OneSpan Inc. - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
FOR THE TRANSITION PERIOD FROM _______ TO
Commission file number 000-24389
_____________________________________
OneSpan Inc.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________
| DELAWARE | 36-4169320 | ||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||
121 West Wacker Drive, Suite 2050
Chicago, Illinois 60601
(Address of Principal Executive Offices) (Zip Code)
(312) 766-4001
(Registrant’s telephone number, including area code)
_____________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||||||||||||
| Common Stock, par value $0.001 per share | OSPN | Nasdaq | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer ,a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | x | |||||||||||
| Non-accelerated filer | o | Emerging growth company | o | |||||||||||
| Smaller reporting company | o | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
There were 39,949,527 shares of Common Stock, $0.001 par value per share, outstanding at April 28, 2023.
OneSpan Inc.
Form 10-Q
For the Quarter Ended March 31, 2023
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
OneSpan Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
| March 31, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 106,519 | $ | 96,167 | |||||||
| Restricted cash | 1,017 | 1,208 | |||||||||
| Short-term investments | — | 2,328 | |||||||||
Accounts receivable, net of allowances of $1,676 in 2023 and $1,600 in 2022 | 32,285 | 65,132 | |||||||||
| Inventories, net | 15,640 | 12,054 | |||||||||
| Prepaid expenses | 7,938 | 6,222 | |||||||||
| Contract assets | 4,256 | 4,520 | |||||||||
| Other current assets | 8,603 | 10,757 | |||||||||
| Total current assets | 176,259 | 198,387 | |||||||||
| Property and equipment, net | 15,095 | 12,681 | |||||||||
| Operating lease right-of-use assets | 7,635 | 8,022 | |||||||||
| Goodwill | 92,243 | 90,514 | |||||||||
| Intangible assets, net of accumulated amortization | 13,323 | 12,482 | |||||||||
| Deferred income taxes | 1,919 | 1,901 | |||||||||
| Other assets | 10,832 | 11,095 | |||||||||
| Total assets | $ | 317,306 | $ | 335,082 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 17,255 | $ | 17,357 | |||||||
| Deferred revenue | 54,072 | 64,637 | |||||||||
| Accrued wages and payroll taxes | 14,163 | 18,345 | |||||||||
| Short-term income taxes payable | 1,932 | 2,438 | |||||||||
| Other accrued expenses | 9,309 | 7,664 | |||||||||
| Deferred compensation | 222 | 373 | |||||||||
| Total current liabilities | 96,953 | 110,814 | |||||||||
| Long-term deferred revenue | 5,715 | 6,269 | |||||||||
| Long-term lease liabilities | 8,093 | 8,442 | |||||||||
| Long-term income taxes payable | 2,565 | 2,565 | |||||||||
| Deferred income taxes | 1,210 | 1,197 | |||||||||
| Other long-term liabilities | 3,439 | 2,484 | |||||||||
| Total liabilities | 117,975 | 131,771 | |||||||||
| Stockholders' equity | |||||||||||
Preferred stock: 500 shares authorized, none issued and outstanding at March 31, 2023 and December 31, 2022 | — | — | |||||||||
Common stock: $.001 par value per share, 75,000 shares authorized; 40,987 and 40,764 shares issued; 39,949 and 39,726 shares outstanding at March 31, 2023 and December 31, 2022, respectively | 40 | 40 | |||||||||
| Additional paid-in capital | 110,019 | 107,305 | |||||||||
Treasury stock, at cost, 1,038 shares outstanding at March 31, 2023 and December 31, 2022 | (18,222) | (18,222) | |||||||||
| Retained earnings | 120,382 | 128,738 | |||||||||
| Accumulated other comprehensive loss | (12,888) | (14,550) | |||||||||
| Total stockholders' equity | 199,331 | 203,311 | |||||||||
| Total liabilities and stockholders' equity | $ | 317,306 | $ | 335,082 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenue | |||||||||||
| Product and license | $ | 33,146 | $ | 29,485 | |||||||
| Services and other | 24,461 | 22,962 | |||||||||
| Total revenue | 57,607 | 52,447 | |||||||||
| Cost of goods sold | |||||||||||
| Product and license | 11,288 | 9,079 | |||||||||
| Services and other | 7,033 | 6,690 | |||||||||
| Total cost of goods sold | 18,321 | 15,769 | |||||||||
| Gross profit | 39,286 | 36,678 | |||||||||
| Operating costs | |||||||||||
| Sales and marketing | 20,011 | 15,000 | |||||||||
| Research and development | 9,463 | 12,096 | |||||||||
| General and administrative | 16,653 | 14,784 | |||||||||
| Restructuring and other related charges | 706 | 2,659 | |||||||||
| Amortization of intangible assets | 583 | 1,382 | |||||||||
| Total operating costs | 47,416 | 45,921 | |||||||||
| Operating loss | (8,130) | (9,243) | |||||||||
| Interest income (expense), net | 503 | (17) | |||||||||
| Other (expense) income, net | (40) | 15,647 | |||||||||
| Income (loss) before income taxes | (7,667) | 6,387 | |||||||||
| Provision for income taxes | 689 | 1,173 | |||||||||
| Net income (loss) | $ | (8,356) | $ | 5,214 | |||||||
| Net loss per share | |||||||||||
| Basic | $ | (0.21) | $ | 0.13 | |||||||
| Diluted | $ | (0.21) | $ | 0.13 | |||||||
| Weighted average common shares outstanding | |||||||||||
| Basic | 40,057 | 39,577 | |||||||||
| Diluted | 40,057 | 39,687 | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net loss | $ | (8,356) | $ | 5,214 | |||||||
| Other comprehensive loss | |||||||||||
| Cumulative translation adjustment, net of tax | 1,715 | (2,020) | |||||||||
| Pension adjustment, net of tax | (60) | (25) | |||||||||
| Unrealized gains (loss) on available-for-sale securities | 7 | (79) | |||||||||
| Comprehensive loss | $ | (6,694) | $ | 3,090 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
For the Three Months Ended March 31, 2023:
| Description | Common Stock | Treasury - Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 39,726 | $ | 40 | 1,038 | $ | (18,222) | $ | 107,305 | $ | 128,738 | $ | (14,550) | $ | 203,311 | ||||||||||||||||||||||||||||||||||||
| Net income (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 | ||||||||||||||||||||||||||||||||||||
For the Three Months Ended March 31, 2022:
| 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, 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) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 1,360 | — | — | 1,360 | ||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | 34 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||
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OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (8,356) | $ | 5,214 | |||||||
| Adjustments to reconcile net loss from operations to net cash used in operations: | |||||||||||
| Depreciation and amortization of intangible assets | 1,319 | 2,097 | |||||||||
| Gain on sale of equity-method investment | — | (14,810) | |||||||||
| Deferred tax benefit | 8 | 794 | |||||||||
| Stock-based compensation | 3,812 | 1,360 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 33,134 | 20,559 | |||||||||
| Inventories, net | (3,361) | (260) | |||||||||
| Contract assets | 278 | (904) | |||||||||
| Accounts payable | (273) | (941) | |||||||||
| Income taxes payable | (512) | (332) | |||||||||
| Accrued expenses | (1,963) | (2,723) | |||||||||
| Deferred compensation | (151) | (797) | |||||||||
| Deferred revenue | (11,390) | (5,156) | |||||||||
| Other assets and liabilities | 692 | (441) | |||||||||
| Net cash provided by (used in) operating activities | 13,237 | 3,660 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of short-term investments | — | (15,812) | |||||||||
| Maturities of short-term investments | 2,330 | 14,500 | |||||||||
| Additions to property and equipment | (3,069) | (272) | |||||||||
| Additions to intangible assets | (7) | (7) | |||||||||
| Cash paid for acquisition of business | (1,800) | — | |||||||||
| Sale of equity-method investment | — | 18,874 | |||||||||
| Net cash (used in) provided by investing activities | (2,546) | 17,283 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Tax payments for restricted stock issuances | (1,098) | (635) | |||||||||
| Net cash used in financing activities | (1,098) | (635) | |||||||||
| Effect of exchange rate changes on cash | 569 | (45) | |||||||||
| Net increase in cash | 10,162 | 20,263 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 97,374 | 64,228 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 107,536 | $ | 84,491 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
7
OneSpan Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us,” refer to OneSpan Inc. and its subsidiaries.
Note 1 – Description of the Company and Basis of Presentation
Description of the Company
OneSpan helps organizations accelerate digital transformations by enabling secure, compliant, and easy customer agreements and transaction experiences. The Company is a global leader in providing high-assurance identity and authentication security as well as enterprise-grade electronic signature (e-signature) solutions for use cases ranging from simple transactions to workflows that are complex or require higher levels of security. The Company’s solutions help its clients ensure the integrity of the people and records associated with digital agreements, transactions, and interactions in industries including banking, financial services, healthcare, and professional services. The Company offers a portfolio of products and services across identity verification, authentication, virtual interactions and transactions, and secure digital storage. OneSpan has operations in Austria, Australia, Belgium, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K), and the United States (U.S.).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of OneSpan and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Business Transformation
In May 2022, the Company announced a three-year strategic transformation plan that began on January 1, 2023. The Company expects this transformation plan will enable it to build on its strong solution portfolio and market position, enhance its enterprise go-to-market strategy, accelerate revenue growth, and drive efficiencies to support margin expansion and increased profitability. In conjunction with the strategic transformation plan and to enable a 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 plans to manage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flow given its more modest growth profile. For further information regarding the Company’s reportable segments, see Note 3, Segment Information.
While the Company’s consolidated results will not be impacted, the Company has recast its segment information for the three months ended March 31, 2022 for comparable presentation.
8
Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation and Transactions
The financial position and results of the operations of the majority of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Losses resulting from foreign currency transactions were $0.2 million and $0.4 million for the three months ended March 31, 2023 and 2022, respectively, and are included in "Other income (expense), net" in the condensed consolidated statements of operations.
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, 2022, filed with the SEC on February 28, 2023 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.
Restricted Cash
We are party to lease agreements that require letters of credit to secure the obligations which totaled $0.9 million and $1.1 million at March 31, 2023 and December 31, 2022, respectively. Additionally, we maintained a cash guarantee with a payroll vendor in the amount of $0.1 million at both March 31, 2023 and December 31, 2022. The restricted cash related to the letters of credit and the payroll vendor cash guarantee is recorded in "restricted cash" on the condensed consolidated balance sheets.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by 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 consolidated financial statements and disclosures upon adoption.
Note 3 – Segment Information
Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM), in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.
•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include our OneSpan Sign e-signature solution and our OneSpan Notary and Virtual Room solutions. As our transformation plan progresses, we expect to include other cloud-based security modules associated with the secure transaction lifecycle of identity verification, authentication, virtual interactions and transactions, and secure digital storage in the Digital Agreements segment. This segment also includes costs attributable to our transaction cloud platform.
•Security Solutions. Security Solutions consists of our broad portfolio of software products and/or software development kits (SDKs) that are used to build applications designed to defend against attacks on digital transactions across online environments, devices and applications. These solutions, which are largely on-premises software products, include identity verification, multi-factor authentication and transaction signing,
9
such as mobile application security, mobile software tokens, and Digipass authenticators that are not cloud-connected devices.
Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue, sales and marketing, research and development expenses, amortization expense, and restructuring and other related charges that are incurred directly by a segment. The Company recorded $0.6 million of amortization expense in Digital Agreements operating income during the three months ended March 31, 2023 and 2022. The Company recorded $0 and $0.8 million of amortization expense in Security Solutions operating income during the three months ended March 31, 2023 and 2022, respectively. 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 segments using a direct cost allocation and an allocation based on revenue split between the segments. Beginning in the first quarter of 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.
Prior to 2023, the company allocated certain cost of goods sold and operating expenses to its two reportable segments using a direct cost allocation and an allocation based on revenue split between the segments. Beginning in the first quarter of 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.
The tables below set forth information about the Company’s reportable operating segments for the three months ended March 31, 2023 and 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 March 31, | |||||||||||
| (In thousands, except percentages) | 2023 | 2022 | |||||||||
| Digital Agreements | |||||||||||
| Revenue | $ | 11,552 | $ | 13,301 | |||||||
| Gross profit | $ | 8,448 | $ | 10,286 | |||||||
| Gross margin | 73 | % | 77 | % | |||||||
| Operating income (loss) | $ | (6,033) | $ | 1,125 | |||||||
| Security Solutions | |||||||||||
| Revenue | $ | 46,055 | $ | 39,146 | |||||||
| Gross profit | $ | 30,838 | $ | 26,392 | |||||||
| Gross margin | 67 | % | 67 | % | |||||||
| Operating income | $ | 15,631 | $ | 7,689 | |||||||
| Total Company: | |||||||||||
| Revenue | $ | 57,607 | $ | 52,447 | |||||||
| Gross profit | $ | 39,286 | $ | 36,678 | |||||||
| Gross margin | 68 | % | 70 | % | |||||||
| Statements of Operations reconciliation: | |||||||||||
| Segment operating income | $ | 9,598 | $ | 8,814 | |||||||
| Corporate operating expenses not allocated at the segment level | (17,728) | (18,057) | |||||||||
| Operating loss | $ | (8,130) | $ | (9,243) | |||||||
| Interest income (expense), net | 503 | (17) | |||||||||
| Other (expense) income, net | (40) | 15,647 | |||||||||
| Income (loss) before income taxes | $ | (7,667) | $ | 6,387 | |||||||
10
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 reportable operating segments for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Digital Agreements | Security Solutions | Digital Agreements | Security Solutions | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Subscription | $ | 10,348 | $ | 19,608 | $ | 11,671 | $ | 11,598 | |||||||||||||||
| Maintenance and support | 996 | 10,165 | 1,352 | 10,594 | |||||||||||||||||||
| Professional services and other (1) | 208 | 1,416 | 278 | 1,603 | |||||||||||||||||||
| Hardware products | — | 14,866 | — | 15,351 | |||||||||||||||||||
| Total Revenue | $ | 11,552 | $ | 46,055 | $ | 13,301 | $ | 39,146 | |||||||||||||||
(1) Professional services and other includes perpetual software licenses revenue, which was less than 2% of total
revenue for the three months ended March 31, 2023 and 2022.
revenue for the three months ended March 31, 2023 and 2022.
The Company allocates goodwill by reporting unit, in accordance with Accounting Standards Codification (ASC) 350 – Goodwill and Other. Asset information by segment is not reported to or reviewed by the CODM to allocate resources, and therefore, the Company has not disclosed asset information for the segments.
Note 4 – Revenue from Contracts with Customers
Disaggregation of Revenues
The following tables present the Company’s revenues disaggregated by major products and services, geographical region and timing of revenue recognition:
Revenue by major products and services
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Subscription | $ | 29,956 | $ | 23,269 | |||||||
| Maintenance and support | 11,161 | 11,946 | |||||||||
| Professional services and other (1) | 1,624 | 1,881 | |||||||||
| Hardware products | 14,866 | 15,351 | |||||||||
| Total Revenue | $ | 57,607 | $ | 52,447 | |||||||
(1)Professional services & other includes perpetual software licenses revenue, which was less than 2% of total revenue for the three months ended March 31, 2023 and 2022.
Revenue by location of customer for the Three Months Ended March 31, 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:
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| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands, except percentages) | |||||||||||
| Revenue | |||||||||||
| EMEA | $ | 27,820 | $ | 24,876 | |||||||
| Americas | 20,498 | 17,249 | |||||||||
| APAC | 9,289 | 10,322 | |||||||||
| Total revenue | $ | 57,607 | $ | 52,447 | |||||||
| % of Total Revenue | |||||||||||
| EMEA | 48 | % | 47 | % | |||||||
| Americas | 36 | % | 33 | % | |||||||
| APAC | 16 | % | 20 | % | |||||||
Timing of revenue recognition
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2023 | 2022 | |||||||||
| Products and Licenses transferred at a point in time | $ | 33,146 | $ | 29,485 | |||||||
| Services transferred over time | 24,461 | 22,962 | |||||||||
| Total Revenue | $ | 57,607 | $ | 52,447 | |||||||
Contract balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as of March 31, 2023 and December 31, 2022:
| March 31, | December 31, | ||||||||||
| (In thousands) | 2023 | 2022 | |||||||||
| Receivables, inclusive of trade and unbilled | $ | 32,285 | $ | 65,132 | |||||||
| Contract Assets (current and non-current) | $ | 4,410 | $ | 4,642 | |||||||
| Contract Liabilities (Deferred Revenue current and non-current) | $ | 59,787 | $ | 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 three months ended March 31, 2023 included $28.3 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
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
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table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2023:
| (In thousands) | 2023 | 2024 | 2025 | Beyond 2025 | Total | ||||||||||||||||||||||||
| Future revenue related to current unsatisfied performance obligations | $ | 28,964 | $ | 21,958 | $ | 9,470 | $ | 5,764 | $ | 66,156 | |||||||||||||||||||
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.
The following tables provide information related to the capitalized costs and amortization recognized in the current and prior period:
| (In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Capitalized costs to obtain contracts, current | $ | 3,011 | $ | 2,929 | |||||||
| Capitalized costs to obtain contracts, non-current | $ | 10,295 | $ | 10,571 | |||||||
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2023 | 2022 | |||||||||
| Amortization of capitalized costs to obtain contracts | $ | 731 | $ | 541 | |||||||
| 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 first-in, first-out (FIFO) method.
Inventories, net consist of the following:
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Component parts | $ | 8,760 | $ | 6,762 | |||||||
| Work-in-process and finished goods | 6,880 | 5,292 | |||||||||
| Total | $ | 15,640 | $ | 12,054 | |||||||
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Note 6 – Goodwill
The following table presents the changes in goodwill during the three months ended March 31, 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 | 247 | 882 | 1,129 | ||||||||||||||
| Acquisition during the period (1) | $ | 600 | $ | — | $ | 600 | |||||||||||
| Net balance at March 31, 2023 | $ | 20,579 | $ | 71,664 | $ | 92,243 | |||||||||||
(1) Represents goodwill recorded in conjunction with the acquisition of substantially all the assets of Southbank Software Pty Ltd. during the three months ended March 31, 2023. See Note 17, Business Acquisitions, for additional information.
No impairment of goodwill was recorded during the three months ended March 31, 2023 and 2022.
Note 7 – Intangible Assets
Intangible assets as of March 31, 2023 and December 31, 2022 consist of the following:
| As of March 31, 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 | $ | 43,590 | $ | 42,057 | $ | 42,022 | $ | 41,894 | ||||||||||||||||||||
| Customer relationships | 5 to 12 | 34,551 | 24,051 | 34,386 | 23,323 | ||||||||||||||||||||||||
| Patents, trademarks, and other | 10 to 20 | 13,538 | 12,248 | 13,518 | 12,227 | ||||||||||||||||||||||||
| Total | $ | 91,679 | $ | 78,356 | $ | 89,926 | $ | 77,444 | |||||||||||||||||||||
Amortization expense was $0.6 million and $1.4 million for the three months ended March 31, 2023 and 2022, respectively.
Certain intangible assets are denominated in functional currencies besides the U.S. dollar and are subject to currency fluctuations.
There was no impairment of intangible assets recorded during the three months ended March 31, 2023 and 2022.
Note 8 – Property and Equipment, net
The following table presents the major classes of property and equipment, net, as of March 31, 2023 and December 31, 2022:
| (In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Office equipment and software | $ | 14,765 | $ | 14,451 | |||||||
| Leasehold improvements | 9,970 | 9,927 | |||||||||
| Furniture and fixtures | 4,285 | 4,260 | |||||||||
| Capitalized software | 6,783 | 4,007 | |||||||||
| Total | 35,803 | 32,645 | |||||||||
| Accumulated depreciation | (20,708) | (19,964) | |||||||||
| Property and equipment, net | $ | 15,095 | $ | 12,681 | |||||||
Depreciation expense was $0.7 million for both the three months ended March 31, 2023 and 2022.
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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 March 31, 2023 and December 31, 2022:
| Fair Value Measurement at Reporting Date Using | |||||||||||||||||||||||
| (In thousands) | March 31, 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 | $ | 17,577 | — | $ | 17,577 | — | |||||||||||||||||
| Commercial Paper | $ | 14,479 | — | $ | 14,479 | — | |||||||||||||||||
| U.S. Treasury Notes | $ | 3,991 | — | $ | 3,991 | — | |||||||||||||||||
| Money Market Funds | $ | 1,855 | — | $ | 1,855 | — | |||||||||||||||||
| 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 March 31, 2023 and December 31, 2022.
The Company did not have any transfers of assets between Level 1 and Level 2 or Level 3 of the fair value hierarchy during three months ended March 31, 2023. Also, the Company did not have any financial liabilities that are measured at fair value on a recurring basis as of March 31, 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. No impairment was recorded during the three months ended March 31, 2023 and 2022.
Note 10 – Allowance for Credit Losses
The changes in the allowance for credit losses during the three months ended March 31, 2023 were as follows:
| (In thousands) | |||||
| Balance at December 31, 2022 | $ | 1,600 | |||
| Provision | 212 | ||||
| Write-offs | (136) | ||||
| Balance at March 31, 2023 | $ | 1,676 | |||
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Note 11 – Leases
Operating lease cost details for the three months ended March 31, 2023 and 2022 are as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Building rent | $ | 523 | $ | 575 | |||||||
| Automobile rentals | 250 | 220 | |||||||||
| Total net operating lease costs | $ | 773 | $ | 795 | |||||||
At March 31, 2023, the Company’s weighted average remaining lease term for its operating leases is 5.6 years, and the weighted average discount rate for its operating leases is 5%.
During the three months ended March 31, 2023, there were $0.7 million of operating cash payments for lease liabilities, and $0.1 million of right-of use assets obtained in exchange for new lease liabilities.
Maturities of the Company’s operating leases as of March 31, 2023 are as follows:
| As of March 31, 2023 | |||||
| (In thousands) | |||||
| 2023 | $ | 2,040 | |||
| 2024 | 2,111 | ||||
| 2025 | 1,805 | ||||
| 2026 | 1,724 | ||||
| 2027 | 1,552 | ||||
| Later years | 2,717 | ||||
| Less imputed interest | (1,730) | ||||
| Total lease liabilities | $ | 10,219 | |||
Note 12 – Income Taxes
The Company’s estimated annual effective tax rate for 2023 before discrete items and excluding entities with a valuation allowance is expected to be approximately 26%. The Company’s global effective tax rate is higher than the U.S. statutory tax rate of 21% primarily due to nondeductible expenses. The ultimate tax expense will depend on the mix of earnings in various jurisdictions. Income tax refunds, net of taxes paid, of $0.3 million were received during the three months ended March 31, 2022. Income taxes, net of refunds, of $1.1 million were paid during the three months ended March 31, 2023.
Management assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of negative evidence such as 3-year cumulative losses are considered. Management
also reviews reversal patterns of temporary differences to determine if the Company would have sufficient taxable income due to the reversal of temporary differences to support the realization of deferred tax assets.
Certain operations have incurred net operating losses (NOLs), which are currently subject to a valuation allowance. These NOLs may become deductible to the extent these operations become profitable. For each of its operations, the Company evaluates whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, the Company considers evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain operations record a loss, the Company does not recognize a corresponding tax benefit, thus increasing its effective tax rate, or decreasing its effective tax rate when reporting income in a jurisdiction that has a valuation allowance. Upon determining that it is more likely than not that
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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, 2022, the Company had deferred tax assets of $46.8 million resulting from U.S., foreign and state NOL carryforwards of $125.7 million and other foreign deductible carryforwards of $124.2 million. At December 31, 2022, the Company had a valuation allowance of $37.7 million against deferred tax assets related to certain carryforwards.
Note 13 – 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 1.0 million restricted stock units during the three months ended March 31, 2023, subject to time-based vesting. The fair value of the unissued time-based restricted stock unit grants was $12.9 million at the dates of grant and the grants are being amortized over the vesting periods of to three years.
The Company awarded restricted stock units subject to the achievement of service and future performance criteria during the three months ended March 31, 2023, which allow for up to 0.9 million shares to be earned if the performance criteria are achieved at the target level. The fair value of these awards was $12.8 million at the dates of grant and the awards are being amortized over the vesting period of to three years. The Company currently believes that all of these shares are expected to be earned.
During the three months ended March 31, 2022, stock-based compensation and other long-term incentive plan compensation accruals were reversed for employees who were terminated. The reversal of the accrued long-term incentive plan compensation for the terminated employees largely offset the expense for the period.
The following table presents stock-based compensation expense and other long-term incentive plan compensation expense for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Stock-based compensation | $ | 3,812 | $ | 1,360 | |||||||
| Other long-term incentive plan compensation | 111 | (136) | |||||||||
| Total compensation | $ | 3,923 | $ | 1,224 | |||||||
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 months ended March 31, 2023, diluted net loss per share for the period excludes the effects of common stock equivalents, which are anti-dilutive.
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The details of the earnings per share calculations for the three months ended March 31, 2023 and 2022 are as follows:
| Three Months Ended March 31, | |||||||||||
| (In thousands, except per share data) | 2023 | 2022 | |||||||||
| Net loss | $ | (8,356) | $ | 5,214 | |||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 40,057 | 39,577 | |||||||||
| Incremental shares with dilutive effect: | |||||||||||
| Restricted stock awards | — | 110 | |||||||||
| Diluted | 40,057 | 39,687 | |||||||||
| Net loss per share: | |||||||||||
| Basic | $ | (0.21) | $ | 0.13 | |||||||
| Diluted | $ | (0.21) | $ | 0.13 | |||||||
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. 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 March 31, 2023, the Company has recorded an accrual of $1.6 million for loss contingencies, which represents the better estimate within the probable range of $1.6 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 March 31, 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.
In May 2022, the Board approved additional actions related to the Plan through the year ending December 31, 2025. This second phase of the Plan consists primarily of headcount-related actions and is designed to continue to advance the 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 $0.7 million and $2.7 million in “Restructuring and other related charges” in the condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, expense of $0.3 million and $0.3 million was recognized in Digital Agreements operating income and Security Solutions operating income, respectively. Expense of $0.2 million and $1.0 million was recognized in Digital Agreements operating income and Security Solutions operating income, respectively during the three months ended March 31, 2022.
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In total, there were approximately 100 employees, across multiple functions, whose positions were made redundant.
The table below sets forth the changes in the carrying amount of the restructuring charge liability for the three months ended March 31, 2023.
| Restructuring Charge Liability | |||||
| (In thousands) | |||||
| Balance as of December 31, 2022 | $ | 3,596 | |||
| Additions | 706 | ||||
| Payments | (477) | ||||
| Balance as of March 31, 2023 | $ | 3,825 | |||
The $2.8 million current portion of the restructuring charge liability at March 31, 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 $1.0 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.
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 remaining $0.2 million 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 March 31, 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 the table below. These estimates are subject to change and 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.
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 financial statements, and therefore, we have not presented pro forma results of operations for the acquisition.
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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us” refer to OneSpan Inc. and its subsidiaries.
This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of OneSpan for the three months ended March 31, 2023 and 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, 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; expected results of the investments we are making in sales, marketing, and product development; our plans for managing our Digital Agreements and Security Solutions segments; expectations regarding our ability to attract new customers and retain existing customers; efficiency, functionality and other expectations for our next-generation transaction-cloud platform; the timing for general availability of new or enhanced products; our expectations regarding our use of technology acquired in our ProvenDB acquisition or other acquisitions we may complete in the future; the expectation that software as a service, or SaaS, will constitute an increasingly important part of our business in the future; the potential benefits, performance and functionality of our products and solutions, including future offerings; future plans or trends in sales and marketing, research and development, and general and administrative expenditures; expectations regarding sources and uses of cash; plans to expand our salesforce and distribution channels; the impact of foreign currency exchange rate fluctuations; the impact of inflation; trends in microprocessor or other costs affecting our Digipass business; the effects of supply chain disruptions; plans or expectations for inventory management in our Digipass business; impacts of macroeconomic conditions or geopolitical conflict; trends in hiring or compensation costs affecting us; and our general expectations regarding our operational or financial performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate", "anticipate", “expect", "intend", "continue", "outlook", "may", "will", "should", "could", or "might", and other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. 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; 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 retain sales and other employees necessary to implement our strategic transformation plan; our ability to successfully develop and market new product offerings and product enhancements; the loss of one or more large customers; difficulties enhancing and maintaining our brand recognition; competition; lengthy sales cycles; departures of senior management or other key employees; changes in customer requirements; interruptions or delays in the performance of our products and solutions; real or perceived malfunctions or errors in our products; the potential effects of technological changes; economic recession, inflation, and political instability; our ability to effectively manage third party partnerships, acquisitions, divestitures, alliances, or joint ventures; security breaches or cyber-attacks; claims that we have infringed the intellectual property rights of others; 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 other factors described in Part I, Item IA, “Risk Factors” in the Form 10-K. Our filings with the Securities and Exchange Commission (the “SEC”) and other important information can be found in the Investor Relations section of our website at investors.onespan.com. We do not have any intent, and disclaim any obligation, to update the forward-looking information to reflect events that occur, circumstances that exist or changes in our expectations after the date of this Form 10-Q, except as required by law.
Our website address is included in this Quarterly Report on Form 10-Q as an inactive textual reference only.
Overview
OneSpan 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 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 help our clients ensure the integrity of the people and records associated with digital agreements, transactions, and interactions in industries including banking, financial services, healthcare and professional services. We are trusted by global blue-chip enterprises, including more than 60% of the world’s largest 100 banks, and process millions of digital agreements and billions of transactions in more than 100 countries annually.
Our solutions are powered by a portfolio of products and services across identity verification, authentication, virtual interactions and 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. Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers.
Business Transformation
We are currently in the midst of a business transformation. In May 2022, we announced a three-year strategic transformation plan that began on January 1, 2023. We believe this transformation plan will enable us to build on our strong solution portfolio and market position, enhance our enterprise go-to-market strategy, accelerate revenue growth, and drive efficiencies to support margin expansion and increased profitability. In conjunction with the strategic transformation plan and to enable a more efficient capital deployment model, effective with the quarter ended June 30, 2022, we began reporting under the following two lines of business, which are our reportable operating segments: Digital Agreements and Security Solutions.
•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include our OneSpan Sign e-signature solution and our OneSpan Notary and Virtual Room solutions. As our transformation plan progresses, we expect to include other cloud-based security modules associated with the secure transaction lifecycle of identity verification, authentication, virtual interactions and transactions, and secure digital storage in the Digital Agreements segment. This segment also includes costs attributable to our transaction cloud platform.
•Security Solutions. Security Solutions consists of our broad portfolio of software products and/or software development kits (SDKs) that are used to build applications designed to defend against attacks on digital transactions across online environments, devices and applications. These solutions, which are largely on-premises software products, include identity verification, multi-factor authentication and transaction signing, such as mobile application security, mobile software tokens, and Digipass authenticators that are not cloud-connected devices.
We expect to manage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flows given its more modest growth profile. Across both segments, we plan to build on our strong foundation in both e-signature and cybersecurity by enhancing product features, developing new solutions, and building out our next-generation transaction cloud platform, which we expect will allow us to efficiently deliver security and e-signature solutions to our customers across their entire digital agreement lifecycle. We also plan to enhance our go-to-market strategy by prioritizing growth at large enterprise accounts, expanding our direct sales force, and accessing new routes to market through alliances and partnerships.
In connection with this business transformation, 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.
Our transformation plan involves numerous risks and uncertainties. For additional details please see Part 1, Item 1A, Risk Factors in our Form 10-K.
Restructuring Plan
In December 2021, our Board of Directors (the "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 primarily of headcount-related reductions and is designed to continue to advance the same objectives as the first phase of the plan.
As part of the restructuring plan, we reduced headcount by eliminating approximately 100 positions. We incurred severance and related benefits costs, recorded in “Restructuring and other related charges” in the consolidated statement of operations for the year ended December 31, 2022.
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 acquisition is expected to provide a foundational architecture for future blockchain-based digital solutions, including secure storage. The results of operations since the acquisition date are included in our Digital Agreements reportable operating segment.
Macroeconomic Conditions
During the first quarter of 2023, we continued to operate under uncertain market conditions, influenced by events such as the Russia-Ukraine conflict, instability in certain parts of the banking sector, supply chain constraints, the inflationary cost environment, and general concerns about economic conditions. Our customers have increased scrutiny on spending decisions, which has resulted in longer sales cycles for both existing customer and new customer opportunities. For a complete discussion of the risks we encounter in our business, please refer to Part 1, Item 1A, Risk Factors, in our Form 10-K.
Components of Operating Results
Revenue
We generate revenue from the sale of our subscriptions, maintenance and support, professional services, and Digipass hardware products. We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments reflecting the transactional nature of significant parts of our business.
•Product and license revenue. Product and license revenue includes Digipass hardware products and software licenses, which are provided on a perpetual or term basis subscription model.
•Service and other revenue. Service and other revenue includes solutions that are provided on a cloud-based subscription model, maintenance and support, and professional services.
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 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,
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the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.
Operating Expenses
Our operating expenses are generally based on anticipated revenue levels and fixed over short periods of time. As a result, small variations in revenue may cause significant variations in the period-to-period comparisons of operating income or operating income as a percentage of revenue.
Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 50% and 60% of our operating expenses. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive.
Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates during the first three months of 2023 compared to the first three months of 2022 resulted in a decrease in operating expenses of approximately $0.6 million.
The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. Long-term incentive plan compensation expense includes both cash and stock-based incentives. During the three months ended March 31, 2023 and 2022, operating expenses included $3.9 million and $1.2 million, respectively, of expenses related to stock-based and long-term incentive plans.
Stock-based compensation expense for the three months ended March 31, 2023 reflected our 2023 annual equity grant to executives and other employees who were hired in the second and third quarters of 2022, including the impact of 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 months ended March 31, 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.
•Restructuring and related charges. Restructuring and other related charges consists of severance and related benefits incurred from headcount reductions as part of our restructuring plan. We plan to incrementally incur additional restructuring costs through December 31, 2025, when the plan terminates.
Segment Results
Segment operating income (loss) consists of the revenue generated by a segment, less the direct costs of revenue, sales and marketing, research and development, and general and administrative expenses, amortization and impairment
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charges that are incurred directly by a segment. Unallocated corporate costs include companywide costs that are not attributable to a particular segment. Financial results by reportable operating segment are included below under Results of Operations.
Interest Income (Expense), Net
Interest income (expense), net, consists of income earned on our cash equivalents and short-term investments. Our cash equivalents and short-term investments are invested in short-term instruments at current market rates.
Other Income (Expense), Net
Other income (expense), net, primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and development in those countries and other miscellaneous non-operational expenses.
Income Taxes
Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). The majority of our IP in our Security Solutions business is owned by two subsidiaries, one in the U.S. and one in Switzerland. The e-signature IP in our Digital Agreements business is owned by a subsidiary in Canada. These subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to the IP owners on either a percentage of revenue or on a cost plus basis or both. Under this structure, the earnings of our service provider subsidiaries are relatively constant. These service provider companies tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings flow to the IP owners.
As the majority of our 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%.
Impact of Currency Fluctuations
During the three months ended March 31, 2023 and 2022, respectively, we generated approximately 80% and 88% of our revenues and incurred approximately 56% and 68% of our operating expenses outside of the U.S. As a result, changes in currency exchange rates, especially the Euro exchange rate and the Canadian Dollar exchange rate, can have a significant impact on our revenue and operating expenses.
While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the three months ended March 31, 2023 was denominated in U.S. Dollars. For the three months ended March 31, 2023, approximately 53% of our revenue was denominated in U.S. Dollars, 42% was denominated in Euros and 5% was denominated in other currencies. For the three months ended March 31, 2022, approximately 57% of our revenue was denominated in U.S. Dollars, 38% was denominated in Euros and 5% was denominated in other currencies.
In general, to minimize the net impact of currency fluctuations on operating income, we attempt to denominate an amount of billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. If the amount of our revenue in Europe denominated in Euros continues as it is now or declines, we may not be able to balance fully the exposures of currency exchange rates on revenue and operating expenses.
The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates generated comprehensive gain of $1.7 million during the three months ended March 31, 2023 and comprehensive loss of $2.0 million during the three months ended March 31, 2022. These amounts are included as a separate component of stockholders’ equity. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar.
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Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other income (expense). Losses resulting from foreign currency transactions were $0.2 million and $0.4 million for the three months ended March 31, 2023 and 2022, respectively.
Results of Operations
In conjunction with our strategic transformation plan, effective with the quarter ended June 30, 2022, we began reporting under the following two lines of business, which are our reportable operating segments: Digital Agreements and Security Solutions.
The following table sets forth, for the periods indicated, selected segment and consolidated operating results.
| Three Months Ended March 31, | |||||||||||
| (In thousands, except percentages) | 2023 | 2022 | |||||||||
| Digital Agreements | |||||||||||
| Revenue | $ | 11,552 | $ | 13,301 | |||||||
| Gross profit | $ | 8,448 | $ | 10,286 | |||||||
| Gross margin | 73 | % | 77 | % | |||||||
| Operating income (loss) | $ | (6,033) | $ | 1,125 | |||||||
| Security Solutions | |||||||||||
| Revenue | $ | 46,055 | $ | 39,146 | |||||||
| Gross profit | $ | 30,838 | $ | 26,392 | |||||||
| Gross margin | 67 | % | 67 | % | |||||||
| Operating income | $ | 15,631 | $ | 7,689 | |||||||
| Total Company: | |||||||||||
| Revenue | $ | 57,607 | $ | 52,447 | |||||||
| Gross profit | $ | 39,286 | $ | 36,678 | |||||||
| Gross margin | 68 | % | 70 | % | |||||||
| Statements of Operations reconciliation: | |||||||||||
| Segment operating income | $ | 9,598 | $ | 8,814 | |||||||
| Corporate operating expenses not allocated at the segment level | (17,728) | (18,057) | |||||||||
| Total Company operating loss | $ | (8,130) | $ | (9,243) | |||||||
Revenue
Revenue by products and services allocated to the segments for the three months ended March 31, 2023 and 2022 is as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Digital Agreements | Security Solutions | Digital Agreements | Security Solutions | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Subscription | $ | 10,348 | $ | 19,608 | $ | 11,671 | $ | 11,598 | |||||||||||||||
| Maintenance and support | 996 | 10,165 | 1,352 | 10,594 | |||||||||||||||||||
| Professional services and other (1) | 208 | 1,416 | 278 | 1,603 | |||||||||||||||||||
| Hardware products | — | 14,866 | — | 15,351 | |||||||||||||||||||
| Total Revenue | $ | 11,552 | $ | 46,055 | $ | 13,301 | $ | 39,146 | |||||||||||||||
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(1) Professional services and other includes perpetual software licenses revenue which was less than 2% of total
revenue for the three months ended March 31, 2023 and 2022.
revenue for the three months ended March 31, 2023 and 2022.
Total revenue increased by $5.2 million, or 10%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Changes in foreign exchange rates as compared to the same period in 2022 negatively impacted revenue by approximately $1.3 million.
Additional information on our revenue by segment follows.
•Digital Agreements revenue decreased $1.7 million, or 13%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The decrease in Digital Agreements revenue was primarily attributable to lower on-premises subscription revenue, which was driven by the non-renewal of several contracts and contraction due to our strategy of sunsetting our on-premises e-signature product. The decrease was partially offset by an increase in cloud subscription revenue, primarily driven by existing customer expansion. Changes in foreign currency rates compared to the same period in 2022 negatively impacted Digital Agreements revenue by less than $0.1 million.
•Security Solutions revenue increased $6.9 million, or approximately 18%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The increase in Security Solutions revenue was attributable to higher on-premises term subscription revenue, which was driven by existing customer expansion and, to a lesser extent, new customer revenue. Lower customer purchase volumes of hardware products due to production delays and lower maintenance and support revenue partially offset the increase in term subscription revenue. Changes in foreign exchange rates compared to the same period in 2022 negatively impacted Security Solutions revenue by $1.3 million.
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. In particular, our Security Solutions revenue for the quarter ended March 31, 2023 benefited from the timing of certain contract renewals. We expect Security Solutions revenue growth to be comparatively more modest for the remainder of 2023.
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 Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands, except percentages) | |||||||||||
| Revenue | |||||||||||
| EMEA | $ | 27,820 | $ | 24,876 | |||||||
| Americas | 20,498 | 17,249 | |||||||||
| APAC | 9,289 | 10,322 | |||||||||
| Total revenue | $ | 57,607 | $ | 52,447 | |||||||
| % of Total Revenue | |||||||||||
| EMEA | 48 | % | 47 | % | |||||||
| Americas | 36 | % | 33 | % | |||||||
| APAC | 16 | % | 20 | % | |||||||
For the three months ended March 31, 2023, revenue generated in EMEA was $2.9 million, or 12%. higher than the same period in 2022, driven primarily by higher on-premises term subscription revenue from existing customer expansion and new customers.
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For the three months ended March 31, 2023, revenue generated in the Americas was $3.2 million, or 19%, higher than the three months ended March 31, 2022. This increase was primarily driven by both higher customer purchase volumes of hardware and a higher average selling price due to customer mix.
For the three months ended March 31, 2023, revenue generated in APAC was $1.0 million, or 10%, lower than the three months ended March 31, 2022, driven by lower customer purchase volumes of hardware products.
Cost of Goods Sold and Gross Margin
The following table presents cost of goods sold for our products and services for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands, except percentages) | |||||||||||
| Cost of goods sold | |||||||||||
| Product and license | $ | 11,288 | $ | 9,079 | |||||||
| Services and other | 7,033 | 6,690 | |||||||||
| Total cost of goods sold | $ | 18,321 | $ | 15,769 | |||||||
| Gross profit | $ | 39,286 | $ | 36,678 | |||||||
| Gross margin | |||||||||||
| Product and license | 66 | % | 69 | % | |||||||
| Services and other | 71 | % | 71 | % | |||||||
| Total gross margin | 68 | % | 70 | % | |||||||
The cost of product and license revenue increased by $2.2 million, or 24%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Cost of goods sold for the three months ended March 31, 2023 was impacted by price increases for our hardware components and higher freight costs than the prior year.
The cost of services and other revenue increased by $0.3 million, or 5%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to higher cloud platform costs.
Gross profit increased $2.6 million, or 7%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Gross profit margin was 68% for the three months ended March 31, 2023, compared to 70% for the three months ended March 31, 2022. The decrease in profit margin for the three months ended March 31, 2023 was primarily driven by customer and product mix and higher freight costs.
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 a favorable impact on overall cost of goods sold of $0.2 million for the three months ended March 31, 2023. Had currency rates during the three months ended March 31, 2023 been equal to rates in the comparable period of 2022, the gross profit margin would have been less than 1 percentage point higher for the three months ended March 31, 2023, driven by the unfavorable currency rate impact to revenue.
Additional information on our gross profit by segment follows.
•Digital Agreements gross profit decreased $1.8 million, or 18%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The decrease in gross profit was driven by lower overall revenue and higher cloud platform costs. Digital Agreements gross margin for the three months ended March 31, 2023 was 73%, compared to 77% for the three months ended March 31, 2022.
•Security Solutions gross profit increased $4.4 million, or approximately 17%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, driven by higher on-premises term
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subscription revenue. Security Solutions gross margin was 67% for both the three months ended March 31, 2023 and 2022, mainly as a result of hardware costs increasing and proportionally offsetting the revenue increase.
Operating Expenses
Operating expenses increased by $1.5 million, or 3%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Changes in foreign exchange rates favorably impacted operating expenses by approximately $0.6 million as compared to the same period in 2022.
The following table presents the breakout of operating expenses by category as of March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Operating costs | |||||||||||
| Sales and marketing | $ | 20,011 | $ | 15,000 | |||||||
| Research and development | 9,463 | 12,096 | |||||||||
| General and administrative | 16,653 | 14,784 | |||||||||
| Restructuring and other related charges | 706 | 2,659 | |||||||||
| Amortization of intangible assets | 583 | 1,382 | |||||||||
| Total operating costs | $ | 47,416 | $ | 45,921 | |||||||
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended March 31, 2023 increased by $5.0 million, or 33%, compared to the three months ended March 31, 2022. The increase was driven by higher expenses for sales-related activities, as well as higher employee compensation costs which included increases in commissions, annual bonus, and long-term incentive plan expenses. Costs incurred to expand our digital marketing initiatives also contributed to the increase.
Average full-time sales, marketing, support, and operating employee headcount for the three months ended March 31, 2023 was 352, compared to 361 for the three months ended March 31, 2022. Average headcount was 2% lower for the three months ended March 31, 2023, compared to the same period in 2022.
In future periods, we generally expect sales and marketing spend to increase as we enhance our enterprise go-to-market strategy, build brand awareness, expand offerings to existing customers, and add new distribution channels. However, our sales and marketing spend levels in any given period may vary depending upon the macroeconomic environment, the expected yield of our sales and marketing activities, and other business factors.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2023 decreased by $2.6 million, or 22%, compared to the three months ended March 31, 2022. The decrease in expense was driven primarily by the capitalization of expanded research and development costs of $2.8 million to enhance our transaction cloud platform and our Digital Agreements product offerings, and lower employee compensation costs. The overall decrease in expense was partially offset by higher outside services costs and higher travel and entertainment costs.
Average full-time research and development employee headcount for the three months ended March 31, 2023 was 315, compared to 367 for the three months ended March 31, 2022. Average headcount was approximately 14% lower for the three months ended March 31, 2023, when compared to the same period in 2022.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2023 increased by $1.9 million, or 13%, compared to the three months ended March 31, 2022. The increase in expense was driven by higher long-term
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incentive plan expense and the expansion of our executive team. The increase in expense was partially offset by a decrease in consulting fees related to our strategic transformation plan incurred during the period compared to the three months ended March 31, 2022.
Average full-time general and administrative employee headcount for the three months ended March 31, 2023 was 146, compared to 138 for the three months ended March 31, 2022. Average headcount was approximately 6% higher for the three months ended March 31, 2023 when compared to the same period in 2022.
Amortization of Intangible Assets
Amortization of intangible assets expense for the three months ended March 31, 2023 decreased by $0.8 million, or 58%, compared to the three months ended March 31, 2022. The decrease was driven by certain intangible assets acquired in prior years becoming fully amortized or impaired during 2022.
Restructuring and Other Related Charges
Restructuring and other related charges for the three months ended March 31, 2023 decreased by $2.0 million, or 73%, compared to the three months ended March 31, 2022. The decrease was driven by a significant number of employee related actions taken during the three months ended March 31, 2022. Expense in both periods includes severance, retention pay, and other related benefit costs incurred in conjunction with our restructuring plan.
Segment Operating Income (Loss)
Information on our operating income (loss) by segment follows.
•Digital Agreements operating loss for the three months ended March 31, 2023 was $6.0 million, compared to operating income of $1.1 million for the three months ended March 31, 2022. Operating loss for the three months ended March 31, 2023 was largely attributable to the change in expense allocations between the segments primarily impacting operating expenses, higher sales and marketing expense which was driven by higher travel and entertainment costs, higher employee compensation costs, and additional headcount on our sales team. Lower profitability also contributed to the segment operating loss. Gross margin for the three months ended March 31, 2023 and 2022 was 73% and 77%, respectively. The 400 basis point decrease in gross margin was driven by lower on-premises subscription revenue and lower maintenance and support revenue.
•Security Solutions operating income for the three months ended March 31, 2023 was $15.6 million, which was a year-over-year increase of $7.9 million, or 103%, from the three months ended March 31, 2022. The increase was driven by the change in expense allocations between the segments primarily impacting operating expenses, higher on-premises subscription revenue, lower research and development expense, and lower amortization as a result of the Dealflo intangible asset impairment in 2022. The increase was partially offset by higher personnel and freight costs. Gross margin was 67% for both the three months ended March 31, 2023 and 2022.
Interest income (expense), net
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Interest income (expense), net | $ | 503 | $ | (17) | |||||||
Interest income (expense), net was $0.5 million for the three months ended March 31, 2023 compared to net expense of less than $0.1 million for the three months ended March 31, 2022. The increase in interest income is related to a higher invested cash balance and higher interest rates.
Other (Expense) Income, net
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| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Other (expense) income, net | $ | (40) | $ | 15,647 | |||||||
Other (expense) income, net primarily includes subsidies received from foreign governments in support of our research and development in those countries, exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, and other miscellaneous non-operational, non-recurring expenses.
Other (expense) income, net for the three months ended March 31, 2023 was less than $(0.1) million. Other (expense) income, net for the three months ended March 31, 2022 was $15.6 million, which primarily consisted of the $14.8 million gain on sale of our equity-method investment in Promon AS ("Promon").
Provision for Income Taxes
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Provision for income taxes | $ | 689 | $ | 1,173 | |||||||
We recorded income tax expense of $0.7 million and $1.2 million for the three months ended March 31, 2023 and 2022, respectively. Lower income tax expense for the three months ended March 31, 2023 was primarily attributable to tax on the gain on sale of our investment in Promon recorded during the three months ended March 31, 2022
Liquidity and Capital Resources
At March 31, 2023, we had cash balances (total cash and cash equivalents) of $106.5 million. Our cash and cash equivalents balance includes U.S. treasury notes and bills, money market funds, and high quality commercial paper with maturities at acquisition of less than three months.
At December 31, 2022, we had cash balances of $96.2 million and short-term investments of $2.3 million.
We are party to lease agreements that require letters of credit to secure the obligations which totaled $0.9 million and $1.1 million at March 31, 2023 and December 31, 2022, respectively. Additionally, we maintained a cash guarantee with a payroll vendor in the amount of $0.1 million at both March 31, 2023 and December 31, 2022. The restricted cash related to the letters of credit and the payroll vendor cash guarantee is recorded in "restricted cash" on the condensed consolidated balance sheets.
As of March 31, 2023, we held $64.2 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $63.6 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.
We believe that our financial resources are adequate to meet our operating needs over the next twelve months.
Our cash flows are as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Cash provided by (used in): | |||||||||||
| Operating activities | $ | 13,237 | $ | 3,660 | |||||||
| Investing activities | (2,546) | 17,283 | |||||||||
| Financing activities | (1,098) | (635) | |||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | 569 | (45) | |||||||||
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Operating Activities
Cash provided by (used in) operating activities primarily consists of net income (loss), as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of amortization of intangible assets, deferred taxes, depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections and payment of expenditures. Our primary uses of cash from operating activities have been for personnel costs. We expect cash outflows from operating activities to be affected by increases in personnel costs as we grow our business.
For the three months ended March 31, 2023, $13.2 million of cash was provided by operating activities. This was driven by a decrease in our accounts receivable balance during the period, partially offset by a decrease in deferred revenue and an increase in inventories, net. For the three months ended March 31, 2022, $3.7 million of cash was provided by operating activities.
Our working capital at March 31, 2023 was $79.3 million compared to $87.6 million at December 31, 2022. The decrease was due to lower capital needs as we better manage the timing of cash collections and vendor payments.
Investing Activities
The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of investments, purchases of property and equipment, and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the growth of our business as well as to continue to invest in our infrastructure and activity in connection with acquisitions.
For the three months ended March 31, 2023, net cash used in in investing activities was $2.5 million, compared to net cash provided by investing activities of $17.3 million for the three months ended March 31, 2022. Cash used in investing activities consisted of additions to property, plant and equipment, net, and the purchase of ProvenDB. Cash usage during the period was partially offset by the maturity of our entire short-term investments balance. For the three months ended March 31, 2022, net cash provided by investing activities consisted of the $18.9 million sale of our investment in Promon.
Financing Activities
The changes in cash flows from financing activities primarily relate to the purchases of common stock under our share repurchase program and tax payments for restricted stock issuances.
Cash of $1.1 million and $0.6 million was used in financing activities during the three months ended March 31, 2023 and 2022, respectively. Cash usage in both periods was attributable to tax payments for stock issuances.
Key Business Metrics and Non-GAAP Financial Measures
In our quarterly earnings press releases and conference calls, we discuss the below key metrics and financial measures that are not calculated according to generally accepted accounting principles (“GAAP”). These metrics and non-GAAP financial measures help us monitor and evaluate the effectiveness of our operations and evaluate period-to-period comparisons. Management believes that these metrics and non-GAAP financial measures help illustrate underlying trends in our business. We use these metrics and non-GAAP financial measures to establish budgets and operational goals (communicated internally and externally), manage our business and evaluate our performance. We also believe that both management and investors benefit from referring to these metrics and non-GAAP financial measures as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. We believe these metrics and non-GAAP financial measures are useful to investors both because they allow for greater transparency with respect to financial measures used by management in their financial and operational decision-making and also because they are used by investors and the analyst community to help evaluate the health of our business.
Annual Recurring Revenue
We use annual recurring revenue, or ARR, as an approximate measure to monitor the revenue growth of our
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recurring business. ARR represents the annualized value of the active portion of SaaS, term-based license, maintenance and support contracts, and other subscription services at the end of the reporting period.
ARR is calculated as the approximate annualized value of our customer recurring contracts as of the measurement date. These include subscription, term-based license, and maintenance contracts and exclude one-time fees. To the extent that we are negotiating a renewal with a customer after the expiration of a recurring contract, we continue to include that revenue in ARR if we are actively in discussions with the customer for a new recurring contract or renewal, or until such customer notifies us that it is not renewing its recurring contract.
ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates, and does not include revenue from perpetual licenses, purchases of Digipass authenticators that are not cloud-connected devices, training, professional services or other sources of revenue that are not deemed to be recurring in nature.
At March 31, 2023, we reported ARR of $141.3 million, which was 10% higher than ARR of $128.7 million at March 31, 2022. Changes in foreign exchange rates during the three months ended March 31, 2023 as compared to the prior year negatively impacted ARR by approximately $0.9 million. ARR growth was primarily driven by an increase in subscription contracts, offset by foreign exchange rate impacts and the same factors that affected NRR, as discussed below.
Net Retention Rate
Net Retention Rate, or NRR, is defined as the approximate year-over-year percentage growth in ARR from the same set of customers at the end of the prior year period. It measures our ability to increase revenue across our existing customer base through expanded use of our platform, offset by customers whose subscription contracts with us are not renewed or renew at a lower amount. The company’s ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers. NRR is an important way in which we track our performance in this area.
Net Retention Rate, or NRR, is defined as the approximate year-over-year percentage growth in ARR from the same set of customers at the end of the prior year period. It measures our ability to increase revenue across our existing customer base through expanded use of our platform, offset by customers whose subscription contracts with us are not renewed or renew at a lower amount. The company’s ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers. NRR is an important way in which we track our performance in this area.
We reported NRR of 108% and 115% at March 31, 2023 and 2022, respectively. Year-over-year, NRR was impacted by foreign exchange rate impacts, longer sales cycles, timing related to contract renewals, a small number of lost contracts in 2022, and our decision to discontinue certain product portfolio offerings.
Adjusted EBITDA
We define Adjusted EBITDA as net income before interest, taxes, depreciation, amortization, long-term incentive compensation, and certain non-recurring items, including acquisition related costs, lease exit costs, rebranding costs, and non-routine shareholder matters. Adjusted EBITDA is a non-GAAP financial metric. We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, amortization, long-term incentive compensation, and certain non-recurring items, including acquisition related costs, lease exit costs, rebranding costs, and non-routine shareholder matters. We use Adjusted EBITDA as a simplified measure of performance for use in communicating our performance to investors and analysts and for comparisons to other companies within our industry. As a performance measure, we believe that Adjusted EBITDA presents a view of our operating results that is most closely related to serving our customers. By excluding interest, taxes, depreciation, amortization, long-term incentive compensation, impairment of intangible assets, restructuring costs, and certain other non-recurring items, we are able to evaluate performance without considering decisions that, in most cases, are not directly related to meeting our customers’ requirements and were either made in prior periods (e.g., depreciation, amortization, long-term incentive compensation, non-routine shareholder matters), deal with the structure or financing of the business (e.g., interest, one-time strategic action costs, restructuring costs, impairment charges)
Adjusted EBITDA
We define Adjusted EBITDA as net income before interest, taxes, depreciation, amortization, long-term incentive compensation, and certain non-recurring items, including acquisition related costs, lease exit costs, rebranding costs, and non-routine shareholder matters. Adjusted EBITDA is a non-GAAP financial metric. We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, amortization, long-term incentive compensation, and certain non-recurring items, including acquisition related costs, lease exit costs, rebranding costs, and non-routine shareholder matters. We use Adjusted EBITDA as a simplified measure of performance for use in communicating our performance to investors and analysts and for comparisons to other companies within our industry. As a performance measure, we believe that Adjusted EBITDA presents a view of our operating results that is most closely related to serving our customers. By excluding interest, taxes, depreciation, amortization, long-term incentive compensation, impairment of intangible assets, restructuring costs, and certain other non-recurring items, we are able to evaluate performance without considering decisions that, in most cases, are not directly related to meeting our customers’ requirements and were either made in prior periods (e.g., depreciation, amortization, long-term incentive compensation, non-routine shareholder matters), deal with the structure or financing of the business (e.g., interest, one-time strategic action costs, restructuring costs, impairment charges)
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or reflect the application of regulations that are outside of the control of our management team (e.g., taxes). In addition, removing the impact of these items helps us compare our core business performance with that of our competitors.
The following table reconciles net income (loss) as reported on our condensed consolidated statements of operations to Adjusted EBITDA:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2023 | 2022 | |||||||||
| Net income (loss) | $ | (8,356) | $ | 5,214 | |||||||
| Interest income (expense), net | (503) | 17 | |||||||||
| Provision for income taxes | 689 | 1,173 | |||||||||
| Depreciation and amortization of intangible assets (1) | 1,319 | 2,097 | |||||||||
| Long-term incentive compensation | 3,923 | 1,224 | |||||||||
| Restructuring and other related charges | 706 | 2,659 | |||||||||
| Other non-recurring items (2) | 585 | (12,144) | |||||||||
| Adjusted EBITDA | $ | (1,637) | $ | 240 | |||||||
(1) Includes depreciation and amortization expense directly related to generating cloud subscription revenue of less than $0.1 million and $0 million at March 31, 2023 and 2022, respectively. Costs are recorded in Cost of service and other revenue.
(2) For the three months ended March 31, 2023, non-recurring items include $0.6 million of fees related to non-recurring projects and our acquisition of ProvenDB.
For the three months ended March 31, 2022, non-recurring items include a $(14.8) million non-operating gain on sale of our investment in Promon and $2.7 million of outside services related to our strategic action plan.
For the three months ended March 31, 2022, non-recurring items include a $(14.8) million non-operating gain on sale of our investment in Promon and $2.7 million of outside services related to our strategic action plan.
Adjusted EBITDA for the three months ended March 31, 2023 was $(1.6) million compared to $0.2 million for the three months ended March 31, 2022. Year-over-year changes in foreign exchange rates negatively impacted Adjusted EBITDA by approximately $1.1 million for the three months ended March 31, 2023. The decrease was also driven by higher operating expenses as we increased investments in our sales and marketing function to drive top line growth, as well as by higher compensation in our executive team due to 2022 executive hires, both in connection with our business transformation.
Critical Accounting Policies
Our accounting policies are fully described in Note 1, Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2022 and Note 2, Summary of Significant Accounting Policies, to our interim unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for the period ended March 31, 2023. We believe our most critical accounting policies include revenue recognition, credit losses, and accounting for income taxes.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our market risk during the three months ended March 31, 2023. For additional information, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our Form 10-K.
Item 4 - Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2023. Based on
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this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2023, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There have been no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended March 31, 2023.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
We are subject to certain legal proceedings and claims incidental to the operation of our business. We are also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business that have not been fully adjudicated. We currently do not anticipate that these matters, if resolved against us, will have a material adverse impact on our financial results.
For further information regarding our legal proceedings and claims, see Note 15, Legal Proceedings and Contingencies, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.
Item 1A – Risk Factors
Careful consideration should be given to the risk factors disclosed in Part I, Item 1A, Risk Factors, of our Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023.
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Item 6 - Exhibits
Exhibit 101.INS – Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||
| Exhibit 101.SCH – Inline XBRL Taxonomy Extension Schema Document | ||
| Exhibit 101.CAL – Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| Exhibit 101.LAB – Inline XBRL Taxonomy Extension Label Linkbase Document | ||
| Exhibit 101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| Exhibit 101.DEF – Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
| Exhibit 104 – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||
_____________________________________
*Compensatory plan or management contract.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 4, 2023.
| 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) | |||||
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