The financial position and results of 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 expense (income), net”.

Note 2 – Summary of Significant Accounting Policies

There have been no changes to the significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, filed with the SEC on February ~~22, 2022~~28, 2023 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

~~Software Capitalization and Depreciation~~

As part of the 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 Digital Agreements product offerings, the Company began capitalizing certain costs incurred in connection with obtaining or developing internal-use software during the nine months ended September 30, 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 condensed 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. The Company capitalized $1.3 million and $1.5 million of internal-use software for the three and nine months ended September 30, 2022, respectively.

Restricted Cash

The Company is party to lease agreements that require letters of credit to secure ~~certain obligations.~~the obligations which totaled $0.7 million and $1.1 million at September 30, 2023 and December 31, 2022, respectively. Additionally, the Company maintained a cash guarantee with a payroll vendor in the amount of $0.1 million at both September 30, 2023 and December 31, 2022. The restricted cash related to ~~these~~the letters of credit and the payroll vendor cash guarantee is recorded in ~~“Other non-current assets”~~"Restricted cash" on the condensed consolidated balance ~~sheets in the amounts of $0.8 million at September 30, 2022 and December 31, 2021.~~

~~Sale of Equity Method Investment~~

On January 31, 2022, the Company sold its equity interest in Promon AS (Promon) for $18.9 million and recorded the gain on sale of $14.8 million in “Other expense (income), net”, on the condensed consolidated statement of operations for the nine months ended September 30, 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).

Prior to January 31, 2022, the Company held a 17% interest in Promon and applied the equity method of accounting to its investment in Promon because it exercised significant influence on, but did not hold a controlling interest in, the investee. Under the equity method of accounting, the Company’s proportionate share of the net earnings (losses) of Promon was reported in “Other expense (income), net”, in its condensed consolidated statements of operations. The impact of the proportionate share of net earnings (losses) was immaterial for the nine months ended September 30, 2022 and 2021, as were the relative size of Promon’s assets and operations in relation to the Company’s.

~~The Company intends to continue to purchase and integrate Promon’s RASP technology into its customer software solutions.~~

sheets.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, the Company believes that the issued standards that are not yet effective will not have a material impact on its condensed consolidated financial statements and disclosures upon adoption.

~~Table of Contents~~

Note 3 – ~~Revenue~~Segment Information

Segments are defined as components of a company that engage in business activities from ~~Contracts~~which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM), in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.

•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with ~~Customers~~

their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include OneSpan Sign e-signature and OneSpan Notary. This segment also includes costs attributable to our transaction cloud platform.

•

~~Disaggregation~~Security Solutions. Security Solutions consists of ~~Revenues~~

our broad portfolio of software products, software development kits (SDKs) and Digipass authenticator devices that are used to build applications designed to defend against attacks on digital transactions across online environments, devices, and applications. The ~~following~~software products and SDKs included in the Security Solutions segment are largely on-premises software products and include identity verification, multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.

Table of Contents

Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue, sales and marketing, research and development expenses, amortization expense, and restructuring and other related charges that are incurred directly by a segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment.

Prior to 2023, the Company allocated certain cost of goods sold and operating expenses to its two reportable operating segments using a direct cost allocation and an allocation based on revenue split between the segments. During the three months ended March 31, 2023, and as a result of the ongoing strategic transformation, the Company refined its allocation methodology to better align internal and external costs more directly to where the employee efforts are being spent on each segment moving forward. As a result of this change, there was an increase in cost of goods sold and operating expenses being allocated to the Digital Agreements segment, which better aligns with the investments the Company is making to grow that segment as compared to its Security Solutions segment.

Effective with the three months ended September 30, 2022, the Company began allocating amortization of intangible assets expense to operating income (loss) for each of its reportable operating segments in order to better align the expense with the operations of each segment. The Company has updated segment operating income (loss) for the three and nine months ended September 30, 2022 to reflect the change in presentation. The allocation change had no impact on the Company's condensed consolidated financial statements.

The tables ~~present~~below set forth information about the Company’s ~~revenues disaggregated by major products~~reportable operating segments for the three and ~~services, geographical region~~nine months ended September 30, 2023 and ~~timing~~2022, along with the items necessary to reconcile the segment information to the totals reported in the accompanying condensed consolidated financial statements.


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except percentages)	2023			2022			2023			2022
Digital Agreements
Revenue	$	13,012		$	12,200		$	36,426		$	35,955
Gross profit	$	9,808		$	9,736		$	26,839		$	27,669
Gross margin	75		%	80		%	74		%	77		%
Operating income (loss) (1)	$	(4,666)		$	2,160		$	(17,820)		$	2,823

Security Solutions
Revenue	$	45,826		$	44,947		$	135,752		$	126,429
Gross profit	$	30,861		$	28,695		$	87,410		$	82,946
Gross margin	67		%	64		%	64		%	66		%
Operating income (2)	$	15,673		$	5,711		$	39,827		$	21,399

Total Company:
Revenue	$	58,838		$	57,147		$	172,178		$	162,384
Gross profit	$	40,669		$	38,431		$	114,249		$	110,615
Gross margin	69		%	67		%	66		%	68		%

Statements of Operations reconciliation:
Segment operating income	$	11,007		$	7,871		$	22,007		$	24,222
Corporate operating expenses not allocated at the segment level	15,801			13,496			52,695			47,328
Operating loss	$	(4,794)		$	(5,625)		$	(30,688)		$	(23,106)
Interest income, net	587			179			1,675			197
Other income (expense), net	353			(1,155)			342			13,817
Loss before income taxes	$	(3,854)		$	(6,601)		$	(28,671)		$	(9,092)

Table of ~~revenue recognition (in thousands, except percentages):~~

Contents

~~Revenue by major products~~(1) Digital Agreements operating income includ

Three months Ended

Nine months Ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

Subscription (1)
$
22,262
$
17,807
$
65,360
$
49,935
Maintenance and support

12,851

12,734

36,975

38,291
Professional services and other (2)

2,220

3,827

6,101

12,075
Hardware products

19,814

17,908

53,948

55,027
Total Revenue
$
57,147
$
52,276
$
162,384
$
155,328

~~(1)~~

~~Subscription includes cloud and on-premises subscription revenue, previously referred to as “subscription” and “term-based software licenses”, respectively.~~

~~(2)~~

Professional services & other includes perpetual software licenses revenue which was less than 3% of total revenue for both the three and nine months ended September 30, 2022, and less than 6% of total revenue for both the three and nine months ended September 30, 2021.

~~Revenue by location~~es $0.6 million of ~~customer~~amortization of intangible assets expense for the three months ended both September 30, 2023 and 2022 and $1.7 million of amortization of intangible assets expense for the nine months ended both September 30, 2023 and 2022.

(2) Security Solutions operating income includes $0 and $0.4 million of amortization of intangible assets expense for the three months ended September 30, 2023 and 2022, respectively, and ~~2021~~$0 and $1.8 million

EMEA

Americas

APAC

Total

Total Revenue:







2022

$
25,999

$
20,394

$
10,754

$
57,147

2021

$
21,965

$
17,621

$
12,690

$
52,276

Percent of Total:

2022

45
%

36
%

19
%

100
%
2021

42
%

34
%

24
%

100
%

~~Revenue by location~~ of ~~customer~~amortization of intangible assets expense for the nine months ended September 30, 2023 and 2022, ~~and 2021~~respectively.

EMEA

Americas

APAC

Total

Total Revenue:









2022

$
74,396

$
56,972

$
31,016

$
162,384

2021

$
73,784

$
51,160

$
30,384

$
155,328

Percent of Total:









2022

46
%

35
%

19
%

100
%
2021

48
%

32
%

20
%

100
%

~~Table of Contents~~

~~Timing of revenue recognition~~

Three Months ended September 30,

Nine Months ended September 30,
(In thousands)

2022

2021

2022

2021
Products and Licenses transferred at a point in time

$
31,280

$
28,193

$
89,496

$
85,016
Services transferred over time

25,867

24,083

72,888

70,312
Total Revenue

$
57,147

$
52,276

$
162,384

$
155,328

~~Contract balances~~

The following ~~table provides information about receivables, contract assets~~tables illustrate the disaggregation of revenues by category and ~~contract liabilities~~services, including a reconciliation of the disaggregated revenues to revenues from ~~contracts with customers:~~

September 30,

December 31,
(In thousands)

2022

2021
Receivables, inclusive of trade and unbilled

$
43,736

$
56,612
Contract Assets (current and non-current)

$
4,712

$
4,889
Contract Liabilities (Deferred Revenue current and non-current)

$
50,814

$
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 bill occurs, which is normally over~~ ~~3-5 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, the Company does not adjust the promised amount of consideration~~Company’s two reportable operating segments for the ~~effects~~three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,
	2023				2022
	Digital Agreements		Security Solutions		Digital Agreements		Security Solutions
(In thousands)
Subscription	$	11,807	$	14,378	$	10,321	$	11,941
Maintenance and support	995		11,276		1,693		11,158
Professional services and other (1)	210		1,333		186		2,034
Hardware products	—		18,839		—		19,814
Total Revenue	$	13,012	$	45,826	$	12,200	$	44,947


	Nine Months Ended September 30,
	2023				2022
	Digital Agreements		Security Solutions		Digital Agreements		Security Solutions
(In thousands)
Subscription	$	32,641	$	46,485	$	30,728	$	34,632
Maintenance and support	3,121		31,914		4,453		32,522
Professional services and other (1)	664		4,002		774		5,327
Hardware products	—		53,351		—		53,948
Total Revenue	$	36,426	$	135,752	$	35,955	$	126,429

(1) Professional services and other includes perpetual software licenses revenue, which was less than 2% of ~~a significant financing component when it expects, at contract inception, that~~total revenue for the ~~period between~~three and nine months ended September 30, 2023, respectively, and less than 3% of total revenue for the ~~transfer of a promised product or service to a customer~~three and ~~when the customer pays for that product or service will be one year or less. Also, the Company does not typically include extended payment terms in its contracts with customers.~~

~~Revenue recognized during the~~ nine months ended September 30, 2022, ~~included $40.3 million that was included on the December 31, 2021 balance sheet in contract liabilities. Deferred revenue decreased in the same period due to timing of annual renewals.~~

respectively.

~~Transaction price allocated to the remaining performance obligations~~

Remaining performance obligations represent the revenue that is expected to be recognized in future periods related to performance obligations that are unsatisfied, or partially unsatisfied, as of the end of the period. The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2022:

(In thousands)

2022

2023

2024

Beyond 2024

Total
Future revenue related to current unsatisfied performance obligations

$
11,238

$
28,617

$
15,823

$
8,375

$
64,053

The Company ~~applies practical expedients~~allocates goodwill by reporting unit, in accordance with Accounting Standards Codification (ASC) 350 – Goodwill and ~~does~~Other. Asset information by segment is not ~~disclose~~reported to or reviewed by the CODM to allocate resources, and therefore, the Company has not disclosed asset information ~~about remaining performance obligations (a) that have original expected durations of~~ ~~one year~~ ~~or less, or (b) where revenue is recognized as invoiced.~~

~~Costs of obtaining a contract~~

~~The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. The Company capitalizes commissions associated with certain new contracts and amortizes~~for the costs over a period of benefit based on the transfer of goods or services that it has determined to be up to seven years. The Company determined the period of benefit by taking into consideration the customer contracts, its technology and other factors,

segments.

Table of Contents

including customer attrition. Commissions are earned upon invoicing to the customer. For contracts with multiple year payment terms, because the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. ~~Commissions and amortization expense are included in “Sales and Marketing” expense in the condensed consolidated statements of operations.~~

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 “Sales and Marketing” expense in the condensed 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)

September 30, 2022

December 31, 2021

Capitalized costs to obtain contracts, current

$
2,632

$
2,134

Capitalized costs to obtain contracts, non-current

$
9,665

$
8,675

Three months ended September 30,

Nine months ended September 30,
(In thousands)

2022

2021

2022

2021
Amortization of capitalized costs to obtain contracts

$
641

$
419

$
1,731

$
1,090
Impairments of capitalized costs to obtain contracts

$
—

$
—

$
—

$
—

Note 4 – Revenue from Contracts with Customers

Revenue by major products and services

The following tables present the Company’s revenues disaggregated by major products and services, geographical region and timing of revenue recognition:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
(In thousands)
Subscription	$	26,185	$	22,262	$	79,126	$	65,360
Maintenance and support	12,271		12,851		35,035		36,975
Professional services and other (1)	1,543		2,220		4,666		6,101
Hardware products	18,839		19,814		53,351		53,948
Total Revenue	$	58,838	$	57,147	$	172,178	$	162,384

(1) Professional services and other includes perpetual software licenses revenue, which was less than 2% of total revenue for the three and nine months ended September 30, 2023, respectively, and less than 3% of total revenue for the three and nine months ended September 30, 2022, respectively.

Revenue by location of customer for the Three and Nine Months Ended September 30, 2023 and 2022

We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes North, Central, and South America; and 3) Asia Pacific (APAC), which includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
(In thousands, except percentages)
Revenue
EMEA	$	26,233		$	25,999		$	80,592		$	74,396
Americas	19,999			20,394			58,828			56,972
APAC	12,606			10,754			32,758			31,016
Total revenue	$	58,838		$	57,147		$	172,178		$	162,384

% of Total Revenue
EMEA	45		%	45		%	47		%	46		%
Americas	34		%	36		%	34		%	35		%
APAC	21		%	19		%	19		%	19		%

Timing of revenue recognition


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Products and Licenses transferred at a point in time	$	31,732	$	31,280	$	95,461	$	89,496
Services transferred over time	27,106		25,867		76,717		72,888
Total Revenue	$	58,838	$	57,147	$	172,178	$	162,384

Table of Contents

Contract balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as of September 30, 2023 and December 31, 2022:


	September 30,		December 31,
(In thousands)	2023		2022
Receivables, inclusive of trade and unbilled	$	38,667	$	65,132
Contract Assets (current and non-current)	$	5,096	$	4,642
Contract Liabilities (Deferred Revenue current and non-current)	$	55,329	$	70,906

Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings. These contract assets are transferred to receivables when the right to bill occurs over a 2- to 5-year period. The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services. Revenue is recognized for these services over time.

As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component when it is expected, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. Extended payment terms are not typically included in contracts with customers.

Revenue recognized during the nine months ended September 30, 2023 included $52.6 million that was included on the December 31, 2022 consolidated balance sheet in contract liabilities. Deferred revenue decreased in the same period due to timing of annual renewals.

Transaction price allocated to the remaining performance obligations


(In thousands)	2023		2024		2025		Beyond 2025		Total
Future revenue related to current unsatisfied performance obligations	$	12,040	$	30,733	$	16,271	$	10,340	$	69,384

The Company applies practical expedients and does not disclose information about remaining performance obligations (a) that have original expected durations of one year or less, or (b) where revenue is recognized as invoiced.

Costs of obtaining a contract

The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. The Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of up to seven years, which is the determined benefit period based on the transfer of goods or services. The Company determined the period of benefit by taking into consideration the customer contracts, its technology and other factors, including customer attrition. Commissions are earned upon invoicing to the customer. For contracts with multiple year payment terms, because the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. Commissions and amortization expense are included in “Sales and Marketing” expense in the condensed consolidated statements of operations.

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 “Sales and Marketing” expense in the condensed consolidated statements of operations.

Table of Contents

The following tables provide information related to the capitalized costs and amortization recognized in the current and prior period:


(In thousands)	September 30, 2023		December 31, 2022
Capitalized costs to obtain contracts, current	$	3,284	$	2,929
Capitalized costs to obtain contracts, non-current	$	10,322	$	10,571


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Amortization of capitalized costs to obtain contracts	$	801	$	641	$	2,286	$	1,731
Impairments of capitalized costs to obtain contracts	$	—	$	—	$	—	$	—

Note 5 – Inventories, net

Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the ~~FIFO~~first-in, first-out (FIFO) method.

Inventories, net ~~are comprised~~consist of the following:


	September 30, 2023		December 31, 2022
(In thousands)
Component parts (1)	$	8,890	$	6,762
Work-in-process and finished goods	6,566		5,292
Total	$	15,456	$	12,054

September 30,

December 31,

2022

2021
(In thousands)

Component parts

$
4,793

$
3,841
Work-in-process and finished goods

4,674

6,504
Total

$
9,467

$
10,345

(1) In conjunction with the Company's decision to discontinue investments in its Digipass CX product (see Note 516, Restructuring and Other Related Charges), non-cash impairment charges of $1.6 million for component parts, net, were recorded in "Cost of goods sold, Product and license" on the condensed consolidated statements of operations during the quarter ended June 30, 2023.

Note 6 – Goodwill

The following table presents the changes in goodwill ~~allocated to the Company’s reportable segments~~ during the nine months ended September 30, ~~2022:~~

2023:


	Digital Agreements		Security Solutions		Total
(In thousands)
Net balance at December 31, 2022	$	19,732	$	70,782	$	90,514
Foreign currency exchange rate effect	56		199		255
Acquisition during the period (1)	$	600	$	—	$	600
Net balance at September 30, 2023	$	20,388	$	70,981	$	91,369

Digital Agreements

Security Solutions

Total
(In thousands)

Net balance at December 31, 2021

$
—

$
—

$
96,174
Goodwill reallocation (1)

20,966

75,208

—
Foreign currency exchange rate effect

(2,175)

(7,805)

(9,980)
Net balance at September 30, 2022

$
18,791

$
67,403

$
86,194

~~Goodwill reallocation:~~ ~~As a result~~(1) Represents goodwill recorded in conjunction with the acquisition of substantially all the assets of the ~~transformation plan and new reportable operating segments (see~~ProvenDB business of Southbank Software Pty Ltd. during the three months ended March 31, 2023. See Note ~~1 -~~ ~~Description of the Company~~~~), the Company allocated the goodwill balance to each reporting unit and respective reportable operating segments on May~~ 17, ~~2022. 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~~

Business Acquisitions, for additional information.

~~Table of Contents~~

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 impairment for any of the reporting units as of May 17, 2022.

No impairment of goodwill was recorded during the nine months ended September 30, 2023 and 2022.

~~Note 6 – Intangible Assets~~

~~Intangible assets as~~Table of ~~September 30, 2022 and December 31, 2021 consist of the following:~~

Contents

As of September 30, 2022

As of December 31, 2021
(In thousands)

Useful Life (in years)

Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization
Acquired technology

3 to 7

$
41,154

$
41,034

$
43,034

$
42,281
Customer relationships

5 to 12

33,732

22,107

39,814

20,653
Patents and trademarks

10 to 20

13,474

12,181

13,549

12,193
Total

$
88,360

$
75,322

$
96,397

$
75,127

~~Amortization expense was~~ $1.0 million and $1.4 million for the three months ended September 30, 2022 and 2021, respectively; and $3.6 million and $4.5 million for the nine months ended September 30, 2022 and 2021, respectively.

~~Certain intangible assets are denominated in functional currencies besides the U.S. dollar and are subject to currency fluctuations.~~

During the nine months ended September 30, 2022, the Company performed an impairment review of the customer relationships intangible assets obtained 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 three months ended September 30, 2022. The charge is included in “Impairment of intangible assets” on the condensed consolidated statements of operations.

~~There were~~ ~~no additional impairments of~~ ~~intangible~~ ~~assets recorded during the nine months ended September 30, 2022 and 2021.~~

Note 7 – Intangible Assets

Intangible assets as of September 30, 2023 and December 31, 2022 consist of the following:

As of September 30, 2023 As of December 31, 2022
(In thousands) Useful Life (in years) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Acquired technology 3 to 7 $ 43,293 $ 42,024 $ 42,022 $ 41,894
Customer relationships 5 to 12 34,451 25,076 34,386 23,323
Patents, trademarks, and other 10 to 20 13,543 12,275 13,518 12,227
Total $ 91,287 $ 79,375 $ 89,926 $ 77,444

Total amortization expense was $0.7 million and $2.0 million for the three and nine months ended September 30, 2023, respectively, compared to $1.0 million and $3.6 million for the three and nine months ended September 30, 2022, respectively. Amortization expense includes cost of sales amortization expense directly related to delivering cloud subscription revenue of $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively, and $0 for the three and nine months ended September 30, 2022. Costs are recorded in "Services and other cost of goods sold" on the condensed consolidated statements of operations.

Certain intangible assets are denominated in functional currencies besides the U.S. dollar and are subject to currency fluctuations.

During the nine months ended September 30, 2022, the Company performed an impairment review of the customer relationships intangible assets obtained 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, substantially 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 three months ended September 30, 2022. The charge is included in “Impairment of intangible assets” on the condensed consolidated statements of operations.

There was no additional impairment of intangible assets recorded during the nine months ended September 30, 2023 and 2022.

Note 8 – Property and Equipment, net

The following table presents the major classes of property and equipment, net, as of September 30, ~~2022~~2023 and December 31, ~~2021:~~

(In thousands)

September 30, 2022

December 31, 2021
Office equipment and software

$
14,606

$
14,327
Leasehold improvements

9,885

10,296
Furniture and fixtures

4,171

4,223
Capitalized software

1,492

—
Total

30,154

28,846
Accumulated depreciation

(19,358)

(18,089)
Property and equipment, net

$
10,796

$
10,757

2022:


(In thousands)	September 30, 2023		December 31, 2022
Office equipment and software	$	7,981	$	14,451
Leasehold improvements	6,827		9,927
Furniture and fixtures	3,295		4,260
Capitalized software	10,565		4,007
Total	28,668		32,645
Accumulated depreciation	(12,150)		(19,964)
Property and equipment, net	$	16,518	$	12,681

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~~Depreciation~~Total depreciation expense was $1.0 million and $2.5 million for the three and nine months ended September 30, 2023, respectively, compared to $0.7 million and $2.1 million for the three and nine months ended September 30, 2022, ~~respectively, compared~~respectively. Depreciation expense includes cost of sales depreciation expense directly related to ~~$0.8 million and $2.3~~delivering cloud subscription revenue of $0.4 million for the three and nine months ended September 30, ~~2021, respectively.~~

~~Note 8 – Fair Value Measurements~~

~~The following tables summarize the Company’s financial assets by level in the fair value hierarchy, which are measured at fair value on a recurring basis, as of September 30, 2022~~2023, respectively, and ~~December 31, 2021:~~

Fair Value Measurement at Reporting Date Using
(In thousands)

September 30, 2022

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

$
1,997

—
$
1,997

—
Corporate Notes / Bonds

$
2,312

—
$
2,312

—
Commercial Paper

$
4,496

—
$
4,496

—
U.S. Treasury Bills

$
2,977

—
$
2,977

—

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. Unrealized gains and losses are recorded to other comprehensive income. The unrealized gains and losses on the available-for-sale debt securities were not material as of September 30, 2022 and December 31, 2021.

~~The Company did not have any transfers of assets between Level 1 and Level 2 or Level 3 of the fair value hierarchy during~~$0 for the three orand nine months ended September 30, 2022. ~~Also,~~Costs are recorded in "Services and other cost of goods sold" on the ~~Company did not have any financial liabilities that are measured at fair value~~condensed consolidated statements of operations.

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As part of the Company's decision to discontinue investments in its Digipass CX product (see Note 16, Restructuring and Other Related Charges), non-cash impairment charges of $1.4 million for capitalized software were recorded in "Restructuring and other related charges" on the condensed consolidated statements of operations during the three months ended June 30, 2023.

In conjunction with the Company's Chicago office lease abandonment (see Note 16, Restructuring and Other Related Charges), non-cash impairment charges of $0.6 million for leasehold improvements and $0.1 million for office equipment and software were recorded in "Restructuring and other related charges" on the condensed consolidated statements of operations during the three months ended June 30, 2023

Due to the Company's Brussels office lease termination (see Note 16, Restructuring and Other Related Charges), a ~~recurring basis as~~non-cash impairment charge of ~~September 30, 2022~~$0.6 million for leasehold improvements was recorded in "Restructuring and ~~December 31, 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~~other related charges" 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~~condensed consolidated statements of operations during the three months ended September 30, ~~2022, the Company recorded an impairment of its Dealflo customer relationships intangible asset in the amount of~~ 2023.~~$3.8 million, which was the entire remaining value of the asset. No impairment was recorded in the three or nine months ended September 30, 2021.~~

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Note 9 – Fair Value Measurements

The following tables summarize the Company’s financial assets by level in the fair value hierarchy, which are measured at fair value on a recurring basis, as of September 30, 2023 and December 31, 2022:

Fair Value Measurement at Reporting Date Using
(In thousands) September 30, 2023 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 Bills $ 8,980 — $ 8,980 —
Money Market Funds $ 18,245 18,245 $ — —

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:
Money Market Funds $ 28,388 28,388 $ — —
Commercial Paper $ 6,743 — $ 6,743 —
Corporate Notes / Bonds $ 2,328 — $ 2,328 —

The Company classifies its investments in debt securities as available-for-sale. The Company reviews available-for-sale debt securities for impairments related to losses and other factors each quarter. The unrealized gains and losses on the available-for-sale debt securities were not material as of September 30, 2023 and December 31, 2022. Also, the Company did not have any financial liabilities that are measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022.

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.

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Note 10 – Allowance for ~~credit losses~~

Credit Losses

The changes in the allowance for credit losses during the nine months ended September 30, ~~2022~~2023 were as follows:

(In thousands)

Balance at December 31, 2021

$
1,419
Provision

1,092
Write-offs

50
Net foreign currency translation

(35)
Balance at September 30, 2022

$
2,526


(In thousands)
Balance at December 31, 2022	$	1,600
Provision	418
Write-offs	(355)

Balance at September 30, 2023	$	1,663

During the nine months ended September 30, 2023, the Company wrote off $0.4 million of accounts receivable that were fully reserved for and no longer deemed collectible.

Note 1011 – Leases

Operating lease cost details for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 are as follows:

Three months ended

Nine months ended

September 30,

September 30,


2022

2021

2022

2021
(In thousands)

Building rent

$
509

$
667

$
1,605

$
1,914
Automobile rentals

295

385

876

1,129
Total net operating lease costs

$
804

$
1,052

$
2,481

$
3,043


	Three Months Ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
(In thousands)
Building rent	$	369	$	509	$	1,370	$	1,605
Automobile rentals	270		295		836		876
Total net operating lease costs	$	639	$	804	$	2,206	$	2,481

At September 30, ~~2022,~~2023, the Company’s weighted average remaining lease term for its operating leases is ~~6.1~~4.5 years, and the weighted average discount rate for its operating leases is 5%.

During the nine months ended September 30, ~~2022,~~2023, there were ~~$2.4~~$2.2 million of operating cash payments for lease liabilities, and $0.6 million of right-of use assets obtained in exchange for new lease liabilities.

As part of its multiyear restructuring plan (see Note 16,

Restructuring and Other Related Charges), the Company vacated its Chicago office space and abandoned the underlying leases during June 2023. The Company accrued a $1.4 million early lease termination fee, which is reflected on the condensed consolidated statements of operations for the nine months ended September 30, 2023 in "Restructuring and other related charges". The underlying lease right-of-use asset and lease liability for the Chicago leased office space were written off, and a $0.3 million gain related to rent concessions and tenant improvement allowances was recorded on the condensed consolidated statements of operations for the nine months ended September 30, 2023 in "Restructuring and other related charges".

In September 2023, the Company vacated its Brussels office and terminated the lease as of September 30, 2023. The Company accrued a $0.3 million early lease termination fee, which is reflected on the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 in "Restructuring and other related charges". The underlying lease right-of-use asset and lease liability for the Brussels leased office space were written off, and a $0.6 million loss related to rent concessions and tenant improvement allowances was recorded on the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 in "Restructuring and other related charges".

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Maturities of the Company’s operating leases as of September 30, 2023 are as follows:

As of September 30, 2022

(In thousands)

2022

$
703

2023

2,535

2024

1,849

2025

1,686

2026

1,630

Later years

4,201

Less imputed interest

(1,952)

Total lease liabilities

$
10,652


	As of September 30, 2023
(In thousands)
2023	$	608
2024	2,099
2025	1,227
2026	1,136
2027	956
Later years	1,266
Less imputed interest	(742)
Total lease liabilities	$	6,550

Note 1112 – Income Taxes

The Company’s estimated annual effective tax rate for ~~2022~~2023 before discrete items and excluding entities with a valuation allowance is expected to be approximately ~~22%~~25%. The Company’s global effective tax rate is higher than the U.S. statutory tax rate of 21% primarily due to foreign tax rate differences and nondeductible expenses. The ultimate tax expense will depend on the mix of earnings in various jurisdictions. Income ~~tax refunds,~~taxes, net of ~~taxes paid,~~refunds, of ~~$0.3~~$4.4 million were ~~received~~paid during the ~~three~~nine months ended September 30, ~~2022.~~2023. Income taxes, net of refunds, of $1.7 million were paid during the nine months ended September 30, 2022.

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

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also reviews reversal patterns of temporary differences to determine if the Company would have sufficient taxable income due to the reversal of temporary differences to support the realization of deferred tax assets.

Certain operations have incurred net operating losses (NOLs), which are currently subject to a valuation allowance. These NOLs may become deductible to the extent these operations become profitable. For each of its operations, the Company evaluates whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, the Company considers evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain operations record a loss, the Company does not recognize a corresponding tax benefit, thus increasing its effective tax rate, or decreasing its effective tax rate when reporting income in a jurisdiction that has a valuation allowance. Upon determining that it is more likely than not that the NOLs will be realized, the Company will reduce the tax valuation allowances related to these NOLs, which will result in a reduction of its income tax expense and its effective tax rate in the period.

At December 31, ~~2021,~~2022, the Company had deferred tax assets of ~~$43.7~~$46.8 million resulting from U.S., 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, the Company had a valuation allowance of ~~$31.3~~$37.7 million against deferred tax assets related to certain carryforwards.

Note 1213 – Long-Term Compensation Plan and Stock Based Compensation (share counts in thousands)

Under the OneSpan Inc. 2019 Omnibus Incentive Plan, the Company awards restricted stock units subject to time-based vesting, restricted stock units which are subject to the achievement of future performance criteria and restricted stock units that are subject to the achievement of market conditions. Other long-term incentive plan compensation expense includes cash incentives.

The Company awarded ~~2,330~~0.9 million restricted stock units during the nine months ended September 30, ~~2022,~~2023, subject to time-based vesting. The fair value of the unissued time-based restricted stock unit grants was ~~$30.3~~$11.9 million at the dates of grant and the grants are being amortized over the vesting periods of one to ~~four~~three years.

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The Company awarded restricted stock units subject to the achievement of service and future performance criteria during the nine months ended September 30, ~~2022,~~2023, which allow for up to ~~200~~0.8 million shares to be earned if the performance criteria are achieved at the target level. The fair value of these awards was ~~$2.4~~$11.9 million at the dates of grant and the awards are being amortized over the ~~vesting~~requisite service period ofone to three years. The Company currently believes that ~~all~~approximately 12% of these shares are expected to be earned.

During the ~~three and~~ nine months ended September 30, 2023 and 2022, stock-based compensation and other long-term incentive plan compensation accruals were reversed for ~~certain~~ employees who were ~~severed from the Company.~~terminated. The reversal of the accrued long-term incentive plan compensation for the ~~severed~~terminated employees largely offset the expense for the ~~periods.~~

period.

The following table presents stock-based compensation expense and other long-term incentive plan compensation expense for the three and nine months ended September 30, ~~2022~~2023 and ~~2021:~~

Three months ended

Nine months ended

September 30,

September 30,



2022

2021

2022

2021

(In thousands)

Stock-based compensation

$
2,884

$
347

$
5,497

$
2,981

Other long-term incentive plan compensation

230

165

118

640

Total compensation

$
3,114

$
512

$
5,615

$
3,621

2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
(In thousands)
Stock-based compensation	$	1,878	$	2,884	$	10,192	$	5,497
Other long-term incentive plan compensation (1)	55		230		234		118
Total compensation	$	1,933	$	3,114	$	10,426	$	5,615

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~~Note 13 – Earnings per Share~~

~~Basic earnings per share is based on the weighted average number of shares outstanding~~(1) Long-term incentive compensation includes immaterial expense for cash incentive grants awarded to employees located in jurisdictions where we do not issue stock-based compensation due to tax, regulatory or similar reasons. The expense associated with these cash incentive grants was $0.1 million and excludes the dilutive effect of common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of common stock equivalents to the extent they are not anti-dilutive. Because the Company was in a net loss position$0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $0.2 million and $0.1 million for the nine months ended September 30, 2023 and 2022, ~~and 2021, diluted net loss per share for these periods excludes the effects of common stock equivalents, which are anti-dilutive.~~

~~The details of the earnings per share calculations for the three and nine months ended September 30, 2022 and 2021 are as follows:~~

Three months ended

Nine months ended

September 30,

September 30,

(In thousands, except per share data)

2022

2021

2022

2021

Net loss

$
(7,201)

$
(975)

$
(11,337)

$
(16,811)

Weighted average common shares outstanding:









Basic

39,723

39,629

39,801

39,688

Incremental shares with dilutive effect:





Restricted stock awards

—

—

—

—

Diluted

39,723

39,629

39,801

39,688

Net loss per share:









Basic

$
(0.18)

$
(0.02)

$
(0.28)

$
(0.42)

Diluted

$
(0.18)

$
(0.02)

$
(0.28)

$
(0.42)

~~Note 14 – Legal Proceedings and Contingencies~~

The Company is subject to certain legal proceedings and claims incidental to the operations of its business. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated. The Company currently does not anticipate that these matters, if resolved against the Company, will have a material adverse impact on its financial results or financial condition.

The Company accrues loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. As of September 30, 2022, the Company has recorded an accrual of $1.3 million for loss contingencies, which represents the better estimate within the probable range of $1.3 million and $2.0 million, related to all probable losses where a reasonable estimate could be made.

The Company does not accrue for contingent losses that, in the judgment of the Company, are considered to be reasonably possible, but not probable. As of September 30, 2022, the Company does not have any reasonably possible losses for which an estimate can be made. Although the Company intends to defend its legal matters vigorously, the ultimate outcome of these matters is uncertain. However, the Company does not expect the potential losses, if any, to have a material adverse impact on its operating results, cash flows, or financial condition.

respectively.

Note 14 – Earnings per Share

Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of common stock equivalents to the extent they are not anti-dilutive. Because the Company was in a net loss position for the three and nine months ended September 30, 2023 and 2022, diluted net loss per share for the period excludes the effects of common stock equivalents, which are anti-dilutive.

The details of the earnings per share calculations for the three and nine months ended September 30, 2023 and 2022 are as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands, except per share data) 2023 2022 2023 2022
Net loss $ (4,133) $ (7,201) $ (30,240) $ (11,337)
Weighted average common shares outstanding:
Basic 40,454 39,723 40,529 39,801
Incremental shares with dilutive effect:
Restricted stock awards — — — —
Diluted 40,454 39,723 40,529 39,801
Net loss per share:
Basic $ (0.10) $ (0.18) $ (0.75) $ (0.28)
Diluted $ (0.10) $ (0.18) $ (0.75) $ (0.28)

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Note 15 – Legal Proceedings and Contingencies
The Company is subject to certain legal proceedings and claims incidental to the operations of its business. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated. The Company currently does not anticipate that these matters, if resolved against the Company, will have a material adverse impact on its financial results or financial condition.
The Company accrues loss contingencies when losses become probable and are reasonably estimable. As of September 30, 2023, the Company has recorded an accrual of $1.0 million for loss contingencies.
The Company does not accrue for contingent losses that, in the judgment of the Company, are considered to be reasonably possible, but not probable. As of September 30, 2023, the Company does not have any reasonably possible losses for which an estimate can be made. Although the Company intends to defend its legal matters vigorously, the ultimate outcome of these matters is uncertain. However, the Company does not expect the potential losses, if any, to have a material adverse impact on its operating results, cash flows, or financial condition.

Note 16 – Restructuring and Other Related Charges

In December 2021, the Company's Board of Directors (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.

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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 solely of headcount-related actions and~~ is designed to continue to advance the ~~Company’s operating model, streamline its business, improve efficiency, and enhance its capital resources.~~

same objectives as the first phase of the Plan.

In connection with the Plan, the Company ~~incurred severance, retention pay, and related benefit costs. The Company~~ recorded ~~$2.7~~$6.5 million and ~~$8.0~~$13.1 million in “Restructuring and other related charges” in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023, respectively, and $6.5 million and $11.8 million for the three and nine months ended September 30, 2022, respectively.

The main categories of charges are in the following areas:

•Employee costs – include severance, related benefits, and retention pay costs incurred as a result of eliminating positions in certain areas of the Company. For the three and nine months ended September 30, 2023, severance-related costs were $5.1 million and $8.2 million, respectively. In total, there were approximately ~~100~~240 employees, across multiple functions, whose positions were made redundant. The $2.3 million current portion of the restructuring liability at September 30, 2023 is included in "Accrued wages and payroll taxes" in the condensed consolidated balance sheet and is expected to be paid within the next 12 months. The $0.5 million non-current portion is included in "Other long-term liabilities" in the condensed consolidated balance sheet and is expected to be paid within the next 24 months.

•Real estate rationalization costs – include costs to align the real estate footprint with the Company’s needs. The Company vacated its Chicago office space and abandoned the underlying leases during the three months ended June 30, 2023. During September 2023, the Company vacated its Brussels office and terminated the lease as of September 30, 2023. The Company accrued contract termination fees of $1.4 million and $0.3 million for the Chicago office and Brussels office, respectively. The $1.0 million current portion of the restructuring liability at September 30, 2023 is included in "Other accrued expenses" in the condensed consolidated balance sheet and is expected to be paid within the next 12 months. The $0.7 million non-current portion is included in "Long-term lease liabilities" in the condensed consolidated balance sheet and is expected to be paid within the next 18 months. In conjunction with the abandonment of the Chicago lease and termination of the Brussels lease, the underlying right-of-use assets and liabilities were written off and a $0.3 million gain and $0.6 million loss, respectively, were recorded related to rent concessions and tenant improvement allowances for restructuring. The Company also incurred $0.7 million and $0.6 million of non-cash impairment charges for fixed assets in its Chicago and Brussels leased office space, respectively (See Note 8, Property and Equipment, net).

•Product and services optimization costs – include costs to discontinue products and services that are no longer advancing the Company's operating model. In June 2023, the Company made the decision to discontinue investments in its Digipass CX product and incurred $1.4 million of non-cash impairment charges for capitalized software. The charges are recorded in "Restructuring and other related charges" on the condensed consolidated

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statements of operations for the nine months ended September 30, 2023 (See Note 8, Property and Equipment, net).

•Vendor rationalization costs – include costs for contractually committed services the Company is no longer utilizing. For the three and nine months ended September 30, 2023, these costs totaled $0.5 million and $0.7 million, respectively, and are included in "Restructuring and other related charges" on the condensed consolidated statements of operations for the nine months ended September 30, 2023.

The table below sets forth the changes in the carrying amount of ~~the~~our restructuring charge liability by restructuring type for the nine months ended September 30, ~~2022.~~

Restructuring Charge Liability
(In thousands)

$

Balance as of December 31, 2021

—
Additions

8,000
Payments

(4,446)
Balance as of September 30, 2022

$
3,554

2023.


	Employee Costs		Real Estate Rationalization		Total
(In thousands)
Balance as of December 31, 2022	$	3,596	$	—	$	3,596
Additions	8,077		1,690		9,767
Payments	(8,853)		—		(8,853)
Balance as of September 30, 2023	$	2,820	$	1,690	$	4,510

Note 17 – Business Acquisitions

On February 22, 2023, the Company acquired substantially all of the assets of the ProvenDB business of Southbank Software Pty Ltd. ("ProvenDB") under the terms of an asset purchase agreement. Pursuant to the terms of the asset purchase agreement, the total consideration for the acquisition was $2.0 million, of which $1.8 million was paid in cash at closing. The ~~$3.6~~remaining $0.2 million ~~restructuring charge liability at~~was held back as security for any indemnity claims made by the Company, and to the extent not used to satisfy such claims, will be paid to the seller 12 months after the acquisition date.

ProvenDB is a developer of secure storage that leverages blockchain technology in order to prevent data tampering or alteration of documents. The technology acquired in the acquisition is expected to provide a foundational architecture for future blockhain-based digital solutions, including secure storage.

As of September 30, ~~2022~~2023, the Company is still determining the purchase price allocation. A preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed is included in ~~“Accrued wages~~the table below. These estimates are subject to change and ~~payroll taxes”~~may result in an increase in goodwill with regard to our estimates of the acquired assets and assumed liabilities during the measurement period, which may extend up to one year from the acquisition date.

ProvenDB is allocated entirely to our Digital Agreements reportable operating segment.


(In thousands)	As of Date of Opening Balance Sheet
Net assets acquired:
Acquired technology	$	1,447
Accrued wages and payroll taxes	(47)
Goodwill	600
Total net assets acquired	$	2,000

Consideration	$	2,000

The financial impact of this acquisition was not material to our condensed consolidated ~~balance sheet. The liability is entirely comprised~~financial statements, and therefore, we have not presented pro forma results of ~~employee costs that are expected to be paid by September 30, 2023.~~

~~Note 16 – Segment Information~~

~~In May 2022,~~operations for the Company announced a three-year strategic 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 business, 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 business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM), in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.

●

~~Digital Agreements.~~ Digital Agreements consists of solutions that enable 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 e-signature solution and our Virtual Room solution. 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 interaction, e-transactions and e-vaulting (storage) in the Digital Agreements segment. This segment also includes costs attributable to its transaction cloud platform.

●

~~Security Solutions.~~ Security Solutions consist 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 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 tokens that are not cloud-connected devices.

acquisition.

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Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue, sales and marketing, and research and development expenses that are incurred directly by a segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment.

The tables below set forth information about the Company’s operating segments for the three and nine months ended September 30, 2022 and 2021, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.

Three months ended

Nine months ended

September 30,

September 30,
(In thousands, except percentages)

2022

2021

2022

2021
Digital Agreements

Revenue

$
12,200

$
10,129

$
35,955

$
29,720
Gross profit

$
9,736

$
7,280

$
27,669

$
21,303
Gross margin

80%

72%

77%

72%
Operating income (loss)

$
2,160

$
79

$
2,823

$
(2,027)

Security

Revenue

$
44,947

$
42,147

$
126,429

$
125,608
Gross profit

$
28,695

$
29,115

$
82,946

$
84,165
Gross margin

64%

69%

66%

67%
Operating income

$
5,711

$
10,689

$
21,399

$
25,610

Total Company:

Revenue

$
57,147

$
52,276

$
162,384

$
155,328
Gross profit

$
38,431

$
36,395

$
110,615

$
105,468
Gross margin

67%

70%

68%

68%

Statements of Operations reconciliation:

Segment operating income

$
7,871

$
10,768

$
24,222

$
23,583
Corporate operating expenses not allocated at the segment level

13,496

12,784

47,328

43,752
Total Company operating loss

$
(5,625)

$
(2,016)

$
(23,106)

$
(20,169)

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~~The following tables illustrate the disaggregation of revenues by category and services, including a reconciliation of the disaggregated revenues to revenues from the Company’s~~ ~~two operating segments for the three and nine months ended September 30, 2022 and 2021:~~

Three Months Ended

September 30, 2022

September 30, 2021

Digital Agreements

Security Solutions

Digital Agreements

Security Solutions
(In thousands)

Subscription
$
10,321
$
11,941
$
8,262
$
9,545
Maintenance and support

1,693

11,158

1,580

11,154
Professional services and other

186

2,034

267

3,560
Hardware products

—

19,814

20

17,888
Total Revenue
$
12,200
$
44,947
$
10,129
$
42,147

Nine Months Ended

September 30, 2022

September 30, 2021

Digital Agreements

Security Solutions

Digital Agreements

Security Solutions
(In thousands)

Subscription
$
30,728
$
34,632
$
24,201
$
25,734
Maintenance and support

4,453

32,522

4,469

33,822
Professional services and other

774

5,327

985

11,090
Hardware products

—

53,948

65

54,962
Total Revenue
$
35,955
$
126,429
$
29,720
$
125,608

~~The Company allocates goodwill by reporting unit, in accordance with ASC 350 –~~ ~~Goodwill and Other~~~~. Asset information by segment is not reported to or reviewed by the CODM to allocate resources, and therefore, the Company has not disclosed asset information for the segments.~~

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~(in thousands,~~ ~~except headcount, ratios, time periods and percentages)~~

Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us” refer to OneSpan Inc. and its subsidiaries.

This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of OneSpan for the ~~three and nine months~~periods ended September 30, ~~2022~~2023 and ~~2021,~~2022 as well as our consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (the “Form 10-K”).

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of applicable U.S. securities laws, including statements regarding the outcomes we expect from our strategic transformation ~~plan;~~plan and our cost reduction actions approved in August 2023, including the ~~results we expect~~ability of those actions and our restructuring plan originally approved in December 2021 to allow us to accelerate adjusted EBITDA growth, enable us to return capital to stockholders, and drive value creation by growing revenue efficiently and profitably; estimates concerning the timing and amount of savings, adjusted EBITDA improvements, and/or restructuring charges that may result from the ~~investments we are making in sales, marketing,~~August 2023 cost reduction actions and ~~product development;~~our prior restructuring plan; our plans for managing our Digital Agreements and Security Solutions segments; our ~~expected financial results for full year 2022;~~expectations regarding our use of technology acquired in our ProvenDB acquisition or other acquisitions we may complete in the ~~potential benefits, performance~~future; expectations about trends in our cost of goods sold, gross margin, and functionality of our products and solutions, including future offerings; our expectations, beliefs, plans, operations and strategies relating to our business and the future of our business; product enhancements and introductions; future sales and marketing, ~~expenditures; plans to expand our salesforce;~~research and development, and general and administrative expenses; the impact of foreign currency ~~exchange~~ rate ~~impacts; the effects~~fluctuations; expectations regarding sources and uses of ~~supply chain disruptions;~~cash; and our general expectations regarding our operational or financial performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate", "anticipate", “expect", "intend", "continue", "outlook", "may", "will", "should", "could", "confident", or "might", and other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. ~~Factors~~Important factors that could materially affect our business and financial results include, but are not limited to: our ability to execute our strategic transformation ~~plan;~~plan and our planned cost reduction actions in the expected timeframe and to achieve the outcomes we expect from them; unintended costs and consequences of our cost reduction actions, including higher than anticipated restructuring charges, disruption to our operations, litigation or regulatory actions, reduced employee morale, attrition of valued employees, adverse effects on our reputation as an employer, loss of institutional know-how, slower customer service response times, and reduced ability to complete or undertake new product development projects and other business, product, technical, compliance or risk mitigation initiatives; our ability to attract new customers and retain and expand sales to existing customers; our ability to effectively develop and expand our sales and marketing capabilities; our ability to hire, train, and ~~train~~retain sales and other employees necessary to implement our strategic transformation plan; our ability to ~~generate~~successfully develop and market ~~demand~~new product offerings and product enhancements; the loss of one or more large customers; difficulties enhancing and maintaining our brand recognition; competition; lengthy sales ~~leads; market acceptance~~cycles; departures of senior management or other key employees; changes in customer requirements; interruptions or delays in the performance of our products and solutions; ~~investments~~real or perceived malfunctions or errors in ~~new products or businesses that may not achieve expected returns; competition; changes in customer requirements;~~our products; the potential effects of technological changes; economic recession, inflation, and political instability; ~~the impact of the COVID-19 pandemic and actions taken to contain it;~~ our ability to effectively manage third party partnerships, acquisitions, divestitures, alliances, or joint ~~ventures and other portfolio actions; the increasing frequency and sophistication of~~ventures; security breaches or cyber-attacks; claims that we have infringed the intellectual property rights of others; litigation or regulatory actions; price competitive bidding; changing laws, government regulations or policies; pressures on price levels; component shortages; delays and disruption in global transportation and supply chains; reliance on third parties for certain products and data center services; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; actions of activist stockholders; and exposure to increased economic and operational uncertainties from operating a global business, as well as ~~those~~other factors described in the “Risk Factors” section of our most recent Annual Report on Form 10-K, as updated by the “Risk Factors” section of our Quarterly Report on Form 10-Q for the quarter ended June, 30, ~~2022.~~2023. Our filings with the Securities and Exchange Commission (the “SEC”) and other important information can be found in the Investor Relations section of our website at ~~investors.onespan.com~~.investors.onespan.com. We do not have any intent, and disclaim any obligation, to update the forward-looking information to reflect events that occur, circumstances that exist or changes in our expectations after the date of this Form 10-Q, except as required by law.

Our website address is included in this Quarterly Report on Form 10-Q as an inactive textual reference only.

Overview

OneSpan ~~designs, develops, and markets solutions that enable~~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 turn allows them to drive growth, reduce risk, and unlock their business potential.

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We are a global leader in providing high-assurance identity and authentication security as well as ~~simplified e-signature workflows.~~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. Our solutions ~~enable trust that ensures~~help our clients ensure the integrity of the people and ~~artifacts~~records associated with digital agreements, transactions, and ~~transactions across~~interactions in industries including banking, financial services, healthcare and professional services. We are trusted by global blue-chip enterprises, including more than 60% of the world’s largest 100 banks, and process millions of digital agreements and billions of transactions in more than 100 countries annually.

Our ~~solution~~solutions are powered by a portfolio ~~includes a broad set~~ of ~~offerings~~products and services across ~~several categories, including~~ identity

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verification, authentication, ~~transaction signing, mobile security, electronic signature, and secure video collaboration for~~ virtual interactions and ~~transactions.~~

transactions, and secure digital storage. These products and services can be acquired and embedded individually within enterprise business workflows or assembled into tailored solutions for simple yet secure business-to-business, business-to-employee, and business-to-customer experiences.

We offer our solutions through cloud-based and, in select cases, on-premises solutions using both open standards and proprietary technologies. We offer our products primarily through a subscription licensing ~~model, including 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 been building a new executive team over the course of 2022 to effect the transformation.

In May 2022, we announced a three-year strategic transformation plan that ~~we believe will enable us to build~~began 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.January 1, 2023 (the “Strategic Plan”). In conjunction with the ~~strategic transformation plan~~Strategic Plan and to enable a more efficient capital deployment model, effective with the quarter ended June 30, 2022, we began reporting under the following two lines of business, which are our reportable operating segments: Digital Agreements and Security Solutions.

●

~~Digital Agreements.~~

•Digital Agreements. 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 e-signature solution and our Virtual Room solution. 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 interaction, e-transactions and e-vaulting (storage) in the Digital Agreements segment. This segment also includes costs attributable to our transaction cloud platform.

●

~~Security Solutions.~~ Security Solutions consist 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 tokens that are not cloud connected devices.

~~We expect to manage~~ Digital Agreements ~~for accelerated growth~~consists of solutions that enable our clients to secure and ~~market share gains~~automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include OneSpan Sign e-signature and OneSpan Notary. This segment also includes costs attributable to our transaction cloud platform.

•Security Solutions. Security Solutions ~~for cash flows given its more modest growth profile. Across both segments, we~~consists of our broad portfolio of software products, software development kits (SDKs) and Digipass authenticator devices that are ~~building~~used to build applications designed to defend against attacks on ~~our strong foundation~~digital transactions across online environments, devices, and applications. The software products and SDKs included in ~~both e-signature~~the Security Solutions segment are largely on-premises software products and ~~cybersecurity by enhancing product features, developing new~~include identity verification, multi-factor authentication and ~~next-generation~~transaction signing solutions, ~~and building out a new transaction~~ ~~cloud platform, which we expect will allow us to efficiently deliver~~such as mobile application security and mobile software tokens.

In connection with the Strategic Plan, during the three months ended March 31, 2023, we changed our methodology for allocating expenses between the segments to better reflect the shift in employee time, effort, and costs toward supporting the growth of our Digital Agreements segment instead of our Security Solutions segment.

In June 2023, we determined that it will take longer than originally expected to achieve the revenue growth levels contemplated by our Strategic Plan. It has been more time-consuming than we projected to build our Digital Agreements sales pipeline, generate demand for our Digital Agreements solutions through marketing efforts, and improve our sales force productivity levels. A number of factors have contributed to the challenges achieving the originally planned growth levels on the timeframes set forth in the Strategic Plan, including: macroeconomic uncertainties, which have resulted in longer sales cycles and greater price sensitivity on the part of customers; increasing maturity and competitiveness in the market for e-signature ~~solutions~~solutions; and higher pricing aggressiveness from competitors.

As a result of the additional insights we have gained into our business transformation process, in August 2023, our Board of Directors (the "Board") approved cost reduction actions (the "2023 Actions") to seek to drive higher levels of adjusted EBITDA while maintaining our long-term growth potential. We intend to continue to pursue the overall strategy set forth in our original Strategic Plan while implementing adjustments to our ~~customers across their entire digital agreement lifecycle. We also~~operating model that are intended to achieve greater operational efficiency, drive higher levels of adjusted EBITDA, and strengthen OneSpan's ability to create value for our shareholders.

Our updated Strategic Plan, the 2023 Actions, and our restructuring plan ~~to enhance our go-to-market strategy by prioritizing growth at large enterprise accounts, expanding our direct sales force, and accessing new routes to market through alliances and partnerships.~~

~~Our transformation plan involves~~originally adopted in December 2021 involve numerous risks and uncertainties. ~~Please~~For additional details please see Item IA, Risk ~~Factors.~~

Factors, below and Part 1, Item 1A, Risk Factors in our Form 10-K.

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Restructuring Plan

In December 2021, our Board approved a restructuring plan designed to advance our operating model, streamline our business, improve efficiency, and enhance our capital resources. The first phase of this restructuring plan began and was substantially completed during the three months ended March 31, 2022.

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In May 2022, our Board approved additional actions related to the restructuring plan through the year ending December 31, 2025. The additional actions ~~consist solely of headcount-related reductions~~are designed to continue to advance the same objectives as the first phase of the plan.

~~As part~~

Actions taken under the plan consist of the ~~restructuring plan, we~~following:

•We have reduced headcount by eliminating approximately ~~100 positions. We~~240 redundant positions and incurred severance, ~~and~~ related benefits, and retention pay costs.

•In June 2023, we vacated our Chicago leased office space and abandoned the underlying leases, and, in future periods, plan to further align our real estate footprint with the Company's operating needs. We recorded lease termination costs, non-cash impairment charges related to the vacated location's fixed assets, and a gain on the underlying right-of-use asset and liability write-off.

•In September 2023, we vacated our Brussels office space and terminated the lease. We recorded lease termination costs and a loss on the underlying right-of-use asset and liability write-off.

•In June 2023, the Company made the decision to discontinue investments in ~~“Restructuring~~its Digipass CX product, which resulted in non-cash impairment charges for capitalized software and ~~other~~write-offs of inventories.

•We are evaluating our vendor spend and updating or eliminating service providers in instances where there are cost-saving opportunities and where redundancies exist. Vendor rationalization costs include costs for contractually committed services the Company is no longer utilizing.

We plan to incrementally take actions under the restructuring plan until December 31, 2025, when the plan terminates.

On August 3, 2023, our Board of Directors approved the 2023 Actions. We anticipate incurring restructuring charges in connection with the 2023 Actions, and expect that these charges will consist primarily of charges related ~~charges”~~to employee transition and severance payments, employee benefits and retention related payments, and share-based compensation, with a significantly smaller amount of charges relating to vendor contract termination and rationalization actions. We currently expect that we will incur restructuring charges of approximately $11 million to $12 million in employee transition and severance payments related to the 2023 Actions (excluding any retention-related payments to employees).

We expect to have completed approximately 85% of the workforce reductions that are planned as part of the 2023 Actions by the end of 2023, and that most of the remaining workforce reductions will occur over the course of 2024 as several Company projects are completed during the year. The vendor contract component of the 2023 Actions is planned for completion by the end of 2025.

Business Acquisitions

On February 22, 2023, we acquired substantially all of the assets of the ProvenDB business of Southbank Software Pty Ltd. ("ProvenDB") under the terms of an asset purchase agreement. ProvenDB is a developer of secure storage that leverages blockchain technology in order to prevent data tampering or alteration of documents. The technology acquired in the ~~condensed consolidated statements~~acquisition is expected to provide a foundational architecture for future blockchain-based digital solutions, including secure storage. The results of operations ~~for~~since the ~~three and~~acquisition date are included in our Digital Agreements reportable operating segment.

Macroeconomic Conditions

During the first nine months ~~ended September 30, 2022. See Note 15 -~~ ~~Restructuring and Other Related Charges~~~~, for additional detail.~~

~~Macroeconomic Events~~

~~Macroeconomic events impacting our business are discussed below. During the third quarter~~ of ~~2022,~~2023, we continued to operate under uncertain market conditions, influenced by ~~events such as the Russia-Ukraine conflict, the continuing impact~~instability in certain parts of the ~~COVID-19 pandemic, disruption to our supply chain and~~banking sector, the inflationary cost ~~environment.~~

environment, geopolitical instability, and general

~~Russia-Ukraine Conflict~~

~~While we do not anticipate that the current posture~~Table of ~~the Russia-Ukraine conflict will materially~~Contents

concerns about economic conditions. Our customers have increased scrutiny on spending decisions, which has resulted in longer sales cycles for both existing customer 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 disruption could materially and adversely affect our company and its operations. The conflict has and may continue to have a significant impact on the global macroeconomic and geopolitical environments, including increased volatility in capital and commodity markets, rapid changes to regulatory conditions (including the use of sanctions), supply chain and operational challenges for multinational corporations, inflationary pressures and an increased risk of cybersecurity incidents.new customer opportunities. For a ~~more~~ complete discussion of the risks we encounter in our business, please refer to Item IA, Risk Factors, below and Part ~~II,~~1, Item 1A, ~~“Risk Factors”~~Risk Factors, in our Form 10-K.

Recent Developments

We plan to announce in the next week following the filing of this Quarterly Report on Form ~~10-Q.~~

~~COVID-19, Supply Chain Disruption and Inflationary Cost Environment~~

~~As we have progressed through 2022, our supply chain has been impacted by global issues related~~10-Q a modified “Dutch auction” tender offer for approximately $20 million of OneSpan common stock at a specified price range that is yet 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 the latterbe determined. The tender offer will be part of ~~the fourth quarter~~our stock repurchase program announced in May 2022, which is further discussed in Part II, Item 2 of 2021, cost increases have been driven by 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 throughout 2022. Further, we anticipate the broader impact of inflationary pressures and increased material and supply chain costs and disruptions to continue throughout 2022. We are closely monitoring our supply chain, including impacts from manufacturing lockdowns related to the spread of COVID-19 in China which continue to disrupt the semiconductor supply market. Accordingly, in the first nine months of 2022 we focusedthis Quarterly Report 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 products until supply constraints have been remediated. We are also considering alternative manufacturing and supply arrangements 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 have led to significant strengthening of the U.S. dollar against other global currencies in 2022. The strong U.S. dollar reduced the impact of cash generated from our foreign operations during the first three quarters of 2022, driven by revenues and costs that are denominated in foreign currencies, which has impacted, and which we expect to continue to impact, our operating cash flows and net income throughout 2022.

Although the macroeconomic environment continued to introduce challenges in 2022, we are encouraged by customer demand for our products and services, particularly in our e-signature solution in the Digital Agreements

Form 10-Q.

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segment and our mobile, authentication and Digipass solutions in our Security Solutions segment. We believe our existing balances of cash and cash equivalents, along with our short-term investments, will continue to be sufficient to satisfy our liquidity requirements associated with our existing operations.

Components of Operating Results

Revenue

We generate revenue from the sale of ~~on-premises and cloud~~our subscriptions, maintenance and support, professional services, and ~~our~~Digipass hardware products. ~~Our revenue~~We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments ~~which may affect~~reflecting the ~~comparability~~transactional nature of significant parts of our ~~period-to-period results, particularly over shorter timeframes.~~

●

~~Product~~ ~~and~~ ~~license revenue~~~~. Product and license revenue includes hardware products and software licenses, which are provided on a perpetual or term basis subscription model.~~

business.

•Product and license revenue. Product and license revenue includes Digipass hardware products and software licenses, which are provided on a perpetual or term basis subscription model.

●

~~Service and other revenue~~~~. Service and other revenue includes solutions that are provided on a cloud-based subscription model, maintenance and support, and professional services.~~

•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.

Cost of Goods Sold

Our total cost of goods sold consists of cost of product and license revenue and cost of service and other revenue. We expect our cost of goods sold to increase in absolute dollars as our business grows, although it may fluctuate as a percentage of total revenue from period to period.

●

~~Cost of product and license revenue~~~~. Cost of product and license revenue primarily consists of direct product and license costs, including personnel costs, production costs, and freight.~~

●

~~Cost of service and other revenue~~. Cost of service and other revenue primarily consists of costs related to cloud solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance and support.

•Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs, including personnel costs, production costs, freight, and inventory impairments for discontinued products and services.

•Cost of service and other revenue. Cost of service and other revenue primarily consists of costs related to cloud subscription solutions, including personnel and equipment costs, depreciation, amortization, and personnel costs of employees providing professional services and maintenance and support.

Gross Profit

Gross profit is revenue net of the cost of goods sold. Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including our average selling price, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.

Operating Expenses

Our operating expenses are generally based on anticipated revenue levels and fixed over short periods of time. As a result, small variations in revenue may cause significant variations in the period-to-period comparisons of operating income or operating income as a percentage of revenue.

Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between ~~55%~~50% and ~~65%~~60% of our operating ~~expenses, respectively.~~expenses. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive.

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates during the three months ended September 30, 2023 compared to the comparable prior year period

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resulted in an increase in operating expenses of approximately $0.7 million. We estimate the change in currency rates during the nine months ended September 30, 2023 compared to the comparable prior year period resulted in an increase in operating expenses of approximately $0.1 million.

The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. ~~Operating expenses for~~Long-term incentive plan compensation expense includes both stock-based incentives and an immaterial amount of cash-based incentives. During the three months ended September 30, 2023 and 2022, operating expenses included $1.9 million and $3.1 million, respectively, of expenses related to stock-based and long-term incentive plans. During the nine months ended September 30, 2023 and 2022, operating expenses included ~~$3.1~~$10.4 million and $5.6 million, respectively, of expenses related to stock-based and long-term incentive ~~plan costs compared to~~

plans.

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~~$0.5 million and $3.6 million of stock-based and long-term incentive plan cost~~Stock-based compensation expense for the three and nine months ended September 30, ~~2021, respectively. Stock-based compensation expense during~~2023 reflected our 2023 annual equity grant to executives and other employees who were hired in the ~~nine months ended September 30,~~second and third quarters of 2022, ~~included a significant number~~including the impact of ~~new grants to our newly hired executives, as well as~~ an overall expansion of the equity incentive program that we put in place during 2022 for the long-term retention of our employees. The reversal in the three and nine months ended September 30, 2023 and 2022 of certain long-term incentive plan compensation accruals and unvested stock-based incentives for employees who were severed from the Company during that period was also a factor in the year-over-year increase in stock-based compensation expense.

Our operating expenses consist of:

●

~~Sales and marketing~~. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. 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.

●

~~Amortization of intangible assets~~~~. Acquired intangible assets are amortized over their respective amortization periods, and are periodically evaluated for impairment.~~

●

~~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 nine months ended September 30, 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 the 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 three months ended September 30, 2022.

●

~~Restructuring and other 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. During the three months ended September 30, 2022, we began presenting restructuring charges, previously included in the sales and marketing, research and development, and general and administrative expense lines, on its own line item on the condensed consolidated statement of operations, in order to improve clarity and comparability of all operating expenses across periods.

•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 decrease in absolute dollars as we take the 2023 Actions described in "Business Transformation" above. However, 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 decrease in absolute dollars as we implement the Actions, and as we capitalize certain costs related to the expansion of our cloud product portfolio. However, our research and development expenses may fluctuate as a percentage of total revenue.

•General and administrative. General and administrative expenses consist primarily of personnel costs, legal, consulting and other professional fees, and long-term incentive compensation. We expect general and administrative expenses to decrease in absolute dollars as we implement the Actions, although our general and administrative expenses may fluctuate as a percentage of total revenue.

•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 consist of employee costs which include severance and related benefits incurred from headcount reductions as part of our restructuring plan and the 2023 Actions; real estate rationalization costs incurred to optimize our real estate footprint which include lease contract termination costs, asset impairment charges, and lease right-of-use asset and lease liability write-off gains or losses; product and services optimization costs incurred to advance our operating model which include impairments of capitalized software assets no longer in use; and vendor rationalization costs for contractually committed services the Company is no longer utilizing. We plan to incrementally incur additional restructuring costs through December 31, 2025, when the restructuring plan terminates and the 2023 Actions are completed.

Segment Results

Segment operating income (loss) consists of the revenue generated by a segment, less the direct costs of revenue, sales and marketing, research and development ~~and general and administrative expenses,~~ amortization and impairment charges that are incurred directly by a segment. Unallocated corporate costs include ~~companywide~~general and administrative expense and other company-wide costs that are not attributable to a particular segment. Financial results by reportable operating segment are included below under Results of Operations.

~~Table of Contents~~

Interest Income, ~~(Expense),~~ Net

Interest income, ~~(expense),~~ net, consists of income earned on our ~~cash,~~ cash equivalents and short-term investments. Our cash equivalents and short-term investments are invested in short-term instruments at current market rates.

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Other (Expense) Income, Net

Other ~~Expense (Income), Net~~

~~Other expense (income),~~(expense) income, net, primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and development in those countries and other miscellaneous non-operational expenses.

Income Taxes

Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). The majority of our IP in our Security Solutions business is owned by two subsidiaries, one in the U.S. and one in Switzerland. The e-signature IP in our Digital Agreements business is owned by a subsidiary in Canada. These ~~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 subsidiaries~~the IP owners on either a percentage of revenue or on a cost plus basis or both. Under this structure, the earnings of our service provider subsidiaries are relatively constant. These service provider companies tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings ~~tend to~~ flow to the U.S. company and Swiss company. In 2022, earnings flowing to the U.S. company are expected to be taxed at a rate of 21% to 25%, while earnings flowing to the Swiss company are expected to be taxed at a rate ranging from 11% to 15%, plus Swiss federal withholding tax of an additional 5%. A Canadian and UK subsidiary of the Company currently sell to and service global customers directly. In addition, many of our 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 strongly influenced by the effective tax rate of our foreign operations. Changes in the effective rate related to foreign operations reflect changes in the geographic mix of earnings and the tax rates in each of the countries in which it is earned. The statutory tax rate for the primary foreign tax jurisdictions ranges from 11% to 35%.

~~Foreign Exchange Rate~~

Impact

~~We generate~~ of Currency Fluctuations

During the three months ended September 30, 2023 and 2022, respectively, we generated approximately ~~85%~~83% and 81% of our ~~revenue~~revenues and ~~have substantial operations~~incurred approximately 61% and 66% of our operating expenses outside of the ~~United States,~~U.S. During the nine months ended September 30, 2023 and ~~therefore~~2022, respectively, we generated approximately 82% and 83% of our revenues and incurred approximately 58% and 68% of our operating expenses outside of the U.S. As a result, changes in ~~foreign~~ currency exchange rates, ~~particularly~~especially the Euro exchange rate and the Canadian Dollar exchange rate, can have a significant impact on our revenue and operating expenses. ~~Changes~~

While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the nine months ended September 30, 2023 was denominated in ~~foreign~~U.S. Dollars. For the nine months ended September 30, 2023, approximately 52% of our revenue was denominated in U.S. Dollars, 43% was denominated in Euros and 5% was denominated in other currencies. For the nine months ended September 30, 2022, approximately 55% of our revenue was denominated in U.S. Dollars, 41% 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 natural hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. If the amount of our revenue in Europe denominated in Euros continues as it is now or declines, we may not be able to balance fully the exposures of currency exchange rates ~~negatively impacted~~on revenue ~~by $4.5~~and operating expenses.

The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar. Accordingly, assets and liabilities of our foreign subsidiaries are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates generated comprehensive loss of $2.6 million and ~~$9.3~~comprehensive gain of $0.1 million during the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2022, translation adjustments arising from differences in exchange rates generated comprehensive loss of $4.8 million and ~~favorably impacted net~~$12.1 million, respectively.

Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other (expense) income, ~~by $1.4~~net. Losses resulting from foreign currency transactions were $0.1 million and ~~$2.1~~$0.5 million for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2022, ~~respectively, as compared to the same periods in 2021.~~

losses resulting from foreign currency transactions were $1.3 million and $2.6 million, respectively.

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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.

~~Table of Contents~~

The following table sets forth, for the periods indicated, selected segment and consolidated operating results.


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except percentages)	2023			2022			2023			2022
Digital Agreements
Revenue	$	13,012		$	12,200		$	36,426		$	35,955
Gross profit	$	9,808		$	9,736		$	26,839		$	27,669
Gross margin	75		%	80		%	74		%	77		%
Operating (loss) income	$	(4,666)		$	2,160		$	(17,820)		$	2,823

Security Solutions
Revenue	$	45,826		$	44,947		$	135,752		$	126,429
Gross profit	$	30,861		$	28,695		$	87,410		$	82,946
Gross margin	67		%	64		%	64		%	66		%
Operating income	$	15,673		$	5,711		$	39,827		$	21,399

Total Company:
Revenue	$	58,838		$	57,147		$	172,178		$	162,384
Gross profit	$	40,669		$	38,431		$	114,249		$	110,615
Gross margin	69		%	67		%	66		%	68		%

Statements of Operations reconciliation:
Segment operating income	$	11,007		$	7,871		$	22,007		$	24,222
Corporate operating expenses not allocated at the segment level	15,801			13,496			52,695			47,328
Total Company operating loss	$	(4,794)		$	(5,625)		$	(30,688)		$	(23,106)

Revenue

Revenue by products and services allocated to the segments for the three and nine months ended September 30, ~~2022~~2023, and ~~2021~~2022 is as follows:

Three Months Ended

September 30, 2022

September 30, 2021

Digital Agreements

Security Solutions

Digital Agreements

Security Solutions
(In thousands)

Subscription (1)
$
10,321
$
11,941
$
8,262
$
9,545
Maintenance and support

1,693

11,158

1,580

11,154
Professional services and other (2)

186

2,034

267

3,560
Hardware products

—

19,814

20

17,888
Total Revenue
$
12,200
$
44,947
$
10,129
$
42,147


	Three Months Ended September 30,
	2023				2022
	Digital Agreements		Security Solutions		Digital Agreements		Security Solutions
(In thousands)
Subscription	$	11,807	$	14,378	$	10,321	$	11,941
Maintenance and support	995		11,276		1,693		11,158
Professional services and other (1)	210		1,333		186		2,034
Hardware products	—		18,839		—		19,814
Total Revenue	$	13,012	$	45,826	$	12,200	$	44,947

Table of Contents

Nine Months Ended

September 30, 2022

September 30, 2021

Digital Agreements

Security Solutions

Digital Agreements

Security Solutions
(In thousands)

Subscription (1)
$
30,728
$
34,632
$
24,201
$
25,734
Maintenance and support

4,453

32,522

4,469

33,822
Professional services and other (2)

774

5,327

985

11,090
Hardware products

—

53,948

65

54,962
Total Revenue
$
35,955
$
126,429
$
29,720
$
125,608

~~(1)~~

~~Subscription includes cloud and on-premises subscription revenue, previously referred to as “subscription” and “term-based software licenses”.~~

~~(2)~~

Professional services & other includes perpetual software licenses revenue, which was less than 3% of total revenue for both the three and nine months ended September 30, 2022, and less than 6% of total revenue for both the three and nine months ended September 30, 2021.


	Nine Months Ended September 30,
	2023				2022
	Digital Agreements		Security Solutions		Digital Agreements		Security Solutions
(In thousands)
Subscription	$	32,641	$	46,485	$	30,728	$	34,632
Maintenance and support	3,121		31,914		4,453		32,522
Professional services and other (1)	664		4,002		774		5,327
Hardware products	—		53,351		—		53,948
Total Revenue	$	36,426	$	135,752	$	35,955	$	126,429

Total revenue increased by ~~$4.9~~$1.7 million, or 9%3%, during the three months ended September 30, ~~2022~~2023 compared to the three months ended September 30, ~~2021.~~2022. Changes in foreign exchange rates as compared to the same period in ~~2021 negatively~~2022 favorably impacted revenue by approximately ~~$4.5~~$1.9 million.

For the nine months ended September 30, ~~2022, total~~2023, revenue increased by ~~$7.1~~$9.8 million, or 5%6%, compared to the nine months ended September 30, ~~2021.~~2022. Changes in foreign exchange rates as compared to the same period in ~~2021 negatively~~2022 favorably impacted revenue by approximately ~~$9.3~~$1.0 million.

Additional information on our revenue by segment follows.

●

~~Digital Agreements~~ revenue increased $2.1 million, or 20%, during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, revenue increased $6.2 million, or 21%, compared to the same period in the prior year. The increase in Digital Agreements revenue for the three and nine month year-over-year periods was driven by new customer revenue and existing customer expansion, partially offset primarily by delays in certain customer renewals, the non-renewal of several contracts, and contraction due to certain existing customers reducing their purchase volumes as compared to the height of the COVID-19 pandemic. Year-over-year growth in Digital Agreements for the three and nine months ended September 30, 2022 was also positively impacted by a significantly higher proportion of cloud subscription revenue relative to on-premises revenue for both periods.

●

~~Security Solutions~~ revenue increased $2.8 million, or approximately 7%, during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. This increase was driven by higher subscription and hardware revenues. For the three months ended September 30, 2022, our on-premises subscription revenue increased as a result of higher customer demand from existing customers and the conversion of perpetual license to term license deals. The increase in hardware revenue was primarily attributable to a higher average selling price for our hardware as a result of customer mix (higher volume sales from customers with a higher average selling price), partially offset by lower customer purchase volumes due to the timing of certain clients restocking their inventories and project delays for certain of our customers. For the nine months ended September 30, 2022, Security Solutions revenue increased $0.8 million, or 1%, compared to the same period in the prior year. This increase was primarily related to expansion of business from existing customers and the conversion of perpetual license to term license deals, partially offset by lower hardware purchase volumes by existing customers. During the three and nine months ended September 30, 2022, our hardware revenue was also impacted by electronic component shortages, particularly microprocessors, as a result of the global supply chain disruption.

•Digital Agreements revenue increased $0.8 million, or 7%, during the three months ended September 30,

2023 compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, Digital Agreements revenue increased $0.5 million, or 1%. The increase in Digital Agreements revenue for both periods was attributable to higher cloud subscription revenue from existing customer expansion, offset by contraction due to our strategy of sunsetting our on-premises e-signature product. Changes in foreign currency rates compared to the same periods in 2022 positively impacted Digital Agreements revenue by less than $0.1 million for the three months ended September 30, 2023 and negatively impacted Digital Agreements revenue by less than $0.1 million for the nine months ended September 30, 2023.

•Security Solutions revenue increased $0.9 million, or approximately 2%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in Security Solutions revenue was attributable to higher on-premises term subscription revenue from existing customer expansion, offset by lower perpetual license revenue and lower volumes of hardware sold. Changes in foreign exchange rates for the three months ended September 30, 2023 compared to the same period in 2022 favorably impacted Security Solutions revenue by $1.8 million. For the nine months ended September 30, 2023, Security Solutions revenue increased $9.3 million, or 7%, which was driven primarily by higher on-premises term subscription revenue, driven by existing customer expansion and, to a lesser extent, new customer revenue, partially offset by lower perpetual license revenue and lower volumes of hardware sold. Changes in foreign exchange rates for the nine months ended September 30, 2023 compared to the same period in 2022 favorably impacted Security Solutions revenue by $1.0 million.

~~Table of Contents~~

Our revenue is heavily influenced by the timing of orders and shipments. As a result, we believe that the overall strength of our business is best evaluated over a longer term where the impact of transactions in any given period is not as significant as in a quarter-over-quarter comparison.

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Revenue by Geographic Regions: We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes sales in North, Central, and South America; and 3) Asia Pacific (APAC), which includes ~~Asia as well as~~ Australia, New Zealand, and ~~New Zealand.~~India. The breakdown of revenue in each of our major geographic areas was as follows:

Three months ended September 30,

Nine months ended September 30,


2022

2021

2022

2021

(In thousands, except percentages)

Revenue









EMEA

$ 25,999

$ 21,965

$ 74,396

$ 73,784

Americas

20,394

17,621

56,972

51,160

APAC

10,754

12,690

31,016

30,384

Total revenue

$ 57,147

$ 52,276

$ 162,384

$ 155,328

% of Total Revenue

EMEA

45%

42%

46%

48%

Americas

36%

34%

35%

33%

APAC

19%

24%

19%

20%

~~Revenue generated in EMEA during~~


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
(In thousands, except percentages)
Revenue
EMEA	$	26,233		$	25,999		$	80,592		$	74,396
Americas	19,999			20,394			58,828			56,972
APAC	12,606			10,754			32,758			31,016
Total revenue	$	58,838		$	57,147		$	172,178		$	162,384

% of Total Revenue
EMEA	45		%	45		%	47		%	46		%
Americas	34		%	36		%	34		%	35		%
APAC	21		%	19		%	19		%	19		%

For the three months ended September 30, 2022 was $4.0 million, or 18%, higher than the three months ended September 30, 2021, driven primarily by a higher volume of term-based license sales, including the transition of certain customers from perpetual licenses to term-based licenses. Higher hardware revenue as a result of a favorable average selling price from customer mix was also a factor in the increase. For the nine months ended September 30, 2022,2023, revenue generated in EMEA was ~~$0.6~~$0.2 million, or 1%, higher than the same period in ~~2021.~~

~~Revenue~~2022, primarily due to an increase in on-premises term subscription revenue from existing customer expansion, partially offset by lower hardware revenue and perpetual software license revenue. For the nine months ended September 30, 2023, revenue generated in EMEA was $6.2 million, or 8%, higher than the ~~Americas during~~same period in 2022 driven by an increase in on-premises term subscription revenue, partially offset by lower hardware revenue and perpetual software license revenue.

For the three months ended September 30, ~~2022~~2023, revenue generated in the Americas was ~~$2.8~~$0.4 million, or ~~16%~~2%, lower than the three months ended September 30, 2022. The decrease was primarily driven by lower hardware revenue and, to a lesser extent, lower mobile authentication revenue, offset partially by an increase in Digital Agreements revenue. For the nine months ended September 30, 2023, revenue generated in the Americas was $1.9 million, or 3%, higher than the nine months ended September 30, 2022. The increase was primarily driven by growth in Security Solutions, including hardware, mobile, and cloud authentication, as well as mobile application security.

For the three months ended September 30, 2023, revenue generated in APAC was $1.9 million, or 17%, higher than the three months ended September 30, 2021. This increase was primarily driven by higher cloud subscription revenue due to both new customers and expansion of services to existing customers as a result of higher usage of our products. Also contributing to the increase was higher hardware revenue driven by both higher customer purchase volumes and a higher average selling price due to customer mix.2022. For the nine months ended September 30, ~~2022,~~2023, revenue generated in ~~the Americas~~APAC was ~~$5.8~~$1.7 million, or ~~11%~~6%, higher than ~~the same period in 2021, driven primarily by higher cloud subscription revenue as a result of both new customers and expansion of services to existing customers.~~

Revenue generated in the Asia Pacific region during the three months ended September 30, 2022 was $2.0 million, or 15%, lower than the three months ended September 30, 2021, driven by lower hardware revenue. For the nine months ended September 30, ~~2022, revenue generated in the Asia Pacific region was $0.6 million, or 2%, higher than the same period in 2021,~~2022. The increases for both periods were driven by higher customer ~~demand for our on-premises~~purchase volumes of hardware products and ~~cloud subscription products, partially offset by lower hardware revenue.~~

a higher average selling price.

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Cost of Goods Sold and Gross Margin

The following table presents cost of goods sold for our products and services for the three and nine months ended September 30, ~~2022~~2023 and ~~2021:~~

2022:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
(In thousands, except percentages)
Cost of goods sold
Product and license	$	11,004		$	12,646		$	36,330		$	32,672
Services and other	7,165			6,070			21,599			19,097
Total cost of goods sold	$	18,169		$	18,716		$	57,929		$	51,769

Gross profit	$	40,669		$	38,431		$	114,249		$	110,615

Gross margin
Product and license	65		%	60		%	62		%	63		%
Services and other	74		%	77		%	72		%	74		%
Total gross margin	69		%	67		%	66		%	68		%

~~Table of Contents~~

Three months ended September 30,

Nine months ended September 30,


2022
2021

2022
2021
(In thousands, except percentages)

Cost of goods sold








Product and license

$ 12,646

$ 9,502

$ 32,672

$ 30,819
Services and other

6,070

6,379

19,097

19,041
Total cost of goods sold

$ 18,716

$ 15,881

$ 51,769

$ 49,860

Gross profit

$ 38,431

$ 36,395

$ 110,615

$ 105,468

Gross margin

Product and license

60%

66%

63%

64%
Services and other

77%

74%

74%

73%
Total gross margin

67%

70%

68%

68%

The cost of product and license revenue decreased by $1.6 million, or 13%, and increased $3.7 million, or 11%, during the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022. The decrease in cost of goods sold for the three months ended September 30, 2023 was driven primarily by a decreased in hardware revenue, offset partially by an increase in license revenue. The increase for the nine months ended September 30, 2023, was primarily due to higher freight costs, higher third-party license costs, and $1.6 million of inventory impairments in conjunction with the discontinuation of investments in our Digipass CX product, which was recorded in June 2023.

The cost of services and other revenue increased by ~~$3.1~~$1.1 million, or ~~33%~~18%, and $2.5 million, or 13%, during the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022. The increase in cost of services for the three months ended September 30, 2023 was largely due to a one-time credit from a cloud service provider in the prior year period, along higher cloud platform costs related to higher volume usage. The increase for the nine months ended September 30, 2023 include the same items as the three month period ended September 30, 2023, and higher amortization of our capitalized software costs.

Gross profit increased $2.2 million, or 6%, during the three months ended September 30, ~~2022~~2023 compared to the three months ended September 30, ~~2021. During~~2022. Gross profit margin was 69% for the three months ended September 30, 2023, compared to 67% for the three months ended September 30, 2022. Gross profit increased $3.6 million, or 3%, during the nine months ended September 30, ~~2022, the cost of product and license revenue increased $1.9 million, or 6%,~~2023 compared to the nine months ended September 30, ~~2021. Cost of goods sold~~2022. Gross profit margin was 66% for the nine months ended September 30, 2023, compared to 68% for the nine months ended September 30, 2022. The changes in profit margin for both the three and nine months ended September 30, ~~2022 were~~2023 was driven primarily impacted by price increases for our hardware components, supply chain disruption, and higher freight costs than the prior year. In addition, and to a lesser extent, the cost of goods sold was impacted by product mix.

The cost of services and other revenue decreased by $0.3 million, or 5%, during the three months ended September 30, 2022 compared to the three months ended September 30, 2021, driven by lower maintenance and professional services revenue, as well as a one-time incentive credit from our cloud services provider. For the nine months ended September 30, 2022, the cost of services and other revenue increased by less than $0.1 million.

Gross profit increased $2.0 million, or 6%, during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. During the nine months ended September 30, 2022 gross profit increased by $5.1 million, or 5%, compared to the nine months ended September 30, 2021. Gross profit margin was 67% and 68% for the three and nine months ended September 30, 2022, respectively, compared to 70% and 68% for the three and nine months ended September 30, 2021, respectively. The decrease in profit margin for the three months ended September 30, 2022 was primarily driven by higher revenue and the changes in costs ~~for our hardware materials and freight.~~

of revenues discussed above.

The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies, including the Euro. The impact of changes in currency rates are estimated to have had an unfavorable impact on overall cost of goods sold of less than $0.2 million for the three months ended September 30, 2023 and a favorable impact on overall cost of goods sold of ~~$0.2 million and $0.4~~less than $0.1 million for the ~~three and~~ nine months ended September 30, ~~2022, respectively.~~2023. Had currency rates ~~in 2022~~during the three months ended September 30, 2023 been equal to rates in the comparable period of ~~2021,~~2022, the gross profit margin would have been ~~approximately 3 and 2~~less than 1 percentage ~~points~~point higher, ~~for~~driven by the ~~three and~~favorable currency rate impact to revenue. Had currency rates during the nine months ended September 30, 2023 been equal to rates in the comparable period of 2022, ~~respectively.~~

the gross profit margin would have been less than 1 percentage point lower, driven by the unfavorable currency rate impact to revenue.

Table of Contents

Additional information on our gross profit by segment follows.

●

~~Digital Agreements~~ gross profit increased $2.5 million, or 34%, during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, Digital Agreements gross profit increased $6.4 million, or 30%, compared to the same period in the prior year. The increase in gross profit for both periods is 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 three and nine months ended September 30, 2022 was 80% and 77%, respectively, compared to 72% for the three and nine months ended September 30, 2021.

•

●

~~Security Solutions~~ gross profit decreased $0.5 million, or approximately 2%, during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, Security Solutions gross profit decreased $1.2Digital Agreements gross profit increased $0.1 million, or 1%, compared to the same period in the prior year. Security Solutions gross margin for the three and nine months ended September 30, 2022 was 64% and 66%, respectively, compared to 69% and 67% for the three and nine months ended September 30, 2021, respectively. The decrease in profitability and margins was primarily driven by higher hardware materials and logistics costs relative to the average selling price of the units.

~~Operating expenses~~

~~Operating expenses increased by $5.6 million, or 15%~~, during the three months ended September 30, ~~2022~~2023 compared to the three months ended September 30, ~~2021. Changes~~2022, driven by higher overall revenue partially offset by a one-time credit from a cloud service provider in the prior year period. Digital Agreements gross margin for the three months ended September 30, 2023 was 75%, compared to 80% for the three months ended September 30, 2022. For the nine months ended September 30, 2023, Digital Agreements gross profit decreased $0.8 million, or 3%, compared to the comparable period in 2022. The decrease in gross profit was driven by our decision to sunset our on-premises e-signature software solution, along with the aforementioned one-time credit, offset partially by an increase in cloud subscription revenue. Digital Agreements gross margin for the nine months ended September 30, 2023 was 74%, compared to 77% for the nine months ended September 30, 2022.

•Security Solutions gross profit increased $2.2 million, or approximately 8%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, driven primarily by higher on-premises term subscription revenue and lower hardware cost of goods sold. Security Solutions gross margin for the three months ended September 30, 2023 was 67%, compared to 64% for the three months ended September 30, 2022. For the nine months ended September 30, 2023, Security Solutions gross profit increased $4.5 million, or 5%, compared to the comparable period in 2022. The increase in gross profit was driven by higher overall revenue, partially offset by inventory impairments related to the discontinuation of Digipass CX. Security Solutions gross margin for the nine months ended September 30, 2023 was 64%, compared to 66% for the nine months ended September 30, 2022. The decrease was driven by inventory impairments related to the discontinuation of Digipass CX and higher hardware costs.

Operating Expenses

Operating expenses increased by $1.4 million, or 3%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. For the three months ended September 30, 2023, changes in foreign exchange rates ~~favorably~~negatively impacted operating expenses by approximately ~~$3.0~~$0.7 million as compared to the same period in ~~2021.~~

~~For~~2022. Operating expenses increased by $11.2 million, or 8%, during the nine months ended September 30, ~~2022, operating expenses increased by $8.1 million, or 6%,~~2023 compared to the nine months ended September 30, ~~2021. Changes~~2022. For the nine months ended September 30, 2023, changes in foreign exchange rates ~~favorably~~unfavorably impacted operating expenses by approximately ~~$6.2~~$0.1 million as compared to the same period in ~~2021.~~

2022.

The following table presents the breakout of operating expenses by category as of September 30, ~~2022~~2023 and ~~2021:~~

Three months ended September 30,

Nine months ended September 30,


2022

2021

2022

2021

(In thousands)

Operating costs









Sales and marketing

$
15,265

$
14,449

$
45,193

$
46,638

Research and development

9,541

11,359

33,596

35,699

General and administrative

11,813

11,207

39,549

38,797

Impairment of intangible assets

3,828

—

3,828

—

Restructuring and other related charges

2,653

—

8,000

—

Amortization of intangible assets

956

1,396

3,555

4,503

Total operating costs

$
44,056

$
38,411

$
133,721

$
125,637

2022:

Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(In thousands)
Operating costs
Sales and marketing $ 16,664 $ 15,265 $ 56,388 $ 45,193
Research and development 10,133 9,541 29,686 33,596
General and administrative 11,559 11,813 44,038 39,549
Restructuring and other related charges 6,524 6,481 13,076 11,828
Amortization of intangible assets 583 956 1,749 3,555
Total operating costs $ 45,463 $ 44,056 $ 144,937 $ 133,721

Sales and Marketing Expenses

Sales and marketing expenses for the three months ended September 30, ~~2022 were $15.3 million, an increase of $0.8~~2023 increased by $1.4 million, or 6%9%, ~~from~~compared to the three months ended September 30, ~~2021. This~~2022. The increase was driven by higher employee compensation costs which included increases in commissions, salaries, and benefits resulting from higher stock-based compensation expense associated with grants issued during the third quarter of 2022, partially offset by some cost reductions due to a lower overall headcount and other payroll related expenses.headcount. Sales and marketing expenses for the nine months ended September 30, ~~2022 were $45.2 million, a decrease of $1.4~~2023 increased by $11.2 million, or ~~approximately 3% from the same period in 2021. The decrease is primarily related~~25%, compared to ~~lower headcount and associated payroll related expenses during~~ the nine months ended September 30, ~~2022 compared~~2022. The increase was driven by higher expenses for sales-related activities, higher employee compensation costs, and an increase in travel-related expenses due to ~~the same period in 2021.~~

increased customer activity and in-person company meetings.

Table of Contents

Average full-time sales, marketing, support, and operating employee headcount for the three and nine months ended September 30, ~~2022~~2023 was 336 and 357, respectively, compared to 331 and 346 ~~respectively, compared to 363 and 368 for the three and nine months ended September 30, 2021, respectively. Average headcount was 9% and 6% lower~~ for the three and nine months ended September 30, 2022, respectively. Average headcount was 2% and 3% higher for the three and nine months ended September 30, 2023, respectively, compared to the same ~~periods~~period in ~~2021.~~

~~In future periods, we expect sales and marketing spend to increase~~2022, however, additional headcount reduction occurred in September 2023 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.

a result of the restructuring actions.

Research and Development Expenses

Research and development expenses for the three months ended September 30, ~~2022, were $9.5 million, a decrease of $1.8~~2023 increased by $0.6 million, or ~~16%~~6%, ~~from~~compared to the three months ended September 30, ~~2021.~~2022, driven primarily by higher outside services costs and personnel production costs. The overall increase was partially offset by the capitalization of expanded research and development costs of $1.1 million to enhance our transaction cloud platform and our Digital Agreements product offerings. Research and development expenses for the nine months ended September 30, ~~2022 were $33.6 million, a decrease of $2.1~~2023 decreased by $3.9 million, or 6%12%, ~~from~~compared to the nine months ended September 30, ~~2021.~~2022. The decrease in expense ~~for both periods~~ was driven primarily by the capitalization of ~~expanded~~ research and development costs ~~to enhance our Digital Agreements product offerings. Personnel costs were also lower during the three and nine months ended September 30, 2022 compared to the same periods in 2021 as a result~~ of ~~restructuring actions that reduced headcount.~~

$6.6 million, partially offset by higher external contractor costs.

Average full-time research and development employee headcount for the three and nine months ended September 30, ~~2022~~2023 was 305 and 313, respectively, compared to 328 and 347 ~~compared to 364 and 359~~ for the three and nine months ended September 30, ~~2021,~~2022, respectively. Average headcount was ~~approximately~~7% and 10% ~~and 3%~~ lower for the three and nine months ended September 30, ~~2022,~~2023, respectively, ~~when~~ compared to the same ~~periods~~period in ~~2021.~~

2022.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, ~~2022, were $11.8 million, an increase of $0.6~~2023 decreased by $0.3 million, or 5%2%, ~~from~~compared to the three months ended September 30, ~~2021.~~2022. General and administrative expenses for the nine months ended September 30, ~~2022 were $39.5 million, an increase of $0.8~~2023 increased by $4.5 million, or 2%11%, ~~from~~compared to the nine months ended September 30, ~~2021. This~~2022. The increase in expense for ~~both periods~~the nine months ended September 30, 2023 as compared to the prior year period was ~~due to~~driven by higher ~~average compensation per employee, higher stock-based compensation~~long-term incentive plan expense and ~~higher travel costs.~~the expansion of our executive team. The ~~increases were~~increase in expense was partially offset by ~~lower outside services costs.~~

a decrease in consulting fees related to our strategic transformation plan incurred during the period compared to the nine months ended September 30, 2022.

Average full-time general and administrative employee headcount for the three and nine months ended September 30, ~~2022~~2023 was 136 and 144, respectively, compared to 139 and 138 ~~respectively, compared to 134~~ for the three and nine months ended September 30, ~~2021.~~2022, respectively. Average headcount was ~~approximately 3%~~2% lower and 4% higher for the three and nine months ended September 30, ~~2022 when~~2023, respectively, compared to the same ~~periods~~period in ~~2021.~~

~~Impairment of Intangible Assets~~

~~During the three~~2022.

Restructuring and nine months ended September 30, 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 2018 acquisition.

~~Amortization of Intangible Assets~~

~~Amortization of intangible assets~~Other Related Charges

Restructuring and other related charges for the three months ended September 30, ~~2022 was $1.0~~2023 increased by less than $0.1 million, or 1%, compared to ~~$1.4~~the three months ended September 30, 2022, driven by real estate rationalization costs and additional headcount reductions implemented during the three months ended September 30, 2023. Restructuring and other related charges for the nine months ended September 30, 2023 increased by $1.2 million, or 11%, compared to the nine months ended September 30, 2022. The increase was driven by real estate rationalization costs, product and services optimization costs, and vendor rationalization spend during the nine months ended September 30, 2023 in conjunction with our restructuring plan.

Amortization of Intangible Assets

Amortization of intangible assets expense for the three months ended September 30, ~~2021.~~2023 decreased by $0.4 million, or 39%, compared to the three months ended September 30, 2022. Amortization of intangible assets expense for the nine months ended September 30, ~~2022 was $3.6~~2023 decreased by $1.8 million, or 51%, compared to ~~$4.5 million for~~ the nine months ended September 30, ~~2021.~~2022. The decrease in expense in both periods was driven by certain intangible assets acquired in prior years becoming fully ~~amortized.~~



PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022	3

	Condensed Consolidated Statements of Operations for the ~~three~~Three and ~~nine months ended~~ Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	4

	Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss for the ~~three~~Three and ~~nine months ended~~ Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	5

	Condensed Consolidated Statements of Stockholders’ Equity for the ~~three~~Three and ~~nine months ended~~ Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	6

	Condensed Consolidated Statements of Cash Flows for the ~~three~~Nine Months Ended September 30, 2023 and ~~nine months ended September 30,~~ 2022 ~~and 2021~~	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37 40

Item 4.	Controls and Procedures	37 40

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	38 40

Item 1A.	Risk Factors	38 40

~~Item~~I tem 2.	Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities	38 41

Item 6.	Exhibits	39 41

SIGNATURES		40 42


	September 30,		December 31,
	2022		2021
ASSETS
Current assets
Cash and cash equivalents	$	81,835	$	63,380
Short-term investments		11,782		35,108
Accounts receivable, net of allowances of $2,526 in 2022 and $1,419 in 2021		43,736		56,612
Inventories, net		9,467		10,345
Prepaid expenses		5,898		7,594
Contract assets		4,572		4,694
Other current assets		10,121		9,356
Total current assets		167,411		187,089
Property and equipment, net		10,796		10,757
Operating lease right-of-use assets		7,747		9,197
Goodwill		86,194		96,174
Intangible assets, net of accumulated amortization		13,038		21,270
Deferred income taxes		3,362		3,786
Other assets		10,983		13,998
Total assets	$	299,531	$	342,271
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	9,824	$	8,204
Deferred revenue		44,271		54,617
Accrued wages and payroll taxes		14,465		16,607
Short-term income taxes payable		1,587		1,103
Other accrued expenses		7,089		7,668
Deferred compensation		345		877
Total current liabilities		77,581		89,076
Long-term deferred revenue		6,543		9,125
Long-term lease liabilities		8,517		10,180
Long-term income taxes payable		3,080		5,054
Deferred income taxes		1,893		1,286
Other long-term liabilities		6,995		7,770
Total liabilities		104,609		122,491
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at September 30, 2022 and December 31, 2021		—		—
Common stock: $.001 par value per share, 75,000 shares authorized; 40,701 and 40,593 shares issued; 39,662 and 40,001 shares outstanding at September 30, 2022 and December 31, 2021, respectively		40		40
Additional paid-in capital		104,669		100,250
Treasury stock, at cost, 1,038 and 592 shares outstanding at September 30, 2022 and December 31, 2021, respectively		(18,222)		(12,501)
Retained earnings		131,836		143,173
Accumulated other comprehensive loss		(23,401)		(11,182)
Total stockholders' equity		194,922		219,780
Total liabilities and stockholders' equity	$	299,531	$	342,271


	September 30,		December 31,
	2023		2022
ASSETS
Current assets
Cash and cash equivalents	$	68,496	$	96,167
Restricted cash	788		1,208
Short-term investments	—		2,328
Accounts receivable, net of allowances of $1,663 in 2023 and $1,600 in 2022	38,667		65,132
Inventories, net	15,456		12,054
Prepaid expenses	7,319		6,222
Contract assets	4,960		4,520
Other current assets	10,377		10,757
Total current assets	146,063		198,387
Property and equipment, net	16,518		12,681
Operating lease right-of-use assets	4,377		8,022
Goodwill	91,369		90,514
Intangible assets, net of accumulated amortization	11,912		12,482
Deferred income taxes	1,843		1,901
Other assets	10,611		11,095
Total assets	$	282,693	$	335,082
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	16,538	$	17,357
Deferred revenue	50,760		64,637
Accrued wages and payroll taxes	13,420		18,345
Short-term income taxes payable	2,184		2,438
Other accrued expenses	8,123		7,664
Deferred compensation	306		373
Total current liabilities	91,331		110,814
Long-term deferred revenue	4,569		6,269
Long-term lease liabilities	5,294		8,442
Long-term income taxes payable	—		2,565
Deferred income taxes	1,218		1,197
Other long-term liabilities	2,963		2,484
Total liabilities	105,375		131,771
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at September 30, 2023 and December 31, 2022	—		—
Common stock: $0.001 par value per share, 75,000 shares authorized; 41,159 and 40,764 shares issued; 39,816 and 39,726 shares outstanding at September 30, 2023 and December 31, 2022, respectively	40		40
Additional paid-in capital	115,162		107,305
Treasury stock, at cost, 1,343 and 1,038 shares outstanding at September 30, 2023 and December 31, 2022, respectively	(21,749)		(18,222)
Retained earnings	98,498		128,738
Accumulated other comprehensive loss	(14,633)		(14,550)
Total stockholders' equity	177,318		203,311
Total liabilities and stockholders' equity	$	282,693	$	335,082


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Net loss	$	(7,201)	$	(975)	$	(11,337)	$	(16,811)
Other comprehensive loss
Cumulative translation adjustment, net of tax		(4,786)		(2,287)		(12,121)		(2,657)
Pension adjustment, net of tax		(21)		—		(68)		—
Unrealized gains (loss) on available-for-sale securities		59		—		(30)		(7)
Comprehensive loss	$	(11,949)	$	(3,262)	$	(23,556)	$	(19,475)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(4,133)	$	(7,201)	$	(30,240)	$	(11,337)
Other comprehensive loss
Cumulative translation adjustment, net of tax	(2,647)		(4,786)		93		(12,121)
Pension adjustment, net of tax	(61)		(21)		(182)		(68)
Unrealized gains (loss) on available-for-sale securities	(2)		59		6		(30)
Comprehensive loss	$	(6,843)	$	(11,949)	$	(30,323)	$	(23,556)

☒
x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐
o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenue
Product and license	$	31,280	$	28,193	$	89,496	$	85,016
Services and other		25,867		24,083		72,888		70,312
Total revenue		57,147		52,276		162,384		155,328

Cost of goods sold
Product and license		12,646		9,502		32,672		30,819
Services and other		6,070		6,379		19,097		19,041
Total cost of goods sold		18,716		15,881		51,769		49,860

Gross profit		38,431		36,395		110,615		105,468

Operating costs
Sales and marketing		15,265		14,449		45,193		46,638
Research and development		9,541		11,359		33,596		35,699
General and administrative		11,813		11,207		39,549		38,797
Impairment of intangible assets		3,828		—		3,828		—
Restructuring and other related charges		2,653		—		8,000		—
Amortization of intangible assets		956		1,396		3,555		4,503
Total operating costs		44,056		38,411		133,721		125,637

Operating loss		(5,625)		(2,016)		(23,106)		(20,169)

Interest income (expense), net		179		(4)		197		2
Other (expense) income, net		(1,155)		283		13,817		950

Loss before income taxes		(6,601)		(1,737)		(9,092)		(19,217)
Provision (benefit) for income taxes		600		(762)		2,245		(2,406)

Net loss	$	(7,201)	$	(975)	$	(11,337)	$	(16,811)

Net loss per share
Basic	$	(0.18)	$	(0.02)	$	(0.28)	$	(0.42)
Diluted	$	(0.18)	$	(0.02)	$	(0.28)	$	(0.42)

Weighted average common shares outstanding
Basic		39,723		39,629		39,801		39,688
Diluted		39,723		39,629		39,801		39,688


Description	Common Stock			Treasury - Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2022	39,726	$	40	1,038	$	(18,222)	$	107,305	$	128,738		$	(14,550)	$	203,311
Net loss	—	—		—	—		—		(8,356)			—		(8,356)
Foreign currency translation adjustment, net of tax	—	—		—	—		—		—			1,715		1,715
Share-based compensation	—	—		—	—		3,812		—			—		3,812
Vesting of restricted stock awards	329	—		—	—		—		—			—		—
Tax payments for stock issuances	(105)	—		—	—		(1,098)		—			—		(1,098)
Unrealized gain (loss) on available-for-sale securities	—	—		—	—		—		—			7		7
Pension adjustment, net of tax	—	—		—	—		—		—			(60)		(60)
Balance at March 31, 2023	39,950	$	40	1,038	$	(18,222)	$	110,019	$	120,382		$	(12,888)	$	199,331
Net loss	—	—		—	—		—		(17,751)			—		(17,751)
Foreign currency translation adjustment, net of tax	—	—		—	—		—		—			1,025		1,025
Share-based compensation	—	—		—	—		4,503		—			—		4,503
Vesting of restricted stock awards	44	—		—	—		—		—			—		—
Tax payments for stock issuances	(15)	—		—	—		(449)		—			—		(449)
Unrealized gain (loss) on available-for-sale securities	—	—		—	—		—		—			1		1
Pension adjustment, net of tax	—	—		—	—		—		—			(61)		(61)
Balance at June 30, 2023	39,979	$	40	1,038	$	(18,222)	$	114,073	$	102,631		$	(11,923)	$	186,599
Net loss	—	—		—	—		—		(4,133)			—		(4,133)
Foreign currency translation adjustment, net of tax	—	—		—	—		—		—			(2,647)		(2,647)
Share-based compensation	—	—		—	—		1,878		—			—		1,878
Vesting of restricted stock awards	226	—		—	—		—		—			—		—
Tax payments for stock issuances	(84)	—		—	—		(789)		—			—		(789)
Unrealized gain (loss) on available-for-sale securities	—	—		—	—		—		—			(2)		(2)
Share repurchases	(305)	—		305	(3,527)		—		—			—		(3,527)
Pension adjustment, net of tax	—	—		—	—		—		—			(61)		(61)
Balance at September 30, 2023	39,816	$	40	1,343	$	(21,749)	$	115,162	$	98,498	0	$	(14,633)	$	177,318


											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, 2021	40,001	$	40	592		(12,501)	$	100,250	$	143,173	$	(11,182)	$	219,780
Net income (loss)	—		—	—		—		—		5,214		—		5,214
Foreign currency translation adjustment, net of tax	—		—	—		—		—		—		(2,020)		(2,020)
Restricted stock awards	34		—	—		—		1,360		—		—		1,360
Tax payments for stock issuances	(14)		—	—		—		(635)		—		—		(635)
Unrealized gain (loss) on available-for-sale securities	—		—	—		—		—		—		(79)		(79)
Pension adjustment, net of tax	—		—	—		—		—		—		(25)		(25)
Balance at March 31, 2022	40,021	$	40	592	$	(12,501)	$	100,975	$	148,387	$	(13,306)	$	223,595
Net income (loss)	—		—	—		—		—		(9,350)		—		(9,350)
Foreign currency translation adjustment, net of tax	—		—	—		—		—		—		(5,315)		(5,315)
Restricted stock awards	28		—	—		—		1,253		—		—		1,253
Tax payments for stock issuances	(6)		—	—		—		(88)		—		—		(88)
Share repurchase	(446)		—	446		(5,721)		—		—		—		(5,721)
Unrealized gain (loss) on available-for-sale securities	—		—	—		—		—		—		(10)		(10)
Pension adjustment, net of tax	—		—	—		—		—		—		(22)		(22)
Balance at June 30, 2022	39,597	$	40	1,038	$	(18,222)	$	102,140	$	139,037	$	(18,653)	$	204,342
Net income (loss)	—		—	—		—		—		(7,201)		—		(7,201)
Foreign currency translation adjustment, net of tax	—		—	—		—		—		—		(4,786)		(4,786)
Restricted stock awards	101		—	—		—		2,884		—		—		2,884
Tax payments for stock issuances	(36)		—	—		—		(355)		—		—		(355)
Unrealized gain (loss) on available-for-sale securities	—		—	—		—		—		—		59		59
Pension adjustment, net of tax	—		—	—		—		—		—		(21)		(21)
Balance at September 30, 2022	39,662	$	40	1,038	$	(18,222)	$	104,669	$	131,836	$	(23,401)	$	194,922


	Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
(In thousands)	As Previously Reported		Adjustments		As Revised		As Previously Reported		Adjustments		As Revised
Cost of goods sold
Product and license	$	8,477	$	1,025	$	9,502	$	27,607	$	3,212	$	30,819
Total cost of goods sold	$	14,856	$	1,025	$	15,881	$	46,648	$	3,212	$	49,860

Gross profit	$	37,420	$	(1,025)	$	36,395	$	108,680	$	(3,212)	$	105,468

Operating costs
Sales and marketing	$	15,474	$	(1,025)	$	14,449	$	49,850	$	(3,212)	$	46,638
Total operating costs	$	39,436	$	(1,025)	$	38,411	$	128,849	$	(3,212)	$	125,637


		Three months Ended				Nine months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021

Subscription (1)	$	22,262	$	17,807	$	65,360	$	49,935
Maintenance and support		12,851		12,734		36,975		38,291
Professional services and other (2)		2,220		3,827		6,101		12,075
Hardware products		19,814		17,908		53,948		55,027
Total Revenue	$	57,147	$	52,276	$	162,384	$	155,328


	EMEA			Americas			APAC			Total
Total Revenue:
2022	$	25,999		$	20,394		$	10,754		$	57,147
2021	$	21,965		$	17,621		$	12,690		$	52,276

Percent of Total:
2022		45	%		36	%		19	%		100	%
2021		42	%		34	%		24	%		100	%


(In thousands)	2022		2023		2024		Beyond 2024		Total
Future revenue related to current unsatisfied performance obligations	$	11,238	$	28,617	$	15,823	$	8,375	$	64,053



(In thousands)		September 30, 2022		December 31, 2021
Capitalized costs to obtain contracts, current	$	2,632	$	2,134
Capitalized costs to obtain contracts, non-current	$	9,665	$	8,675


		Digital Agreements		Security Solutions		Total
(In thousands)
Net balance at December 31, 2021	$	—	$	—	$	96,174
Goodwill reallocation (1)		20,966		75,208		—
Foreign currency exchange rate effect		(2,175)		(7,805)		(9,980)
Net balance at September 30, 2022	$	18,791	$	67,403	$	86,194



		As of September 30, 2022				As of December 31, 2021
(In thousands)	Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Acquired technology	3 to 7	$	41,154	$	41,034	$	43,034	$	42,281
Customer relationships	5 to 12		33,732		22,107		39,814		20,653
Patents and trademarks	10 to 20		13,474		12,181		13,549		12,193
Total		$	88,360	$	75,322	$	96,397	$	75,127


		As of September 30, 2023				As of December 31, 2022
(In thousands)	Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Acquired technology	3 to 7	$	43,293	$	42,024	$	42,022	$	41,894
Customer relationships	5 to 12	34,451		25,076		34,386		23,323
Patents, trademarks, and other	10 to 20	13,543		12,275		13,518		12,227
Total		$	91,287	$	79,375	$	89,926	$	77,444


(In thousands)
Balance at December 31, 2021	$	1,419
Provision		1,092
Write-offs		50
Net foreign currency translation		(35)
Balance at September 30, 2022	$	2,526


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2023		2022		2023		2022
Net loss	$	(4,133)	$	(7,201)	$	(30,240)	$	(11,337)
Weighted average common shares outstanding:
Basic	40,454		39,723		40,529		39,801
Incremental shares with dilutive effect:
Restricted stock awards	—		—		—		—
Diluted	40,454		39,723		40,529		39,801

Net loss per share:
Basic	$	(0.10)	$	(0.18)	$	(0.75)	$	(0.28)
Diluted	$	(0.10)	$	(0.18)	$	(0.75)	$	(0.28)


	Restructuring Charge Liability
(In thousands)	$
Balance as of December 31, 2021		—
Additions		8,000
Payments		(4,446)
Balance as of September 30, 2022	$	3,554


				~~Total Number~~
				~~of Shares~~	~~Maximum~~
				~~Purchased as~~	~~Dollar Value of Shares~~
	~~Total~~			~~Part of Publicly~~	~~that May Yet Be~~
	~~Number of~~	~~Average~~		~~Announced~~	~~Purchased Under~~
	~~Shares Purchased~~	~~Price Paid~~		~~Plans or~~	~~the Plans or~~
~~Period~~	~~(1)~~	~~per Share~~		~~Programs~~	~~Programs~~
~~July 1, 2022 through July 31, 2022~~	—	$	—	—	~~44,278,939~~
~~August 1, 2022 through August 31, 2022~~	—	$	—	—	~~44,278,939~~
~~September 1, 2022 through September 30, 2022~~	—	$	—	—	~~44,278,939~~


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2023 through July 31, 2023	—	$	—	—	44,278,939
August 1, 2023 through August 31, 2023	104,210	$	11.30	104,210	43,101,534
September 1, 2023 through September 30, 2023	201,171	$	11.63	201,171	40,761,555


Exhibit 31.1 – Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 8 , 2023.

Exhibit 31.2 – Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, date d November 8 , 2023.

Exhibit 32.1 – Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 8 , 2023.

Exhibit 32.2 – Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 8 , 2023.

Exhibit 101.INS – Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

Exhibit 101.SCH – Inline XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL – Inline XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB – Inline XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF – Inline XBRL Taxonomy Extension Definition Linkbase Document

Employment Agreement between the Registrant and Jorge Martell* ~~Exhibit 10.2 –~~ Employment Agreement between the Registrant and Lara Mataac* ~~Exhibit 10.3 –~~ Performance-Based RSU Agreement between the Registrant and Matthew Moynahan* ~~Exhibit 10.4 –~~ Time-Based RSU Agreement between the Registrant and Matthew Moynahan* ~~Exhibit 10.5–~~ Form of Performance-Based RSU Agreement under the Registrant’s 2019 Omnibus Incentive Plan* ~~Exhibit 10.6 –~~ Form of Time-Based RSU Agreement (Executive) under the Registrant’s 2019 Omnibus Incentive Plan* ~~Exhibit 10.7 –~~ Form of Time-Based RSU Agreement (General) under the Registrant’s 2019 Omnibus Incentive Plan* ~~Exhibit 31.1 –~~ ~~Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 1, 2022.~~ ~~Exhibit 31.2 –~~ ~~Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 1, 2022.~~ ~~Exhibit 32.1 –~~ ~~Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 1, 2022.~~ ~~Exhibit 32.2 –~~ ~~Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 1, 2022.~~ ~~Exhibit 101.INS – Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document~~ ~~Exhibit 101.SCH – Inline XBRL Taxonomy Extension Schema Document~~ ~~Exhibit 101.CAL – Inline XBRL Taxonomy Extension Calculation Linkbase Document~~ ~~Exhibit 101.LAB~~ – ~~Inline XBRL Taxonomy Extension Label Linkbase Document~~ ~~Exhibit 101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase Document~~ ~~Exhibit 101.DEF – Inline XBRL Taxonomy Extension Definition Linkbase Document~~ Exhibit 104 – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document


			OneSpan Inc.


	/s/ Matthew P. Moynahan
			Matthew P. Moynahan
			Chief Executive Officer
			(Principal Executive Officer)

			/s/ Jorge Martell
			Jorge Martell
			Chief Financial Officer
			(Principal Financial Officer)

			/s/ John Bosshart
			John Bosshart
			Chief Accounting Officer
			(Principal Accounting Officer)