During 2023, the Company terminated its Brussels warehouse lease, effective July 31, 2024, and incurred settlement costs associated with the lease termination.
•Product and services optimization costs – include costs to discontinue products and services that are no longer advancing the Company's operating model. The Company made the decision to stop any incremental development investments supporting its previously acquired blockchain technology, and related commercial efforts. As a result, the Company wrote-off the related acquired technology and previously capitalized software. The Company recorded a $0.8 million write-off of intangible assets in "Services and other cost of goods sold" on the condensed consolidated statements of operations for the nine months ended September 30, 2024 (see Note 7, Intangible Assets). For capitalized software, the Company recorded a write-off of $1.0 million of property and equipment, net, of which $0.7 million was recognized in "Services and other cost of goods sold" on the condensed consolidated statements of operations for the nine months ended September 30, 2024 (see Note 8, Property and Equipment, net). The remaining write-off amount of $0.3 million was recognized in "Restructuring and other related charges" on the condensed consolidated statements of operations for the nine months ended September 30, 2024. During 2023, the Company made the decision to discontinue investments in its Digipass CX product and incurred $1.4 million of write-offs for capitalized software. The charges are recorded in "Restructuring and other related charges" on the condensed consolidated statements of operations for the nine months ended September 30, 2023 (see Note 8, Property and Equipment, net).
•Vendor rationalization costs – include costs for contractually committed services the Company is no longer utilizing. The Company recognized $0 and $0.2 million, respectively, of vendor rationalization costs for the three and nine months ended September 30, 2024, and $0.5 million and $0.7 million, respectively, for the three and nine months ended September 30, 2023. These costs are included in "Restructuring and other related charges" on the condensed consolidated statements of operations.
The table below sets forth the changes in the carrying amount of the restructuring charge liability for the nine months ended September 30, 2024.
| (In thousands) | Employee Costs | Real Estate Rationalization | Total | ||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | ||||||||||||||
| Additions | |||||||||||||||||
| Payments | ( | ( | ( | ||||||||||||||
| Balance as of September 30, 2024 | $ | $ | $ | ||||||||||||||
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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us” refer to OneSpan Inc. and its subsidiaries.
This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of OneSpan for the three- and nine-month periods ended September 30, 2024 and 2023 as well as our consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “Form 10-K”).
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of applicable U.S. securities laws, including statements regarding the outcomes we expect from our updated strategic transformation plan and cost reduction and restructuring actions approved in August 2023 and in prior periods, including the ability of those actions to allow us to accelerate Adjusted EBITDA growth and drive value creation by growing revenue efficiently and profitably; estimates concerning the timing and amount of savings, Adjusted EBITDA improvements, and/or restructuring charges that may result from our cost reduction and restructuring actions; our plans for managing our Digital Agreements and Security Solutions segments; expectations about trends in our cost of goods sold, gross margin, and sales and marketing, research and development, and general and administrative expenses; the impact of foreign currency rate fluctuations; expectations regarding sources and uses of cash; and our general expectations regarding our operational or financial performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate", "anticipate", “expect", "intend", "continue", "outlook", "may", "will", "should", "could", or "might", and other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could materially affect our business and financial results include, but are not limited to: our ability to execute our updated strategic transformation plan and cost reduction and restructuring actions in the expected timeframe and to achieve the outcomes we expect from them; unintended costs and consequences of our cost reduction and restructuring actions, including higher than anticipated restructuring charges, disruption to our operations, litigation or regulatory actions, or employee turnover; our ability to attract new customers and retain and expand sales to existing customers; our ability to successfully develop and market new product offerings and product enhancements; changes in customer requirements; the potential effects of technological changes; the loss of one or more large customers; difficulties enhancing and maintaining our brand recognition; competition; lengthy sales cycles; challenges retaining key employees and successfully hiring and training qualified new employees; security breaches or cyber-attacks; real or perceived malfunctions or errors in our products; interruptions or delays in the performance of our products and solutions; reliance on third parties for certain products and data center services; our ability to effectively manage third party partnerships, acquisitions, divestitures, alliances, or joint ventures; economic recession, inflation, and political instability; claims that we have infringed the intellectual property rights of others; changing laws, government regulations or policies; pressures on price levels; component shortages; delays and disruption in global transportation and supply chains; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; actions of activist stockholders; and exposure to increased economic and operational uncertainties from operating a global business, as well as other factors described in the “Risk Factors” section of our most recent Annual Report on Form 10-K. Our filings with the Securities and Exchange Commission (the “SEC”) and other important information can be found in the Investor Relations section of our website at investors.onespan.com. We do not have any intent, and disclaim any obligation, to update the forward-looking information to reflect events that occur, circumstances that exist or changes in our expectations after the date of this Form 10-Q, except as required by law.
Our website address is included in this Quarterly Report on Form 10-Q as an inactive textual reference only.
Overview
OneSpan provides security, identity, electronic signature (“e-signature”) and digital workflow solutions that protect and facilitate digital transactions and agreements. Through our two business units, Security Solutions and Digital Agreements, we deliver products and services that automate and secure customer-facing and revenue-generating business processes for use cases ranging from simple transactions to workflows that are complex or require higher levels of security.
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Our solutions help our customers ensure the integrity of the people and records associated with digital agreements, transactions, and interactions in industries including banking, financial services, healthcare, and professional services. We are trusted by global blue-chip enterprises, including more than 60% of the world’s 100 largest banks, and we process millions of digital agreements and billions of transactions in more than 100 countries annually.
We offer our products primarily through a subscription licensing model and provide multiple deployment options, including cloud-based and on-premises solutions. Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers.
Business Transformation
We are currently in the midst of a business transformation. In December 2021, our board of directors (“Board” or “Board of Directors”) approved a restructuring plan (the “restructuring plan”) designed to advance our operating model, streamline our business, improve efficiency, and enhance our capital resources. The first phase of this restructuring plan began and was substantially completed during the three months ended March 31, 2022. In May 2022, our Board approved additional actions related to the restructuring plan and we announced a three-year strategic transformation plan that began on January 1, 2023 (the "2022 strategic plan"). In conjunction with the 2022 strategic plan and to enable a more efficient capital deployment model, effective with the quarter ended June 30, 2022, we began reporting under the following two lines of business, which are our reportable operating segments: Digital Agreements and Security Solutions.
•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include OneSpan Sign e-signature, OneSpan Notary, and Identity Verification. This segment also includes costs attributable to our transaction cloud platform.
•Security Solutions. Security Solutions consists of our broad portfolio of software products, software development kits (SDKs) and Digipass authenticator devices that are used to build applications designed to defend against attacks on digital transactions across online environments, devices, and applications. The software products and SDKs included in the Security Solutions segment are largely on-premises software products and include multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.
When we began the 2022 strategic plan, we expected that we would manage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flow given its more modest growth profile.
During the quarter ended June 30, 2023, we determined that we were unlikely to achieve the revenue growth levels set forth in our 2022 strategic plan within the contemplated three-year timeframe. A number of factors contributed to the challenges achieving the originally planned growth levels, particularly in Digital Agreements, on the timeframes set forth in the 2022 strategic plan, including: macroeconomic uncertainties in the banking and financial services segments, which resulted in longer sales cycles and greater price sensitivity on the part of customers; increasing maturity and competitiveness in the market for e-signature solutions; limited awareness of our brand among buyers of e-signature tools; and higher pricing aggressiveness from competitors. These and other factors made it more difficult than we originally anticipated to build our Digital Agreements sales pipeline, generate demand for our Digital Agreements solutions through marketing efforts, and improve our sales force productivity levels.
In response to these challenges in growing our Digital Agreements revenue, we modified our strategy to focus more heavily on improving Adjusted EBITDA margin across the business. To this end, in August 2023, our Board approved cost reduction actions (the “2023 Actions”) to seek to drive higher levels of Adjusted EBITDA while maintaining our long-term growth potential. We intend to continue to pursue the overall strategy set forth in the 2022 strategic plan, including driving efficient growth in Digital Agreements and managing Security Solutions for modest growth and cash flow, while implementing adjustments to our operating model that are intended to achieve greater operational efficiency and strengthen our ability to create value for our shareholders.
Our updated strategy, the 2023 Actions and other cost reduction actions implemented under our restructuring plan originally adopted in December 2021 involve numerous risks and uncertainties. For additional details please see Item 1A, Risk Factors, below and Part 1, Item 1A, Risk Factors in our Form 10-K.
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Restructuring Plan
In December 2021, our Board approved the restructuring plan discussed above. The first phase of this restructuring plan began and was substantially completed during the three months ended March 31, 2022. In May 2022, our Board approved additional actions related to the restructuring plan through the year ending December 31, 2025.
On August 3, 2023, our Board of Directors approved the 2023 Actions. We have incurred and expect to continue to incur restructuring charges in connection with the 2023 Actions, most of which are related to employee transition and severance payments and employee benefits, with a significantly smaller amount of charges related to vendor contract termination and rationalization actions. We currently expect that we will incur restructuring charges of approximately $0.5 million to $1.5 million related to the 2023 Actions in future periods, substantially all of which relate to employee transition and severance payments.
Actions taken under the restructuring plan consist of the following:
•We have reduced headcount by eliminating approximately 330 redundant positions and incurred severance, related benefits, and retention pay costs.
•In June 2023, we vacated our Chicago leased office space and abandoned the underlying lease, and, in future periods, plan to further align our real estate footprint with our operating needs. We recorded lease termination costs, write-offs related to the vacated location's fixed assets, and a gain on the underlying right-of-use asset and liability write-off. In August 2024, we finalized our early termination agreement with the landlord to terminate and release any further obligations for either party.
•In June 2023, we made the decision to discontinue investments in our Digipass CX product, which resulted in write-offs of capitalized software.
•In September 2023, we vacated our Brussels office space and terminated the lease. We recorded lease termination costs and a loss on the underlying right-of-use asset and liability write-off.
•We evaluated our vendor spend and updated or eliminated service providers in instances where there are cost-saving opportunities and where redundancies exist. Vendor rationalization costs include costs for contractually committed services we are no longer utilizing.
•In June 2024, we made the decision to stop any incremental development investments supporting our previously acquired blockchain technology and related commercial efforts, which resulted in write-offs of such acquired technology and related capitalized software.
We plan to incrementally take actions under the restructuring plan until December 31, 2025, when the plan terminates.
We completed a majority of the workforce reductions planned as part of the 2023 Actions by the end of 2023, and we expect that the remaining workforce reductions will occur by the end of 2024. The vendor contract component of the 2023 Actions is planned for completion by the end of 2025.
Components of Operating Results
Revenue
We generate revenue from the sale of our subscriptions, maintenance and support, professional services, and Digipass hardware products. We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments, reflecting the transactional nature of significant parts of our business.
•Product and license revenue. Product and license revenue includes Digipass hardware products and software licenses, which are provided on a perpetual or term basis subscription model.
•Service and other revenue. Service and other revenue includes solutions that are provided on a cloud-based subscription model, maintenance and support, and professional services.
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Cost of Goods Sold
Our total cost of goods sold consists of cost of product and license revenue and cost of service and other revenue. We expect our cost of goods sold to increase in absolute dollars as our business grows, although it may fluctuate as a percentage of total revenue from period to period.
•Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs, including personnel costs, production costs, freight, and inventory write-off adjustments for discontinued products and services.
•Cost of service and other revenue. Cost of service and other revenue primarily consists of costs related to cloud subscription solutions, including personnel and equipment costs, depreciation, amortization, and personnel costs of employees providing professional services and maintenance and support.
Gross Profit
Gross profit is revenue net of the cost of goods sold. Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including our average selling price, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.
Operating Expenses
Our operating expenses are generally based on anticipated revenue levels and fixed over short periods of time. As a result, small variations in revenue may cause significant variations in the period-to-period comparisons of operating income or operating income as a percentage of revenue.
Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 50% and 60% of our operating expenses. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive.
Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates during the three months ended September 30, 2024 compared to the comparable prior year period resulted in an increase in operating expenses of less than $0.1 million. We estimate the change in currency rates during the nine months ended September 30, 2024 compared to the comparable prior year period resulted in an increase in operating expenses of less than $0.1 million.
The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. Long-term incentive plan compensation expense includes both stock-based incentives and an immaterial amount of cash-based incentives. During the three months ended September 30, 2024 and 2023, operating expenses included $2.7 million and $1.9 million, respectively, of expenses related to stock-based and long-term incentive plans. During the nine months ended September 30, 2024 and 2023, operating expenses included $6.4 million and $10.4 million, respectively, of expenses related to stock-based and long-term incentive plans.
Our operating expenses consist of:
•Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. Our sales and marketing expenses may fluctuate as a percentage of total revenue.
•Research and development. Research and development expenses consist primarily of personnel costs and long-term incentive compensation. Our research and development expenses may fluctuate as a percentage of total revenue.
•General and administrative. General and administrative expenses consist primarily of personnel costs, legal, consulting and other professional fees, and long-term incentive compensation. Our general and administrative expenses may fluctuate as a percentage of total revenue.
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•Amortization of intangible assets. Acquired intangible assets are amortized over their respective amortization periods and are periodically evaluated for impairment or changes in estimated useful life.
•Restructuring and related charges. Restructuring and other related charges consist of employee costs which include severance, retention pay, and related benefits incurred from headcount reductions as part of our restructuring plan, including the 2023 Actions; real estate rationalization costs incurred to optimize our real estate footprint which include lease contract termination costs, asset impairment charges, and lease right-of-use asset and lease liability write-off gains or losses; product and services optimization costs incurred to advance our operating model which include write-offs of capitalized software assets no longer in use; write-offs of acquired blockchain technology and related capitalized software due to the discontinuation of incremental development investments and related commercial efforts; and vendor rationalization costs for contractually committed services the Company is no longer utilizing. We plan to incrementally incur additional restructuring costs through December 31, 2025, when the restructuring plan terminates and the 2023 Actions are completed.
Segment Results
Segment operating income (loss) consists of the revenue generated by a segment, less the direct costs of revenue, sales and marketing, research and development amortization and any impairment charges that are incurred directly by a segment. Unallocated corporate costs include general and administrative expense and other company-wide costs that are not attributable to a particular segment. Financial results by reportable operating segment are included below under Results of Operations.
Interest Income, Net
Interest income, net, consists of income earned on our cash equivalents. Our cash equivalents are invested in short-term instruments at current market rates.
Other Income (Expense), Net
Other income (expense), net, primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and development in those countries and other miscellaneous non-operational expenses.
Income Taxes
Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). The majority of our IP in our Security Solutions business is owned by two subsidiaries, one in the U.S. and one in Switzerland. The e-signature IP in our Digital Agreements business is owned by a subsidiary in Canada. These subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to the IP owners on either a percentage of revenue or on a cost plus basis or both. Under this structure, the earnings of our service provider subsidiaries are relatively constant. These service provider companies tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings flow to the IP owners.
As the majority of our earnings are generated outside of the U.S., our consolidated effective tax rate is strongly influenced by the effective tax rate of our foreign operations. Changes in the effective rate related to foreign operations reflect changes in the geographic mix of earnings and the tax rates in each of the countries in which it is earned. The statutory tax rate for the primary foreign tax jurisdictions ranges from 11% to 35%.
Impact of Currency Fluctuations
During the three months ended September 30, 2024 and 2023, we generated approximately 81% and 83% of our revenues and incurred approximately 58% and 61% of our operating expenses, respectively, outside of the U.S. During the nine months ended September 30, 2024 and 2023, we generated approximately 83% and 82% of our revenues and incurred approximately 60% and 58% of our operating expenses, respectively, outside of the U.S. As a result, changes in currency exchange rates, especially the Euro exchange rate and the Canadian Dollar exchange rate, can have a significant impact on our revenue and operating expenses.
While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the nine months ended September 30, 2024 was denominated in U.S. Dollars. For the nine months ended
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September 30, 2024, approximately 55% of our revenue was denominated in U.S. Dollars, 41% was denominated in Euros and 4% was denominated in other currencies. For the nine months ended September 30, 2023, approximately 52% of our revenue was denominated in U.S. Dollars, 43% was denominated in Euros and 5% was denominated in other currencies.
In general, to minimize the net impact of currency fluctuations on operating income, we attempt to denominate an amount of billings in a currency such that it would provide a natural hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. If the amount of our revenue in Europe denominated in Euros continues as it is now or declines, we may not be able to balance fully the exposures of currency exchange rates on revenue and operating expenses.
The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar. Accordingly, assets and liabilities of our foreign subsidiaries are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates generated a comprehensive gain of $5.9 million and $3.8 million during the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2023, translation adjustments arising from differences in exchange rates generated a comprehensive loss of $2.6 million and comprehensive gain of $0.1 million, respectively.
Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other (expense) income, net. Foreign exchange transaction losses aggregated $2.0 million and $1.8 million for the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2023, losses resulting from foreign currency transactions were $0.1 million and $0.5 million, respectively.
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Results of Operations
The following table sets forth, for the periods indicated, selected segment and condensed consolidated operating results.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands, except percentages) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Digital Agreements | |||||||||||||||||||||||
| Revenue | $ | 15,405 | $ | 13,012 | $ | 45,280 | $ | 36,426 | |||||||||||||||
| Gross profit | $ | 11,031 | $ | 9,808 | $ | 30,664 | $ | 26,839 | |||||||||||||||
| Gross margin | 72 | % | 75 | % | 68 | % | 74 | % | |||||||||||||||
Operating income (loss) | $ | 3,419 | $ | (4,666) | $ | 3,000 | $ | (17,820) | |||||||||||||||
| Security Solutions | |||||||||||||||||||||||
| Revenue | $ | 40,837 | $ | 45,826 | $ | 136,728 | $ | 135,752 | |||||||||||||||
| Gross profit | $ | 30,517 | $ | 30,861 | $ | 98,620 | $ | 87,410 | |||||||||||||||
| Gross margin | 75 | % | 67 | % | 72 | % | 64 | % | |||||||||||||||
Operating income | $ | 20,200 | $ | 15,673 | $ | 66,770 | $ | 39,827 | |||||||||||||||
| Total Company: | |||||||||||||||||||||||
| Revenue | $ | 56,242 | $ | 58,838 | $ | 182,008 | $ | 172,178 | |||||||||||||||
| Gross profit | $ | 41,548 | $ | 40,669 | $ | 129,284 | $ | 114,249 | |||||||||||||||
| Gross margin | 74 | % | 69 | % | 71 | % | 66 | % | |||||||||||||||
| Statements of Operations reconciliation: | |||||||||||||||||||||||
| Segment operating income | $ | 23,619 | $ | 11,007 | $ | 69,770 | $ | 22,007 | |||||||||||||||
| Corporate operating expenses not allocated at the segment level | 12,367 | 15,801 | 36,771 | 52,695 | |||||||||||||||||||
Operating income (loss) | 11,252 | (4,794) | 32,999 | (30,688) | |||||||||||||||||||
Interest income, net | 624 | 587 | 1,246 | 1,675 | |||||||||||||||||||
Other income (expense), net | (1,915) | 353 | (1,293) | 342 | |||||||||||||||||||
Income (loss) before income taxes | $ | 9,961 | $ | (3,854) | $ | 32,952 | $ | (28,671) | |||||||||||||||
Revenue
Revenue by products and services allocated to the segments for the three and nine months ended September 30, 2024, and 2023 is as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (In thousands) | Digital Agreements | Security Solutions | Digital Agreements | Security Solutions | |||||||||||||||||||
| Subscription | $ | 15,045 | $ | 18,603 | $ | 11,807 | $ | 14,378 | |||||||||||||||
| Maintenance and support | 327 | 9,317 | 995 | 11,276 | |||||||||||||||||||
| Professional services and other (1) | 33 | 820 | 210 | 1,333 | |||||||||||||||||||
| Hardware products | — | 12,097 | — | 18,839 | |||||||||||||||||||
| Total Revenue | $ | 15,405 | $ | 40,837 | $ | 13,012 | $ | 45,826 | |||||||||||||||
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| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (In thousands) | Digital Agreements | Security Solutions | Digital Agreements | Security Solutions | |||||||||||||||||||
| Subscription | $ | 43,641 | $ | 59,642 | $ | 32,641 | $ | 46,485 | |||||||||||||||
| Maintenance and support | 1,321 | 29,125 | 3,121 | 31,914 | |||||||||||||||||||
| Professional services and other (1) | 318 | 3,548 | 664 | 4,002 | |||||||||||||||||||
| Hardware products | — | 44,413 | — | 53,351 | |||||||||||||||||||
| Total Revenue | $ | 45,280 | $ | 136,728 | $ | 36,426 | $ | 135,752 | |||||||||||||||
(1) Professional services and other includes perpetual software licenses revenue, which was less than 1% of total revenue for both the three and nine months ended September 30, 2024 and approximately 1% of total revenue for both the three and nine months ended September 30, 2023.
Total revenue decreased by $2.6 million, or 4%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Changes in foreign exchange rates as compared to the same period in 2023 favorably impacted revenue by approximately $0.2 million. For the nine months ended September 30, 2024, revenue increased by $9.8 million, or 6%, compared to the nine months ended September 30, 2023. Changes in foreign exchange rates as compared to the same period in 2023 favorably impacted revenue by approximately $0.3 million.
Additional information on our revenue by segment follows.
•Digital Agreements revenue increased $2.4 million, or 18%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, Digital Agreements revenue increased $8.9 million, or 24%. The increase in Digital Agreements revenue for both periods was primarily attributable to higher cloud subscription revenue from existing customer expansions and new logos. Changes in foreign currency rates compared to the same period in 2023 favorably impacted Digital Agreements revenue by less than $0.1 million for the three months ended September 30, 2024. Changes in foreign currency rates compared to the same period in 2023 favorably impacted Digital Agreements revenue by less than $0.1 million for the nine months ended September 30, 2024.
•Security Solutions revenue decreased $5.0 million, or approximately 11%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease in Security Solutions revenue was primarily attributable to lower volumes of hardware devices sold, and lower maintenance revenue due to our transition from legacy perpetual contracts to subscription licenses, partially offset by an increase in on-premises subscription revenue specific to authentication solution products from existing customer expansions. Changes in foreign exchange rates for the three months ended September 30, 2024 compared to the same period in 2023 favorably impacted Security Solutions revenue by $0.1 million. For the nine months ended September 30, 2024, Security Solutions revenue increased $1.0 million, or 1%, which was driven by an increase in on-premises subscription revenue from existing customer expansion and higher year over year renewals, partially offset by a decline in maintenance revenue, and lower volumes of hardware devices sold. Changes in foreign exchange rates for the nine months ended September 30, 2024 compared to the same period in 2023 favorably impacted Security Solutions revenue by $0.2 million.
Our revenue is heavily influenced by the timing of orders and shipments, as well as the timing of customer renewals in any given period. As a result, we believe that the overall strength of our business is best evaluated over a longer term where the impact of transactions in any given period is not as significant as in a quarter-over-quarter comparison.
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Revenue by Geographic Regions: We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes sales in North, Central, and South America; and 3) Asia Pacific (APAC), which also includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands, except percentages) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| EMEA | $ | 22,342 | $ | 26,233 | $ | 79,377 | $ | 80,592 | |||||||||||||||
| Americas | 22,106 | 19,999 | 64,549 | 58,828 | |||||||||||||||||||
| APAC | 11,794 | 12,606 | 38,082 | 32,758 | |||||||||||||||||||
| Total revenue | $ | 56,242 | $ | 58,838 | $ | 182,008 | $ | 172,178 | |||||||||||||||
| % of Total Revenue | |||||||||||||||||||||||
| EMEA | 40 | % | 45 | % | 44 | % | 47 | % | |||||||||||||||
| Americas | 39 | % | 34 | % | 35 | % | 34 | % | |||||||||||||||
| APAC | 21 | % | 21 | % | 21 | % | 19 | % | |||||||||||||||
For the three months ended September 30, 2024, revenue generated in EMEA was $3.9 million, or 15%, lower than the same period in 2023, primarily due to a decrease in hardware volumes from existing customers, and the impact of an end-of-life product. For the nine months ended September 30, 2024, revenue generated in EMEA was $1.2 million, or 2%, lower than the same period in 2023, primarily due to a decrease in hardware volumes sold, the impact of end-of-life products, partially offset by higher on-premises subscription revenue from existing customer expansions in authentication solution products.
For the three months ended September 30, 2024, revenue generated in the Americas was $2.1 million, or 11%, higher than the three months ended September 30, 2023. The increase was primarily driven by an increase in Digital Agreements revenue. For the nine months ended September 30, 2024, revenue generated in the Americas was $5.7 million, or 10%, higher than the same period in 2023, primarily due to an increase in Digital Agreements e-signature revenue and software authentication products, partially offset by lower hardware revenue.
For the three months ended September 30, 2024, revenue generated in APAC was $0.8 million, or 6%, lower than the three months ended September 30, 2023, largely due to a decrease in hardware volumes sold. For the nine months ended September 30, 2024, revenue generated in APAC was $5.3 million, or 16%, higher than the same period in 2023, primarily due to customer expansion in authentication and mobile security solutions products.
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Cost of Goods Sold and Gross Margin
The following table presents cost of goods sold for our products and services for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands, except percentages) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Product and license | $ | 7,394 | $ | 11,004 | $ | 28,347 | $ | 36,330 | |||||||||||||||
| Services and other | 7,300 | 7,165 | 24,377 | 21,599 | |||||||||||||||||||
| Total cost of goods sold | $ | 14,694 | $ | 18,169 | $ | 52,724 | $ | 57,929 | |||||||||||||||
| Gross profit | $ | 41,548 | $ | 40,669 | $ | 129,284 | $ | 114,249 | |||||||||||||||
| Gross margin | |||||||||||||||||||||||
| Product and license | 74 | % | 65 | % | 71 | % | 62 | % | |||||||||||||||
| Services and other | 74 | % | 74 | % | 71 | % | 72 | % | |||||||||||||||
| Total gross margin | 74 | % | 69 | % | 71 | % | 66 | % | |||||||||||||||
The cost of product and license revenue decreased by $3.6 million, or 33%, and $8.0 million, or 22% during the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023. The decrease in cost of product and license revenue for both the three and nine months ended September 30, 2024 was driven primarily by lower hardware revenue and lower third-party license costs, and the $1.6 million inventory non-cash impairment recognized in the prior year in conjunction with the discontinuation of investments in our Digipass CX product.
The cost of services and other revenue increased by $0.1 million, or 2%, and $2.8 million, or 13%, during the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023. The increase in cost of services for both three and nine months ended September 30, 2024 was largely due to higher cloud platform costs related to higher volume usage and the write-off associated with acquired technology and capitalized internally-developed software costs due to the decision to discontinue investment in blockchain technology for the nine months ended September 30, 2024.
Gross profit increased $0.9 million, or 2%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Gross profit margin was 74% for the three months ended September 30, 2024, compared to 69% for the three months ended September 30, 2023. Gross profit increased $15.0 million, or 13% during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Gross profit margin was 71% for the nine months ended September 30, 2024, compared to 66% for the nine months ended September 30, 2023. The change in profit margin was driven primarily by higher software versus hardware revenue mix and the changes in costs of revenues discussed above.
The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies, including the Euro. The impact of changes in currency rates are estimated to have had an favorable impact on overall cost of goods sold of $0.3 million for both the three and nine months ended September 30, 2024. Had currency rates during the three months ended September 30, 2024 been equal to rates in the comparable period of 2023, the gross profit margin would have been less than 1 percentage point lower, driven by the favorable currency rate impact to revenue. Had currency rates during the nine months ended September 30, 2024 been equal to rates in the comparable period of 2023, the gross profit margin would have been less than 1 percentage point lower, driven by the favorable currency rate impact to revenue.
Additional information on our gross profit by segment follows.
•Digital Agreements gross profit increased $1.2 million, or 12%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Digital Agreements gross margin for the three months ended September 30, 2024 was 72%, compared to 75% for the three months
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ended September 30, 2023. For the nine months ended September 30, 2024, Digital Agreements gross profit increased $3.8 million, or 14%, compared to the comparable period in 2023. Digital Agreements gross margin for the nine months ended September 30, 2024 was 68%, compared to 74% for the nine months ended September 30, 2023. The increase in gross profit for both periods was driven by higher overall revenue, partially offset by higher cloud platform costs and higher depreciation of capitalized software costs. The decrease in gross margin for both periods is primarily the result of an increase in depreciation of capitalized software costs and the write-off of the previously capitalized software for the nine months ended September 30, 2024 only, as compared to prior year.
•Security Solutions gross profit decreased $0.3 million, or 1%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Security Solutions gross margin for the three months ended September 30, 2024 was 75%, compared to 67% for the three months ended September 30, 2023. The increase in gross margin was primarily due to higher software versus hardware revenue mix, which has a direct correlation to gross profit. For the nine months ended September 30, 2024, Security Solutions gross profit increased $11.2 million, or 13%, compared to the comparable period in 2023. The increase in gross profit was driven by an increase in subscription revenue, lower third-party license costs, and inventory impairments recognized in the prior year period. Security Solutions gross margin for the nine months ended September 30, 2024 was 72%, compared to 64% for the nine months ended September 30, 2023. The increase in gross margin was primarily due to more favorable revenue mix between software and hardware, more favorable customer mix in our hardware business, lower third-party license costs, and inventory impairments recognized in the prior year period.
Operating Expenses
Operating expenses decreased by $15.2 million, or 33%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. For the three months ended September 30, 2024, changes in foreign exchange rates negatively impacted operating expenses by less than $0.1 million as compared to the same period in 2023. Operating expenses decreased by $48.7 million, or 34%, during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. For the nine months ended September 30, 2024, changes in foreign exchange rates negatively impacted operating expenses by less than $0.1 million as compared to the same period in 2023.
The following table presents the breakout of operating expenses by category as of September 30, 2024 and 2023:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Operating costs | |||||||||||||||||||||||
| Sales and marketing | $ | 10,138 | $ | 16,664 | $ | 33,574 | $ | 56,388 | |||||||||||||||
| Research and development | 7,533 | 10,133 | 24,133 | 29,686 | |||||||||||||||||||
| General and administrative | 11,343 | 11,559 | 32,907 | 44,038 | |||||||||||||||||||
| Restructuring and other related charges | 697 | 6,524 | 3,905 | 13,076 | |||||||||||||||||||
| Amortization of intangible assets | 585 | 583 | 1,766 | 1,749 | |||||||||||||||||||
| Total operating costs | $ | 30,296 | $ | 45,463 | $ | 96,285 | $ | 144,937 | |||||||||||||||
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended September 30, 2024 decreased by $6.5 million, or 39%, compared to the three months ended September 30, 2023. Sales and marketing expenses for the nine months ended September 30, 2024 decreased by $22.8 million, or 40%, compared to the nine months ended September 30, 2023. The decreases were driven primarily by lower employee compensation costs which included decreases in commissions, salaries, and benefits as a result of headcount reductions, along with decreased consulting and marketing costs related to our strategic plan, and lower travel and entertainment expenses.
Average full-time sales, marketing, support, and operating employee headcount for the three and nine months ended September 30, 2024 was 148 and 166, respectively, compared to 336 and 357 for the three and nine months ended
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September 30, 2023, respectively. Average headcount was 56% and 54% lower for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023.
Research and Development Expenses
Research and development expenses for the three months ended September 30, 2024 decreased by $2.6 million, or 26%, compared to the three months ended September 30, 2023. Research and development expenses for the nine months ended September 30, 2024 decreased by $5.6 million, or 19%, compared to the nine months ended September 30, 2023. The decrease in expense was driven primarily by lower compensation costs as a result of lower headcount and lower consulting expenses related to our strategic transformation plan, partially offset by increased bonus expense accruals.
Average full-time research and development employee headcount for the three and nine months ended September 30, 2024 was 228 and 239, respectively, compared to 305 and 313 for the three and nine months ended September 30, 2023, respectively. Average headcount was 25% and 24% lower for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2024 decreased by $0.2 million, or 2%, compared to the three months ended September 30, 2023. General and administrative expenses for the nine months ended September 30, 2024 decreased by $11.1 million, or 25%, compared to the nine months ended September 30, 2023. The decrease in expense for both the three and nine months ended September 30, 2024 as compared to the prior year period was largely driven by lower employee compensation costs, which included a decrease in salaries, payroll taxes, and related benefits as a result of lower headcount. Also, stock-based compensation expense was higher during the quarter due to awards granted to the former interim President and CEO upon accepting the permanent role of President and CEO, but was lower year over year due to lower headcount, including the termination of our former CEO, and lower annual equity awards granted to employees. These decreases were offset by higher bonus accruals and other non-recurring expenses.
Average full-time general and administrative employee headcount for the three and nine months ended September 30, 2024 was 95 and 102, respectively, compared to 136 and 144 for the three and nine months ended September 30, 2023, respectively. Average headcount was 30% and 29% lower for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023.
Restructuring and Other Related Charges
Restructuring and other related charges for the three months ended September 30, 2024 decreased by $5.8 million, or 89%, compared to the three months ended September 30, 2023, driven by more significant headcount reduction and the termination of the Brussels lease during the three months ended September 30, 2023. Restructuring and other related charges for the nine months ended September 30, 2024 decreased by $9.2 million, or 70%, compared to the nine months ended September 30, 2023. The decrease was also driven by more significant headcount, termination of the Brussels and Chicago leases, and discontinuing investments in our Digipass CX product during the nine months ended September 30, 2023, partially offset by capitalized software and acquired technology write-offs incurred in 2024.
Amortization of Intangible Assets
Amortization of intangible assets expense for the three months ended September 30, 2024 increased by less than $0.1 million, or 0%, compared to the three months ended September 30, 2023. Amortization of intangible assets expense for the nine months ended September 30, 2024 increased by less than $0.1 million, or 1%, compared to the nine months ended September 30, 2023.
Segment Operating Income (Loss)
Information on our operating income (loss) by segment follows.
•Digital Agreements operating income for the three and nine months ended September 30, 2024 was $3.4 million and $3.0 million, respectively, compared to an operating loss of $4.7 million and $17.8 million, respectively, for the three and nine months ended September 30, 2023. The improvement in operating income for the three and nine months ended September 30, 2024 was driven by higher overall revenue, lower sales
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and marketing expenses and research and development expenses, including lower employee compensation costs, marketing expenses, travel and entertainment costs, and lower restructuring expenses, partially offset by the write-off of our acquired blockchain technology and related capitalized software for the nine months ended September 30, 2024.
•Security Solutions operating income for the three months ended September 30, 2024 was $20.2 million, which was a year-over-year increase of $4.5 million, or 29%, from the three months ended September 30, 2023. Operating income for the nine months ended September 30, 2024 was $66.8 million, which was a year-over-year increase of $26.9 million, or 68% from the nine months ended September 30, 2023. The increase was largely due to higher subscription revenue and lower sales and marketing expenses, research and development expenses, and restructuring expenses.
Interest income, net
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Interest income, net | $ | 624 | $ | 587 | $ | 1,246 | $ | 1,675 | |||||||||||||||
Interest income, net, was $0.6 million for both three months ended September 30, 2024 and 2023. Interest income, net, was $1.2 million for the nine months ended September 30, 2024 compared to $1.7 million for the nine months ended September 30, 2023. The decrease in interest income is due to lower average excess cash invested in the periods compared to last year.
Other Income (Expense), net
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Other income (expense), net | $ | (1,915) | $ | 353 | $ | (1,293) | $ | 342 | |||||||||||||||
Other income (expense), net, primarily includes subsidies received from foreign governments in support of our research and development in those countries, exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, and other miscellaneous non-operational, non-recurring expenses.
Other income (expense), net, for the three and nine months ended September 30, 2024 was $(1.9) million and $(1.3) million, respectively, and consisted mostly of transaction losses due to the unfavorable US dollar rate against other functional currencies. Other income, net, for both the three and nine months ended September 30, 2023 was approximately $0.4 million, and consisted mostly of subsidies received from foreign governments.
Provision for Income Taxes
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Provision for income taxes | $ | 1,688 | $ | 279 | $ | 4,658 | $ | 1,569 | |||||||||||||||
We recorded income tax expense of $1.7 million and $0.3 million for the three months ended September 30, 2024 and 2023, respectively. Higher income tax expense for the three months ended September 30, 2024 was primarily attributable to an increase in income before taxes. We recorded income tax expense of $4.7 million and $1.6 million for the nine months ended September 30, 2024 and 2023, respectively. Higher income tax expense for the nine months ended September 30, 2024 was primarily attributable to an increase in income before taxes, offset by a $1.2 million benefit recorded related to a Belgium audit (see Note 12, Income Taxes).
Liquidity and Capital Resources
At September 30, 2024, we had cash and cash equivalent balances of $77.5 million. Our cash and cash equivalents balance includes money market funds with maturities at acquisition of less than three months.
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At December 31, 2023, we had cash and cash equivalent balances of $43.0 million.
We are party to lease agreements that require letters of credit to secure the obligations which totaled $0.4 million at both September 30, 2024 and December 31, 2023. Additionally, we maintained a cash guarantee with a payroll vendor in the amount of $0 and $0.1 million at September 30, 2024 and December 31, 2023, respectively. The restricted cash related to the letters of credit and the payroll vendor cash guarantee is recorded in "Restricted cash" on the condensed consolidated balance sheets.
As of September 30, 2024, we held $71.2 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $70.4 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.
We believe that our financial resources are adequate to meet our operating needs over the next twelve months.
Our cash flows are as follows:
| Nine Months Ended September 30, | |||||||||||
| (In thousands) | 2024 | 2023 | |||||||||
| Cash provided by (used in): | |||||||||||
| Operating activities | $ | 43,241 | $ | (13,838) | |||||||
| Investing activities | (7,326) | (8,536) | |||||||||
| Financing activities | (2,832) | (5,862) | |||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | 1,215 | 145 | |||||||||
Operating Activities
Cash used in operating activities primarily consists of net income (loss), as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of allowance for doubtful accounts, amortization of intangible assets, asset write-offs, deferred taxes, depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel and vendor costs. We expect cash outflows from operating activities to be affected by changes in personnel costs and the timing of payment of expenditures.
For the nine months ended September 30, 2024, $43.2 million of cash was provided by operating activities. This was driven by a net income for the period and a decrease in our accounts receivable balance, partially offset by a decrease in deferred revenue. For the nine months ended September 30, 2023, $13.8 million of cash was used in operating activities.
Our working capital at September 30, 2024 was $61.4 million compared to $31.5 million at December 31, 2023. The increase was driven by lower deferred revenue, accrued wages and payroll taxes, and other accrued expenses and increased cash and cash equivalents, partially offset by lower accounts receivable.
Investing Activities
The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of investments, purchases of property and equipment, capitalized software activities, and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the growth of our business as well as to continue to invest in our infrastructure and activity in connection with acquisitions.
For the nine months ended September 30, 2024, net cash used in investing activities was $7.3 million, compared to net cash used in investing activities of $8.5 million for the nine months ended September 30, 2023. Cash used in investing activities primarily consisted of additions to property and equipment. For the nine months ended September 30, 2023, net cash used in investing activities consisted of additions to property and equipment, net, (primarily capital software activities), and the purchase of ProvenDB described in Note 6, Goodwill to the condensed consolidated financial statements.
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Financing Activities
The changes in cash flows from financing activities primarily relate to the purchases of common stock under our share repurchase program and tax payments for restricted stock issuances.
Cash of $2.8 million used in financing activities during the nine months ended September 30, 2024 was attributable to tax payments for stock issuances and cash paid for the holdback component of the ProvenDB acquisition. Cash of $5.9 million used in financing activities during the nine months ended September 30, 2023 was attributable to tax payments for stock issuances and cash paid for share repurchases.
Key Business Metrics and Non-GAAP Financial Measures
In our quarterly earnings press releases and conference calls, we discuss the below key metrics and financial measures that are not calculated according to generally accepted accounting principles (“GAAP”). These metrics and non-GAAP financial measures help us monitor and evaluate the effectiveness of our operations and evaluate period-to-period comparisons. Management believes that these metrics and non-GAAP financial measures help illustrate underlying trends in our business. We use these metrics and non-GAAP financial measures to establish budgets and operational goals (communicated internally and externally), manage our business and evaluate our performance. We also believe that both management and investors benefit from referring to these metrics and non-GAAP financial measures as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. We believe these metrics and non-GAAP financial measures are useful to investors both because they allow for greater transparency with respect to financial measures used by management in their financial and operational decision-making and also because they are used by investors and the analyst community to help evaluate the health of our business.
Annual Recurring Revenue
We use annual recurring revenue, or ARR, as an approximate measure to monitor the growth of our recurring business. ARR represents the annualized value of the active portion of SaaS, term-based license, and maintenance and support contracts at the end of the reporting period. ARR is calculated as the approximate annualized value of our customer recurring contracts as of the measurement date. These include subscription, term-based license, and maintenance and support contracts and exclude one-time fees. For term-based license arrangements, the amount included in ARR is consistent with the amount that we invoice the customer annually for the term-based license transaction. A customer with a one-year term-based license contract will be invoiced for the total value of the contract at the beginning of the contractual term, while a customer with a multi-year term-based license contract will be invoiced for each annual period at the beginning of each year of the contract. For contracts that include annual values that increase over time because there are additional deliverables in subsequent periods, we include in ARR only the annualized value of components of the contract that are considered active as of the date of the ARR calculation. We do not include the future committed increases in the contract value as of the date of the ARR calculation.
We consider a contract to be active from when the product or service contractual term commences (the “start date”) until the right to use the product or service ends (the “expiration date”). Even if the contract with the customer is executed before the start date, the contract will not count toward ARR until the customer right to receive the benefit of the products or services has commenced.
To the extent that we are negotiating a renewal with a customer within 90 days after the expiration of a recurring contract, we continue to include that revenue in ARR if we are actively in discussions with the customer for a new recurring contract or renewal and the customer has not notified us of an intention not to renew. We exclude from the calculation of ARR renewal contracts that are more than 90 days after their expiration date, even if we are continuing to negotiate a renewal at that time.
ARR is not calculated based on recognized or unearned revenue and there is no direct relationship between revenue recognized in accordance with ASC 606 and the Company’s ARR business metric. We believe ARR is a valuable operating measure to assess the health of our SaaS, term-based license, and maintenance and support contracts because it illustrates our customer recurring contracts as of the measurement date. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates, and does not include revenue from perpetual licenses, purchases of Digipass authenticators, training, professional services or other sources of revenue that are not deemed to be recurring in nature.
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ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. Investors should consider our ARR operating measure only in conjunction with our GAAP financial results.
At September 30, 2024, we reported ARR of $163.9 million, which was 9% higher than ARR of $149.8 million at September 30, 2023. Changes in foreign exchange rates during the nine months ended September 30, 2024 as compared to the prior year positively impacted ARR by approximately $0.1 million. ARR growth was primarily driven by an increase in subscription contracts and new logos.
Net Retention Rate
Net Retention Rate, or NRR, is defined as the approximate year-over-year percentage growth in ARR from the same set of customers at the end of the prior year period. It measures our ability to increase revenue across our existing customer base through expanded use of our platform, offset by customers whose subscription contracts with us are not renewed or renew at a lower amount. Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers. NRR is an important way in which we track our performance in this area.
We reported NRR of 106% and 108% at September 30, 2024 and 2023, respectively. Year-over-year, NRR was primarily impacted by the same factors that affected ARR, as discussed above.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, amortization, long-term incentive compensation, restructuring and other related charges, and certain non-recurring items, including acquisition related costs, rebranding costs, and non-routine shareholder matters. Adjusted EBITDA is a non-GAAP financial metric. We use Adjusted EBITDA as a simplified measure of performance for use in communicating our performance to investors and analysts and for comparisons to other companies within our industry. As a performance measure, we believe that Adjusted EBITDA presents a view of our operating results that is most closely related to serving our customers. By excluding interest, taxes, depreciation, amortization, long-term incentive compensation, restructuring costs, and certain other non-recurring items, we are able to evaluate performance without considering decisions that, in most cases, are not directly related to meeting our customers’ requirements and were either made in prior periods (e.g., depreciation, amortization, long-term incentive compensation, non-routine shareholder matters), deal with the structure or financing of the business (e.g., interest, one-time strategic action costs, restructuring costs, impairment charges) or reflect the application of regulations that are outside of the control of our management team (e.g., taxes). In addition, removing the impact of these items helps us compare our core business performance with that of our competitors.
The following table reconciles net income (loss) as reported on our condensed consolidated statements of operations to Adjusted EBITDA:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net income (loss) | $ | 8,273 | $ | (4,133) | $ | 28,294 | $ | (30,240) | |||||||||||||||
| Interest income, net | (624) | (587) | (1,246) | (1,675) | |||||||||||||||||||
| Provision for income taxes | 1,688 | 279 | 4,658 | 1,569 | |||||||||||||||||||
| Depreciation and amortization of intangible assets (1) | 1,941 | 1,689 | 6,086 | 4,524 | |||||||||||||||||||
| Long-term incentive compensation (2) | 2,744 | 1,933 | 6,358 | 10,426 | |||||||||||||||||||
| Restructuring and other related charges (3) | 720 | 6,524 | 5,454 | 13,076 | |||||||||||||||||||
| Other non-recurring items (4) | 1,983 | 599 | 3,060 | 3,160 | |||||||||||||||||||
| Adjusted EBITDA | $ | 16,725 | $ | 6,304 | $ | 52,664 | $ | 840 | |||||||||||||||
(1) Includes cost of sales depreciation and amortization expense directly related to delivering cloud subscription revenue of $0.7 million and $2.4 million for the three and nine months ended September 30, 2024, respectively, and $0.4
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million and $0.7 million for the three and nine months ended September 30, 2023, respectively. Costs are recorded in "Services and other cost of goods sold" on the condensed consolidated statements of operations.
(2) Long-term incentive compensation includes stock-based compensation and cash incentive grants awarded to employees located in jurisdictions where we do not issue stock-based compensation due to tax, regulatory or similar reasons. The immaterial expense associated with these cash incentive grants was $0.1 million for both the three months ended September 30, 2024 and 2023 and $0.2 million for both the nine months ended September 30, 2024 and 2023.
(3) Includes write-offs of intangible assets and property and equipment, net, of $0.8 million and $1.0 million, respectively, for the nine months ended September 30, 2024 and $0 for both the three and nine months ended September 30, 2023. Costs are recorded in "Services and other cost of goods sold" and "Restructuring and other related charges," respectively, on the condensed consolidated statements of operations.
Includes restructuring and other related charges of less than $0.1 million and $0.1 million, for the three and nine months ended September 30, 2024, respectively, and $0 for both the three and nine months ended September 30, 2023. These charges are recorded in "Services and other cost of goods sold" on the condensed consolidated statements of operations.
(4) For the three months ended September 30, 2024 and 2023, other non-recurring items consist of $2.0 million and $0.6 million, respectively, of fees related to non-recurring projects.
For the nine months ended September 30, 2024, other non-recurring items consist of $3.1 million of fees related to non-recurring projects. For the nine months ended September 30, 2023, other non-recurring items consist of $1.6 million of inventory impairment charges and $1.6 million of fees related to non-recurring projects and our acquisition of ProvenDB.
Adjusted EBITDA for the three months ended September 30, 2024 was $16.7 million compared to $6.3 million for the three months ended September 30, 2023. Adjusted EBITDA for the nine months ended September 30, 2024 was $52.7 million compared to $0.8 million for the nine months ended September 30, 2023. The increase for both periods was driven largely by higher revenue and gross profit, as well as lower operating expenses as a result of the restructuring activities described elsewhere in this Item 2. Year-over-year changes in foreign exchange rates unfavorably impacted Adjusted EBITDA by approximately $0.1 million for the three and nine months ended September 30, 2024.
Critical Accounting Policies
Our accounting policies are fully described in Note 1, Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2023 and Note 2, Summary of Significant Accounting Policies, of our interim Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the three months ended September 30, 2024.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our market risk during the three months ended September 30, 2024. For additional information, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our Form 10-K.
Item 4 - Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2024, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
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Changes in Internal Controls
There have been no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended September 30, 2024.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
We are subject to certain legal proceedings and claims incidental to the operation of our business. We are also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business that have not been fully adjudicated. We currently do not anticipate that these matters, if resolved against us, will have a material adverse impact on our financial results.
For further information regarding our legal proceedings and claims, see Note 15, Legal Proceedings and Contingencies, included in Part I, Item 1, Condensed Consolidated Financial Statements, of this Quarterly Report on Form 10-Q.
Item 1A – Risk Factors
There were no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 6, 2024.
Item 2 – Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
The following table provides information about purchases by the Company of its shares of common stock during the third quarter of 2024:
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| July 1, 2024 through July 31, 2024 | — | $ | — | — | $ | 50,000,000 | ||||||||||||||||||||
| August 1, 2024 through August 31, 2024 | — | $ | — | — | $ | 50,000,000 | ||||||||||||||||||||
| September 1, 2024 through September 30, 2024 | — | $ | — | — | $ | 50,000,000 | ||||||||||||||||||||
(1) On May 9, 2024, the Board of Directors terminated the stock repurchase program adopted on May 11, 2022 and adopted a new stock repurchase program under which the Company is authorized to repurchase up to $50.0 million of our issued and outstanding shares of common stock. Share purchases under the program will take place in open market transactions, privately negotiated transactions or tender offers, and may be made from time to time depending on market conditions, share price, trading volume, and other factors. The timing of the repurchases and the amount of stock repurchased in each transaction is subject to our sole discretion and will depend upon market and business conditions, applicable legal and credit requirements, and other corporate considerations. The authorization is effective until May 9, 2026 unless the total amount has been used or authorization has been cancelled.
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Item 6 - Exhibits
Exhibit 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 | ||
| Exhibit 101.SCH – Inline XBRL Taxonomy Extension Schema Document | ||
| Exhibit 101.CAL – Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| Exhibit 101.LAB – Inline XBRL Taxonomy Extension Label Linkbase Document | ||
| Exhibit 101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| Exhibit 101.DEF – Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
| Exhibit 104 – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||
_____________________________________
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on October 30, 2024.
| OneSpan Inc. | |||||
/s/ Victor Limongelli | |||||
Victor Limongelli | |||||
| President and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| /s/ Jorge Martell | |||||
| Jorge Martell | |||||
| Chief Financial Officer | |||||
(Principal Financial and Accounting Officer) | |||||
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