Washington, D.C. 20549
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.
BecauseAlso, 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.
See Item IA, Risk Factors, for additional information about the laws and regulations we are subject to and the risks to our business associated with those laws and regulations.
Human CapitalOneSpan’s values
OneSpan is powered by a team of approximately 790 employees that spans the globe, consisting of approximately 300 employees in Canada, 292 in Europe, 27 in the Middle East and Latin America, 134 in the United States, and 37 in the Asia Pacific Region. As of December 31, 2022, approximately 309 of our employees were in research and development, 338 in sales and marketing, and 143 in general and administrative.
We are currently in the early stages of a business transformation that we believe will disrupt our industry by securing the digital agreements process while taking a human-centric approach to end-user experience. We understand that
achieving this ambitious goal will depend primarily on the skills, creativity, and determination of our people, and we believe that people do their best work in an environment built on a compelling shared purpose, openness, trust, mutual accountability, and the opportunity to make a meaningful impact.To that end, our human capital objectives are built on the following five pillars, which we refer to as our “People Promise”:
•Now is the time. With a bold vision and an ambitious market opportunity, we are ready to seize the moment. There’s never been a better time to join the team and play a part in the OneSpan story.
•Start from openness. We lead with transparency, engage with open minds, and promote diversity in our thinking and in our culture. That’s why we encourage each of our people to bring their whole self to work and be open to different ideas, new challenges, and new possibilities.
•Build it on trust. Real connections and true collaboration are built on trust. We trust each other and have no time for internal politics. We trust our people to always to bring their best. We trust ourselves to take chances and to build something bigger – together.
•Own it. We believe in empowerment through freedom: giving our people flexibility and enabling them to carve their path, their way. We don’t just ask our team to embrace change; we ask them to own it.
•Make a global impact. We challenge the now by thinking ahead, speaking up, and working together to constantly improve. Everyone is an integral part of the work we do with an equal opportunity to participate and make a global impact.
The goal of our People Promise is to create an environment that will attract, retain and develop talented people who are motivated to find opportunities and create new possibilities for our customers, for themselves and their teams, and for OneSpan. To achieve this goal, we focus on developingthe areas described below.
Competitive Compensation and maintaining a world class innovative workforce through collaboration, accountability, transparency,Benefits. We seek to provide our employees with competitive and speed. Our talented teams are carefully managed to ensure retentionfair compensation and ability to sustain business performance with an eye toward the future.Our talent managementbenefit offerings, 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 strives to offer competitive base and variable pay programs. We use market benchmarks to ensure external competitiveness while maintaining internal value or equity within the organization. Our short-termWe tie incentive compensation to both business and long-term incentive plans are designed toindividual performance and provide a variable payrange of health, wellness, family leave, savings, retirement, and time-off benefits for our employees, which vary based on local regulations and norms.
Engagement. We regularly request input from employees, including through a broad employee engagement survey conducted annually and through more frequent, “pulse” surveys. These surveys are intended to measure our progress in promoting an environment where employees are engaged, productive, and have a strong sense of belonging. As part of our commitment to acting on employee input, we also use survey results to identify areas where we can do better and expect our managers to actively work to improve those areas.
Hybrid Workplace Policy. For our employees who live near one of our offices, we have adopted a hybrid work model whereby employees generally come to the office in person once a week, on a day designated by local office leadership. For the rest of the week, employees may work either remotely or from their local office. We believe this approach maintains the flexibility of remote work while also providing a regular opportunity for in-person interactions to rewardcollaborate, innovate, and build relationships with colleagues.
Diversity and Inclusion. With approximately 790 employees around the attainment of key financialworld and operational goals and shareholder value creation. The mix among base compensation, short-term incentives and long-term incentives is designed to align withcustomers in more than 100 countries, we understand the competitive market.
OneSpan is committed to fostering, cultivating, and preserving a cultureimportance of diversity equalityin perspectives, experience, backgrounds and inclusion. Our vision iscultures. As part of our efforts to embraceencourage diversity and inclusion, all employees take an inclusiveannual diversity and engaged culture that drives a sense of belonginginclusion training and respectsan unconscious bias training. We also work with diversity focused job sites and celebrates our differences. candidate application platforms to increase access to diverse talent. In addition, we have an evolving programactive employee resource group, Women at OneSpan, focused on providing support, mentoring and setsother resources for our female employees, and are beginning the process of policiesmaking other employee resource groups available to interested employees.
We monitor the gender diversity of our workforce regularly. We measure gender diversity overall, by job level, and
procedures regarding corporate social responsibility, privacy, compliance and security. We believe these issues are important not only to our customers and investors, but also to our employees. Certain highlights on these matters are presented publicly on our website onespan.com under the About Us section.
by job category. As of December 31, 2021,2022, approximately 31% of our employees identified as female, up from 27% at the end of 2021. The percentage of women in all job levels and categories also improved year over year. Although our gender diversity metrics may fluctuate from period to period, over the longer term, we had 879 total employees, including 463 locatedhope and expect to see continued improvement in the Americas, 381 locatedrepresentation of women across the company.
We are also proud of the strides we have made during 2022 in EMEA (Europe, the Middle Eastdiversity of our executive leadership team. As a result of new management hires during 2022, more than half of our 13-person executive team identifies as female, LGBTQ, and/or a person of color, which represents significant progress as compared to the prior year.
Training and Africa),Talent Development. We promote and 35 locatedsupport employee development, compliance and organizational effectiveness by providing compliance training and professional development programs. All of our employees take a required annual training on the following topics: our code of conduct and ethics; cybersecurity; diversity and inclusion; and preventing sexual harassment. In addition, in Asia Pacific. Of2022, we added a training on psychological safety at work, which covers ways managers and employees can promote an open, trusting and non-judgmental environment that promotes creativity and the total employees, 367 were involved in sales, marketing, operations,free exchange of ideas.
Feedback and customer support, 373 in research andCoaching. We believe regular feedback is an integral component of employee development, and 139that creating a culture of ongoing performance coaching is critical to our success. To that end, we conduct quarterly coaching sessions, where each employee is evaluated by their personal manager. Employee performance is assessed in generalsignificant part based on the achievement of goals set collaboratively by the employee and administration.their manager.We also encourage managers to provide ongoing feedback and performance coaching to their direct reports, and to solicit their teams’ feedback on their own performance.
Employee Recognition. We regularly recognize our employees for driving business results and exemplifying our company values. We believe that these recognition programs help drive strong employee performance. Employees also have access to an internal communications channel to recognize their peers for their contributions to the company.
Community Outreach and Support. We believe it is important to promote community outreach through corporate giving and employee volunteerism in the communities where we live and work. We provide each employee with one paid day off each year to participate in volunteer activities of their choice. Beginning in mid-2023, we plan to launch a global social impact platform that will help our employees to find volunteer opportunities and collaborate with colleagues on social impact efforts.
Monitoring our Progress
We monitor our progress toward the goal of our People Promise by tracking the following metrics:
•Employee Survey Results. As discussed above under “Engagement”, we conduct a comprehensive employee engagement survey annually, and compare results for each survey question from year to year.
•Employee Turnover. We monitor attrition, voluntary turnover, and total turnover, as a whole and by tenure, region, and by job family. Attrition captures all reasons employees leave, including voluntary turnover and involuntary turnover due tojob eliminations or performance reasons, whereas voluntary turnover is limited to elective departures by employees. Total turnover is the sum of attrition plus voluntary turnover. Our voluntary turnover across our global employee base in 2022 was 16%, which we believe compares favorably with global turnover rates in the technology industry.
•Diversity. As discussed above under “Diversity and Inclusion”, we measure gender diversity at least annually overall, by geography, by job role, and by job level. We also monitor the racial and ethnic diversity of our U.S.-based employees, to the extent that our employees disclose their race and ethnicity to us.
Corporate Information
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 VASCO Data Security, Inc. 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., thereby becoming a publicly traded company. In May 2018, VASCO Data Security International, Inc., our publicly traded parent company, changed its name to OneSpan Inc.
Including our predecessor companies, we have completed 17 acquisitions and two dispositions since our inception, including the 2013 acquisition of Cronto Limited, a provider of secure visual transaction authentication solutions
for online banking, and the 2015 acquisition of Silanis Technology Inc., a provider of e-signature and digital transaction solutions which we now market and sell under the OneSpan Sign name.
Our principal executive offices are located at 121 West Wacker Drive, Suite 2050, Chicago, IL 60601.
“OneSpan” and other trademarks, trade names or service marks of OneSpan Inc. or its subsidiaries appearing in this Annual Report on Form 10-K are the property of OneSpan Inc. or its appliable subsidiary. This Annual Report on Form 10-K may contain additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Annual Report on Form 10-K may appear without the ® or ™ symbols.
Available Information
We maintain an Internet website at www.onespan.com. The information on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be a part of this Annual Report on Form 10-K. Our website address is included in this Annual Report on Form 10-K as inactive textual reference only. Our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and amendments to those reports, are accessible through our website, free of charge, as soon as reasonably practicable after these reports are filed electronically with, or otherwise furnished to, the Securities and Exchange Commission, or the SEC. We also make available on our website the charters of our audit committee, compensation committee and nominating and corporate governance committee, as well as our corporate governance guidelines and our code of business conduct and ethics. In addition, we intend to disclose on our website any amendments to, or waivers from, our code of business conduct and ethics that are required to be disclosed pursuant to SEC rules.
Information about our Executive Officers
The following sets forth certain information with regard to each of our executive officers. 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.
MATTHEW P. MOYNAHAN — Mr. Moynahan has served as OneSpan’s President and Chief Executive Officer since November 2021 and as a director since June 2022. Before OneSpan, he was the Chief Executive Officer of Forcepoint LLC, a global provider of commercial and government cybersecurity solutions and a subsidiary of Raytheon Technologies Corporation, from May 2016 until its acquisition by Francisco Partners in January 2021. Prior to that, Mr. Moynahan served as President of Arbor Networks, a network security and monitoring software company and a subsidiary of Danaher Corporation, from January 2012 through May 2016, where he was responsible for building a large commercial cloud DDoS platform and network-based advanced threat protection systems, and as President and Chief Executive Officer of Veracode, Inc., a SaaS pioneer of cloud-based software security testing platforms, from April 2006 through May 2011. Earlier in his career, he served as Vice President of Symantec’s enterprise product management group, as well as Vice President and General Manager of its consumer division. Mr. Moynahan is 52 years old.
JORGE MARTELL— Mr. Martell has served as OneSpan’s Chief Financial Officer since September 2022. From July 2016 to September 2022, he served as Chief Financial Officer and Treasurer and from April 2015 to July 2016 as Vice President of Finance, Corporate Controller, at Extreme Reach Inc., a private-equity owned omnichannel creative logistics company for brand advertising, where he played an integral role in optimizing the company’s balance sheet and in executing the company’s growth strategy through global M&A, prior to its acquisition by another private equity firm. From September 2012 to March 2015, Mr. Martell was Treasurer and Assistant Corporate Controller at Sapient Corporation, a technology company, where he led its global revenue organization, execution of its M&A financial strategy, and global treasury organization prior to its acquisition by Publicis Groupe. Earlier in his career, Mr. Martell held leadership roles at ABM Industries, Inc., a provider of facilities management solutions, and at KPMG LLP, a public accounting firm. Mr. Martell is 44 years old.
LARA MATAAC — Ms. Mataac has served as OneSpan’s General Counsel, Chief Compliance Officer and Secretary since June 2022. From April 2021 to June 2022, Ms. Mataac was General Counsel at Constant Contact, Inc., a provider of cloud-based online marketing solutions, where she led the legal and compliance team during a period of transition after the company’s spinout from Endurance International Group (EIG) in February 2021. Before Constant Contact, Ms. Mataac was at EIG, a provider of cloud-based web presence and online marketing solutions, from February
2013 through March 2021, most recently as Deputy General Counsel. Before EIG, Ms. Mataac was corporate legal director at Bottomline Technologies, a software company. Earlier in her career, Ms. Mataac practiced corporate law at the firms Wilmer Cutler Pickering Hale & Dorr LLP and Fenwick & West LLP. Ms. Mataac is 46 years old.
Item 1A - Risk Factors
You should carefully considerRisk Factors Summary
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this Risk Factors Summary. These summary risks provide an overview of many of the risks we are exposed to in the normal course of our business, some of which have manifested and any of which may occur in the future. As a result, the following risk factors, which we considersummary risks do not contain all of the most significant, as well asinformation that may be important to you, and you should read them together with the more detailed discussion of risks set forth following this section under the heading “Risk Factors,” and with the other information contained in this Annual Report on Form 10-K. In addition, there are a numberAdditional risks beyond those summary risks discussed below, in “Risk Factors” or elsewhere in this Annual Report on Form 10-K, could have an adverse effect on our business, results 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,operations, financial condition or operating resultsprospects, and could be materially and adversely affected. We have grouped our Risk Factors under captions that we believe describe various categories of potential risk. Forcause 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 accessibilitytrading price of our risk factor disclosures. We encourage our stockholderscommon stock to carefully review the full risk factors contained in this Form 10-K in their entirety for additional information regarding thedecline. Our business, results of operations, financial condition or prospects could also be harmed by risks and uncertainties not currently known to us or that could cause our actual results to vary materially from recent results or from our anticipated future results.
Risks Related to our Business
● | While we believe the coronavirus may have a negative impact on our financial results, 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. |
● | We have been undertaking a multi-year business transformation since 2017 and in 2021 we replaced multiple senior executives, including our CEO. It is anticipated that our current CEO will lead a further transformation beginning in 2022. If such transformation is not successful or completed on time, there could be an adverse impact on our business. |
● | 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 often 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, components or technology 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 relationshipswe currently do not believe are material. Consistent 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 attract and retain qualified personnel, especially in competitive markets and functions, 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. |
● | 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.
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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, such as due to the limited number of shares that publicly trade. |
● | 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.
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Risks Related to Technology and Intellectual Property
● | Technological changes occur rapidly in our industry and our development of new products or features is critical to maintain our revenue. New or disruptive technology from competitors or future competitors could decrease the amount of business from our current customers which represent a large majority of 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. Similarly, our key suppliers also have business continuity risks associated with their vendors which could in turn have a material effect upon us. |
● | 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. |
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 or Asian 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. In addition, governments or customers may demand increased disclosure related to environment, social and other issues. |
● | The vote by the United Kingdom (UK) to leave the European Union (EU) or the actions by China in Hong Kong 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. |
● | Delays in global transportation and disruptions in supply chains increase the likelihood that we will be unable to fulfill customer orders on time or within budget. |
Risks Related to Our Business
While we believe the coronavirus may have a negative impact on our financial results, the impact is difficult to assess at this time.
The effects of the COVID-19 pandemic and its variations 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. Subsequently, certain geographies have experienced progress and regression in addressing the pandemic, including the distribution of vaccines, and therefore progress has been uneven and difficult to predict. We re-opened a limited number of our offices during 2020 and continued to date 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 experience with this new situation has been mostly 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 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,foregoing, we are exposed to specifica variety of risks, related to manufacturing, supply chain, shipping and distribution- all of which have been impacted byincluding the COVID-19 pandemic. As a result of COVID-19, we have experienced,following significant risks:
•Our strategic transformation plan involves numerous risks and may continue to experience, delays and increased costs related to fulfilling our hardware orders. Such issues have been managed however continuing disruptions in global transportation meansnot achieve the results we may be unable to satisfy certain customer orders for our products in the future if orders substantially increase and/or further supply chain problems emerge. In order to meet our customers’ needs, we have and may continue to incur increased costs which reduce our margins. In addition, the global economic uncertainty associated with the COVID-19 pandemic has affected many of our customers differently and we believe those effects may include changes to ordering of hardware authentication tokens, mobile authentication software and delays in implementing certain security software projects. We are not able to predict at this time whether the COVID-19 pandemic will continue to affect ordering patterns, 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 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, andexpect.
•If we are unable to predict whether itattract new customers and retain and expand sales to existing customers, we will continue or decline. Moreover, the conditions caused by the COVID-19 pandemic can affect the rate of IT spending, the decisionbe unable to start new IT projects, the timing of existing projectsgrow our business.
•Failure to effectively develop and the priorityexpand 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. 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 impactsales and marketing capabilities, and particularly our ability to provide on-sitehire, train, and retain sales meetings or professional servicespersonnel, may have a material adverse effect on our ability to grow our business.
•If our new product offerings and product enhancements do not keep pace with the needs of our customers delay the provisioning ofor do not achieve sufficient customer acceptance, 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, operatingcompetitive position and financial results and overall financial performance. During the Summer of 2020, we began to experience some of the aforementioned scenarios, and this continued through the present, due in part 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, 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, new strains and transmission rate of the virus, the extent and effectiveness of containment actions and vaccines, 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.
negatively impacted.
•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
•If we are not able to enhance our revenue from a limited number of customers, many ofbrand recognition and maintain our brand reputation, our business may be adversely affected.
•The market we serve is highly competitive, which are financial institutions. The loss of substantial sales to any one of them could adverselymay negatively affect our operationsability to add new customers, retain existing customers and results. In fiscal 2021, 2020, and 2019,grow our top 10 largest customers contributed 22%, 21%, and 29%, respectively, of total worldwide revenue.The return of a worldwide recession and/or regional economic downturns may further impact our business.
•Our Digipass authenticator 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.
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; |
| ● | 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 and financial services industry; |
| ● | 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, order cancellations, inability of customers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense; |
| ● | 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 sales, cash collections and revenue streams. |
| ● | 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. |
We are unable to predict potential future economic conditions, disruptions in the sovereign debt markets or other financial markets, 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 and financial services market in Europe would be impacted most directly by any such disruption and that the consequences may be materially adverse, as approximately 49% of our consolidated revenues originated in the EMEA region in 2021.
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.
In response to the material weakness in our internal control over financial reporting disclosed as of December 31, 2019, we expended significant resources to improve our internal control over financial reporting and the effectiveness of our disclosure controls and procedures. We expended significant resources, including accounting related costs and significant management oversight as we corrected the deficiencies. Management has determined that full remediation of the prior deficiencies in internal control over financial reporting that led to this material weakness occurred, disclosed in Item 9A of the annual report on Form 10-K for the year ended December 31, 2020. Investments will continue to be made to improve the control 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 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 $(30.6) million, $(5.5) million, and $7.9 million for the years ended December 31, 2021, 2020, and 2019, respectively, our retained earnings were $143.2 million at December 31, 2021. Over our approximately 30 year operating history, we have operated at a loss for many of those years. Depending on the economic environment’s changing conditions, business volatility, applicable rules and regulations, and our investment strategies, it may be difficult for us to sustain profitability on a GAAP basis. We may choose to invest for long term value which could decrease or eliminate short-term profit. We have now operated at a net loss for two years in a row and we cannot predict with certainty whether this will change in the future.
We derive revenue from a limited number of products.
A significant portion of our revenue is derived from the sales of our legacy authentication hardware, software, and related services. We anticipate a substantial portion of future revenue, will be derived from the same. If the sale of these products and services is impeded for any reason and we have not diversified our offerings into more products or markets, our business and results of operations would be negatively impacted. Further, we expect the growth of our hardware product sales to be minimal or negative 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 often 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 financial services market is often six months or more. Larger banking transactions may take up to 18 months or more. Purchasing decisions for our products and services may be subject to delays due to many factors that are not within our control, such as:
| ● | Changes to the regulatory framework; |
| ● | Time required for a prospective customer to recognize the need for our products; |
| ● | Significant expense of many security products and systems; |
| ● | Customer budgeting process; and |
| ● | Customer evaluation, testing and approval process. |
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 dependencedependent on a limited number of suppliers, and the loss of their manufacturing capability, components and technology could materially impact our operations.
Our Digipass business may also experience inventory-related losses.
•The sales cycle for our products is often long, and we may incur substantial expenses for sales that do not occur when anticipated or at all.
•If we are unable to successfully hire, train, and retain qualified personnel, we may be unable to achieve our business objectives. In addition, we are dependent on the continued services and performance of our senior management and other key employees, the loss of whom could adversely affect our business, operating results and financial condition.
•Security breaches or cyberattacks could expose us to significant liability, cause our business and reputation to suffer, and harm our competitive position.
•Real or perceived malfunctions and errors in our products could result in warranty and product liability risks and economic and reputational damages.
•We depend on third party hosting providers and other technology vendors, as well as our own infrastructure, to provide our products and solutions to our customers in a timely manner. Interruptions or delays in performance of our products and solutions could result in customer dissatisfaction, damage to our reputation, loss of customers, and a reduction in revenue.
•Our success depends in part on establishing and maintaining relationships with other companies to distribute our technology and products or to incorporate their technology into our products and services, or vice versa.
•We have operated at a loss for each of the past three years, and we may not be profitable in the future.
•Our financial results may fluctuate from period to period, making it difficult to project future results. If we fail to meet the expectations of securities analysts or investors, the price of our common stock could decline.
•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.
•Acquisitions or other strategic transactions may not achieve the intended benefits or may disrupt our current plans and operations.
•We may be subject to legal proceedings for a variety of claims, including intellectual property disputes, labor and employment issues, commercial disagreements, securities law violations and other matters. These proceedings may be costly, subject us to significant liability, limit our ability to use certain technologies, increase our costs of doing business or otherwise adversely affect our business and operating results.
•We are subject to numerous laws and regulations and customer requirements governing the production, distribution, sale and use of our products. Any failure to comply with these laws, regulations and requirements could result in unanticipated costs and could have a materially adverse effect on our business, results of operations and financial condition.
Risk Factors
Our business involves significant risks, some of which are described below. You should carefully consider the following risks, some of which have manifested and any of which may occur in the future, together with all of the other information in this Annual Report on Form 10-K, including in the preceding Risk Factors Summary, and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K before making an investment decision with respect to any of our securities. .
Risks Related to our Business and Industry
Our strategic transformation plan involves numerous risks and may not achieve the results we expect.
In May 2022, we announced a three-year strategic transformation plan that began on January 1, 2023. Although we believe that this plan will enable to us accelerate revenue growth and increase profitability, we may not be successful in executing the plan on our expected timeframe or at all, or the plan may not achieve the results we expect, for a number of reasons, including the following:
•The assumptions we used in developing the plan, including assumptions regarding customer acquisition, customer retention, market needs, market opportunity size, and the impact of our marketing initiatives, may prove incorrect;
•We may experience challenges or delays in growing our salesforce and marketing programs to support our growth plans or in training and incentivizing our salespeople to execute our new go-to-market approach;
•We may have difficulties in hiring and retaining employees in general due to the challenging hiring environment;
•It may be more difficult, time consuming, or expensive than we anticipate to build a robust sales pipeline, increase our brand awareness, or enhance our product distribution channels;
•We may encounter difficulties and delays in platform and product-related initiatives to support our growth, including delays in the availability of new product offerings or the buildout of our next-generation transaction- cloud platform due to staffing and other resource constraints;
•Ongoing component shortages and shipping delays affecting our Digipass authenticator devices could negatively impact revenue and cash flow for our Security Solutions segment, which we are relying upon to help fund growth in our Digital Agreements segment; and
•Economic slowdown or recession, heightened inflation, capital markets volatility, political instability or conflict, and changes in interest rates and foreign exchange rates may negatively affect our financial and operating results.
If we are unable to attract new customers and retain and expand sales to existing customers, we will be unable to grow our business.
Our success will depend significantly on our ability to attract new customers, particularly enterprise customers. We have experienced, and expect to continue to experience in the near term, challenges in adding new customers, in part because we are in the early stages of scaling our sales and marketing capabilities to support our strategic transformation plan. If we are unable to adequately enhance our sales and marketing organizations in the timeframe we expect, we may not be able to attract sufficient new enterprise customers to achieve the growth objectives in our strategic transformation plan, which would have an adverse effect on our business.
The achievement of our growth objectives also depends on our ability to retain and expand sales to existing customers. Our renewal and expansion rates may be below our expectations, decline or fluctuate as a result of a number of factors, including customer budgets, decreases in the number of users at our customers, changes in the type and size of our customers, pricing, competitive conditions, customer attrition and general economic and global market conditions. If our
efforts to expand sales to our existing customers are not successful or if our customers do not renew their subscriptions at the rates we expect, our business will be negatively impacted.
Failure to effectively develop and expand our sales and marketing capabilities, and particularly our ability to hire, train, and retain sales personnel, may have a material adverse effect on our ability to grow our business.
Our ability to increase our customer base and achieve broader market acceptance of our products and solutions depends to a significant extent on our ability to effectively develop and expand our sales and marketing operations. As part of our three-year strategic transformation plan, we are making significant investments in and changes to our sales operations. We are in the process of implementing a unified go-to-market approach across our entire business rather than having separate salespeople for Digital Agreements and Security Solutions. This initiative involves intensive training to enable our sales force to sell across our full product portfolio. We are also shifting our sales model to target high-potential enterprise sales prospects using an account-based engagement model. This buildout of our salesforce involves, among other things, hiring of additional salespeople to support our growth plans. To achieve this, we must locate and hire a significant number of qualified individuals with the experience and skills necessary to sell our full product portfolio, and competition for such individuals is intense. Once a new salesperson is hired, we must invest considerable time and resources into training before the person is able to achieve full productivity. If we are unable to retain the individual for a sufficiently long period of time, we may never recoup this investment.
We are also dedicating significant resources to demand generation and marketing efforts, and doing more outbound targeted marketing than we have historically. Since our investment in marketing has been relatively limited in the past and because we have limited brand awareness in many of our markets, it may take time and substantial expense to generate demand and a robust and consistent sales pipeline.
If we cannot train or expand our sales force or successfully generate demand for our products through our marketing efforts in the timeframe contemplated by our strategic transformation plan, we may not be able to achieve the goals of the plan on time or at all, which may have a material adverse effect on our business.
If our new product offerings and product enhancements do not keep pace with the needs of our customers or do not achieve sufficient customer acceptance, our competitive position and financial results will be negatively impacted.
Technological changes occur rapidly in our industry and our development of new products and features is critical to maintain and grow our revenue. Our future growth will depend in part upon our ability to enhance our current products and develop innovative new solutions to distinguish us from the competition and to meet customers’ changing needs. 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. 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.
We spend substantial amounts of time and money to research and develop new offerings and enhanced versions of our existing offerings in order to meet our customers’ rapidly evolving needs. When we develop a new offering or an enhanced version of an existing offering, we typically incur expenses and expend resources upfront to market, promote and sell the new offering. Therefore, when we develop or acquire new or enhanced offerings, their introduction must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market. For example, if our recent new product offerings, such as our Digipass CX and OneSpan Notary products, do not garner widespread customer adoption and implementation, our business may be adversely affected. Any such adverse effect may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new offerings or enhancements.
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. The loss of substantial sales to any one of them could adversely affect our operations and results. In 2022, 2021, and 2020, our top 10 largest customers contributed 23%, 22%, and 21%, respectively, of our total worldwide revenue.
If we are not able to enhance our brand recognition and maintain our brand reputation, our business may be adversely affected.
We believe that enhancing our brand recognition is important to our efforts to attract new customers and channel partners. If we do not build awareness of our brand, we could be at a competitive disadvantage to companies whose brands are, or become, more recognizable than ours. Our brand recognition and reputation are dependent upon numerous factors including:
•our marketing efforts;
•our ability to continue to offer high quality, innovative and reliable products;
•our ability to maintain customer satisfaction with our products;
•our ability to be responsive to customer concerns and provide high quality customer support, training and professional services;
•any misuse or perceived misuse of our products;
•positive or negative publicity, including through reviews by industry analysts;
•our ability to prevent or quickly react to any cyberattack on our information technology systems or security breach of or related to our software; and
•litigation or regulatory-related developments.
Improving our brand recognition is likely to require significant additional expenditures and may not be successful or yield increased revenues. If we do not successfully enhance our brand and maintain our reputation, we may have reduced pricing power relative to competitors with stronger brands and we could lose customers or renewals, which would adversely affect our business.
The market we serve is highly competitive, which may negatively affect our ability to add new customers, retain existing customers and grow our business.
The market for digital solutions for identity, authentication, and secure digital agreements is very competitive and, like most technology-driven markets, is subject to rapid change and constantly evolving solutions and services.
Our identity verification and authentication products are designed to allow authorized users access to digital business processes and properties, in some cases using patented technology, as a replacement for or supplement to a static password. Our main competitors in our identity verification and authentication markets are Gemalto, a subsidiary of Thales Group, and RSA Security. There are also many other companies, such as Transmit Security, Symantec, and Duo Security, that offer competing 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 risk and 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 are DocuSign and Adobe Systems. Both companies are significantly larger than us. In addition to these companies, there are numerous smaller and regional or niche providers of electronic signing solutions.
Some of our present and potential competitors have significantly greater financial, technical, marketing, purchasing, and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion and sale of products, or deliver competitive products at a lower end-user price than we do. Any of these factors would make it difficult for us to compete successfully, which would negatively affect our business.
Our Digipass authenticator business is dependent on a limited number of suppliers, and the loss of their manufacturing capability, components and technology could materially impact our operations. Our Digipass business may also experience inventory-related losses.
In the event that the supply of components or finished products for our Digipass authenticator business 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. Our hardware Digipass authentication devices are assembled at facilities located in mainland China and Romania. The importation of these products from China and Romania 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 StatesU.S. or European UnionEU that are adverse to trade, including enactment of protectionist legislation. In 2020,We experienced supply chain disruption in 2022 as a portionresult of the impact on 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 risksChinese contract manufacturers of manufacturing in mainland China, in 2020 we launched an initiative to establish limited manufacturing in the European Union. At this time, we do not know whether this project will be successful or how much this project couldChina’s implementation and subsequent reversal of
its “Zero COVID” policy. To mitigate the risks related to Chinese manufacturing. Regardlessassociated with our China-based contract manufacturing facilities, we are considering alternative manufacturing and supply arrangements, such as moving some of the location ofDigipass manufacturing we continuecurrently done in China to be exposedRomania or to other locations. It is possible that this transition may cause a disruption in our Digipass manufacturing operations. Product supply chain risks and uncertaintiesdisruptions or related to disruptions caused by the COVID-19 pandemic. In addition, portions ofcost increases could have a material adverse impact on our software solutions are materially dependent on third parties who supply the underlying technology. Shouldbusiness.
Under some circumstances, we
lose the ability to utilize such technology, or do so at a commercially reasonable price, our results of operations could be adversely affected.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 or supply chain difficulties emerge, we sometimes purchase multiple years’ supply of parts for our Digipass authenticator devices based on internal forecasts of demand. In addition, todemand, anticipated supply chain constraints, or other reasons. 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.
The sales cycle for our products is often long, and we may incur substantial expenses for sales that do not occur when anticipated or at all.
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.
A typical sales cycle in the financial services market is often nine to 18 months long. We often need to spend significant time and resources to better educate and familiarize these potential customers with the value proposition of our products and solutions. Purchasing decisions for our products and services may be subject to delays due to a number of factors, many of which are outside of our control, such as:
•Time required for a prospective customer to recognize the need for our products;
•Effectiveness of our salesforce;
•Changes to regulatory requirements;
•The complexity of contracts with certain large business customers;
•The significant expense of some of our products and systems;
•Customer budgeting and procurement processes;
•Economic and other factors impacting customer budgets; and
•Customer evaluation, testing and approval process.
The timing of sales with our enterprise customers and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for these customers. 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. In addition, during the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale.
If we are unable to successfully hire, train, and retain qualified personnel, we may be unable to achieve our business objectives.
Our ability to successfully pursue our three-year strategic transformation plan will depend significantly on our ability to attract, motivate and retain employees, especially those in sales. We face intense competition for these employees from numerous technology, software and other companies, many of whom have greater resources than we do. In 2022, we incurred higher compensation-related expenses in order to remain competitive in a tight labor market, particularly in light of wage inflation, and we expect to continue to experience this type of cost pressure. Even with an increase in the compensation we offer, we may not be able to attract, motivate and/or retain sufficient qualified employees. Difficulties attracting and retaining personnel could have an adverse effect on our ability to achieve our sales, operational, or other business objectives and, as a result, our ability to compete could decrease and our financial results could be adversely affected. In addition, even if we are able to identify and recruit a sufficient number of new hires, these new hires will require significant training before they achieve full productivity, particularly in the case of sales employees.
We are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.
Our future performance depends on the continued services and contributions of our senior management, particularly Matthew Moynahan, our Chief Executive Officer, and other key sales and technical employees. Our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment
with us at any time. The temporary or permanent loss of the services of our senior management or other key employees for any reason could significantly delay or prevent the achievement of our objectives and harm our business, financial condition and results of operations. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.
Security breaches or cyberattacks could expose us to significant liability and cause our business and reputation to suffer and harm our competitive position.
Our corporate infrastructure stores and processes our sensitive, proprietary and other confidential information (including as related to financial, technology, employees, marketing, sales, etc.) which is used on a daily basis in our operations. In addition, our software involves transmission and processing of our customers' confidential, proprietary and sensitive information. We have legal and contractual obligations to protect the confidentiality and appropriate use of customer data. Because we are a cybersecurity company, and because the majority of our customers are banks and other financial institutions, which are frequent targets of cyberattacks, we may be an attractive target for cyber attackers or other data thieves.
High-profile cyberattacks and security breaches have increased in recent years, with the potential for such acts heightened as a result of the number of employees working remotely due to the COVID-19 pandemic. Security industry experts and government officials have warned about the risks of hackers and cyberattacks targeting IT products and enterprise infrastructure. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and often are not recognized until launched against a specific target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As we seek to increase our client base and expand awareness of our brand, we may become more of a target for third parties seeking to compromise our security systems and we anticipate that hacking attempts and cyberattacks will increase in the future.
We have experienced several security incidents in the past. None have been material to date, but it is possible that we will experience a material event in the future. Even though we have established teams, processes and strategies to protect our assets, we may not always be successful in preventing or repelling unauthorized access to our systems. We also may face delays in our ability to identify or otherwise respond to any cybersecurity incident or any other breach. Additionally, we use third-party service providers to provide some services to us that involve the storage or transmission of data, such as software as a service (SaaS), cloud computing, and internet infrastructure and bandwidth, and they face various cybersecurity threats and also may suffer cybersecurity incidents or other security breaches. Despite our security measures, our IT and infrastructure may be vulnerable to attacks. Threats to IT security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that pose threats to our customers and our IT. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to attack our products and services or gain access to our networks, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information or take other actions to gain access to our data or our users’ or customers’ data, or acting in a coordinated manner to launch distributed denial of service or other coordinated attacks. Inadequate account security practices may also result in unauthorized access to confidential and/or sensitive data.
Security risks, including, but not limited to, unauthorized use or disclosure of customer data, theft of proprietary information, theft of intellectual property, theft of internal employees' personally identifiable information, theft of financial data and financial reports, loss or corruption of customer data and computer hacking attacks or other cyberattacks, could require us to expend significant capital and other resources to alleviate the problem and to improve technologies, may impair our ability to provide services to our customers and protect the privacy of their data, may result in product development delays, may compromise confidential or technical business information, may harm our competitive position, may result in theft or misuse of our intellectual property or other assets and could expose us to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expenses, costs for remediation and incentives offered to affected parties, including customers, other business partners and employees, in an effort to maintain business relationships after a breach or other incident, and other liabilities. We are continuously working to improve our IT systems, together with creating security boundaries around our critical and sensitive assets. We provide advanced security awareness training to our employees and contractors that focuses on various aspects of cybersecurity. All of these steps are taken in order to mitigate the risk of attack and to ensure our readiness to responsibly handle any security violation or attack. However, because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach
of our security occurs, the market perception of the effectiveness of our security measures and our products could be harmed, we could lose potential sales and existing customers, our ability to operate our business could be impaired, we may incur significant liabilities, we could suffer harm to our reputation and competitive position, and our business and financial condition could be negatively impacted.
Real or perceived malfunctions and errors in our products could result in warranty and product liability risks and economic and reputational damages.
Our products are inherently complex and may malfunction or contain undetected errors or defects when first introduced or as new versions are released. We have experienced these malfunctions and errors or defects in connection with new products and product upgrades, and we expect that these malfunctions, errors and defects will continue to be found from time to time in new or enhanced products. Malfunctions and defects may make our products vulnerable to attacks, prevent vulnerability detection, or temporarily impact our customer’s environments. These problems may result in a breach of a legal obligation or may cause physical harm or damage which 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, testing, and scanning of our software solutions (including SaaS), 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, a publicly known defect or perceived defect in our products could lead to customers delaying or withholding payments, divert the attention of our key personnel, adversely affect the market’s perception of us and our products, and have an adverse effect on our reputation and the demand for our products.
Our financial results may fluctuate from period to period, making it difficult to project future results. If we fail to meet the expectations of securities analysts or investors, the price of our common stock could decline.
Our revenue and results of operations have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:
•The size, timing, and payment terms of significant orders, and any unexpected delay or cancelation of such orders;
•The variability of revenue realized from individual customers, as their buying patterns can vary significantly from period to period and are affected by the individual solutions purchased and the structure of the contract;
•Larger customers delaying renewal of their subscriptions or failing to renew at all;
•Changes in customer budgets;
•The effectiveness of our sales and marketing programs, including our ability to hire, train and retain our sales personnel;
•Changes in pricing by competitors;
•New product announcements or introductions by competitors;
•Technological changes in the market for our products, including the adoption of new technologies and standards;
•Our ability to develop, introduce and market new products and product enhancements on a timely basis;
•Market and customer acceptance of any new products and product enhancements that we introduce;
•With respect to our Digipass business, component costs and availability;
•Network outages, security breaches, technical difficulties or interruptions affecting our products;
•Seasonality in our business;
•Changes in foreign currency exchange rates;
•General economic and political conditions, as well as economic conditions specifically affecting industries in which our customers operate; and
•Other events or factors, including those resulting from pandemics, war, natural disasters, incidents of terrorism or responses to these events.
Any one of these or other factors discussed elsewhere in this Annual Report on Form 10-K, or the cumulative effect of a combination of these factors, may result in fluctuations in our financial results, which may cause us to miss our guidance and analyst expectations and cause the price of our common stock to decline.
We have operated at a loss for each of the past three fiscal years, and we may not be profitable in the future.
Over our approximately 30-year operating history, we have operated at a loss for many of those years, including for the years ended December 31, 2022, 2021 and 2020, for which we reported a net loss of $14.4 million, $30.6 million, and $5.5 million, respectively. We will need to generate and sustain increased revenue levels and manage our expenses in future periods to become profitable and, even if we do, we may not be able to maintain or increase our level of profitability. We intend to continue to incur significant expenses to support growth, further develop and enhance our products and solutions, expand our infrastructure and technology, increase our sales headcount and marketing activities, and grow our customer base. Our efforts to grow our business may be costlier than we expect, and we may not be able to increase our revenue enough to offset our increased operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and experience unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the value of our business and common stock may significantly decrease.
Our business, operations and financial performance may be negatively affected by adverse changes in the evolving COVID-19 pandemic.
The COVID-19 pandemic is continuing to evolve, and significant adverse changes in the spread or severity of COVID-19 infections and the resulting economic impact could have a material adverse effect on our business, operations and financial performance.
In our Digipass authenticator device 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 have experienced, and may continue to experience, delays and increased costs related to fulfilling our device orders. Although we have managed these issues to date, ongoing disruptions in global transportation may continue to delay fulfillment, which may in turn delay our recognition of revenue from customer orders, or even prevent us from satisfying certain customer orders for our products in the future if orders substantially increase and/or further supply chain problems emerge. In order to meet our customers’ needs, we have and may continue to incur increased freight and other costs related to our Digipass devices, which would reduce our margins.
We experienced some increased sales for our e-signature solution and products used to facilitate remote employee access in 2020 that we attribute in part to the COVID-19 pandemic; however, since that time, customer buying patterns have generally returned to more typical pre-pandemic levels.
A resurgence or similar development in the COVID-19 pandemic would likely create additional economic uncertainty and have a number of adverse effects, including: a negative impact on our customers’ ability or willingness to attend our sales and marketing events or to purchase our offerings; a delay in prospective customers’ purchasing decisions; our inability to provide on-site sales meetings or professional services to our customers; delays in the provisioning of our products; longer customer payment terms; lower value or shorter duration of customer contracts; lower margins, especially in our Digipass business; or an increase in customer attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance.
We depend on third-party hosting providers and other technology vendors, as well as our own infrastructure, to provide our products and solutions to our customers in a timely manner. Interruptions or delays in performance of our products and solutions could result in customer dissatisfaction, damage to our reputation, loss of customers, and reduction in revenue.
We outsource portions of our cloud infrastructure to third-party hosting providers, principally Amazon Web Services, or AWS. We also outsource components of our services to third-party technology vendors who host their products in the cloud. Customers of our products need to be able to access our platform at any time, without interruption or degradation of performance. AWS and other third-party hosting providers run their own platforms that we access, and we are therefore vulnerable to service interruptions on these third-party platforms, as well as to service interruptions affecting our third-party technology vendors. We have experienced interruptions, delays and outages in service and availability from time to time due to a variety of factors impacting our third-party hosting providers or other vendors, and we expect to experience these types of incidents in the future.
If our products or platform are unavailable or our users are otherwise 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
performance, especially during peak usage times, as our products become more complex and the usage of our products increases. We have in the past and may in the future experience capacity constraints that affect our product performance and cause us to miss our service level agreements with our customers. These capacity constraints can be due to a number of causes, including technical failures, natural disasters, fraud or security attacks. To the extent that we do not effectively address capacity constraints, either through our current providers or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in service levels from our third-party hosting providers or other cloud-based technology vendors may adversely affect our ability to meet our customers' requirements.
Our third-party hosting providers have no obligations to renew their agreements with us on commercially reasonable terms or at all, and the agreements governing these relationships can generally be terminated by either party with limited notice. Access to hosting services may also be restricted by the provider at any time, with no or limited notice. Although we expect that we could receive similar services from other third parties, if any of our arrangements with AWS or other third-party hosting providers are terminated, we could experience interruptions on our platform and in our ability to make our platform available to customers, as well as downtime, delays and additional expenses in arranging alternative cloud infrastructure services.
It is also possible that our customers and potential customers would hold us accountable for any breach of security affecting infrastructure of our third-party hosting providers. We may incur significant liability from those customers and from third parties with respect to any such breach, and we may not be able to recover a material portion of our liabilities to our customers and third parties from our hosting providers in the event of any breach affecting their systems.
Any of the above circumstances or events may harm our reputation, cause 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.
Our success depends
in part on establishing and maintaining
strategic relationships with other companies to distribute our technology and products
and, in some cases, for usor to incorporate their technology into our products and
services.services, or vice versa.
Part of our business strategy is to enter into strategic alliancespartnerships and other cooperative arrangements with other companies in our industry.third parties. We currently are regularly involved in cooperative efforts with respect to the incorporation of our products into products of others and vice versa, research and development efforts, and marketing, effortsdistributor and reseller arrangements. These relationships are generally non-exclusive, and some of our strategic partners also have cooperative
relationships with certain of our competitors.competitors or offer some products and services that are competitive with ours. If we lose third-party relationships, if these relationships are not commercially successful, or if we are unable to enter cooperative arrangementsinto third-party relationships on commercially reasonable terms in the future, or if we lose any of our current strategic or cooperative relationships, our business could be harmed. negatively impacted.
SaaS offerings, which involve various risks, constitute an important part of our business.
We do notexpect that our SaaS offerings will constitute an increasingly important part of our business. As a result, we will need to continue to evolve our processes to meet a number of regulatory, intellectual property, contractual, service, and security 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 the timeHealth Insurance Portability and resources devoted to such activitiesAccountability Act of 1996 (HIPAA) and the General Data Protection Regulation (GDPR)), protecting our products from external threats, maintaining continuous service levels and data security practices expected by parties with whom we have relationships. In addition, we may not have the resources available to satisfy 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, certaincustomers, preventing inappropriate use of our products, and services competeincurring significant up-front costs where desired higher margins are dependent on achieving significant sales volume 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 to 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, and 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.
Failure to maintain high-quality customer support could have a material adverse effect on our business.
Our business relies on our customers’ satisfaction with the
technical and customer support and professional services we provide to support our products. If we fail to provide customer and technical support services that are high-quality, responsive, and able to promptly resolve issues that our customers encounter with our products and services,
of our strategic partners.Wethen they may elect not be able to maintain effective product distribution channels, which couldpurchase or renew subscription licenses or may otherwise reduce or discontinue their business relationship with us. This would likely result in decreased revenue.
We rely on bothloss of revenue and damage to 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, any ofreputation, which could have an adverse effect on our business. Further,
Failure to effectively manage our distributors, integratorsproduct and resellers may sell competing products. The lossservice lifecycles could harm our business.
As part of
important sales personnel, distributors, integratorsthe natural lifecycle of our products and services, we periodically inform customers that products or
resellersservices have reached 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
us.We depend on our key personnel for the success of our business and operating results. In addition, the lossfailure to generate new revenue to replace and/or expand the revenue realized from discontinued products or services could adversely affect our business and operating results.
We are subject to foreign currency exchange rate fluctuations, which could adversely affect our financial condition and results of one or moreoperations.
Because a significant number of our key personnelprincipal 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 have an adverse effectadversely affect our revenue and profitability in U.S. Dollars of our products sold in these markets. Furthermore, a strengthening of the U.S. dollar could increase the cost in local currency of our products and services to customers outside the United States, which could adversely affect our business, results of operations, financial condition and cash flows.
The exchange rate between the U.S. Dollar and foreign currencies has fluctuated in recent years and may fluctuate substantially in the future. As discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the U.S. Dollar’s strength during foreign currencies, particularly the Euro, during 2022 had a significant impact on our 2022 financial results and may continue to adversely affect our results in the future. We do not currently use forward contracts or other hedging strategies such as options or foreign exchange swaps to mitigate our exposure to foreign currency fluctuations.
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 2022, approximately 83% of our revenue and approximately 66% of our operating expenses were generated/incurred outside of the U.S, In 2021, approximately 86% of our revenue and approximately 68% of our operating expenses were generated/incurred outside of the U.S. In 2020, approximately 88% of our revenue and approximately 73% 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 related to our international operations, any or all of which could result in a disruption in our business and a decrease in our revenue. These include:
•increased management, infrastructure and legal costs associated with having international operations;
•costs of compliance with foreign legal and regulatory requirements, including, but not limited to data privacy, data protection and data security regulations, and the risks and costs of non-compliance;
•costs of compliance with U.S. laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to managesell or provide our solutions in certain foreign markets, and the risks and costs of non-compliance;
•heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;
•costs of compliance with multiple and possibly overlapping tax structures, and related potential adverse tax impacts;
•risks of reliance on channel partners for sales in some countries;
•differing technology standards in certain international markets;
•the uncertainty and limitation of protection for intellectual property rights in some countries;
•greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;
•difficulties and costs of staffing and managing international operations, including maintaining internal controls and challenges in closing or restructuring such operations;
•difficulty in providing support and training to customers in certain international locations;
•management communication and integration problems resulting from cultural and linguistic differences and geographic dispersion;
•foreign currency exchange rate fluctuations;
•adverse tax burdens and foreign exchange controls that could be negatively perceivedmake it difficult to repatriate earnings and cash;
•increased exposure to climate change, natural disasters, acts of war, terrorism, epidemics, or pandemics and other health crises, including the ongoing COVID-19 pandemic; and
•economic or political instability in foreign markets, including instability related to the capital markets.United Kingdom’s recent exit from the EU, China’s “zero COVID” policies, and the impact of geopolitical tensions between China and the U.S. over Taiwan, Hong Kong, tariffs and other matters.
Our successbusiness, including the sales of our products and professional services by us and our abilitychannel partners, may be subject to manageforeign governmental regulations, which vary substantially from country to country and change from time to time. Our failure, or the failure by our channel partners, to comply with these regulations could adversely affect our business. Further, in some foreign countries, it may be more common for others to engage in business depend,practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Violations of laws or internal policies by our employees, contractors, channel partners or agents could result in large part, upondelays in revenue recognition, financial reporting misstatements, fines, penalties or the efforts and continued serviceprohibition of the importation or exportation of our senior management team. The loss of one or more of our key personnelproducts and could have a material adverse effect on our business and results of operations. ItIf we are unable to successfully manage the challenges of international expansion and operations, our business and operating results could be adversely affected.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
We review our goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. At December 31, 2022, we had goodwill and intangible assets with a net book value of $103.0 million primarily related to our acquisitions. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may have a material negative impact on our operating results.
Because we recognize revenue from subscription-based software licenses over the term of the relevant contract, downturns or upturns in sales contracts are not immediately reflected in full in our operating results. In addition, our reported revenue may fluctuate widely due to the interpretation or application of accounting rules.
Approximately 41% of our total revenue for the year ended December 31, 2022 was attributable to subscription license contracts. We recognize subscription revenue over the term of each of our subscription contracts,which are typically one year in length but may be up to three years or longer. As a result, much of our revenue is generated from the recognition of contract liabilities from contracts entered into during previous periods. Consequently, a shortfall in demand for our products or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in future quarters. Our revenue recognition model also makes it difficult for us to find replacements forrapidly increase our key personnel,revenue through additional sales contracts in any period, as competitionrevenue from new customers is recognized over the applicable term of their contracts.
In addition, our sales arrangements often include multiple elements, including hardware, services, software, maintenance and support. We have sold software related arrangements in multiple forms, including perpetual licenses, term-based licenses and SaaS subscriptions, each of which may be treated differently under accounting rules. The accounting rules for such personnel is often intense. For example,arrangements are complex and subject to change from time to time. The nature of the
arrangement can create variations in 2021,the timing of revenue recognition. If applicable accounting standards or practices change, or if the judgments or estimates we use when applying existing standards prove to be incorrect, our Chief Executive Officer and Chief Financial Officer left the Company. Further, such a lossfinancial results may be adversely affected.
We could be
negatively perceived in the capital markets, which could reduce the market value of our securities.If we failsubject to continue to attractadditional tax liabilities, and retain qualified personnel, our business may be harmed.
Our future success depends upon our ability to attractuse our net operating losses may be limited.
We are subject to U.S. federal, state, local 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 personneltaxes in the future orUnited States and foreign income taxes, withholding taxes and transaction taxes in numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain and the relevant taxing authorities may be abledisagree with our determinations as to do so only at significantly increased compensation. If we cannot retain or are unablethe income and expenses attributable to hire such key personnel,specific jurisdictions. In addition, our business, financial conditiontax obligations and results of operations could be significantly adversely affected.Changes in our effective tax rate may have an adverse effect on our results of operations.
Our future effective tax rates maycould be adversely affected by a number of factors including changes in the volumerelevant tax, accounting and mix ofother laws, regulations, principles and interpretations by recognizing tax losses or lower than anticipated earnings and losses in jurisdictions with differentwhere we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes to our operating structure (including a currently in-process revenue of our intellectual property structure), by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities,liabilities. We may be audited in various jurisdictions, and in deferredsuch jurisdictions may assess additional taxes, sales taxes and value-added taxes against us. Although we believe our tax valuation allowances, increases in expenses not deductible for tax purposes, includingestimates are reasonable, the impairmentfinal determination of goodwill in connection with acquisitions, changes in share-based compensation expense, changes in available tax credits, the resolution ofany tax audits adjustments to income taxes upon finalization of returns, and changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles. Any significant increase inlitigation could be materially different from our future effective tax rates could adversely impact net income for future periods.
Our worldwide incomehistorical 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, determination of permanent establishment 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,operating results of operations,or cash flows in the period for which a determination is made.
At December 31, 2022 we had U.S. federal, state and
financial condition.We couldforeign net operating losses (NOLs), of $18.0 million, $27.7 million, and $80.1 million, respectively, available to offset future taxable income, some of which begin to expire in 2023. Federal NOLs incurred in taxable years beginning after December 31, 2017 can be materiallycarried forward indefinitely, but the deductibility of federal NOLs in taxable years beginning after December 31, 2021, is subject to certain limitations. A lack of future taxable income would adversely affected by futureaffect our ability to utilize these NOLs before they expire.
In addition, under the provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, substantial changes in tax law or policy (or in their interpretation or enforcement)our ownership may limit the amount of pre-change NOLs that can be utilized annually in the jurisdictions wherefuture to offset taxable income. Section 382 of the Internal Revenue Code imposes limitations on a company’s ability to use its NOLs if one or more stockholders or groups of stockholders that own at least 5% of the company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. Based upon an analysis as of December 31, 2021, we operate. Thesedetermined that we do not expect these limitations to materially impair our ability to use our NOLs prior to expiration. However, if changes couldin our ownership occurred after such date, or occur in the future, our ability to use our NOLs may be exacerbated by economic, budgetfurther limited. Subsequent statutory or regulatory changes in respect of the utilization of NOLs for federal or state purposes, such as suspensions on the use of NOLs or limitations on the deductibility of NOLs carried forward, or other challenges facingunforeseen reasons, may result in our existing NOLs expiring or otherwise being unavailable to offset future income tax liabilities. For these jurisdictions. For example, foreign jurisdictions could impose tax rate changes along with additional corporate tax provisions that would disallowreasons, we may not be able to utilize a material portion of the NOLs, even if we achieve profitability.
Acquisitions 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.Acquisitions, divestitures and other strategic transactions present many risks,may not achieve the intended benefits or may disrupt our current plans and failureoperations.
In order to
realizeremain competitive, we have in the
financialpast and
strategic goals we anticipate could have a material adverse effect on our business, results of operations, cash flows and financial condition.We may evaluate and consider potential strategic transactions, including acquisitions of,in the future seek to acquire additional businesses, products or technologies or to make investments in, complementary businesses, technologies, services, products and other assets, divestitures, alliances,or enter into joint ventures or similar transactions with, third parties. These transactions involve numerous risks, including the following:
•Difficulties or delays in integrating the acquired businesses, which could prevent us from realizing the anticipated benefits of acquisitions;
•Delays or reductions in customer purchases for both us and other portfolio actions. We also may enter into relationships with other businessesthe company we acquired due to expandcustomer uncertainty about continuity and effectiveness of service from either company;
•Challenges in successfully cross-selling acquired products to our existing customer base, or in cross-selling our products to the acquired company’s customer base;
•Difficulties in supporting and platform,migrating acquired customers, if any, to our platforms, which could involve preferred or exclusive licenses, additional channelscause customer churn, unanticipated costs, and damage to our reputation;
•Disruption 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 regulationsongoing business 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 attentionand other resources from existing operations;
•Constraints on our liquidity and in the event that we use cash or incur debt to fund an acquisition, or dilution to existing business and may present financial, managerial and operational risks, including disruptionsstockholders 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 the transactions could seriously harm our financial condition or operating results. The expected benefits of any acquisition may not be realized. In connection with our recent acquisitions and any future purchases, we could face additional financial and operational risks beyond those described above, including: dilution of our stockholders, ifevent we issue equity securities as part of the consideration for the acquisition;
•Our use of cash to fundpay for acquisitions would limit other potential uses for our cash and affect our liquidity;
•Assumption of debt or other actual or contingent liabilities of the acquired company, including litigation risk;
•Differences in in corporate culture, compliance protocols, and risk management practices between us and acquired companies;
•Potential loss of the key employees of an acquired business;
•Potential loss of the customers or partners of an acquired business due to the actual or perceived impact of the acquisition;
• Difficulties associated with governance, management, and control matters in majority or minority investments or joint ventures;
•Unforeseen or undisclosed liabilities or challenges associated with the companies, businesses, or technologies we acquire;
•Adverse tax consequences, including exposure of our entire business to taxation in additional jurisdictions; and
•Accounting effects, including potential impairment charges and requirements that we record acquired deferred revenue at fair value.
Any of these
transactions; reduced liquidity, increased debt and higher amortization expenses; assumption of operating losses, increased expenses and liabilities; discovery of unanticipated issues and liabilities; failurerisks could result in acquisitions or other strategic transactions disrupting our business and/or failing 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.achieve their intended objectives.
We also regularly review our product portfolio from time to time 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-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. The nature of the arrangement can create variations in the timing of 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 the past, we worked with a customer at our expense to resolve a claim brought against the customer related to our technology, and it is likely that we will need to indemnify our customers for similar claims in the future. The expense of defending these types claims may adversely affect our financial results and may not be covered by any insurance policies we maintain. In addition, weany such disputes and litigation could divert management attention and harm our reputation in the market.
We also 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.
Although we normally contractually limit our liability with respect to such representations, warranties and other contractual obligations, we may still incur substantial liability related to them. 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 indemnity payments or damages resulting from our contractual obligations could harm our business, operating results and financial condition.
The evolution of
Any failure to protect our proprietary technology and intellectual property rights could substantially harm our business
requires more complex development and
go-to-market strategies, which involve significant risk.operating results.
Our
increasing focussuccess is dependent, in part, upon protecting our proprietary technology. We rely on
developinga combination of patents, copyrights, trademarks, service marks, trade secret laws and
marketing a platform of solutionscontractual provisions in an effort to establish and protect our proprietary rights. However, the steps we take to protect our intellectual property may be inadequate. While we have been issued patents in the U.S. and other countries and have additional patent applications pending, we may be unable to obtain patent protection for
identity management, authentication, risk analysis, fraud detection, digital business processes and related areas requires different development and go-to-market strategies thanthe technology covered in 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 has been in process for multiple years and currently continues 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.patent applications. In addition,
marketing and selling new solutions to enterprises requires significant investment of time and resources in order to train our employees and educate our customers on the benefits of our 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, or may not produce the desired results.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 security and electronic signature products and services is highly competitive. Our competitors include organizations that provide 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 products and services 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 increaseany patents issued 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 maintainmay not provide us with competitive advantages 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.
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; |
| ● | The size, timing, cancellation or rescheduling of significant orders; |
| ● | New product announcements or introductions by competitors; |
| ● | Technological changes in the market for our products including the adoption of new technologies and standards; |
| ● | 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 may be multiple years apart; |
| ● | The variability of revenue realized from individual customers as their buying patterns can vary significantly from period to period and is affected by the individual solutions purchased and the structure of the contract; |
| ● | 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 our markets. These trends can include the summer months, particularly in Europe, 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, such as due to the limited numbersuccessfully challenged by third parties. Any of our shares that trade in the public markets.
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; |
| ● | 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, including from current and former directors and officers; |
| ● | 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 andpatents, trademarks or other intellectual property rights may be suspendedchallenged 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,circumvented by others 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 amountinvalidated through administrative process 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.litigation. There can be no assuranceguarantee that any stock repurchasesothers 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 promote, delay or prevent a change of control.
Mr. T. Kendall Hunt, our founder and former Chairman of the Board, beneficially owns approximately 10.2% of the outstanding shares of our common stock. In addition, Blackrock, Inc. holds approximately 12.8% of ownership, Legion Partners Asset Management holds approximately 6.9% of ownership, The Vanguard Group holds approximately 5.6% of ownership, and Legal & General Investment Management LTD holds approximately 5.1% of ownership.
The concentration of ownership may have the effect of a small number of investors promoting, 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 Company 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. Delaware law also limits business combinations with interested stockholders. These 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,not independently develop similar products, duplicate 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. In 2021, Legion Partners Asset Management launched a proxy contest that settled prior to our annual stockholder meeting in June 2021. Pursuant to that settlement (which was disclosed at that time) we made certain changes to our Board of Directors. Such proxy contest and related matters required significant time and attention from our directors and officers, and we incurred significant incremental expenses. We cannot predict whether additional proxy contests or related matters will occur in the future and the time and cost associated with such matters.
Risks Related to Technology and Intellectual Property
Technological changes occur rapidly in our industry and our development of new products and features is critical to maintain our revenue. New or disruptive technology from competitors or future competitors could decrease the amount of business from our current customers which represent a large majority of 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 new solutions to distinguish us from the competition and to meet customers’ changing needs. 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. In addition, a substantial number of our competitors are much larger organizations with many more financial and human resources.
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:
1.Software and information systems that we use to help us run our business more efficiently and cost effectively, which are increasingly cloud-based tools;
2.The products we have traditionally sold and continue to sell to our customers contain technology that incorporates the use of secret numbers and encryption technology; and
3.Solutions delivered on a software-as-a-service basis, from both public and private cloud models, which may process and store confidential, personal, health and financial information and which may rely on third parties for some or all of the solution.
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 unauthorized attempts intended to capture business information or exploit computing power to impede the performance of our products or design around our patents. Furthermore, legal standards relating to accessthe validity, enforceability and scope of protection of intellectual property rights are uncertain. Despite our customers’precautions, it may be possible for unauthorized third parties to copy our products and use information or harm our reputationthat we regard as a company. The processes used by hackersproprietary to access or sabotage technologycreate products services and networks are evolving in sophisticationsolutions that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and increasing in frequency. We could experience a security incident due to various causes including intentional or unintentional conductdisclosure of our employees, vendors, technology partnersproducts may be unenforceable under the laws of jurisdictions outside the U.S. To the extent
we expand our international activities, our exposure to unauthorized copying and
others that have access to or store our information.In July 2011, we discovered a cyber-incident related to DigiNotar B.V. shortly after we purchased the company. The hacking incident at DigiNotar B.V. led to the termination of DigiNotar B.V’s registration as a certification service provider and DigiNotar B.V.’s bankruptcy. Since 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 data 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 securityuse of our products and proprietary information may increase.
We enter into confidentiality and invention assignment agreements with our systems,employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. These agreements may not be effective in controlling access to establish information security governance procedures and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors or partners from independently developing technologies that are substantially equivalent or superior to train our employees. However,products and solutions.
In order to protect our intellectual property rights, we
are the subject of a large volume of hacking attemptsmay be required to spend significant resources to monitor and
protect and enforce these rights, including through litigation. Litigation brought to protect and enforce our
defenses might not alwaysintellectual property rights could be
effective. If a hacking attempt werecostly, time consuming and distracting to
be successfulmanagement and
lead to a material data breach, then it could
harm our business, financial condition and results of operations, bothresult in the
current period and for a significant future periodimpairment or loss of
time.We rely upon Amazon Web Services to operate portions of our platformintellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and any disruption of or interference with our use of Amazon Web Services or other vendors’ material would adversely affect our business, results of operationscountersuits attacking the validity and financial condition
We outsource portionsenforceability of our cloud infrastructureintellectual property rights. Our inability to Amazon Web Services,protect our proprietary technology against unauthorized copying or AWS. Customersuse, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our products need toand solutions, impair the functionality of our products and solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our products and solutions or injure our reputation. We will not be able to accessprotect our platform at any time, without interruption or degradation of performance. AWS runs its own platform thatintellectual property if 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 enforce our rights or if we do not detect unauthorized use of our products within a reasonable amountintellectual property. Moreover, policing unauthorized use of time or at all, thenour technologies, trade secrets and intellectual property may be difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the U.S. and where mechanisms for enforcement of intellectual property rights may be weak. If we fail to adequately protect our intellectual property and proprietary rights, our business, operating 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 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
We may be
adversely affected. In addition, any changes in service levels from AWSsubject to legal proceedings for a variety of claims, including intellectual property disputes, labor and employment issues, commercial disagreements, securities law violations and other matters. These proceedings may
adversely affectbe costly, subject us to significant liability, limit our ability to
meetuse certain technologies, increase our
customers' requirements.Anycosts of the above circumstancesdoing business 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. 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.
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.
Our products are distributed with software programs licensed to us by third-party authors under open-source licenses, which may include the GNU General Public License, the GNU Lesser Public License, the BSD License and the Apache License. Third-party, open-source programs are typically licensed to us for no fee and the underlying license agreements could 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 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 may have equal access to these open source products, which may help them develop competitive products; and |
| ● | open-source software potentially increases customer support costs because licensees can modify the software and potentially introduce errors, which could also increase the risk of vulnerabilities available to hackers. |
We must continue to attract and retain highly skilled technical personnel for our research and development efforts.
The market for highly skilled technical 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.
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. In addition, the failure to realize new revenue to replace and/or expand the revenue realized from discontinued products or services 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 grow SaaS 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, incurring significant up-front costs where desired higher margins are dependent on achieving significant sales volume 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 are involved as a party or an indemnitor in disputes or regulatory inquiries. These may include alleged claims, lawsuits and proceedings regarding intellectual property disputes, labor and employment issues, commercial disagreements, securities law violations and other matters. In particular, companies in the software industry are often required to defend against litigation or claims based on allegations of infringement or other violations of intellectual property rights. In certain instances, 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 segmentsmarkets 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. Such claims sometimes involve patent holding companies or other adverse patent owners that have no relevant product revenue and against which our own patents may therefore provide little or no deterrence. 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 our products, 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(which may not be available to us on commercially reasonable termsterms), or at all. We have made and expectsatisfy indemnification obligations 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 usecustomers, any of this third party softwarewhich could have a material adverse effect on our business.
Regardless of the merits or
technology, could result in shipment delaysultimate outcome of any claims that have been 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 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 claimsbrought against us or that we may bring against others, lawsuits are time-consuming and expensive to resolve, divert management’s time and attention, and could harm our customers. Our contracts generally indemnifyreputation. Although we carry general liability and other forms of insurance, 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 thisinsurance may not always be the case. The expense of defending thesecover potential claims may adversely affect our financial results andthat arise or 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 numerous patents in the United States and in other countries, which cover multiple aspects of our technology. A substantial part of our patents cover the Digipass product line. Our patents expire between now and more than 10 years from now. There can be no assurance that we will continueadequate 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 withindemnify us for market share.
We are subject to warrantylawsuits, and product liability risks.
A malfunction of or design defect in our products which results in a breach of a legal obligation or physical harm or damage from our 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 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, andit is possible that litigation could have an adverse effect on our reputationbusiness, operating results or financial condition.
We use open-source software in our products, which could subject us to litigation or other actions.
We use open-source software in our products and solutions. Any use of open-source software may expose us to greater risks than the demanduse of commercial software because open-source licensors generally do not provide warranties or
controls on the functionality or origin of the software. Any use of open-source software may involve security risks, making it easier for
hackers and other third parties to determine how to compromise our platform. From time to time, there have been claims challenging the ownership of open-source software against companies that incorporate open-source software into their products. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open-source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our products.
Similarly, an actualIn addition, if we were to combine our proprietary software products with open-source software in a certain manner, we could, under certain of the open-source licenses, be required to release the source code of our proprietary software products. If we inappropriately use or
perceived breachincorporate open-source software subject to certain types of
security withinopen-source licenses that challenge the proprietary nature of our
own systems could damagesoftware products, we may be required to re-engineer our
reputationproducts, discontinue the sale of our products and
have an adverse effect on the demand for our products.solutions or take other remedial actions.
There is significant government regulation of technology imports and
exports and to the extentexports. If 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.law including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control. 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.
Additionally, we may be negatively affected if our third-party technology partners fail to obtain proper licenses and permits for the import and export of their products. We maintain trade control compliance requirements for our partners; however, we cannot guarantee that our partners will comply with these requirements. Violations of export control and international trade laws could result in penalties, fines, adverse reputational consequences, and other materially adverse consequences. In the past, we voluntarily disclosed a trade control matter to the U.S. government. Although this matter was closed during 2019 with no fines, penalties, or finding of wrongdoing,
we cannot guarantee that suchsimilar issues
will notcould arise in the future. In addition,
we cannot predict the future
changes in government regulation
of aspects oftechnology imports and exports could negatively affect our
business and such regulation could be detrimental to our results.business.
We employ cryptographic technology in our authentication
products. If the codes used in our cryptographic technology are eventually broken or become subject to additional government regulation, our technology and products
that uses complex mathematical formulations.may become less effective, which would have a material adverse effect on our business.
A 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: | ● | products, which would have a material adverse effect on our business:
•Any significant advance in techniques for attacking cryptographic systems, including the development of an easy factoring method or faster, more powerful computers, such as quantum computing;
• |
| ● | 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 2021, approximately 86% of our revenue and approximately 68% of our operating expenses were generated/incurred outside of the U.S. In 2020, approximately 88%successful decoding of our revenuecryptographic messages or the misappropriation of keys; and approximately 73%
•Increased government regulation limiting the use, scope or strength of our operating expenses were generated/incurred outside of the U.S. In 2019, approximately 89% of our revenuecryptography.
International and
approximately 72% 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 controls and closing or restructuring such operations; |
| ● | 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 our solutions in individual countries, even if there were past sales; |
| ● | Linguistic and cultural differences; |
| ● | A widely distributed workforce; |
| ● | Difficulty in providing support and training to customers in certain international locations; |
| ● | Economic and political instability, including military or terrorist actions and uncertainties in market conditions caused by the COVID-19 pandemic; and |
| ● | Social unrest, health crises, and cultural barriers or changes. |
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 Europeandomestic regulatory environmentenvironments regarding privacy and data protection regulations could have a material adverse impact on our results of operations.
In
We collect, transmit, store, and otherwise process (on our systems and on our third-party partners’ systems) our customers’ and our employees’ data that includes personally identifiable information that is subject to international and domestic privacy and data protection regulations. For example, in Europe, we are subject to the 1995 European Union (“EU”) Directive onUnion's General Data Protection (“1995 Data Protection Directive”), which requiresRegulation, (EU) 2016/679, commonly known as the GDPR, and laws implemented by EU member states tostates. The GDPR and member state laws impose minimum restrictions on the collection and use of personal data that in some respects, are generally 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
They 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 Company continuesWe continue to adapt itsour compliance with GDPR through the use of standard contractual clauses and other methodsmethods; however, it is difficult to be certain that compliance has been achieved. The General Data Protection Regulation (“GDPR”) replaced the 1995 Data Protection Directive effective May 25, 2019, creating significant impacts on how businesses can collect and process the personal data of EU individuals. We have expended significant resources to comply, but those methods may be subject to scrutiny by data protection authorities in EU member states.
Moreover, the decision of the United Kingdom, or UK to leave the EU has created uncertainty with regard to data protection regulations in the UK, particularly because the UK government has recently announced that it intends to revise aspects of its data protection regime to move further away from the EU approach. This may result in substantively different compliance obligations with respect to transfers of personal data out of the UK and the EU. Compliance with a newly adopted UK data privacy regime may result in substantial operational costs and require us to modify our data handling practices. The costs of compliance with
GDPR and new UK data privacy laws, and other burdens imposed by such laws, regulations and policies that are applicable to us may limit our use of personal data and solutions and could have a material adverse impact on our results of operations.
Additionally, we may face audits or investigations by one or more foreign government agencies relating to our compliance with GDPR and new UK data privacy laws that could result in the imposition of penalties or fines.
In the United States the federal and state governments have also enacted privacy and data protection regulations that impact us, our customers, and partners. For example, in June 2018, California enacted the California Consumer Privacy Act, or CCPA, which took effect January 1, 2020, and imposed many requirements on businesses that process the personal information of California residents. Many of the CCPA’s requirements are similar to those found in the GDPR, including requiring businesses to provide notice to data subjects regarding the information collected about them and how such information is used and shared, and providing data subjects the right to request access to such personal information and, in certain cases, request the erasure of such personal information. The CCPA also affords California residents the right to opt-out of “sales” of their personal information. The CCPA contains significant penalties for companies that violate its requirements. In November 2020 California voters passed a ballot initiative for the California Privacy Rights Act of 2020, or CPRA, which went into effect on January 1, 2023, and significantly expanded the CCPA to incorporate additional GDPR-like provisions including requiring that the use, retention, and sharing of personal information of California residents be reasonably necessary and proportionate to the purposes of collection or processing, granting additional protections for sensitive personal information, and requiring greater disclosures related to notice to residents regarding retention of information. The CPRA also created a new enforcement agency – the California Privacy Protection Agency – whose sole responsibility is to enforce the CPRA, which will further increase compliance risk. The provisions in the CPRA may apply to some of our business activities. In addition, other states, including Virginia, Colorado, Utah, and Connecticut, already have passed state privacy laws. Virginia’s privacy law also went into effect on January 1, 2023, and the laws in the other three states will go into effect later in the year. Other states will be considering these laws in the future, and Congress has also been debating passing a federal privacy law. These laws may impact our business activities, including our identification of research subjects, relationships with business partners and ultimately the marketing and distribution of our products.
We work to comply with all applicable international and domestic privacy and data protection regulations; however, these laws vary greatly from jurisdiction to jurisdiction, change rapidly, and are subject to interpretation, all of which leads to uncertainty in their applicability. Preparation and compliance with these regulations may require that we implement new processes and policies, or change our existing processes and policies or features of our systems, which may require substantial financial and other resources and which otherwise may be difficult to undertake. Any failure or perceived failure by us (or our third-party partners) to comply with these privacy and data protection regulations, our processes and policies, contractual provisions, or an actual, perceived or suspected data protection or information security incident could result in serious consequences for us. These consequences may include enforcement actions, investigations, prosecutions, fines, penalties, debarment, litigation, claims for damages by customers and other affected individuals, reputational loss, and financial and business losses.
We must comply with
governmental regulations setting environmental standards. In addition, governments or customers may demand increasedthe requirements of being a public company, including developing and maintaining proper and effective disclosure
related to environment, socialcontrols and
other issues.Governmental regulations setting environmental standards influence the design, components or operation of our products. New regulationsprocedures 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. Ourinternal control over financial reporting. Any failure to comply with these regulationsrequirements 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 disruptionsadversely affect investor confidence 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 marginscompany and, results of operations and increaseas a result, the volatilityvalue of our financial results.
Wecommon stock.
As a public company, we are subject to the
Restriction onreporting requirements of the
Use of Hazardous Substances Directive 2002/95/EC (also known asExchange Act, the
“RoHS Directive”) andSarbanes-Oxley Act, 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. 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. In addition to these laws and regulations, we may be subject to increased disclosure obligations related to environmental, social or other issues from governments or customers. If we do not make such disclosures, or do so in a way that is not perceived as positive, our business could be adversely affected.
The vote by the United Kingdom (UK) to leave the European Union (EU) or the actions by China in Hong Kong 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". 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 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. 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 have customers and manufacturing partners connected to Hong Kong. The recent unrest in Hong Kong and the related actions by China could adversely affect our business.
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 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. In addition, disclosures we may be required to make with respect to climate change may damage our reputation and have an adverse impact on our business.
The effects of regulations relating to conflict minerals may adversely affect our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, contains provisionsthe listing requirements of Nasdaq and other applicable securities rules and regulations that impose various requirements on public companies. Our management and other
personnel devote a substantial amount of time to improve transparency and accountability concerning the supply of certain minerals and derivatives (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. Compliancecompliance with these rules alsorequirements and such compliance has increased, and may continue to increase, our legal, accounting and financial costs.
The Sarbanes-Oxley Act requires
due diligence including countrythat we maintain effective disclosure controls and procedures and internal control over financial reporting and furnish a report by management on, among other things, the effectiveness of
origin inquiries to determine the sourcesour internal control over financial reporting on an annual basis. This assessment includes disclosure of
Conflict Minerals usedany material weaknesses identified by our management in our
products.Asinternal control over financial reporting. We are also required to have our independent registered public accounting firm issue an opinion annually on the effectiveness of our internal control over financial reporting. During the evaluation and testing process, if we filed our annual reports related to products manufactured. We reported that we determined we had no reason to believe Conflict Minerals usedidentify one or more material weaknesses 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 mayinternal control over financial reporting, we will be unable to verify the origin of all Conflict Mineralsassert that our internal control over financial reporting is effective.
We identified a material weakness in our
products. We may encounter challenges with customersinternal control over financial reporting as of December 31, 2019. Although we remediated that material weakness, it is possible that additional material weaknesses, or significant deficiencies, in our internal controls will 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
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 someauditor attestations regarding the effectiveness of our assetsinternal controls, failure to meet periodic reporting obligations, and key employees are not locatedmaterial misstatements in our financial statements. Any material misstatement of our financial statements may result in a restatement, loss of investor and customer confidence, a decline in the United States.
Severalmarket price of our key employees are full-timecommon stock, and potential sanctions or part-time residents of foreign countries, and a substantial portion ofinvestigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our assets and those of some of our key employees are located in foreign countries. As a result, it may not be possible for investors to effect service of process on those persons located in foreign countries,internal control over financial reporting, or to enforce judgments against someimplement or maintain other effective control systems required of public companies, could also restrict our key employees based uponfuture access to the securities or other laws of jurisdictions in those foreign countries.
capital markets.
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 anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act, and other similar 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. While we have implemented policies and training that mandate compliance with these anti-corruption laws, we cannot guarantee that these policies and procedures will prevent reckless or criminal acts committed by our employees, consultants, sales agents or channel partners. Violations of the FCPAthese laws may result in materially significant diversion of management’s resources as well as significant investigation and outside counsel expense. Violations of these laws may also 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 disrupt our business and result in materially adverse effect on our reputation, business, results of operations, and financial condition.
We are subject to numerous laws, regulations and customer requirements governing the production, distribution, sale and use of our products. Any failure to comply with these laws, regulations and requirements could result in unanticipated costs and could have a materially adverse effect on our business, results of operation, and financial condition.
We are subject to global legal, regulatory, and customer compliance requirements that span many different areas. For example, 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), which 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.
In addition, like many electronic devices, our hardware products contain certain minerals and derivatives that are subject to SEC disclosure and reporting requirements, or (Conflict Minerals). Compliance with these rules also requires due diligence including country of origin inquiries to determine the sources of Conflict Minerals used in our products. 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.
Environmental compliance and management of environmental factors has produced significant regulatory and legislative efforts on a global basis, a trend we expect to continue. New laws and regulations intended to curb environmental impacts such as climate change and pollution may result in added compliance requirements and increased costs of energy for the Company and our suppliers which could result in a significant negative impact on our ability to operate or operate profitably. In addition, disclosures we may be required to make with respect to climate change may damage our reputation and have an adverse impact on our business.
We sell products and services to U.S. federal, state and local, as well as foreign government entities. Risks associated with selling our products and services to government entities include compliance with complex procurement regulations and government-specific contractual requirements that may vary from our standard terms and conditions, longer sales cycles that are not easy to predict, and varying government funding and budgeting processes. Selling to these entities is expensive and time-consuming and often requires significant up-front resource effort and expense. We have certain policies and processes in place to aid in compliance with applicable government contracting requirements; however, it is difficult to be certain that compliance has been achieved. Non-compliance with government entity requirements may result in significant material risk to the Company including debarment, reputational loss, and financial and business losses.
New laws and regulations and changes to current laws and regulations are always possible and, in some jurisdictions they may be introduced with little or no time to bring related products into compliance. Furthermore, our products are used by customers to assist with achieving compliance with laws and regulations that apply to their industry. Our failure to comply with laws and regulations and to adapt to our customers’ needs may prevent us from selling our products in a certain country or to a particular customer. In addition, these laws, regulations, and requirements may increase our cost of supplying the products by forcing us to redesign existing products, change manufacturing practices, 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, and we may experience lowered customer demand. 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 may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We expect that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our estimate as to how long we expect our cash and cash equivalents to be able to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. We intend to continue to make investments to support our business growth and may require additional funds to achieve our objectives and respond to business challenges, including the need to develop new features or enhance our products, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.
General economic conditions both inside and outside the U.S., as well as the COVID-19 pandemic and geopolitical events, have recently resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity for certain corporate development transactions or our ability to make other important, opportunistic investments. In addition, market volatility, high levels of inflation and interest rate fluctuations may increase our cost of financing or restrict our access to potential sources of future liquidity. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected.
Risks Related to Ownership of Our Common Stock
Our stock price has been and will likely continue to be volatile.
The market price of our common stock has been and may continue to be highly volatile and may fluctuate substantially as a result of a variety of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating resultsperformance. Factors that could cause fluctuations in the market price of our common stock include the following:
•Actual or anticipated fluctuations in our quarterly or annual operating results;
•Variance in our financial performance from our own financial guidance or from expectations of securities analysts;
•The trading volume of our common stock;
•Failure of securities analysts to maintain coverage of our company or changes in financial estimates by any securities analysts who follow our company;
•Changes in market valuations of other technology companies;
•Announcements by us or our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
•Our involvement in any litigation or investigations by regulators;
•Our sale of our common stock or other securities in the future;
•Sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
•Repurchases pursuant to Board-authorized share repurchase programs, or announcements of the inception or discontinuation of any such program;
•Short sales, hedging and other derivative transactions involving our capital stock;
•Additions or departures of any of our key personnel;
•Changing legal or regulatory developments;
•The inclusion or exclusion of our stock in ETFs, indices and other benchmarks, and changes made to related methodologies;
•Reactions by investors to uncertainties in the world economy and financial condition. Violationsmarkets.
In recent years, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies due to, among other factors, the actions of market participants or other actions outside of our control, including general market volatility caused by geopolitical events, developments in the COVID-19 pandemic, and general economic developments. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We have been the target of this type of litigation in the past, and may be targeted again the future, which could result in substantial costs and divert our management’s attention.
A small group of shareholders control a substantial amount of our common stock and could promote, delay or prevent a change of control.
A small number of shareholders control a significant amount of our outstanding common stock, as follows: Blackrock, Inc. holds approximately 16.3% of our outstanding common stock; Legion Partners Asset Management holds approximately 8.8%; Mr. T. Kendall Hunt, our founder and former Chairman of the U.K. Bribery ActBoard, holds approximately 8.6%; Vanguard Group Holdings holds approximately 6.8%; Altai Capital Management L.P. holds approximately 5.8%; and Legal & General Investment Management Limited holds approximately 5.3% This concentration of ownership may have the effect of a small number of investors promoting, 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 Company 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. Delaware law also limits business combinations with interested stockholders. These 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.
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 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.
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 have in the past, and may from time to time in the future, 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. We cannot predict whether additional proxy contests or related matters will occur in the future and the time and cost associated with such matters.
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.
General Risks
Economic uncertainties or downturns could materially adversely affect our business.
Negative economic conditions, including conditions resulting from changes in foreign currency rates, changes in interest rates, gross domestic product growth, financial and credit market fluctuations, inflation, political turmoil, geopolitical tensions, natural catastrophes, regional and global conflicts, natural disasters, and terrorist attacks, could cause a decrease in business investments, including spending on information technology, and negatively affect the growth of our business. If global or regional 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, order cancellations, lower revenues, increased inventories, and lower gross margins;
•continued volatility in the global markets and fluctuations in exchange rates for foreign currencies could negatively impact our reported financial results and condition;
•continued volatility in the prices for materials we use in our products could have a material adverse effect on our costs, gross margins, and profitability;
•restructurings, reorganizations, consolidations and other corporate events could affect our customers’ budgets and buying cycles, particularly in the banking and financial services industry;
•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, longer sales cycles, order cancellations, inability of customers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense;
•a severe criminalfinancial difficulty experienced by our customers may cause them to become insolvent or civil sanctionscease business operations, which could reduce sales, cash collections and revenue streams; and
•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.
Furthermore, in an adverse economic environment there is a risk that customers may delay their orders until the economic conditions improve. 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.
Catastrophic events may disrupt our business.
Our business operations are subject to interruption by natural disasters, including those related to the effects of climate change, and other catastrophic events such as fire, floods, power loss, telecommunications failure, cyberattack, war or terrorist attack, or epidemic or pandemic, such as the COVID-19 pandemic. To the extent such events impact our facilities or off-premises infrastructure, we may be
subjectunable to
other liabilities thatcontinue our operations and may endure system interruptions, reputational harm, delays in our software development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could
negatively affecthave an adverse effect on our
businessfuture operating
results and financial condition.results. Item 1B - Unresolved Staff Comments OneSpan has operations in Austria, Australia, Belgium, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom, and the United States of America. Our corporate headquarters is
located in Chicago,
Illinois. Our international headquarters is in Zurich, Switzerland. OurIllinois; our European operational headquarters is in Brussels,
Belgium, along withBelgium; our
logistics facility. We conduct sales and marketing, research and development and customer support activities from various locations. Our primary global research and development center is in Montreal,
Canada.Canada; and our Digipass authenticator logistics facility is located in Mollem, Belgium. We
have additional researchconduct sales and
development facilities in the Netherlands, Cambridge, United Kingdom, Bordeaux, Francemarketing, customer support, and
Vienna, Austria.We have sales personnel in our offices near Brussels, Belgium, Singapore, Tokyo, Japan,Dubai, Zurich, Switzerland, Chicago, Illinois, London, United Kingdom, Boston, Massachusetts,general and in several field officesadministrative activities from various locations around the world.
Each of our properties support the operations of our two lines of business, which are our reportable operating segments: Digital Agreements and Security Solutions.
All of our properties are leased.We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations. Item 3 - Legal Proceedings
We are a party to or have intellectual property subject to litigationcertain legal proceedings and claims incidental to the operations of our business. We are also subject to certain other legal proceedings and claims that arisehave arisen 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.business that have not been fully adjudicated. We believe the probability is remotecurrently do not anticipate that the outcome of each of these matters, including the legal proceedings described below,if resolved against us, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effectimpact on our financial results in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existingor financial condition.
For further information regarding our legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable)see Note 18, Commitments and Contingencies, 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.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 no liabilities recorded for these clauses as of December 31, 2021.
A complaint was filed on August 20, 2020 against OneSpan and certain of its officers, asserting claims for purported violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and SEC Rule 10b-5 promulgated thereunder, based on certain alleged material misstatements and omissions. The case is captioned Almendariz v. OneSpan Inc., et al., No. 1:20-cv-04906 (N.D. Ill.) (the “Securities Class Action”). Specifically, the plaintiffincluded in the Securities Class Action alleges, among other things, that certainnotes to consolidated financial statements about OneSpan’s business were misleading becausein Part IV of defendants’ failure to disclose that OneSpan purportedly had inadequate internal procedures and controls over financial reporting and related disclosures; and OneSpan purportedly downplayed the negative impacts of immaterial errors in its financial statements. On April 28, 2021, the Securities Class Action was dismissed by the court without prejudice.
A complaint, related in subject matter to the Securities Class Action, was filedthis Annual Report on October 23, 2020 against certain of OneSpan’s officers and directors, and names 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 Securities Class Action. On February 16, 2021, on the parties’ agreed motion, the court stayed the action pending a decision on the then-anticipated motion to dismiss in the Securities Class Action. On June 28, 2021 the Klein case was dismissed by the court without prejudice.
On April 2, 2021, a different purported shareholder of the Company, represented by one of the same law firms representing plaintiff in the Klein case, filed second derivative suit in the Northern District of Illinois arising out of the same events that led to the filing of the Securities Class Action. The case is captioned Herrera v. Boroditsky, et al., 1:21-cv-01789 (N.D. Ill.). The factual allegations are substantially similar to those in Klein, except that the complaint does not contain express allegations regarding the pendency of the Securities Class Action and only one cause of action, for breach of fiduciary duty, is asserted. On June 28, 2021 the Herrera case was dismissed by the court without prejudice.
From time to time, we have been involved in litigation and claims incidental to the conduct of our business, such as compensation claims from current or former employees, or commercial disputes with vendors. We expect that to continue. Excluding matters specifically disclosed above, we are not a party to any lawsuit or proceeding that, in management’s opinion, is likely to have a material adverse effect on its business, financial condition or results of operations.
Form 10-K.Item 4 - Mine Safety Disclosures 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 OSPN.
The following table sets forth,
for the periods indicated, the range of high and low daily closing prices of our common stock on the NASDAQ Capital
Market for the past two years. | | | | | | |
2021 | | High | | Low |
Fourth quarter | | $ | 21.30 | | $ | 15.86 |
Third quarter | | | 25.55 | | | 17.86 |
Second quarter | | | 28.97 | | | 24.33 |
First quarter | | | 26.77 | | | 21.43 |
| | | | | | |
2020 | | High | | Low |
Fourth quarter | | $ | 26.60 | | $ | 18.20 |
Third quarter | | | 32.96 | | | 18.84 |
Second quarter | | | 27.93 | | | 14.89 |
First quarter | | | 20.39 | | | 10.95 |
Market.
| | | | | | | | | | | | | | |
| 2022 | | High | | Low |
| Fourth quarter | | $ | 14.12 | | | $ | 8.36 | |
| Third quarter | | $ | 12.40 | | | 8.58 | |
| Second quarter | | $ | 15.87 | | | 11.01 | |
| First quarter | | $ | 17.42 | | | 12.34 | |
| | | | | | | | | | | | | | |
| 2021 | | High | | Low |
| Fourth quarter | | $ | 21.30 | | | $ | 15.86 | |
| Third quarter | | $ | 25.55 | | | $ | 17.86 | |
| Second quarter | | $ | 28.97 | | | $ | 24.33 | |
| First quarter | | $ | 26.77 | | | $ | 21.43 | |
On February 18,
2022,2023, there were
153120 registered holders and approximately
9,86010,799 street name holders of
the Company’sour common stock.
Dividends
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’sour results of operations, financial condition, cash requirements, plans for expansion and other factors deemed relevant by the Board of Directors.
The Company intendsWe intend to retain any future earnings for use in
itsour business and therefore
doesdo not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
Issuer Purchases of Equity Securities
During the year ended December 31, 2020,
On May 12, 2022, the Board ofDirectors authorized a shareterminated the stock repurchase program (“program”), pursuantit adopted on September 10, 2020 and adopted a new stock repurchase program under which we are authorized to which the Company can repurchase up to $50.0 million of our issued and outstanding shares of common stock. Share purchases under the program will take place in open market transactions 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’sour 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, 2022May 11, 2024 unless the total
amount has been used or
the authorization has been cancelled.
During the year ended December 31, 2021, the Company2022, we repurchased 0.30.4 million shares of the Company’sour stock for $7.5$5.7 million in the aggregate at an average cost of $21.82$12.83 per share under itsour repurchase program. An additional 0.30.1 million shares of itsour common stock were withheld to satisfy the mandatory tax withholding requirements upon vesting of restricted stock and restricted stock units.units issued to employees under our equity incentive plan. There were no shares of stock repurchased during the fourth quarter of 2021.2022.
The Stock Performance Graph below compares the cumulative total return through December 31,
20212022 assuming reinvestment of dividends, by an investor who invested $100.00 on December 31,
2015,2017, in each of (i) our common stock, (ii) the
Nasdaq Computer Index, (iii) the Russell 2000
index, (iii)Index, (iv) the Standard Industrial Code Index 3577 – Computer Peripheral Equipment, NEC and
(iv)(v) a comparable industry
(the peer group) index selected by the
Company.company (the peer group). The peer group for this purpose consists of: American Software, Inc., Appian Corporation, BlackLine, Inc., CPI Card Group, Inc., Mandiant, Inc., ProofPoint, Inc., PROS Holdings, Inc., Q2 Holdings, Inc., QAD, Inc., Qualys, Inc., Rapid7, Inc., Seachange, Inc., SecureWorks Corp., Varonis Systems, Inc.
Of these peer group companies, three (Mandiant, ProofPoint, and QAD) were sold prior to December 31, 2022, and are therefore included in the graph only through their last trading day prior to the closing of their respective acquisitions. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
This graph shall not be deemed "soliciting material" or be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended (the Securities Act), whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
| | | | | | | | | | | | | | | | | | | | |
| 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 |
| OneSpan Inc. | $ | 100.00 | | $ | 93.17 | | $ | 123.17 | | $ | 148.78 | | $ | 121.80 | | $ | 80.49 | |
| NASDAQ Computer Index | $ | 100.00 | | $ | 96.32 | | $ | 144.80 | | $ | 217.17 | | $ | 299.39 | | $ | 192.28 | |
| Russell 2000 Index | $ | 100.00 | | $ | 88.99 | | $ | 111.70 | | $ | 134.00 | | $ | 153.85 | | $ | 122.41 | |
| 3577 - Computer Peripheral Equipment, NEC | $ | 100.00 | | $ | 116.39 | | $ | 163.74 | | $ | 235.43 | | $ | 373.68 | | $ | 264.54 | |
| Peer Group | $ | 100.00 | | $ | 114.57 | | $ | 156.68 | | $ | 270.83 | | $ | 232.95 | | $ | 140.54 | |
Item 6.
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except head count, ratios, time periods and 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
“Forward“Cautionary Note Regarding Forward Looking Statements” at the beginning of this Form 10-K.
The Company has excluded discussion of the
Revision of Previously Issued Financial Statements
This information should be read
OneSpan helps organizations accelerate digital transformations by enabling secure, compliant, and refreshingly easy digital customer agreements and transaction experiences. We deliver digital agreement products and services that automate and secure customer-facing and revenue-generating business processes. Our solutions help organizations streamline and secure user experiences, which in
conjunction with the consolidated financial statementsturn allows them to drive growth, reduce risk, 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
We continue to actively address the effects of the COVID-19 pandemic and its impact globally. Due to economic uncertainty connected to the COVID-19 pandemic, we have experienced lengthened sales cycles and reduced demand for some of our security solutions.
Financial Results and Outlook
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 itsunlock their business operations and financial results.potential.
We believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on the global economy and our business results. 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
OneSpan Inc. and its wholly owned subsidiaries 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 digitalproviding high-assurance identity and anti-fraudauthentication security as well as enterprise-grade electronic signature (e-signature) solutions, for use cases ranging from simple transactions to financial institutions and other businesses. We establish trust in people’s identities, the devices they use, and the transactions they execute. We make digital banking accessible, secure, easy, and valuable.workflows that are complex or require higher levels of security. Our solutions secure access to online accounts, data, assets,help our clients ensure the integrity of the people and applications forrecords associated with digital agreements, transactions, and interactions in industries including banking, financial services, healthcare, digital services and others. We are trusted by global enterprises; provide tools for application developers to easily integrate security functions into their web-basedblue-chip enterprises, including more than 60% of the world’s largest 100 banks, and mobile applications;process millions of digital agreements and facilitate end-to-end financial agreement automation. billions of transactions in more than 100 countries annually.
Our solutions
enhance the abilityare powered by a portfolio of
companies to onboard new customersproducts and
prevent hacking attacks against onlineservices across identity verification, authentication, virtual interactions and
mobile transactions,
while providing an exceptional experienceand secure digital storage. These products and services can be acquired and embedded individually within enterprise business workflows or assembled into tailored solutions for
remote customers.simple yet secure business-to-business, business-to-employee, and business-to-customer experiences.
We offer
cloud basedour solutions through cloud-based and on-premises solutions using both open standards and proprietary technologies.
Some of our proprietary technologies are patented. Our products and services are used for a wide range of use cases including e-signing Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and Business-to-Consumer (“B2C”) agreements, delivering passwordless authentication experiences, mitigating fraud, authorizing financial transactions, and achieving regulatory compliance.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.
Our primary growth objectives include:
| ● | Making digital banking more accessible, secure, easy and valuable; |
| ● | Expanding our portfolio of solutions that enable institutions to mitigate fraud, reduce operational costs, comply with regulations, easily on-board customers, adaptively authenticate transactions and reduce time to deploy; |
| ● | Automating and securing digital customer journeys to remotely verify identities, mitigate application fraud, and secure account openings 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 primarily through a product sales andsubscription licensing model or through our services platform, which includes our cloud-based service offerings.
model. Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers.
Business Transformation
We are currently in the midst of a business transition and transformation. Our total revenue decreased on a year-over-year basis in 2020, and 2021, and we experienced negative operating income and net losses in both of those years. During 2021 and early 2022, our previous CEO, CFO, and several other senior executives left the company. In late
November 2021, our current CEO joined us and has built a new executive team over the course of 2022 to affect the transformation.
In May 2022, we announced a three-year strategic transformation plan that began on January 1, 2023. We believe this transformation plan will enable us to build on our strong solution portfolio and market position, enhance our enterprise go-to-market strategy, accelerate revenue growth, and drive efficiencies to support margin expansion and increased profitability. In conjunction with the strategic transformation plan and to enable a more efficient capital deployment model, effective with the quarter ended June 30, 2022, we began reporting under the following two lines of business, which are our reportable operating segments: Digital Agreements and Security Solutions.
•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include our OneSpan Sign e-signature solution and our recently introduced OneSpan Notary and Virtual Room solutions. As our transformation plan progresses, we expect to include other cloud-based security modules associated with the secure transaction lifecycle of identity verification, authentication, virtual interactions and transactions, and secure digital storage in the Digital Agreements segment. This segment also includes costs attributable to our transaction- cloud platform.
•Security Solutions. Security Solutions consists of our broad portfolio of software products and/or software development kits (SDKs) that are used to build applications designed to defend against attacks on digital transactions across online environments, devices and applications. These solutions, which are largely on-premises software products, include identity verification, multi-factor authentication and transaction signing, such as mobile application security, mobile software tokens, and Digipass authenticators that are not cloud-connected devices.
We expect to manage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flows given its more modest growth profile. Across both segments, we are building on our strong foundation in both e-signature and cybersecurity by enhancing product features, developing new solutions, and building out our next-generation transaction cloud platform, which we expect will allow us to efficiently deliver security and e-signature solutions to our customers across their entire digital agreement lifecycle. We also plan to enhance our go-to-market strategy by prioritizing growth at large enterprise accounts, expanding our direct sales force, is ableand accessing new routes to offer customersmarket through alliances and partnerships.
Our transformation plan involves numerous risks and uncertainties. Please see Item IA, Risk Factors.
Restructuring Plan
In December 2021, our Board approved a choicerestructuring plan designed to advance our operating model, streamline our business, improve efficiency, and enhance our capital resources. The first phase of an on-site implementation usingthis restructuring plan began and was substantially completed during the three months ended March 31, 2022.
In May 2022, our
traditional on-premises model or a cloud implementation for some solutions using our services platform.Industry Growth
Economic instabilityBoard approved additional actions related to the COVID-19 pandemic impacted our resultsrestructuring plan through the year ending December 31, 2025. The additional actions consist primarily of headcount-related reductions designed to continue to advance the same objectives as the first phase of the plan.
As part of the restructuring plan, we reduced headcount by eliminating approximately 100 positions. We incurred severance and related benefits costs, recorded in “Restructuring and other related charges” in the consolidated statement of operations for the year ended December 31, 2021. As economic2022.
Macroeconomic Events
Macroeconomic events impacting our business are discussed below. Throughout 2022, we operated under uncertain market conditions, recover, we believeinfluenced by events such as the global markets for authentication, fraud mitigation, agreement automation, and electronic signature solutions will continueRussia-Ukraine conflict, the continuing impact of the COVID-19 pandemic, disruption to grow driven by dynamic and growing threat environments, increased focus on the digital experience for mobile and online users, new government regulations, and continued growth in electronic commerce. The rate of growth in each country around the world may vary significantly based on local culture, competitive position, economic conditions,our supply chain and the useinflationary cost environment. For a more complete discussion of technology.Economic Conditions
Our revenue may vary significantly with changesthe risks we encounter in our business, please see Item 1A,
Risk Factors.
Russia-Ukraine Conflict
While we do not anticipate that the current posture of the Russia-Ukraine conflict will materially and adversely affect our results of operations, the conflict is still ongoing and future impacts are difficult to estimate. An escalation of the conflict’s current scope or expansion of the conflict’s economic conditions in the countries in which we currently sell products. Withdisruption could materially and adversely affect 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
company and its
regulatory frameworkoperations. The conflict has and 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.
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 OneSpan networks, and similarly, is not connected to the Internet.
In the case of our cloud-based solutions, which involve the processing of customer information, we believe a cyber incident could have a material impact on our business. While our revenue from cloud-based solutions comprises a minority of our revenue today, we believe that these solutions will provide substantial future growth. A cyber incident involving these solutions 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 code we are currently using as well as the hosting platforms and procedures that we employ. We mitigate the risk of 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 are not aware of any cyber incidents during the year ended December 31, 2021 that had a significant impact on our business, it is possible that we could experience an incident in future years, which could result in unanticipated costs.
Currency Fluctuations
In 2021, approximately 86% of our revenue and approximately 68% of our operating expenses were generated/incurred outside of the U.S. In 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. 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 revenuethe global macroeconomic and expenses.
Whilegeopolitical environments, including increased volatility in capital and commodity markets, rapid changes to regulatory conditions (including the majorityuse of sanctions), supply chain and operational challenges for multinational corporations, inflationary pressures and an increased risk of cybersecurity incidents.
COVID-19, Supply Chain Disruption and Inflationary Cost Environment
During 2022, the supply chain for our Digipass devices was impacted by global issues related to the effects of the COVID-19 pandemic, the Russia-Ukraine conflict and the inflationary cost environment, particularly with respect to materials in the semiconductor market, including part shortages, increased freight costs, diminished transportation capacity and labor constraints. This has resulted in disruptions in our supply chain, as well as difficulties and delays in procuring certain semiconductor components. Since late 2021, our costs have increased due to elevated lead times and increased material costs, in particular the need to purchase semiconductor components from alternative sources. We expect increased costs to procure materials within the semiconductor market to continue in 2023. Further, we anticipate the broader impact of inflationary pressures and increased material and supply chain costs and disruptions will continue in 2023.
In response to these supply chain conditions, in 2022 we focused on improving our supplier network, engineering alternative designs and working to reduce supply shortages. We are actively managing our inventory in an effort to minimize supply chain disruptions and enable continuity of supply and services to our customers, and we expect to maintain elevated levels of inventory for certain of our revenue is generated outsideproducts until supply constraints have been remediated. We are also considering alternative manufacturing and supply arrangements, including moving more of our manufacturing from China to Romania or other locations, to mitigate these supply chain risks in the future.
In order to combat rising inflation in the U.S., the Federal Reserve has raised interest rates multiple times since the beginning of 2022. The increase in U.S. dollar interest rates and overall market conditions led to significant strengthening of the U.S., a significant amount dollar against other global currencies in 2022. The strong U.S. dollar reduced the impact of cash generated from our foreign operations during 2022, driven by revenues and costs that are denominated in foreign currencies, which impacted our revenue, earned duringoperating cash flows and net income throughout 2022. We expect these impacts to continue into 2023.
Although the
year ended December 31, 2021 was denominatedmacroeconomic environment presented challenges in
U.S. Dollars. In 2021, approximately 51%2022 and may continue to do so in 2023, we are encouraged by customer demand for our products and services, particularly in our e-signature solution in the Digital Agreements segment and our mobile, security, authentication server and Digipass solutions in our Security Solutions segment. We believe our existing balances of
cash and cash equivalents, along with our
revenue was denominated in U.S. Dollars, 44% was denominated in Euros and 5% was denominated in other currencies. In 2020, approximately 44% ofshort-term investments, will continue to be sufficient to satisfy our
revenue was denominated in U.S. Dollars, 51% was denominated in Euros and 5% was denominated in other currencies. In 2019, approximately 47% ofliquidity requirements associated with our
revenue was denominated in U.S. Dollars, 49% was denominated in Euros, and 4% 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
existing operations.
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 loss of $3.0 million in 2021, comprehensive gain of $4.5 million in 2020 and comprehensive gain of $1.5 million in 2019. These amounts are included as a separate component of stockholders’ equity. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar.
Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense). Foreign exchange transaction gains aggregated less than $0.1 million and less than $0.1 million for the years ended December 31, 2021 and December 21, 2020, respectively. We reported foreign exchange transaction losses of $1.5 million during the year ended December 31, 2019.
Restructuring Plan
During the fourth quarter of 2021, the Board approved a restructuring plan (“Plan”) designed to advance the Company’s operating model, streamline its business, and enhance its capital resources. The Plan began the first of two phases constituting a multi-year strategic plan on December 16, 2021. The Company did not take any actions or record any charges in connection with the Plan during the year ended December 31, 2021.
Components of Operating Results
We generate revenue from the sale of our
hardware products, software licenses, subscriptions, maintenance and support,
professional services, and
professional services.Digipass hardware products. We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments reflecting the transactional nature of significant parts of our business.
| ● | Product and license revenue. Product and license revenue includes hardware products and software licenses, which can be provided on a perpetual or term basis. |
•Product and license revenue. Product and license revenue includes Digipass hardware products and software licenses, which are provided on a perpetual or term basis subscription model.
| ● | Service and other revenue. Service and other revenue includes subscription solutions (which is our definition of software-as-a-service solutions), maintenance and support, and professional services. |
•Service and other revenue. Service and other revenue includes solutions that are provided on a cloud-based subscription model, maintenance and support, and professional services.
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 product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs, including personnel costs, production costs, and freight.
|
| ● | Cost of service and other revenue. Cost of service and other revenue primarily consists of costs related to subscription solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance and support. |
Gross Profit
Gross Profit
profit is revenue net of the cost of goods sold. Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including our average selling price, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.
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%50% and
65%60% of our operating expenses. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive.
Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates in
20212022 compared to
20202021 resulted in
an increasea decrease in operating expenses of approximately
$2.4$7.5 million in
2021.2022.
The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans.
For full-yearIn 2022, 2021,
2020, and
2019,2020, operating expenses included
$8.8 million, $5.2 million,
and $6.0 million,
and $5.3 million, respectively,
of expenses related to stock-based and long-term incentive plans.
Stock-based compensation expense during 2022 included a significant number of new grants to our newly hired executives, as well as an overall expansion of the equity incentive program put in place for the long-term retention of our employees. 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 long-term incentive compensation. We expect general and administrative expenses to increase in absolute dollars although our general and administrative expenses may fluctuate as a percentage of total revenue. |
| ● | Amortization/impairment of intangible assets. Acquired intangible assets are amortized over their respective amortization periods, and are periodically evaluated for impairment. |
•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 expand our salesforce and marketing activities to support our strategic transformation plan, 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 costs to increase in absolute dollars as we continue to enhance and expand our product offerings and cloud platform. However, our research and development expenses may fluctuate as a percentage of total revenue due to expected growth of our team and continued capitalization of certain costs related to the expansion of our cloud product portfolio.
•General and administrative. General and administrative expenses consist primarily of personnel costs, legal, consulting and other professional fees, and long-term incentive compensation. We expect general and administrative expenses to increase in absolute dollars to support the anticipated growth of our business, although our general and administrative expenses may fluctuate as a percentage of total revenue.
•Impairment of intangible assets. Impairment of intangible assets are incurred when we determine that the carrying value of an asset exceeds its fair value. We test annually, or when triggering events arise.
During the year ended December 31, 2022, we performed an impairment review of the customer relationships intangible assets obtained in our 2018 acquisition of Dealflo Limited (“Dealflo”). The impairment review was triggered by our July 2022 notification to customers regarding our intent to gradually sunset our Dealflo solution in the months leading up to December 31, 2023. The results of the impairment review indicated that the carrying value of the Dealflo customer relationships exceeded the fair value, and we recorded a $3.8
million impairment charge on the entire remaining value of the asset during the year ended December 31, 2022.
•Amortization of intangible assets. Acquired intangible assets are amortized over their respective amortization periods and are periodically evaluated for impairment.
•Restructuring and related charges. Restructuring and other related charges consists of severance and related benefits incurred from headcount reductions as part of our restructuring plan. We plan to incrementally incur additional restructuring costs through December 31, 2025, when the plan terminates.
Segment Results
Segment operating income (loss) consists of the revenue generated by a segment, less the direct costs of revenue, sales and marketing, research and development, and general and administrative expenses, amortization and impairment charges that are incurred directly by a segment. Unallocated corporate costs include companywide costs that are not attributable to a particular segment. Financial results by operating segment are included below under Results of Operations.
Interest Income
(Expense), Net
Interest income (expense), net, 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.
Other Income (Expense), Net
Other income (expense), net, primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and development in those countries and other miscellaneous non-operational expenses.
Income Taxes
Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”).
AllThe majority of our IP in our
traditional authenticationSecurity Solutions business is owned by two subsidiaries, one in the U.S. and one in Switzerland.
The IP in our Digital Agreements business is owned by a subsidiary in Canada. These
two subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to
our U.S. and Swiss subsidiariesthe IP owners on either a percentage of revenue or on a
cost pluscost-plus basis or both.
In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products. 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 2021, losses flowing to the U.S. company are expected to be taxed at a rate of 21% to 25%, while losses flowing to the Swiss company are expected to be taxed at a rate ranging from 11% to 15%, plus Swiss withholding tax of an additional 5%. A Canadian and UK subsidiary currently sell to and service global customers directly. In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products.IP owners.
As the majority of our revenues are generated outside of the U.S., our consolidated effective tax rate is 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 OneSpan Canada Inc. (formerly eSignLive), a foreign company with substantial IP and net operating losses and other tax carryforwards. The tax benefit of the carryforwards has been fully reserved as realization has not been deemed more likely than not.
In May 2019, we acquired Dealflo Limited (“Dealflo”), a foreign company with substantial IP and net operating losses. The tax benefit of existing loss carryforwards at the time of acquisition was not recorded as the Company determined they were not more likely than not to be realized.
The Company recorded changes in valuation allowance of $15.0$4.4 million and $2.7$15.0 million, as of December 31, 20212022 and 2020,2021, respectively, against deferred tax assets that, based on Management’smanagement’s assessment are considered not to
be more likely than not to be realized. The increase in the valuation allowance in 20212022 reflects Net Operating Losses ( “NOLs”(“NOLs”), other deduction carryforwards, and credits for which the realization is not more likely than not. The change in valuation allowance also reflects other factors including, but not limited to, changes in Management’smanagement’s assessment of the ability to use existing deferred tax assets, including NOLs and other deduction carryforwards.
Management assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of negative evidence such as 3-year cumulative losses are considered. Management also reviewed reversal patterns of temporary differences to determine if the Company would have sufficient taxable income due to the reversal of temporary differences to support the realization of deferred tax assets. In 20212022, Management made the decision to establish a valuation allowance against certain deferred tax assets in jurisdictions that were not previously valued as the deferred tax assets were no longer more likely than not to be realized. Management continues to maintain a valuation allowance against certain deferred tax assets in other jurisdictions where assets had been previously valued. For
all other remaining deferred tax assets,
Managementmanagement believes it is still more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
Results
Impact of OperationsCurrency Fluctuations
In 2022 and 2021, respectively, we generated approximately 83% and 86% of our revenues and incurred approximately 66% and 68% of our operating expenses outside of the U.S. As a result, changes in currency exchange rates, especially the Euro exchange rate and the Canadian Dollar exchange rate, can have a significant impact on our revenue and operating expenses.
While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the year ended December 31, 2022 was denominated in U.S. Dollars. In 2022, approximately 54% of our revenue was denominated in U.S. Dollars, 42% was denominated in Euros and 4% was denominated in other currencies. In 2021, approximately 51% of our revenue was denominated in U.S. Dollars, 44% was denominated in Euros and 5% was denominated in other currencies.
In general, to minimize the net impact of currency fluctuations on operating income, we attempt to denominate an amount of billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. If the amount of our revenue in Europe denominated in Euros continues as it is now or declines, we may not be able to balance fully the exposures of currency exchange rates on revenue and operating expenses.
The following tables summarize our consolidatedfinancial 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 loss of $7.2 million in 2022 and $3.0 million in 2021. These amounts are included as a separate component of stockholders’ equity. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar.
Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense). Foreign exchange transaction losses aggregated $1.8 million and foreign exchange transaction gains aggregated less than $0.1 million for the years ended December 31, 2022 and 2021, respectively.
Results of Operations
In conjunction with our strategic transformation plan, effective with the quarter ended June 30, 2022, we began reporting under the following two lines of business, which are our reportable operating segments: Digital Agreements and Security Solutions.
The following table sets forth, for the periods
presented.indicated, selected segment and consolidated operating results.
| | | | | | | | | | | | | | | |
| |
| Years Ended December 31, |
| 2022 | | 2021 | | |
| (In thousands, except percentages) | | | | | |
| Digital Agreements | | | | | |
| Revenue | $ | 48,401 | | | $ | 40,551 | | | |
| Gross profit | $ | 37,488 | | | $ | 29,557 | | | |
| Gross margin | 77 | % | | 73 | % | | |
| Operating income | $ | 5,348 | | | $ | (1,612) | | | |
| | | | | |
| Security | | | | | |
| Revenue | $ | 170,605 | | | $ | 173,930 | | | |
| Gross profit | $ | 111,082 | | | $ | 113,378 | | | |
| Gross margin | 65 | % | | 65 | % | | |
| Operating income | $ | 32,051 | | | $ | 35,395 | | | |
| | | | | |
| Total Company: | | | | | |
| Revenue | $ | 219,006 | | | $ | 214,481 | | | |
| Gross profit | $ | 148,570 | | | $ | 142,935 | | | |
| Gross margin | 68 | % | | 67 | % | | |
| | | | | |
| Statements of operations reconciliation: | | | | | |
| Segment operating income | $ | 37,399 | | | $ | 33,783 | | | |
| Corporate operating expenses not allocated at the segment level | 64,514 | | | 59,911 | | | |
| Operating loss | $ | (27,115) | | | $ | (26,128) | | | |
Revenue by Product: We generateproducts and services allocated to the segments for the years ended December 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | |
| Digital Agreements | | Security Solutions | | Digital Agreements | | Security Solutions | |
| (In thousands) | | | | | | | | |
| Subscription (1) | $ | 42,029 | | | $ | 47,124 | | | $ | 33,283 | | | $ | 35,224 | | |
| Maintenance and support | 5,451 | | | 42,894 | | | 5,709 | | | 45,567 | | |
| Professional services and other (2) | 921 | | | 7,087 | | | 1,494 | | | 13,703 | | |
| Hardware products | — | | | 73,500 | | | 65 | | | 79,436 | | |
| Total Revenue | $ | 48,401 | | | $ | 170,605 | | | $ | 40,551 | | | $ | 173,930 | | |
(1) Subscription includes cloud and on-premises subscription revenue, from the sale of our hardware products,previously referred to as "subscription" and
"term-based software licenses", respectively.
(2) Professional services and other includes perpetual software licenses subscriptions, professional services,revenue, which was approximately 2% of
total revenue for the year ended December 31, 2022 and maintenance and support. Product and licenseapproximately 5% of revenue includes hardware products and software licenses. Service and otherfor the year ended
December 31, 2021.
For the year ended December 31, 2022, total revenue includes subscription solutions (which is our definition of software-as-a-service solutions), maintenance and support, and professional services.increased
| | | | | | | | | | | |
| | Years ended December 31, | | | Change |
| | 2021 | | 2020 | | | $ | | % |
|
| | (in thousands) |
Revenue | | | | | | | | | | | |
Hardware | $ | 79,501 | | | $ | 81,849 | | $ | (2,348) | | (3)% |
Software licenses | | 40,857 | | | | 51,137 | | | (10,280) | | (20)% |
Subscription | | 38,213 | | | | 27,788 | | | 10,425 | | 38% |
Professional services | | 4,634 | | | | 5,689 | | | (1,055) | | (19)% |
Maintenance, support and other | | 51,276 | | | | 49,228 | | | 2,048 | | 4% |
Total revenue | $ | 214,481 | | | $ | 215,691 | | $ | (1,210) | | (1)% |
Total revenue decreased $1.2 by $4.5 million, or 1%2%, compared to the year ended December 31, 2021. Changes in foreign exchange rates as compared to the same period in 2021 negatively impacted total revenue by approximately $12.2 million.
Additional information on our revenue by segment follows.
•Digital Agreements revenue increased $7.9 million, or 19%, during the year ended December 31, 20212022 compared to the year ended December 31, 2020.2021. The overall decreaseincrease in Digital Agreements revenue was comprised of a $16.0 million decrease in perpetual software licensedriven by new customer revenue and a $2.3 million decrease in hardware revenue,existing customer expansion, partially offset by an increase in recurring revenue, which is the portionnon-renewal of certain contracts and contraction. We saw the conversion of some of our large existing on-premises Digital Agreements customers convert to our cloud subscription model, contributing to the growth. Changes in foreign exchange rates as compared to the same period in 2021 negatively impacted Digital Agreements revenue subject to future renewal. Recurring by $0.4 million.
•Security Solutions revenue comprised of subscription, term-based software license, and maintenance, support and other revenue, increased $18.2decreased $3.3 million, or 18%approximately 2%, during the year ended December 31, 2021,2022 compared to the year ended December 31, 2020. An increase in recurring revenue is reflective of the company’s strategy to increase its recurring revenue through an expanded recurring revenue customer base.Product and license revenue decreased $12.6 million or 9% during the year ended December 31, 2021 compared to the year ended December 31, 2020. The2021. This decrease was largely driven by lower perpetual software license sales, partially offset by an increase in term-based software license sales, which we attribute to our strategy focused on growing recurring software revenue over perpetual licenses combined with softened demandhardware revenues as a result of the pandemic.
Servicesdelayed production deliveries due to global supply chain disruptions. In addition, we experienced lower volume hardware purchases from existing customers. Both maintenance and professional services and other revenue decreased while subscription revenue increased by $11.4 million, or 14% duringin conjunction with the year ended December 31, 2021 comparedtransition from perpetual license to the year ended December 31, 2020. The increase for the year ended December 31, 2021term license deals. Changes in foreign exchange rates compared to the same period in 2020 was2021 negatively impacted Security Solutions revenue by $11.8 million, driven by higher subscription and maintenance revenue, which is reflective of the company’s strategy to increase its recurring revenue through an expanded recurring revenue customer base.
We believe comparison of revenues between periods is heavily influencedlargely by the timing of orders and shipments reflectingUS Dollar strengthening versus the transactional nature of significant parts of our business. Factors affecting our results include the size, timing, cancellation or rescheduling of significant orders. Revenue realized from individual customers can also vary widely as their buying patterns can change from period to period. We also experience seasonality or variation across the year in our markets. These trends can include lower sales during the summer months, particularly in EMEA. 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.
Euro.
Revenue by Geographic Regions: We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes sales in North, Central, and
South America; and 3) Asia Pacific (APAC), which also includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:
| | | | | | | | | |
| | | Years ended December 31, | | | | |
| | | 2021 | | 2020 | | $ Change | | % Change |
|
| | | (in thousands) | | | | |
Revenue | | | | | | | | | |
EMEA | | | $ 104,878 | | $ 117,086 | | ($ 12,208) | | (10)% |
Americas | | | 68,646 | | 53,171 | | 15,475 | | 29% |
APAC | | | 40,957 | | 45,434 | | (4,477) | | (10)% |
Total revenue | | | $ 214,481 | | $ 215,691 | �� | ($ 1,210) | | (1)% |
| | | | | | | | | |
% of Total Revenue | | | | | | | | | |
EMEA | | | 49% | | 54% | | | | |
Americas | | | 32% | | 25% | | | | |
APAC | | | 19% | | 21% | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands, except percentages) | |
| Revenue | | | | | | | |
| EMEA | $ | 100,298 | | | $ | 104,878 | | | ($4,580) | | | (4) | % |
| Americas | 77,740 | | | 68,646 | | | 9,094 | | | 13 | % |
| APAC | 40,968 | | | 40,957 | | | 11 | | | — | % |
| Total revenue | $ | 219,006 | | | $ | 214,481 | | | $4,525 | | | 2 | % |
| | | | | | | |
| % of Total Revenue | | | | | | | |
| EMEA | 46 | % | | 49 | % | | | | |
| Americas | 35 | % | | 32 | % | | | | |
| APAC | 19 | % | | 19 | % | | | | |
For the year ended December 31,
2021,2022, revenue generated in EMEA was
$12.2$4.6 million or
10%4% lower than the same period in
2020,2021, driven
largely by
lower software license revenue andthe strengthening of the U.S. Dollar compared to the Euro, as well as lower hardware
revenue.sales.
For the year ended December 31,
2021,2022, revenue generated in the Americas was
$15.5$9.1 million or
29%13% higher than the same period in
2020,2021, driven primarily by higher
cloud subscription
revenue.revenue as a result of both new customers and expansion of services to existing customers as a result of higher usage of our products.
For the year ended December 31,
2021,2022, revenue generated in the Asia Pacific region
(APAC) was
$4.5less than $0.1 million or
10% lowerless than 1% higher than the same period in
2020, driven by lower software license and hardware revenue.2021.
Cost of Goods Sold and Gross Margin
| | | | | | | | | |
| | | Years ended December 31, | | |
| | | 2021 | 2020 | | $ | | % Change |
|
| | | (in thousands) |
Cost of goods sold | | | | | | | | | |
Product and license | | | $ 46,196 | | $ 46,013 | | $ 183 | | 0% |
Services and other | | | 25,350 | | 21,619 | | 3,731 | | 17% |
Total cost of goods sold | | | $ 71,546 | | $ 67,632 | | $ 3,914 | | 6% |
| | | | | | | | | |
Gross profit | | | $ 142,935 | | $ 148,059 | | (5,124) | | (3)% |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands, except percentages) | |
| Cost of goods sold | | | | | | | |
| Product and license | $ | 45,106 | | | $ | 46,196 | | | $ | (1,090) | | | (2) | % |
| Services and other | 25,330 | | | 25,350 | | | (20) | | | — | % |
| Total cost of goods sold | $ | 70,436 | | | $ | 71,546 | | | $ | (1,110) | | | (2) | % |
| | | | | | | |
| Gross profit | $ | 148,570 | | | 142,935 | | | 5,635 | | | 4 | % |
| | | | | | | |
| Gross margin | | | | | | | |
| Product and license | 63 | % | | 62 | % | | | | |
| Services and other | 74 | % | | 73 | % | | | | |
| Total gross margin | 68 | % | | 67 | % | | | | |
Gross margin | | | | | | | | | |
Product and license | | | 62% | | 65% | | | | |
Services and other | | | 73% | | 74% | | | | |
Total gross margin | | | 67% | | 69% | | | | |
The cost of product and license revenue increased $0.2decreased $1.1 million or 0% during2% for the year ended December 31, 20212022 compared to the year ended December 31, 2020.2021. The increasedecrease in cost of product and license was driven by lower hardware sales, partially offset by higher RASPthird-party software licensing costs in conjunction with higher software license sales, as well as price increases for our hardware components, and higher shipping costs for certain hardware products.
The cost of services and other revenue
increaseddecreased by
$3.7less than $0.1 million, or
17%less than 1% during the year ended December 31,
20212022, compared to the year ended December 31,
2020. The increase in cost of services and other revenue is reflective of higher subscription revenue, which has increased cloud-based infrastructure costs and higher third-party app shielding costs.2021.
Gross profit
decreased $5.1increased $5.6 million, or
3% during4% for the year ended December 31,
20212022 compared to the year ended December 31,
2020. Gross profit2021. Total gross margin was
68% for the year ended December 31, 2022, compared to 67% for the year ended December 31,
2021, compared2021. The improvement in total gross margin was primarily due to
69% for the year ended December 31, 2020. The decrease in profit margin for the year ended December 31, 2021 reflects higher cloud-based services costsproduct mix and
certain cloud cost incentives received, partially offset by foreign currency impact. Subscription revenue increased
shipping costs for certain30% year-over-year, while hardware
products.revenue decreased 7%.
The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies, including the Euro. The impact of changes in currency rates are estimated to have
increased revenue by $3.8had a favorable impact on overall cost of goods sold of approximately $1.0 million for the year ended December 31,
2021.2022. Had currency rates in
20212022 been equal to rates in
2020,the comparable period of 2021, the gross profit
marginsmargin would have been approximately
21 percentage
point lowerpoints higher for the year ended December 31,
2021.2022.
Operating Expenses
| | | | | | | | | |
| Years ended December 31, | | |
| 2021 | | 2020 | | $ | | % Change |
|
| (in thousands) | | | | |
Operating costs | | | | | | | | | |
Sales and marketing | $ | 62,730 | | $ | 56,663 | | $ 6,067 | | 11% |
Research and development | | 47,414 | | | 41,194 | | 6,220 | | 15% |
General and administrative | | 53,031 | | | 46,338 | | 6,693 | | 14% |
Amortization of intangible assets | | 5,888 | | | 9,122 | | (3,234) | | (35)% |
Total operating costs | $ | 169,063 | | $ | 153,317 | | $ 15,746 | | 10% |
Additional information on our gross profit by segment follows.
Sales and Marketing Expenses
Sales and marketing expenses
•Digital Agreements gross profit increased $6.0$7.9 million, or 11% during27%, for the year ended December 31, 2022 compared to the prior year. The increase in gross profit was driven by higher revenues and lower outside services costs for operating our cloud platform due to higher usage tier discounts, including a one-time incentive credit. Digital Agreements gross margin for the years ended December 31, 2022 and 2021 was 77% and 73%, respectively.
•Security Solutions Security Solutions gross profit decreased $2.3 million, or approximately 2%, for the year ended December 31, 2022 compared to the prior year. The decrease in profitability was primarily driven by higher hardware materials and logistics costs relative to the average selling price of the units. Security Solutions gross margin was 65% for each of the years ended December 31, 2022 and 2021 .
Operating Expenses
For the year ended December 31, 2022, operating expenses increased by $6.6 million, or 4%, compared to the year ended December 31, 2020.2021. Changes in foreign exchange rates favorably impacted operating expenses by approximately $7.5 million as compared to the year ended December 31, 2021.
The increasefollowing table presents the breakout of operating expenses by category as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands, except percentages) | | | | | |
| Operating costs | | | | | | | |
| Sales and marketing | $ | 60,949 | | | 62,730 | | | $ | (1,781) | | | (3) | % |
| Research and development | 41,735 | | | 47,414 | | | (5,679) | | | (12) | % |
| General and administrative | 55,552 | | | 53,031 | | | 2,521 | | | 5 | % |
| Impairment of intangible assets | 3,828 | | | — | | | 3,828 | | | NM |
| Restructuring and other related charges | 9,482 | | | — | | | 9,482 | | | NM |
| Amortization of intangible assets | 4,139 | | | 5,888 | | | (1,749) | | | (30) | % |
| Total operating costs | $ | 175,685 | | | $ | 169,063 | | | $ | 6,622 | | | 4 | % |
Sales and Marketing Expenses
Sales and marketing expenses decreased $1.8 million, or 3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was driven by higherprimarily related to lower headcount and higher expense per head.associated payroll related expenses during the year ended December 31, 2022 compared to the prior year.
Average full-time sales and marketing employee headcount for year ended December 31,
20212022 was
368,344, compared to
356368 for year ended December 31,
2020.2021. Average headcount in
20212022 was
3% higher7% lower than in
2020.2021.
In future periods, we expect sales and marketing spend to increase as we enhance our enterprise go-to-market strategy. We are focused on new logo growth through building brand awareness, as well as expanding offerings to our existing customers. We expect to expand our sales force and add new distribution channels.
Research and Development Expenses
Research and development expenses increased $6.2decreased $5.7 million, or 15% during12%, for the year ended December 31, 20212022 compared to the year ended December 31, 2020.2021. The increasedecrease in expense was driven primarily by the capitalization of expanded research and development costs of $4.0 million to enhance our transaction-cloud platform and our Digital Agreements product offerings. Personnel costs were also lower for the year ended December 31, 2021 was primarily driven by higher personnel costs due2022 compared to higher headcount and higher expense per head.the prior year as a result of restructuring actions that reduced headcount.
Average full-time research and development employee headcount for year ended December 31, 20212022 was 363,340, compared to 328363 for year ended December 31, 2020.2021. Average headcount in 20212022 was 11% higher6% lower than in 2020.
2021.
General and Administrative Expenses
General and administrative expenses increased
$6.7$2.5 million, or
14% during5%, for the year ended December 31,
20212022 compared to the year ended December 31,
2020. The2021. This increase in
generalexpense was due to higher average compensation per employee, higher stock-based compensation expense, and
administrative expenses was drivenhigher travel costs. The increases were partially offset by
higher personnel costs,lower outside
professional services
fees related to our second quarter proxy contest, and consulting fees related to our strategic action plan.costs.
Average full-time general and administrative employee headcount for year ended December 31, 20212022 was 135,139, compared to 125135 for the year ended December 31, 2020.2021. Average general and administrative headcount in 20212022 was 8%3% higher than in 2020.2021.
Impairment of Intangible AssetsFor the year ended December 31, 2022, we recorded $3.8 million of impairment of intangible assets charges. The impaired intangible assets were customer relationships associated with our Dealflo product, which was purchased in connection with a prior year acquisition.
Restructuring and Other Related Charges
Restructuring and other related charges were $9.5 million for the year ended December 31, 2022. The charges include severance, retention pay, and related benefit costs incurred in conjunction with our restructuring plans.
Amortization of Intangible Assets
Amortization of intangible assets for the year ended December 31, 2021 was
$5.9$4.1 million, compared to
$9.1$5.9 million for the year ended December 31,
2020,2021, a decrease of
$3.2$1.7 million or
35%30%. The decrease was driven by certain
intangible assets acquired in the
Silanis acquisitionprior years becoming fully amortized.
Segment Operating Income (Loss)
Information on our operating income (loss) by segment follows.
•Digital Agreements Operating income for the year ended December 31, 2022 was $5.4 million, compared to operating loss of $1.6 million for the the prior year. The operating income increase reflects our strategic transformation plan to accelerate growth in this operating segment, which drove higher revenues. The increase in operating income was also driven by the capitalization of research and development costs for internal-use software incurred to grow the Digital Agreements product offerings. A one-time incentive credit from our cloud services provider also contributed to the increase, as well as lower payroll related expenses due to lower headcount, partially offset by the impact of foreign currency fluctuations.
•Security Solutions For the year ended December 31, 2022, Security Solutions operating income was $32.1 million, which was $3.3 million, or 10%, lower than the prior year. This decrease was driven by the intangible assets impairment, an increase in material and freight costs, and the impact of foreign currency fluctuations.
Interest Income (expense), net
| | | | | | | | | |
| | | Years ended December 31, | | |
| | | 2021 | 2020 | | $ Change | | % Change |
| | | (in thousands) | | | | |
Interest income (expense), net | | | ($ 1) | | $ 404 | | ($ 405) | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands, except percentages) | | | | | |
| Interest income (expense), net | $ | 595 | | | (1) | | | $ | 596 | | | NM |
Interest income (expense), net, was
$0.6 million for the year ended December 31, 2022, compared to less than $(0.1) million for the year ended December 31,
2021, compared to $0.4 million for the year ended December 31, 2020.2021. The
decreaseincrease in interest income
for 2021 comparedis related to
2020 reflects a decrease inhigher interest rates favorably impacting our
invested cash
equivalents and short-term investment balance.balances during 2022.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands, except percentages) | | | | | |
| Other income (expense), net | $ | 14,827 | | | (14) | | | $ | 14,841 | | | NM |
| | | | | | | | |
| | Years ended December 31, | | |
| | 2021 | | 2020 | | $ Change | | % Change |
|
| | (in thousands) | | | | |
Other income (expense), net | | ($ 14) | | $ 1,434 | | ($ 1,448) | | -101% |
Other income (expense), net, primarily includes subsidies received from foreign governments in support of our research and development in those countries, exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, 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 forand expenses.
For the year ended December 31, 20212022, other income (expense), net was $14.8 million, compared to less than $(0.1) million, compared to $1.4 million for the year ended December 31, 2020. Lower income2021. The fluctuation was primarily driven by losses resulting from exchange lossesthe $14.8 million gain on transactions.
sale of our equity-method investment in Promon AS.
Provision for income taxes
| | | | | | | | |
| | Years ended December 31, | | |
| | 2021 | | 2020 | | $ | | % Change |
|
| | (in thousands) | | | | |
Provision for income taxes | | $ 4,441 | | $ 2,035 | | $ 2,406 | | 118% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands, except percentages) | | | | | |
| Provision for income taxes | $ | 2,741 | | | 4,441 | | | $ | (1,700) | | (38)% |
The Company
We recorded Provision for income tax expensetaxes for the year ended December 31, 20212022 of $4.4$2.7 million compared to $2.0$4.4 million for the year ended December 31, 2020.2021. The increasedecrease in expense recorded for the year ended December 31, 20212022 was primarily attributable to an increase in the jurisdictional mix of profit before taxes, and a lower valuation allowance recorded on U.S. deferred tax assets.
in 2022 compared to 2021.
Loss Carryforwards Available
At December 31, 2021,2022, we have gross deferred tax assets of $43.7$46.8 million resulting from US,U.S. federal, foreign and state NOL carryforwards of $148.6$125.7 million and other foreign deductible carryforwards of $97.5$124.2 million. At December 31, 2021,2022, we have a valuation allowance of $31.3$37.7 million against deferred tax assets related to certain carryforwards. See Note 13 – Income
Key Business Metrics and Non-GAAP Financial Measures
In our quarterly earnings press releases and conference calls, we discuss the below key metrics and financial measures that are not calculated according to generally accepted accounting principles (“GAAP”). These metrics and non-GAAP financial measures help us monitor and evaluate the effectiveness of our operations and evaluate period-to-period comparisons. Management believes that these metrics and non-GAAP financial measures help illustrate underlying trends
in our business. We use these metrics and non-GAAP financial measures to establish budgets and operational goals (communicated internally and externally), manage our business and evaluate our performance. We also believe that both management and investors benefit from referring to these metrics and non-GAAP financial measures as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. We believe these metrics and non-GAAP financial measures are useful to investors both because they allow for greater transparency with respect to financial measures used by management in their financial and operational decision-making and also because they are used by investors and the analyst community to help evaluate the health of our business.
Annual Recurring Revenue
We use annual recurring revenue, or ARR, as an approximate measure to monitor the revenue growth of our recurring business. ARR represents the annualized value of the active portion of SaaS, term-based license, maintenance and support contracts, and other subscription services at the end of the reporting period.
ARR is calculated as the approximate annualized value of our customer recurring contracts as of the measurement date. These include subscription, term-based license, and maintenance contracts and exclude one-time fees. To the extent that we are negotiating a renewal with a customer after the expiration of a recurring contract, we continue to include that revenue in ARR if we are actively in discussions with the customer for a new recurring contract or renewal, or until such customer notifies us that it is not renewing its recurring contract.
ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates, and does not include revenue from perpetual licenses, purchases of Digipass authenticators that are not cloud-connected devices, training, professional services or other sources of revenue that are not deemed to be recurring in nature.
At December 31, 2022, we reported ARR of $138.7 million, which was 12% higher than 2021 ARR of $124.1 million. Changes in foreign exchange rates during the year ended December 31, 2022 as compared to the prior year negatively impacted ARR by approximately $3.9 million. ARR growth was primarily driven by an increase in subscription contracts.
Net Retention Rate
Net Retention Rate, or NRR, is defined as the approximate year-over-year percentage growth in ARR from the same set of customers at the end of the prior year period. It measures the Company’s ability to increase revenue across our existing customer base through expanded use of our platform, offset by customers whose subscription contracts with us are not renewed or renew at a lower amount. The company’s ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers. NRR is an important way in which we track our performance in this area.
We previously referred to NRR as Dollar-Based Net Expansion (DBNE). There is no change in how we define or calculate NRR as compared to DBNE.
We reported NRR of 107% and 115% at December 31, 2022 and 2021, respectively. Year-over-year, NRR was impacted by foreign currency exchange impacts, longer sales cycles in certain international regions, timing related to contract renewals, and contraction.
Adjusted EBITDA
We define Adjusted EBITDA as net income before interest, taxes,
depreciation, amortization, long-term incentive compensation, and certain non-recurring items, including acquisition related costs, lease exit costs, rebranding costs, and non-routine shareholder matters. We use Adjusted EBITDA as a simplified measure of performance for
more information regarding carryforwardsuse in communicating our performance to investors and
valuation allowances.analysts and for comparisons to other companies within our industry.
As a performance measure, we believe that Adjusted EBITDA presents a view of our operating results that is most closely related to serving our customers. By excluding interest, taxes, depreciation, amortization, long-term incentive compensation, impairment of intangible assets, restructuring costs, and certain other non-recurring items, we are able to
evaluate performance without considering decisions that, in most cases, are not directly related to meeting our customers’ requirements and were either made in prior periods (e.g., depreciation, amortization, long-term incentive compensation, non-routine shareholder matters), deal with the structure or financing of the business (e.g., interest, one-time strategic action costs, restructuring costs, impairment charges) or reflect the application of regulations that are outside of the control of our management team (e.g., taxes). In addition, removing the impact of these items helps us compare our core business performance with that of our competitors.
Non-GAAP financial metrics such as Adjusted EBITDA are not measures of performance under GAAP and should not be considered in isolation or as alternatives or substitutes for the most directly comparable financial measures calculated in accordance with GAAP, but, rather, should be considered together with our consolidated financial statements, which are prepared in accordance with GAAP and included in Part IV, Item 15, Exhibits and Financial Statement Schedules.
The following table reconciles net income as reported on our consolidated statements of operations to non-GAAP Adjusted EBITDA:
| | | | | | | | | | | | | | |
| | Years Ended
December 31, |
| (In thousands) | | 2022 | | 2021 |
| Net loss | | $ | (14,434) | | | $ | (30,584) | |
| Interest (expense) income, net | | (595) | | | 1 | |
| Provision for income taxes | | 2,741 | | | 4,441 | |
| Depreciation and amortization of intangible assets | | 7,066 | | | 8,926 | |
| Long-term incentive compensation | | 8,813 | | | 5,202 | |
| Impairment of intangible assets | | 3,828 | | | — | |
| Restructuring and other related charges | | 9,482 | | | — | |
| Other non-recurring items (1) | | (10,505) | | | 6,951 | |
| Adjusted EBITDA | | $ | 6,396 | | | $ | (5,063) | |
(1) For the year ended December 31, 2022, non-recurring items consist of $4.3 million of outside services related to our strategic action plan, and a $(14.8) million non-operating gain on the sale of our equity-method investment in Promon AS.
For the year ended December 31, 2021, non-recurring items consist of $3.5 million of outside service costs related to our strategic action plan, $2.8 million of outside service costs related to the proxy contest that took place in 2021 and the related $0.7 million settlement with Legion Partners.
Adjusted EBITDA increased during the year ended December 31, 2022 compared to 2021, primarily due to higher Net income (loss) as well as increases in certain expenses excluded from Adjusted EBITDA. Long-term incentive compensation, Impairment of intangible assets, and Restructuring and other related charges were offset by a $14.8 million net gain from the sale of our equity-method investment in Promon.
Please see further discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for an analysis of what comprises Net loss in the consolidated statements of operations for the years ended December 31, 2022 and 2021, and additional detail around items excluded from Adjusted EBITDA.
Liquidity and Capital Resources
As of December 31,
2021,2022, we had net cash balances (total cash and cash equivalents) of
$96.5 million and short-term investments of $2.3 million. At December 31, 2022, short-term investments consist of corporate notes and bonds. At December 31, 2021, we had net cash balances of $63.4 million and short-term investments of $35.1 million. Short-term investments
consistat December 31, 2021 consisted of U.S. treasury bills and notes, government agency notes, corporate notes and bonds, and
high qualityhigh-quality commercial paper with maturities at acquisition of more than three months and less than twelve months.
At December 31, 2020, we had net cash balances of $88.4 million and short-term investments of $26.9 million.
We are
inparty to lease agreements that require letters of credit to secure the obligations. The restricted cash related to these letters of credit is recorded in
"Other non-current
assetsassets" on the
Consolidated Balance sheetconsolidated balance sheets in the amounts of $0.8 million
and $0.8 million at December 31,
20212022 and
December 31, 2020, respectively.2021.
As of December 31,
2021,2022, we held
$45.0$58.9 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount,
$43.9$58.0 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.
We
believeexpect that our
financial resources are adequateexisting cash and cash equivalents will be sufficient to meet our
operatinganticipated cash needs
overfor working capital and capital expenditures for at least the next
twelve12 months.
Our cash flows are as follows:
| | | | |
| | Years ended December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Cash provided by (used in): | | | | |
Operating activities | | ($ 2,745) | | $ 14,922 |
Investing activities | | (10,980) | | (4,664) |
Financing activities | | (10,394) | | (7,060) |
Effect of foreign exchange rate changes on cash and cash equivalents | | (895) | | 914 |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (In thousands) | |
| Cash provided by (used in): | | | |
| Operating activities | (5,786) | | | (2,745) | |
| Investing activities | 46,587 | | | (10,980) | |
| Financing activities | (7,308) | | | (10,394) | |
| Effect of foreign exchange rate changes on cash and cash equivalents | (372) | | | (895) | |
Cash
generated by (used in)used in operating activities is primarily comprised of net income (loss), 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, deferred taxes, depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in sales and timing of
collections.collections and payment of expenditures. 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, 2022, $5.8 million of cash was used in operating activities. This was primarily driven by severance payments, offset by changes in accounts receivable, inventories, accounts payable, and deferred revenue. For the year ended December 31, 2021, $2.7 million of cash was used in operating activities. Cash of $14.9 million and $18.2 million was provided by operating activities for the years ended December 31, 2020 and 2019, respectively.
Our working capital at December 31, 20212022 was $98.0$86.7 million, a decrease of $33.9$11.3 million, or 26%12%, from $131.9$98.0 million at December 31, 2020.2021. The decrease iswas due to a lower operating income driven largely by higher personnel costsrestructuring and certain non-recurring expensesother related to our proxy contestcharges as well as lower capital needs as we better manage the timing of cash collections and strategic action plan.
vendor payments.
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.
For the year ended December 31,
2021 and December 31, 20202022 cash of $46.6 million was provided by investing activities, compared to cash of $11.0 million
and $4.7 million, respectively, was used in investing activities. The increase in cash used in investing activities during the year ended December 31,
2021 compared to2021. The cash provided for the year ended December 31,
2020,2022 was primarily
driven byattributable to the
timingproceeds received from the sale of
our equity investment in Promon AS and the sale of certain of our short-term
investment purchases and maturities.investments.
The changes in cash flows from financing activities primarily
relatedrelate to the purchases of common stock under our share repurchase program and tax payments for restricted stock issuances.
For the year ended December 31, 2022, net cash used in financing activities was $7.3 million, which consisted of $5.7 million of common stock repurchased and $1.6 million of tax payments for restricted stock issuances.
For the year ended December 31, 2021, net cash used in financing activities was $10.4 million, which
was comprisedconsisted of $7.5 million of common stock repurchased and $2.9 million of tax payments for restricted stock issuances.
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.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Contractual Obligations and Commitments
We have purchase obligations of
$45.6$24.6 million, including
$15.4$5.3 million of inventory purchase obligations which are expected to be consummated in the next 12 months,
$26.9$17.4 million of committed hosting arrangements which
we expect will be used in the next one to
threetwo years, and
$3.3$2.0 million for other software agreements related to the administration of our business which range from one to
fivethree years.
We have operating lease obligations of
$12.7$10.7 million which will expire in the next one to
eight yearsseven years. The operating lease obligations 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.
We have taxes payable of
$5.6$4.5 million due within the next one to three years, which primarily represent deemed repatriation tax from 2017. The Company had
$0.5$0.0 million and $0.5 million of unrecognized tax benefits as of December 31,
2022 and 2021,
and December 31, 2020, respectively, which have been set aside in a reserve in accordance with ASC 740 Income Taxes. The amounts are not included in the tax payable amounts above as the timing of payment of such obligations, if any, is not determinable.respectively.
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.
We record revenue in accordance with ASC Topic 606 "Revenue from Contracts with Customers". 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. |
•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 Companyus from a
customer, are excluded from revenue. Shipping and handling costs associated with outbound freight
afterbefore control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in
cost"Cost of goods
sold.sold".
Nature of Goods and Services
We derive our revenues primarily from
Productproduct and
License Revenue,license revenue, which includes hardware products and
software licenses,on-premises subscription revenue, and
Servicesservices and
Other,other, which is inclusive of
software-as-a-service (which we refer to as “subscription”, or “SaaS”),cloud subscription revenue, maintenance and support, and professional services.
Product Revenue:
Subscription: Subscription includes cloud and on-premises subscription revenue, previously referred to as “subscription” and “term-based software licenses”, respectively.
We generate cloud subscription revenues from our Digital Agreements and Security Solutions cloud service offerings. 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.
Revenue from the sale of
security hardwareon-premises subscription revenue is recorded upon
shipment,delivery 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 for on-premises subscription revenue 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 partythird-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 the revenue is recognized.
Subscription Revenue: We generate subscription revenues from our digital agreementsMaintenance and digital security cloud service offerings. 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:support: 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:Services and other Revenue: 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. Professional services and other revenue includes perpetual licenses revenue which was less than 3% of revenue for the year ended December 31, 2022 and less than 6% for the year ended December 31, 2021. Perpetual licenses grant the customer unlimited access to the software.
Hardware products: 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.
The Company also enters into separate service agreements with certain hardware customers to perform distribution services. In these situations, revenue is recognized prior to physical delivery of a good (i.e. “bill-and-hold arrangements). The Company evaluates bill-and-hold arrangement, and records revenue accordingly when the following criteria is met:
•The reason for the bill-and-hold arrangement is substantive;
•The product is identified separately as belonging to the customer;
•The product currently is ready for physical transfer to the customer; and
•OneSpan does not have the ability to use the product or to direct it to another customer.
Multiple-Element Arrangements
In our typical multiple-element arrangement, the primary deliverables include:
1.A client component (i.e. an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a device that the customer already owns);
2.Server system software that is installed on the customer’s systems (i.e., software on the server system that verifies the identity of the person being authenticated) or licenses for additional users on the server system software if the server system software had been installed previously; and
3.Post contract support (PCS) in the form of maintenance on the server system software or support.
Our multiple-element arrangements may also include other items that are usually delivered
prior to the recognition of any revenue
and 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.
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 charge 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 transactions involving software licenses or subscriptions, we determine the SSP for those performance obligations using the residual method.
approach.
In accordance with ASUAccounting Standards Update (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”)(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.
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 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”“more-likely-than-not” standard has been met 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.
Recently Issued Accounting Pronouncements
In December 2019,For information regarding our new accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the FASB issued ASU 2019-12, Simplification for Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidancenotes to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU
2020-12 was effective beginning January 1, 2021. The adoption of this standard did not have a material impact on the Company’s condensed consolidated 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 condensed consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance: Disclosures by Business Entities about Government Assistance, which requires business entities to disclose certain information about certain government assistance they receive. ASU 2021-10 is effective for annual periods beginning after December 15, 2021. We are currently assessing the effect that the ASU will have on our consolidated financial statements included in Part IV, Item 15, Exhibits and related disclosures.
F
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 issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.inancial Statements Schedules
.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk (In thousands)
Foreign Currency Exchange Risk – In 2021,2022, approximately 86%83% of our business was conducted outside the United States, primarily in Europe, Latin America and Asia/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 consolidated 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.
Interest Rate Risk – We have minimal interest rate risk. We had no debt outstanding at December 31, 2021.2022. 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’sour interest income would increase or decrease approximately $0.2by less than $0.1 million annually.
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-1 through F-38 of this Form 10-K,in Item 15, Exhibits and Financial Statement Schedules, and in Item 7, under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.
None.Item 9A - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer who, respectively, are our principal executive officer and(our principal financial officer, conducted an evaluation ofofficer), has evaluated 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, 2021. 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. 2022.
Based upon that evaluation, our
managementChief Executive Officer and Chief Financial Officer have concluded that
the Company'sour disclosure controls and procedures
arewere effective as of December 31,
2021,2022, to
giveprovide 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 OneSpan Inc. is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting
is(as 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’s principal executive and principal financial officers and effected by the Company’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.Our management,). 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, 2021, usingbased upon the criteria set forth in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).
Management’s evaluation of our internal control over financial reporting determined
Management has concluded that
the Company’sits internal control over financial reporting was effective
based on those criteria as of December 31,
2021.2022 to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
KPMG LLP, an independent registered public accounting firm, has audited the
consolidated financial statements as of and for the year ended December 31, 2021 included in this Annual Report on Form 10-K, and has issued its report on the effectiveness of
the Company’sour internal control over financial reporting as of December 31,
2021,2022, included on page
51F-2 of this
annual report.Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2021,2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
Limitations on the Effectiveness of Controls
Internal
Management believes that our disclosure controls and procedures and internal control over financial reporting
has inherent limitations. Internalare designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting
is a processwill prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
involves human diligencethe objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting alsoinstances of fraud, if any, have been detected. Additionally, controls can be circumvented by
the individual acts of some persons, by collusion
of two or
impropermore people or by 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 featuresoverride of the
financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.controls. 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.
Item 9B - Other Information
On February 23, 2022, the Compensation Committee of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders andour Board of Directors
OneSpan Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited (the “Compensation Committee”) adopted the 2023 Management Incentive Plan (the “2023 MIP”), a cash-based incentive compensation plan pursuant to which eligible employees of OneSpan Inc. and subsidiaries'its subsidiaries, including named executive officers, are eligible for an annual bonus.
Participants in the 2023 MIP are eligible to receive a cash bonus (“Bonus”) based upon a combination of (1) our achievement against targets for designated performance metrics (“Company Performance Factors”) and (2) their individual performance (the Company) internal control over“Individual Performance Factor”). The Company Performance Factors are weighted to account for a total of 90% of the potential Bonus amount and the Individual Performance Factor is weighted to account for 10% of the potential Bonus amount. The weighted Company Performance Factors and Individual Performance Factor are added together to create a Combined Performance Factor, which is used to calculate the amount of the Bonus.
The two Company Performance Factors are Revenue and Adjusted EBITDA. “Revenue” refers to our publicly reported revenue, and Adjusted EBITDA is defined in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Revenue factor is weighted at 70% and the Adjusted EBITDA factor is weighted at 20% (for a total Company Performance Factor weighting of 90%). Different levels of achievement against the Revenue and Adjusted EBITDA targets will correspond to different Bonus payout levels, as follows:
•Revenue: The Company must achieve a minimum of 97.9% of the Revenue target in order for the Revenue factor to contribute to the Bonus payout calculation. For the Revenue factor, a 97.9% achievement level would correspond to the minimum payout level of 50%; a 100% achievement level would correspond to the target payout level of 100%; and a 105.3% or greater achievement level would correspond to the maximum payout level of 150%.
•Adjusted EBITDA: The Company must achieve a minimum of 66.7% of the Adjusted EBITDA target in order for the Adjusted EBITDA factor to contribute to the Bonus payout calculation. For the Adjusted EBITDA factor, a 66.7% achievement level would correspond to the minimum payout level of 50%; a 100% achievement level would correspond to the target payout level of 100%; and a 133.3% or greater achievement level would correspond to the maximum payout level of 125%.
For achievement levels that fall between the maximum, target, and minimum Revenue and Adjusted EBITDA achievement levels, the corresponding payout levels will be calculated using linear interpolation.
10% of the potential Bonus amount is calculated based on a participant’s performance against individual performance objectives set by their manager. Performance that meets expectations will correspond to a 100% payout level for the Individual Performance Factor, and performance that is below or above expectations will be adjusted accordingly.
In addition to the Company Performance Factors and the Individual Performance Factor, the potential Bonus under the 2023 MIP depends on a participant’s eligible target Bonus amount, which may be expressed either as a fixed dollar amount or as a percentage of the participant's base salary.
Achievement against the Company Performance Factors is based on the Company's 2023 financial reportingperformance and is subject to approval by the Board of Directors or the Compensation Committee. The Board of Directors or the Compensation Committee may make adjustments to the targets for the Company Performance Factors to address the impact of any mergers, acquisitions or other unexpected activities, developments, trends or events. In addition, achievement of the targets for the Company Performance Factors may, in the Board of Directors' or Compensation Committee’s discretion, include or exclude the impact of any of the following events that occur during 2023: any reorganization or restructuring transactions; extraordinary nonrecurring items; and significant acquisitions or divestitures. OneSpan reserves the right to unilaterally alter or discontinue the 2023 MIP at its complete discretion, unless specifically prohibited under local law.
The foregoing summary of the terms of the 2023 MIP is qualified in its entirety by reference to the 2023 MIP, which the Company expects to file as an exhibit to its Quarterly Report on Form 10-Q for the quarter ending March 31, 2023.
Also on February 23, 2022, the Compensation Committee approved, and on February 27, 2022 OneSpan entered into, the following two amendments to agreements with our CEO, Matthew Moynahan:
Amendment and Restatement of 2022 PSU Agreement. The original 2022 performance-based restricted stock unit (PSU) agreement between Mr. Moynahan and the Company dated June 23, 2022 provided that one-third of the PSUs granted under the agreement would be earned and vest based on the Company’s performance against 2022 targets for Subscription and Term Revenue and Adjusted EBITDA; one-third would be earned and vest based on performance metrics to be established by the Compensation Committee for 2023; and one-third would be earned and vest based on performance metrics to be established by the Compensation Committee for 2024. The amendment and restatement of the 2022 PSU Agreement (the “Amended PSU Agreement”) provides that the PSUs granted under the Amended PSU Agreement are earned based entirely on the Company’s performance against 2022 targets for Subscription and Term Revenue and Adjusted EBITDA, and once earned, vest as to one-third of the earned shares on December 31 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizationseach of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, 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 accordance2022, 2023, and 2024, provided that Mr. Moynahan is still employed with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for eachapplicable vesting date. In the event Mr. Moynahan is terminated without cause or resigns his employment within 18 months following a change in control of the yearsCompany, all earned shares will vest in full. The definitions of the terms “cause”, “good reason”, and “change in control” are set forth in the three-year period ended December 31, 2021, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated February 22, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
Amended PSU Agreement. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessmentpurpose of the effectiveness of internal control over financial reporting, included inAmended PSU Agreement was to effectuate the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independentCompensation Committee’s original intent with respect to this 2022 grant to Mr. Moynahan, which was to incentivize and reward 2022 performance.
Amendment and Restatement of Employment Agreement. This amendment and restatement (the “Amended Employment Agreement”) of Mr. Moynahan’s employment agreement with the Company dated November 29, 2021 makes a variety of changes to the original agreement in accordanceorder to conform Mr. Moynahan’s agreement to certain of the Company’s practices for more recently hired executives, including: providing that Mr. Moynahan will receive the severance pay specified in the agreement if he is terminated without cause or resigns for good reason within 18 months (rather than 12 months) following a change in control of the Company; providing that in the event he is terminated without cause or leaves for good reason (whether or not in connection with a change in control), the U.S. federal securities lawsCompany will pay his full COBRA premiums rather than the employer portion only; requiring Mr. Moynahan to execute the Company’s standard executive non-disclosure and invention assignment agreement and standard non-competition and non-solicitation agreement for Massachusetts-based executives, the latter of which contemplates a one-year non-compete and non-solicit period; clarifying certain timing requirements and logistics in the event of Mr. Moynahan’s resignation for good reason; clarifying separation and release requirements in the event of a separation from the Company; and making certain other administrative, clarifying and conforming changes. The definitions of the terms “cause”, “good reason”, and “change in control” are set forth in the Amended Employment Agreement. The Amended Employment Agreement also increases Mr. Moynahan's base salary to $600,000 per year, effective in the next reasonably practicable pay period following the effective date of the Amended Employment Agreement.
The foregoing summaries of the terms of the Amended PSU Agreement and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaccordance 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) pertaintheir entirety by reference to the maintenance of records that, in reasonable detail, accurately and fairly reflectfull respective agreements, which the transactions and dispositions ofCompany expects to file as exhibits to its Quarterly Report on Form 10-Q for 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
quarter ending March 31, 2023.
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chicago, Illinois
February 22, 2022
Item 10 - Directors, Executive Officers and Corporate Governance All information in response to this Item,
other than the required information on executive officers, is incorporated by reference to the
“Directors“Information regarding our Board of Directors” and
Executive Officers” and “Section“Delinquent Section 16(a)
Beneficial Ownership Compliance”Reports” sections of OneSpan’s Proxy Statement to be filed with the SEC for the
20212023 Annual Meeting of Stockholders.
The following sets forth certainrequired information with regard to each executive officer of the Corporation. There are no family relationships between any of theon 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.
MATTHEW P. MOYNAHAN — Mr. Moynahan has served as OneSpan’s President and Chiefset forth in Part I of this Form 10-K under "Information about our Executive Officer since November 2021. Prior to joining OneSpan, he spent five years as CEO at Forcepoint, a global leader in cybersecurity. There he was responsible for transforming the company’s offerings from predominantly on-premises to a cloud-consumption model. From January 2021 to May 2016, he served as President at Arbor Networks, a subsidiary of Danaher, where he was responsible for building cloud DDoS platforms and network-based advanced threat protection systems. Prior to that, he was the CEO of Veracode from April 2006 to May 2011, a SaaS pioneer of cloud-based software security testing platforms. Earlier in his career, he served as Vice President and General Manager of Symantec’s Consumer Division, responsible for serving hundreds of millions of customers while delivering a superior end-user experience. Mr. Moynahan is 52 years old.
JAN KEES VAN GAALEN — Mr. van Gaalen has served as OneSpan’s Interim Chief Financial Officer since October 2021. Since December 2019, he has been a consultant to technology companies involved in SaaS, Big Data, AI, IT consulting and outsourced services. He served in chief financial officer roles at C&J Energy Services Inc. from September 2018 through December 2019, at Kennametal Inc. from September 2015 to September 2018, and at Dresser-Rand Inc. from April 2013 to July 2015. Earlier in his career, Mr. van Gaalen held various internationally-based CFO and other finance executive roles. Mr. van Gaalen is 65 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 51 years old.
Officers."Item 11 - Executive Compensation The information in response to this Item is incorporated by reference to the “Executive Compensation”
sectionand "Director Compensation" sections of OneSpan’s Proxy Statement
(except for the section titled "Executive Compensation - Pay versus Performance) to be filed with the SEC for the
20222023 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 OneSpan’s Proxy Statement to be filed with the SEC for the 20212023 Annual Meeting of Stockholders.
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 OneSpan’s Proxy Statement to be filed with the SEC for the
20222023 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”“Fees Paid to Independent Registered Public Accounting Firm for 2022 and 2021” section of OneSpan’s Proxy Statement to be filed with the SEC for the
20222023 Annual Meeting of Stockholders.
Item 15 - Exhibits and Financial Statement Schedules (a)The following documents are filed as part of this Annual Report on Form 10-K. (1)The following consolidated financial statements and notes thereto, and the related independent auditors’ report, are included on pages F-1 through F-38F-39 of this Annual Report on Form 10-K: Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31,
20212022 and
20202021
Consolidated Statements of Operations for the Years Ended December 31,
2022, 2021
2020 and
20192020
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31,
2022, 2021
2020 and
20192020
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31,
2022, 2021
2020 and
20192020
Consolidated Statements of Cash Flows for the Years Ended December 31,
2022, 2021
2020 and
20192020
Notes to Consolidated Financial Statements
(2)The following consolidated financial statement schedule of the companyCompany is included on page F-39F-40 of this Form 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 Annual Report on Form 10-K or incorporated by reference as set forth at the end of the list of exhibits:
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2.2 |
| Arrangement Agreement, dated October 6, 2015, among VASCO Data Security International, Inc., 685102 N.B. Inc., Silanis Technology Inc., Silanis International Limited, Silanis Canada Inc., and Silanis Agent Inc. (incorporated(Incorporated by reference – Reference to the Registrant's Form 8-K filed October 13, 2015.2015) |
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| Share Sale and Purchase Agreement by and among VASCO Data Security International, Inc., A.O.S. Holding B.V., Filipan Beheer B.V., Mr. Mladen Filipan and Pijnenburg Beheer N.V., dated February 4, 2005 (Incorporated by reference - Form 8-K filed February 8, 2005.)
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3.1
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| Certificate of Incorporation of the Registrant, as amended. (incorporatedamended (Incorporated by reference –Reference to the Registrant’s Form 8-K10-Q filed June 1, 2018.)August 4, 2022) |
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4.1 |
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4.2*
10.1 |
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4.3*
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| Form of Award Agreement for Restricted Shares under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan with respect to awards granted January 4, 2019. (Incorporated by reference – Form 10-K filed March 8, 2018.)
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4.4*
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| Form of Award Agreement for Performance Shares under VASCO Data Security International, Inc. 2009 Equity Incentive Plan with respect to awards granted January 4, 2019. (Incorporated by reference – Form 10-K filed March 8, 2018.)
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4.5*
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| Fiscal Year 2019 Form of Award Agreement for Deferred Stock under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan. (Incorporated by reference – Form 10-K filed March 8, 2018.)
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4.6*
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| Form of Award Agreement for Restricted Stock Units under the OneSpan Inc. 2020 Omnibus Incentive Plan. (Incorporated by reference – Form 10-K filed March 16, 2020.)
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4.7*
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| Form of Award Agreement for Performance-based Restricted Stock Units under the OneSpan Inc. 2020 Omnibus Incentive Plan. (Incorporated by reference – Form 10-K filed March 16, 2020.)
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4.8*
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| Form of Award Agreement for Restricted Stock Units for Non-Employee Directors under the OneSpan Inc. 2020 Omnibus Incentive Plan. (Incorporated by reference – Form 10-K filed March 16, 2020.)
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4.9*
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| OneSpan Inc. Cash Award Long-Term Incentive Plan Agreement under the OneSpan Inc. 2020 Omnibus Incentive Plan. (Incorporated by reference – Form 10-K filed March 16, 2020.)
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10.1*
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| VASCO Data Security International, Inc. 2009 Equity Incentive Plan, effective December 19, 2008. (Incorporated by referenceReference to the Registrant’s Definitive Proxy Statement pursuant to Schedule 14A,Form 10-Q filed with the SEC on April 30, 2009.)November 1, 2022)
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101.INS |
| XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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104 |
| The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
___________________________
*Compensatory plan or management contract.
| *
| Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.
|
OneSpan Inc. will furnish any of the above exhibits to stockholders upon written request addressed to the Secretary at the address given on the cover page of this Form 10-K.
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.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OneSpan Inc.:
Opinion
Opinions on the
Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of OneSpan Inc. and subsidiaries (the Company) as of December 31, 20212022 and 2020,2021, 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, 2021,2022, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021,2022, in conformity with U.S. generally accepted accounting principles.We also have audited, Also in accordance withour opinion, the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’smaintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,2022 based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2022 expressed an unqualified opinion on the effectiveness of theCommission. Basis for Opinions
The Company’s
management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting.
Basisreporting, and for Opinion
These consolidated financial statements are the responsibilityits assessment of the Company’s management.effectiveness of internal control over financial reporting, included in the accompanying Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (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 auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditsaudit of the consolidated financial statements 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 auditsaudit 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. 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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.
Identification of performance obligations in contracts containing software licenses with unique terms and conditions
As discussed in Notes 2 and 5 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. The Company recognized total revenue of $214$219 million, a portion of which related to contracts containing software licenses, for the year ended December 31, 2021.
2022.
We identified the evaluation of the Company’s identification of performance obligations in contracts containing software licenses with unique terms and conditions as a critical audit matter. Specifically, complex 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 related 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 and contracts that were amended with existing customers, by obtaining and reading the underlying contract and accounting analysis to evaluate the Company’s identification of 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.
We have served as the Company’s auditor since 1996.
Chicago, Illinois
February
22, 2022
28, 2023
CONSOLIDATED BALANCE SHEETS
(
inIn thousands, except per share data)
| | | | | | |
| | December 31, | | December 31, |
| | 2021 | | 2020 |
ASSETS | | | | | | |
Current assets | | | | | | |
Cash and equivalents | | $ | 63,380 | | $ | 88,394 |
Short term investments | | | 35,108 | | | 26,859 |
Accounts receivable, net of allowances of $1,419 in 2021 and $4,135 in 2020 | | | 56,612 | | | 57,537 |
Inventories, net | | | 10,345 | | | 13,093 |
Prepaid expenses | | | 7,594 | | | 7,837 |
Contract assets | | | 4,694 | | | 7,202 |
Other current assets | | | 9,356 | | | 6,256 |
Total current assets | | | 187,089 | | | 207,178 |
Property and equipment, net | | | 10,757 | | | 11,835 |
Operating lease right-of-use assets | | | 9,197 | | | 11,356 |
Goodwill | | | 96,174 | | | 97,552 |
Intangible assets, net of accumulated amortization | | | 21,270 | | | 27,196 |
Deferred income taxes | | | 3,786 | | | 7,030 |
Contract assets - non-current | | | 195 | | | 1,877 |
Other assets | | | 13,803 | | | 11,179 |
Total assets | | $ | 342,271 | | $ | 375,203 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Current liabilities | | | | | | |
Accounts payable | | $ | 8,204 | | $ | 5,684 |
Deferred revenue | | | 54,617 | | | 43,417 |
Accrued wages and payroll taxes | | | 16,607 | | | 13,649 |
Short-term income taxes payable | | | 1,103 | | | 2,618 |
Other accrued expenses | | | 7,668 | | | 8,334 |
Deferred compensation | | | 877 | | | 1,602 |
Total current liabilities | | | 89,076 | | | 75,304 |
Long-term deferred revenue | | | 9,125 | | | 11,730 |
Long-term lease liabilities | | | 10,180 | | | 12,399 |
Other long-term liabilities | | | 7,770 | | | 10,423 |
Long-term income taxes payable | | | 5,054 | | | 6,095 |
Deferred income taxes | | | 1,286 | | | 1,912 |
Total liabilities | | | 122,491 | | | 117,863 |
Stockholders' equity | | | | | | |
Preferred stock: 500 shares authorized, none issued and outstanding at December 31, 2021 and December 31, 2020 | | | — | | | — |
Common stock: $.001 par value per share, 75,000 shares authorized; 40,593 and 40,353 shares issued; 40,001 and 40,103 shares outstanding at December 31, 2021 and December 31, 2020, respectively | | | 40 | | | 40 |
Additional paid-in capital | | | 100,250 | | | 98,819 |
Treasury stock, at cost, 592 and 250 shares outstanding at December 31, 2021 and December 31, 2020, respectively | | | (12,501) | | | (5,030) |
Retained earnings | | | 143,173 | | | 173,731 |
Accumulated other comprehensive loss | | | (11,182) | | | (10,220) |
Total stockholders' equity | | | 219,780 | | | 257,340 |
Total liabilities and stockholders' equity | | $ | 342,271 | | $ | 375,203 |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 96,501 | | | $ | 63,380 | |
| Short-term investments | 2,328 | | | 35,108 | |
| Accounts receivable, net of allowances of $1,600 in 2022 and $1,419 in 2021 | 65,132 | | | 56,612 | |
| Inventories, net | 12,054 | | | 10,345 | |
| Prepaid expenses | 6,222 | | | 7,594 | |
| Contract assets | 4,520 | | | 4,694 | |
| Other current assets | 10,783 | | | 9,356 | |
| Total current assets | 197,540 | | | 187,089 | |
| Property and equipment, net | 12,681 | | | 10,757 | |
| Operating lease right-of-use assets | 8,022 | | | 9,197 | |
| Goodwill | 90,514 | | | 96,174 | |
| Intangible assets, net of accumulated amortization | 12,482 | | | 21,270 | |
| Deferred income taxes | 1,901 | | | 3,786 | |
| Other assets | 11,942 | | | 13,998 | |
| Total assets | $ | 335,082 | | | $ | 342,271 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| Current liabilities | | | |
| Accounts payable | $ | 17,357 | | | $ | 8,204 | |
| Deferred revenue | 64,637 | | | 54,617 | |
| Accrued wages and payroll taxes | 18,345 | | | 16,607 | |
| Short-term income taxes payable | 2,438 | | | 1,103 | |
| Other accrued expenses | 7,664 | | | 7,668 | |
| Deferred compensation | 373 | | | 877 | |
| Total current liabilities | 110,814 | | | 89,076 | |
| Long-term deferred revenue | 6,269 | | | 9,125 | |
| Long-term lease liabilities | 8,442 | | | 10,180 | |
| Other long-term liabilities | 2,484 | | | 7,770 | |
| Long-term income taxes payable | 2,565 | | | 5,054 | |
| Deferred income taxes | 1,197 | | | 1,286 | |
| Total liabilities | 131,771 | | | 122,491 | |
| Stockholders' equity | | | |
| Preferred stock: 500 shares authorized, none issued and outstanding at December 31, 2022 and 2021 | — | | | — | |
| Common stock: $.001 par value per share, 75,000 shares authorized; 40,764 and 40,593 shares issued; 39,726 and 40,001 shares outstanding at December 31, 2022 and 2021, respectively | 40 | | | 40 | |
| Additional paid-in capital | 107,305 | | | 100,250 | |
| Treasury stock, at cost, 1,038 and 592 shares outstanding at December 31, 2022 and 2021, respectively | (18,222) | | | (12,501) | |
| Retained earnings | 128,738 | | | 143,173 | |
| Accumulated other comprehensive loss | (14,550) | | | (11,182) | |
| Total stockholders' equity | 203,311 | | | 219,780 | |
| Total liabilities and stockholders' equity | $ | 335,082 | | | $ | 342,271 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share data)
| | | | | | | | | |
| | For the years ended December 31, |
| | 2021 | | 2020 | | 2019 |
Revenue | | | | | | | | | |
Product and license | | $ | 120,358 | | $ | 132,986 | | $ | 183,313 |
Services and other | | | 94,123 | | | 82,705 | | | 70,171 |
Total revenue | | | 214,481 | | | 215,691 | | | 253,484 |
| | | | | | | | | |
Cost of goods sold | | | | | | | | | |
Product and license | | | 46,196 | | | 46,013 | | | 67,077 |
Services and other | | | 25,350 | | | 21,619 | | | 18,569 |
Total cost of goods sold | | | 71,546 | | | 67,632 | | | 85,646 |
| | | | | | | | | |
Gross profit | | | 142,935 | | | 148,059 | | | 167,838 |
| | | | | | | | | |
Operating costs | | | | | | | | | |
Sales and marketing | | | 62,730 | | | 56,663 | | | 57,819 |
Research and development | | | 47,414 | | | 41,194 | | | 42,463 |
General and administrative | | | 53,031 | | | 46,338 | | | 43,897 |
Amortization of intangible assets | | | 5,888 | | | 9,122 | | | 9,470 |
Total operating costs | | | 169,063 | | | 153,317 | | | 153,649 |
| | | | | | | | | |
Operating income (loss) | | | (26,128) | | | (5,258) | | | 14,189 |
| | | | | | | | | |
Interest income (expense), net | | | (1) | | | 404 | | | 747 |
Other income (expense), net | | | (14) | | | 1,434 | | | (527) |
| | | | | | | | | |
Income (loss) before income taxes | | | (26,143) | | | (3,420) | | | 14,409 |
Provision for income taxes | | | 4,441 | | | 2,035 | | | 6,545 |
| | | | | | | | | |
Net income (loss) | | $ | (30,584) | | $ | (5,455) | | $ | 7,864 |
| | | | | | | | | |
Net income (loss) per share | | | | | | | | | |
Basic | | $ | (0.77) | | $ | (0.14) | | $ | 0.20 |
Diluted | | $ | (0.77) | | $ | (0.14) | | $ | 0.20 |
| | | | | | | | | |
Weighted average common shares outstanding | | | | | | | | | |
Basic | | | 39,614 | | | 40,035 | | | 40,050 |
Diluted | | | 39,614 | | | 40,035 | | | 40,136 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Revenue | | | | | |
| Product and license | $ | 121,426 | | | $ | 120,358 | | | $ | 132,986 | |
| Services and other | 97,580 | | | 94,123 | | | 82,705 | |
| Total revenue | 219,006 | | | 214,481 | | | 215,691 | |
| | | | | |
| Cost of goods sold | | | | | |
| Product and license | 45,106 | | | 46,196 | | | 46,013 | |
| Services and other | 25,330 | | | 25,350 | | | 21,619 | |
| Total cost of goods sold | 70,436 | | | 71,546 | | | 67,632 | |
| | | | | |
| Gross profit | 148,570 | | | 142,935 | | | 148,059 | |
| | | | | |
| Operating costs | | | | | |
| Sales and marketing | 60,949 | | | 62,730 | | | 56,663 | |
| Research and development | 41,735 | | | 47,414 | | | 41,194 | |
| General and administrative | 55,552 | | | 53,031 | | | 46,338 | |
| Impairment of intangible assets | 3,828 | | | — | | | — | |
| Restructuring and other related charges | 9,482 | | | — | | | — | |
| Amortization of intangible assets | 4,139 | | | 5,888 | | | 9,122 | |
| Total operating costs | 175,685 | | | 169,063 | | | 153,317 | |
| | | | | |
| Operating loss | (27,115) | | | (26,128) | | | (5,258) | |
| | | | | |
| Interest income (expense), net | 595 | | | (1) | | | 404 | |
| Other income (expense), net | 14,827 | | | (14) | | | 1,434 | |
| | | | | |
| Loss before income taxes | (11,693) | | | (26,143) | | | (3,420) | |
| Provision for income taxes | 2,741 | | | 4,441 | | | 2,035 | |
| | | | | |
| Net loss | $ | (14,434) | | | $ | (30,584) | | | $ | (5,455) | |
| | | | | |
| Net loss per share | | | | | |
| Basic | $ | (0.36) | | | $ | (0.77) | | | $ | (0.14) | |
| Diluted | $ | (0.36) | | | $ | (0.77) | | | $ | (0.14) | |
| | | | | |
| Weighted average common shares outstanding | | | | | |
| Basic | 40,143 | | | 39,614 | | | 40,035 | |
| Diluted | 40,143 | | | 39,614 | | | 40,035 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(
inIn thousands)
| | | | | | | | | |
| | For the years ended December 31, |
| | 2021 | | 2020 | | 2019 |
Net income (loss) | | $ | (30,584) | | $ | (5,455) | | $ | 7,864 |
Other comprehensive loss | | | | | | | | | |
Cumulative translation adjustment, net of tax | | | (2,997) | | | 4,534 | | | 1,543 |
Pension adjustment, net of tax | | | 2,056 | | | (1,459) | | | (1,551) |
Unrealized losses on available-for-sale securities | | | (21) | | | — | | | — |
Comprehensive income (loss) | | $ | (31,546) | | $ | (2,380) | | $ | 7,856 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net loss | $ | (14,434) | | | $ | (30,584) | | | $ | (5,455) | |
| Other comprehensive loss | | | | | |
| Cumulative translation adjustment, net of tax | (7,245) | | | (2,997) | | | 4,534 | |
| Pension adjustment, net of tax | 3,859 | | | 2,056 | | | (1,459) | |
| Unrealized losses on available-for-sale securities | 18 | | | (21) | | | — | |
| Comprehensive loss | $ | (17,802) | | | $ | (31,546) | | | $ | (2,380) | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(
inIn thousands)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | |
| | | | | | | | | | | | Additional | | | | | Other | | Total |
| | Common Stock | | Treasury - Common Stock | | Paid-In | | Retained | | Comprehensive | | Stockholders |
Description | | Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Equity |
Balance at December 31, 2018 | | 40,225 | | | 40 | | — | | | — | | | 93,310 | | | 171,576 | | | (13,287) | | | 251,639 |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | 7,864 | | | — | | | 7,864 |
Foreign currency translation adjustment, net of tax | | — | | | — | | — | | | — | | | — | | | — | | | 1,543 | | | 1,543 |
Stock-based compensation | | — | | | — | | — | | | — | | | 3,368 | | | — | | | — | | | 3,368 |
Tax payments for stock issuances | | (18) | | | — | | — | | | — | | | (569) | | | — | | | — | | | (569) |
Pension adjustment, net of tax | | — | | | — | | — | | | — | | | — | | | — | | | (1,551) | | | (1,551) |
Balance at December 31, 2019 | | 40,207 | | $ | 40 | | — | | $ | — | | $ | 96,109 | | $ | 179,440 | | $ | (13,295) | | $ | 262,294 |
Cumulative effect of change related to adoption of ASU 2016-13, net of tax | | — | | | — | | — | | | — | | | — | | | (254) | | | — | | | (254) |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | (5,455) | | | — | | | (5,455) |
Foreign currency translation adjustment, net of tax | | — | | | — | | — | | | — | | | — | | | — | | | 4,534 | | | 4,534 |
Stock-based compensation | | 242 | | | — | | — | | | — | | | 4,740 | | | — | | | — | | | 4,740 |
Tax payments for stock issuances | | (96) | | | — | | — | | | — | | | (2,030) | | | — | | | — | | | (2,030) |
Pension adjustment, net of tax | | — | | | — | | — | | | — | | | — | | | — | | | (1,459) | | | (1,459) |
Repurchase of common shares | | (250) | | | — | | 250 | | | (5,030) | | | — | | | — | | | — | | | (5,030) |
Balance at December 31, 2020 | | 40,103 | | $ | 40 | | 250 | | $ | (5,030) | | $ | 98,819 | | $ | 173,731 | | $ | (10,220) | | $ | 257,340 |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | (30,584) | | | — | | | (30,584) |
Foreign currency translation adjustment, net of tax | | — | | | — | | — | | | — | | | — | | | 26 | | | (2,997) | | | (2,971) |
Stock-based compensation | | 385 | | | — | | — | | | — | | | 4,354 | | | — | | | | | | 4,354 |
Tax payments for stock issuances | | (145) | | | — | | — | | | — | | | (2,923) | | | — | | | — | | | (2,923) |
Share repurchase | | (342) | | | — | | 342 | | | (7,471) | | | — | | | — | | | — | | | (7,471) |
Pension adjustment, net of tax | | — | | | — | | — | | | — | | | — | | | — | | | 2,056 | | | 2,056 |
Unrealized gain (loss) on available-for-sale securities | | — | | | — | | — | | | — | | | — | | | — | | | (21) | | | (21) |
Balance at December 31, 2021 | | 40,001 | | $ | 40 | | 592 | | $ | (12,501) | | $ | 100,250 | | $ | 143,173 | | $ | (11,182) | | $ | 219,780 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury - Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Stockholders
Equity |
| Description | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2019 | | 40,207 | | $ | 40 | | | — | | $ | — | | | $ | 96,109 | | | $ | 179,440 | | | $ | (13,295) | | | $ | 262,294 | |
| Cumulative effect of change related to adoption of ASU 2016-13, net of tax | | — | | — | | | — | | — | | | — | | | (254) | | | — | | | (254) | |
| Net income (loss) | | — | | — | | | — | | — | | | — | | | (5,455) | | | — | | | (5,455) | |
| Foreign currency translation adjustment, net of tax | | — | | — | | | — | | — | | | — | | | — | | | 4,534 | | | 4,534 | |
| Stock-based compensation | | 242 | | — | | | — | | — | | | 4,740 | | | — | | | — | | | 4,740 | |
| Tax payments for stock issuances | | (96) | | — | | | — | | — | | | (2,030) | | | — | | | — | | | (2,030) | |
| Pension adjustment, net of tax | | — | | — | | | — | | — | | | — | | | — | | | (1,459) | | | (1,459) | |
| Repurchase of common shares | | (250) | | — | | | 250 | | (5,030) | | | — | | | — | | | — | | | (5,030) | |
| Balance at December 31, 2020 | | 40,103 | | $ | 40 | | | 250 | | $ | (5,030) | | | $ | 98,819 | | | $ | 173,731 | | | $ | (10,220) | | | $ | 257,340 | |
| Net income (loss) | | — | | — | | | — | | — | | | — | | | (30,584) | | | — | | | (30,584) | |
| Foreign currency translation adjustment, net of tax | | — | | — | | | — | | — | | | — | | | 26 | | | (2,997) | | | (2,971) | |
| Stock-based compensation | | 385 | | — | | | — | | — | | | 4,354 | | | — | | | | | 4,354 | |
| Tax payments for stock issuances | | (145) | | — | | | — | | — | | | (2,923) | | | — | | | — | | | (2,923) | |
| Pension adjustment, net of tax | | — | | — | | | — | | — | | | — | | | — | | | 2,056 | | | 2,056 | |
| Repurchase of common shares | | (342) | | — | | | 342 | | (7,471) | | | — | | | — | | | — | | | (7,471) | |
| Unrealized gain (loss) on available-for-sale securities | | — | | — | | | — | | — | | | — | | | — | | | (21) | | | (21) | |
| Balance at December 31, 2021 | | 40,001 | | $ | 40 | | | 592 | | $ | (12,501) | | | $ | 100,250 | | | $ | 143,173 | | | $ | (11,182) | | | $ | 219,780 | |
| Net income (loss) | | — | | — | | | — | | — | | | — | | | (14,434) | | | — | | | (14,434) | |
| Foreign currency translation adjustment, net of tax | | — | | — | | | — | | — | | | — | | | (1) | | | (7,245) | | | (7,246) | |
| Stock-based compensation | | 263 | | — | | | — | | — | | | 8,642 | | | — | | | | | 8,642 | |
| Tax payments for stock issuances | | (92) | | — | | | — | | — | | | (1,587) | | | — | | | — | | | (1,587) | |
| Share repurchase | | (446) | | — | | | 446 | | (5,721) | | | — | | | — | | | — | | | (5,721) | |
| Pension adjustment, net of tax | | — | | — | | | — | | — | | | — | | | — | | | 3,859 | | | 3,859 | |
| Unrealized gain (loss) on available-for-sale securities | | — | | — | | | — | | — | | | — | | | — | | | 18 | | | 18 | |
| Balance at December 31, 2022 | | 39,726 | | $ | 40 | | | 1,038 | | $ | (18,222) | | | $ | 107,305 | | | $ | 128,738 | | | $ | (14,550) | | | $ | 203,311 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(
inIn thousands)
| | | | | | | | | |
| | Twelve months ended December 31, |
| | 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | | | | |
Net loss from operations | | $ | (30,584) | | $ | (5,455) | | $ | 7,864 |
Adjustments to reconcile net loss from operations to net cash provided by (used in) operations: | | | | | | | | | |
Depreciation and amortization of intangible assets | | | 8,926 | | | 12,003 | | | 11,545 |
Loss on disposal of assets | | | 13 | | | 118 | | | 69 |
Deferred tax benefit | | | 2,823 | | | (1,487) | | | (1,624) |
Stock-based compensation | | | 4,354 | | | 4,740 | | | 3,368 |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | | 2,047 | | | 5,181 | | | (4,786) |
Allowance for doubtful accounts | | | (2,705) | | | 1,611 | | | 1,372 |
Inventories, net | | | 2,209 | | | 6,725 | | | (5,391) |
Contract assets | | | 3,787 | | | (191) | | | 1,740 |
Accounts payable | | | 2,716 | | | (5,237) | | | 3,628 |
Income taxes payable | | | (2,525) | | | (5,642) | | | 158 |
Accrued expenses | | | 3,089 | | | (3,124) | | | (1,286) |
Deferred compensation | | | (725) | | | 574 | | | (334) |
Deferred revenue | | | 9,713 | | | 8,342 | | | 1,465 |
Other assets and liabilities | | | (5,883) | | | (3,236) | | | 456 |
Net cash provided by (used in) operating activities | | | (2,745) | | | 14,922 | | | 18,244 |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Purchase of short term investments | | | (59,925) | | | (34,060) | | | (33,839) |
Maturities of short term investments | | | 51,149 | | | 32,630 | | | 31,399 |
Additions to property and equipment | | | (2,169) | | | (3,101) | | | (7,453) |
Additions to intangible assets | | | (35) | | | (133) | | | — |
Net cash used in investing activities | | | (10,980) | | | (4,664) | | | (9,893) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Repurchase of common stock | | | (7,471) | | | (5,030) | | | — |
Tax payments for restricted stock issuances | | | (2,923) | | | (2,030) | | | (569) |
Net cash used in financing activities | | | (10,394) | | | (7,060) | | | (569) |
| | | | | | | | | |
Effect of exchange rate changes on cash | | | (895) | | | 914 | | | (208) |
| | | | | | | | | |
Net increase (decrease) in cash | | | (25,014) | | | 4,112 | | | 7,574 |
Cash, cash equivalents, and restricted cash, beginning of period | | | 89,241 | | | 85,129 | | | 77,555 |
Cash, cash equivalents, and restricted cash, end of period (1.) | | $ | 64,227 | | $ | 89,241 | | $ | 85,129 |
| | | | | | | | | |
Supplemental cash flow disclosures: | | | | | | | | | |
Cash paid for income taxes | | $ | 7,700 | | $ | 9,442 | | $ | 7,839 |
Cash paid for interest | | $ | — | | $ | — | | $ | — |
(1.)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net loss from operations | $ | (14,434) | | | $ | (30,584) | | | $ | (5,455) | |
| Adjustments to reconcile net loss from operations to net cash provided by (used in) operations: | | | | | |
| Depreciation and amortization of intangible assets | 7,066 | | | 8,926 | | | 12,003 | |
| Impairment of intangible assets | 3,828 | | | — | | | — | |
| Gains on sale of equity-method investment | (14,810) | | | — | | | — | |
| Deferred tax benefit | 1,637 | | | 2,823 | | | (1,487) | |
| Stock-based compensation | 8,642 | | | 4,354 | | | 4,740 | |
| Allowance for doubtful accounts | 184 | | | (2,705) | | | 1,611 | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (9,705) | | | 2,047 | | | 5,181 | |
| Inventories, net | (2,168) | | | 2,209 | | | 6,725 | |
| Contract assets | 52 | | | 3,787 | | | (191) | |
| Accounts payable | 9,261 | | | 2,716 | | | (5,237) | |
| Income taxes payable | (1,140) | | | (2,525) | | | (5,642) | |
| Accrued expenses | 2,197 | | | 3,089 | | | (3,124) | |
| Deferred compensation | (504) | | | (725) | | | 574 | |
| Deferred revenue | 8,173 | | | 9,713 | | | 8,342 | |
| Other assets and liabilities | (4,065) | | | (5,870) | | | (3,118) | |
| Net cash (used in) provided by operating activities | (5,786) | | | (2,745) | | | 14,922 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Purchase of short-term investments | (15,812) | | | (59,925) | | | (34,060) | |
| Maturities of short-term investments | 48,550 | | | 51,149 | | | 32,630 | |
| Additions to property and equipment | (4,996) | | | (2,169) | | | (3,101) | |
| Additions to intangible assets | (29) | | | (35) | | | (133) | |
| Sale of equity-method investment | 18,874 | | | — | | | — | |
| Net cash provided by (used in) investing activities | 46,587 | | | (10,980) | | | (4,664) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Repurchase of common stock | (5,721) | | | (7,471) | | | (5,030) | |
| Tax payments for restricted stock issuances | (1,587) | | | (2,923) | | | (2,030) | |
| Net cash used in financing activities | (7,308) | | | (10,394) | | | (7,060) | |
| | | | | |
| Effect of exchange rate changes on cash | (372) | | | (895) | | | 914 | |
| | | | | |
| Net increase (decrease) in cash | 33,121 | | | (25,014) | | | 4,112 | |
| Cash, cash equivalents, and restricted cash, beginning of period | 64,227 | | | 89,241 | | | 85,129 | |
| Cash, cash equivalents, and restricted cash, end of period (1) | $ | 97,348 | | | $ | 64,227 | | | $ | 89,241 | |
| | | | | |
| Supplemental cash flow disclosures: | | | | | |
| Cash paid for income taxes | $ | 2,025 | | | $ | 7,700 | | | $ | 9,442 | |
| Cash paid for interest | $ | — | | | $ | — | | | $ | — | |
(1) End of period cash, cash equivalents, and restricted cash includes $0.8 million,
$0.9$0.8 million and
$0.8$0.9 million of restricted cash at December 31,
2022, 2021,
and 2020,
and 2019, respectively.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless otherwise noted, references in this Annual Report on Form 10-K to “OneSpan”, and “Company”, “we”, “our” and “us” refer to OneSpan Inc. and its subsidiaries.
Note 1 – Description of the Company and Basis of Presentation
Description of the Company
OneSpan
Inc.helps organizations accelerate digital transformations by enabling secure, compliant, and
easy customer agreements and transaction experiences. The Company is a global leader in providing high-assurance identity and authentication security as well as enterprise-grade electronic signature (e-signature) solutions for use cases ranging from simple transactions to workflows that are complex or require higher levels of security. The Company’s solutions help its
wholly owned subsidiaries design, develop, marketclients ensure the integrity of the people and
support hardwarerecords associated with digital agreements, transactions, and
software security systems that manageinteractions in industries including banking, financial services, healthcare, and professional services. The Company offers a portfolio of products and services across identity verification, authentication, virtual interactions and transactions, and secure
access to information assets.digital storage. 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.)(U.K), and the United States (U.S.).
Transformation Plan
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 ofMay 2022, the Company announced a three-year strategic transformation plan that begins on January 1, 2023. The Company expects this transformation plan will enable it to build on its strong solution portfolio and market position, enhance its enterprise go-to-market strategy, accelerate revenue growth, and drive efficiencies to support margin expansion and increased profitability. In conjunction with the strategic transformation plan and to enable a consolidated basis, makes decisions and managesmore efficient capital deployment model, effective with the operations ofquarter ended June 30, 2022, the Company as a singlebegan reporting under the following two lines of business, which are its reportable operating segment.Impact of COVID-19 pandemic
We continuesegments: Digital Agreements and Security Solutions. The Company plans to actively addressmanage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flow given its more modest growth profile. For further information regarding the effects ofCompany’s reportable segments, see Note 3,
Segment Information.
While the
COVID-19 pandemic andCompany’s consolidated results will not be impacted, the Company has recast its
impact globally Due to economic uncertainty connected to the COVID-19 pandemic, we have experienced lengthened sales cycles and reduced demandsegment information during 2022 for
some of our security solutions. While we hope that the negative consequences on our business associated with the COVID-19 pandemic will subside, we cannot predict the impact with certainty.comparable presentation.
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. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation and Transactions
The financial position and results of the operations of the majority of the Company’s foreign subsidiaries 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. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Gains or (losses) resulting from foreign currency transactions were $(1.9) million, less than $0.1 million, and less than $0.1 million in 2022, 2021, and 2020, respectively, and are included in "Other income (expense)" in the consolidated statements of operations.
Note 2 – Summary of Significant Accounting Policies
Cash and Cash Equivalents
and Restricted Cash
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 three months or less. Cash and cash equivalents are held by a number of U.S. and non-U.S. commercial banks and money market investment funds. We are inThe Company is party to lease agreements that require letters of credit to secure the obligations. The restricted cash related to these letters of credit is recorded in
other“Other non-current
assets on the Condensed Consolidated Balance Sheetassets” in the
amountsconsolidated balance sheets in the amount of $0.8 million
and $0.8 million at December 31, 20212022 and December 31, 2020, respectively.2021.
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 qualityhigh-quality commercial paper with maturities at acquisition of more than three months and less than twelve months. The Company classifies its investments in debt securities as available-for-sale. The Company adopted ASUIn accordance with Accounting Standards Update "ASU" No. 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020, which amended our accounting for available-for-sale debt securities. Creditcredit impairments are recorded through an allowance rather than a direct write-down of the security and are recorded through a charge to the consolidated statement of operations. Unrealized gains or losses not related to credit impairments are recorded in accumulated“Accumulated other comprehensive gain/(loss) inloss” on the consolidated balance sheets. The Company reviews available-for-sale debt securities for impairments related to credit losses and other factors each quarter. As of December 31, 20212022 and December 31, 2020,2021, the unrealized gains and losses were not material.
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 fair value.
In accordance with ASU
No.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, 2022 and 2021, and 2020, ourthe Company's financial instruments were Cash and cash and equivalents, short-termShort-term investments, accountsAccounts receivable, accountsAccounts payable, and accruedAccrued liabilities. The estimated fair value of our financial instruments has been determined by using available market information and appropriate valuation methodologies, as defined in ASCAccounting Standards Codification "ASC" 820, Fair Value Measurements. The fair values of the financial instruments were not materially different from their carrying amounts at December 31, 20212022 and 2020.2021. See Note 9, - Fair Value Measurements, for additional detail.
Inventories, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the first-in-first-out (FIFO) method.
We writeThe Company writes down inventory when it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory.
We analyzeThe Company analyzes 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 price 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.
Property and Equipment, net
Property and EquipmentProperty and equipment, net, 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.
All of
ourthe Company's leases are operating leases.
The Company adoptedrecords leases in accordance with ASC Topic 842, Leases as of January 1, 2019, using the modified retrospective approach. In addition, theLeases. The Company elected the following practical expedients: | ● | •The package of practical expedients permitted under the transition guidance within the new standard. The practical expedient package applies to leases commenced prior to adoption of the new standard and permits companies not to reassess whether existing or expired contracts contain a lease, the lease classification, and any initial direct costs for existing leases. •The short-term lease practical expedient, which allowed the Company to exclude short-term leases from recognition in the consolidated balance sheets; •The Company has lease agreements that contain lease and non-lease components. For automobile leases, lease and non-lease components are accounted for together. For office leases, the components are accounted for separately using a relative standalone selling basis; and •The Company applies the portfolio approach to automobile leases with similar characteristics that commence in the same period. The package of practical expedients permitted under the transition guidance within the new standard. The practical expedient package applies to leases commenced prior to adoption of the new standard and permits companies not to reassess whether existing or expired contracts contain a lease, the lease classification, and any initial direct costs for existing leases.
|
| ● | The short-term lease practical expedient, which allowed the Company to exclude short-term leases from recognition in the consolidated balance sheets; |
| ● | We have lease agreements that contain lease and non-lease components. For automobile leases, we account for lease and non-lease components together. For office leases, we account for these components separately using a relative standalone selling basis; and |
| ● | We apply the portfolio approach to automobile leases with similar characteristics that commence in the same period. |
The difference between the asset and liability is a result of lease incentives, such as tenant improvement allowances, and deferred rent on the consolidated balance sheet at transition. See Note 11, –
Leases, for additional information.
Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination.
We assessThe Company assesses the impairment of goodwill annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
OurThe annual impairment test date is October 1.
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 unit against the planned results. Additionally, the 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. 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 the estimated fair value of the reporting unit is compared with its carrying value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
We operate in
As a result of the transformation plan and new reportable operating segments, the Company allocated the goodwill balance to each of its reporting units and respective reportable operating segments on May 17, 2022. Prior to the transformation plan, the Company operated under one reporting unit. See Note 1, reporting unitDescription of the Company and had 0Basis of Presentation, for additional information.
No goodwill impairment
was recorded
forduring the years ended December 31,
2022, 2021,
2020, and
2019.2020.
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 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-lived 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.
Equity Method Investment
We apply
On January 31, 2022, the Company sold its equity method of accounting to our investmentinterest in Promon AS (Promon) for $18.9 million and recorded the gain on sale of $14.8 million in “Other income (expense), because we exercise significant influence, but not controlling interest, innet”, on the investee.consolidated statement of operations for the year ended December 31, 2022. 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
Prior to January 31, 2022, the Company held a result of our 17% ownership17% interest in Promon our representationand applied the equity method of accounting to its investment in Promon because it exercised significant influence on, Promon’s Board of Directors, andbut did not hold a controlling interest in, the significance to Promon of our business activities with them. We integrate Promon’s RASP technology into our software solutions, which are licensed to our customers.investee. Under the equity method of accounting, the Company’s proportionate share of the net earnings (losses) of Promon iswas reported in other“Other income (expense), net in ournet”, on the consolidated Statementsstatements of Operations.operations. The impact of the proportionate share of net earnings (losses) werewas immaterial for the years ended December 31, 2022, 2021, 2020 and 20192020, as were the relative size of Promon’s assets and operations in relation to the Company’s. The carrying value of our equity method investment is reported in other noncurrent assets in the consolidated Balance Sheets and is reported originally at cost and adjusted each period for the Company’s share of the investee’s earnings (losses) and dividends paid, if any.
The Company
also assesses the investment for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may not be recoverable. There were no qualitative factors that indicated that the carrying value of the investment may not be recoverable. The Company did not record any impairment charges during the years ended December 31, 2021, 2020 or 2019. The Company recorded $4.0 millionintends to continue to purchase and
$2.5 million in costs of sales during the years ended December 31, 2021 and 2020, respectively for license fees owed to Promon for use of theirintegrate Promon’s RASP technology into its customer software
and technology. The Company owed Promon $1.5 million and $2.2 million as of December 31, 2021 and December 31, 2020, respectively, which is included in accounts payable and accrued liabilities.solutions.
Share Repurchase Program
During the year ended December 31, 2020,
On May 12, 2022, the Board of Directors
authorized a shareterminated the stock repurchase program
(“program”), pursuant toadopted on September 10, 2020 and adopted a new stock repurchase program under which the Company
canis authorized to repurchase up to $50.0 million of
its 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, 2021, $7.5 million of issued and outstanding stock was repurchased under the program. The authorization is effective until
June 10, 2022May 11, 2024 unless the total amount has been used or authorization has been cancelled.
During the year ended December 31,
2021,2022, the Company repurchased
0.30.4 million shares of the Company’s stock for
$7.5$5.7 million in the aggregate at an average cost of
$21.82$12.83 per share under its repurchase program.
Revenue Recognition
On January 1, 2019, we adopted FASB Accounting Standards Codification (ASC)
We record revenue in accordance with ASC Topic 606 “Revenue"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, 2019. Results for reporting periods beginning after January 1, 2019 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, 2019 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 5 - Revenue for further details.Customers". 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. |
•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
ourthe Company's 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
afterbefore control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in
cost"Cost of goods
sold.sold".
Nature of Goods and Services
We derive our revenues primarily from
Productproduct and
License Revenue,license revenue, which includes hardware products and
software licenses,on-premises subscription revenue, and
Servicesservices and
Other,other, which is inclusive of
software-as-a-service (which we refer to as “subscription”, or “SaaS”),cloud subscription revenue, maintenance and support, and professional services.
Product Revenue: Revenue
Subscription: Subscription includes cloud and on-premises subscription revenue, previously referred to as “subscription” and “term-based software licenses”, respectively.
Cloud subscription revenues are generated from from the
sale of security hardware is recorded upon shipment, which is the point at which control of the goods are transferredCompany's Digital Agreements 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 delivery which is 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 the revenue is recognized.
Subscription Revenue: We generate subscription revenues from our digital agreements and digital security cloudSecruity Solutions service offerings. Our standardStandard 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.
Revenue from the sale of on-premises subscription revenue is recorded upon delivery which is 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. We offer term licenses for on-premises subscription revenue ranging from one to five years in length.. 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 records the corresponding revenue on a gross basis from these transactions. For transactions in which we do not act as the principal, we recognize revenue on a net basis. The fees owed to the third parties are recognized as a component of cost of goods sold when the revenue is recognized.
Maintenance Support and Other:support: Maintenance and support agreements generally call for usthe Company 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:Services and other Revenue: 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.
Professional services and other revenue includes perpetual licenses revenue, which was less than 3% of revenue for the year ended December 31, 2022 and less than 6% for the year ended December 31, 2021. Perpetual licenses grant the customer unlimited access to the software.
Hardware products: 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 performance obligations are completed, 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.
The Company also enters into separate service agreements with certain hardware customers to perform
distribution services.In these situations, revenue is recognized prior to physical delivery of a good (i.e. “bill-and-hold arrangements). The Company evaluates bill-and-hold arrangement, and records revenue accordingly when the following criteria is met:
•The reason for the bill-and-hold arrangement is substantive;
•The product is identified separately as belonging to the customer;
•The product currently is ready for physical transfer to the customer;
•The Company does not have the ability to use the product or to direct it to another customer.
Multiple-Element Arrangements
In
ourthe Company's typical multiple-element arrangement, the primary deliverables include:
| 1. | A client component (i.e. an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a device that the customer already owns); |
| 2. | Server system software that is installed on the customer’s systems (i.e., software on the server system that verifies the identity of the person being authenticated) or licenses for additional users on the server system software if the server system software had been installed previously; and |
| 3. | Post contract support (PCS) in the form of maintenance on the server system software or support. |
Our
1.A client component (i.e. an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a device that the customer already owns);
2.Server system software that is installed on the customer’s systems (i.e. software on the server system that verifies the identity of the person being authenticated) or licenses for additional users on the server system software if the server system software had been installed previously; and
3.Post contract support (PCS) in the form of maintenance on the server system software or support.
The Company's multiple-element arrangements may also include other items that are usually delivered prior to the recognition of any revenue
and 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 deliverthe Company delivers the device to
ourits customer’s end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.
Significant Judgments
We enter
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 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 contractsContracts 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 charge 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 transactions involving software licenses or subscriptions, we determine the SSP for those performance obligations using the residual method.approach.
Included in
product"Product and license cost of goods
soldsold" are direct product costs and direct costs to deliver and provide software licenses. Cost of goods sold related to service and other revenues are primarily costs related to
cloud subscription solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance support.
Research and Development Costs
As part of the strategic transformation plan announced in May 2022, the Company began investing in its Digital Agreements operating segment for accelerated growth. In conjunction with expanded research and development activities to grow the Company’s transaction-cloud platform and Digital Agreements product offerings, the Company began capitalizing certain costs incurred in connection with obtaining or developing internal-use software during the year ended December 31, 2022. These costs include payroll and payroll-related costs for employees who are directly associated with the internal-use software projects, external direct costs of materials and services costs while developing the software. Capitalized software costs are included in “Property and equipment, net” on the consolidated balance sheets and are amortized using the straight-line method over the estimated life of three years. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs
incurred during the preliminary project and post-implementation stages, as well as software maintenance and training costs, are expensed in the period in which they are incurred. Other 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.
The Company capitalized $4.0 million of internal-use software during the year ended December 31, 2022.
Software Development Costs
Software
Other costs for research and development,
costs are accounted for in accordance with ASC 985-20, Costsprincipally the design and development of Software to be Sold, Leased, or Marketed. Research costshardware, and
softwarethe design and development
costs,of software prior to the
establishmentdetermination of technological feasibility,
determined based upon the creation of a working model, are expensed as
incurred. Our software capitalization policy defines technological feasibility asincurred on 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.project-by-project basis.
Stock-Based Compensation
We have
The Company has stock-based employee compensation plans, described in Note 14, – Stock Compensation.Compensation. ASC 718, Stock Compensation, requires usthe Company 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
The Company records 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 ourThe Company reviews its 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
ourthe consolidated financial statements using a December 31 measurement date.
Other Income (Expense), Net
Other income (expense), net,
consists primarily
includesof exchange gains (losses) on transactions that are denominated in currencies other than
ourthe Company’s subsidiaries’ functional currencies, subsidies received from foreign governments in support of
ourthe Company's research and development in those countries and other miscellaneous non-operational
income and expenses.
Income Taxes
As a global company, we calculate
The Company calculates and provideprovides for income taxes in each tax jurisdiction in which we operate.it operates. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred
from uncertain tax positions.
OurThe Company’s provision for income taxes is significantly affected by shifts in the geographic mix of
ourits 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
ourthe Company's 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 recognizeThe Company recognizes 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
The Company recognizes 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
ourthe Company's income tax returns that 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”“more-likely-than-not” standard has been met when developing the provision for income taxes.
We recognize
The Company recognizes the tax impact of including certain foreign earnings in U.S. taxable income as a period cost.
We haveThe Company has recognized deferred income taxes for local country income and withholding taxes that could be incurred on distributions of non-U.S. earnings because
we domanagement does not plan to indefinitely reinvest such earnings.
We monitor
The Company monitors for changes in tax laws and reflect the impacts of tax law changes in the period of enactment.
Foreign Currency Translation and Transactions
The financial position and results of operations of the majority of the Company’s foreign subsidiaries 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 are charged or credited to other comprehensive income (loss). Gains or (losses) resulting from foreign currency transactions were less than $0.1 million, less than $0.1 million, and $(1.5) million in 2021, 2020, and 2019, respectively, and are included in other income (expense), net in the consolidated statements of operations.
The financial position and results of our operations in Singapore, Switzerland, and Canada are measured in U.S. Dollars. For these subsidiaries, gains and losses that result from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net.
Recently Issued Accounting Pronouncements
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 intra-period 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 2020-12 was effective beginning January 1, 2021. The adoption of this standard did not have a material impact on the Company’s condensed consolidated 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 condensed consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance: Disclosures by Business Entities about Government Assistance ("ASU 2021-10"), which requires business entities to disclose certain information about certain government assistance they receive. ASU 2021-10 is effective for annual periods beginning after December 15, 2021. We are currently assessingThe adoption of this standard did not have a material impact on the effect that the ASU will have on ourCompany's consolidated financial statements and related disclosures.
statements.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by
usthe Company as of the specified effective date. Unless otherwise discussed,
our management believes that the issued standards that are not yet effective will not have a material impact on
ourthe consolidated financial statements upon adoption.
Note 3 – Revision- Segment Information
In May 2022, the Company announced a three-year strategic transformation plan begins on January 1, 2023. The Company expects this transformation plan that will enable it to build on its strong solution portfolio and market position, enhance its enterprise go-to-market strategy, accelerate revenue growth, and drive efficiencies to support margin expansion and increased profitability. In conjunction with the strategic transformation plan and to enable a more efficient capital deployment model, effective with the quarter ended June 30, 2022, the Company began reporting under the following two lines of Previously Issued Financial StatementsWe have revised amounts reportedbusiness, which are its reportable operating segments: Digital Agreements and Security Solutions. The Company expects to manage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flow given its more modest growth profile.
Segments are defined as components of a company that engage in previously issuedbusiness activities from which they may earn revenues and incur expenses, and for which separate financial statements forinformation is available and is evaluated regularly by the periods presentedchief operating decision maker (CODM), in this Annual Reportdeciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.
•Digital Agreements. Digital Agreements consists of solutions that enable the Company’s clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include the Company’s OneSpan Sign e-signature solution and its recently introduced OneSpan Notary and Virtual Room
solutions. As the transformation plan progresses, the Company expects to include other cloud-based security modules associated with the secure transaction lifecycle of identity verification, authentication, virtual interactions and transactions, and secure digital storage in the Digital Agreements segment. This segment also includes costs attributable to our next-generation transaction-cloud platform.
•Security Solutions. Security Solutions consists of a broad portfolio of software products and/or software development kits (SDKs) that are used to build applications designed to defend against attacks on Form 10-K related to immaterial errors. The errors relate to certaindigital transactions across online environments, devices and applications. These solutions, which are largely on-premises software products, include identity verification, multi-factor authentication and transaction signing, such as mobile application security, mobile software tokens, and Digipass authenticators that are not cloud-connected devices.
Segment operating income consists of the revenues generated by a segment, less the direct costs
directly related to the production and distribution of
hardware products. The costs were not properly categorized in prior periods, which led to an understatement of product and license cost of goods sold and an overstatement ofrevenue, sales and marketing,
expense. There was no impactresearch and development expenses, amortization expense, and restructuring and other related charges that are incurred directly by a segment. The Company recorded $2.3 million and $1.8 million of amortization expense in Digital Agreements operating income and Security Solutions operating income, respectively, during the year ended December 31, 2022. During the year ended December 31, 2021, the Company recorded $2.5 million and $3.3 million of amortization expense in Digital Agreements operating income and Security Solutions operating income, respectively. The Company recorded $5.9 million and $3.1 million of amortization expense in Digital Agreements operating income and Security Solutions operating income, respectively, during the year ended December 31, 2020.Unallocated corporate costs include costs related to
previously reported revenue or net income.We evaluatedadministrative functions that are performed in a centralized manner that are not attributable to a particular segment.
The tables below set forth information about 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-KCompany’s operating segments for the years ended December 31,
2020 and 2019, or for any quarterly periods included therein or through our Quarterly Report on Form 10-Q for the quarterly periods ended September 30, 2021, June 30,2022, 2021, and
March 31, 2021.2020, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.
| | | | | | | | | | | | | | | | | | |
| |
| Years Ended December 31, |
| 2022 | | 2021 | | | 2020 |
| (In thousands, except percentages) | | | | | | |
| Digital Agreements | | | | | | |
| Revenue | $ | 48,401 | | | $ | 40,551 | | | | $ | 29,633 | |
| Gross profit | $ | 37,488 | | | $ | 29,557 | | | | $ | 20,361 | |
| Gross margin | 77 | % | | 73 | % | | | 69 | % |
| Operating income | $ | 5,348 | | | $ | (1,612) | | | | $ | (7,559) | |
| | | | | | |
| Security | | | | | | |
| Revenue | $ | 170,605 | | | $ | 173,930 | | | | $ | 186,058 | |
| Gross profit | $ | 111,082 | | | $ | 113,378 | | | | $ | 127,698 | |
| Gross margin | 65 | % | | 65 | % | | | 69 | % |
| Operating income | $ | 32,051 | | | $ | 35,395 | | | | $ | 55,295 | |
| | | | | | |
| Total Company: | | | | | | |
| Revenue | $ | 219,006 | | | $ | 214,481 | | | | $ | 215,691 | |
| Gross profit | $ | 148,570 | | | $ | 142,935 | | | | $ | 148,059 | |
| Gross margin | 68 | % | | 67 | % | | | 69 | % |
| | | | | | |
| Statements of operations reconciliation: | | | | | | |
| Segment operating income | $ | 37,399 | | | $ | 33,783 | | | | $ | 47,736 | |
| Corporate operating expenses not allocated at the segment level | 64,514 | | | 59,911 | | | | 52,994 | |
| Operating loss | $ | (27,115) | | | $ | (26,128) | | | | $ | (5,258) | |
| Interest income, net | 595 | | | (1) | | | | 404 | |
| Other income (expense), net | 14,827 | | | (14) | | | | 1,434 | |
| Loss before income taxes | $ | (11,693) | | | $ | (26,143) | | | | $ | (3,420) | |
The following tables presentillustrate the effectsdisaggregation of revenues by category and services, including a reconciliation of the aforementioned revisions on our consolidated statements of operationsdisaggregated revenues to revenues from the Company's two operating segments for the years ended December 31, 2022, 2021, and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Digital Agreements | | Security Solutions | | Digital Agreements | | Security Solutions | | Digital Agreements | | Security Solutions |
| (In thousands) | | | | | | | | | | | |
| Subscription (1) | $ | 42,029 | | | $ | 47,124 | | | $ | 33,283 | | | $ | 35,224 | | | $ | 22,632 | | | $ | 29,757 | |
| Maintenance and support | 5,451 | | | 42,894 | | | 5,709 | | | 45,567 | | | 5,035 | | | 44,193 | |
| Professional services and other (2) | 921 | | | 7,087 | | | 1,494 | | | 13,703 | | | 1,966 | | | 30,259 | |
| Hardware products | — | | | 73,500 | | | 65 | | | 79,436 | | | — | | | 81,849 | |
| Total Revenue | $ | 48,401 | | | $ | 170,605 | | | $ | 40,551 | | | $ | 173,930 | | | $ | 29,633 | | | $ | 186,058 | |
1.Subscription includes cloud and on-premises subscription revenue, previously referred to as “subscription” and “term-based software licenses”, respectively.
2.Professional services and other includes perpetual software licenses revenue, which was approximately 2%, 5%, and 12% of total revenue for the years ended December 31, 2022, 2021, and 2020, respectively.
The Company allocates goodwill by reporting unit, in accordance with ASC 350 – Goodwill and 2019.Other
. Asset information by segment is not reported to or reviewed by the CODM to allocate resources, and therefore, the Company has not disclosed asset information for the segments.Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
in thousands | | As Previously Reported | | Adjustments | | As Revised | | As Previously Reported | | Adjustments | | As Revised |
Cost of goods sold | | | | | | | | | | | | | | | | | | |
Product and license | | $ | 41,820 | | $ | 4,193 | | $ | 46,013 | | $ | 63,393 | | $ | 3,684 | | $ | 67,077 |
Total cost of goods sold | | | 63,439 | | | 4,193 | | | 67,632 | | | 81,962 | | | 3,684 | | | 85,646 |
| | | | | | | | | | | | | | | | | | |
Gross profit | | | 152,252 | | | (4,193) | | | 148,059 | | | 171,522 | | | (3,684) | | | 167,838 |
| | | | | | | | | | | | | | | | | | |
Operating costs | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 60,856 | | | (4,193) | | | 56,663 | | | 61,503 | | | (3,684) | | | 57,819 |
Total operating costs | | | 157,510 | | | (4,193) | | | 153,317 | | | 157,333 | | | (3,684) | | | 153,649 |
Note 4 – Inventories, net
Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the FIFO method.
Inventories, net, are comprised of the following:
| | | | | | |
| | 2021 | | 2020 |
|
| | (in thousands) |
Component parts | | $ | 3,841 | | $ | 5,439 |
Work-in-process and finished goods | | | 6,504 | | | 7,654 |
Total | | $ | 10,345 | | $ | 13,093 |
following as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Component parts | $ | 6,762 | | | $ | 3,841 | |
| Work-in-process and finished goods | 5,292 | | | 6,504 | |
| Total | $ | 12,054 | | | $ | 10,345 | |
Note 5 – 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
ourthe Company's revenues disaggregated by major products and services, geographical region and timing of revenue recognition.
Revenue by major products and services (in thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) | | | | | |
| Subscription (1) | $ | 89,153 | | | $ | 68,507 | | | $ | 52,389 | |
| Maintenance and support | 48,345 | | | 51,276 | | | 49,228 | |
| Professional services and other (2) | 8,008 | | | 15,197 | | | 32,225 | |
| Hardware products | 73,500 | | | 79,501 | | | 81,849 | |
| Total Revenue | $ | 219,006 | | | $ | 214,481 | | | $ | 215,691 | |
| | | | | | | | | | |
| | | | Years ended December 31, |
| | | 2021 | | 2020 | | | 2019 |
| | | | | | | | | | |
Hardware products | | | $ | 79,501 | | $ | 81,849 | | $ | 127,005 |
Software licenses | | | | 40,857 | | | 51,137 | | | 56,308 |
Subscription | | | | 38,213 | | | 27,788 | | | 22,280 |
Professional services | | | | 4,634 | | | 5,689 | | | 5,759 |
Maintenance, support, and other | | | | 51,276 | | | 49,228 | | | 42,132 |
Total Revenue | | | $ | 214,481 | | $ | 215,691 | | $ | 253,484 |
1.| Subscription includes cloud and on-premises subscription revenue, previously referred to as “subscription” and “term-based software licenses”, respectively.
2.Professional services and other includes perpetual software licenses revenue, which was approximately 2%, 5%, and 12% of total revenue for the years ended December 31, 2022, 2021, and 2020, respectively.
| | | | | | | | |
Revenue by location of customer for the years ended December 31, 2022, 2021, 2020, and 2019 (in thousands)
| | | | | | | | | | | | | |
| | EMEA | | Americas | | APAC | | Total | |
Total Revenue: | | | | | | | | | | | | | |
2021 | | $ | 104,878 | | $ | 68,646 | | $ | 40,957 | | $ | 214,481 | |
2020 | | $ | 117,086 | | $ | 53,171 | | $ | 45,434 | | $ | 215,691 | |
2019 | | $ | 145,942 | | $ | 61,577 | | $ | 45,965 | | $ | 253,484 | |
| | | | | | | | | | | | | |
Percent of Total: | | | | | | | | | | | | | |
2021 | | | 49 | % | | 32 | % | | 19 | % | | 100 | % |
2020 | | | 54 | % | | 25 | % | | 21 | % | | 100 | % |
2019 | | | 58 | % | | 24 | % | | 18 | % | | 100 | % |
2020 | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | EMEA | | Americas | | APAC | | Total |
| Total Revenue: | | | | | | | |
| 2022 | $ | 100,298 | | | $ | 77,740 | | | $ | 40,968 | | | $ | 219,006 | |
| 2021 | $ | 104,878 | | | $ | 68,646 | | | $ | 40,957 | | | $ | 214,481 | |
| 2020 | $ | 117,086 | | | $ | 53,171 | | | $ | 45,434 | | | $ | 215,691 | |
| | | | | | | |
| Percent of Total: | | | | | | | |
| 2022 | 46 | % | | 35 | % | | 19 | % | | 100 | % |
| 2021 | 49 | % | | 32 | % | | 19 | % | | 100 | % |
| 2020 | 54 | % | | 25 | % | | 21 | % | | 100 | % |
Timing of revenue recognition (in thousands)
| | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 | | 2019 |
Products and Licenses transferred at a point in time | $ | 120,358 | | $ | 132,986 | | $ | 183,313 |
Services transferred over time | | 94,123 | | | 82,705 | | | 70,171 |
Total Revenue | $ | 214,481 | | $ | 215,691 | | $ | 253,484 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Products and Licenses transferred at a point in time | $ | 121,426 | | | $ | 120,358 | | | $ | 132,986 | |
| Services transferred over time | 97,580 | | | 94,123 | | | 82,705 | |
| Total Revenue | $ | 219,006 | | | $ | 214,481 | | | $ | 215,691 | |
Contract balances
(in thousands)The following table provides information about receivables, contract assets and contract liabilities from contracts with
customers.
| | | | | | |
| | | December 31, |
in thousands | | | 2021 | | | 2020 |
Receivables, inclusive of trade and unbilled | | $ | 56,612 | | $ | 57,537 |
Contract Assets (current and non-current) | | $ | 4,889 | | $ | 9,079 |
Contract Liabilities (Deferred Revenue current and non-current) | | $ | 63,742 | | $ | 55,147 |
customers as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| (In thousands) | December 31, |
| 2022 | | 2021 |
| Receivables, inclusive of trade and unbilled | $ | 65,132 | | | $ | 56,612 | |
| Contract Assets (current and non-current) | $ | 4,642 | | | $ | 4,889 | |
| Contract Liabilities (Deferred Revenue current and non-current) | $ | 70,907 | | | $ | 63,742 | |
Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings. These contract assets are transferred to receivables when the right to billing occurs, which is normally over
1-53-5 years. The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services. Revenue is recognized for these services over time.As a practical expedient,
we dothe Company does not adjust the promised amount of consideration for the effects of a significant financing component when
we expect,it is expected, at contract inception, that the period between
ourthe Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less.
We doExtended payment terms are not typically
include extended payment termsincluded in
our contracts with customers.
Revenue recognized during the year ended December 31,
20212022 included
$41.3$52.8 million that was included on the December 31,
20202021 consolidated balance sheet in contract liabilities. Deferred revenue increased in the same period due to timing of annual renewals.
Transaction price allocated to the remaining performance obligations
Remaining performance obligations represent the revenue that is expected to be recognized in future periods related to performance obligations that are unsatisfied, or partially unsatisfied, as of the end of the period. The following
table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied)
at the endas of
the reporting period.
| | | | | | | | | | | | | | | |
in thousands | | 2022 | | 2023 | | 2024 | | Beyond 2024 | | Total |
Future revenue related to current unsatisfied performance obligations | | $ | 31,626 | | $ | 15,608 | | $ | 7,514 | | $ | 2,498 | | $ | 57,246 |
December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2023 | | 2024 | | 2025 | | Beyond 2025 | | Total |
| Future revenue related to current unsatisfied performance obligations | $ | 44,407 | | | $ | 19,574 | | | $ | 7,872 | | | $ | 5,336 | | | $ | 77,189 | |
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, theThe Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of up to seven years, which is the determined benefit period based on the transfer of goods or services that we have determined to be up to seven years. Weservices. The Company determined the period of benefit by taking into consideration ourthe customer contracts, ourits technology and other
factors, including customer attrition. Commissions are earned upon invoicing to the customer.For contracts with multiple year payment terms, because the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. Commissions and amortization expense are included in Sales“Sales and Marketing expenses onmarketing” expense in the consolidated statements of operations.
Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less. These costs are included in
Salesthe “Sales and
Marketing expensemarketing” caption in the consolidated statements of operations.
The following tables provide information related to the capitalized costs and amortization recognized in the current and prior period:
| | | | | | | | |
| | | | | | | | |
in thousands | | | | December 31, 2021 | | | December 31, 2020 | |
Capitalized costs to obtain contracts, current | | | $ | 2,134 | | $ | 1,222 | |
Capitalized costs to obtain contracts, non-current | | | $ | 8,675 | | $ | 5,464 | |
| | | | | | | | |
| | | | Twelve months ended December, | |
in thousands | | | | 2021 | | | 2020 | |
Amortization of capitalized costs to obtain contracts | | | $ | 1,555 | | $ | 904 | |
Impairments of capitalized costs to obtain contracts | | | $ | - | | $ | - | |
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Capitalized costs to obtain contracts, current | $ | 2,929 | | | $ | 2,134 | |
| Capitalized costs to obtain contracts, non-current | $ | 10,571 | | | $ | 8,675 | |
| | | | | | | | | | | |
| (In thousands) | Years Ended December 31, |
| 2022 | | 2021 |
| Amortization of capitalized costs to obtain contracts | $ | 2,404 | | | $ | 1,555 | |
| Impairments of capitalized costs to obtain contracts | $ | — | | | $ | — | |
The following tables present the changes in goodwill during 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | Digital Agreements | | Security Solutions | | Total |
| In thousands | | | | | | |
| Net balance at December 31, 2020 | | $ | — | | | $ | — | | | $ | 97,552 | |
| Net foreign currency translation | | — | | | — | | | (1,378) | |
| Net balance at December 31, 2021 | | — | | | — | | | 96,174 | |
| Goodwill reallocation | | 20,966 | | | 75,208 | | | — | |
| Net foreign currency translation | | (1,234) | | | (4,426) | | | (5,660) | |
| Net balance at December 31, 2022 | | $ | 19,732 | | | $ | 70,782 | | | $ | 90,514 | |
Goodwill activity for the two years ended December 31, 2021 consistedreallocation: As a result of the following:transformation plan and new reportable operating segments, the Company allocated the goodwill balance to each reporting unit and respective reportable operating segments on May 17, 2022 (see Note 1,
Description of the Company and Basis of Presentation | | | |
in thousands | | | |
Net balance at December 31, 2019 | | $ | 94,612 |
Net foreign currency translation | | | 2,940 |
Net balance at December 31, 2020 | | $ | 97,552 |
Net foreign currency translation | | | (1,378) |
Net balance at December 31, 2021 | | $ | 96,174 |
Certain portions). Additionally, the Company performed a goodwill impairment test on the goodwill balances of each of the reporting units of its reportable operating segments as of May 17, 2022, by comparing the fair value of each reporting unit to its carrying value, including the allocated goodwill. The Company concluded that there was no indication of goodwill are denominated in local currencies and are subject to currency fluctuations. impairment for any of the reporting units as of May 17, 2022.
No impairment of goodwill was recorded during the years ended December 31,
2022, 2021,
2020, or
2019.
Note 7 – Intangible Assets
Intangible asset activityassets as of December 31, 2022 and 2021 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| (In thousands) | Useful Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Acquired technology | 3 to 7 | | $ | 42,022 | | | $ | 41,894 | | | $ | 43,034 | | | $ | 42,281 | |
| Customer relationships | 5 to 12 | | 34,386 | | | 23,323 | | | 39,814 | | | 20,653 | |
| Patents and trademarks | 10 to 20 | | 13,518 | | | 12,227 | | | 13,549 | | | 12,193 | |
| Total | | | $ | 89,926 | | | $ | 77,444 | | | $ | 96,397 | | | $ | 75,127 | |
Amortization expense was $4.1 million, $5.9 million, and $9.1 million for the
two years ended December 31,
2022, 2021,
is detailed in the following table;
| | | | | | | | | | | | |
| | | | | | | | | |
in thousands | | Acquired Technology | | Customer Relationships | | Other | | Total Intangible Assets |
Net balance at December 31, 2019 | | $ | 5,454 | | | 26,884 | | | 3,871 | | | 36,209 |
Additions | | | 46 | | | — | | | 87 | | | 133 |
Disposals | | | — | | | — | | | (58) | | | (58) |
Net foreign currency translation | | | 53 | | | (58) | | | 39 | | | 34 |
Amortization expense | | | (3,276) | | | (3,626) | | | (2,220) | | | (9,122) |
Net balance at December 31, 2020 | | | 2,277 | | | 23,200 | | | 1,719 | | | 27,196 |
Additions | | | 15 | | | — | | | 20 | | | 35 |
Disposals | | | — | | | — | | | (21) | | | (21) |
Net foreign currency translation | | | 2 | | | (46) | | | (8) | | | (52) |
Amortization expense | | | (1,541) | | | (3,993) | | | (354) | | | (5,888) |
Net balance at December 31, 2021 | | $ | 753 | | $ | 19,161 | | $ | 1,356 | | $ | 21,270 |
| | | | | | | | | | | | |
December 31, 2021 balance at cost | | $ | 43,034 | | $ | 39,814 | | $ | 13,549 | | $ | 96,397 |
Accumulated amortization | | | (42,281) | | | (20,653) | | | (12,193) | | | (75,127) |
Net balance at December 31, 2021 | | $ | 753 | | $ | 19,161 | | $ | 1,356 | | $ | 21,270 |
and 2020, respectively.
Certain intangible assets are denominated in local currencies and are subject to currency fluctuations.
Expected amortization
During the year ended December 31, 2022, the Company performed an impairment review of the customer relationships intangible assets forobtained in its 2018 acquisition of Dealflo Limited (“Dealflo”). The impairment review was triggered by the Company’s July 2022 notification to customers regarding its intent to gradually sunset its Dealflo solution in the months leading up to December 31, 2023. As a result, all Dealflo solution customer contracts will terminate on or before December 31, 2023. The results of the impairment review indicated that the carrying value of the Dealflo customer relationships exceeded the fair value, and the Company recorded a $3.8 million impairment charge on the entire remaining value of the asset during the year ended December 31, 2022. The charge is included in “Impairment of intangible assets” on the consolidated statements of operations and is included in "Operating income" of the Security Solutions reportable operating segment.
There were no additional impairments of intangible assets recorded during the years
ended:ended December 31, 2022, 2021, and 2020.
The estimated future amortization expense of intangible assets as of December 31, 2022, is as follows:
| | | | | |
| 2023 | $ | 2,338 | |
| 2024 | 2,335 | |
| 2025 | 2,334 | |
| 2026 | 2,328 | |
| 2027 | 2,123 | |
| Thereafter | 263 | |
| Subject to amortization | 11,721 | |
| Trademarks | 761 | |
| Total intangible assets | $ | 12,482 | |
| | | |
December 31, 2022 | | $ | 4,678 |
December 31, 2023 | | | 4,049 |
December 31, 2024 | | | 4,046 |
December 31, 2025 | | | 3,046 |
December 31, 2026 | | | 2,327 |
Thereafter | | | 2,368 |
Subject to amortization | | | 20,514 |
Trademarks | | | 756 |
Total intangible assets | | $ | 21,270 |
Note 8 – Property and Equipment,
net
The
following table presents the major classes of property and equipment,
arenet, as
follows:
| | | | | | |
in thousands | | December 31, 2021 | | December 31, 2020 |
Office equipment and software | | $ | 14,327 | | $ | 13,540 |
Leasehold improvements | | | 10,296 | | | 10,593 |
Furniture and fixtures | | | 4,223 | | | 3,827 |
Total | | | 28,846 | | | 27,960 |
Accumulated depreciation | | | (18,089) | | | (16,125) |
Property and equipment, net | | $ | 10,757 | | $ | 11,835 |
of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | Useful Life (in years) | | 2022 | | 2021 |
| Office equipment and software | 3-5 | | $ | 14,451 | | | $ | 14,327 | |
| Leasehold improvements | 10 | | 9,927 | | | 10,296 | |
| Furniture and fixtures | 5 | | 4,260 | | | 4,223 | |
| Capitalized software | 3 | | 4,007 | | | — | |
| Total | | | 32,645 | | | 28,846 | |
| Accumulated depreciation | | | (19,964) | | | (18,089) | |
| Property and equipment, net | | | $ | 12,681 | | | $ | 10,757 | |
Depreciation expense was
$2.9 million, $3.0 million,
$2.9 million, and
$2.1$2.9 million for the years ended December 31,
2022, 2021,
and 2020,
and 2019, respectively.
Note 9 – Fair Value Measurements
The fair values of cash equivalents,
receivables, net,"Receivables, net", and
accounts payable"Accounts payable" approximate their carrying amounts due to their short duration. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing base upon its own market assumptions.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies, as defined in ASC 820, Fair Value Measurements. The fair value hierarchy consists of the following three levels:
•Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
•Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived primarily from or corroborated by observable market data.
•Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The following tables summarize the Company’s financial assets by level in the fair value hierarchy, which are measured at fair value on a recurring basis, as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at Reporting Date Using |
| (In thousands) | December 31, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| Corporate Notes / Bonds | $ | 2,328 | | | — | | | $ | 2,328 | | | — | |
| Commercial Paper | $ | 6,743 | | | — | | | $ | 6,743 | | | — | |
| Money Market Funds | $ | 28,388 | | | — | | | $ | 28,388 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at Reporting Date Using |
| (In thousands) | December 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| U.S. Treasury Notes | $ | 4,038 | | | — | | | $ | 4,038 | | | — | |
| Corporate Notes / Bonds | $ | 9,585 | | | — | | | $ | 9,585 | | | — | |
| Commercial Paper | $ | 8,996 | | | — | | | $ | 8,996 | | | — | |
| U.S. Treasury Bills | $ | 9,990 | | | — | | | $ | 9,990 | | | — | |
| U.S. Government Agencies | $ | 2,499 | | | — | | | $ | 2,499 | | | — | |
The Company classifies its investments in debt securities as available-for-sale.
We reviewThe Company reviews available-for-sale debt securities for impairments related to losses and other factors each quarter. The unrealized gains and losses on the available-for-sale debt securities were not material as of December 31,
20212022 and
December 31, 2020.2021.
The estimated fair valueCompany did not have any transfers of our financial instruments has been determined by using available market informationassets between Level 1 and appropriate valuation methodologies, as defined in ASC 820, Fair Value Measurements. TheLevel 2 or Level 3 of the fair value hierarchy consists ofduring the following three levels: | ● | Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 – Inputs are quoted prices for similar assets oryear ended December 31, 2022. Also, the Company did not have any financial liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived primarily from or corroborated by observable market data. |
| ● | Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
The following tables summarize assets that are measured at fair value on a recurring basis as of December 31, 20212022 and 2021.
The Company’s non-financial assets and liabilities, which include goodwill and long-lived assets held and used, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, the Company would evaluate the non-financial assets and liabilities for impairment. If an impairment was to occur, the asset or liability would be recorded at its estimated fair value. During the year ended December 31, 2020:2022, the Company recorded an impairment of its Dealflo customer relationships intangible asset in the amount of $3.8 million, which was the entire remaining value of the asset. See Note 7,
Intangible Assets, | | | | | | | | | |
| | | | | Fair Value Measurement at Reporting Date Using |
in thousands | | | December 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | |
U.S. Treasury Notes | | $ | 4,038 | | - | $ | 4,038 | | - |
Corporate Notes / Bonds | | $ | 9,585 | | - | $ | 9,585 | | - |
Commercial Paper | | $ | 8,996 | | - | $ | 8,996 | | - |
U.S. Treasury Bills | | $ | 9,990 | | - | $ | 9,990 | | - |
U.S. Government Agencies | | $ | 2,499 | | - | $ | 2,499 | | - |
for additional information. No impairment was recorded during the year ended December 31, 2021.
| | | | | | | | | |
| | | | | Fair Value Measurement at Reporting Date Using |
in thousands | | | December 31, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | |
U.S. Treasury Notes | | $ | 4,951 | | - | $ | 4,951 | | - |
Corporate Notes / Bonds | | $ | 8,780 | | - | $ | 8,780 | | - |
Commercial Paper | | $ | 4,098 | | - | $ | 4,098 | | - |
U.S. Treasury Bills | | $ | 5,292 | | - | $ | 5,292 | | - |
U.S. Government Agencies | | $ | 3,738 | | - | $ | 3,738 | | - |
Note 10 – Allowance for Credit Losses
The change in the allowance for credit losses during the years ended December 31,
20202021 and
20212022 were as follows:
| | | |
in thousands | | | |
Balance at December 31, 2019 | | $ | 2,524 |
Impact of ASU 2016-13 adoption | | | 288 |
Balance at January 1, 2020 | | | 2,812 |
Provision | | | 2,306 |
Write-offs | | | (994) |
Net foreign currency translation | | | 11 |
Balance at December 31, 2020 | | $ | 4,135 |
Provision | | | (16) |
Write-offs | | | (2,689) |
Net foreign currency translation | | | (11) |
Balance at December 31, 2021 | | $ | 1,419 |
| | | | | |
| (In thousands) | |
| Balance at December 31, 2020 | 4,135 | |
| Provision | (16) | |
| Write-offs | (2,689) | |
| Net foreign currency translation | (11) | |
| Balance at December 31, 2021 | $ | 1,419 | |
| Provision | 517 | |
| Write-offs | (334) | |
| Net foreign currency translation | (2) | |
| Balance at December 31, 2022 | $ | 1,600 | |
During the
yearyears ended December 31,
2022 and 2021,
wethe Company wrote off
$0.3 million and $2.7 million,
respectively, of accounts receivable that were fully reserved for and no longer deemed collectible.
The Company leases certain real estate and automobiles. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the consolidated balance
sheet; thesheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company determines if an arrangement is a lease at inception. All of
ourthe Company's leases are operating leases.
Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s leases do not provide an implicit rate of return, the Company uses its imputed collateralized rate based on the information available at the commencement date in determining the present value of lease payments. Operating lease ROU assets are comprised of the lease liability plus prepaid rents and are reduced by lease incentives or deferred rents. The Company has lease agreements with non-lease components which are not bifurcated.
Some of ourthe Company's leases include 1one or more options to renew, with renewal terms that can extend the lease from one to five years. The exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options to purchase the leased property at fair value. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. Certain of the Company’s lease agreements include payments adjusted periodically for inflation based on the consumer price index. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating lease cost details for the years ended December 31,
2022, 2021,
December 31,and 2020
and December 31, 2019 are as follows:
| | | | | | | | | |
| | | | | |
| | Years ended December 31, |
| | 2021 | | 2020 | | 2019 |
|
| | (in thousands) |
Building rent | | $ | 2,564 | | $ | 2,978 | | $ | 3,397 |
Automobile rentals | | | 1,505 | | | 1,576 | | | 1,531 |
Total net operating lease costs | | $ | 4,069 | | $ | 4,554 | | $ | 4,928 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) | | | | | |
| Building rent | $ | 2,117 | | | $ | 2,564 | | | $ | 2,978 | |
| Automobile rentals | 1,180 | | | 1,505 | | | 1,576 | |
| Total net operating lease costs | $ | 3,297 | | | $ | 4,069 | | | $ | 4,554 | |
Short-term lease costs and variable lease costs recognized during the years ended December 31, 2022, 2021, December 31,and 2020 and December 31, 2019 are immaterial.
Supplemental consolidated balance sheet information related to
our operating leases
as of December 31, 2022 and 2021, is as follows:
| | | | | | |
| | December 31, 2021 | | | December 31, 2020 |
in thousands | | | | | | |
Leases | | | | | | |
Assets | | | 9,197 | | | 11,356 |
Operating lease right-of-use assets | | $ | 9,197 | | $ | 11,356 |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Operating lease liabilities | | $ | 2,476 | | $ | 2,855 |
| | | | | | |
Noncurrent | | | | | | |
Operating lease liabilities | | | 10,180 | | | 12,399 |
Total lease liabilities | | $ | 12,656 | | $ | 15,254 |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) | | | |
| Leases | | | |
| Assets | $ | 8,022 | | | $ | 9,197 | |
| Operating lease right-of-use assets | $ | 8,022 | | | $ | 9,197 | |
| | | |
| Liabilities | | | |
| Current | | | |
| Operating lease liabilities | $ | 2,258 | | | $ | 2,476 | |
| | | |
| Noncurrent | | | |
| Operating lease liabilities | 8,442 | | | 10,180 | |
| Total lease liabilities | $ | 10,700 | | | $ | 12,656 | |
The weighted average remaining lease term for
our operating leases is
6.45.7 years. The weighted-average discount rate for
our operating leases is 5%.
Supplemental consolidated cash flow information related to leases is as follows:
| | | | | | | | | | |
| | Years ended December 31, |
| | 2021 | | 2020 | | | 2019 |
|
| | | (in $ thousands) |
Supplemental cash flow and other information related to leases: | | | | | | | | | | |
| | | | | | | | | | |
Operating cash payments from operating leases | | $ | 3,630 | | $ | 3,835 | | | $ | 3,731 |
| | | | | | | | | | |
ROU assets obtained in exchange for new operating lease liabilities | | $ | 589 | | $ | 3,549 | | | $ | 4,924 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) | |
| Supplemental cash flow and other information related to leases: | | | | | |
| | | | | |
| Operating cash payments from operating leases | $ | 3,346 | | | $ | 3,630 | | | $ | 3,835 | |
| | | | | |
| ROU assets obtained in exchange for new operating lease liabilities | $ | 1,172 | | | $ | 589 | | | $ | 3,549 | |
Maturities of
ourthe Company's operating leases
as of December 31, 2022 are as follows:
| | | | | | |
| | As of December 31, 2021 | | |
| | | (in $ thousands) | | | |
2022 | | $ | 3,040 | | | |
2023 | | | 2,599 | | | |
2024 | | | 1,823 | | | |
2025 | | | 1,693 | | | |
2026 | | | 1,629 | | | |
Later years | | | 4,352 | | | |
Less imputed interest | | | (2,480) | | | |
Total lease liabilities | | $ | 12,656 | | | |
F-24
| | | | | |
| |
| (In thousands) | |
| 2023 | $ | 2,743 | |
| 2024 | 2,082 | |
| 2025 | 1,778 | |
| 2026 | 1,698 | |
| 2027 | 1,530 | |
| Later years | 2,713 | |
| Less imputed interest | (1,844) | |
| Total lease liabilities | $ | 10,700 | |
The quarterly results of operations are summarized in the following select income statement line items:
| | | | | | | | | | | | |
| | First | | Second | | Third | | Fourth |
| | Quarter | | Quarter | | Quarter | | Quarter |
2021 | | | | | | | | | | | | |
Total revenues | | $ | 50,775 | | $ | 52,277 | | $ | 52,276 | | $ | 59,153 |
Product and license cost of goods sold (1.) | | | 10,752 | | | 10,565 | | | 9,502 | | | 15,377 |
Gross profit | | | 34,242 | | | 34,831 | | | 36,395 | | | 37,467 |
Sales and marketing expense (1.) | | | 17,168 | | | 15,021 | | | 14,449 | | | 16,092 |
Operating costs | | | 43,536 | | | 43,690 | | | 38,411 | | | 43,426 |
Operating income (loss) | | | (9,294) | | | (8,859) | | | (2,016) | | | (5,959) |
Provision (benefit) for income taxes | | | (501) | | | (1,143) | | | (762) | | | 6,847 |
Net income (loss) | | | (9,151) | | | (6,685) | | | (975) | | | (13,773) |
Net income/(loss) per share: | | | | | | | | | | | | |
Basic | | $ | (0.23) | | $ | (0.17) | | $ | (0.02) | | $ | (0.35) |
Diluted | | $ | (0.23) | | $ | (0.17) | | $ | (0.02) | | $ | (0.35) |
| | | | | | | | | | | | |
2020 | | | | | | | | | | | | |
Total revenues | | $ | 56,370 | | $ | 54,954 | | $ | 51,439 | | $ | 52,928 |
Product and license cost of goods sold (1.) | | | 11,764 | | | 13,689 | | | 11,071 | | | 9,489 |
Gross profit | | | 39,274 | | | 35,616 | | | 34,954 | | | 38,215 |
Sales and marketing expense (1.) | | | 13,833 | | | 13,581 | | | 13,569 | | | 15,680 |
Operating costs | | | 38,449 | | | 37,303 | | | 37,309 | | | 40,256 |
Operating income (loss) | | | 825 | | | (1,687) | | | (2,355) | | | (2,041) |
Provision (benefit) for income taxes | | | 690 | | | 973 | | | 95 | | | 277 |
Net income (loss) | | | 4 | | | (2,025) | | | (1,678) | | | (1,756) |
Net income/(loss) per share: | | | | | | | | | | | | |
Basic | | $ | (0.00) | | $ | (0.05) | | $ | (0.04) | | $ | (0.04) |
Diluted | | $ | (0.00) | | $ | (0.05) | | $ | (0.04) | | $ | (0.04) |
(1.) We have revised certain period previously issued financial statements to reflect immaterial reclassification adjustments of expenses directly attributable to the production and distribution of hardware products. Certain sales and marketing expenses were reclassified to product and license cost of goods sold. For the first, second, and third quarters of 2021, product and license cost of goods sold increased by $1.2 million, $1.0 million, and $1.0 million, respectively. For the first, second, and third quarters of 2021, gross profit, sales and marketing expense, and total operating costs decreased by $1.2 million, $1.0 million, and $1.0 million, respectively.
For the first, second, third and fourth quarters of 2020, product and license cost of goods sold increased by $1.0 million, $1.1 million, $1.0 million and $1.0 million, respectively. For the first, second, third and fourth quarters of 2020, gross profit, sales and marketing expense, and total operating costs decreased by $1.0 million, $1.1 million, $1.0 million and $1.0 million, respectively.
The adjustments had no impact on previously reported revenue or net income. See Note 3 – Revision of Previously Issued Financial Statements for additional detail.
F-25
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| 2022 | | | | | | | | |
| Total revenues | | $ | 52,447 | | | $ | 52,790 | | | $ | 57,147 | | | $ | 56,622 | |
| Gross profit | | 36,678 | | | 35,506 | | | 38,431 | | | 37,955 | |
| Operating costs | | 45,921 | | | 43,744 | | | 44,056 | | | 41,964 | |
| Operating income (loss) | | (9,243) | | | (8,238) | | | (5,625) | | | (4,009) | |
| Provision (benefit) for income taxes | | 1,173 | | | 472 | | | 600 | | | 496 | |
| Net income (loss) | | 5,214 | | | (9,350) | | | (7,201) | | | (3,097) | |
| Net income/(loss) per share: | | | | | | | | |
| Basic | | $ | 0.13 | | | $ | (0.23) | | | $ | (0.18) | | | $ | (0.08) | |
| Diluted | | $ | 0.13 | | | $ | (0.23) | | | $ | (0.18) | | | $ | (0.08) | |
| | | | | | | | |
| 2021 | | | | | | | | |
| Total revenues | | $ | 50,775 | | | $ | 52,277 | | | $ | 52,276 | | | $ | 59,153 | |
| Gross profit | | 34,242 | | | 34,831 | | | 36,395 | | | 37,467 | |
| Operating costs | | 43,536 | | | 43,690 | | | 38,411 | | | 43,426 | |
| Operating income (loss) | | (9,294) | | | (8,859) | | | (2,016) | | | (5,959) | |
| Provision (benefit) for income taxes | | (501) | | | (1,143) | | | (762) | | | 6,847 | |
| Net income (loss) | | (9,151) | | | (6,685) | | | (975) | | | (13,773) | |
| Net income/(loss) per share: | | | | | | | | |
| Basic | | $ | (0.23) | | | $ | (0.17) | | | $ | (0.02) | | | $ | (0.36) | |
| Diluted | | $ | (0.23) | | | $ | (0.17) | | | $ | (0.02) | | | $ | (0.36) | |
Income (loss) before income taxes was generated in the following jurisdictions:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) | | | | | |
| U.S. | $ | (9,569) | | | $ | (15,056) | | | $ | 1,046 | |
| Non-U.S. | (2,124) | | | (11,087) | | | (4,466) | |
| Total | $ | (11,693) | | | $ | (26,143) | | | $ | (3,420) | |
| | | | | | | | | |
| | For the year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | | | | |
U.S. | | $ | (15,056) | | $ | 1,046 | | $ | 3,223 |
Non-U.S. | | | (11,087) | | | (4,466) | | | 11,186 |
Total | | $ | (26,143) | | $ | (3,420) | | $ | 14,409 |
For the years ended December 31, 2022, 2021, 2020, and 2019,2020, domestic income excludes intercompany dividend income of $0 million, $38.0$0 million, and $6.3$38.0 million, respectively. The provision (benefit) for income taxes consists of the following:
| | | | | | | | | | |
| | For the year ended December 31, | |
| | 2021 | | 2020 | | 2019 | |
| | | | Years Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| (In thousands) | | (In thousands) | | | | | |
Current: | | | | | | | | | | Current: | |
Federal | | $ | (11) | | $ | 1,715 | | $ | 433 | Federal | $ | 122 | | | $ | (11) | | | $ | 1,715 | |
State | | | (23) | | | 49 | | | 107 | State | 32 | | | (23) | | | 49 | |
Foreign | | | 2,478 | | | 1,758 | | | 7,629 | Foreign | 1,665 | | | 2,478 | | | 1,758 | |
Total current | | | 2,444 | | | 3,522 | | | 8,169 | Total current | 1,819 | | | 2,444 | | | 3,522 | |
| | | | | | | | | | |
| Deferred: | | | | | | | | | | Deferred: | |
Federal | | | 3,774 | | | 1,385 | | | (970) | Federal | (349) | | | 3,774 | | | 1,385 | |
State | | | (3) | | | (24) | | | 24 | State | 35 | | | (3) | | | (24) | |
Foreign | | | (1,774) | | | (2,848) | | | (678) | Foreign | 1,236 | | | (1,774) | | | (2,848) | |
Total deferred | | | 1,997 | | | (1,487) | | | (1,624) | Total deferred | 922 | | | 1,997 | | | (1,487) | |
Total | | $ | 4,441 | | $ | 2,035 | | $ | 6,545 | Total | $ | 2,741 | | | $ | 4,441 | | | $ | 2,035 | |
For
2022, 2021,
and 2020,
and 2019, ourthe Company's U.S. federal statutory rate was 21%. The differences between the income tax provisions computed using the statutory federal income tax rate and the provisions for income taxes reported in the consolidated statements of operations are as follows:
| | | | | | | | | |
| | For the year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | | | | |
Expected tax at statutory rate | | $ | (5,490) | | $ | (718) | | $ | 3,026 |
Foreign taxes at other rates | | | 307 | | | (309) | | | (914) |
Valuation allowance changes | | | 15,019 | | | 2,617 | | | 2,042 |
Global intangible low-taxed income inclusion | | | — | | | 339 | | | (27) |
State income taxes, net of federal benefit | | | (811) | | | 32 | | | 108 |
Uncertain tax positions | | | 12 | | | 235 | | | 1,845 |
Research credits | | | (3,466) | | | (1,029) | | | — |
Disallowed expenses and other | | | (1,130) | | | 868 | | | 465 |
Total | | $ | 4,441 | | $ | 2,035 | | $ | 6,545 |
F-26
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) | | | | | |
| Expected tax at statutory rate | $ | (2,456) | | | $ | (5,490) | | | $ | (718) | |
| Foreign taxes at other rates | 3,373 | | | 307 | | | (309) | |
| Valuation allowance changes | 4,370 | | | 15,019 | | | 2,617 | |
| Global intangible low-taxed income inclusion | — | | | — | | | 339 | |
| State income taxes, net of federal benefit | (322) | | | (811) | | | 32 | |
| Uncertain tax positions | (515) | | | 12 | | | 235 | |
| Research credits | (2,568) | | | (3,466) | | | (1,029) | |
| Disallowed expenses and other | 859 | | | (1,130) | | | 868 | |
| Total | $ | 2,741 | | | $ | 4,441 | | | $ | 2,035 | |
Significant components of ourthe Company's deferred tax assets and liabilities as of December 31, 2022 and 2021, are as follows:
| | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
Deferred tax assets: | | | | | | |
Stock and long-term compensation plans | | $ | 1,337 | | $ | 2,450 |
Foreign NOL & other carryforwards | | | 38,153 | | | 29,267 |
US and state NOL carryforwards | | | 5,539 | | | 718 |
Deferred revenue | | | 2,068 | | | 671 |
Pension liability | | | 1,547 | | | 2,074 |
Amortization and depreciation | | | 257 | | | 167 |
Lease liability | | | 3,171 | | | 3,837 |
Accrued expenses and other | | | 1,157 | | | 1,264 |
Total gross deferred tax assets | | | 53,229 | | | 40,448 |
Less: Valuation allowance | | | (34,979) | | | (19,992) |
Net deferred income tax assets | | $ | 18,250 | | $ | 20,456 |
| | | | | | |
Deferred tax liabilities: | | | | | | |
Accruals | | $ | 231 | | $ | 286 |
Tax on unremitted foreign earnings | | | 1,357 | | | 1,809 |
Right of use asset | | | 2,872 | | | 3,251 |
Intangible assets | | | 5,225 | | | 6,135 |
Tax on credits | | | 3,439 | | | 2,241 |
Contract acquisition costs | | | 2,626 | | | 1,616 |
Deferred tax liabilities | | $ | 15,750 | | $ | 15,338 |
| | | | | | |
Net deferred tax assets (liabilities) | | $ | 2,500 | | $ | 5,118 |
| | | | | | |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) | | | |
| Deferred tax assets: | | | |
| Stock and long-term compensation plans | $ | 923 | | | $ | 1,337 | |
| Foreign NOL & other carryforwards | 41,154 | | | 38,153 | |
| US and state NOL carryforwards | 5,654 | | | 5,539 | |
| Deferred revenue | 863 | | | 2,068 | |
| Pension liability | 498 | | | 1,547 | |
| Amortization and depreciation | 526 | | | 257 | |
| Lease liability | 2,641 | | | 3,171 | |
| Capitalized research and development | 487 | | | — | |
| Accrued expenses and other | 1,427 | | | 1,157 | |
| Total gross deferred tax assets | 54,173 | | | 53,229 | |
| Less: Valuation allowance | (39,177) | | | (34,979) | |
| Net deferred income tax assets | $ | 14,996 | | | $ | 18,250 | |
| | | |
| Deferred tax liabilities: | | | |
| Accruals | $ | 319 | | | $ | 231 | |
| Tax on unremitted foreign earnings | 1,249 | | | 1,357 | |
| Right of use asset | 2,531 | | | 2,872 | |
| Intangible assets | 3,009 | | | 5,225 | |
| Tax on credits | 3,736 | | | 3,439 | |
| Contract acquisition costs | 3,448 | | | 2,626 | |
| Deferred tax liabilities | $ | 14,292 | | | $ | 15,750 | |
| | | |
| Net deferred tax assets | $ | 704 | | | $ | 2,500 | |
Deferred tax assets and liabilities are netted by tax jurisdiction.
At December 31, 2021, we2022, the Company had foreign and state net operating loss (NOL) carryforwards and other foreign deductible carryforwards as shown in the following table:
| | | | | |
| | Carryforward | | Expiration |
NOL Carryforward | | | | | |
Canada | | $ | 40,759 | | 2027-2039 |
United States | | | 19,113 | | None |
United Kingdom | | | 9,730 | | None |
Switzerland | | | 10,688 | | 2028 |
Other foreign | | | 6,501 | | None |
Canada province | | | 40,730 | | 2027-2039 |
U.S. states | | | 21,091 | | 2021-2041 |
| | | 148,612 | | |
Other Carryforwards | | | | | |
United States credit | | | 390 | | 2031 |
Canada | | | 36,141 | | None |
Canada province | | | 50,272 | | None |
Capital loss | | | 407 | | None |
Canada credits | | | 7,227 | | 2023-2041 |
Canada province credits | | | 3,052 | | 2036-2041 |
| | | 97,489 | | |
| | | | | |
| | $ | 246,101 | | |
| | | | | | | | | | | |
| Carryforward | | Expiration |
| (In thousands) | | | |
| NOL Carryforward | | | |
| Canada | $ | 24,804 | | | 2034-2039 |
| United States | 17,989 | | | None |
| United Kingdom | 9,569 | | | None |
| Switzerland | 14,319 | | | 2028-2029 |
| Other foreign | 5,886 | | | None |
| Canada province | 25,502 | | | 2034-2039 |
| U.S. states | 27,680 | | | 2023-2042 |
| $ | 125,749 | | | |
| Other Carryforwards | | | |
| United States credit | $ | 828 | | | 2032 |
| Canada | 47,526 | | | None |
| Canada province | 61,657 | | | None |
| Capital loss | 383 | | | None |
| Canada credits | 9,809 | | | 2025-2042 |
| Canada province credits | 3,980 | | | 2036-2042 |
| $ | 124,183 | | | |
| | | |
| $ | 249,932 | | | |
The valuation allowance against the net deferred tax assets as of December 31,
2022 and 2021
was $39.2 million and
2020 was $35.0 million,
and $20.0 million, respectively.
The Company recorded changes in valuation allowance of
$4.4 million and $15.0 million,
and $2.7 million, as ofduring the years ended December 31, 20212022 and 2020,2021, respectively, against deferred tax assets that, based on Management’sthe Company's assessment are considered not to be more likely than not to be realized. The increase in the valuation allowance in 20212022 reflects Net Operating Losses (“NOLs”), other deduction carryforwards, and credits for which the realization is not more likely than not. The change in valuation allowance also reflects other factors including, but not limited to, changes in Management’sthe Company's assessment of the ability to use existing deferred tax assets, including NOLs and other deduction carryforwards.Management
The Company assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of negative evidence such as 3-year cumulative losses are considered.
ManagementThe Company also reviewed reversal patterns of temporary differences to determine if the Company would have sufficient taxable income due to the reversal of temporary differences to support the realization of deferred tax assets. In
2022 and 2021,
Managementthe Company made the decision to establish a valuation allowance against certain deferred tax assets in jurisdictions that were not previously valued as the deferred tax assets were no longer more likely than not to be realized.
ManagementThe Company continues to maintain a valuation allowance against certain deferred tax assets in other jurisdictions where assets had been previously valued. For all other remaining deferred tax assets,
Managementthe Company believes it is still more likely than not that the results of future operations
or tax planning strategies will generate sufficient taxable income to realize the deferred tax assets.
Our
The Company's policy is to record interest and penalties on income taxes as income tax expense. We providedexpense, It recorded expense of less than $0.1 million in 2022 and 2021, less thanand $0.1 million in 2020 and $0.2 million during 2019.2020.
ASC 740, Income Taxes sets a “more likely than not”“more-likely-than-not” criterion for recognizing the tax benefit of uncertain tax positions. As of December 31, 2022, 2021, and 2020, and 2019, wethe Company had reserves of $0.5$0 million, $0.5 million, and $2.9$0.5 million, respectively.
| | | | | | | | | |
| | As of year ended December 31, |
| | 2021 | | 2020 | | 2019 |
Reserve at beginning of year | | $ | 500 | | $ | 2,923 | | $ | 427 |
Increases related to prior year tax positions | | | 12 | | | 277 | | | 2,500 |
Decreases related to prior year tax positions | | | — | | | (37) | | | — |
Lapse of statute of limitations | | | — | | | — | | | (4) |
Settlement | | | — | | | (2,663) | | | — |
Total | | $ | 512 | | $ | 500 | | $ | 2,923 |
We file
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) | | | | | |
| Reserve at beginning of year | $ | 512 | | | $ | 500 | | | $ | 2,923 | |
| Increases related to prior year tax positions | — | | | 12 | | | 277 | |
| Decreases related to prior year tax positions | (512) | | | — | | | (37) | |
| | | | | |
| Settlement | — | | | — | | | (2,663) | |
| Total | $ | — | | | $ | 512 | | | $ | 500 | |
The Company files income tax returns in the U.S. federal jurisdiction and in many state and foreign
jurisdictions. We arejurisdictions, and is subject to examination of
ourits income tax returns by the IRS and other tax authorities.
We believe The Company reduced an uncertain tax position in the U.S. upon filing of an accounting method change and receiving audit protection.
The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in
ourthe Company's tax audits are resolved in a manner not consistent with
management'sthe Company's expectations,
wethere could be
requireda requirement to adjust
ourthe provision for income taxes in the period such resolution occurs. Included in the balance of unrecognized tax benefits as of December 31,
20212022 is
$0.5 million,$0, of tax benefits that, if recognized, would affect the effective tax rate.
We estimate that our unrecognized tax benefits as of December 31, 2021 could decrease by as much as $0.5 million in the next 12 months.
Our
The Company's primary tax jurisdictions and the earliest tax year subject to audit are presented in the following table.
|
|
| | | |
Australia | | 2013
2014 |
Austria | | 2015
2016 |
Belgium | | 2017
2018 |
Canada | | 2017
2018 |
Netherlands | | 2016
2017 |
Singapore | | 2016
2017 |
Switzerland | | 2019
2020 |
United Kingdom | 2020
| 2019
|
United States | | 2017 |
Note 14 – Stock Compensation Plans
The Company has a share-based compensation plan, the OneSpan Inc. 2019 Omnibus Incentive Plan (“Plan”),
which was approved by its Shareholders in June 2019 under which the Board of Directors may grant share-based awards including restricted stock units (RSUs) and performance restricted stock units (PSUs).
The Plan may provide performance incentives to employees and non-employee directors, consultants and other key persons of the Company. The plan is administered by the Compensation Committee as appointed by the Board of Directors and is intended to be a non-qualified plan.
As of December 31,
2021,2022, the remaining number of shares allowed to be issued under the Plan was
3.41.9 million shares of the
company’sCompany’s common stock, representing
9%4% of the issued and outstanding shares of the
companyCompany as of such date.
The following table details long-term compensation plan and stock-based compensation expense for the years ended December 31, 2022, 2021, 2020, and 2019.2020.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) | | | | | |
| Stock-based compensation | $ | 8,642 | | | $ | 4,354 | | | $ | 4,740 | |
| Other long-term incentive plan compensation | 171 | | | 848 | | | 1,262 | |
| Total compensation | $ | 8,813 | | | $ | 5,202 | | | $ | 6,002 | |
| | | | | | | | | |
| | For the year ended December 31, |
| | 2021 | | 2020 | | 2019 |
in thousands | | | | | | | | | |
Stock-based compensation | | $ | 4,354 | | $ | 4,740 | | $ | 3,368 |
Other long-term incentive plan compensation | | | 848 | | | 1,262 | | | 1,955 |
Total compensation | | $ | 5,202 | | $ | 6,002 | | $ | 5,323 |
Time-Based Restricted Stock Awards (sharecounts in thousands)
Time-based
Non-forfeited time-based restricted stock awards granted to certain executive officers
and other employees under the
OneSpanVASCO Data Security International, Inc. 2009 Equity Plan
vest in equal semi-annual installments over four years. Awards granted to certain other employees vest ratably over a four-year period withbecame fully vested during the
first one-fourth of the grant vesting one year
after the date of the grant. Shares areended December 31, 2022. Certain shares became subject to forfeiture
ifwhen the service
period requirement
iswas not met. Compensation expense was
less than $0.1 million, $0.3 million,
and $0.7 million
for 2022, 2021, and
$0.5 million for 2021, 2020,
and 2019, respectively. Tax benefit related to the compensation expense was less than $0.1 million,
$0.2$0.1 million, and $0.2 million for
2022, 2021,
2020, and
2019,2020, respectively. The following table summarizes the time-based restricted stock activity for the year ended December 31,
2021.
| | | | | | | |
| | | | Weighted- | | | Weighted- |
| | | | average | | | average |
| | | | remaining | | | grant date |
(in thousands) | | Shares | | term (years) | | | fair value |
Outstanding at January 1, 2021 | | 56 | | 0.89 | | $ | 14.60 |
Shares vested | | (40) | | | | | 14.91 |
Shares forfeited | | (9) | | | | | 14.91 |
Outstanding at December 31, 2021 | | 7 | | 0.42 | | $ | 16.23 |
The2022.
| | | | | | | | | | | | | | | | | |
| (In thousands) | Shares | | Weighted-
average
remaining
term (years) | | Weighted-
average
grant date
fair value |
| Outstanding at January 1, 2022 | 7 | | 0.42 | | $ | 16.23 | |
| Shares vested | (3) | | | | 16.17 | |
| Shares forfeited | (4) | | | | 17.75 | |
| Outstanding at December 31, 2022 | — | | | — | | | $ | — | |
There was no unamortized future compensation expense for time-based restricted stock awards
was less than $0.1 million at December 31,
2021.2022.
Time-Based Restricted Stock Units (sharecounts in thousands)
Beginning in 2019, under
Under the OneSpan Inc. 2019 Omnibus Incentive Plan, the companyCompany 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 certain executive officers vest in equal semi-annual installments over one to four years. Awards granted to certain other employees vest over two-year to four-year period. Shares are subject to forfeiture if the service period is not met. Compensation expense was $6.9 million, $3.7 million, and $2.5 million for 2022, 2021, and $1.0 million for 2021, 2020, and 2019, respectively, and the related tax benefit was $0.2 million, $0.1 million, $0.5 million, and $0.3$0.5 million, respectively. The following table summarizes the time-based restricted stock activity for the year ended December 31, 2021:2022:
| | | | | | | |
| | | | Weighted- | | | Weighted- |
| | | | average | | | average |
| | | | remaining | | | grant date |
(in thousands) | | Shares | | term (years) | | | fair value |
Unearned, January 1, 2021 | | 379 | | 2.55 | | $ | 16.87 |
Shares vested | | (196) | | | | | 18.50 |
Shares awarded | | 573 | | | | | 21.21 |
Shares forfeited | | (197) | | | | | 20.51 |
Unearned, December 31, 2021 | | 559 | | 3.08 | | $ | 19.30 |
| | | | | | | |
| | | | | | | | | | | | | | | | | |
| (In thousands) | Shares | | Weighted-
average
remaining
term (years) | | Weighted-
average
grant date
fair value |
| Unearned, January 1, 2022 | 559 | | 3.08 | | $ | 19.30 | |
| Shares vested | (308) | | | | 17.19 | |
| Shares awarded | 2,064 | | | | 11.97 | |
| Shares forfeited | (245) | | | | 15.06 | |
| Unearned, December 31, 2022 | 2,070 | | 2.95 | | $ | 12.82 | |
The unamortized future compensation expense for time-based restricted stock awards was $9.0$19.4 million at December 31, 2021.
2022.
Performance-Based Restricted Stock Units settled in stock(sharecounts in thousands) Performance-based restricted stock units granted to executive officers and certain other employees were subject to achievement of one to three year performance criteria established by the Board of DirectorsDirectors. Under certain grants, earned shares related to one to three-year targets cliff vest upon fulfillment of the performance criteria and completion of the three-yearrequisite service period and per recommendation of the Compensation Committee of the OneSpan Inc. Board of Directors (“Compensation Committee”). Shares are subject to forfeiture if the performance criteria and service period are not met.
The restricted stock units subject to achievement of future performance criteria awarded during the year ended December 31,
20212022 will be earned if the performance criteria and service period are met at the end of the
three-yearone to three year performance period.
NaN of the restricted stock units subject to the achievement of future performance criteria awarded during the year ended December 31, 2020 were earned, and the related expense was reversed during the year ended December 31, 2020. Certain restricted stock units subject to the achievement of future performance criteria awarded during the year ended December 31, 2019 are not expected to be earned. The compensation cost recorded for 81 unvested shares issued during the year ended December 31, 2019 subject to performance criteria no longer considered probable of achievement was reversed during the year ended December 31, 2020. Approximately 9 additional restricted stock units issued during the year ended December 31, 2019, subject to the achievement of performance criteria, are no longer considered probable of achievement and the related compensation expense will be reversed upon recommendation of the Compensation Committee.Compensation expense in
2022, 2021,
and 2020
and 2019 was
$1.6 million, $0.3 million,
$1.1 million, and
$1.8$1.1 million. Tax benefit related to the compensation expense was less than $0.1 million,
$0.2$0.1 million, and $0.2 million for
2022, 2021,
and 2020,
and 2019, respectively.
The following table summarizes activity related to unvested performance restricted stock shares during
2021:
| | | | | | | |
| | | | Weighted- | | | Weighted- |
| | Total | | average | | | average |
| | Unvested | | remaining | | | grant date |
(in thousands) | | Shares | | term (years) | | | fair value |
Unearned, January 1, 2021 | | 459 | | 0.83 | | $ | 15.29 |
Shares vested | | (93) | | | | | 15.16 |
Shares awarded | | 144 | | | | | 24.92 |
Shares forfeited | | (389) | | | | | 17.09 |
Unearned, December 31, 2021 | | 121 | | 3.29 | | $ | 17.30 |
2022:
| | | | | | | | | | | | | | | | | |
| (In thousands) | Total
Unvested
Shares | | Weighted-
average
remaining
term (years) | | Weighted-
average
grant date
fair value |
| Unearned, January 1, 2022 | 121 | | 3.29 | | $ | 17.30 | |
| Shares vested | (50) | | | | 19.88 | |
| Shares awarded | 370 | | | | 11.37 | |
| Shares forfeited | (52) | | | | 13.31 | |
| Unearned, December 31, 2022 | 389 | | 2.76 | | $ | 12.60 | |
Unamortized future compensation expense for performance-based restricted stock was
$0.6$3.1 million at December 31,
2021.2022.
Market-Based Restricted Stock Units settled in stock
(sharecounts(sharecounts in thousands)
Market-based restricted stock units granted to executive officers and certain other employees were subject to achievement of three year market-based performance criteria established by the Board of DirectorsDirectors. Under certain grants, earned shares related to three-year targets cliff vest upon fulfillment of the market-based performance criteria and completion of the three-year period. Shares are subject to forfeiture if the performance criteria and service period are not met. Compensation expense for the years ended December 31, 2022 and 2021 was $0.5 million and December 31, 2020 was less than $0.1 million and $0.4 million, respectively, and the related tax benefit was less than $0.1 million and $0 million, and $0.1 million, respectively.
The following table summarizes activity related to unvested market and service restricted stock units settled in stock:
| | | | | | | |
| | | | Weighted- | | | Weighted- |
| | | | average | | | average |
| | | | remaining | | | grant date |
(in thousands) | | Shares | | term (years) | | | fair value |
Unearned, January 1, 2021 | | 52 | | 2.00 | | $ | 28.44 |
Shares awarded | | 291 | | | | | 20.09 |
Shares forfeited | | (60) | | | | | 32.17 |
Unearned, December 31, 2021 | | 283 | | 3.43 | | $ | 19.06 |
| | | | | | | | | | | | | | | | | |
| (In thousands) | Shares | | Weighted-
average
remaining
term (years) | | Weighted-
average
grant date
fair value |
| Unearned, January 1, 2022 | 283 | | 3.43 | | $ | 19.06 | |
| Shares awarded | — | | | | | — | |
| Shares forfeited | — | | | | | — | |
| Unearned, December 31, 2022 | 283 | | 3.43 | | $ | 19.06 | |
Unamortized future compensation expense for market-based restricted stock was
$4.4$2.2 million at December 31,
2021.2022.
Note 15 – Earnings per Common Share (sharecounts in thousands)
Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of common stock equivalents to the extent they are not anti-dilutive. Because the Company is in a net loss position for the years ended December 31,
2022, 2021 and
December 31, 2020, diluted net loss per share for these periods exclude the effects of all common stock equivalents, which are anti-dilutive.
For the year ended December 31, 2019, 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:
| | | | | | | | | |
| | For the year ended December 31, |
in thousands, except per share data | | 2021 | | 2020 | | 2019 |
Net loss | | $ | (30,584) | | $ | (5,455) | | $ | 7,864 |
Weighted average common shares outstanding: | | | | | | | | | |
Basic | | | 39,614 | | | 40,035 | | | 40,050 |
Incremental shares with dilutive effect: | | | | | | | | | |
Restricted stock awards | | | — | | | — | | | 86 |
Diluted | | | 39,614 | | | 40,035 | | | 40,136 |
| | | | | | | | | |
Net loss per share: | | | | | | | | | |
Basic | | $ | (0.77) | | $ | (0.14) | | $ | 0.20 |
Diluted | | $ | (0.77) | | $ | (0.14) | | $ | 0.20 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (In thousands, except per share data) | 2022 | | 2021 | | 2020 |
| Net loss | $ | (14,434) | | | $ | (30,584) | | | $ | (5,455) | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 40,143 | | | 39,614 | | | 40,035 | |
| Incremental shares with dilutive effect: | | | | | |
| Restricted stock awards | — | | | — | | | — | |
| Diluted | 40,143 | | | 39,614 | | | 40,035 | |
| | | | | |
| Net loss per share: | | | | | |
| Basic | $ | (0.36) | | | $ | (0.77) | | | $ | (0.14) | |
| Diluted | $ | (0.36) | | | $ | (0.77) | | | $ | (0.14) | |
Note 16 – Employee Benefit Plans
The Company maintains 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, 2022, 2021, and 2020, and 2019, wethe Company expensed contributions of $0.3 million, $0.3 million, and $0.3 million, respectively.
The Company is subject to national mandatory pension systems and other compulsory plans,or
makemakes contributions to social pension funds based on local regulations. When
ourthe Company's 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,the Company has, 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
The Company also
maintainmaintains 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
prescribedprescribes a minimum annual return of 1.8% on employer contributions and 1.8% 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.
Components of net periodic pension cost included in earnings:
| | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | | | | |
Service cost (gross) | | $ | 1,587 | | $ | 1,549 | | $ | 1,164 |
Interest cost | | | 53 | | | 106 | | | 234 |
Expected return on plan assets | | | (302) | | | (271) | | | (242) |
Amortization of unrecognized actuarial gain | | | (12) | | | (40) | | | (22) |
Net periodic pension cost | | $ | 1,326 | | $ | 1,344 | | $ | 1,134 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) | | | | | |
| Service cost (gross) | $ | 1,107 | | | $ | 1,587 | | | $ | 1,549 | |
| Interest cost | 138 | | | 53 | | | 106 | |
| Expected return on plan assets | (288) | | | (302) | | | (271) | |
| Amortization of unrecognized actuarial gain | (90) | | | (12) | | | (40) | |
| Net periodic pension cost | $ | 867 | | | $ | 1,326 | | | $ | 1,344 | |
The net unfunded status of the Non-U.S. pension plans
as of December 31, 2022 and 2021, is as follows:
| | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
Fair value of plan assets | | $ | 17,394 | | $ | 17,290 |
Projected benefit obligation | | | (24,855) | | | (27,431) |
Net unfunded benefit obligation | | $ | (7,461) | | $ | (10,141) |
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Fair value of plan assets | $ | 15,415 | | | $ | 17,394 | |
| Projected benefit obligation | (17,715) | | | (24,855) | |
| Net unfunded benefit obligation | $ | (2,300) | | | $ | (7,461) | |
Net unfunded benefit obligation is recorded as other long-term liabilities in ourthe consolidated Balance Sheets.balance sheets.
The change in the fair value of plan assets is as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (In thousands) | | | |
| Fair value of plan assets at January 1 | $ | 17,394 | | | $ | 17,290 | |
| Employee contributions | 437 | | | 499 | |
| Actual return on plan assets | (288) | | | 46 | |
| Benefits (paid), net of transfers | (2,361) | | | (492) | |
| Employer contributions | 911 | | | 1,049 | |
| Foreign exchange adjustment | (678) | | | (998) | |
| Fair value of plan assets at December 31 | $ | 15,415 | | | $ | 17,394 | |
| | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 |
| | | | | | |
Fair value of plan assets at January 1 | | $ | 17,290 | | $ | 14,159 |
Employee contributions | | | 499 | | | 512 |
Actual return on plan assets | | | 46 | | | 441 |
Benefits (paid), net of transfers | | | (492) | | | (251) |
Employer contributions | | | 1,049 | | | 1,088 |
Foreign exchange adjustment | | | (998) | | | 1,341 |
Fair value of plan assets at December 31 | | $ | 17,394 | | $ | 17,290 |
The change in benefit obligations is as follows:
| | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 |
| | | | | | |
Benefit obligations at January 1 | | $ | 27,431 | | $ | 21,759 |
Gross service cost | | | 1,587 | | | 1,549 |
Interest cost | | | 53 | | | 106 |
Employee contributions | | | 499 | | | 512 |
Actuarial (gains)/losses | | | (2,185) | | | 1,694 |
Plan amendment | | | (432) | | | — |
Benefits (paid), net of transfers | | | (492) | | | (251) |
Foreign exchange adjustment | | | (1,606) | | | 2,062 |
Benefit obligations at December 31 | | $ | 24,855 | | $ | 27,431 |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (In thousands) | | | |
| Benefit obligations at January 1 | $ | 24,855 | | | $ | 27,431 | |
| Gross service cost | 1,107 | | | 1,587 | |
| Interest cost | 138 | | | 53 | |
| Employee contributions | 437 | | | 499 | |
| Actuarial (gains)/losses | (4,676) | | | (2,185) | |
| Benefits (paid), net of transfers | (2,361) | | | (432) | |
| Curtailments & settlements | (799) | | | (492) | |
| Foreign exchange adjustment | (986) | | | (1,606) | |
| Benefit obligations at December 31 | $ | 17,715 | | | $ | 24,855 | |
The decrease in benefit obligations at December 31, 2022 compared to December 31, 2021 was primarily driven by benefits paid, actuarial gains and foreign exchange adjustments, driven by the weakened Euro and Swiss Franc currencies. The decrease in benefit obligations at December 31, 2021 compared to December 31, 2020 was primarily driven by
service costs, actuarial gains and foreign exchange adjustments, driven by the weakened Euro and Swiss Franc currencies. The increase in benefit obligations at December 31, 2020 compared to December 31, 2019 was primarily driven by an increase in actuarial
lossesgains and the impact of foreign exchange adjustments.
Our
The Company's investment policy meets ourthe responsibility under local social legislation and aligns plan assets with liabilities, while minimizing risk. For the years ended December 31, 20212022 and 2020,2021, plan assets are invested in guaranteed investment contracts. Fair value of guaranteed investment contracts is surrender value. Fair value for the year ended December 31, 20212022 was determined using Level 3 inputs as defined by ASC 820, Fair Value Measurements.Measurements. Changes in our plan assets are attributable to benefit payments and contributions as we havethe Company has not actively traded our assets during the years ended December 31, 20212022 and December 31, 2020.2021.
The accumulated benefit obligation for the plans were
$22.9$16.8 million and
$25.1$22.9 million as of December 31,
2022 and 2021,
and 2020, respectively.
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,
2022, 2021,
2020, and
20192020 were not material.
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 weighted-average assumptions between all plans were utilized in the pension calculations:
| | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
|
| | (%) |
Discount rates | | 0.20 | - | 0.90 | | 0.05 | - | 0.60 |
Inflation | | 0.90 | - | 1.90 | | 0.90 | - | 1.80 |
Expected return on plan assets | | 1.25 | - | 2.00 | | 1.25 | - | 2.00 |
Rate of salary increases | | 1.90 | - | 2.80 | | 1.90 | - | 2.80 |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (%) |
| Discount rates | 2.15 | - | 3.50 | | 0.20 | - | 0.90 |
| Inflation | 1.25 | - | 2.20 | | 0.90 | - | 1.90 |
| Expected return on plan assets | 2.00 | - | 2.50 | | 1.25 | - | 2.00 |
| Rate of salary increases | 2.25 | - | 3.20 | | 1.90 | - | 2.80 |
Projected future pension benefits as of December 31,
2021:
| | | |
2022 | | $ | 872 |
2023 | | | 719 |
2024 | | | 628 |
2025 | | | 769 |
2026 | | | 1,393 |
Beyond | | | 4,579 |
2022 (in thousands): | | | | | |
| 2023 | $ | 662 | |
| 2024 | $ | 426 | |
| 2025 | $ | 643 | |
| 2026 | $ | 1,204 | |
| 2027 | $ | 474 | |
| Beyond | $ | 5,628 | |
Note 17 – Geographic, Customer and Supplier Information
We classify our
The Company classifies sales by
our customers’ locations in
3three geographic regions: 1) EMEA, which includes Europe, the Middle East, and Africa; 2) the Americas, which includes sales in North, Central,
Latin and South America and Canada; and 3) Asia Pacific, which
also includes Australia and
India.We have recast the below EMEA gross profit amounts for the years ended December 31, 2020 and 2019 for immaterial errors, consistent with the impacts disclosed in Note 3 – Revision of Previously Issued Financial Statements. New Zealand.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Europe,
Middle East,
Africa (EMEA) | | Americas | | Asia Pacific | | Total |
| 2022 | | | | | | | | |
| Revenue | | $ | 100,298 | | | $ | 77,740 | | | $ | 40,968 | | | $ | 219,006 | |
| Gross profit | | 68,040 | | | 52,738 | | | 27,792 | | | 148,570 | |
| Long-lived assets | | 4,856 | | | 15,270 | | | 577 | | | 20,703 | |
| | | | | | | | |
| 2021 | | | | | | | | |
| Revenue | | $ | 104,878 | | | $ | 68,646 | | | $ | 40,957 | | | $ | 214,481 | |
| Gross profit | | 69,893 | | | 45,747 | | | 27,295 | | | 142,935 | |
| Long-lived assets | | 5,978 | | | 13,634 | | | 342 | | | 19,954 | |
| | | | | | | | |
| 2020 | | | | | | | | |
| Revenue | | $ | 117,086 | | | $ | 53,171 | | | $ | 45,434 | | | $ | 215,691 | |
| Gross profit | | 78,456 | | | 37,532 | | | 32,071 | | | 148,059 | |
| Long-lived assets | | 7,482 | | | 14,968 | | | 741 | | | 23,191 | |
For the years
ended December 31,2022, 2021, and 2020,
and 2019, EMEA gross profit decreased by $4.2 million and $3.7 million, respectively.
| | | | | | | | | | | | |
| | Europe, | | | | | | | | | |
| | Middle East, | | | | | | | | | |
| | Africa (EMEA) | | Americas | | Asia Pacific | | Total |
2021 | | | | | | | | | | | | |
Revenue | | $ | 104,878 | | $ | 68,646 | | $ | 40,957 | | $ | 214,481 |
Gross profit | | | 69,893 | | | 45,747 | | | 27,295 | | | 142,935 |
Long-lived assets | | | 5,978 | | | 13,634 | | | 342 | | | 19,954 |
| | | | | | | | | | | | |
2020 | | | | | | | | | | | | |
Revenue | | $ | 117,086 | | $ | 53,171 | | $ | 45,434 | | $ | 215,691 |
Gross profit | | | 78,456 | | | 37,532 | | | 32,071 | | | 148,059 |
Long-lived assets | | | 7,482 | | | 14,968 | | | 741 | | | 23,191 |
| | | | | | | | | | | | |
2019 | | | | | | | | | | | | |
Revenue | | $ | 145,942 | | $ | 61,577 | | $ | 45,965 | | $ | 253,484 |
Gross profit | | | 95,069 | | | 41,667 | | | 31,102 | | | 167,838 |
Long-lived assets | | | 8,085 | | | 13,240 | | | 709 | | | 22,034 |
For the years 2021, 2020, and 2019, our top 10 customers contributed 22%23%, 21%22% and 29%21%, respectively, of total worldwide revenue. The majority of ourthe Company's hardware products are assembled by four independent factories in China and one independent factory in Romania.
Note 18 – Commitments and Contingencies
The companyCompany leases office space and automobiles under operating lease agreements. See Note 11, – Leases, for future minimum rental payments required under non-cancelable leases.
At December 31, 2021, we have2022, the Company has purchase obligations of $45.6$24.6 million, including $15.4$5.3 million of inventory purchase obligations which are expected to be consummated in the next 12 months, $26.9$17.4 million of committed hosting arrangements which will be used in the next one to threetwo years, and $3.3$2.0 million for other software agreements related to the administration of ourthe Company's business which range from one to three years.We are a party to or have intellectual property
The Company is subject to litigationcertain legal proceedings and claims incidental to the operations of its business. The Company is also subject to certain other legal proceedings and claims that arisehave arisen 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 remotebusiness and that the outcome of each ofhave not been fully adjudicated. The Company currently does not anticipate that these matters, includingif resolved against the legal proceedings described below,Company, will have a material adverse effectimpact on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on ourits financial results in any particular interim reporting period. Amongor financial condition.
The Company accrues loss contingencies when losses become probable and are reasonably estimable. If 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.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 oris a range of loss or makeand no amount within the range is a statement that such an estimate cannot be made. We follow a process in which we seek tobetter 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 customer agreements. These indemnifications may include, but are not limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type andminimum 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 clausesrange is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have 0 liabilities recorded for these clauses as a liability. As of December 31, 2021.
A complaint was filed on August 20, 2020 against OneSpan2022, the Company has recorded an accrual of $1.5 million for loss contingencies, which represents the better estimate within the probable range of $1.5 million and certain of its officers, asserting claims$2.0 million, related to all probable losses where a reasonable estimate could be made.
The Company does not accrue for
purported violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and SEC Rule 10b-5 promulgated thereunder, based on certain alleged material misstatements and omissions. The case is captioned Almendariz v. OneSpan Inc., et al., No. 1:20-cv-04906 (N.D. Ill.) (the “Securities Class Action”). Specifically, the plaintiffcontingent losses that, in the
Securities Class Action alleges, among other things, that certain statements about OneSpan’s business were misleading because of defendants’ failure to disclose that OneSpan purportedly had inadequate internal procedures and controls over financial reporting and related disclosures; and OneSpan purportedly downplayed the negative impacts of immaterial errors in its financial statements. On April 28, 2021, the Securities Class Action was dismissed by the court without prejudice.A complaint, related in subject matter to the Securities Class Action, was filed on October 23, 2020 against certain of OneSpan’s officers and directors, and names 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 Securities Class Action. On February 16, 2021, on the parties’ agreed motion, the court stayed the action pending a decision on the then-anticipated motion to dismiss in the Securities Class Action. On June 28, 2021 the Klein case was dismissed by the court without prejudice.
On April 2, 2021, a different purported shareholderjudgment of the Company, represented by oneare considered to be reasonably possible, but not probable. As of December 31, 2022, the same law firms representing plaintiff in the Klein case, filed second derivative suit in the Northern District of Illinois arising out of the same events that led to the filing of the Securities Class Action. The case is captioned Herrera v. Boroditsky, et al., 1:21-cv-01789 (N.D. Ill.). The factual allegations are substantially similar to those in Klein, except that the complaintCompany does not contain express allegations regardinghave any reasonably possible losses for which an estimate can be made. Although the pendencyCompany intends to defend its legal matters vigorously, the ultimate outcome of these matters is uncertain. However, the Securities Class Action and only one cause of action, for breach of fiduciary duty, is asserted. On June 28, 2021Company does not expect the Herrera case was dismissed by the court without prejudice.
From time to time, we have been involved in litigation and claims incidental to the conduct of our business, such as compensation claims from current or former employees or commercial disputes with vendors. We expect that to continue. Excluding matters specifically disclosed above, we are not a party topotential losses, if any, lawsuit or proceeding that, in management’s opinion, is likely to have a material adverse effectimpact on its business,operating results, cash flows, or financial condition or results of operations.
From time to time, we have been involved in litigation and claims incidental to the conduct of our business, such as compensation claims from current or former employees in Europe. We expect that to continue. Excluding matters specifically disclosed above, we are not a party to any lawsuit or proceeding that, in management’s opinion, is likely to have a material adverse effect on its business, financial condition or results of operations.
condition.
Note 19 – Restructuring
Planand Other Related Charges
During the fourth quarter of
In December 2021, the Board approved a restructuring plan (“Plan”) designed to advance the Company’s operating model, streamline its business, improve efficiency, and enhance its capital resources. As part of the first phase of the Plan, the Company reduced headcount by eliminating positions in certain areas of its organization. The first phase of the Plan began and was substantially completed during the three months ended March 31, 2022.
In May 2022, the Board approved additional actions related to the Plan through the year ending December 31, 2025. This second phase of the Plan consists primarily of headcount-related actions and is designed to achieve the same objectives as the first phase of two phases constituting a multi-year strategic plan on December 16, 2021. The Company did not take any actions or record any charges inthe Plan.
In connection with the Plan, the Company incurred severance, retention pay, and related benefit costs. The Company recorded $9.5 million in “Restructuring and other related charges” in the consolidated statement of operations for the year ended December 31, 2022. Expense of $1.9 million and $5.1 million was recognized in Digital Agreements operating income and Security Solutions operating income, respectively, during the year ended December 31, 2021.
In total, there were approximately 100 employees, across multiple functions, whose positions were made redundant.
The table below sets forth the changes in the carrying amount of the restructuring charge liability for the year ended December 31, 2022.
| | | | | | | | |
| | |
| (In thousands) | | Restructuring Charge Liability |
| Balance as of December 31, 2021 | | $ | — | |
| Additions | | 9,482 | |
| Payments | | (5,886) | |
| Balance as of December 31, 2022 | | $ | 3,596 | |
The $3.6 million restructuring charge liability at December 31, 2022 is included in “Accrued wages and payroll taxes” in the consolidated balance sheet. The liability is entirely comprised of employee costs that are expected to be paid by December 31, 2023.
Note 20 – Related Party Transactions
Agreements with Related Parties
The Company entered into an agreement to provide e-signature and secure agreement automation services to Cox Automotive in the fourth quarter of
2020.2021. Marianne Johnson is an Executive Vice President and the Chief Product Officer at Cox Automotive. Ms. Johnson has served on the OneSpan Board of Directors since March 2020. The amount of revenue recognized for e-signature and secure agreement automation services during the years ended December 31,
2022 and 2021
and 2020 was
$0.3$0.7 million and
$0.1$0.3 million, respectively, and is included in subscription revenue. The amount receivable as of December 31,
2022 and 2021
was $1 million and
2020 was $0 million,
and $0.4 million.respectively.
The companyCompany purchases subscription SMS services from Twilio, Inc. From February 2015 through August 2022, Marc Boroditsky iswas the Chief Revenue Officer of Twilio, Inc. and has a direct ownership interest in Twilio, Inc. Mr. Boroditsky has served on the OneSpan Board of Directors since June 2020. The total amount paid to Twilio, Inc. during the year ended December 31, 20212022 was $0.8$1.0 million and is included in cost"Cost of goods sold.sold". The amount payable at December 31, 20212022 was less than $0.1$0.2 million. The total amount paid to Twilio, Inc. during the year ended December 31, 20202021 was $0.4$0.8 million and the amount payable at December 31, 20202021 was less than $0.1 millionmillion.
The Company purchases cloud operations services from Cloudflare Inc. Mr. Boroditsky has served as the President of Revenue at Cloudflare Inc. since November 2022. The total amount paid to Cloudflare Inc. during the year ended December 31, 2022 was $0.2 million and is included in "Cost of goods sold". The amount payable at December 31, 2022 was less than $0.1 million. During the year ended December 31, 2021, the Company paid Cloudflare Inc. $0.1 million, and had no accounts payable due at December 31, 2021.
As mentioned
On February 22, 2023, the Company completed its previously announced acquisition of ProvenDB pursuant to an Asset Purchase Agreement, dated January 26, 2023 (the “Purchase Agreement”), by and between the Company, as purchaser, and Southbank Software Pty Ltd., the seller, for the acquisition of substantially all of the assets and the assumption of designated liabilities of the ProvenDB business.
ProvenDB is a developer of secure storage that leverages blockchain technology in Note 2 – Summaryorder to prevent data tampering or alteration of Significant Accounting Policies, we haddocuments. The technology acquired in the acquisition is expected to
provide a foundational architecture for future blockchain-based digital solutions, including secure storage.
Pursuant to the Purchase Agreement, the Company agreed to purchase ProvenDB for an equity interestaggregate purchase price of 17% in Promon AS$2.0 million, of which $1.8 million was paid upfront, and $0.2 million will be held and paid within 12 months of the acquisition date, to account for potential net working capital adjustments. The Company estimates that most of the purchase price will be allocated to capitalized software development and related technology costs.
The Company's consolidated balance sheet as of December 31,
2021. 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 integrate Promon’s RASP technology into our software solutions, which are licensed to our customers.On January2022 and the Company's consolidated statement of operations and consolidated statement of cash flows for the year ended December 31, 2022 we sold our equity interest in Promon for $18.9 million, and will recorddo not reflect the gain on saleimpacts of $14.8 million in other income (expense) onProvenDB as the Consolidated Statement of Operations duringacquisition was completed after the three months ended March 31, 2022.
We intend to continue to purchase and integrate Promon’s RASP technology into our customer software solutions.
balance sheet date.
VALUATION AND QUALIFYING ACCOUNTS
Credit losses for trade receivables.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Beginning
Balance | | Provision
for Bad
Debts | | Chargeoffs | | Foreign
Currency
Translation | | Ending
Balance |
| Years Ended December 31, | | | | | | | | | | |
| 2022 | | $ | 1,419 | | | 517 | | | (334) | | | (2) | | | $ | 1,600 | |
| 2021 | | $ | 4,135 | | | (16) | | | (2,689) | | | (11) | | | $ | 1,419 | |
| 2020 | | $ | 2,812 | | (1) | 2,306 | | | (994) | | | 11 | | $ | 4,135 | |
(1) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | Provision | | | | Foreign | | | |
| | Beginning | | for Bad | | | | Currency | | Ending |
| | Balance | | Debts | | Chargeoffs | | Translation | | Balance |
For the year ended December 31, | | | | | | | | | | | | |
2021 | | $ | 4,135 | | (16) | | (2,689) | | (11) | | $ | 1,419 |
2020 | | $ | 2,812 | (1) | 2,306 | | (994) | | 11 | | $ | 4,135 |
2019 | | $ | 1,152 | | 2,215 | | (843) | | — | | $ | 2,524 |
Includes the $288 impact of the initial ASU No. 2016-13 adoption on January 1, 2020.
| (1) | Includes the $288 impact of the initial ASU 2016-13 adoption on January 1, 2020. |
See accompanying independent auditors’ report.
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
February 22, 2022.28, 2023
| OneSpan Inc.
| | | | |
| OneSpan Inc.
|
| /s/
|
| /s/ Matthew P. Moynahan |
| Matthew P. Moynahan |
| Chief Executive Officer |
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 February 22, 2022.
Each of the undersigned, in his or her capacity as an officer or director, or both, as the case may be, of OneSpan Inc. does hereby appoint Matthew Moynahan and Jorge Martell, and each of them severally, his or her true and lawful attorneys or attorney to execute in his or her name, place and stead, in his or her capacity as director or officer, or both, as the case may be, this Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 and any and all amendments thereto and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission. Each of said attorneys shall have power to act hereunder with or without the other attorney and shall have full power and authority to do and perform in the name and on behalf of each of said directors or officers, or both, as the case may be, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as to which each of said officers or directors, or both, as the case may be, might or could do in person, hereby ratifying and confirming all that said attorneys or attorney may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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SIGNATURE |
| TITLE | | DATE |
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/s/ Matthew P. Moynahan Matthew P. Moynahan
| | President and Chief Executive Officer
| | February 28, 2023 |
| Matthew P. Moynahan | | (Principal Executive Officer) | | |
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/s/ Jan Kees van Gaalen Jan Kees van Gaalen
Jorge Martell | | Interim Chief Financial Officer
| | February 28, 2023 |
| Jorge Martell | | (Principal Financial Officer) | | |
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/s/ John Bosshart John Bosshart
| | Chief Accounting Officer
| | February 28, 2023 |
| John Bosshart | | (Principal Accounting Officer) | | |
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/s/ Alfred Nietzel Alfred Nietzel
| | Chairman | | February 28, 2023 |
Alfred Nietzel
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| /s/ Marc D. Boroditsky | | Director | | February 28, 2023 |
| Marc D. Boroditsky | | Director
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/s/ Garry Capers Garry Capers
| | Director | | February 28, 2023 |
Garry Capers
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| /s/ Sarika Garg Sarika Garg
| | Director | | February 28, 2023 |
Sarika Garg
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/s/ Jean K. Holley
Jean K. Holley
| | Director
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/s/ Marianne Johnson Marianne Johnson
| | Director | | February 28, 2023 |
Marianne Johnson
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| /s/ Michael McConnell Michael McConnell
| | Director | | February 28, 2023 |
Michael McConnell
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| /s/ Marc Zenner | | Director | | February 28, 2023 |
| Marc Zenner | | Director
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