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| Driving increased demand for our products in new applications, new markets, and new territories; |
| Expanding our channel partner ecosystem; and |
● | Strategically acquiring companies that expand our technology portfolio or customer |
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Impact of COVID-19 pandemic
In March 2020, the World Health Organization recognized a novel strain of coronavirus (COVID-19) as a pandemic. In response to the pandemic, the United States and various foreign, state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing many businesses, including retail banking branches, to reduce or suspend operating activities. The pandemic and various governments’ responses have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate.
Beginning in the Summer of 2020 and continuing through the year ended December 31, 2020, we experienced lengthened sales cycles and reduced demand for some of our security solutions due to economic uncertainty connected with the COVID-19 pandemic. The most significant impact of the pandemic on our business has been a sharp drop in demand for our hardware authentication products and delays in the implementation of certain software security solutions.
As we cannot predict the duration or scope of the pandemic or its impact on the economy, financial markets and our customers, any negative impact to our results cannot be reasonably estimated, but it could be material. We continue to closely monitor the Company’s financial health and liquidity and the impact of the pandemic on the Company. We are able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. See Part I – Item 1A – Risk Factors of this Form 10-K for additional information regarding the potential impact of COVID-19 on the Company.
Industry Background
The number of people using the internet via computers, tablets, and smartphones continues to grow at a rapid pace. Consumers are embracing onlineRapid global growth in cloud and mobile banking transactions is driving increased demand for multi-channel security solutions and banking inenhanced user experiences across the financial services industry. Similarly, increasing numbers. Organizationsremote corporate access of all types have an increasing number ofimportant resources by employees, and business partners accessing protected resources from remote locations. New business paradigms such as these introduceand customers is introducing new security risks for participants, especially banks, merchants, and other online and mobile service providers.participants. Large and powerful criminal hacking organizations are launching more sophisticated hacking attacks with greater frequency. The criminal activities of private and state-sponsored hacking organizations have driven an increased need for security solutions and expansion of regulations requiring improved security measures to protect against hacking attacks and breaches. Several governments worldwide have recognized the risk associated with using user name and password access for internet and mobile applications and have issued specific recommendations either requiring or advocating multi-factor authentication for enhanced online and mobileother security measures to improve the security of remote banking security. We anticipate this trend may continue.
transactions. We believe there are no reliable measurements ofthese global trends have been accelerated by the total industry size or the industry growth rate for our securitypandemic and eSignature productswill continue and services. However, we believethat the market for authentication, anti-fraud, and eSignaturee-signature solutions will continue to grow driven by new government regulations,growth in digital banking transactions, digital commerce, work-from-home corporate access requirements, growing awareness of the impact of cyber-crime, and growth in electronic commerce. The issues driving growth are global however, the rate of adoption in each country is a function of culture, competitive position, economic conditions and use of technology.new government regulations.
Our Background
Our predecessor company, VASCO Corp., entered the data security business in 1991 through the acquisition of a controlling interest in ThumbScan, Inc., which we renamed as VASCO Data Security, Inc.
In 1996, we expanded our computer security business by acquiring Lintel Security NV/SA, a Belgian corporation, which included assets associated with the development of security tokens and security technologies for personal computers and computer networks. Also in 1996, we acquired Digipass NV/SA, a Belgian corporation, which was also a developer of security tokens and security technologies. In 1997, the acquired entity was renamed VASCO Data Security NV/SA.
In 1997, VASCO Data Security International, Inc. was incorporated and in 1998, we completed a registered exchange offer with the holders of the outstanding securities of VASCO Corp., becoming a publicly traded company.
In 2006, we opened our international headquarters in Zurich, Switzerland.
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In 2013, we acquired Cronto Limited (“CRONTO”Cronto”), a provider of secure visual transaction authentication solutions for online banking.
In 2014, we acquired Risk IDS, a provider of risk analysis solutions to the banking community.
In November 2015, we acquired Silanis Technology Inc., a leading provider of electronic signature (eSignature)(e-signature) and digital transaction solutions used to electronically sign, send, and manage documents. The solution is sold under the eSignLive™OneSpan Sign (formerly eSignLive) name and is trusted by many of the largest banks, insurers, and government agencies.
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TableIn May 2018, we acquired Dealflo Limited, a leading provider of Contentsidentity verification and end-to-end financial automation solutions.
Also in May 2018, VASCO Data Security international, Inc. changed its name to OneSpan Inc. The Company’s name change reflects a shift in our strategy and solution offerings.
Including our predecessor company, VASCO Corp.,companies, we have engaged in fifteensixteen acquisitions and two dispositions.
Our Products and Services
DIGIPASSTrusted Identity Platform
The Trusted Identity (TID) platform is a cloud-based platform that brings together OneSpan’s broad portfolio of technologies including Intelligent Adaptive Authentication, Risk Analytics, OneSpan Cloud Authentication, OneSpan Identity Verification, Mobile Security Suite, OneSpan Sign, multi-factor authentication, biometrics, and orchestration to power solutions that secure users, devices, and transactions across the digital journey. The innovative approach of this platform delivers on simplicity with orchestration technology that integrates applications and services requirements via a single interface while constantly protecting sensitive data through an encrypted client/server secure channel.
Intelligent Adaptive Authentication
Intelligent Adaptive Authentication is a cloud-based solution that enables banks and other financial institutions to secure users, devices, and transactions while providing an enhanced customer experience. It is powered by the TID platform and leverages advanced risk analytics, mobile security, multi-factor authentication, biometrics, and other technologies that enable the real-time analysis and scoring of vast and disparate data across channels. This risk score drives a precise level of authentication security for Appseach unique transaction which ensures a positive customer experience while safe guarding transactions and DIGIPASS for Mobilesensitive customer data. This helps institutions reduce fraud and drive growth through higher customer loyalty and increased use of bank services.
Our DIGIPASS Software authenticators, DIGIPASS for Apps and DIGIPASS for Mobile areRisk Analytics
Risk Analytics is a comprehensive anti-fraud solution designed to help banks and other financial institutions improve the speed and accuracy of detecting known and emerging fraud across online and mobile channels. A component of the TID platform, which includes machine learning technology, the solution analyzes vast amounts of user, device, and transaction data in real time to provide our customersa comprehensive risk assessment. It enables institutions to take a proactive approach to fraud prevention while removing major points of friction for end users. Cross-channel, prebuilt rules complement this scoring process and allow fraud experts to make decisions on alerts or link to automated business processes such as step-up authentication. The solution can be implemented in combination with increased securityMobile Security Suite to provide integrated trust with minimal impact on the end user experience. It can be deployed in the cloud or on-premises.
OneSpan Cloud Authentication
OneSpan Cloud Authentication is a quick-to-deploy, cloud-based multifactor authentication solution that supports a full range of authentication options including biometrics, push notification, visual cryptograms for transaction
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data signing, SMS and hardware authenticators. It eliminates cost associated with managing legacy on-premises authentication technology and provides a seamless upgrade path to more comprehensive solutions such as Intelligent Adaptive Authentication and Risk Analytics.
OneSpan Identity Verification
OneSpan Identity Verification gives banks and other financial institutions access to a wide range of identity verification services – all through a single API integration. Solution capabilities include: Identity document (e.g., driver’s license, passport, etc.) capture and real-time authenticity verification, as well as facial comparison (“selfie”) and liveness detection to establish that the individual presenting the identity document is the same person whose picture appears on the authenticated identity document.
The solution enables banks and financial institutions to verify the identity of remote applicants during the new digital account opening, lending, and financing application processes. The multi-layered identity verification approach enables automated failover to alternative identity verification providers in the event of a verification failure or provider unavailability which reduces applicant abandonment rates. Additionally, the solution provides organizations the ability to ensure the best identity verification processes for their mobile applicationsbusiness needs and networks without havingdigital channels to carry a standalone hardware device. DIGIPASS software authenticators balance the need for stronger mobilehelp maximize pass rates, minimize application security with the demands for user convenience by delivering comprehensive, built-in security for mobile applications, combined with a frictionless, “hands-free” authenticationfraud, and e-signing experience for mobile users.increase operational efficiencies.
DIGIPASS for AppsMobile Security Suite and Mobile Authenticator Studio
Mobile Security Suite is a comprehensive software development kit (SDK) that allows application developers to natively integrate security features including geolocation, device identification, jailbreak and root detection, fingerprint and face recognition, one-time password delivery via PUSHpush notification, and electronic signing, among others. Through a comprehensive library of APIs, application developers can extend and strengthen application security, deliver enhanced convenience to their application users, and streamline application deployment and lifecycle management processes. Mobile Security Suite also includes a Runtime Application Self-Protection module, which can detect and mitigate malicious app activity and potential loss to hacking activities.
DIGIPASS for Mobile Authenticator Studio is a user-friendly and secure mobile authenticator that operates as a discrete mobile application. It includes many of the features of DIGIPASS for Appsthe Mobile Security Suite and can easily be tailored to meet the needs of anycountless authentication process.processes. It can be customized and deployed rapidly without extensive technical support ensuring strong security with compelling value.
IDENTIKEY Risk ManagerOneSpan Sign
IDENTIKEY Risk Manager (IRM) is a comprehensive anti-fraud solution designed to help banks and other users improve the manner and speed of detecting fraud across multiple channels. It enables banks and financial institutions to take a proactive approach to fraud prevention, while making the experience frictionless for end users. IRM uses analytic techniques such as neural network implementations to score real-time transaction activity. Cross-channel prebuilt rules complement this score and allow fraud experts to make decisions on alerts or link to automated business processes such as step-up authentication. This solution can be implemented in combination with DIGIPASS for Apps to provide integrated trust with minimal impact on the end user experience. These products are targeted at banks, transaction processors, and ATM operations.
Application Shielding with RASP
VASCO’s application shielding with Runtime Application Self-Protection (RASP), neutralizes the threat of sophisticated attacks on mobile apps. It can mitigate malicious app activities before they interfere with the normal operation of the app and expose sensitive user data. This solution also provides code obfuscation and anti-tampering to stop hackers from debugging and reverse-engineering applications, ultimately reducing the risk of rogue apps.
eSignLive eSignature
eSignLiveOneSpan Sign supports a broad range of eSignaturee-signature requirements from simple to complex, and from the occasional electronic contractagreement to the processing tens of thousands of transactions. eSignLiveOneSpan Sign provides multiple deployment options including public cloud, private cloud, or on-premises without compromising security or functionality. eSignLiveThe solution is also available in a FedRAMPFederal Risk and Authorization Management Program (FedRAMP) SaaS-level compliant cloud, allowing U.S. government agencies to implement eSignaturese-signatures in the cloud and meet GSA security requirements.
Customers can configure eSignLive end-userOneSpan Sign to reinforce their brand for a seamless signing experience. Each step of the eSignaturee-signature workflow can be customized, from authentication to e-document distribution. eSignLive can be
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used across multiple devices, including laptop, mobile phone, or tablet, contributing to high levels of user adoptiondistribution and satisfaction.
eSignLivestorage. OneSpan Sign also provides the most comprehensive and secure electronic evidence for the strongeststrong legal protection by capturing both document and process-level evidence. This reduces the time and cost of gathering evidence and demonstrating legal and regulatory compliance. eSignLive electronicElectronic signature capabilities can be a critical component of the customeraccount opening and onboarding process for mobile applicationsprocesses, providing a secure and user friendlyuser-friendly way to capture customer signatures.execute legally binding agreements.
eSignLive eVault Manager
eVault Manager is a secure, web-based platform that provides mortgage lenders, auto financers, equipment lessors and other financial services organizations the means to store, assign and service electronic mortgage notes and secured loans and leases. The solution enables fully electronic, straight-through processing of mortgages and other secured loans and leases, from origination to retirement. After being electronically signed with eSignLive or another system, the authoritative copy of an eMortgage note or e-chattel paper is deposited in an eVault and protected throughout its lifecycle.
eVault Manager can be deployed in a public cloud, private cloud or on-premise. It maintains a single authoritative copy that is unique and identifiable; securely manages the transfer of assignment and location; ensures records cannot be altered, except as permitted; provides secure access and authorization control; includes an administration console for managing, pooling, searching and auditing electronic records; and supports vault-to-vault transfers and secure output to paper.
VACMAN
Our VACMAN product line incorporates a range of strong authentication utilities and solutions designed to allow organizations to add DIGIPASS strong authentication into their existing networks and applications. VACMAN solutions integrate with the most popular hardware and software and once integrated, become largely transparent to users, minimizing rollout and support issues. VACMAN encompasses multiple authentication technologies (passwords, dynamic password technologies, certificates, and biometrics) and allows use of any combination of those technologies simultaneously.
VACMAN enables customers to administer a high level of access control and allows them to match the level of authentication security used with the risk associated with each user of their application. Customers simply add fields to their existing user databases to describe the authentication technology used, and, if applicable, the unique DIGIPASS assigned to each end user of their application. VACMAN requires only a few days to implement in most systems and supports all DIGIPASS functionality. Once linked to an application, VACMAN automatically handles login requests from any user authorized to have a DIGIPASS.
DIGIPASS Hardware Authenticators
We offer a wide variety of DIGIPASShardware authenticators, each of which has its own distinct characteristics to meet the needs of our customers. All models of the DIGIPASSDigipass family of authenticators are designed to work together so customers can switch devices without changes to their existing infrastructure. Our hardware DIGIPASS models range from simple one-button devices
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and smart card readers to devices that include more secureadvanced technologies, such as public key infrastructure (“PKI”). and visual cryptography.
With the acquisition of CRONTO in May 2013, VASCO added visual cryptography to its product portfolio. Sensitive transaction data is captured in a cryptogram that consists of a matrix of colored dots. By scanning the image with a hardware or software authenticator, the data contained in the cryptogram is decrypted and the transaction details are presented to the user for verification providing a highly secure method of visual transaction signing with maximum user convenience.
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Many DIGIPASS hardware authenticators combine the benefits of traditional password authenticators (authentication and digital signatures) with smart card readers. Together, they bring portability to smart cards and allow the use of secure time-based algorithms.
DIGIPASSDigipass hardware technology is designed to support authentication and digital signatures for applications running on desktoptraditional PCs, laptops, tablets, and smartmobile phones.
IDENTIKEY Authentication Server
IDENTIKEY Authentication Server isresides on-premises and incorporates a centralizedrange of strong authentication server thatutilities and solutions designed to allow organizations to securely authenticate users and transactions. The solution, once integrated, becomes largely transparent to users, minimizing rollout and support issues. Authentication Server encompasses multiple authentication technologies (e.g., passwords, dynamic password technologies, certificates, and biometrics) and allows the use of any combination of those technologies simultaneously.
Authentication Server enables customers to administer a high level of access control. The solution requires only a few days to implement in most systems and supports the deployment, use,our line of hardware and administration of DIGIPASS strong user authentication. It is based on VASCO’s core VACMAN technology. IDENTIKEY is also available as a stand-alone appliance and as a virtual appliance.software authenticators. Once linked to an application, Authentication Server automatically handles login requests from any authorized user.
Intellectual Property and Proprietary Rights and Licenses
We rely on a combination of patent, copyright, trademark, design, and trade secret laws, as well as employee and third-party non-disclosure agreements to protect our proprietary rights. In particular, we hold several patents in the U.S. and in other countries, which cover multiple aspects of our technology. These patents expire between 2019now and 2035.more than 10 years from now. In addition to the issued patents, we also have several patent applications pending in the U.S., Europe, and other countries. The majority of our issued and pending patents cover our DIGIPASSDigipass product line. We believe these patents to be valuable property rights and we rely on the strength of our patents and on trade secret law to protect our proprietary technology. We furthermore have registrations for most of our trademarks in most of the markets where we sell the corresponding products and services and registrations of the designs of many of our hardware products primarily in the EU and China. To the extent that we believe our intellectual property rights are being infringed upon, we intend to assert vigorously our intellectual property rights, including but not limited to, pursuing all available legal remedies.
Research and Development
Our research and development efforts historically have been, and will continue to be, concentrated on productsolution enhancement, new technology development, and related new productsoftware introductions. We employ a team of full-time engineers and, from time to time, also engage independent engineering firms to conduct non-strategic product development efforts on our behalf. For fiscal years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, we incurred expenses of $23.1$41.2 million, $23.2$42.5 million, and $17.5$32.2 million, respectively, for research and development.
Production
Our Digipass security hardware DIGIPASS products are manufactured by third party manufacturers pursuant to purchase orders that we issue. Our hardware DIGIPASSDigipass products are made primarily from commercially available electronic components purchased globally. Our software productssolutions are produced in-house.in-house or developed by third parties and sold under license.
Hardware DIGIPASSDigipass products utilize commercially available programmable microprocessors purchased from several suppliers. The microprocessors are the most important components of our security authenticators that are not commodity items readily available on the open market. Some microprocessors are single sourced. Orders of microprocessors generally require a lead-time of 12-16 weeks. We attempt to maintain a sufficient inventory of all parts to handle short-term increases in orders.
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Large orders that would significantly deplete our inventory are typically required to be placed with more than twelve weeks of lead-time, allowing us to make appropriate arrangements with our suppliers. We purchase microprocessors and arrange for shipment to third parties for assembly and testing in accordance with our design specifications. The majority of our DIGIPASSDigipass products are manufactured by four independent vendors domiciledfactories in Hong Kong and Macau with production facilities in mainlandSouthern China. Purchases are made on a volume purchase order basis. We supply product test equipment at the point of assembly. We maintain a local team in China to conduct quality control and quality assurance procedures. Periodic visits are conducted by our personnel for quality management, assembly process review, and supplier relations.
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some component suppliers and third party manufacturers, and a reduction in global air and sea transportation capacity. Adjustments to our supply chain, manufacturing and transportation workflow processes has enabled us to meet customer delivery requirements.
Competition
The market for computerdigital solutions for identity, security, and network securitybusiness productivity solutions is very competitive and, like most technology-driven markets, is subject to rapid change and constantly evolving productssolutions and services. Our anti-fraud products are designed to allow authorized users access to a computing environment or application, in some cases using patented technology, as a replacement for or supplement to a static password. Although certain of our security technologies are patented, there are other organizations that offer anti-fraud solutions that compete with us for market share. Our main competitors in our anti-fraud markets are Gemalto, and RSA Security, a subsidiary of Dell Technologies.Thales Group, and RSA Security. There are many other companies, such as Kobil Systems,Transmit Security, Symantec, and Early Warning that offer competing authentication hardware, software and services that range from simple locking mechanisms to sophisticated encryption technologies.services. In addition to these companies, we face competition from many small authentication solution providers, many of whom offer new technologies and niche solutions such as biometric or behavioral analysis. We believe that competition in this market is likely to intensify as a result of increasing demand for security products. Our primary competitors for electronic signature solutions include DocuSign and Adobe Systems. Both companies are significantly larger than us. In addition to these companies, there are dozens of smaller and regional providers of electronic signing solutions.
We believe that the principal competitive factors affecting the market for computerdigital solutions for identity, security, and network security productsbusiness productivity, as well as electronic signatures include the strength and effectiveness of the solution, technical features, ease of use, quality and reliability, customer service and support, brand recognition, customer base, distribution channels, and the total cost of ownership of the solution. Although we believe that our products currently compete favorably with respect to such factors, there can be no assurance that we can maintain our competitive position against current and potential competitors.
Some of our present and potential competitors have significantly greater financial, technical, marketing, purchasing, and other resources. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of products, or to deliver competitive products at a lower end-user price. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. It is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Accordingly, we have forged, and will continue to forge, our own partnerships to offer a broader range of products and capabilities to the market.
Sales and Marketing
Our solutions are sold worldwide through our direct sales force as well as through distributors, resellers, systems integrators, and original equipment manufacturers. Our sales staff coordinates sales activity through both our sales channels and those of our strategic partners making direct sales calls either alone or with the sales personnel of our partners. Our sales staff also provides product education seminars to sales and technical personnel of vendorsresellers and distributors with whom we have working relationships and to potential end-users of our products.
Our sales force is able toWe offer customers a choice between SaaS, private cloud, and traditional on-premise software deployments.
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Part of our expanded selling effort includes approaching our existing strategic partners to find additional applications for our security products. In addition, our marketing plan calls for the identification of new business opportunities that may require enhanced security or areas where we do not currently market our products. Our efforts also include various activities to increase market awareness of solutions as well as preparation and dissemination of white papers explaining how our security products can add value or otherwise be beneficial.
Customers and Markets
CustomersWe generally focus our sales and marketing efforts in three primary areas. The first is financial institutions where the majority of our revenue is derived. This segment includes traditional banks, credit unions, and online-only banks. This is our primary market. We believe there are substantial opportunities for future growth in the financial vertical as our solution portfolio expands and we deliver additional capabilities targeted specifically at identifying and mitigating online and mobile banking fraud. We also sell to the enterprise market segment which consists primarily of businesses seeking secure internal and remote network access. We sell to these businesses mostly through distribution and resellers. Our strategy is to leverage products include some ofdeveloped for the world’s most recognized names: JPMorgan Chase & Co., Citibank, HSBC, Rabobank, Deutsche Bank, Sumitomo Mitsui Banking Corporation, BNP-Paribas Fortis, The Bank of
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Tokyo-Mitsubishi, Banco Santander,banking market in the enterprise market as the hacking attacks in both markets have many similarities. We also target the government, healthcare and U.S. government agencies includinginsurance market segments in select regions around the Postal Service, USDA, Census Bureau, and GSA.globe.
Our top 10 customers contributed 27%21%, 36%29%, and 50%24%, in 2017, 2016,2020, 2019, and 2015,2018, respectively, of total worldwide revenue. In 2015, Rabobank contributed 30% of our worldwide revenue.
A significant portion of our sales is denominated in foreign currencies and changes in exchange rates impact results of operations. To mitigate exposure to risks associated with fluctuations in currency exchange rates, we attempt to denominate an amount of billings in a currency such that it would provide a hedge against operating expenses being incurred in that currency. For additional information regarding how currency fluctuations can affect our business, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk.”
We also experience seasonality or variation across the year in our business. Historically, these seasonalmarkets. These trends are most notable incan include lower sales during the summer months, particularly in Europe, when many businesses defer purchase decisions; however, the timing of any one or more large orders may temper or offset this seasonality.EMEA.
We generally focus our sales and marketing efforts in three primary areas:
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We serve multiple markets via our two-tier indirect sales channel. We invest in and support our channel with training, marketing and sales support resources. Distributors and resellers get the tools they need to be successful, such as campaigns, case studies, marketing funds and more. We train employees of our resellers and distributors on-site and in our offices.
Backlog
Our backlog at December 31, 2017 was approximately $48 million compared to $50 million at December 31, 2016 and $51 million at December 31, 2015. We do not believe that the specific amount of backlog at any point in time is indicative of the trends in our markets or the expected results of our business. Given the large size of orders, the backlog number can change significantly with the receipt of a new order or modification of an existing order.
Financial Information Relating to Foreign and Domestic Operations
For financial information regarding VASCO,OneSpan, see our Consolidated Financial Statements and the related Notes, which are included in this Annual Report on Form 10-K. We have a single operating segment for all our products and operations. See Note 1117 in the Notes to Consolidated Financial Statements for a breakdown of revenue and long-lived assets between the U.S. and other regions.
Government Regulation
As a global cybersecurity company, we are subject to complex and evolving global regulations in the various jurisdictions in which our products and services are used. The most significant government regulations that impact our business are discussed below. For further discussion of how global regulations may impact our business, see Item 1A – Risk Factors.
We are subject to anti-corruption laws and regulations, including the U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and other laws that generally prohibit the making or offering of improper payments to foreign operations.government officials and political figures for the purpose of obtaining or retaining business or to gain an unfair business advantage.
EmployeesIn addition, we are subject to economic and trade sanctions programs administered by the Office of Foreign Assets Control (OFAC) in the U.S. Therefore, we do not permit financial institutions or entities that are domiciled in countries or territories subject to comprehensive OFAC trade sanctions (currently, Cuba, Iran, North Korea, Syria and Crimea), or that are included on OFAC’s list of Specially Designated Nationals and Blocked persons, to purchase OneSpan products and services or engage in transactions using our services.
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The European General Data Production Regulation (GDPR) took effect in May 2018 and applies to certain of our products and services used by customers in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union that are different from those previously in place in the European Union, and includes significant penalties for non-compliance. Other jurisdictions, such as Canada and Australia have enacted data privacy or data protection laws. As these laws continue to emerge in the countries where we or our customers operate, we need to analyze each of them to determine the applicability to our corporate operations and the applicability to our solutions and customers.
We are subject to the Restriction on the Use of Hazardous Substances Directive 2002/95/EC (also known as the “RoHS Directive”) and the Waste Electrical and Electronic Equipment Directive (also known as the “WEEE Directive”). These directives restrict the distribution of products containing certain substances, including lead, within applicable geographies and require a manufacturer or importer to recycle products containing those substances. These directives affect the worldwide electronics and electronics components industries as a whole.
Because banking and financial services is our largest industry target market, the government regulations affecting our customers in this area have a significant indirect effect on our business. For example, regulatory changes in Europe to promote a more open and connected digital banking ecosystem create compliance needs for our customers as well as market opportunities for those market participants that move to capitalize on these changes. Similar regulatory dynamics occur in the other primary markets where we have customers, such as healthcare and government. Additional proposed or new legislation and regulations could also significantly affect our business.
Human Capital
OneSpan’s values focus on developing and maintaining a world class innovative workforce through collaboration, accountability, transparency, and speed. Our talented teams are carefully managed to ensure retention and ability to sustain business performance with an eye toward the future.
Our talent management and succession plan process at OneSpan includes the identification of key positions based on current and future business strategies, the identification of potential successors, and a plan for talent development. In addition to deep technical and skill development opportunities that enable OneSpan to foster employee engagement, we conduct extensive compliance-related training which is completed by all employees annually. Our managers of people are offered a variety of leadership development modules. Moreover, all employees are empowered to lead from any seat.
OneSpan aligns its base and variable pay with the external market to ensure external competitiveness while maintaining internal value or equity within the organization. Our short-term and long-term incentive plans are designed to provide a variable pay opportunity to reward the attainment of key financial and operational goals and shareholder value creation. The mix among base compensation, short-term incentives and long-term incentives is designed to align with the competitive market.
OneSpan is committed to fostering, cultivating, and preserving a culture of diversity, equality and inclusion. Our vision is to embrace an inclusive and engaged culture that drives a sense of belonging and respects and celebrates our differences.
As of December 31, 2017,2020, we had 611870 total employees, including 327449 located in the Americas, 383 located in EMEA (Europe, the Middle East and Africa), 254 located in the Americas, and 3038 located in Asia Pacific. Of the total employees, 311389 were involved
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in sales, marketing, operations, and customer support, 203347 in research and development and 97134 in general and administration.
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RISK FACTORS
You should carefully consider the following risk factors, which we consider the most significant, as well as other information contained in this Annual Report on Form 10-K. In addition, there are a number of less significant and other general risk factors that could affect our future results. If any of the events described in the risk factors were to occur, our business, financial condition or operating results could be materially and adversely affected. We have grouped our Risk Factors under captions that we believe describe various categories of potential risk. For the reader’s convenience, we have not duplicated risk factors that could be considered to be included in more than one category.
Summary of Risk Factors
We are providing the following summary of the risk factors contained in this Form 10-K to enhance the readability and accessibility of our risk factor disclosures. We encourage our stockholders to carefully review the full risk factors contained in this Form 10-K in their entirety for additional information regarding the risks and uncertainties that could cause our actual results to vary materially from recent results or from our anticipated future results.
Risks Related to Ourour Business
| ● | While we believe the coronavirus could have a negative impact on our financial results in the future, the impact is difficult to assess at this time. |
| ● | A significant portion of our sales are to a limited number of customers. The loss of substantial sales to any one of them could have an adverse effect on revenues and profits. |
| ● | The return of a worldwide recession and/or regional economic downturns may further impact our business. |
| ● | Disruptions in markets or the European Union may affect our liquidity and capital resources. |
| ● | We could incur substantial accounting related costs if we are unable to maintain an effective system of internal control over financial reporting. |
| ● | We have a long operating history, but only modest accumulated profit. |
| ● | We derive revenue from a limited number of products. |
| ● | The sales cycle for our products and technology is long, and we may incur substantial expenses for sales that do not occur when anticipated. |
| ● | We have a great dependence on a limited number of suppliers and the loss of their manufacturing capability could materially impact our operations. |
| ● | We order some hardware components, such as processors, in advance of expected use and often produce finished goods prior to the receipt of executed customer orders. If orders are not received, we could suffer losses related to inventory that cannot be sold at full value. |
| ● | Our success depends on establishing and maintaining strategic relationships with other companies to distribute our technology and products and, in some cases, for us to incorporate their technology into our products and our products and services. |
| ● | We may not be able to maintain effective product distribution channels, which could result in decreased revenue. |
| ● | We depend on our key personnel for the success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business or could be negatively perceived in the capital markets. |
| ● | If we fail to continue to attract and retain qualified personnel, our business may be harmed. |
| ● | Changes in our effective tax rate may have an adverse effect on our results of operations. |
| ● | Our worldwide income tax provisions and other tax accruals may be insufficient if any taxing authorities assume taxing positions that are contrary to our positions. |
| ● | Changes in global tax laws or in their interpretation or enforcement, could have a material adverse effect on our effective tax rate, results of operations, cash flows and financial condition. |
| ● | Acquisitions, divestitures and other strategic transactions present many risks, and failure to realize the financial and strategic goals we anticipate could have a material adverse effect on our business, results of operations, cash flows and financial condition. |
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| ● | Reported revenue may fluctuate widely due to the interpretation or application of accounting rules. |
| ● | Provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses. |
| ● | The evolution of our business requires more complex development and go-to-market strategies, which involve significant risk. |
Risks Related to the Market
| ● | We face significant competition and if we lose or fail to gain market share our financial results will suffer. |
| ● | A decrease of average selling prices for our products and services could adversely affect our business. |
| ● | We may need additional capital in the future and our failure to obtain capital would interfere with our growth strategy. |
| ● | We experience variations in quarterly operating results and sales are subject to seasonality, both of which may result in a volatile stock price. |
| ● | Our stock price may be volatile for reasons other than variations in our quarterly operating results. |
| ● | Our stock repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock |
| ● | A small group of persons control a substantial amount of our common stock and could delay or prevent a change of control. |
| ● | Certain provisions of our charter and of Delaware law make a takeover of our Company more difficult. |
| ● | Future issuances of blank check preferred stock may reduce voting power of common stock and may have anti-takeover effects that could prevent a change in control. |
| ● | Our business could be adversely affected as a result of actions of activist stockholders. |
Risks Related to Technology and Intellectual Property
| ● | Technological changes occur rapidly in our industry and our development of new products is critical to maintain our revenue. |
| ● | Our business could be negatively impacted by cyber security incidents and other disruptions. |
| ● | We rely upon Amazon Web Services to operate portions of our platform and any disruption of or interference with our use of Amazon Web Services or other vendors’ material would adversely affect our business, results of operations and financial condition |
| ● | Some of our products contain third-party, open-source software and failure to comply with the terms of the underlying open-source software licenses could restrict our ability to sell our products or otherwise result in claims against us. |
| ● | We must continue to attract and retain highly skilled technical personnel for our research and development efforts. |
| ● | We cannot be certain that our research and development activities will be successful. |
| ● | Failure to effectively manage our product and service lifecycles could harm our business. |
| ● | SaaS offerings, which involve various risks, constitute an important part of our business. |
| ● | We depend significantly upon our proprietary technology and intellectual property and the loss of or successful challenge to our proprietary rights could require us to divert management attention and could reduce revenue and increase our operating costs. |
| ● | Our patents may not provide us with competitive advantages. |
| ● | We are subject to warranty and product liability risks. |
| ● | There is significant government regulation of technology imports and exports and to the extent we cannot meet the requirements of the regulations we may be prohibited from exporting some of our products, which could negatively impact our revenue. |
| ● | We employ cryptographic technology in our authentication products that uses complex mathematical formulations. |
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Risks Related to International Operations
| ● | We face a number of risks associated with our international operations, any or all of which could result in a disruption in our business and a decrease in our revenue. |
| ● | We are subject to foreign currency exchange rate fluctuations and risks, and improper management of that risk could adversely affect our business, results of operations, and financial conditions. |
| ● | Changes in the European regulatory environment regarding privacy and data protection regulations could have a material adverse impact on our results of operations. |
| ● | We must comply with governmental regulations setting environmental standards. |
| ● | The vote by the United Kingdom (UK) to leave the European Union (EU) could adversely affect our financial results. |
| ● | We or our suppliers may be impacted by new regulations related to climate change. |
| ● | The effects of regulations relating to conflict minerals may adversely affect our business. |
| ● | U.S. investors may have difficulties in making claims for any breach of their rights as holders of shares because some of our assets and key employees are not located in the United States. |
| ● | Our business in countries with a history of corruption and transactions with foreign governments increase the risks associated with our international activities. |
Risks Related to Our Business
While we believe the coronavirus could have a negative impact on our financial results in the future, the impact is difficult to assess at this time.
The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. A significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the broader economies, financial markets and overall demand environment for our products.
As a result of the COVID-19 pandemic, we temporarily closed our offices in March 2020 (including our corporate headquarters) in many countries except where we have been able to accommodate limited essential employees such as for the shipping of our hardware authentication tokens under revised procedures. We re-opened a limited number of our offices during the third and fourth quarter of 2020 with limited capacity under revised procedures. We are unable to predict further re-openings or whether the initial re-openings will be successful or remain in place. We implemented certain travel restrictions, remote work arrangements and other measures and while our early experience with this new situation has been satisfactory to date, it has disrupted how we normally operate our business and may in the longer term impact our productivity, innovation and effectiveness such that our results are adversely affected. We have shifted certain of our customer events to virtual-only experiences and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Because we operate in multiple international locations, we expect there to be variability and additional complications from differing conditions and inconsistent guidance from numerous public health agencies.
In our hardware business, we are exposed to specific risks related to manufacturing, supply chain, shipping and distribution- all of which have been impacted by the COVID-19 pandemic. As a result of COVID-19, we experienced some delays and increased costs related to fulfilling our hardware orders. Such issues have been primarily resolved however we may be unable to satisfy certain customer orders for our products in the future if orders substantially increase and/or supply chain problems emerge. In addition, the global economic uncertainty associated with the COVID-
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19 pandemic has affected many of our customers and we believe one of those effects has been decreased orders of hardware authentication tokens. We are not able to predict at this time whether and to what extent such orders may return or in what specific quantities. This risk is in addition to the other risks associated with our hardware business as stated elsewhere in “Risk Factors.”
In our software business, we experienced some increased sales for products used in remote employee access and electronic signature in 2020 that we attribute in part to the COVID-19 pandemic. This increase may have been temporary, and we are unable to predict whether it will continue or decline. Moreover, the conditions caused by the COVID-19 pandemic can affect the rate of IT spending, the decision to start new IT projects, the timing of existing projects and the priority our customers place on various projects. While these factors may be positive for some of our software solutions such as electronic signature, these factors may be negative for our other software solutions, such as risk analysis software. The COVID-19 pandemic could adversely affect our customers’ ability or willingness to attend our events or to purchase our offerings, delay prospective customers’ purchasing decisions, adversely impact our ability to provide on-site sales meetings or professional services to our customers, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of their contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance. During the Summer of 2020, we began to experience some of the aforementioned scenarios, and this continued through the remainder of 2020, due to, we believe, global economic uncertainty connected with the continued seriousness of the COVID-19 pandemic. While we hope that the negative consequences on our business associated with the COVID-19 pandemic will subside in 2021, we cannot predict the impact with certainty.
If the restrictions on our employees, customers and others in the world continue or increase in order to limit the spread of COVID-19, the potential effects could continue and could be exacerbated, and our results of operations and overall financial performance may be harmed. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.
A significant portion of our sales are to a limited number of customers. The loss of substantial sales to any one of them could have an adverse effect on revenues and profits.
We derive a substantial portion of our revenue from a limited number of customers, many of which are financial institutions. The loss of substantial sales to any one of them could adversely affect our operations and results. In fiscal 2017, 2016,2020, 2019, and 2015,2018, our top 10 largest customers contributed 27%21%, 36%29%, and 50%24%, respectively, of total worldwide revenue. In 2015, Rabobank contributed 30% of total revenue principally due to an order for card readers incorporating our CRONTO technology.
The return of a worldwide recession and/or an increase in the concern over the European sovereign debt crisisregional economic downturns may further impact our business.
Our business is subject to economic conditions that may fluctuate in the major markets in which we operate. Factors that could cause economic conditions to fluctuate include, without limitation, recession, inflation, deflation, interest rates, unemployment, consumer debt levels, general retail or commercial markets and consumer or business purchasing power or preferences.
While it appears that circumstances that led to the sovereign debt crisis have abated, many significant economic issues have not been addressed fully. As a result, we expect that parts of Europe will continue to face difficult economic conditions in 2018. If global economic and financial market conditions remain uncertain and/or weak for an extended period of time, any of the following factors, among others, could have a material adverse effect on our financial condition and results of operations:
| slower consumer or business spending may result in reduced demand for our products and services, reduced orders from customers for our products, order cancellations, lower revenues, increased inventories, and lower gross margins; |
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| continued volatility in the global markets and fluctuations in exchange rates for foreign currencies and contracts or purchase orders in foreign currencies could negatively impact our reported financial results and condition; |
| continued volatility in the prices for commodities and raw materials we use in our products could have a material adverse effect on our costs, gross margins, and ultimately our profitability; |
| restructurings, reorganizations, consolidations and other corporate events could affect our customers’ budgets and buying cycles, particularly in the banking industry; |
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| if our customers experience declining revenues, or experience difficulty obtaining financing in the capital and credit markets to purchase our products and services, this could result in reduced orders, |
| in the event of a contraction of our sales, dated inventory may result in a need for increased obsolescence reserves; |
| a severe financial difficulty experienced by our customers may cause them to become insolvent or cease business operations, which could reduce |
| any difficulty or inability on the part of manufacturers of our products or other participants in our supply chain in obtaining sufficient financing to purchase raw materials or to finance general working capital needs may result in delays or non-delivery of shipments of our products. |
While we believe that many of the effects of the recession and credit crisis have abated, weWe are unable to predict potential future economic conditions, disruptions in the sovereign debt markets or other financial markets, the Euro Monetary Union or the European Union,regional recessions, or the effect of any such disruption or disruptions on our business and results of operations, but the consequences may be materially adverse. We believe that our business in the Banking market in Europe would be impacted most directly by any such disruption and that the consequences may be materially adverse, as approximately 48%53% of our consolidated revenues originated in the EMEA region in 2017.2020.
Disruptions in markets or the European Union may affect our liquidity and capital resources.
We believe our financial resources are adequate to meet our operating needs. However, disruptions in the sovereign debt markets or other financial markets, the Euro Monetary Union or the European Union, could materially adversely affect our liquidity and capital resources and expose us to additional currency fluctuation risk. Sufficiently adverse effects could cause us to modify our business plans.
Furthermore, in an adverse economic environment there is a risk that customers may delay their orders until the economic conditions improve further. If a significant number of orders are delayed for an indefinite period of time, our revenue and cash receipts may not be sufficient to meet the operating needs of the business. If this is the case, we may need to significantly reduce our workforce, sell certain of our assets, enter into strategic relationships or business combinations, discontinue some or all of our operations, or take other similar restructuring actions. While we expect that these actions would result in a reduction of recurring costs, they also may result in a reduction of recurring revenue and cash receipts. It is also likely that we would incur substantial non-recurring costs to implement one or more of these restructuring actions.
We could incur substantial accounting related costs if we are unable to maintain an effective system of internal control over financial reporting.
As a result ofIn response to the material weakness in our internal control over financial reporting disclosed as of December 31, 2016, related2018, we expended significant resources to deficiencies associated with our acquisition of Silanis Technology Inc. in November 2015 and its subsequent operations, we improvedimprove our internal control over financial reporting and the
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effectiveness of our disclosure controls and procedures. We expended significant resources, including accounting-relatedaccounting related costs and significant management oversight as we corrected pastthe deficiencies. Management has determined that full remediation of the prior deficiencies in internal control over financial reporting that led to thethis material weakness has occurred, anddisclosed in Item 9A of the subsequent investment inannual report on Form 10-K for the year ended December 31, 2019. Investments will continue to be made to improve the control environment will continue.environment.
We cannot provide absolute assurance that additional material weaknesses, or significant deficiencies, in our internal controls will not be identified in the future. Failure to maintain effective controls or implement new or improved controls could result in significant deficiencies or material weaknesses, affect management evaluations and auditor attestations regarding the effectiveness of our internal controls, failure to meet periodic reporting obligations, and
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material misstatements in our financial statements. Material misstatement of our financial statements may result in a restatement, loss of investor and customer confidence, a decline in the market price of the Company’s common stock, and potential sanctions or investigations by NASDAQ, the Securities and Exchange Commission or other regulatory authorities. Failure to remedy any material weakness in the Company’s internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict the Company’s future access to the capital markets.
We have a long operating history, but only modest accumulated profit.
Although we have reported net income (loss) of $(22.4)$(5.5) million, $10.5$8.8 million, and $42.2$3.8 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, our retained earnings were $156.2$173.7 million at December 31, 2017.2020. Over our 25 year operating history, we have operated at a loss for many of those years. InDepending on the current uncertain economic environment,environment’s changing rules and regulations, and our investment strategies, it may be difficult for us to sustain our recent levels of profitability.profitability on a GAAP basis. We may also choose to invest for long term value which could decrease or eliminate short term profit.
We derive revenue from a limited number of products and do not have a broadly-diversified product base.products.
A majoritysignificant portion of our revenue is derived from the salesales of our legacy authentication products.hardware, software, and related services. We anticipate a substantial portion of future revenue, will be derived from authentication, products and related services. If the sale of these products and services is impeded for any reason and we have not diversified our product offerings into more software, our business and results of operations would be negatively impacted. Further, we expect our hardware product sales to decline over the long term in our traditional markets. If the rate of decline is more than expected and the aforementioned diversification is not enough to offset the decline, our results could be uneven and overall could be negative.
The sales cycle for our products and technology is long, and we may incur substantial expenses for sales that do not occur when anticipated.
The sales cycle for our products, which is the period of time between the identification of a potential customer and completion of the sale, is typically lengthy and subject to a number of significant risks over which we have little control. If revenue falls significantly below anticipated levels, our business would be seriously harmed.
A typical sales cycle in the Bankingfinancial services market is often six months or more. Larger Bankingbanking transactions may take up to 18 months or more. Purchasing decisions for our products and systemsservices may be subject to delays due to many factors that are not within our control, such as:
| Time required for a prospective customer to recognize the need for our products; |
| Significant expense of many |
| Customer budgeting process; and |
| Customer evaluation, testing and approval process. |
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As our operating expenses are based on anticipated revenue levels, a small fluctuation in the timing of sales can cause our operating results to vary significantly between periods.
We have a great dependence on a limited number of suppliers and the loss of their manufacturing capability could materially impact our operations.
In the event that the supply of components or finished products is interrupted or relations with any of our principal vendors is terminated, there could be increased costs and considerable delay in finding suitable replacement sources to manufacture our hardware products. The majority of our products are manufactured by four independent vendors domiciled in Hong Kong and Macau. Our hardware DIGIPASSDigipass authentication devices are assembled at facilities located in mainland China. The importation of these products from China exposes us to the possibility of product supply disruption and increased costs in the event of changes in the policies of the Chinese government, political unrest or unstable economic conditions in China or developments in the United States or European Union that are adverse to trade, including enactment of protectionist legislation. In 2019, a portion of our hardware products became subject to tariffs. If such tariffs increase in amount or scope, our financial results could be negatively affected. In part to address these risks of manufacturing in mainland China, in 2020 we launched an initiative to establish limited manaufacturing in the European Union. At this time, we do not know whether this project will be successful or how much this project could mitigate the risks related to Chinese manufacturing. Regardless of the location of manufacturing, we continue to be exposed to supply chain risks and uncertainties related to disruptions caused by the COVID-19 pandemic.
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We order some hardware components, such as processors, in advance of expected use and often produce finished goods prior to the receipt of executed customer orders. If orders are not received, we could suffer losses related to inventory that cannot be sold at full value.
In an attempt to minimize the risk of not having an adequate supply of component parts to meet demand and to take advantage of volume purchasing benefits, especially in situations where we have been notified that key processors will no longer be manufactured, we sometimes purchase multiple years’ supply of parts based on internal forecasts of demand. In addition, to meet customers’ demands for accelerated delivery of product, we sometimes produce finished product for existing customers before we receive the executed order from the customer. Should our forecasts of future demand be inaccurate or if we produce product that is never ordered, we could incur substantial losses related to the realization of our inventory.
Our success depends on establishing and maintaining strategic relationships with other companies to develop, market, and distribute our technology and products and, in some cases, for us to incorporate ourtheir technology into their products.our products and our products and services.
Part of our business strategy is to enter into strategic alliances and other cooperative arrangements with other companies in our industry. We currently are involved in cooperative efforts with respect to the incorporation of our products into products of others and vice versa, research and development efforts, marketing efforts and reseller arrangements. None of theseThese relationships are exclusive,generally non-exclusive, and some of our strategic partners also have cooperative relationships with certain of our competitors. If we are unable to enter cooperative arrangements in the future or if we lose any of our current strategic or cooperative relationships, our business could be harmed. We do not control the time and resources devoted to such activities by parties with whom we have relationships. In addition, we may not have the resources available to satisfy our commitments,expectations, which may adversely affect these relationships. These relationships may not continue, may not be commercially successful, or may require our expenditure of significant financial, personnel and administrative resources from time to time. Further, certain of our products and services compete with the products and services of our strategic partners.
We may not be able to maintain effective product distribution channels, which could result in decreased revenue.
We rely on both our direct sales force and an indirect channel distribution strategy for the sale and marketing of our products. We may be unable to attract distributors, resellers and integrators, as planned, that can market our products effectively and provide timely and cost-effective customer support and service. There is also a risk that some or all of our distributors, resellers or integrators may be acquired, may change their business models or may go out of business,
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any of which could have an adverse effect on our business. Further, our distributors, integrators and resellers may carrysell competing lines of products. The loss of important sales personnel, distributors, integrators or resellers could adversely affect us.
We depend on our key personnel for the success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business or could be negatively perceived in the capital markets.
Our success and our ability to manage our business depend, in large part, upon the efforts and continued service of our senior management team. The loss of one or more of our key personnel could have a material adverse effect on our business and operations. It could be difficult for us to find replacements for our key personnel, as competition for such personnel is often intense. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.
If we fail to continue to attract and retain qualified personnel, our business may be harmed.
Our future success depends upon our ability to continue to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is often intense and there can be no assurance that we can attract other highly qualified personnel in the future. If we cannot retain or are unable to hire such key personnel, our business, financial condition and results of operations could be significantly adversely affected.
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Changes in our effective tax rate may have an adverse effect on our results of operations.
Our future effective tax rates may be adversely affected by a number of factors including the distribution of income among the various countries in which we operate, changes in the valuation of our deferred tax assets, increases in expenses not deductible for tax purposes, including the impairment of goodwill in connection with acquisitions, changes in share-based compensation expense, and changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles. Any significant increase in our future effective tax rates could adversely impact net income for future periods; and a reduction in our U.S. tax rate could negatively impact our deferred tax assets which could also adversely impact our net income.
Our worldwide income tax provisions and other tax accruals may be insufficient if any taxing authorities assume taxing positions that are contrary to our positions.
Significant judgment is required in determining our provision for income taxes and other taxes such as sales and VAT taxes. There are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of intercompany agreements to purchase intellectual properties, allocate revenue and costs, and other factors, each of which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although we believe that our approach to determining the amount of such arrangements is reasonable, we cannot be certain that the final tax authority review of these matters will not differ materially from what is reflected in our historical income tax provisions and other tax accruals. Such differences could have a material effect on our income tax provisions or benefits, or other tax accruals, in the period in which such determination is made, and consequently, on our results of operations for such period.
Changes in global tax laws or in their interpretation or enforcement, could have a material adverse effect on our effective tax rate, results of operations, cash flows and financial condition.
We could be materially adversely affected by future changes in tax law or policy (or in their interpretation or enforcement) in Europe or otherthe jurisdictions where we operate. These changes could be exacerbated by economic, budget or other challenges facing these jurisdictions. For example, foreign jurisdictions could impose tax rate changes along with additional corporate tax provisions that would disallow or tax perceived “base erosion” or profit shifting amongst jurisdictions. In addition, aspects of U.S. tax reform may lead foreign jurisdictions to respond by enacting additional tax legislation that results in an adverse effect on our effective tax rate, results of operations, cash flows and financial condition.
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Acquisitions, divestitures and other strategic transactions present many risks, and failure to realize the refinement of provisional estimates could make our results difficult to predict.
In December 2017, the United States enacted tax reform legislation (“U.S. tax reform”). The legislation implements many new U.S. domesticfinancial and international tax provisions. Many aspects of the U.S. tax reform are unclear, and although additional clarifying guidance is expected to be issued in the future (by the Internal Revenue Service, the U.S. Treasury Department or via a technical correction law change), it may not be clarified for some time. In addition, many states have not yet updated their laws to take into account the new federal legislation. As a result,strategic goals we have not yet been able to determine the full impact of the new laws on our results of operations and financial condition. Provisional estimates used in our financial statements to reflect U.S. tax reform are expected to change and such changes could be significant depending on future guidance under U.S. tax reform and state actions. It is possible that U.S. tax reform, or the guidance under it, could change in the future andanticipate could have a material adverse effect on our effective tax rate,business, results of operations, cash flows and financial condition.
We may acquire or invest in companies, which may disrupt our business and divert management's attention and cause harm to our financial condition or results. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.
We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, complementary businesses, technologies, services, products and other assets, in the future.divestitures, alliances, joint ventures and other portfolio actions. We also may enter into
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relationships with other businesses to expand our products and platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies.
Our success depends, in part, upon our ability to identify suitable transactions; negotiate favorable contractual terms; comply with applicable regulations and receive necessary consents, clearances and approvals (including regulatory and antitrust clearances and approvals); integrate or separate businesses, operations technology and personnel; realize the full extent of the benefits, cost savings or synergies presented by strategic transactions; minimize potential losses of customers, business partners and key technical and managerial personnel; and minimize indemnities and potential disputes with buyers, sellers and strategic partners. In addition, execution or oversight of strategic transactions may result in the diversion of management attention from our existing business and may present financial, managerial and operational risks, including disruptions in our business because of the allocation of resources to consummate these transactions. Moreover, we might incur asset impairment charges related to acquisitions or divestitures that reduce our earnings.
With respect to acquisitions in particular, our failure to successfully structure or manage any acquisitionsthe transactions could seriously harm our financial condition or operating results. The expected benefits of any acquisition may not be realized. In connection with our acquisition of eSignLiverecent acquisitions and any future purchases, we willcould face additional financial and operational risks beyond those described above, including: dilution of our stockholders, if we issue equity to fund these transactions; reduced liquidity, increased debt and higher amortization expenses; assumption of operating losses, increased expenses and liabilities; discovery of unanticipated issues and liabilities; failure to meet expected returns; and difficulty in maintaining financial reporting and internal control processes needed to be compliant with requirements applicable to companies subject to SEC reporting.
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We also regularly review our portfolio for contributions to our objectives and alignment with our strategy, and we may pursue divestiture activities as a result of these reviews. However, we may not be successful in separating any underperforming or non-strategic assets, and gains or losses on any divestiture of, or lost operating income from, such assets may adversely affect our results of operations. Divestitures could also expose us to unanticipated liabilities or result in ongoing obligations, including transition service obligations and indemnity obligations.
Reported revenue may fluctuate widely due to the interpretation or application of accounting rules.
Our sales arrangements often include multiple elements, including hardware, services, software, maintenance and support. In addition, we have sold software related arrangements in multiple forms, including perpetual licenses, term basedterm-based licenses and SaaS subscriptions, each of which may be treated differently under accounting rules. The accounting rules for such arrangements are complex and subject to change from time to time. Small changes in circumstances could cause wide deviationsThe nature of the arrangement can create variations in the timing of reported revenue.revenue recognition.
Provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with customers, solution partners and channel partners generally include provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for damages caused by us to property or persons or for other damages. In addition, we make certain representations and warranties and incur obligations under our contracts in the ordinary course of business, including for items related to data security and potential data privacy breaches. Not all of our potential losses under our contracts are covered by insurance policies, which could increase the impact of any such loss should it occur. Large
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indemnity payments or damages resulting from our contractual obligations could harm our business, operating results and financial condition.
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The evolution of our business requires more complex development and go-to-market strategies, which involve significant risk.
Our increasing focus on developing and marketing a platform of solutions for identity management, authentication, risk analysis, fraud detection, digital business processes and related areas requires different development and go-to-market strategies than our historic hardware authentication business. We are developing, buying and licensing technology weighted toward software solutions and investment in research, development, product management, sales training and senior management. This transformation strategy is currently in progress and brings with it significant risks related to our choice of solutions and our ability to execute the strategy successfully. This strategy requires a greater focus on marketing and selling product suites and software solutions rather than selling hardware products for authentication and transaction signing. Consequently, we are developing, and must continue to develop, new strategies for marketing and selling our offerings. In addition, marketing and selling new technologiessolutions to enterprises requires significant investment of time and resources in order to train our employees and educate our customers on the benefits of our new product offerings. These investments can be costly and the additional effort required to educate both customers and our own sales force can distract from efforts to sell existing products and services.
Risks Related to the Market
We face significant competition and if we lose or fail to gain market share our financial results will suffer.
The market for data security products and services is highly competitive. Our competitors include organizations that provide data security products based upon approaches similar to and different from those that we employ. Many of our competitors have significantly greater financial, marketing, technical and other competitive resources than we do. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products.
A decrease of average selling prices for our products and services could adversely affect our business.
The average selling prices for our solution offerings may decline as a result of competitive pricing pressures or a change in our mix of products, software and services. In addition, competition continues to increase in the market segments in which we participate and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Furthermore, we anticipate that the average selling prices and gross profits for our products will decrease over product life cycles. To maintain or realize our revenue and gross margins, we must continue to develop, or purchase and introduce new products and services that incorporate new technologies or increased functionality. If we experience such pricing pressures or fail to deliver new products and services relevant to our markets, our revenue and gross margins could decline, which could harm our business, financial condition and results of operations.
We may need additional capital in the future and our failure to obtain capital would interfere with our growth strategy.
Our ability to obtain financing will depend on a number of factors, including market conditions, our operating performance and investor or creditor interest. These factors may make the timing, amount, terms and conditions of any financing unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. If adequate funds are not available or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, defer our product development activities, or delay the introduction of new products.
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We experience variations in quarterly operating results and sales are subject to seasonality, both of which may result in a volatile stock price.
In the future, as in the past, our quarterly operating results may vary significantly, resulting in a volatile stock price. Factors affecting our operating results include:
| The level of competition; |
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| The size, timing, cancellation or rescheduling of significant orders; |
| New product announcements or introductions by competitors; |
| Technological changes in the market for |
| Changes in pricing by competitors; |
| Our ability to develop, introduce and market new products and product enhancements on a timely basis, if at all; |
| Component costs and availability; |
| Achievement of significant market share in particular markets followed by declines as buying cycles |
| The variability of revenue realized from individual customers as their buying patterns |
| Our success in expanding our sales and marketing programs; |
| Market acceptance of new products and product enhancements; |
| Changes in foreign currency exchange rates; and |
| General economic conditions in the countries in which we operate. |
We also experience seasonality or variation across the year in allour markets. These seasonal trends are most notable incan include the summer months, particularly in Europe, when many businesses defer purchase decisions.or the second half of the fiscal year is generally higher than the first half in terms of sales.
Our stock price may be volatile for reasons other than variations in our quarterly operating results.
The market price of our common stock may fluctuate significantly in response to factors, some of which are beyond our control, including the following:
| Actual or anticipated fluctuations in our quarterly or annual operating results; |
| Differences between actual operating results and results estimated by analysts that follow our stock and provide estimates of our results to the market; |
| Differences between guidance relative to financial results, if given, and actual results; |
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| Changes in market valuations of other technology companies, and cybersecurity companies in particular; |
| Investor acceptance of our strategies and the perception of our success in executing those strategies; |
● | Announcements by us or our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; |
| Additions or departures of key personnel; |
| Future sales of common stock; |
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| The inclusion or exclusion of our stock in ETF’s, indices and other benchmarks, and changes made to methodologies connected therewith; |
| Trading volume fluctuations; and |
| Reactions by investors to uncertainties in the world economy and financial markets. |
Our stock repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock
On June 10, 2020, the Board of Directors authorized a share repurchase program (“program”). Under the program, we are authorized to repurchase shares of our common stock from time to time in the open market, in privately negotiated transactions, or otherwise, at prices that the Company deems appropriate and subject to market conditions, applicable law and other factors deemed relevant in the Company’s sole discretion, up to an aggregate purchase price of $50.0 million. The timing and actual number of shares repurchased depend on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements, and other market conditions. The program does not obligate the Company to repurchase any dollar amount or number of shares of common stock. The authorization is effective until June 10, 2022. Repurchases pursuant to our stock repurchase program could affect our stock price and increase its volatility. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of common stock. Although our stock repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness.
A small group of persons control a substantial amount of our common stock and could delay or prevent a change of control.
Our Board of Directors, our officers and their immediate families and related entities beneficially own approximately 23%, with Mr. T. Kendall Hunt, our founder and former Chairman of the Board, beneficially owningowns approximately 21%,12% of the outstanding shares of our common stock. As the ChairmanIn addition, Blackrock, Inc. holds approximately 12% of the Boardownership, Legion Partners Asset Management holds approximately 7% of Directorsownership, The Vanguard Group holds approximately 6% of ownership, Legal & General Investment Management LTD holds approximately 5% of ownership, and our largest stockholder, Mr. Hunt may exercise substantial control over our future direction and operations and suchSylebra Capital LTD holds approximately 5% of ownership.
The concentration of controlownership may have the effect of discouraging, delaying or preventing a change in control and may also have an adverse effect on the market price of our common stock.
Certain provisions of our charter and of Delaware law make a takeover of our companyCompany more difficult.
Our corporate charter and Delaware law contain provisions, such as a class of authorized but unissued preferred stock which may be issued by our board without stockholder approval that might enable our management to resist a takeover of our company.Company. Delaware law also limits business combinations with interested stockholders. These
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provisions might discourage, delay or prevent a change in control or a change in our management. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.
Future issuances of blank check preferred stock may reduce voting power of common stock and may have anti-takeover effects that could prevent a change in control.
Our corporate charter authorizes the issuance of up to 500,000 shares of preferred stock with such designations, rights, powers and preferences as may be determined from time to time by our Board of Directors, including such dividend, liquidation, conversion, voting or other rights, powers and preferences as may be determined from time to time by the Board of Directors without further stockholder approval. The issuance of preferred stock could adversely affect the voting power or other rights of the holders of common stock. In addition, the authorized shares of preferred stock and common stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control.
Our business could be adversely affected as a result of actions of activist stockholders.
Although we strive to maintain constructive, ongoing communications with all of our stockholders, and welcome their views and opinions with the goal of enhancing value for all of our stockholders, our stockholders may from time to time engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes or acquire control of the Company. Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming and could divert the attention of our Board of Directors and senior management from the management of our operations and the pursuit of our business strategy.
Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy or changes to the composition of our Board of Directors or senior management team arising from proposals by activist stockholders or a proxy contest could lead to the perception of a change in the direction of our business or instability that may be exploited by our competitors and/or other activist stockholders, result in the loss of potential business opportunities, result in the loss of our employees and business partners and make it more difficult to pursue our strategic initiatives or attract and retain qualified personnel and business partners, any of which could have an adverse effect on our business, financial condition and operating results.
Further, actual or perceived actions of activist stockholders may cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the Company’s underlying fundamentals and prospects.
Risks Related to Technology and Intellectual Property
Technological changes occur rapidly in our industry and our development of new products is critical to maintain our revenue.
The introduction by our competitors of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable. Our future revenue growth and operating profit will depend in part upon our ability to enhance our current products and develop innovative productsnew solutions to distinguish us from the competition and to meet customers’ changing needs. Security-related product developments and technology innovations by others may adversely affect our competitive position and we may not successfully anticipate or adapt to changing technology, industry standards or customer requirements on a timely basis.
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Our business could be negatively impacted by cyber security incidents and other disruptions.
Our use of technology is increasing and is critical in at least three primary areas of our business:
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A cyber incident in any of these areas of our business could disrupt our ability to take orders or deliver products or services to our customers, cause us to suffer significant monetary and other losses and significant reputational harm, or substantially impair our ability to grow the business. We expect that there will continue to be hacking attempts intended to capture business information or exploit computing power to impede the performance of our products, disruptto access our services andcustomers’ information, or harm our reputation as a company, as thecompany. The processes used by computer hackers to access or sabotage technology products, services and networks are rapidly evolving in sophistication.sophistication and increasing in frequency. We could experience a security incident due to various causes including intentional or unintentional conduct of our employees, vendors, technology partners and others that have access to or store our information.
In July 2011, we experienceddiscovered a cyber incidentcyber-incident related to DigiNotar B.V. shortly after we purchased the company. The hacking incident at DigiNotar B.V.ledB.V. led to the termination of DigiNotar B.V’s registration as a certification service provider and DigiNotar B.V.’s bankruptcy. WeSince that time, we have experienced several security incidents, although none have been material. Even though we have established teams, processes and strategies to protect our corporate and solution assets, we may incur losses from such events as a result of unanticipated costs associated with hackingdata security incidents.
In addition, because we are in the cyber security industry, we could be targeted by hackers more than other companies and if a material cyber security breach occurred related to corporate or customer information, the reputational harm and potential lost future business could be greater than other companies not in our industry. We have taken various measures to strengthen the security of our products and our systems, to establish information security governance procedures and to train our employees. However, we are the subject of a large volume of hacking attempts and our defenses might not always be effective. If a hacking attempt were to be successful and lead to a material data breach, then it could harm our business, financial condition and results of operations, both in the current period and for a significant future period of time.
We rely upon Amazon Web Services to operate portions of our platform and any disruption of or interference with our use of Amazon Web Services or other vendors’ material would adversely affect our business, results of operations and financial condition
We outsource portions of our cloud infrastructure to Amazon Web Services, or AWS. Customers of our products need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. We have experienced and expect that in the future we may experience interruptions, delays and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In addition, if our security, or that of AWS, is compromised, our products or platform are unavailable or our users are unable to use our products within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our platform
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performance, especially during peak usage times, as our products become more complex and the usage of our products increases. To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected.
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In addition, any changes in service levels from AWS may adversely affect our ability to meet our customers' requirements.
Any of the above circumstances or events may harm our reputation, possibly move customers to stop using our products, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and financial condition. These risks are also present with our other cloud service infrastructure vendors beside AWS as well.AWS. In addition, we also utilize strategic vendors to resell or incorporate third party technology and if these material vendors experienced a data breach, outage in service or other failure, we could be prevented from meeting our customers’ requirements.
OurSome of our products contain third-party, open-source software and failure to comply with the terms of the underlying open-source software licenses could restrict our ability to sell our products or otherwise result in claims of infringement.against us.
Our products are distributed with software programs licensed to us by third-party authors under “open-source”open-source licenses, which may include the GNU General Public License, the GNU Lesser Public License, the BSD License and the Apache License. These open-source software programs include, without limitation, Linux, Apache, Openssl, IPTables, Tcpdump, Postfix, Cyrus, Perl, Squid, Snort, Ruby, Rails, PostgreSQL, MongoDB and Puppet. These third-party,Third-party, open-source programs are typically licensed to us for no fee and the underlying license agreements generallycould require us to make available to users the source code for such programs, as well as the source code for any modifications or derivative works we create based on these third-party, open-source software programs.
We do not believe that we have created any modifications or derivative works to, an extended version of, or works based on, any open-source software programs referenced above. We include instructions to users on how to obtain copies of the relevant open-source code and licenses.
We do not provide end users a copy of the source code to our proprietary software because we believe that the manner in which our proprietary software is aligned or communicates with the relevant open-source programs does not create a modification, derivative work or extended version of, or a work based on, that open-source program requiring the distribution of our proprietary source code.
Our ability to commercialize our products by incorporating third-party, open-source software may be restricted because, among other reasons:
| the terms of open-source license agreements are unclear and subject to varying interpretations, which could result in unforeseen obligations regarding our proprietary products or claims of infringement; |
| it may be difficult to determine the developers of open-source software and whether such licensed software infringes another party’s intellectual property rights; |
| competitors |
| open-source software potentially increases customer support costs because licensees can modify the software and potentially introduce |
We must continue to attract and retain highly skilled technical personnel for our research and development efforts.
The market for highly skilled technicianstechnical talent is highly competitive. If we fail to attract, train, assimilate and retain qualified technical personnel for our research and development and product management efforts, we will experience delays or failures in introductions of new or modified products, and services, failures in adequate analysis of technology or acquisitions in the market, loss of clients and market share and a reduction in revenue.
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We cannot be certain that our research and development activities will be successful.
While management is committed to enhancing our current product offerings and introducing new products, we cannot be certain our research and development activities will be successful. Furthermore, we may not have sufficient financial resources to identify and develop new technologies and bring new products to market in a timely and cost effective manner, and we cannot ensure that any such products will be commercially successful.
Failure to effectively manage our product and service lifecycles could harm our business.
As part of the natural lifecycle of our products and services, we periodically inform customers that products or services will be reaching their end of life or end of availability and will no longer be supported or receive updates and security patches. Failure to effectively manage our product and service lifecycles could lead to customer dissatisfaction and contractual liabilities, which could adversely affect our business and operating results.
SaaS offerings, which involve various risks, constitute an important part of our business.
As we continue to acquire, develop and offer SaaS versions of products, we will need to continue to evolve our processes to meet a number of regulatory, intellectual property, contractual and service compliance challenges. These challenges include compliance with licenses for open source and third party software embedded in our SaaS offerings, maintaining compliance with export control and privacy regulations, including HIPAA and GDPR, protecting our services from external threats, maintaining continuous service levels and data security expected by our customers, preventing inappropriate use of our services and adapting our go-to-market efforts. In addition to using our internal resources, we also utilize third party resources to deliver SaaS offerings, such as third party data hosting vendors. The failure of a third party provider to prevent service disruptions, data losses or security breaches may require us to issue credits or refunds or indemnify or otherwise be liable to customers or third parties for damages that may occur. Additionally, if these third-party providers fail to deliver on their obligations, our reputation could be damaged, our customers could lose confidence in us and our ability to maintain and expand our SaaS offerings. Finally, our SaaS offerings need to be designed to operate at significant transaction volumes. When combined with third party software and hosting infrastructure, our SaaS offerings may not perform as designed which could lead to service disruptions and associated damages.
We depend significantly upon our proprietary technology and intellectual property and the loss of or successful challenge to our proprietary rights could require us to divert management attention and could reduce revenue and increase our operating costs.
From time to time, we receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights, and trademarks. Because of constant technological change in the segments in which we compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents, it is possible that the number of these claims may grow. In addition, former employers of our former, current, or future employees may assert claims that such employees have improperly disclosed to us the confidential or proprietary information of these former employers. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not successful in defending such claims, we could be required to stop selling, delay shipments, redesign our products, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations with our customers. Royalty or licensing arrangements we may seek in such circumstances may not be available to us on commercially reasonable terms or at all. We have made and expect to continue making significant expenditures to establish our intellectual property rights and to investigate, defend and settle claims related to the use of technology and intellectual property rights as part of our strategy to manage this risk. In addition, we license and use software from third parties in our business. These third party software licenses may not continue to be available to us on acceptable terms or at all, and may expose us to additional liability. This liability, or our inability to use any of this third party software or technology, could result in shipment delays or other disruptions in our business that could materially and adversely affect our operating results.
We rely principally on trade secrets to protect much of our intellectual property in cases where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although our
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employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information. We may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position. If we are unable to prevent third parties from infringing or misappropriating our copyrights, trademarks or other proprietary information, our competitive position could be adversely affected. In the course of conducting our business, we may inadvertently infringe the intellectual property rights of others, resulting in claims against us or our customers. Our contracts generally indemnify our customers for third-party claims for intellectual property infringement by the services and products we provide. In the past, we have resolved several claims of patent infringement brought against us and a claim brought against a customer related to our technology. None of these claims were material to our financial results but this may not always be the case. The expense of defending these claims may adversely affect our financial results and may not be covered by any insurance policies we maintain. In addition, any such disputes and litigation could divert management attention and harm our reputation in the market.
Our patents may not provide us with competitive advantages.
We hold severalnumerous patents in the United States and in other countries, which cover multiple aspects of our technology. A substantial part of our patents cover the DIGIPASSDigipass product line. Our patents expire between 2019now and 2035.more than 10 years from now. There can be no assurance that we will continue to develop proprietary products or technologies that are patentable, that any issued patent will provide us with any competitive advantages or will not be challenged by third parties, or that patents of others will not hinder our competitive advantage. Although certain of our technologies are patented, there are other organizations that offer products with comparable functionality that employ different technological solutions and compete with us for market share.
We are subject to warranty and product liability risks.
A malfunction of or design defect in our products which results in a breach of a customer’s data securitylegal obligation or physical harm or damage from our hardware products could result in tort or warranty claims against us. We seek to reduce the risk of these losses by using qualified engineers in the design, manufacturing and testing of our hardware products, proper development and testing of our software solutions, attempting to negotiate warranty disclaimers and liability limitation clauses in our sales agreements, and maintaining customary insurance coverage. However, these measures may ultimately prove ineffective in limiting our liability for damages.
In addition to any monetary liability for the failure of our products, an actual or perceived breach of network or data security at one of our customers or publicly known defect or perceived defect in our products could adversely affect the market’s perception of us and our products, and could have an adverse effect on our reputation and the demand for our products. Similarly, an actual or perceived breach of network or data security within our own systems could damage our reputation and have an adverse effect on the demand for our products.
There is significant government regulation of technology imports and exports and to the extent we cannot meet the requirements of the regulations we may be prohibited from exporting some of our products, which could negatively impact our revenue.
Our international sales and operations are subject to risks such as the imposition of government controls, new or changed export license requirements, restrictions on the export of critical technology, trade restrictions and changes in tariffs. If we are unable to obtain regulatory approvals on a timely basis our business may be impacted. Certain of our products are subject to export controls under U.S. law. The list of products and countries for which export approval is required, and the regulatory policies with respect thereto, may be revised from time to time and our inability to obtain required approvals under these regulations could materially and adversely affect our ability to make international sales. Violations of export control and international trade laws could result in penalties, fines, adverse reputational consequences, and other materially adverse consequences. Reference is made to Part 1, Item 3, Legal Proceedings of this Form 10-K with respectIn the past, we voluntarily disclosed a trade control matter to the internal investigation regarding salesU.S. government. Although this matter was closed during 2018 with no fines, penalties, or finding of VASCO products by a VASCO European subsidiarywrongdoing, we cannot guarantee that such issues will not arise in the future. In addition, we cannot predict the future government regulation of aspects of our business and such regulation could be detrimental to a third party distributor which distributor may have resold such products to Iranian entities.
our results.
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We employ cryptographic technology in our authentication products that uses complex mathematical formulations to establish network security systems.formulations.
ManyA portion of our products are based on cryptographic technology. With cryptographic technology, a user is given a key that is required to encrypt and decode messages. The security afforded by this technology depends on the integrity of a user’s key and in part on the application of algorithms, which are advanced mathematical factoring equations. These codes may eventually be broken or become subject to government regulation regarding their use, which would render our technology and products less effective. The occurrence of any one of the following could result in a decline in demand for our technology and products:
| Any significant advance in techniques for attacking cryptographic systems, including the development of an easy factoring method or faster, more powerful computers; |
| Publicity of the successful decoding of cryptographic messages or the misappropriation of keys; and |
| Increased government regulation limiting the use, scope or strength of cryptography. |
Risks Related to International Operations
We face a number of risks associated with our international operations, any or all of which could result in a disruption in our business and a decrease in our revenue.
In 2017, approximately 72% of our revenue and approximately 76% of our operating expenses were generated/incurred outside of the U.S. In 2016,2020, approximately 88% of our revenue and approximately 73% of our operating expenses were generated/incurred outside of the U.S. In 2015,2019, approximately 95%89% of our revenue and approximately 65%72% of our operating expenses were generated/incurred outside of the U.S. In 2018, approximately 91% of our revenue and approximately 71% of our operating expenses were generated/incurred outside of the U.S. A severe economic decline in any of our major foreign markets could adversely affect our results of operations and financial condition.
In addition to exposures to changes in the economic conditions of our major foreign markets, we are subject to a number of risks any or all of which could result in a disruption in our business and a decrease in our revenue. These include:
| Inconsistent regulations and unexpected changes in regulatory requirements; |
| Export controls relating to our technology; |
| Difficulties and costs of staffing and managing international operations, including maintaining internal |
| Potentially adverse tax consequences; |
| Wage and price controls or protection; |
| Uncertain protection for intellectual property rights, contractual rights and collecting accounts receivable; |
| Imposition of trade barriers; |
| Differing technology standards; |
| Uncertain demand for |
| Linguistic and cultural differences; |
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| A widely distributed workforce; |
| Difficulty in providing support and training to customers in certain international locations; |
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We are subject to foreign currency exchange rate fluctuations and risks, and improper management of that risk could adversely affect our business, results of operations, and financial conditions.
Because a significant number of our principal customers are located outside the United States, we expect that international sales will continue to generate a significant portion of our total revenue. We are subject to foreign exchange fluctuations and risks because the majority of our product costs are denominated in U.S. Dollars, whereas a significant portion of the sales and expenses of our foreign operating subsidiaries are denominated in various foreign currencies. A decrease in the value of any of these foreign currencies relative to the U.S. Dollar could adversely affect our revenue and profitability in U.S. Dollars of our products sold in these markets. We do not currently hold forward exchange contracts to exchange foreign currencies for U.S. Dollars to offset currency rate fluctuations.
Changes in the European regulatory environment regarding privacy and data protection regulations could have a material adverse impact on our results of operations.
In Europe, we are subject to the 1995 European Union (“EU”) Directive on Data Protection (“1995 Data Protection Directive”), which requires EU member states to impose minimum restrictions on the collection and use of personal data that, in some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States. We may also face audits or investigations by one or more foreign government agencies relating to our compliance with these regulations that could result in the imposition of penalties or fines. The EU member state regulations establish several obligations that organizations must follow with respect to use of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not protect personal data to an adequate level of privacy or security. In addition, certain member states have adopted more stringent data protection standards. The Company addressed these requirements by certification to the U.S.-EU Safe Harbor Frameworks prior to such Frameworks being invalidated in October 2015 by the European Court of Justice. The General Data Protection Regulation (“GDPR”) will replacereplaced the 1995 Data Protection Directive effective May 25, 2018, creating significant impacts on how businesses can collect and process the personal data of EU individuals. In the interim, we are pursuing alternative methods of compliance,We have expended significant resources to comply, but those methods may be subject to scrutiny by data protection authorities in EU member states. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us may limit theour use and adoption of our productspersonal data and solutions and could have a material adverse impact on our results of operations.
We must comply with governmental regulations setting environmental standards.
Governmental regulations setting environmental standards influence the design, components or operation of our products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Our failure to comply with these regulations may prevent us from selling our products in a certain country. In addition, these regulations may increase our cost of supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these cases, we may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring products into compliance. This could have an adverse effect on our revenues, gross profit margins and results of operations and increase the volatility of our financial results.
We are subject to the Restriction on the Use of Hazardous Substances Directive 2002/95/EC (also known as the “RoHS Directive”) and the Waste Electrical and Electronic Equipment Directive (also known as the “WEEE Directive”).
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These directives restrict the distribution of products containing certain substances, including lead, within applicable geographies and require a manufacturer or importer to recycle products containing those substances.
These directives affect the worldwide electronics and electronics components industries as a whole. If we or our customers fail to comply with such laws and regulations, we could incur liabilities and fines and our operations could be suspended.
The vote by the United Kingdom (UK) to leave the European Union (EU) could adversely affect our financial results.
In June 2016, UK voters approved a referendum to withdraw the UK's membership from the EU, which is commonly referred to as "Brexit". In March 2017, the UK government initiated the exit process under Article 50 of the Treaty of the European Union, commencing a period of up to two years for the UK and the other EU member states to negotiate the terms of the withdrawal. We have operations in the UK and the EU, and as a result, we face risks associated with the potential uncertainty and disruptions that may lead up to and follow Brexit, including with respect to volatility in exchange rates and interest rates and potential material changes to the regulatory regime applicable to our operations in the UK. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. Although we do not have a substantial portion of our operations in, nor derive a substantial portion of our revenue from, the UK, we do have substantial operations and revenue in the EU. Any of these effects of Brexit, and others we cannot anticipate or that may evolve over time, could adversely affect our business, financial condition, and operating results.
We or our suppliers may be impacted by new regulations related to climate change.
In addition to the European environmental regulations noted above, we or our suppliers may become subject to new laws enacted with regards to climate change. In the event that new laws are enacted or current laws are modified in countries in which we or our suppliers operate, our flow of product may be impacted and/or the costs of handling the potential waste associated with our products may increase dramatically, either of which could result in a significant negative impact on our ability to operate or operate profitably.
The effects of regulations relating to conflict minerals may adversely affect our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals and derivatives ( collectively(collectively “Conflict Minerals”) which may originate from the conflict zones of the Democratic Republic of Congo (DRC) and adjoining countries (collectively, “Covered Countries”). As a result, in August 2012 the SEC established annual disclosure and reporting requirements for companies using Conflict Minerals in their products, including products manufactured by third parties. Like many electronic devices, our hardware products contain Conflict Minerals and are subject to the disclosure and reporting requirements. Compliance with these rules also requires due diligence including country of origin inquiries to determine the sources of Conflict Minerals used in our products.
As required, we filed our annual reports related to products manufactured. We reported that we determined we had no reason to believe Conflict Minerals used in our products may have originated in Covered Countries.
We may incur continued costs associated with complying with these disclosure requirements. These requirements may affect pricing, sourcing and availability of Conflict Minerals used to produce our devices. We may be unable to verify the origin of all Conflict Minerals in our products. We may encounter challenges with customers and stakeholders if we are unable to certify that our products are conflict free.
U.S. investors may have difficulties in making claims for any breach of their rights as holders of shares because some of our assets and key employees are not located in the United States.
Several of our key employees are full-time or part-time residents of foreign countries, and a substantial portion of our assets and those of some of our key employees are located in foreign countries. As a result, it may not be possible
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for investors to effect service of process on those persons located in foreign countries, or to enforce judgments against some of our key employees based upon the securities or other laws of jurisdictions in those foreign countries.
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Our business in countries with a history of corruption and transactions with foreign governments increase the risks associated with our international activities.
We are subject to the U.S. Foreign Corrupt Practices Act (FCPA), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. We have operations, deal with and make sales to governmental or quasi-governmental customers in countries known to experience corruption, particularly certain countries in the Middle East, Africa, East Asia and South and Central America, and further expansion of our international selling efforts may involve additional regions. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or channel partners that could be in violation of various laws, including the FCPA and the U.K. Bribery Act, even though these parties are not always subject to our control. Violations of the FCPA may result in severe criminal or civil sanctions, including suspension or debarment from U.S. government contracting, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. Violations of the U.K. Bribery Act may result in severe criminal or civil sanctions and we may be subject to other liabilities that could negatively affect our business operating results and financial condition.
Item 1B - Unresolved Staff Comments
None.
Our corporate headquarters is located in Chicago, Illinois. Our international headquarters is in Zurich, Switzerland. Our European operational headquarters is located in Brussels, Belgium.Belgium, along with our logistics facility. We conduct sales and marketing, research and development and customer support activities from our operational headquarters.various locations. Our logistics facilityprimary global research and development center is also located in Belgium. In the Netherlands, weMontreal, Canada. We have twoadditional research and development facilities one of which also houses a sales office. Additionally, we have research and development facilities in the Netherlands, Cambridge, United Kingdom, Bordeaux, France and Vienna, Austria.
We have sales personnel in our offices near Boston, Massachusetts, Sydney, Australia,Brussels, Belgium, Singapore, Tokyo, Japan, Sao Paulo, Brazil, Dubai, Zurich, Switzerland, Chicago, Illinois, and London, United Kingdom, Boston, Massachusetts, Sydney, Australia, and conduct sales activities through liaisonin several field offices and agents in other locations.
During 2015, we acquired Silanis Technology, Inc. with offices in Montreal, Canada.around the world.
All of our properties are leased.
In additionWe are a party to or have intellectual property subject to litigation and other proceedings that arise in the ordinary course of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal mattersproceedings described below, we are, from time to time, involved in routine legal matters incidental to the conduct of our business, including legal matters such as to protect our intellectual property rights and resolve employment claims. We believe that the ultimate resolution of any such current routine matter will not have a material adverse effect on our continued financial position, results of operations or cash flows.
On January 10, 2011, we purchased our wholly-owned subsidiary, DigiNotar B.V.,the corporation as a private company organized and existing in The Netherlands fromwhole, notwithstanding that the shareholders (“Sellers”). On September 19, 2011, DigiNotar B.V. filed a bankruptcy petition under Article 4 of the Dutch Bankruptcy Act in the Haarlem District Court, The Netherlands. On September 20, 2011, the court declared DigiNotar B.V. bankrupt and appointed a bankruptcy trustee and a bankruptcy judge to manage all affairs of DigiNotar B.V. through the bankruptcy process.
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In January 2015, we received a notice of potential claim by the trustee against all of the individuals who served as Directors of DigiNotar, both before and after our acquisition of DigiNotar. T. Kendall Hunt, Jan Valcke, and Clifford K. Bown were the Directors of DigiNotar following its purchase by VASCO. We do not expect theunfavorable resolution of the potential claim toany matter may have a material adverse effect on our business, financial conditionresults in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or resultspossible damages or loss contingency (if estimable), the progress of operations. VASCOthe case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is indemnifying Messrs. Hunt, Valcke,at least a reasonable possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a process in which we seek to estimate the reasonably possible loss or range of loss, and Bownonly if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in
29
our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
We include various types of indemnification clauses in our agreements. These indemnifications may include, but are not limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have no liabilities recorded for these clauses as of December 31, 2020.
We have been involved in an ongoing dispute with a German company, Onespin solutions GmbH, regarding the co-existence of, or alleged infringement with, its trademark in certain jurisdictions for “ONESPIN” and our trademark in certain jurisdictions for “ONESPAN”. Onespin sells integrated circuit integrity verification solutions for use in the system on chip software development process flow. During the fourth quarter of 2020, we reached a settlement with Onespin on these matters. The amount of the settlement was not material from a financial perspective. We consider this matter.matter to now be closed.
On July 28, 2015 a putative class actionA complaint was filed in the United States District Court for the Northern District of Illinois, captioned Linda J. Rossbach v. Vasco Data Security International, Inc., et al., naming VASCOon August 20, 2020 against OneSpan and certain of its current and former executive officers, as defendants and alleging violations under the Securities Exchange Act of 1934, as amended. The suit was purportedly filed on behalf of a putative class of investors who purchased VASCO securities between April 28, 2015 and July 28, 2015, and seeks to recover damages allegedly caused by the defendants’ allegedasserting claims for purported violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and SEC Rule 10b‑510b-5 promulgated thereunder.thereunder, based on certain alleged material misstatements and omissions. The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys’ fees. On January 30, 2017, the appointed lead plaintiff filed an amended complaint in which the allegations regarding OFAC related matters were dropped and replaced with allegations regarding public disclosures made by the defendants in April 2015 as compared to public statements made in July 2015, generally regarding the strength of the Company’s business and its future prospects. This case is now referredcaptioned Almendariz v. OneSpan Inc., et al., No. 1:20-cv-04906 (N.D. Ill.) (the “Securities Class Action”). Specifically, the plaintiff in the Securities Class Action alleges, among other things, that certain statements about OneSpan’s business were misleading because of defendants’ failure to bydisclose that OneSpan purportedly had inadequate internal procedures and controls over financial reporting and related disclosures; and OneSpan purportedly downplayed the namenegative impacts of immaterial errors in its financial statements.
A complaint, related in subject matter to the new lead plaintiff, Bunk. The defendantsSecurities Class Action, was filed a motion to dismiss the Bunk complaint on March 31, 2017. A decision from the court on such motion has not been issued to date. Although the ultimate outcomeOctober 23, 2020 against certain of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend against the action vigorously. VASCO is indemnifying itsOneSpan’s officers and directors, for this matter.
On October 9, 2015, a derivative complaint was filed in the United States District Court for the Northern District of Illinois, captioned Elizabeth Herrera v. Hunt, et al., naming VASCO’s Board of Directors and certain of its current and former executive officers as individual defendants and the Companynames OneSpan as a nominal defendant. The case is captioned Klein v. Boroditzky, et al., No. 1:20-cv-06310 (N.D. Ill.) (the “Derivative Action” and, collectively with the Securities Class Action, the “Litigation”). The plaintiff asserts claims for breach of fiduciary duty, abuse of control and corporate waste, as well as a claim for contribution under Sections 10(b) and 21D of the Exchange Act, based on the same alleged wrongdoing pled in the Herrera case voluntarily dismissedSecurities Class Action. We intend to defend against the action on July 12, 2017. Two additional complaints, captioned Beth Seltzer v. Hunt, et al.,Litigation vigorously.
From time to time, we have been involved in litigation and William Hooper v. Hunt, et al., were filed on October 22, 2015 and March 22, 2016, respectively, in the Circuit Court of Cook County, Illinois naming the same defendants.
The complaints assert, among other things, that the individual defendants breached their fiduciary duties by making material misstatements in, and omitting material information from, the Company’s public disclosures and by failing to maintain adequate internal controls and properly manage the Company. Among other things, the complaints seek unspecified compensatory damages and injunctive relief.
On February 9, 2016, the court granted an agreed motion for voluntary dismissal of the Seltzer action, which dismissed the action with prejudice asclaims incidental to the named plaintiff’s individual claims. As for the Hooper action, the court granted a stay on June 8, 2016 and on July 18, 2017, the plaintiff in Hooper amended the complaint to largely mirror the amended complaint in Bunk.
On July 19, 2017, a derivative complaint was filed in the Circuit Court of Cook County, Illinois, captioned Fancesco D’Angelo v. Hunt, et. al., naming VASCO’s Board of Directors and certain former officers as individual defendants and the Company as a nominal defendant. This complaint largely follows the allegations in the Bunk case. The D’Angelo case has been consolidated with the Hooper case and remains subject to stay.
In February 2017, we learned an integrated reseller and certain end customers, were named as defendants in a patent infringement lawsuit in Japan related to our CRONTO technology. We have indemnification obligations in favorconduct of our reseller and end customers andbusiness, such as compensation claims from current or former employees in Europe. We expect that to continue. Excluding matters specifically disclosed above, we are working with themnot a party to defend such suit. In December 2017 the Japan Patent Office ruled the plaintiff’s patentany lawsuit or proceeding that, in management’s opinion, is invalid. In February 2018,likely to have a trial court decision declared the plaintiff’s patent to be invalid. The decision is subject to appeal. We believe there are strong grounds to argue the plaintiff’s patent is invalid.
On March 14, 2017, a complaint was filed in the United States District Court for the Districtmaterial adverse effect on its business, financial condition or results of Massachusetts, captioned StrikeForce Technologies, Inc. v. Vasco Data Security International, Inc., et al., claiming VASCO infringed on certain patent rights of the plaintiff. On May 8, 2017, VASCO answered the complaint denying the allegations of patent infringement. The parties then engaged in motion practice and discovery in the case. The plaintiff has alsooperations.
25
brought suit against various other companies in the cybersecurity industry. In one such suit in the federal district court for the Central District of California, on December 1, 2017, the court granted defendant’s motion to dismiss, finding that the StrikeForce asserted claims are invalid. StrikeForce is in the process of appealing such decision. In light of such ruling, on December 20, 2017, the court in the Company’s case granted a stay of the proceedings pending the appeal in the related case. Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend itself vigorously.
On February 14, 2018, a complaint was filed in the United States District Court for the District of Delaware, captioned Vortex Pathway LLC (a Texas non-practicing entity) v. VASCO Data Security International, Inc. et. al. claiming one of VASCO’s hardware authenticators infringes on certain patent rights of the plaintiff. The Company will analyze this recent complaint in the ordinary course and intends to defend itself vigorously.
Item 4 - Mine Safety Disclosures
Not applicable.
30
PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock, par value $0.001 per share, trades on the NASDAQ Capital Market under the symbol VDSI.OSPN.
The following table sets forth the range of high and low daily closing prices of our common stock on the NASDAQ Capital Market for the past two years.
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| ||||||
2017 |
| High |
| Low | ||||||||
| | | | | | | ||||||
2020 |
| High |
| Low | ||||||||
Fourth quarter |
| $ | 14.35 |
| $ | 11.90 | | $ | 26.60 | | $ | 18.20 |
Third quarter |
|
| 14.60 |
|
| 11.05 | |
| 32.96 | |
| 18.84 |
Second quarter |
|
| 14.80 |
|
| 12.10 | |
| 27.93 | |
| 14.89 |
First quarter |
|
| 15.65 |
|
| 12.60 | |
| 20.39 | |
| 10.95 |
|
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| ||||||
2016 |
| High |
| Low | ||||||||
| | | | | | | ||||||
2019 | | High | | Low | ||||||||
Fourth quarter |
| $ | 18.44 |
| $ | 13.50 | | $ | 19.74 | | $ | 14.13 |
Third quarter |
|
| 19.02 |
|
| 15.31 | |
| 16.68 | |
| 12.95 |
Second quarter |
|
| 18.40 |
|
| 15.39 | |
| 19.41 | |
| 13.40 |
First quarter |
|
| 16.64 |
|
| 13.39 | |
| 21.55 | |
| 12.40 |
On February 22, 2018,18, 2021, there were 57111 registered holders and approximately 18,2799,670 street name holders of the company’sCompany’s common stock.
We have not paid any dividends on our common stock since incorporation. The declaration and payment of dividends will be at the sole discretion of the Board of Directors and subject to certain limitations under the General Corporation Law of the State of Delaware. The timing, amount and form of dividends, if any, will depend, among other things, on the company’sCompany’s results of operations, financial condition, cash requirements, plans for expansion and other factors deemed relevant by the Board of Directors. The companyCompany intends to retain any future earnings for use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
None
26
Issuer Purchases of Equity Securities
On June 10, 2020, the Board of Directors authorized a share repurchase program (“program”), pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. Share purchases under the program will take place in open market transactions or in privately negotiated transactions 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 OneSpan’s sole discretion and will depend upon market and business conditions, applicable legal and credit requirements and other corporate considerations. The authorization is effective until June 10, 2022 unless the total amount has been used or authorization has been cancelled.
During the year ended December 31, 2020, the Company repurchased 0.3 million shares of the Company’s stock for $5.0 million in the aggregate at an average cost of $20.10 per share under its repurchase program. An additional 0.1 million shares of its common stock were withheld to satisfy the mandatory tax withholding requirements upon vesting of restricted stock for $2.0 million at an average cost of $21.08 per share.
31
The following table provides information about purchases by the Companyrelating to our purchase of its shares of our common stock duringin the three month period ended December 31, 2016:fourth quarter of 2020 (in thousands, except per share amounts):
| | | | | | | | | |
| | | | | | | Total Number | | |
| | | | | | | of Shares | | Maximum |
| | | | | | | Purchased as | | Dollar Value of Shares |
| | Total | | | | Part of Publicly | | that May Yet Be | |
| | Number of | | Average | | Announced | | Purchased Under | |
| | Shares Purchased | | Price Paid | | Plans or | | the Plans or | |
Period |
| (1) |
| per Share |
| Programs |
| Programs | |
October 1, 2020 through October 31, 2020 |
| — |
| $ | — |
| — |
| 50,000 |
November 1, 2020 through November 30, 2020 |
| 50 | | $ | 18.94 |
| 50 |
| 49,050 |
December 1, 2020 through December 31, 2020 |
| 204 | | $ | 20.78 |
| 200 |
| 44,970 |
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| Total Number |
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|
|
|
|
| of Shares |
| Maximum |
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|
|
|
| Purchased as |
| Number of Shares |
|
| Total |
|
|
| Part of Publicly |
| that May Yet Be | |
|
| Number of |
| Average |
| Announced |
| Purchased Under | |
|
| Shares Purchased |
| Price Paid |
| Plans or |
| the Plans or | |
Period |
| (1) |
| per Share |
| Programs (2) |
| Programs (2) | |
October 1, 2017 through October 31, 2017 |
| 237 | �� | $ | 12.00 |
| — |
| — |
November 1, 2017 through November 30, 2017 |
| 18,535 |
|
| 14.10 |
| — |
| — |
December 1, 2017 through December 31, 2017 |
| 1,832 |
|
| 12.95 |
| — |
| — |
| (1) |
|
|
|
|
Stock Performance Graph
The Stock Performance Graph below compares the cumulative total return through December 31, 2017,2020 assuming reinvestment of dividends, by an investor who invested $100.00 on December 31, 2012,2015, in each of (i) our common stock, (ii) the Russell 2000 index, (iii) the Standard Industrial Code Index 3577 – Computer Peripheral Equipment, NEC and (iv) a comparable industry (the peer group) index selected by the company.Company. The peer group for this purpose consists of: American Software, Inc., Appian Corporation, Barracuda Networks, Inc., BlackLine, Inc., Callidus Software, Inc., Carbonite, Inc., CPI Card Group, Inc., FireEye, Inc., Gigamon, Inc., Imperva, Inc., Mobilelron, Inc., ProofPoint, Inc., PROS Holdings, Inc., Q2 Holdings, Inc., QAD, Inc., Qualys, Inc., Rapid7, Inc., SecureWorks Corp.,
27
Varonis Systems, Inc. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
32
Item 6 - Selected Financial Data (in thousands, except per share data)
The following table presents selected consolidated financial data for the periods indicated. The following information should be read in conjunction with the consolidated financial statements and the accompanying notes and "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K. We have revised the prior period consolidated financial statements for the years ended December 2019 and 2108 to reflect immaterial errors identified and described within Note 2 - Summary of Significant Accounting Policiesand summarized within Note 3 - Revision of Prior Period Financial Statements.
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | |||||||||||||
|
| 2020 |
| 2019 |
| 2018* |
| 2017* |
| 2016* | |||||
Statements of Operations Data: |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenue | | $ | 215,691 | | $ | 253,484 | | $ | 211,336 | | $ | 193,291 | | $ | 192,304 |
Operating income (loss) | |
| (5,258) | |
| 14,189 | |
| (920) | |
| 6,192 | |
| 9,599 |
Net income (loss) | |
| (5,455) | |
| 7,864 | |
| 3,044 | |
| (22,399) | |
| 10,514 |
Diluted net income (loss) per common share | |
| (0.14) | |
| 0.20 | |
| 0.08 | |
| (0.56) | |
| 0.27 |
| | | | | | | | | | | | | | | |
Balance Sheet Data: | |
| | |
| | |
| | |
|
| |
|
|
Cash and equivalents | | $ | 88,394 | | $ | 84,282 | | $ | 76,708 | | $ | 78,661 | | $ | 49,345 |
Working capital | |
| 131,874 | |
| 135,989 | | | 118,797 | |
| 161,784 | |
| 139,199 |
Total assets | |
| 375,203 | |
| 382,542 | | | 351,882 | |
| 337,622 | |
| 327,270 |
Long term obligations | |
| 42,559 | |
| 46,436 | | | 28,028 | |
| 33,539 | |
| 6,148 |
Total stockholders equity | |
| 257,340 | |
| 262,294 | | | 251,639 | |
| 237,930 | |
| 253,162 |
*Prior period amounts are presented under ASC 605 and ASC 985-20.
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|
|
|
|
| Year Ended December 31, | |||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 | |||||
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 193,291 |
| $ | 192,304 |
| $ | 241,443 |
| $ | 201,537 |
| $ | 155,047 |
Operating income |
|
| 6,192 |
|
| 9,599 |
|
| 50,453 |
|
| 38,088 |
|
| 13,712 |
Net income (loss) |
|
| (22,399) |
|
| 10,514 |
|
| 42,151 |
|
| 32,611 |
|
| 10,967 |
Diluted net income (loss) per common share |
|
| (0.56) |
|
| 0.27 |
|
| 1.06 |
|
| 0.85 |
|
| 0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
| $ | 78,661 |
| $ | 49,345 |
| $ | 78,522 |
| $ | 72,441 |
| $ | 98,607 |
Working capital |
|
| 161,784 |
|
| 139,199 |
|
| 127,675 |
|
| 161,029 |
|
| 124,538 |
Total assets |
|
| 337,622 |
|
| 327,270 |
|
| 311,827 |
|
| 251,553 |
|
| 211,877 |
Long term obligations |
|
| 33,539 |
|
| 6,148 |
|
| 11,197 |
|
| 2,823 |
|
| 493 |
Total stockholders equity |
|
| 237,930 |
|
| 253,162 |
|
| 245,156 |
|
| 205,873 |
|
| 174,278 |
Cash dividends declared per common share |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
28
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except head count, ratios, time periods and percents)percentages)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Item 1A – Risk Factors and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below. Please see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995”“Forward Looking Statements” at the beginning of this Form 10-K.
The Company has excluded discussion of the comparison of the years ended December 31, 2019 and 2018 from this Form 10-K., which can be found in the annual report on Form 10-K for the period ended December 31, 2019, filed on March 16, 2020.
Revision of Previously Issued Financial Statements
This information should be read in conjunction with the consolidated financial statements and the notes thereto included in this Annual Report. We have revised our prior period financial statements to reflect the correction of immaterial errors as described in this Annual Report in Notes to the Consolidated Financial Statements, Note 3 – Revision of Previously Issued Financial Statements.
COVID-19 Pandemic Response and Impact
In March 2020, the World Health Organization recognized a novel strain of coronavirus (COVID-19) as a pandemic. In response to the pandemic, the United States and various foreign, state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend
33
operating activities. The pandemic and the various governments’ response have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate.
Financial Results and Outlook
Beginning in the Summer of 2020 and continuing through the year ended December 31, 2020, we experienced lengthened sales cycles and reduced demand for some of our security solutions due to economic uncertainty connected with the COVID-19 pandemic. The most significant impact of the pandemic on our business has been a sharp drop in demand for our hardware authentication products and delays in the implementation of certain software security solutions.
In addition, we believe demand for our hardware offerings declined in favor of our mobile and cloud security solutions as customers increasingly adopted digital alternatives in 2020. Finally, we saw strong demand for our hardware solutions in Europe during 2019 that did not repeat in 2020 due to many of our customers complying with banking regulations imposed by Payment Services Directive 2 (“PSD2”). As a result, our hardware revenues for 2020 were substantially below such revenues as compared to 2019.
In the current and future periods, we may experience weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results.
As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets, any negative impact to our results cannot be reasonably estimated, but it could be material. We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. We are able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. See Part I – Item 1A – Risk Factors of this Form 10-K for additional information regarding the potential impact of COVID-19 on the Company.
Overview
We design, develop and market digital solutions for identity, security, and business productivity that protect and facilitate electronic transactions via mobile and connected devices. We are a global leader in providing anti-fraud and digital transaction management solutions to financial institutions and other businesses. Our solutions secure online and mobile access to online accounts, data, assets, and applications for global enterprises; provide tools for application developers to easily integrate security functions into their web-based and mobile applications; and facilitate end-to-end financial agreement automation including digital transactions involving the signing, sending,identity verification, electronic signature and managing of documents.electronic notarization. Our core technologies, multi-factor authentication, electronic signature, and transaction signing, strengthen the process of preventing hacking attacks against online and mobile transactions to allowtransactions. This allows companies to transact business safely and with an improved customer experience for remote customers.
We offer cloud based and on premiseson-premises solutions using both open standards and proprietary technologies. Some of our proprietary technologies are patented. Our products and services are used for authentication, fraud mitigation, e-signing transactions and documents, and identity management in Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and Business-to-Consumer (“B2C”) environments. Our target market is business processes using an electronic interface, particularly the Internet, where there is risk of unauthorized access.account takeover or new account fraud. Our products can increase security associated with accessing business processes, reduce losses from unauthorized access, help customers comply with regulations, enhance the end-user experience, and reduce the cost of the processbusiness processes by automating activities previously performed manually.
Online and mobile application owners and publishers benefit from our expertise in multi-factor authentication, document signing, transaction signing, application security, remote customer onboarding, and in mitigating hacking attacks. Our convenient and proven security solutions enable low friction and trusted interactions between businesses, employees, and consumers across a variety of online and mobile platforms.
34
Our primary growth strategy is to make digital banking more accessible, secure, easy and valuable. Our key growth objectives include:
| ● | Expanding our portfolio of services that enable institutions to mitigate fraud, reduce operational costs, comply with regulations, easily on-board customers, and adaptively authenticate transactions and reduce time to deploy; |
| ● | Automating and securing digital customer journeys to remotely verify identities, mitigate application fraud and secure account opening and transactions; |
| ● | Increasing sales to existing customers and acquiring new customers; |
| ● | Driving increased demand for our products in new applications, new markets, and new territories; |
| ● | Expanding our channel partner ecosystem; and |
| ● | Strategically acquiring companies that expand our technology portfolio or customer base and increase our recurring revenue. |
Our Business Model
We offer our products through a product sales and licensing model or through our services platform, which includes our cloud-based service offering.offerings.
Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers. Our sales force is able to offer customers a choice of an on-site implementation using our traditional on-premises model or a cloud implementation for some solutions using our services platform.
Industry Growth
We believe there are no reliable measurements ofEconomic instability related to the industry size or growth ratesCOVID-19 pandemic impacted our results for the segments that we serve. However,year ended December 31, 2020. As economic conditions recover, we believe the marketglobal markets for authentication, anti-fraud,fraud mitigation, agreement automation, and electronic signature solutions will continue to grow driven by dynamic and growing threat environments, increased focus on the digital experience for mobile and online users, new government regulations, growing awareness of the impact of cyber-crime, and thecontinued growth in electronic commerce. The issues driving growth are global however, the rate of adoptiongrowth in each country is a function ofaround the world may vary significantly based on local culture, competitive position, economic conditions, and the use of technology.
Economic Conditions
Our revenue may vary significantly with changes in the economic conditions in the countries in which we currently sell products. With our current concentration of revenue in Europe and specifically in the banking and finance vertical market, significant changes in the economic outlook for the European Banking market may have a significant effect on our revenue.
The COVID-19 pandemic and the various responses of governments around the world have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate. See Part I, Item 1A – Risk Factors of this Form 10-K for additional information regarding the potential impact of COVID-19 on the Company.
2935
Cybersecurity Risks
Our use of technology is increasing and is critical in three primary areas of our business:
1. | Software and information systems that we use to help us run our business more efficiently and cost effectively; |
2. | The products we have traditionally sold and continue to sell to our customers for integration into their software applications contain technology that incorporates the use of secret numbers and encryption technology; and |
3. | New products and services that we introduced to the market are focused on processing information through our servers or in the cloud. |
We believe that the risks and consequences of potential incidents in each of the above areas are different.
In the case of the information systems we use to help us run our business, we believe that an incident could disrupt our ability to take orders or deliver product to our customers, but such a delay in these activities would not have a material impact on our overall results. To minimize this risk, we actively use various forms of security and monitor the use of our systems regularly to detect potential incidents as soon as possible.
In the case of products that we have traditionally sold, we believe that the risk of a potential cyber incident is minimal. We offer our customers the ability to either create the secret numbers themselves or have us create the numbers on their behalf. When asked to create the numbers, we do so in a secure environment with limited physical access and store the numbers on a system that is not connected to any other network, including other VASCOOneSpan networks, and similarly, is not connected to the internet.Internet.
In the case of our new products and services,cloud-based solutions, which involve the active daily processing of the secret numbers on our servers or servers managed by others in a hosted environment,customer information, we believe a cyber incident could have a material impact on our future business. We also believe that these products may be more susceptible to cyber attacks thanWhile our traditional products since it involves the active processing of transactions using the secret numbers. While we do not have a significant amount of revenue from these productscloud-based solutions comprises a minority of our revenue today, we believe that these products have the potential tosolutions will provide substantial future growth. A cyber incident involving these productssolutions in the future could substantially impair our ability to grow the business and we could suffer significant monetary and other losses and significant reputational harm.
To minimize the risk, we review our product security and procedures on a regular basis. Our reviews include the processes and software programscode we are currently using as well as new forms of cyber incidentsthe hosting platforms and new or updated software programsprocedures that may be available in the market that would helpwe employ. We mitigate the risk of incidents.cyber incidents through a series of reviews, tests, tools and training. Certain insurance coverages may apply to certain cyber incidents. Overall, we expect the cost of securing our networks will increase in future periods, whether through increased staff, systems or insurance coverage.
While we didare not experienceaware of any cyber incident in 2017, 2016, or 2015incidents during the year ended December 31, 2020 that had a significant impact on our business, it is possible that we could experience an incident in 2018 or future years, which could result in unanticipated costs.
Currency Fluctuations
In 2017, approximately 72% of our revenue and approximately 76% of our operating expenses were generated/incurred outside of the U.S. In 2016,2020, approximately 88% of our revenue and approximately 73% of our operating expenses were generated/incurred outside of the U.S. In 2019, approximately 89% of our revenue and approximately 72% of our operating expenses were generated/incurred outside of the U.S. In 2018, approximately 91% of our revenue and approximately 71% of our operating expenses were generated/incurred 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 revenue and expenses.
While the majority of our revenue is generated outside of the U.S., the majoritya significant amount of our revenue is billedearned during the year ended December 31, 2020 was denominated in U.S. Dollars. In 2017,2020, approximately 66%44% of our revenue was denominated in U.S. Dollars, 29%51% was denominated in Euros and 5% was denominated in other currencies. In 2016, 2019,
36
approximately 69%47% of our revenue was denominated in U.S. Dollars, 26%49% was denominated in Euros and 5%9% was denominated in other currencies.
30
our revenue was denominated in U.S. Dollars, 30% was denominated in Euros, and 12% 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 hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may also 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. Accordingly, assets and liabilities 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 comprehensive incomegain of $4.0$4.5 million in 2017,2020, comprehensive gain of $1.5 million in 2019 and comprehensive lossesloss of $2.5 million and $3.3$5.5 million in 2016, and 2015, respectively.2018. These amounts are included as a separate component of stockholders’ equity. The functional currency offor our subsidiaries in Switzerland, Canada,Singapore and SingaporeCanada is the U.S. Dollar.
Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations asin other non-operating income/expense.income (expense). Foreign exchange transaction gains aggregated less than $0.1 million for the year ended December 31, 2020. We reported foreign exchange transaction losses of $0.5$1.5 million in 2017, foreign exchange transaction gains of $0.1and $0.2 million in 2016,during the years ended December 31, 2019 and foreign exchange transaction losses of $1.2 million in 2015,2018, respectively.
Components of Operating Results
Revenue
We generate revenue from the sale of our hardware products, software licenses, subscriptions, maintenance and support, and professional services. 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 hardware products and software |
| Service and other revenue. Service and other revenue includes |
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. |
| Cost of service and other revenue. Cost of service and other revenue primarily consists of costs related to |
37
Gross Profit
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.
31
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 55%60% and 65% 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.
In November 2015, with the acquisition of eSignLive, our headcount increased by 156. Average headcount for the full-year 2017, 2016, and 2015 was 614, 595, and 412, respectively.
Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates in 20172020 compared to 20162019 resulted in an increase in operating expenses of approximately $0.4$0.7 million in 2017.2020.
The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. For full-year 2017, 2016,2020, 2019, and 2015,2018, operating expenses included $5.4$6.0 million, $4.9$5.3 million, and $5.7$6.1 million, respectively, related to stock-based and long-term incentive plans. Generally, performance awards granted at the beginning of 2016 were not earned. Long-term incentive awards granted at the beginning of 2015 were earned. Long-term incentive plan compensation expense includes both cash and stock-based incentives.
| 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. We expect sales and marketing expenses to increase in absolute dollars as we continue to invest in sales resources in key focus areas, although 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. We expect research and development expenses to increase in absolute dollars as we continue to invest in our future solutions, although 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 and other professional fees, and |
|
|
Interest Income, Net
Interest income consists of income earned on our cash equivalents and short term investments. Our cash equivalents and short term investments are invested in short-term instruments at current market rates.
38
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.
32
Income Taxes
Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). All our IP in our traditional authentication business is owned by two subsidiaries, one in the U.S. and one in Switzerland. These two subsidiaries have entered into agreements with most of the other VASCOOneSpan entities under which those other entities provide services to our U.S. and Swiss subsidiaries 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 tend to flow to the U.S. company and Swiss company. In 2018,2020, earnings flowing to the U.S. company are expected to be taxed at a rate of 21% to 25%, while earnings flowing to the Swiss company are expected to be taxed at a rate ranging from 11% to 12%, plus Swiss withholding tax of an additional 5%. OurA Canadian and UK subsidiary currently sellssell to and servicesservice global customers directly. In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products.
As the majority of our revenues 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%.
The geographic mix of earnings of our foreign subsidiaries primarily depends on the level of pretax income of our service provider subsidiaries and the benefit realized in Switzerland through the sales of product. The level of pretax income in our service provider subsidiaries is expected to vary based on:
1. | the staff, programs and services offered on a yearly basis by the various subsidiaries as determined by management, or |
2. | the changes in exchange rates related to the currencies in the service provider subsidiaries, or |
3. | the amount of revenues that the service provider subsidiaries generate. |
For items 1 and 2 above, there is a direct impact in the opposite direction on earnings of the U.S. and Swiss entities. Any change from item 3 is generally expected to result in a larger change in income in the U.S. and Swiss entities in the direction of the change (increased revenues expected to result in increased margins/pretax profits and conversely decreased revenues expected to result in decreased margins/pretax profits).
In addition to the provision of services, the intercompany agreements transfer the majority of the business risk to our U.S. and Swiss subsidiaries. As a result, the contracting subsidiaries’ pretax income is reasonably assured while the pretax income of the U.S. and Swiss subsidiaries varies directly with our overall success in the market.
In November 2015, we acquired eSignLive,OneSpan Canada Inc. (formerly eSignLive), a foreign company with substantial IP and net operating losslosses and other tax carryforwards. The tax benefit of the carryforwards has been fully reserved as realization has not been deemed more likely than not.
U.S. Tax Reform
On December 22, 2017,In May 2018, we acquired Dealflo Limited (“Dealflo”), a foreign company with substantial IP and net operating losses. The tax benefit of the United States enacted U.S. tax reform that included a broad range of business tax provisions, including but not limited to a reduction in the U.S. federal tax rate from 35% to 21% as well as provisions that limit or eliminate various deductions or credits. The legislation also includes a one-time transition tax on accumulated foreign earnings and profits.
In responseloss carryforwards will be reserved to the enactment of U.S.extent they exceed the deferred tax reform, the SEC issued guidance to address the complexity in accounting for this new legislation. When the initial accounting for items under the new legislation is incomplete, the guidance allows us to recognize provisional amounts when reasonable estimates can be made or to continue to apply the prior tax law if a reasonable estimate of the impact cannot be made. The SECliabilities recognized upon acquisition as realization has provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation and we anticipate finalizing our accounting during 2018.
not been deemed more likely than not.
3339
While our accounting for the new U.S. tax legislation is not complete, we have made reasonable estimates for some provisions and recognized a $28.1 million discrete tax expense in our 2017 financial statements. This expense is primarily comprised of a $2.3 million provisional deferred tax expense from revaluing our net U.S. deferred tax assets to reflect the new U.S. corporate tax rate, an additional $7.3 million provisional deferred tax expense related to changes in our indefinite reinvestment assertion, as well as $18.5 million provisional charge for the deemed repatriation tax. However, as of the date of this Form 10-K, we are continuing to evaluate the accounting impacts of the legislation, as we continue to assemble and analyze all the information required to prepare and analyze these effects and await additional guidance from the U.S. Treasury Department, the IRS or other standard-setting bodies. Additionally, we continue to analyze other information and regulatory guidance, and accordingly we may record additional provisional amounts or adjustments to provisional amounts in future periods. See Note 6, Income Taxes, for further details on the impacts of U.S. tax reform.
Results of Operations
The following tables summarize our consolidated results of operations for the periods presented (dollars in thousands) and as a percentagepresented.
Revenue
Revenue by Product: We generate revenue from the sale of our totalhardware products, software licenses, subscriptions, professional services, and maintenance and support. Product and license revenue for those periods. The period-to-period comparisonincludes hardware products and software licenses. Service and other revenue includes subscription solutions (which is our definition of results is not necessarily indicative of results for future periods.software-as-a-service solutions), maintenance and support, and professional services.
Comparison of the Years Ended December 31, 2017 and 2016
| | | | | | | | | | | |
| | Years ended December 31, | | | Change | ||||||
|
| 2020 |
| 2019 | |
| $ | | % | ||
| | (in thousands) | |||||||||
Revenue |
|
|
| |
|
| |
|
| |
|
Hardware | $ | 81,849 | | | $ | 127,005 | | $ | (45,156) | | (36)% |
Software licenses | | 51,137 | | | | 56,308 |
| | (5,171) | | (9)% |
Subscription | | 27,788 | | | | 22,280 | | | 5,508 | | 25% |
Professional services | | 5,689 | | | | 5,759 | | | (70) | | (1)% |
Maintenance, support and other | | 49,228 | | | | 42,132 | | | 7,096 | | 17% |
Total revenue | $ | 215,691 | | | $ | 253,484 |
| $ | (37,793) | | (15)% |
Revenue
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| Years ended December 31, | |||||||||||||||
|
| 2017 |
| 2016 |
| Change | |||||||||||
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| % of Total |
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| % of Total |
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| Amount |
|
| Revenue |
|
| Amount |
|
| Revenue |
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| Amount |
| % |
Revenue |
|
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|
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|
Product and license |
| $ | 147,257 |
|
| 76% |
| $ | 156,057 |
|
| 81% |
| $ | (8,800) |
| (6%) |
Services and other |
|
| 46,034 |
|
| 24% |
|
| 36,247 |
|
| 19% |
|
| 9,787 |
| 27% |
Total revenue |
| $ | 193,291 |
|
| 100% |
| $ | 192,304 |
|
| 100% |
| $ | 987 |
| 1% |
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Revenue by geographic region |
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EMEA |
| $ | 92,859 |
|
| 48% |
| $ | 95,897 |
|
| 50% |
| $ | (3,038) |
| (3%) |
Americas |
|
| 52,981 |
|
| 27% |
|
| 33,204 |
|
| 17% |
|
| 19,777 |
| 60% |
APAC |
|
| 47,452 |
|
| 25% |
|
| 63,203 |
|
| 33% |
|
| (15,751) |
| (25%) |
Total revenue |
| $ | 193,291 |
|
| 100% |
| $ | 192,304 |
|
| 100% |
| $ | 987 |
| 1% |
Total revenue increased $1.0decreased $37.8 million or 1%15%, during the year ended December 31, 20172020 compared to the year ended December 31, 2016. Product2019. The overall decrease in revenue was comprised of a $45.2 million decrease in hardware revenue and a $13.7 million decrease in perpetual software license revenue, decreasedpartially offset by $8.8an increase in recurring revenue, which is the portion of our revenue subject to future renewal. Recurring revenue, comprised of subscription, term-based software license, and maintenance, support and other revenue, increased $21.1 million or 6%26% during the year ended December 31, 2017. The decrease in product2020, compared to the year ended December 31, 2019. Year-over-year revenue comparisons were affected by the one-time positive impact on 2019 revenue from the PSD2 regulation deadline. We also experienced reduced demand for our hardware products and perpetual software licenses due to an uncertain near-term business outlook for certain of our customers as a result of the pandemic.
Product and license revenue was primarily due to a decrease in hardware revenue offset partially by an increase in software licenses. Services and other revenue increased by $9.8decreased $50.3 million or 27% during the year ended December 31, 2017. The increase2020 compared to the year ended December 31, 2019, which was due to an increaselargely driven by a decrease in SaaS and maintenance revenue.
Revenue generated in EMEA decreased $3.0 million, or 3%hardware sales. Hardware sales increased during the year ended December 31, 2017.2019 related to the PSD2 regulation deadline. The decrease in revenue was primarily driven byhardware sales in 2020 is attributed to a declinereduction in our hardware products partially offset by an increase indemand following the PSD2 deadline, increased adoption of digital alternatives, and reduced demand due to the pandemic. Perpetual software licenses.
Revenue generated in the Americas increased $19.8 million, or 60%license sales also decreased during the year ended December 31, 2017.2020 compared to the year ended December 31, 2019, which we attribute to our strategy focused on growing recurring software revenue over perpetual licenses combined with softened demand as a result of the pandemic.
Services and other revenue increased by $12.5 million, or 18% during the year ended December 31, 2020 compared to the year ended December 31, 2020. The increase for the year ended December 31, 2020 compared to the same period in 2019 was driven by higher subscription and maintenance revenue.
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. As a result of the volatility in our business, 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.
40
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 primarily due to increasedas follows:
| | | | | | | | |
| | Years ended December 31, | | | | | ||
|
| 2020 |
| 2019 | | $ Change |
| % Change |
| | (in thousands) | | | | | ||
Revenue |
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| |
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|
EMEA | | $ 117,086 | | $ 145,942 | | ($ 28,856) | | (20)% |
Americas | | 53,171 | | 61,577 |
| (8,406) | | (14)% |
APAC | | 45,434 | | 45,965 | | (531) | | (1)% |
Total revenue | | $ 215,691 | | $ 253,484 |
| ($ 37,793) | | (15)% |
| | | | | | | | |
% of Total Revenue | | | | | | | | |
EMEA | | 54% | | 58% | | | | |
Americas | | 25% | | 24% | | | | |
APAC | | 21% | | 18% | | | | |
For the year ended December 31, 2020, revenue generated in EMEA was $28.9 million or 20% lower than the same period in 2019, driven by lower hardware sales, partially offset by higher maintenance and professional services revenue. Hardware revenue comparisons were affected by the one-time positive impact on 2019 revenue from non-hardware products, including eSignLivethe PSD2 regulation deadline.
For the year ended December 31, 2020, revenue generated in the Americas was $8.4 million or 14% lower than the same period in 2019, driven by lower hardware and security software licenses.license revenue, partially offset by higher subscription revenue.
RevenueFor the year ended December 31, 2020, revenue generated in the Asia Pacific region decreased $15.8was $0.5 million or 25% during1% lower than the year ended December 31, 2017. The decreasesame period in 2019, driven by lower hardware revenue, was primarily due to a decline in hardwarepartially offset by higher maintenance and professional services revenue.
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Cost of Goods Sold and Gross Margin
| | | | | | | | | | |||||||||||||||||
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Cost of goods sold |
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Product and license |
| $ | 48,333 |
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| $ | 53,191 |
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|
| $ | (4,858) |
| (9%) | | | $ 41,820 | | $ 63,393 | | ($ 21,573) | | (34)% |
Services and other |
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| 10,444 |
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| 8,456 |
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| 1,988 |
| 24% | | | 21,619 | | 18,569 |
| 3,050 | | 16% |
Total cost of goods sold |
|
| 58,777 |
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| 61,647 |
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| (2,870) |
| (5%) | | | $ 63,439 | | $ 81,962 |
| ($ 18,523) | | (23)% |
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Gross profit |
| $ | 134,514 |
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| $ | 130,657 |
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| $ | 3,857 |
| 3% | | | $ 152,252 | | $ 171,522 | | (19,270) | | (11)% |
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Gross margin |
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Product and license |
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| 67% |
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| 66% |
|
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| | | 69% | | 65% | | | | |
Services and other |
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| 77% |
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| 77% |
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| | | 74% | | 74% | | | | |
Total gross margin |
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| 70% |
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| 68% |
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|
|
| | | 71% | | 68% | | | | |
The cost of product and license revenue decreased $4.9$21.6 million or 9%34% during the year ended December 31, 20172020 compared to the year ended December 31, 2016.2019. The decrease in cost of product and license revenue was primarily driven by a decline in ourlower hardware revenue.sales.
41
The cost of services and other revenue increased $2.0by $3.1 million, or 24%,16% during the year ended December 31, 20172020 compared to the year ended December 31, 2016.2019. The increase in cost of services and other revenue was primarily due tois reflective of higher subscription revenue, which has increased services and other revenues and increased SaaS hosting fees.cloud-based infrastructure costs.
Gross profit increased $3.9decreased $19.3 million, or 3%,11% during the year ended December 31, 20172020 compared to the year ended December 31, 2016.2019. Gross profit margin was 70%71% for the year ended December 31, 2017 and2020, compared to 68% for the year ended December 31, 2016.2019. The increase in grossprofit margin primarily reflects an increase in software solutions as a percentage of total revenues.for the year ended December 31, 2020 was driven by stronger margins for product and license.
The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies including the Euro. For the year ended December 31, 2017, as the U.S. Dollar weakened against the Euro compared to the year ended December 31, 2016, revenue from sales in Euros, as measured in U. S. Dollars, increased, without a corresponding change in the cost of goods sold. The impact of changes in currency rates are estimated to have increased revenue by approximately $1.2$2.0 million for the full year of 2017.ended December 31, 2020. Had currency rates in the full year of 20172020 been equal to rates in the same period in 2016,2019, the gross profit marginmargins would have been approximately 0.2one percentage pointspoint lower for the full year of 2017.ended December 31, 2020.
Operating Expenses
| | | | | | | | | | |||||||||||||||||||
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Operating costs |
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Sales and marketing |
| $ | 58,994 |
|
| 46% |
| $ | 57,347 |
|
| 47% |
| $ | 1,647 |
| 3% | | | $ | 60,856 | | $ | 61,503 | | ($ 647) | | (1)% |
Research and development |
|
| 23,119 |
|
| 18% |
|
| 23,214 |
|
| 19% |
|
| (95) |
| (0%) | | | 41,194 | | 42,463 |
| (1,269) | | (3)% | ||
General and administrative |
|
| 37,400 |
|
| 29% |
|
| 31,648 |
|
| 26% |
|
| 5,752 |
| 18% | | | 46,338 | | 43,897 |
| 2,441 | | 6% | ||
Amortization of purchased intangible assets |
|
| 8,809 |
|
| 7% |
|
| 8,849 |
|
| 7% |
|
| (40) |
| (0%) | |||||||||||
Amortization of intangible assets | | | | 9,122 | | | 9,470 |
| (348) | | (4)% | |||||||||||||||||
Total operating costs |
| $ | 128,322 |
|
| 100% |
| $ | 121,058 |
|
| 100% |
| $ | 7,264 |
| 6% | | | $ | 157,510 | | $ | 157,333 |
| $ 177 | | 0% |
35
Sales and Marketing Expenses
Sales and marketing expenses increased $1.6decreased $0.6 million, or 1% during the year ended December 31, 2020 compared to the year ended December 31, 2019. Lower travel spend were partially offset by costs associated with higher headcount during the year ended December 31, 2020.
Average full-time sales and marketing employee headcount for year ended December 31, 2020 was 356, compared to 319 for year ended December 31, 2019. Average headcount in 2020 was 12% higher than in 2019.
Research and Development Expenses
Research and development expenses decreased $1.3 million, or 3% during the year ended December 31, 20172020 compared to the year ended December 31, 2016, primarily due to headcount and increased marketing investments. Average full-time sales, marketing, support, and operating employee headcount2019. The decrease in expense for year ended December 31, 2017 was 614, compared to 595 for year ended December 31, 2016. Average headcount in 2017 was 3% higher than in 2016.
Research and development expenses decreased $0.1 million, or 0% during the year ended December 31, 2017 compared to the year ended December 31, 2016. 2020 was primarily driven by lower cloud computing costs for our test environment and lower travel costs, partially offset by higher personnel costs.
Average full-time research and development employee headcount for year ended December 31, 20172020 was 215,328, compared to 225302 for year ended December 31, 2016.2019. Average headcount in 20172020 was 4% lower9% higher than in 2016, partially attributed to the divestiture of a non-strategic business line in August 2017.2019.
General and Administrative Expenses
General and administrative expenses increased $5.8$2.4 million, or 18%6% during the year ended December 31, 20172020 compared to the year ended December 31, 2016.2019. The increase in general and administrative expenses for the year ended December 31, 2017 primarily reflect increased headcount, professional fees2020 was driven by higher personnel costs which included additional stock comp due to an increase in eligible participants. The increase in expense was also driven by higher consulting spend, additional expense for subscription software tools and facilities expense. Professional fees primarily relate to internal controls, legal and internal systems. higher bad debt expense driven by a higher allowance for the likely adverse impact of the COVID-19 pandemic. Lower travel costs partially offset spend increases.
42
Average full-time general and administrative employee headcount for year ended December 31, 20172020 was 91,125, compared to 82 for year ended December 31, 2016. Average headcount in 2017 was 11% higher than in 2016.
Amortization of purchased intangible assets expense113 for the year ended December 31, 20172019. Average headcount in 2020 was $8.8 million, compared to $8.8 million for the year ended December 31, 2016. There were no significant changes11% higher than in our amortization2019.
Amortization of purchasedIntangible Assets
Amortization of intangible assets for the year ended December 31, 2017 from the year ended December 31, 2016.
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||||||
|
| 2017 |
| 2016 |
| Change | |||||
|
|
| Amount |
|
| Amount |
|
| Amount |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | 1,431 |
| $ | 785 |
| $ | 646 |
| 82% |
Consolidated net interest income for the year ended December 31, 20172020 was $1.4$9.1 million, compared to $0.8$9.5 million for the year ended December 31, 2016.2019, a decrease of $0.3 million or 4%. The increasedecrease was driven by certain technology assets becoming fully amortized during the year.
Interest Income, net
| | | | | | | | | |
| | | Year ended December 31, | | | ||||
|
| | 2020 | 2019 | | $ Change |
| % Change | |
| | | (in thousands) | | | | | ||
Interest income, net | | | $ 404 | | $ 747 | | ($ 343) | | (46)% |
Interest income, net was $0.4 million for the year ended December 31, 2020, compared to $0.7 million for the year ended December 31, 2019. The decrease in interest income for 20172020 compared to 2019 reflects a decrease in interest rates during the 2016 reflects an increase in the average interest rate earned on invested balances and an increase in the average invested balance.year ended December 31, 2020.
Other Income, Net
| | | | | | | | |
| | Year ended December 31, | | | ||||
|
| 2020 | | 2019 | | $ Change |
| % Change |
| | (in thousands) | | | | | ||
Other income (expense), net | | $ 1,434 | | ($ 527) | | $ 1,961 | | (372)% |
Other Income (Expense)income (expense) , Net
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||||||
|
| 2017 |
| 2016 |
| Change | |||||
|
|
| Amount |
|
| Amount |
|
| Amount |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
| $ | 758 |
| $ | 993 |
| $ | (235) |
| (24%) |
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, non-recurring expenses.
Other income (expense), net for the year ended December 31, 20172020 was $0.8$1.4 million, compared to $0.9$(0.5) million for the year ended December 31, 2016. Other2019. Higher income (expense), net includedfor the year ended December 31, 2020 was primarily driven by exchange losses of $0.5gains on transactions that are denominated in currencies other than our subsidiaries’ functional currencies.
Provision for income taxes
| | | | | | | | |
| | Year ended December 31, | | | ||||
|
| 2020 | | 2019 | | $ |
| % Change |
| | (in thousands) | | | | | ||
Provision for income taxes | | $ 2,035 | | $ 6,545 | | ($ 4,510) | | (69)% |
Income tax expense for the year ended December 31, 2020 was $2.0 million compared to $6.5 million for the year ended December 31, 2017 compared2019. The decrease in expense was attributable to exchange gainsdecreased profits in the period excluding losses at entities where we cannot record a tax benefit, as well as a higher uncertain tax positions recorded in 2019 of $0.1 million for the year ended December 31, 2016.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||||||
|
| 2017 |
| 2016 |
| Change | |||||
|
|
| Amount |
|
| Amount |
|
| Amount |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
| $ | 30,780 |
| $ | 863 |
| $ | 29,917 |
| 3,467% |
$1.6 million.
3643
Income tax expense for 2017 was $30.8 million, compared to $0.9 million in 2016. The effective tax rate in 2017 was 367%, compared to 8% in 2016. The increase in the rate is primarily due to the repatriation tax, change in permanently reinvested assertion, and tax rate change on deferred tax assets described in Note 6.
Our future effective tax rate will be affected by U.S. tax reform. Effective in 2018, the U.S. statutory tax rate decreases from 35% to 21% and creates new taxes on certain foreign-sourced earnings which are referred to as the global intangible low-taxed income tax (“GILTI”).
Loss Carryforwards AvailableAvailable
At December 31, 2017,2020, we have gross deferred tax assets of $21.7$30.0 million resulting from foreign and state NOL carryforwards of $120.5$119.5 million and other foreign deductible carryforwards of $31.2$64.7 million. At December 31, 2017,2020, we have a valuation allowance of $12.8$19.8 million against deferred tax assets related to certain carryforwards. See Note 6 to the consolidated financial statements13 – Income taxes for more information regarding carryforwards and valuation allowances.
Comparison of the Years Ended December 31, 2016 and 2015
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||||||||||
|
| 2016 |
| 2015 |
| Change | |||||||||
|
|
|
|
| % of Total |
|
|
|
| % of Total |
|
|
|
|
|
|
| Amount |
| Revenue |
| Amount |
| Revenue |
| Amount |
| % | |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and license |
| $ | 156,057 |
| 81% |
| $ | 218,908 |
| 91% |
| $ | (62,851) |
| (29%) |
Services and other |
|
| 36,247 |
| 19% |
|
| 22,535 |
| 9% |
|
| 13,712 |
| 61% |
Total revenue |
| $ | 192,304 |
| 100% |
| $ | 241,443 |
| 100% |
| $ | (49,139) |
| (20%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA |
| $ | 95,897 |
| 50% |
| $ | 164,180 |
| 68% |
| $ | (68,283) |
| (42%) |
Americas |
|
| 33,204 |
| 17% |
|
| 25,596 |
| 11% |
|
| 7,608 |
| 30% |
APAC |
|
| 63,203 |
| 33% |
|
| 51,667 |
| 21% |
|
| 11,536 |
| 22% |
Total revenue |
| $ | 192,304 |
| 100% |
| $ | 241,443 |
| 100% |
| $ | (49,139) |
| (20%) |
Total revenue decreased $49.1 million or 20% during the year ended December 31, 2016 compared to the year ended December 31, 2015. Product and license revenue decreased by $62.9 million, or 29% during the year ended December 31, 2016. The decrease in product and license revenue was driven by a decrease in sales of hardware products, primarily products sold to Rabobank. Services and other revenue increased by $13.7 million, or 61% during the year ended December 31, 2016. The increase was primarily due to an increase in software revenues.
Revenue generated in EMEA decreased $68.3 million, or 42% during the year ended December 31, 2016. The decrease in revenue was primarily driven by a decrease in sales of hardware products, primarily products sold to Rabobank.
Revenue generated in the Americas increased $7.6 million, or 30% during the year ended December 31, 2016. The increase in revenue was primarily due to increased revenues from non-hardware products, including eSignLive.
Revenue generated in the Asia Pacific region increased $11.5 million, or 22% during the year ended December 31, 2016. The increase in revenue was due to increases in hardware products and software licenses sold.
37
Cost of Goods Sold and Gross Margin
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
| 2016 |
| 2015 |
|
| Change | ||||||||
|
|
| Amount |
| Gross margin |
|
| Amount |
| Gross margin |
|
| Gross margin |
| % |
Cost of goods sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and license |
| $ | 53,191 |
|
|
| $ | 95,028 |
|
|
| $ | (41,837) |
| (44%) |
Services and other |
|
| 8,456 |
|
|
|
| 2,875 |
|
|
|
| 5,581 |
| 194% |
Total cost of goods sold |
|
| 61,647 |
|
|
|
| 97,903 |
|
|
|
| (36,256) |
| (37%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
| $ | 130,657 |
|
|
| $ | 143,540 |
|
|
| $ | (12,883) |
| (9%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and license |
|
|
|
| 66% |
|
|
|
| 57% |
|
|
|
|
|
Services and other |
|
|
|
| 77% |
|
|
|
| 87% |
|
|
|
|
|
Total gross margin |
|
|
|
| 68% |
|
|
|
| 60% |
|
|
|
|
|
The cost of product and license revenue decreased $41.8 million, or 44%, during the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in cost of product and license revenue was primarily driven by a decline in our hardware revenue, partially offset by an increase in software licenses.
The cost of service and other revenue increased $5.6 million, or 194%, during the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in cost of service and other revenue was primarily due to the cost of revenue associated with increased revenue related to the acquisition of eSignLive.
Gross profit decreased $12.9 million, or 9%, during the year ended December 31, 2016 compared to the year ended December 31, 2015. Gross margin was 68% for the year ended December 31, 2016 and 60% for the year ended December 31, 2015. The increase in gross margin primarily reflects an increase in software solutions as a percentage of total revenues.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||||||||||||
|
| 2016 |
| 2015 |
| Change | |||||||||||
|
|
|
|
| % of Total |
|
|
|
| % of Total |
|
|
|
|
| ||
|
| Amount |
| Expenses |
| Amount |
| Expenses |
| Amount |
| % | |||||
Operating costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
| $ | 57,347 |
|
| 47% |
| $ | 38,199 |
|
| 41% |
| $ | 19,148 |
| 50% |
Research and development |
|
| 23,214 |
|
| 19% |
|
| 17,457 |
|
| 19% |
|
| 5,757 |
| 33% |
General and administrative |
|
| 31,648 |
|
| 26% |
|
| 32,489 |
|
| 35% |
|
| (841) |
| (3%) |
Amortization of purchased intangible assets |
|
| 8,849 |
|
| 7% |
|
| 4,942 |
|
| 5% |
|
| 3,907 |
| 79% |
Total operating costs |
| $ | 121,058 |
|
| 100% |
| $ | 93,087 |
|
| 100% |
| $ | 27,971 |
| 30% |
Sales and marketing expenses increased $19.1 million, or 50% during the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to increased compensation expense and increased marketing initiatives, including trade shows and other marketing efforts in relation to the eSignLive acquisition. Average full-time sales, marketing, support, and operating employee headcount for year ended December 31, 2016 was 288, compared to 199 for year ended December 31, 2015. Average headcount in 2016 was 45% higher than in 2015.
Research and development expenses increased $5.8 million, or 33% during the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to increased compensation expense related to the eSignLive acquisition. Average full-time research and development employee headcount for year ended December 31,
38
2016 was 225, compared to 151 for year ended December 31, 2015. Average headcount in 2016 was 49% higher than in 2015.
General and administrative expenses decreased $0.8 million, or 3% during the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in general and administrative expenses for the year ended December 31, 2016 primarily reflects a decrease in professional fees and other expenses partially offset by increased general and administrative expenses from eSignLive. Average full-time general and administrative employee headcount for year ended December 31, 2016 was 82, compared to 62 for year ended December 31, 2015. Average headcount in 2016 was 32% higher than in 2015.
Amortization of purchased intangible assets expense for the year ended December 31, 2016 was $8.8 million, compared to $4.9 million for the year ended December 31, 2015. The increase was primarily related to the amortization of intangible assets associated with our acquisition of eSignLive in November 2015.
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||||||
|
| 2016 |
| 2015 |
| Change | |||||
|
|
| Amount |
|
| Amount |
|
| Amount |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | 785 |
| $ | 364 |
| $ | 421 |
| 116% |
Consolidated net interest income for the year ended December 31, 2016 was $0.8 million, compared to $0.4 million for the year ended December 31, 2015. The increase in net interest income reflected an increase in the average return on invested balances partially offset by a decrease in the average net cash balance. Our return on average net cash balances was 0.6% in 2016 compared to 0.2% in 2015. Average net cash and short term investment balances were $134.5 million in 2016, a decrease of $21.8 million or 14% from $156.3 million in 2015.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||||||
|
| 2016 |
| 2015 |
| Change | |||||
|
|
| Amount |
|
| Amount |
|
| Amount |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
| $ | 993 |
| $ | 38 |
| $ | 955 |
| 2,513% |
Other income (expense), net for the year ended December 31, 2016 was $1.0 million, compared to $0.04 million for the year ended December 31, 2015. Other income (expense), net included exchange gains of $0.1 million for the year ended December 31, 2016 compared to exchange losses of $1.2 million for the year ended December 31, 2015.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||||||
|
| 2016 |
| 2015 |
| Change | |||||
|
|
| Amount |
|
| Amount |
|
| Amount |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
| $ | 863 |
| $ | 8,704 |
| $ | (7,841) |
| (90%) |
Income tax expense for 2016 was $0.9 million, compared to $8.7 million in 2015. The effective tax rate in 2016 was 8%, a decrease of 9 percentage points from 17% in 2015. The decrease in the rate is primarily due to increase in losses in higher tax jurisdictions partially offset by the increase in the Swiss tax rate as applicable to VASCO.
39
Liquidity and Capital Resources
As of December 31, 2017,2020, we had net cash balances (total cash and cash equivalents and restricted cash less bank borrowings)equivalents) of $78.7$88.4 million and short-term investments of $79.7$26.9 million. We had no outstanding debt or restricted cash at December 31, 2017. Short term investments at December 31, 2017, consistingconsist of U.S. treasury bills and notes, government agency notes, corporate notes and bonds, and high quality commercial paper with maturities at acquisition of more than three months and less than six months, were held by our U.S. and Swiss entities and issued by domestic and foreign corporations.
Ontwelve months. At December 22, 2017, U.S. tax reform was enacted and31, 2019, we recorded a tax liability for the one-time transition tax on accumulated foreign subsidiary earningshad net cash balances of $18.3 million, of which $1.2$84.3 million and $12.8short-term investments of $25.5 million.
We are in a lease agreement that required a letter of credit in the amount of $0.8 million were presented within “income taxes payable” and “income tax payable,to secure the obligation. The restricted cash related to this letter of credit is recorded in other non-current” respectively, assets on ourthe Consolidated Balance Sheets asSheet at December 31, 2020 and December 31, 2019.
As of December 31, 2017. As permitted by U.S. Tax Reform,2020, we intend to pay the one-time transition tax in eight annual interest-free installments beginning in 2018.
We also recorded a tax liability for withholding tax for distributing earnings of $7.3 million which is presented in deferred income taxes on our Consolidated Balance Sheets as of December 31, 2017.
At December 31, 2017, we had $46.9held $52.0 million of cash held byand cash equivalents in subsidiaries outside of the United States and had $108.4States. Of that amount, $51.4 million of cash held by foreign subsidiaries. The cash held by foreign subsidiaries is not subject to significant repatriation restrictions, andbut may be subject to taxtaxes upon repatriation. However, we have provided for substantially all of the taxes as indicated above.
We believe that our financial resources are adequate to meet our operating needs over the next twelve months.
Our cash flows are as follows:
| | | | | | |
| | Year ended December 31, | ||||
|
| 2020 | | 2019 | | 2018 |
| | (in thousands) | ||||
Cash provided by (used in): |
|
|
|
| | |
Operating activities | | $ 14,922 | | $ 18,244 | | 1,226 |
Investing activities | | (4,664) | | (9,893) |
| 194 |
Financing activities | | (7,060) | | (569) | | (970) |
Effect of foreign exchange rate changes on cash and cash equivalents | | 914 | | (208) | | (1,556) |
Operating Activities
Cash generated by operating activities is primarily comprised of net income, as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of amortization and impairment of intangible assets, 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 costs. We expect cash outflows from operating activities to be affected by increases in personnel cost as we grow our business.
For the year ended December 31, 2020, $14.9 million of cash was provided by operating activities. Cash of $18.2 million and $1.2 million was provided by operating activities was $17.6 million, $28.4 million and $68.8 million duringfor the years ended December 31, 2017, 20162019 and 2015,2018, respectively.
Our working capital at December 31, 2020 was $131.9 million, a decrease of $4.1 million or 3% from $136.0 million at December 31, 2019. The decrease is due to lower accounts receivable and higher deferred revenue, driven by the timing of revenue contracts with customers.
44
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, and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the continued growth of our business as well to continue to invest in our infrastructure and activity in connection with acquisitions.
Cash provided by investing activities was $12.8 million duringFor the year ended December 31, 2017,2020 and December 31, 2019, cash of $4.7 million and $9.9 million, respectively, was used in investing activities, which was primarily driven by the purchase of $56.5 millionproperty and $56.0 million duringequipment, as well as purchases of short term investments which were partially offset by the yearsmaturity of short term investments.
For the year ended December 31, 20162018, cash of $0.2 million was provided by investing activities, which was driven by the maturity of short term investments, partially offset by the purchase of Dealflo and 2015, respectively.purchase of short term investments.
Financing Activities
The changes in cash flows from financing activities primarily relaterelated to the purchases of common stock under our share repurchase program and tax payments for restricted stock issuances.
On June 10, 2020, the Board of Directors authorized a share repurchase program (“program”), pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. Share purchases under the program will take place in open market transactions or in privately negotiated transactions 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 OneSpan’s sole discretion and will depend upon market and business conditions, applicable legal and credit requirements and other corporate considerations. During the year ended December 31, 2020, the Company repurchased 0.3 million shares of the Company’s stock for $5.0 million in the aggregate at an average cost of $20.10 per share under its repurchase program. The authorization is effective until June 10, 2022 unless the total amount has been used or authorization has been cancelled.
For the year ended December 31, 2020, net cash used in financing activities was $7.1 million, which was comprised of $5.0 million of common stock repurchased and $2.0 million of tax payments for restricted stock issuances.
Cash of $0.6 million and $1.0 million was used in financing activities was $0.6 million, $1.1 million and $6.4 million during the years ended December 31, 2017, 20162019 and 2015,December 31, 2018, respectively. In 2015, we repaid debt associated with the eSignLive acquisition.The cash usage was comprised of tax payments for restricted stock issuances in both periods.
40
Off-Balance Sheet Arrangements
The companyCompany has no off-balance sheet arrangements.
Contractual Obligations and Commitments
The following summarizes our contractual obligations and commitments as of December 31, 2017:2020:
| | | | | | | | | | | | | | | |
| | Payments due by period | |||||||||||||
|
| | |
| | |
| 2-3 |
| 4-5 |
| More than | |||
| | Total | | 1 year | | years | | years | | 5 years | |||||
Operating lease obligations | | $ | 15,254 | | $ | 2,814 | | $ | 4,646 | | $ | 2,527 | | $ | 5,267 |
Purchase obligations | |
| 23,921 | |
| 20,586 | |
| 3,323 | |
| 12 | |
| — |
Taxes payable | |
| 7,148 | |
| 1,053 | |
| 3,027 | |
| 3,068 | |
| — |
| | $ | 46,323 | | $ | 24,453 | | $ | 10,996 | | $ | 5,607 | | $ | 5,267 |
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| 2-3 |
| 4-5 |
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Operating lease obligations |
| $ | 17,183 |
| $ | 3,487 |
| $ | 4,984 |
| $ | 3,107 |
| $ | 5,605 |
Purchase obligations |
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| 14,985 |
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| 14,985 |
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Taxes payable |
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| 14,436 |
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| 1,155 |
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| 2,310 |
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| 2,310 |
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| 8,661 |
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| $ | 46,604 |
| $ | 19,627 |
| $ | 7,294 |
| $ | 5,417 |
| $ | 14,266 |
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We have purchase obligations of $23.9 million, including $12.7 million of inventory purchase obligations which are expected to be consummated in the next 12 months, $5.8 million of committed hosting arrangements which will be used in the next one to four years, and $5.4 million for other software agreements related to the administration of our business which range from one to five years.
The operating lease obligations above do not include common area maintenance (“CAM”) charges or real estate taxes under our operating leases, for which the Company is also obligated. These charges are generally not fixed and can fluctuate from year to year.
Taxes payable primarily represents one-time transitiondeemed repatriation tax payable related to known amounts of cash taxes payable in future years as a result of U.S. tax reform. For further information, refer to Note 6.
from 2017. The companyCompany had $0.1$0.5 million, $2.9 million and $0.7$0.4 million of unrecognized tax benefits as of December 31, 20172020, December 31, 2019 and 2016,December 31, 2018, respectively, which have been set aside in a reserve in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC 740 Income Taxes. TheseTaxes. The amounts are not included in the above table as the timing of payment of such obligations, if any, is not determinable.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, net realizable value of inventory and intangible assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition
On January 1, 2018, we adopted FASB Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers”,or “Topic 606” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606. We recorded a net increase to opening Retained Earnings of $11.9 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the accounting impacts of our customer contracts that include a term license to our software, as well as the impact of accounting for costs incurred to obtain our contracts. See Note 6 - Revenue for further details. We determine revenue recognition through the following steps:
| ● | Identification of the contract, or contracts, with a customer; |
| ● | Identification of the performance obligations in the contract; |
| ● | Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when, or as, we satisfy a performance obligation. |
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services, which excludes any sales incentives and amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight
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after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
We recognize revenue in accordance with ASC 985-605, Software – Revenue Recognition, ASC 985-605-25, Revenue Recognition – Multiple Element Arrangements and Staff Accounting Bulletin 104.
derive our revenues primarily from Product and License Revenue, which includes hardware products and software licenses.licenses, and Services and Other, includes softwarewhich is inclusive of software-as-a-service (which we refer to as a service (“SaaS”“subscription”, or “SaaS”), maintenance and support, and professional services.
Product Revenue:Revenue from the sale of security hardware is recorded upon shipment, which is the point at which control of the goods are transferred and the completion of the performance obligations, unless there are specific terms that would suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer invoices and subsequent payments normally correspond with delivery.
License Revenue: Revenue from the sale of software licenses is recorded upon the latter of when the customer receives the ability to access the software or when they are legally allowed to use the software. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited access to the software, and term licenses which limit the customer’s access to the software to a specific time period. We offer term licenses ranging from one to five years in length. Customer payments normally correspond with delivery for perpetual licenses. For term licenses, payments are either on installment or in advance. In limited circumstances, we integrate third party software solutions into our software products. We have determined that, consistent with our conclusion under prior revenue recognition rules, generally we act as the principal with respect to the satisfaction of the related performance obligation and record the corresponding revenue on a gross basis from these transactions. For transactions in which we do not act as the principal, we would recognize revenue on a net basis. The fees owed to the third parties are recognized as a component of cost of goods sold when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the revenue is probable.recognized.
In multiple-elementSubscription Revenue: We generate subscription revenues from our cloud services offerings. Subscription revenues mostly include fees from customers for access to the OneSpan Sign, TID, and Dealflo solutions. Our standard customer arrangements somedo not provide the customer with the right to take possession of our products are accounted for under the software provisionssupporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of ASC 985-605the contract. Customer payments are normally in advance for annual service.
Maintenance, Support and others underOther: Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. The annual fee for maintenance and technical support is recognized ratably over the provisionsterm of the maintenance and support agreement as this is the period the services are delivered. Customer payments are normally in advance for annual service.
Professional Services: Professional services revenues are primarily comprised of implementing, automating and extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized over time as services are rendered, usually over a period of time that relateis generally less than a few months. Most projects are performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee. For time and material contracts, revenues are generally recognized and invoiced by multiplying the number of hours expended in the performance of the contract by the contractual hourly rates. For fixed fee contracts, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours to complete the sale of non-software products.
services. Customer payments normally correspond with delivery.
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Multiple-Element Arrangements
In our typical multiple-element arrangement, the primary deliverables include:
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Our multiple-element arrangements may also include other items that are usually delivered
prior to the recognition of any revenue are incidental to the overall transaction such as initialization of the hardware device, customization of the hardware device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer’s end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.
In multiple-elementSignificant Judgments
We enter into contracts to deliver a combination of hardware devices, software licenses, subscriptions, maintenance and support and, in some situations, professional services. The Company evaluates the nature of the goods or services promised in these arrangements to identify the distinct performance obligations. Determining whether products and services are considered distinct performance obligations that includeshould be accounted for separately versus together may require significant judgment depending on the terms and conditions of the respective customer arrangement. When a hardware client device we allocateand licenses to server software are sold in a contract, they are treated as a single performance obligation because the selling price among all elements, delivered and undelivered, based on our internal price lists and the percentagesoftware license is deemed to be a component of the selling price ofhardware that element, per the price list,is integral to the totalfunctionality of the estimated selling price of all of the elements per the price list. Our internal price listshardware that is used by our customers for both delivered and undelivered elements were determined to be reasonable estimates of the selling price of each element based on a comparison of actual sales made to the price list.
In multiple-element arrangements that includeidentity authentication. When a software client device is sold in a contract server software, the licenses are considered a single performance obligation to deliver the authentication solution to the customer. In either of these types of arrangements, maintenance and support and professional services are typically distinct separate performance obligations from the hardware or software solutions. Our contracts to deliver subscription services typically do not include multiple performance obligations; however, in certain limited cases customers may purchase professional services that are distinct performance obligations.
For contracts that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on their estimated relative standalone selling price. Judgment is required to determine the stand-alone selling price (“SSP”) of each distinct performance obligation. We determine SSP for maintenance and support and professional services based on observable inputs; specifically, the range of prices charged to customers to renew annual maintenance and support contracts and the range of hourly rates we continue to accountcharge our customers in standalone professional services contracts. In instances where SSP is not directly observable, and when we sell at a highly variable price range, such as for each element under the current standards of ASC 985-605 related to software. When software client device and host software are delivered elements, we use the Residual Method for determining the amount of revenue to recognize for token andtransactions involving software licenses ifor subscriptions, we have vendor-specific objective evidence (“VSOE”)determine the SSP for allthose performance obligations using the residual method.
Credit Losses
We adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. As a result of the undelivered elements. Any discount provided toadoption, we amended the customer is applied fully to the delivered elements in such an arrangement. VSOEaccounting policies for undelivered elements is established using the “bell curve method.” Under this method, we conclude VSOE exists when a substantial majority of PCS renewals are within a narrow range of pricing. The estimated selling price of PCS items is based on an established percentage of the user license fee attributable to the specific software. In sales arrangements where VSOE of fair value has not been established, revenue for all elements is deferred and amortized over the life of the arrangement.
For transactions other than multiple-element arrangements, we recognize revenue as follows:
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We generate subscription services revenues primarily from our cloud services offerings. Subscription services revenues include subscription fees from customers for access to the eSignLive suite of solutions. Our standard customer arrangements generally do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract.
We recognize revenue from sales to distributors and resellers on the same basis as sales made directly to customers. We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the revenue is probable.
For large-volume transactions, we may negotiate a specific price that is based on the number of users of the software license or quantities of hardware supplied. The per unit prices for large-volume transactions are generally lower than transactions for smaller quantities and the price differences are commonly referred to as volume-purchase discounts.
All revenue is reported on a net basis, excluding any sales taxes or value added taxes.
In the first quarter of 2018, we will adopt Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as amended, will replace most existing revenue recognition guidance in U.S. GAAP. This new guidance will require significant amounts of judgements and estimates in implementing its five-step process to be followed in determining the amount and timing of revenue recognition and related disclosures. Refer to Note 1 in the notes to the consolidated financial statements for further discussion regarding our status of adoption/implementation.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for goods and services. We analyze accounts receivable, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.credit losses. In accordance with ASU No. 2016-13, 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 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 a specific review of all significant past-due accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their abilityrelevant available information, from internal and external sources, relating to make payments, additional allowances may be required.
Net Realizable Value of Inventory
We write down inventory where it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume in the form of sales to new customers as well as sales to previous customers, the expected sales priceevents, current conditions, and the cost of making the sale when evaluating the valuation of our inventory. If the sales volume or sales price of a specific model declines significantly, additional write-downs may be required.
Impairment of Long-Livedreasonable and Intangible Assets
Definite-lived intangible assets include proprietary technology, customer relationships, and other intangible assets. Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for proprietary technology and five to twelve years for customer relationships. Patents are amortized over the life of the patent, generally 20 years in the U.S.
Long-lived assets, including property, plant and equipment, definite-lived intangible assets being amortized and capitalized software costs, are reviewed for impairment in accordance with ASC 360-10, Property, Plant and Equipment, whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group may not be recoverable. An impairment loss shall be recognized if the carrying amount of a long-lived asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-livedsupportable forecasts.
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asset group exceeds its fair value. Long-lived assets held for sale are reported at the lower of carrying value or fair value less cost to sell.
Goodwill and Other Intangible Assets
Intangible assets arising from business combinations, such as acquired technology, customer relationships, and other intangible assets, are originally recorded at fair value. Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for proprietary technology and five to twelve years for customer relationships. Patents are amortized over the life of the patent, generally 20 years in the U.S.
Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination. We assess the impairment of goodwill each November or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the reporting units against the planned results used in the last quantitative goodwill impairment test. Additionally, each reporting unit’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity- and reporting unit specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgments and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under the two-step assessment is determined using a combination of both income and market-based variation approaches. The inputs and assumptions to valuation methods used to estimate the fair value of reporting units involves significant judgments.
We have not recognized any impairment for the years ended December 31, 2017, 2016 or 2015.
Income Taxes
As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, and tax planning opportunities available in each tax jurisdiction.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of a change in tax rates on deferred tax assets and liabilities and in income in the period that includes the enactment date.
We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that
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do not meet these recognition and measurement standards. Assumptions, judgments, and the use of estimates are required in determining whether the “more likely than not” standard has been meetmet when developing the provision for income taxes.
We recognize the tax impact of including certain foreign earnings in U.S. taxable income as a period cost. We have recognized deferred income taxes for local country income and withholding taxes that could be incurred on distributions of non-U.S. earnings because we do not plan to indefinitely reinvest such earnings.
We monitor for changes in tax laws and reflect the impacts of tax law changes in the period of enactment. In response to the U.S. tax reform legislation enacted on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) issued guidance that allows us to record provisional amounts for the impacts of U.S. tax reform if the full accounting cannot be completed before we file our 2017 financial statements. For provisions of the tax law where we are unable to make a reasonable estimate of the impact, the guidance allows us to continue to apply the historical tax provisions in computing our income tax liability and deferred tax assets and liabilities as of December 31, 2017. The guidance also allows us to finalize accounting for the U.S. tax reform changes within one year of the December 22, 2017 enactment date. See Note 6 Income Taxes, for additional information on how we recorded the impacts of the U.S. tax reform
Recently Issued Accounting Pronouncements
We adopted ASU 2015‑11, Inventory (Topic 330) – Simplifying the Measurement of Inventory as of January 1, 2017. ASU 2015‑11 requires measurement of inventory at the lower of cost or net realizable value, defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Adoption of ASU 2015‑11 did not have a significant impact on our financial statements.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, (ASU 2015-16), which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. The ASU is effective for annual periods beginning after December 15, 2015 and interim periods within such annual periods and applies prospectively to adjustments to provisional amounts that occur after the effective date. We have adopted ASU 2015-16 in our consolidated financial statements as of January 1, 2016. Measurement period adjustments identified subsequent to December 31, 2015 for the eSignLive Acquisition, further described in Note 4 to the Consolidated Financial Statements, were recorded and disclosed in accordance with ASU 2015-16.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard creates a five-step model to achieve its core principle: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. It also provides guidance on accounting for costs incurred to obtain or fulfill contracts with customers. In addition, entities must disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative disclosures are required about: (i) the nature, amount, timing and uncertainty of revenue under the entity’s contracts with customers; (ii) the significant judgments, and changes in judgments, made in applying the guidance to those contracts; and (iii) any assets recognized from the costs to obtain or fulfill a contract with a customer.
The FASB has issued numerous amendments to ASU 2014-09 from August 2015 through January 2018, which provides supplemental and clarifying guidance, as well as amend the effective date of the new standard.
The new standard is effective for us on January 1, 2018. We will adopt ASU 2014-09 on a modified-retrospective basis. Such method provides the cumulative effect from prior periods upon applying the new guidance to be recognized in our consolidated balance sheets as of the date of adoption, including an adjustment to retained earnings. Prior periods will not be retrospectively adjusted.
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We expect this new guidance to have a material impact on the timing of revenue recognition for certain of our multiple element arrangements. Currently, software license revenue from term license sales (“Term Licenses”) is generally recognized ratably over the respective license term (“over time”) due to a lack of VSOE for the PCS that is provided during the Term License. Upon adoption of the new standard, we expect to recognize the portion of the transaction price allocated to the distinct Term License upon delivery of the software to the customer (“point in time”) and the non-license portion (e.g., PCS) of the transaction price over the respective PCS term (“over time”). Also, under legacy GAAP when professional services are provided in a Term License for which VSOE of PCS does not exist, the professional services fees are currently recognized over the PCS period as well, as it is typically longer than the period to deliver professional services. Under the new standard, the professional services will be considered a separate performance obligation, and we will recognize the portion of the transaction price allocated to the professional services as those services are performed. We also expect the adoption of the new standard to have a significant impact on the nature and extent of disclosures of contracts with customers and related costs.
We have determined the significant incremental costs incurred to obtain contracts with customers are sales commissions paid to our sales teams. Under legacy GAAP, we expense sales commissions as earned, and record such amounts as a component of Sales and marketing operating costs in our consolidated statements of operations. We recognized sales commission expense of $4,250 in the 2017. Under the new guidance, we expect to capitalize portions of our sales commissions as an asset, and amortize the benefit to expense over an amortization period that will include the expected contract renewals, which we currently estimate may be up to 7 years. However, we will apply the practical expedient to expense commissions as incurred when the amortization period is one year or less. In addition, we will allocate the costs of obtaining a contract in each contract to the performance obligations in the contract and amortize the allocated cost commensurate with the transfer of control of each respective performance obligation. This will generally result in a large portion of the capitalized cost of obtaining the contract to be recognized when software licenses or hardware is delivered to the customer, usually at the outset of the arrangement. At the date of the adoption of this new guidance, we expect to record an asset in our consolidated balance sheets for the amount of unamortized sales commissions for prior periods, as calculated under the new standard. We are finalizing the impact of this adjustment upon adoption of the new standard.
We continue to execute our implementation plan, which will continue through the filing of our consolidated interim financial statements for the period ended March 31, 2018. We are completing our stand-alone selling price analyses for certain goods and services, the evaluation of material rights in certain customer contracts, the income tax effect on our transition adjustments, and our evaluation of the new disclosure requirements. We are also finalizing on our newly developed processes and internal controls over revenue recognition and continue to implement system changes and enhancements.
We are in the process of evaluating all contracts not completed as of January 1, 2018, and we expect to record a material impact to retained earnings from the adoption of the new standard primarily due to the effect of Term License arrangements discussed above that would have been recognized as revenue in 2018 and beyond. During 2017, recognized revenue associated with term licenses represented 6% of 2017 revenues. At December 31, 2017, these term arrangements had remaining license periods ranging and up to four years scheduled. For fiscal year 2018, we expect the financial impact of adoption of the new standard, which has the effect of reducing our 2018 revenue that would have been recognized under legacy GAAP, to be offset by the recognition of Term License revenue from newly executed contracts post-adoption that would have been deferred and recognized over multiple periods under legacy GAAP. However, our assessment of the foregoing is ongoing and subject to finalization, such that the actual impact of the adoption may differ materially from the discussion above.
In February 2016, the FASB issued ASU No. 2016-02, Leases2016-13, Measurement of Credit Losses on Financial Instruments (Topic 842). The new standard will replace most existing lease326), which amends the Board’s guidance in U.S. GAAP. The core principle of the ASU is the requirement for lessees to report a right to use asset and a lease payment obligation on the balance sheet but recognize expenses on their income statements in a manner similar to today’s accounting, and for lessors the guidance remains substantially similar to current U.S. GAAP. The ASU is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2018. However, early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.
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We are in the process of evaluating the impact this standard will have on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosureimpairment of financial instruments. Such guidance will impact how we account for our investments reported underThe ASU adds an impairment model that is based on expected losses rather than incurred losses, which is known as the cost method of accounting as follows: Equity investments (exceptcurrent expected credit loss (“CECL”) model. The CECL model applies to most debt instruments (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee) will be required to be measured at fair value with changes in fair value recognized in net earnings. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The impairment assessment of equity investments without readily determinable fair values will require a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. We are currently evaluating the impact on our consolidatedvalue), trade and other receivables, financial statementsguarantee contracts, and related disclosures.
On March 30, 2016, the FASB issuedloan commitments. This ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, to improve accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes certain aspects of accounting for share-based payment award transactions, including: (1) recognition of excess tax benefits and tax deficiencies as income tax expense or benefit instead of additional paid-in capital; (2) classification of excess tax benefits on the statement of cash flows, and (3) accounting for forfeitures. The other provisions of ASU 2016-09 are immaterial to the Company. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. We have early2019, and interim periods within those fiscal years. The Company adopted ASU 2016-09 in our consolidated financial statementsASC 326 as of January 1, 2016 and applicable aspects described were adopted prospectively. Prior periods were not retrospectively adjusted.
2020, using the cumulative-effect transition method with the required prospective approach. The adoption of ASU 2016-09 resulted in an increase to the tax provision of $169 that would have otherwise been debited to additional paid in capital. Similarly, as a result of the adoption of ASU 2016-09, cash flows from operating activities decreased $169 and cash flows from financing activities decreased by the same amount. The Company also elected to begin accounting for forfeitures when they occur. The impact of this policy change was immaterial to our consolidated financial statements. The impact of this ASU on future periods is dependent on our stock price at the time restricted stock awards vest.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments. This guidance clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU is effective for the Company January 1, 2018, with early adoption permitted. Upon adoption, the ASU requires a retrospective application unless it is determined that it is impractical to do so in which case it must be retrospectively applied at the earliest date practical. The Company is currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. The new guidance is intended to simplify the accounting for intercompany asset transfers. The core principle requirescumulative-effect transition method enables an entity to immediately recognizerecord an allowance for expected credit losses at the tax consequencesdate of intercompany asset transfers.adoption without restating comparative periods. The ASU is effectivecumulative-effect adjustment for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company will adopt this standard onadoption of ASC 326 resulted in a decrease of $0.3 million in Accounts receivable, net of allowances and Retained Earnings as of January 1, 2018. The Company anticipates the adoption in the effective period and we are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.2020.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations – Clarifying the Definition of a Business. This standard changes the definition of a business by requiring that at least one substantive process exist in the acquired entity. It also states that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the set of transferred assets and activities is not a business. The guidance is effective for the Company beginning in the first quarter of 2018, and should be applied
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prospectively. Early adoption is permitted. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance iswas effective for us beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. We adopted this standard on January 1, 2020 on a prospective basis. The Company is currently evaluating the effect, if any, that the ASU willadoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.statements.
In March 2017,August 2018, the FASB issued ASU No. 2017-07, Compensation2018-13, Disclosure Framework - Retirement Benefits (ASC 715) - ImprovingChanges to the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Cost. The new guidance will improveDisclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the presentation of pension costdisclosure requirements for fair value measurements by providing additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The core principle of the ASU is to provide more transparency in the presentation of these costs by requiring the service cost component to be reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. The amendments require that the Consolidated Statements of Income impacts be applied retrospectively, while Balance Sheet changes should be applied prospectively.
removing, modifying, or adding certain disclosures. The ASU is effective for annual reporting periods, including interim periods within those annual periods, beginning
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after December 15, 2017.2019, with early adoption permitted for removed or modified disclosures, and delayed adoption of the additional disclosures until their effective date. We adopted this standard on January 1, 2020 on a retrospective basis. The Company will adoptadoption of this standard did not have a material impact on our consolidated financial statements.
In August 2018, the newlyFASB issued ASU 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a hosted CCA service. Under ASU 2018-15, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. We adopted this standard on January 1, 2018.2020 on a prospective basis. The Companyadoption of this standard did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is currently evaluatingeffective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. The adoption of the effect, if any, that the ASU will have onstandard was not materially impactful to our consolidated financial statements and related disclosures.
In September 2015,December 2019, the FASB issued Accounting Standards Update No. 2015-16, Simplifying theASU 2019-12, Simplification for Accounting for Measurement-Period Adjustments, (ASU 2015-16)Income Taxes, which eliminates the requirementremoves certain exceptions for an acquirer to retrospectively adjust the financial statementsrecognizing deferred taxes for measurement-period adjustments that occurinvestments, performing intraperiod allocation and calculating income taxes in periods after a business combination is consummated.interim periods. The ASU isalso adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 was effective for annual periods beginning after December 15, 2015 and interim periods within such annual periods and applies prospectively to adjustments to provisional amounts that occur after the effective date. We have adopted ASU 2015-16 in our consolidated financial statements as of January 1, 2016. Measurement period adjustments identified subsequent to December 31, 2015 for the eSignLive Acquisition, further described in Note 4 to the Consolidated Financial Statements, were recorded and disclosed in accordance with ASU 2015-16.2021. The adoption of this standard did not have a material impact on our financial statements.
In May 2014,March 2020, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principleASU 2020-04, Facilitation of ASU 2014-09 isthe Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to recognize revenues when promised goodscertain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or services are transferred to customers in an amount that reflects the consideration to which an entity expectsanother reference rate expected to be entitled for those goods or services.discontinued. The standard creates a five-step model to achieve its core principle: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. It also provides guidance on accounting for costs incurred to obtain or fulfill contracts with customers. In addition, entities must disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative disclosures are required about: (i) the nature, amount, timing and uncertainty of revenue under the entity’s contracts with customers; (ii) the significant judgments, and changes in judgments, made in applying the guidance to those contracts; and (iii) any assets recognized from the costs to obtain or fulfill a contract with a customer.
The FASB has issued numerous amendments to ASU 2014-09 from August 2015 through January 2018, which provides supplemental and clarifying guidance, as well as amend the effective date of the new standard.
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The new standard is effective for us on January 1, 2018. We will adopt ASU 2014-09 on a modified-retrospective basis. Such method provides the cumulative effect from prior periods upon applying the new guidance toissuance and can be recognized in our consolidated balance sheets asapplied through December 31, 2022. The adoption of the date of adoption, including an adjustment to retained earnings. Prior periods willthis standard did not be retrospectively adjusted.
We expect this new guidance to have a material impact on the timing of revenue recognition for certain of our multiple element arrangements. Currently, software license revenue from term license sales (“Term Licenses”) is generally recognized ratably over the respective license term (“over time”) due to a lack of VSOE for the PCS that is provided during the Term License. Upon adoption of the new standard, we expect to recognize the portion of the transaction price allocated to the distinct Term License upon delivery of the software to the customer (“point in time”) and the non-license portion (e.g., PCS) of the transaction price over the respective PCS term (“over time”). During 2017, revenue recognized associated with term licenses, and related PCS, represented approximately 6% of 2017 consolidated revenues. At December 31, 2017, these term arrangements had remaining license periods ranging up to four years. Also, under legacy GAAP when professional services are provided in a Term License for which VSOE of PCS does not exist, the professional services fees are currently recognized over the PCS period as well, as it is typically longer than the period to deliver professional services. Under the new standard, the professional services will be considered a separate performance obligation, and we will recognize the portion of the transaction price allocated to the professional services as those services are performed. We also expect the adoption of the new standard to have a significant impact on the nature and extent of disclosures of contracts with customers and related costs.
We have determined the significant incremental costs incurred to obtain contracts with customers are sales commissions paid to our sales teams. Under legacy GAAP, we expense sales commissions as earned, and record such amounts as a component of Sales and marketing operating costs in our consolidated statements of operations. We recognized sales commission expense of $4,250 in the 2017. Under the new guidance, we expect to capitalize portions of our sales commissions as an asset, and amortize the benefit to expense over an amortization period that will include the expected contract renewals, which we currently estimate may be up to 7 years. However, we will apply the practical expedient to expense commissions as incurred when the amortization period is one year or less. In addition, we will allocate the costs of obtaining a contract in each contract to the performance obligations in the contract and amortize the allocated cost commensurate with the transfer of control of each respective performance obligation. This will generally result in a large portion of the capitalized cost of obtaining the contract to be recognized when software licenses or hardware is delivered to the customer front, which is usually at the outset of the arrangement. At the date of the adoption of this new guidance, we expect to record an asset in our consolidated balance sheets for the amount of unamortized sales commissions for prior periods, as calculated under the new standard. We are finalizing the impact of this adjustment upon adoption of the new standard.
We continue to execute our implementation plan, which will continue through the filing of our consolidated interim financial statements for the period ended March 31, 2018. We are completing our stand-alone selling price analyses for certain goods and services, the evaluation of material rights in certain customer contracts, the income tax effect on our transition adjustments, and our evaluation of the new disclosure requirements. We are also finalizing on our newly developed processes and internal controls over revenue recognition and continue to implement system changes and enhancements.
We are in the process of evaluating all contracts not completed as of January 1, 2018, and we expect to record a material reduction to retained earnings from the adoption of the new standard primarily due to the effect of Term License arrangements discussed above that would have been recognized as revenue in 2018 and beyond. For fiscal year 2018, we expect the financial impact of adoption of the new standard, which has the effect of reducing our 2018 revenue that would have been recognized under legacy GAAP, to be offset by the recognition of Term License revenue from newly executed contracts post-adoption that would have been deferred and recognized over multiple periods under legacy GAAP. However, our assessment of the foregoing is ongoing and subject to finalization, such that the actual impact of the adoption may differ materially from the discussion above.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard will replace most existing lease guidance in U.S. GAAP. The core principle of the ASU is the requirement for lessees to report a right to use asset and a lease payment obligation on the balance sheet but recognize expenses on their income statements in a
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manner similar to today’s accounting, and for lessors the guidance remains substantially similar to current U.S. GAAP. The ASU is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2018. However, early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are in the process of evaluating the impact this standard will have on ourCompany’s consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Such guidance will impact how we account for our investments reported under the cost method of accounting as follows: Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) will be required to be measured at fair value with changes in fair value recognized in net earnings. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The impairment assessment of equity investments without readily determinable fair values will require a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. We are currently evaluating the impact on our consolidated financial statements and related disclosures.
On March 30, 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, to improve accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes certain aspects of accounting for share-based payment award transactions, including: (1) recognition of excess tax benefits and tax deficiencies as income tax expense or benefit instead of additional paid-in capital; (2) classification of excess tax benefits on the statement of cash flows, and (3) accounting for forfeitures. The other provisions of ASU 2016-09 are immaterial to the Company. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. We have early adopted ASU 2016-09 in our consolidated financial statements as of January 1, 2016 and applicable aspects described were adopted prospectively. Prior periods were not retrospectively adjusted.
The adoption of ASU 2016-09 resulted in an increase to the tax provision of $169 that would have otherwise been debited to additional paid in capital. Similarly, as a result of the adoption of ASU 2016-09, cash flows from operating activities decreased $169 and cash flows from financing activities decreased by the same amount. The Company also elected to begin accounting for forfeitures when they occur. The impact of this policy change was immaterial to our consolidated financial statements. The impact of this ASU on future periods is dependent on our stock price at the time restricted stock awards vest.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments. This guidance clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU is effective for the Company January 1, 2018, with early adoption permitted. Upon adoption, the ASU requires a retrospective application unless it is determined that it is impractical to do so in which case it must be retrospectively applied at the earliest date practical. The Company is currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. The new guidance is intended to simplify the accounting for intercompany asset transfers. The core principle requires an entity to immediately recognize the tax consequences of intercompany asset transfers. The ASU is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company will adopt this standard on January 1, 2018. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations – Clarifying the Definition of a Business. This standard changes the definition of a business by requiring that at least one substantive process exist in the
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acquired entity. It also states that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the set of transferred assets and activities is not a business. The guidance is effective for the Company beginning in the first quarter of 2018, and should be applied prospectively. Early adoption is permitted. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for us beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. The Company is currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (ASC 715) - Improving the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Cost. The new guidance will improve the presentation of pension cost by providing additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The core principle of the ASU is to provide more transparency in the presentation of these costs by requiring the service cost component to be reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. The amendments require that the Consolidated Statements of Income impacts be applied retrospectively, while Balance Sheet changes should be applied prospectively.
The ASU is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. However, early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company will adopt the newly issued ASU as of January 1, 2018. The Company is currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk (In thousands)
Foreign Currency Exchange Risk – In 2017,2020, approximately 72%88% of our business was conducted outside the United States, primarily in Europe, Latin America and Asia/Pacific. A significant portion of our business operations is transacted in foreign currencies. As a result, we have exposure to foreign exchange fluctuations. We are affected by both foreign currency translation and transaction adjustments. Translation adjustments result from the conversion of the foreign subsidiaries’ balance sheets and income statements to U.S. Dollars at year-end exchange rates and weighted average exchange rates, respectively. Translation adjustments resulting from this process are recorded directly into stockholders’ equity. Transaction adjustments result from currency exchange movements when one of our companies transacts business in a currency that differs from its local currency. These adjustments are recorded as gains or losses in our statements of operations. Our business transactions are spread across numerous countries and currencies. This geographic diversity reduces the risk to our operating results. As noted in Management’s Discussion and Analysis above, we attempt to minimize the net impact of currency on operating earnings by denominating an amount of billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency.
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Interest Rate Risk – We have minimal interest rate risk. We had no debt outstanding at December 31, 2017.2020. Our cash, cash equivalents, and short term investments are invested in short-term instruments at current market rates. If rates were to increase or decrease by one percentage point, the company’sCompany’s interest income would increase or decrease approximately $1.6$0.3 million annually.
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Impairment Risk – At December 31, 2017, we had goodwill of $56.3 million and other intangible assets of $37.9 million, primarily from acquisitions including eSignLive in 2015, Risk IDS in 2014, CRONTO in 2013, and other prior acquisitions. We assess the recoverability of goodwill at least annually, and the recoverability of other intangible assets whenever events or circumstances change indicating the carrying value may not be recoverable. For the twelve months ended December 31, 2017, 2016, and 2015, we did not incur any impairments however, we may incur impairment charges in future periods.
Item 8 - Financial Statements and Supplementary Data
The information in response to this item is included in our consolidated financial statements, together with the report thereon of KPMG LLP, appearing on pages F‑1F-1 through F‑29F-41 of this Form 10‑K,10-K, and in Item 7 under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation as of December 31, 2017, under the supervision andOur management, with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer, (“CFO”),who, respectively, are our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). as of December 31, 2020. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure (i) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our CEO and CFOmanagement have concluded that the Company's disclosure controls and procedures are effective as of December 31, 2020, to give reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The management of VASCO Data Security International,OneSpan Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’sCompany’s principal executive and principal financial officers and effected by the company’sCompany’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
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Our management, led by our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 20172020, using the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO) in Internal Control—Integrated Framework (2013).
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Management’s evaluation of our internal control over financial reporting determined that the Company’s internal control over financial reporting was effective based on those criteria as of December 31, 2017.
2020.
KPMG LLP, an independent registered public accounting firm, has audited the Company’sconsolidated financial statements as of and for the year ended December 31, 2020 included in this Annual Report on Form 10-K, and has issued its report on the effectiveness of the Company’s internal control over financial reporting as of March 8, 2018,December 31, 2020, included on page 5553 of this annual report.
Changes in Internal Control over Financial Reporting
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether anyThere were no changes in our internal control over financial reporting (as that occurredterm is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during our last fiscalthe quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting
During the three months ended December 31, 2017, the Company finalized its remediation plan related to the material weakness that was identified in 2016. The deficiencies that constituted a material weakness in our internal control over financial reporting as of December 31, 2016 were as follows:
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The Company has finalized its remediation plan in the three months ended December 31, 2017, which consisted of the following measures and we are satisfied that the material weakness in internal control over financial reporting identified as of December 31, 2016 has been remediated:
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We also implemented a change in internal control over financial reporting during the quarter ended December 31, 2017 related to the review of defined benefit obligations in certain international locations in which we operate. Specifically, we enhanced our communication process and the design and effectiveness of controls over identifying, communicating, and evaluating the impact of local laws and regulations on the accounting for our defined benefit obligations. This change was implemented to remediate a material weakness in the Company's information and communication controls, which led to ineffectively designed controls over the identification, accounting, and disclosure of defined benefit obligations. This material weakness, which arose in prior periods and was identified in the quarter ended December 31, 2017, resulted in immaterial errors, certain of which were corrected in previously issued financial statements as disclosed in note 1 to the 2017 consolidated financial statements.
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Other than as discussed above, there have been no other changes in the Company’s internal control over financial reporting in the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
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Report of Independent Registered Public Accounting Firm
The
To the Stockholders and Board of Directors and Stockholders
OneSpan Inc.:
VASCO Data Security International, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited VASCO Data Security International,OneSpan Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2020, and the related notes (andand financial statement Schedule scheduleII – Valuation and Qualifying Accounts) (collectively, the consolidated financial statements), and our report dated March 8, 2018February 25, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
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inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chicago, IllinoisMarch 8, 2018February 25, 2021
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Item 9B – Other Information
On February 24, 2021, Naureen Hassan informed the Company’s Board of Directors that she will resign from the Board of Directors, effective March 1, 2021, as she has accepted a position in the public sector that precludes her continued role as a Board member of a publicly traded company.
Ms. Hassan did not advise the Company of any disagreement with the Company on any matters relating to its operations, policies or practices.
PART III
Item 10 - Directors, Executive Officers and Corporate Governance
All information in response to this Item is incorporated by reference to the “Directors and Executive Officers” and “Section 16(a) Beneficial Ownership Compliance” sections of VASCO’sOneSpan’s Proxy Statement to be filed with the SEC for the 20182021 Annual Meeting of Stockholders.
The following sets forth certain information with regard to each executive officer of the Corporation. There are no family relationships between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected.
SCOTT M. CLEMENTS—Mr. Clements has served as OneSpan’s President and Chief Executive Officer since July 2017. From November 2016 to July 2017, he served as the Company’s President and Chief Operating Officer, and prior to that, Mr. Clements served as the Company’s Chief Strategy Officer since he joined the Company in December 2015. Before joining OneSpan, Mr. Clements spent eleven years at Tyco International where he most recently served as Corporate Senior Vice President, Business Development focused on technology acquisitions. Prior to that, Mr. Clements served as President of Tyco Retail Solutions and also as Tyco’s Chief Technology Officer. Before joining Tyco, Mr. Clements spent a decade at Honeywell International in domestic and international financial and operational leadership roles. Mr. Clements is 58 years old.
MARK S. HOYT—In November 2015, the Board of Directors appointed Mr. Hoyt to the positions of Chief Financial Officer and Treasurer. In March 2018, the Board also appointed Mr. Hoyt an Executive Vice President. Prior to joining the Company, Mr. Hoyt was the Chief Financial Officer of operations in Europe, Middle East and Africa for Groupon, Inc., and was based in Switzerland from 2012 to 2015, and from 2010 to 2012, he was Vice President of International Financial Operations of Groupon, Inc. and was based in Chicago. Mr. Hoyt is 53 years old.
STEVEN R. WORTH —Mr. Worth has served as OneSpan’s General Counsel, Chief Compliance Officer and Corporate Secretary since April 2016. Mr. Worth also has executive responsibility for corporate information security and product related security compliance. Prior to joining OneSpan, Mr. Worth spent five years at cloud software company SilkRoad Technology where he served as an Executive Vice President. Prior to that, Mr. Worth served five years as Vice President, General Counsel and Corporate Secretary of Diamond Management and Technology Consultants, an international publicly traded technology services company. Earlier in his career, Mr. Worth practiced law with the international firm Winston & Strawn. Mr. Worth is 50 years old.
Item 11 - Executive Compensation
The information in response to this Item is incorporated by reference to the “Executive Compensation” section of VASCO’sOneSpan’s Proxy Statement to be filed with the SEC for the 20182021 Annual Meeting of Stockholders.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in response to this Item is incorporated by reference to the “Security Ownership of Certain Beneficial Owners, Directors and Management” section of VASCO’sOneSpan’s Proxy Statement to be filed with the SEC for the 20182021 Annual Meeting of Stockholders.
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Item 13 - Certain Relationships and Related Transactions, and Director Independence
The information in response to this Item is incorporated by reference to the “Directors and Executive Officers” and “Transactions with Related Persons” sections of VASCO’sOneSpan’s Proxy Statement to be filed with the SEC for the 20182021 Annual Meeting of Stockholders.
Item 14 - Principal Accounting Fees and Services
The information in response to this Item is incorporated by reference to the “Report of the Audit Committee” section of VASCO’sOneSpan’s Proxy Statement to be filed with the SEC for the 20182021 Annual Meeting of Stockholders.
PART IV
Item 15 - Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Form 10‑K.10-K.
(1) The following consolidated financial statements and notes thereto, and the related independent auditors’ report, are included on pages F‑1F-1 through F‑29F-41 of this Form 10‑K:10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 20172020 and 20162019
Consolidated Statements of Operations for the Years Ended December 31, 2017, 20162020, 2019 and 20152018
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 20162020, 2019 and 20152018
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 20162020, 2019 and 20152018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 20162020, 2019 and 20152018
Notes to Consolidated Financial Statements
57
(2) The following consolidated financial statement schedule of the company is included on page F‑36F-42 of this Form 10‑K:10-K:
Schedule II – Valuation and Qualifying Accounts
All other financial statement schedules are omitted because such schedules are not required or the information required has been presented in the aforementioned consolidated financial statements.
(3) The following exhibits are filed with this Form 10‑K10-K or incorporated by reference as set forth at the end of the list of exhibits:
56
57
OneSpan Inc.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. F-1 Report of Independent Registered Public Accounting Firm
Opinion on the ConsolidatedFinancial Statements We have audited the accompanying consolidated balance sheets of We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, Changes in Accounting Principle As discussed in Notes 2 and 11 to the consolidated financial statements, the Company has changed its method of accounting for credit losses on financial instruments as of January 1, 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments, and as discussed in Notes 2 and 12 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification (ASC) Topic 842, Leases. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. F-2 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue from contracts containing software licenses with terms and conditions that are unique to individual contracts As discussed in Notes 2 and 6 to the consolidated financial statements, the Company enters into contracts to deliver a combination of hardware devices, software licenses, subscriptions, maintenance and support and, in some situations, professional services. The Company evaluates the nature of the goods and services promised in these arrangements to identify the distinct performance obligations. Certain arrangements contain terms and conditions that are unique to the individual contracts and may vary with regard to the number and type of promises included. The Company recognized total revenue of $215.7 million for the year ended December 31, 2020. We identified the evaluation of revenue from contracts containing software licenses with terms and conditions that are unique to individual contracts as a critical audit matter. Specifically, auditor judgment was required to evaluate the Company's identification of performance obligations in such contracts, including for contracts with new customers or contracts that were amended with existing customers. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s revenue recognition process. This included controls relating to the identification of performance obligations and evaluation of unique terms and conditions present in individual contracts. We tested a selection of contracts, including contracts with new customers or contracts that were amended with existing customers, by obtaining and reading the underlying contract and accounting analysis to evaluate the Company’s identification performance obligations. Specifically, we evaluated the completeness and accuracy of the Company’s identification of terms and conditions that were unique to the selected contracts and the Company’s determination of the impact of those terms and conditions on revenue recognition. /s/ KPMG LLP We have served as the Company’s auditor since 1996.
OneSpan Inc.
(in thousands, except per share data)
See accompanying notes to consolidated financial statements.
OneSpan Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
See accompanying notes to consolidated financial statements.
OneSpan Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
See accompanying notes to consolidated financial statements.
OneSpan Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands)
See accompanying notes to consolidated financial statements.
OneSpan Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes to consolidated financial statements.
F-9 OneSpan Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless otherwise noted, references in this Annual Report on Form Note 1 – Description of the Company and Basis of Presentation Description of the Company OneSpan Inc. and its wholly owned subsidiaries design, develop, market and support hardware and software security systems that manage and secure access to information assets. OneSpan has operations in Austria, Australia, Belgium, Brazil, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K.), and the United States (U.S.). In accordance with ASC 280, Segment Reporting, our operations are reported as a single operating segment. The chief operating decision maker is the Chief Executive Officer who reviews the statement of operations of the Company on a consolidated basis, makes decisions and manages the operations of the Company as a single operating segment. Impact of COVID-19 pandemic In March 2020, the World Health Organization recognized a novel strain of coronavirus (COVID-19) as a pandemic. In response to the pandemic, the United States and various foreign, state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. The pandemic and the various governments’ responses have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate. Beginning in the Summer of 2020 and continuing through the year ended December 31, 2020, we experienced lengthened sales cycles and reduced demand for some of our security solutions due to economic uncertainty connected with the COVID-19 pandemic. The most significant impact of the pandemic on our business has been a sharp drop in demand for our hardware authentication products and delays in the implementation of certain software security solutions. As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets, any future negative impact to our results cannot be reasonably estimated, but it could be material. We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. We are able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. Principles of Consolidation The consolidated financial statements include the accounts of OneSpan Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Estimates and Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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. F-10 Note
Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are high-quality short term money market instruments and commercial paper with maturities at acquisition of
The Company’s short term investments are in debt securities which consist of U.S treasury bills and notes, U.S. government agency notes, corporate notes, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months. The Company classifies its Credit Losses Reasonable assurance of collection is a requirement for revenue recognition. Credit limit adjustments for existing customers may result from the periodic review of outstanding accounts receivable. The Company records trade accounts receivable at invoice values, which are generally equal to The allowance for credit losses. In accordance with ASU No. 2016-13, 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 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. Fair Value of Financial Instruments At December 31, 2020 and 2019, our financial instruments were cash and equivalents, short term investments, accounts receivable, accounts payable and accrued liabilities. The estimated fair value of our financial instruments has been determined by using available market information and appropriate valuation methodologies, as defined in ASC Inventories Inventories, consisting principally of hardware and component parts, are
cost or net realizable value. Cost is determined using the first-in-first-out (FIFO) method. We F-11 evaluating the valuation of our inventory. If the sales volume or sales price of a specific model declines significantly, additional write downs may be required. Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to ten years. Leasehold improvements are depreciated over the lesser of the remaining lease term or 10 years. Additions and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses resulting from sales or retirements are recorded as incurred, at which time related costs and accumulated depreciation are removed from the accounts. Accounting for Leases All of our leases are operating leases. Under ASC 840 – For the Year ended December 31, 2018; Rent expense on Under ASC 842 – For the Years ended December 31, 2020 and December 31, 2019: The Company adopted ASC Topic 842, Leases as of January 1, 2019, using the modified retrospective approach. Prior period amounts were not adjusted. In addition, the Company elected the following practical expedients:
The adoption of this accounting standard resulted in the recording of Operating lease right-of-use (“ROU”) assets and Operating lease liabilities of $9.2 million and $11.0 million, respectively, as of January 1, 2019. The difference between the asset and liability is a result of lease incentives, such as tenant improvement allowances, and deferred rent on the balance sheet at transition. The adoption of ASC Topic 842 had no impact on Retained earnings. See Note 12 – Leases for additional information. Goodwill Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination. We assess the impairment of goodwill annually or whenever events or changes in circumstances F-12 indicate that the carrying value may not be recoverable. During the years ended December 31, 2019 and 2018, we assessed the impairment of goodwill in November. Upon becoming a large accelerated filer during the year ended December 31, 2020, we updated our accounting policy and shifted the annual impairment test to October 1, in order to allow for a greater amount of time to analyze our assessment in advance of the Company’s new accelerated filing deadline. The change in date of the annual impairment assessment of goodwill did not have a material impact to the analysis or conclusions during the year ended December 31, 2020, and is unlikely to materially impact our conclusions of the analysis in future years. During the year ended December 31, 2020, the Company adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill impairment. The guidance simplifies the goodwill impairment test to address concerns related to The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial We operate in 1 reporting unit and Long-Lived and Intangible Assets Finite-lived intangible assets include proprietary technology, customer relationships, and other intangible assets. Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for proprietary technology and five to twelve years for customer relationships. Patents are amortized over the life of the patent, generally 20 years in the U.S. Intangible assets arising from business combinations, such as acquired technology, customer relationships, and other intangible assets, are originally recorded at fair value. Long-lived assets, including property, plant and equipment, operating lease right-of-use assets, finite-lived intangible assets being amortized and capitalized software costs for internal use, are reviewed for impairment whenever events or
Equity Method Investment We apply the equity method of accounting to our investment in Promon AS (Promon), because we exercise significant influence, but not controlling interest, in the investee. Promon is a technology company headquartered in Norway that specializes in mobile app security, whose solutions focus largely on Runtime Application Self-Protection (RASP). We exercise significant influence over Promon as a result of our 17% ownership interest in Promon, our representation on Promon’s Board of Directors, and the significance to Promon of our business activities with them. We F-13 integrate Promon’s RASP technology into our software solutions, which are licensed to our customers. Under the equity method of accounting, the Company’s proportionate share of the net earnings (losses) of Promon is reported in other income (expense), net in our consolidated Share Repurchase Program On June 10, 2020, the Board of Directors authorized a share repurchase program (“program”), pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. Share purchases under the program will take place in open market transactions or in privately negotiated transactions 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 OneSpan’s sole discretion and will depend upon market and business conditions, applicable legal and credit requirements and other corporate considerations. During the year ended December 31, 2020, $5.0 million of issued and outstanding stock was repurchased under the program. The authorization is effective until June 10, 2022 unless the total amount has been used or authorization has been cancelled. During the year ended December 31, 2020, the Company repurchased 0.3 million shares of the Company’s stock for $5.0 million in the aggregate at an average cost of $20.10 per share under its repurchase program. Revenue Recognition On January 1, 2018, we adopted FASB Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers”,or “Topic 606” using the modified retrospective method applied to those
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services, which excludes any sales incentives and amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
F-14
Product Revenue: Revenue from the sale of security hardware is recorded upon shipment, which is the point at which control of the goods are transferred and the completion of the performance obligations, unless there are specific terms that would suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer invoices and subsequent payments normally correspond with delivery. License Revenue: Revenue from the sale of software licenses is recorded upon the latter of when the customer receives the ability to access the software or when they are legally allowed to use the software. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited access to the software, and term licenses which limit the customer’s access to the software to a specific time period. We offer term licenses ranging from one to five years in Subscription Revenue: We generate subscription revenues from our cloud services offerings. Subscription revenues mostly include fees from customers for access to the OneSpan Sign, TID, and Dealflo solutions. Our standard customer arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract. Customer payments are normally in advance for annual service. Maintenance, Support and Other: Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. The annual fee for maintenance and technical support is recognized ratably over the term of the maintenance and support agreement as this is the period the services are delivered. Customer payments are normally in advance for annual service. Professional Services: Professional services revenues are primarily comprised of implementing, automating and extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized over time as services are rendered, usually over a period of time that is generally less than a few months. Most projects are performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee. For time and material contracts, revenues are generally recognized and invoiced by multiplying the number of hours expended in the performance of the contract by the contractual hourly rates. For fixed fee contracts, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours to complete the services. Customer payments normally correspond with delivery. Multiple-Element Arrangements In our typical multiple-element arrangement, the primary deliverables include:
F-15
Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of any revenue are incidental to the overall transaction such as initialization of the hardware device, customization of the hardware device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer’s end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.
We enter into contracts to deliver a combination of
hardware devices, software licenses, subscriptions, maintenance and support and, in some situations, professional services. The Company evaluates the nature of the goods or services promised in these arrangements to identify the distinct performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment depending on the terms and conditions of the respective customer arrangement. When a hardware client device and licenses to server software are sold in a contract, they are treated as a single performance obligation because the software license is deemed to be a component of the hardware that is integral to the functionality of the hardware that is used by our customers for identity authentication. When a software client device is sold in a contract server software, the licenses are considered a single performance obligation to deliver the authentication solution to the customer. In either of these types of arrangements, maintenance and support and professional services are typically distinct separate performance obligations from the hardware or software solutions. Our contracts to deliver subscription services typically do not include multiple performance obligations; however, in certain limited cases customers may purchase professional services that are distinct performance obligations.
Cost of Goods Sold Included in product and license cost of goods sold are direct product costs and direct costs to Research and Development Costs Costs for research and development, principally the design and development of hardware, and the design and development of software prior to the determination of technological feasibility, are expensed as incurred on a project-by-project basis. Software Development Costs Software development costs are accounted for in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed. Research costs and software development costs, prior to the establishment of technological F-16 feasibility, determined based upon the creation of a working model, are expensed as incurred. Our software capitalization policy defines technological feasibility as a functioning beta test prototype with confirmed manufacturability (a working model), within a reasonably predictable range of costs. Additional criteria include receptive customers, or potential customers, as evidenced by interest expressed in a beta test prototype, at some suggested selling price. Our policy is to amortize capitalized costs by the greater of (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product or (b) the straight-line method over the remaining estimated economic life of the product, generally two to five years, including the period being reported on. Stock-Based Compensation We have stock-based employee compensation plans, described in Note 14 – Stock Compensation. ASC 718, Stock Compensation requires us to estimate the fair value of restricted stock granted to employees, directors and others to record compensation expense equal to the estimated fair value. Compensation expense is recorded on a straight-line basis over the vesting period for time-based awards and performance and market-based awards with cliff vesting provisions and on a graded basis for performance and market-based awards with graded vesting provisions. Forfeitures are recorded as incurred. Retirement Benefits We record annual expenses relating to defined benefit pension plans based on calculations which include various actuarial assumptions, including discount rates, assumed asset rates of return, compensation increases, and turnover rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends. The effects of gains, losses, and prior service costs and credits are amortized over the average service life. The funded status, or projected benefit obligation less plan assets, for each plan, is reflected in our consolidated financial statements 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. During 2018, the
Deferred tax assets and liabilities are recognized for the We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely F-17 to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments, and the We recognize the tax impact of including certain foreign earnings in U.S. taxable income as a period cost. We have recognized deferred income taxes for local country income and We monitor for changes in tax laws and reflect the Foreign Currency Translation and Transactions The financial position and results of The financial position and results of our operations in
Recently Issued Accounting Pronouncements
In September
2020, using the cumulative-effect transition method with the required prospective approach. The
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill In
Disclosure Requirements for Fair Value Measurement (
removing, modifying, or adding certain disclosures. The ASU is effective for annual F-18 In August 2018, the In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. The adoption of the standard was not materially impactful to our consolidated financial statements and disclosures. In December 2019, the FASB issued ASU 2019-12, Simplification for Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 was effective beginning January 1, 2021. The adoption of this standard did not have a material impact on our financial statements. In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and can be applied through December 31, 2022. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of Note 3 – Revision of Previously Issued Financial Statements We have revised amounts reported in previously issued financial statements for the periods presented in this Annual Report on Form 10-K related to immaterial errors. The errors relate to certain contracts with customers involving term-based software licenses and related We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Reports on Form 10-K for the years ended December 31, 2019 and 2018, or for any quarterly periods included therein or through our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. The following tables present the effects of the aforementioned revisions on our consolidated balance sheet as of December 31, 2019 and our consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the years ended December 31, 2020 and 2019. F-19 Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
F-20 Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Note Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or
Note On Dealflo’s total purchase price consideration was $53.9 million, net of
During the year ended December 31, 2019, we recorded certain measurement period adjustments to amounts previously reported, comprised primarily of
The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value assigned to
identifiable intangible assets. The following table summarizes
The results of operations of Dealflo subsequent to the acquisition date have been included in the consolidated statement of operations of the years ended December 31, 2020, December 31, 2019 and December 31, 2018. The acquisition related costs directly attributable to the business combination of $1.1 million, including professional fees, and other direct expenses, were expensed as incurred and included in general and administrative expense in the consolidated statement of operations for the year ended December 31, 2018. Unaudited Pro Forma Financial Information The following presents the unaudited pro forma F-22 These
Note 6 – Revenue We recognize revenue in accordance with ASC 606 “Revenue from Contracts with Customers” (“Topic 606”), as described below. Disaggregation of Revenues The following tables present our revenues disaggregated by major products and services, geographical region and timing of revenue recognition. Certain amounts reported for the years ended December 31, 2019 and 2018 have been recast consistent with the impacts disclosed in Note 3 – Revision of Previously Issued Financial Statements. Revenue by major products and services (in thousands)
Revenue by location of customer for the years ended December 31, 2020, 2019, and 2018 (in thousands)
F-23 Timing of revenue recognition (in thousands)
The following table provides information about receivables, contract assets and contract liabilities from
Contract assets relate primarily to multi-year term license arrangements and the As a practical expedient, we do not adjust the promised amount of Revenue recognized during the year ended December 31,
The following
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. Under Topic 606, the Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of benefit based on the transfer of goods or services that we have determined to be up to seven years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors, including customer attrition. Commissions are earned upon invoicing to the customer. For contracts with F-24 multiple year payment terms, as 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 expenses on the consolidated statements of Applying the practical expedient, the Company recognizes the incremental costs of
Note Goodwill activity for the two years ended December 31,
Certain portions of goodwill are denominated in local currencies and are subject to currency fluctuations. No impairment of goodwill was recorded during the years ended December 31, 2020, 2019, or 2018.
Note Intangible asset activity for the two years ended December 31,
As a result of the Company rebranding, the values of certain intangible assets were written down during the second quarter of 2018, and impairment charges of $0.5 million were recorded for the year ended December 31, 2018. Expected amortization of the intangible assets for the years ended:
Note
Depreciation expense was $2.9 million, $2.1 million, and $2.3 million for the years ended December F-26 Note 10 – Fair Value Measurements The fair values of cash equivalents, receivables, net, 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 The Company classifies its investments in debt securities as available-for-sale. As described in Note 2 – Summary of
The estimated fair value of our financial instruments has been determined by using available market information and
The following tables summarize assets that are measured at fair value on a recurring basis as of December 31,
F-27 Note 11 – Allowance for Credit Losses As described in Note 2 – Summary of Significant Accounting Policies, the January 1, 2020 adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, amended our The change in the
A higher allowance for credit losses was recorded during the Note 12 – Leases As mentioned in Note 2 – Summary of Significant Accounting Policies, the Company adopted ASC Topic 842, Leases on January 1, 2019, using the modified retrospective approach. The adoption of this accounting standard resulted in the recording of operating lease right-of-use (“ROU”) assets of $9.2 million in Operating lease right-of use assets, and operating lease liabilities of $2.5 million and $8.5 million in Other accrued expenses and Long-term lease liabilities, respectively, as of January 1, 2019, to capture the cumulative effect of the standard. The difference between the asset and liability is a result of The Company leases certain real estate and automobiles. Leases with an initial term of Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the
Some of our leases include 1 or more options to F-28 Operating lease cost details for the years ended December 31, 2020 and
Operating lease rent expense was $4.9 million for the year ended December 31, Short term lease costs and variable lease costs recognized during the years ended December 31, 2020 and December 31, 2019 are immaterial. Supplemental consolidated balance sheet information related to our operating leases is as follows:
The weighted average remaining lease term for our operating leases is 6.8 years. The weighted-average discount rate for our operating leases is 5%. Supplemental consolidated cash flow information related to leases is as follows:
F-29 Maturities of our operating leases are as follows:
Note 13 – Income Taxes Income (loss) before income taxes was generated in the following jurisdictions:
For the
The provision (benefit) for income taxes consists of the following:
For 2020, 2019, and 2018, our U.S. federal
Significant components of our deferred tax assets and liabilities are as follows:
Deferred tax assets and liabilities are netted by tax jurisdiction.
At December 31,
The net change in the valuation allowance for the Our policy is to record interest and penalties on income taxes as income tax expense. ASC 740, Income Taxes sets a “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions. As of December 31,
We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. We are subject to examination of our income tax returns by the IRS and other tax authorities. During the year ended December 31, 2020, we concluded an audit with the Belgian tax authorities which covered income tax returns filed for the years 2015-2018, and entered into a
F-32 We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the We estimate that our unrecognized tax
the next 12 months. Our primary tax jurisdictions and the earliest tax year subject to audit are presented in the following table.
Note
The
As of December 31, The following table
Time-Based Restricted Stock Awards Time-based awards granted to certain executive officers vest in equal semi-annual installments over four years. Awards granted to certain other employees vest ratably over a four-year period with the first one-fourth of the grant vesting one year after the date of the grant. Shares are subject to forfeiture if the service period requirement is not met. Compensation expense was $0.7 million, $0.5 million, and $2.0 million for 2020, 2019, and 2018, respectively. Tax benefit related to the compensation expense was $0.2 million, $0.2 million, and $0.5 million for 2020, 2019, and 2018, F-33 respectively. The following table summarizes the time-based restricted stock activity for the year ended December 31, 2020.
The unamortized future compensation expense for time-based restricted stock awards was $0.5 million at December 31, 2020. Time-Based Restricted Stock Units Settled in Stock Beginning in 2019, the company grants certain eligible employees RSUs that settle in Company stock. RSUs granted to non-employee directors vest on the first anniversary date of the grant. Awards granted to
The unamortized future compensation expense for time-based restricted stock awards was Performance-Based Restricted Stock Units settled in stock Performance-based restricted stock
Compensation expense in 2020, 2019, and 2018, respectively.
The following table summarizes activity related to unvested performance restricted stock shares during
2020:
Unamortized future compensation expense for performance-based restricted stock was $0.8 million at December 31, Market-Based Restricted Stock Units settled in stock We awarded restricted stock unit grants during the year ended December 31, 2020 to executive officers and certain other employees, subject to the achievement of market and service conditions, which allow for up to 52 shares to be earned if the market conditions are fully achieved at the end of the three year performance period. The fair value of these awards was $1.5 million at the dates of grant and the awards are being amortized over the vesting period of three years. Compensation expense for the year ended December 31, 2020 was $0.4 million and the related tax benefit was $0.1. The following table summarizes activity related to unvested
Unamortized future compensation expense for market-based restricted stock was $1.1 million at December 31, 2020. Note Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of F-35 period excludes the effects of all common stock equivalents, which are anti-dilutive. For the years ended December 31, 2019 and December 31, 2018, the anti-dilutive effect of our securities is immaterial. A reconciliation of the shares included in the basic and fully diluted earnings per share calculations is as follows:
Note U.S. Plan We maintain a defined contribution pension plan for U.S. employees established pursuant to Section 401(k) of the Internal Revenue Code. The plan allows voluntary employee contributions and discretionary employer contributions. For the years ended December 31, Non-U.S. We are subject to national mandatory pension systems and other compulsory plans, or make contributions to social pension funds based on local regulations. When our obligation is limited to the payment of the contribution into these plans or funds, the recognition of such liabilities is not required.
In addition, we have, in some countries, defined benefit plans consisting of final retirement salary and committed pension payments. In Switzerland, the pension plan is a cash balance plan where contributions are expressed as a percentage of the pensionable salary. Contributions to Swiss plans are paid by the employees and the employer. The pension plan guarantees the amount accrued on the members’ savings accounts, as well as a minimum interest on those savings accounts. The plan assets are held in guaranteed investment contracts. We also maintain a pension plan for our Belgian employees, in compliance with Belgian law. Contributions to Belgium plans are paid by the employees and the employer. Certain features of the plans require them to be categorized as defined benefit plans under ASC 715 due to Belgian social legislation, which prescribed a minimum annual return of 1.6% on employer contributions and 1.6% for employee contributions. The plan assets are held in guaranteed investment contracts. The Company also includes a liability related to obligations to provide retirement benefits to employees who retire from the Company’s French subsidiary, as required by law. Per French regulations, each employee is entitled to a lump sum payment upon retirement based on years of service and salary at retirement. Benefit rights vest upon the statutory retirement age of 62. The obligation recorded represents the present value of amounts the Company expects to pay. F-36 Components of net periodic pension
The net unfunded status of the Non-U.S. pension plans is as follows:
Net unfunded benefit obligation is recorded as other long-term liabilities in our consolidated The change in the fair value of plan assets is as follows:
The change in benefit obligations is as follows:
The increase in benefit obligations at December 31, 2020 compared to December 31, 2019 was primarily driven by service costs, actuarial losses and foreign exchange adjustments, driven by the weakened Euro and Swiss Franc currencies. The increase in benefit obligations at December 31, 2019 compared to December 31, 2018 was primarily driven by a decrease in actuarial losses.
F-37 Our investment policy meets our responsibility under local social legislation and aligns plan assets with liabilities, while minimizing risk. For the years ended December 31,
The accumulated benefit obligation for the plans were The Company expects to pay approximately $1.0 million of contributions over the next twelve months. The amounts reclassified out of other comprehensive income during the years ended December 31, 2020, 2019, and 2018 were not material. Actuarial Assumptions Certain actuarial assumptions such as the discount rate and the long-term rate of return on plan assets have a significant effect on the amounts reported for net periodic cost and the benefit obligation. The assumed discount rates reflect the prevailing market rates of a universe of high-quality, non-callable, corporate bonds currently available that, if the obligation were settled at the measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. In determining the long-term return on plan assets, the Company considers long-term rates of return of comparable low risk investments, such as Euro AA bonds. The following
F-38 Note
We have recast the below revenue and
For the years
Note The company leases office space and automobiles under operating lease agreements.
At December 31, We are a party to or have intellectual property subject to litigation and other proceedings that arise in the ordinary course of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our financial results in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress. F-39 Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated. We include various types of indemnification clauses in our agreements. These indemnifications may include, but are not limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have
A complaint,
From time to time, we have been involved in litigation and claims incidental to the conduct of our
Note The quarterly results of operations are as follows:
* Note 20 – Related Party The Company entered into an agreement to provide e-signature and secure agreement automation services to Cox Automotive in the fourth quarter of
In
VALUATION AND QUALIFYING ACCOUNTS
See accompanying independent auditors’ report.
F-42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities indicated on POWER OF ATTORNEY Each of the undersigned, in his capacity as an officer or director, or both, as the case may be, of
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