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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
OR
oTRANSITION 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)
_____________________________________
Delaware36-4169320
(State or Other Jurisdiction of
Incorporation or Organization)		(I.R.S. Employer
Identification No.)
1 Marina Park Drive, Unit 1410
Boston, Massachusetts 02210
(Address of Principal Executive Offices) (Zip Code)
(312) 766-4001
(Registrant’s telephone number, including area code)

121 West Wacker Drive, Suite 2050
Chicago, Illinois 60601
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading SymbolName of each exchange on which registered:
Common Stock, par value $0.001 per shareOSPNNasdaq
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer ,a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated fileroAccelerated filerx
Non-accelerated fileroEmerging growth company o
Smaller reporting companyo
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 39,887,336 shares of Common Stock, $0.001 par value per share, outstanding at November 3, 2023.

OneSpan Inc.
Form 10-Q
For the Quarter Ended September 30, 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)
September 30,December 31,
20232022
ASSETS
Current assets
Cash and cash equivalents$68,496 $96,167 
Restricted cash788 1,208 
Short-term investments— 2,328 
Accounts receivable, net of allowances of $1,663 in 2023 and $1,600 in 2022
38,667 65,132 
Inventories, net15,456 12,054 
Prepaid expenses7,319 6,222 
Contract assets4,960 4,520 
Other current assets10,377 10,757 
Total current assets146,063 198,387 
Property and equipment, net16,518 12,681 
Operating lease right-of-use assets4,377 8,022 
Goodwill91,369 90,514 
Intangible assets, net of accumulated amortization11,912 12,482 
Deferred income taxes1,843 1,901 
Other assets10,611 11,095 
Total assets$282,693 $335,082 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$16,538 $17,357 
Deferred revenue50,760 64,637 
Accrued wages and payroll taxes13,420 18,345 
Short-term income taxes payable2,184 2,438 
Other accrued expenses8,123 7,664 
Deferred compensation306 373 
Total current liabilities91,331 110,814 
Long-term deferred revenue4,569 6,269 
Long-term lease liabilities5,294 8,442 
Long-term income taxes payable— 2,565 
Deferred income taxes1,218 1,197 
Other long-term liabilities2,963 2,484 
Total liabilities105,375 131,771 
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at September 30, 2023 and December 31, 2022
— — 
Common stock: $0.001 par value per share, 75,000 shares authorized; 41,159 and 40,764 shares issued; 39,816 and 39,726 shares outstanding at September 30, 2023 and December 31, 2022, respectively
40 40 
Additional paid-in capital115,162 107,305 
Treasury stock, at cost, 1,343 and 1,038 shares outstanding at September 30, 2023 and December 31, 2022, respectively
(21,749)(18,222)
Retained earnings98,498 128,738 
Accumulated other comprehensive loss(14,633)(14,550)
Total stockholders' equity177,318 203,311 
Total liabilities and stockholders' equity$282,693 $335,082 
See accompanying notes to 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
September 30, 		Nine Months Ended
September 30,
2023202220232022
Revenue
Product and license$31,732 $31,280 $95,461 $89,496 
Services and other27,106 25,867 76,717 72,888 
Total revenue58,838 57,147 172,178 162,384 
Cost of goods sold
Product and license11,004 12,646 36,330 32,672 
Services and other7,165 6,070 21,599 19,097 
Total cost of goods sold18,169 18,716 57,929 51,769 
Gross profit40,669 38,431 114,249 110,615 
Operating costs
Sales and marketing16,664 15,265 56,388 45,193 
Research and development10,133 9,541 29,686 33,596 
General and administrative11,559 11,813 44,038 39,549 
Restructuring and other related charges6,524 6,481 13,076 11,828 
Amortization of intangible assets583 956 1,749 3,555 
Total operating costs45,463 44,056 144,937 133,721 
Operating loss(4,794)(5,625)(30,688)(23,106)
Interest income, net587 179 1,675 197 
Other income (expense), net353 (1,155)342 13,817 
Loss before income taxes(3,854)(6,601)(28,671)(9,092)
Provision for income taxes279 600 1,569 2,245 
Net loss$(4,133)$(7,201)$(30,240)$(11,337)
Net loss per share
Basic$(0.10)$(0.18)$(0.75)$(0.28)
Diluted$(0.10)$(0.18)$(0.75)$(0.28)
Weighted average common shares outstanding
Basic40,45439,72340,52939,801
Diluted40,45439,72340,52939,801
See accompanying notes to condensed consolidated financial statements.
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OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net loss$(4,133)$(7,201)$(30,240)$(11,337)
Other comprehensive loss
Cumulative translation adjustment, net of tax(2,647)(4,786)93 (12,121)
Pension adjustment, net of tax(61)(21)(182)(68)
Unrealized gains (loss) on available-for-sale securities(2)59 6 (30)
Comprehensive loss$(6,843)$(11,949)$(30,323)$(23,556)
See accompanying notes to condensed consolidated financial statements.
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OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
For the Nine Months Ended September 30, 2023:
DescriptionCommon StockTreasury - Common StockAdditional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Stockholders'
Equity
SharesAmountSharesAmount
Balance at December 31, 202239,726$40 1,038$(18,222)$107,305 $128,738 $(14,550)$203,311 
Net loss— — — — — (8,356)— (8,356)
Foreign currency translation adjustment, net of tax— — — — — — 1,715 1,715 
Share-based compensation— — — — 3,812 — — 3,812 
Vesting of restricted stock awards329 — — — — — — — 
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, 202339,950$40 1,038$(18,222)$110,019 $120,382 $(12,888)$199,331 
Net loss—— —— — (17,751)— (17,751)
Foreign currency translation adjustment, net of tax—— —— — — 1,025 1,025 
Share-based compensation— — — — 4,503 — — 4,503 
Vesting of restricted stock awards44— —— — — — — 
Tax payments for stock issuances(15)— —— (449)— — (449)
Unrealized gain (loss) on available-for-sale securities—— —— — — 1 1 
Pension adjustment, net of tax—— —— — — (61)(61)
Balance at June 30, 202339,979$40 1,038$(18,222)$114,073 $102,631 $(11,923)$186,599 
Net loss— — — — — (4,133)— (4,133)
Foreign currency translation adjustment, net of tax— — — — — — (2,647)(2,647)
Share-based compensation— — — — 1,878 — — 1,878 
Vesting of restricted stock awards226 — — — — — — — 
Tax payments for stock issuances(84)— — — (789)— — (789)
Unrealized gain (loss) on available-for-sale securities— — — — — — (2)(2)
Share repurchases(305)— 305 (3,527)— — — (3,527)
Pension adjustment, net of tax— — — — — — (61)(61)
Balance at September 30, 202339,816$40 1,343$(21,749)$115,162 $98,498 0$(14,633)$177,318 
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For the Nine Months Ended September 30, 2022:
DescriptionCommon StockTreasury - Common StockAdditional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Stockholders'
Equity
SharesAmountSharesAmount
Balance at December 31, 202140,001$40 592(12,501)$100,250 $143,173 $(11,182)$219,780 
Net income—— —— — 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 awards34— —— — — — — 
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, 202240,021$40 592$(12,501)$100,975 $148,387 $(13,306)$223,595 
Net loss—— —— — (9,350)— (9,350)
Foreign currency translation adjustment, net of tax—— —— — — (5,315)(5,315)
Share-based compensation28— —— 1,253 — — 1,253 
Vesting of restricted stock awards(6)— —— (88)— — (88)
Tax payments for stock issuances(446)— 446(5,721)— — — (5,721)
Unrealized gain (loss) on available-for-sale-securities—— — — — — (10)(10)
Pension adjustment, net of tax—— — — — — (22)(22)
Balance at June 30, 202239,597$40 1,038$(18,222)$102,140 $139,037 $(18,653)$204,342 
Net loss—— —— — (7,201)— (7,201)
Foreign currency translation adjustment, net of tax—— —— — — (4,786)(4,786)
Vesting of restricted stock awards101 — —— 2,884 — — 2,884 
Tax payments for stock issuances(36)— —— (355)— — (355)
Unrealized gain (loss) on available-for-sale-securities—— — — — — 59 59 
Pension adjustment, net of tax—— — — — — (21)(21)
Balance at September 30, 202239,662$40 1,038$(18,222)$104,669 $131,836 $(23,401)$194,922 
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OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20232022
Cash flows from operating activities:
Net loss$(30,240)$(11,337)
Adjustments to reconcile net loss from operations to net cash used in operations:
Depreciation and amortization of intangible assets4,524 5,691 
Loss on disposal of asset72 — 
Impairment of intangible assets— 3,828 
Impairments of property and equipment, net2,640 — 
Impairments of inventories, net1,568 — 
Gain on sale of equity-method investment— (14,810)
Deferred tax benefit44 683 
Stock-based compensation10,192 5,497 
Changes in operating assets and liabilities:
Accounts receivable and allowance for doubtful accounts26,396 10,437 
Inventories, net(5,277)(540)
Contract assets(542)(232)
Accounts payable(834)2,236 
Income taxes payable(2,826)(1,450)
Accrued expenses(4,620)(1,342)
Deferred compensation(67)(532)
Deferred revenue(15,425)(10,838)
Other assets and liabilities557 (970)
Net cash used in operating activities(13,838)(13,679)
Cash flows from investing activities:
Purchase of short-term investments— (15,812)
Maturities of short-term investments2,330 39,050 
Additions to property and equipment(9,035)(2,547)
Additions to intangible assets(31)(17)
Cash paid for acquisition of business(1,800)— 
Sale of equity-method investment— 18,874 
Net cash (used in) provided by investing activities(8,536)39,548 
Cash flows from financing activities:
Tax payments for restricted stock issuances(2,335)(1,078)
Repurchase of common stock(3,527)(5,721)
Net cash used in financing activities(5,862)(6,799)
Effect of exchange rate changes on cash145 (616)
Net (decrease) increase in cash(28,091)18,454 
Cash, cash equivalents, and restricted cash, beginning of period97,375 64,228 
Cash, cash equivalents, and restricted cash, end of period$69,284 $82,682 

See accompanying notes to condensed consolidated financial statements.
8
OneSpan Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us,” refer to OneSpan Inc. and its subsidiaries.

Note 1 – Description of the Company and Basis of Presentation

Description of the Company
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 and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Business Transformation

In May 2022, the Company announced a three-year strategic transformation plan that began on January 1, 2023. 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.

During the three months ended March 31, 2023, and as a result of the ongoing strategic transformation, the Company refined its allocation methodology to better align internal and external costs more directly to where the employee efforts and company resources are being spent on each segment. While the Company's consolidated results will not be impacted, the Company has recast its segment information for the three and nine months ended September 30, 2022 for comparable presentation.

For further information regarding the Company’s reportable segments, see Note 3, Segment Information.
Estimates and Assumptions
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
9
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 operations of the majority of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other (expense) income, net. Foreign exchange transaction losses aggregated $0.1 million and $0.5 million for the three and nine months ended September 30, 2023, respectively. Foreign exchange transaction losses aggregated $1.3 million and $2.6 million for the three and nine months ended September 30, 2022, respectively.
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
The Company is party to lease agreements that require letters of credit to secure the obligations which totaled $0.7 million and $1.1 million at September 30, 2023 and December 31, 2022, respectively. Additionally, the Company maintained a cash guarantee with a payroll vendor in the amount of $0.1 million at both September 30, 2023 and December 31, 2022. The restricted cash related to 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 condensed 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 OneSpan Sign e-signature and OneSpan Notary. This segment also includes costs attributable to our transaction cloud platform.
•Security Solutions. Security Solutions consists of our broad portfolio of software products, software development kits (SDKs) and Digipass authenticator devices that are used to build applications designed to defend against attacks on digital transactions across online environments, devices, and applications. The software products and SDKs included in the Security Solutions segment are largely on-premises software products and include identity verification, multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.

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

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

Effective with the three months ended September 30, 2022, the Company began allocating amortization of intangible assets expense to operating income (loss) for each of its reportable operating segments in order to better align the expense with the operations of each segment. The Company has updated segment operating income (loss) for the three and nine months ended September 30, 2022 to reflect the change in presentation. The allocation change had no impact on the Company's condensed consolidated financial statements.
The tables below set forth information about the Company’s reportable operating segments for the three and nine months ended September 30, 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
September 30,		Nine Months Ended
September 30,
(In thousands, except percentages)2023202220232022
Digital Agreements
Revenue$13,012 $12,200 $36,426 $35,955 
Gross profit$9,808 $9,736 $26,839 $27,669 
Gross margin75 %80 %74 %77 %
Operating income (loss) (1)$(4,666)$2,160 $(17,820)$2,823 
Security Solutions
Revenue$45,826 $44,947 $135,752 $126,429 
Gross profit$30,861 $28,695 $87,410 $82,946 
Gross margin67 %64 %64 %66 %
Operating income (2)$15,673 $5,711 $39,827 $21,399 
Total Company:
Revenue$58,838 $57,147 $172,178 $162,384 
Gross profit$40,669 $38,431 $114,249 $110,615 
Gross margin69 %67 %66 %68 %
Statements of Operations reconciliation:
Segment operating income$11,007 $7,871 $22,007 $24,222 
Corporate operating expenses not allocated at the segment level15,801 13,496 52,695 47,328 
Operating loss$(4,794)$(5,625)$(30,688)$(23,106)
Interest income, net587 179 1,675 197 
Other income (expense), net353 (1,155)342 13,817 
Loss before income taxes$(3,854)$(6,601)$(28,671)$(9,092)
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(1) Digital Agreements operating income includes $0.6 million of amortization of intangible assets expense for the three months ended both September 30, 2023 and 2022 and $1.7 million of amortization of intangible assets expense for the nine months ended both September 30, 2023 and 2022.
(2) Security Solutions operating income includes $0 and $0.4 million of amortization of intangible assets expense for the three months ended September 30, 2023 and 2022, respectively, and $0 and $1.8 million of amortization of intangible assets expense for the nine months ended September 30, 2023 and 2022, respectively.
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 and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30,
20232022
Digital AgreementsSecurity SolutionsDigital AgreementsSecurity Solutions
(In thousands)
Subscription$11,807 $14,378 $10,321 $11,941 
Maintenance and support995 11,276 1,693 11,158 
Professional services and other (1)210 1,333 186 2,034 
Hardware products— 18,839 — 19,814 
Total Revenue$13,012 $45,826 $12,200 $44,947 


Nine Months Ended September 30,
20232022
Digital AgreementsSecurity SolutionsDigital AgreementsSecurity Solutions
(In thousands)
Subscription$32,641 $46,485 $30,728 $34,632 
Maintenance and support3,121 31,914 4,453 32,522 
Professional services and other (1)664 4,002 774 5,327 
Hardware products— 53,351 — 53,948 
Total Revenue$36,426 $135,752 $35,955 $126,429 
(1) Professional services and other includes perpetual software licenses revenue, which was less than 2% of total revenue for the three and nine months ended September 30, 2023, respectively, and less than 3% of total revenue for the three and nine months ended September 30, 2022, respectively.
The Company allocates goodwill by reporting unit, in accordance with Accounting Standards Codification (ASC) 350 – Goodwill and Other. Asset information by segment is not reported to or reviewed by the CODM to allocate resources, and therefore, the Company has not disclosed asset information for the segments.
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Note 4 – Revenue from Contracts with Customers
Revenue by major products and services
The following tables present the Company’s revenues disaggregated by major products and services, geographical region and timing of revenue recognition:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(In thousands)
Subscription$26,185 $22,262 $79,126 $65,360 
Maintenance and support12,271 12,851 35,035 36,975 
Professional services and other (1)1,543 2,220 4,666 6,101 
Hardware products18,839 19,814 53,351 53,948 
Total Revenue$58,838 $57,147 $172,178 $162,384 
(1) Professional services and other includes perpetual software licenses revenue, which was less than 2% of total revenue for the three and nine months ended September 30, 2023, respectively, and less than 3% of total revenue for the three and nine months ended September 30, 2022, respectively.
Revenue by location of customer for the Three and Nine Months Ended September 30, 2023 and 2022
We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes North, Central, and South America; and 3) Asia Pacific (APAC), which includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(In thousands, except percentages)
Revenue
EMEA$26,233 $25,999 $80,592 $74,396 
Americas19,999 20,394 58,828 56,972 
APAC12,606 10,754 32,758 31,016 
Total revenue$58,838 $57,147 $172,178 $162,384 
% of Total Revenue
EMEA45 %45 %47 %46 %
Americas34 %36 %34 %35 %
APAC21 %19 %19 %19 %
Timing of revenue recognition
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2023202220232022
Products and Licenses transferred at a point in time$31,732 $31,280 $95,461 $89,496 
Services transferred over time27,106 25,867 76,717 72,888 
Total Revenue$58,838 $57,147 $172,178 $162,384 
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Contract balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as of September 30, 2023 and December 31, 2022:
September 30,December 31,
(In thousands)20232022
Receivables, inclusive of trade and unbilled$38,667 $65,132 
Contract Assets (current and non-current)$5,096 $4,642 
Contract Liabilities (Deferred Revenue current and non-current)$55,329 $70,906 
Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings. These contract assets are transferred to receivables when the right to bill occurs over a 2- to 5-year period. The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services. Revenue is recognized for these services over time.
As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component when it is expected, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. Extended payment terms are not typically included in contracts with customers.
Revenue recognized during the nine months ended September 30, 2023 included $52.6 million that was included on the December 31, 2022 consolidated balance sheet in contract liabilities. Deferred revenue decreased in the same period due to timing of annual renewals.
Transaction price allocated to the remaining performance obligations
Remaining performance obligations represent the revenue that is expected to be recognized in future periods related to performance obligations that are unsatisfied, or partially unsatisfied, as of the end of the period. The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2023:
(In thousands)202320242025Beyond 2025Total
Future revenue related to current unsatisfied performance obligations$12,040 $30,733 $16,271 $10,340 $69,384 
The Company applies practical expedients and does not disclose information about remaining performance obligations (a) that have original expected durations of one year or less, or (b) where revenue is recognized as invoiced.
Costs of obtaining a contract
The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. The Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of up to seven years, which is the determined benefit period based on the transfer of goods or services. The Company determined the period of benefit by taking into consideration the customer contracts, its technology and other factors, including customer attrition. Commissions are earned upon invoicing to the customer. For contracts with multiple year payment terms, because the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. Commissions and amortization expense are included in “Sales and Marketing” expense in the condensed consolidated statements of operations.
Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less. These costs are included in “Sales and Marketing” expense in the condensed consolidated statements of operations.
14
The following tables provide information related to the capitalized costs and amortization recognized in the current and prior period:
(In thousands)September 30, 2023December 31, 2022
Capitalized costs to obtain contracts, current$3,284 $2,929 
Capitalized costs to obtain contracts, non-current$10,322 $10,571 
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2023202220232022
Amortization of capitalized costs to obtain contracts$801 $641 $2,286 $1,731 
Impairments of capitalized costs to obtain contracts$— $— $— $— 
Note 5 – Inventories, net
Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method.
Inventories, net consist of the following:
September 30,
2023		December 31,
2022
(In thousands)
Component parts (1)$8,890 $6,762 
Work-in-process and finished goods6,566 5,292 
Total $15,456 $12,054 
(1) In conjunction with the Company's decision to discontinue investments in its Digipass CX product (see Note 16, Restructuring and Other Related Charges), non-cash impairment charges of $1.6 million for component parts, net, were recorded in "Cost of goods sold, Product and license" on the condensed consolidated statements of operations during the quarter ended June 30, 2023.
Note 6 – Goodwill
The following table presents the changes in goodwill during the nine months ended September 30, 2023:
Digital AgreementsSecurity SolutionsTotal
(In thousands)
Net balance at December 31, 2022$19,732 $70,782 $90,514 
Foreign currency exchange rate effect56 199 255 
Acquisition during the period (1)$600 $— $600 
Net balance at September 30, 2023$20,388 $70,981 $91,369 
(1) Represents goodwill recorded in conjunction with the acquisition of substantially all the assets of the ProvenDB business 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 nine months ended September 30, 2023 and 2022.
15
Note 7 – Intangible Assets
Intangible assets as of September 30, 2023 and December 31, 2022 consist of the following:
As of September 30, 2023As of December 31, 2022
(In thousands)Useful Life (in years)Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
Acquired technology
3 to 7
$43,293 $42,024 $42,022 $41,894 
Customer relationships
5 to 12
34,451 25,076 34,386 23,323 
Patents, trademarks, and other
10 to 20
13,543 12,275 13,518 12,227 
Total$91,287 $79,375 $89,926 $77,444 
Total amortization expense was $0.7 million and $2.0 million for the three and nine months ended September 30, 2023, respectively, compared to $1.0 million and $3.6 million for the three and nine months ended September 30, 2022, respectively. Amortization expense includes cost of sales amortization expense directly related to delivering cloud subscription revenue of $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively, and $0 for the three and nine months ended September 30, 2022. Costs are recorded in "Services and other cost of goods sold" on the condensed consolidated statements of operations.
Certain intangible assets are denominated in functional currencies besides the U.S. dollar and are subject to currency fluctuations.
During the nine months ended September 30, 2022, the Company performed an impairment review of the customer relationships intangible assets obtained in its 2018 acquisition of Dealflo Limited (“Dealflo”). The impairment review was triggered by the Company’s July 2022 notification to customers regarding its intent to gradually sunset its Dealflo solution in the months leading up to December 31, 2023. As a result, substantially all Dealflo solution customer contracts will terminate on or before December 31, 2023. The results of the impairment review indicated that the carrying value of the Dealflo customer relationships exceeded the fair value, and the Company recorded a $3.8 million impairment charge on the entire remaining value of the asset during the three months ended September 30, 2022. The charge is included in “Impairment of intangible assets” on the condensed consolidated statements of operations.
There was no additional impairment of intangible assets recorded during the nine months ended September 30, 2023 and 2022.
Note 8 – Property and Equipment, net
The following table presents the major classes of property and equipment, net, as of September 30, 2023 and December 31, 2022:
(In thousands)September 30, 2023 December 31, 2022
Office equipment and software$7,981 $14,451 
Leasehold improvements6,827 9,927 
Furniture and fixtures3,295 4,260 
Capitalized software10,565 4,007 
Total28,668 32,645 
Accumulated depreciation(12,150)(19,964)
Property and equipment, net$16,518 $12,681 
Total depreciation expense was $1.0 million and $2.5 million for the three and nine months ended September 30, 2023, respectively, compared to $0.7 million and $2.1 million for the three and nine months ended September 30, 2022, respectively. Depreciation expense includes cost of sales depreciation expense directly related to delivering cloud subscription revenue of $0.4 million for the three and nine months ended September 30, 2023, respectively, and $0 for the three and nine months ended September 30, 2022. Costs are recorded in "Services and other cost of goods sold" on the condensed consolidated statements of operations.
16
As part of the Company's decision to discontinue investments in its Digipass CX product (see Note 16, Restructuring and Other Related Charges), non-cash impairment charges of $1.4 million for capitalized software were recorded in "Restructuring and other related charges" on the condensed consolidated statements of operations during the three months ended June 30, 2023.
In conjunction with the Company's Chicago office lease abandonment (see Note 16, Restructuring and Other Related Charges), non-cash impairment charges of $0.6 million for leasehold improvements and $0.1 million for office equipment and software were recorded in "Restructuring and other related charges" on the condensed consolidated statements of operations during the three months ended June 30, 2023
Due to the Company's Brussels office lease termination (see Note 16, Restructuring and Other Related Charges), a non-cash impairment charge of $0.6 million for leasehold improvements was recorded in "Restructuring and other related charges" on the condensed consolidated statements of operations during the three months ended September 30, 2023.
Note 9 – Fair Value Measurements
The following tables summarize the Company’s financial assets by level in the fair value hierarchy, which are measured at fair value on a recurring basis, as of September 30, 2023 and December 31, 2022:
Fair Value Measurement at Reporting Date Using
(In thousands)September 30, 2023Quoted Prices in Active Markets for
Identical Assets (Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury Bills$8,980 — $8,980 — 
Money Market Funds$18,245 18,245 $— — 
Fair Value Measurement at Reporting Date Using
(In thousands)December 31, 2022Quoted Prices in Active Markets for
Identical Assets (Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money Market Funds$28,388 28,388 $— — 
Commercial Paper$6,743 — $6,743 — 
Corporate Notes / Bonds$2,328 — $2,328 — 
The Company classifies its investments in debt securities as available-for-sale. The Company reviews available-for-sale debt securities for impairments related to losses and other factors each quarter. The unrealized gains and losses on the available-for-sale debt securities were not material as of September 30, 2023 and December 31, 2022. Also, the Company did not have any financial liabilities that are measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022.
The Company’s non-financial assets and liabilities, which include goodwill and long-lived assets held and used, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, the Company would evaluate the non-financial assets and liabilities for impairment. If an impairment was to occur, the asset or liability would be recorded at its estimated fair value.
17
Note 10 – Allowance for Credit Losses
The changes in the allowance for credit losses during the nine months ended September 30, 2023 were as follows:
(In thousands)
Balance at December 31, 2022$1,600 
Provision418 
Write-offs(355)
Balance at September 30, 2023$1,663 
During the nine months ended September 30, 2023, the Company wrote off $0.4 million of accounts receivable that were fully reserved for and no longer deemed collectible.
Note 11 – Leases
Operating lease cost details for the three and nine months ended September 30, 2023 and 2022 are as follows:
Three Months Ended
September 30,		Nine months ended
September 30,
2023202220232022
(In thousands)
Building rent$369 $509 $1,370 $1,605 
Automobile rentals270 295 836 876 
Total net operating lease costs$639 $804 $2,206 $2,481 
At September 30, 2023, the Company’s weighted average remaining lease term for its operating leases is 4.5 years, and the weighted average discount rate for its operating leases is 5%.
During the nine months ended September 30, 2023, there were $2.2 million of operating cash payments for lease liabilities, and $0.6 million of right-of use assets obtained in exchange for new lease liabilities.
As part of its multiyear restructuring plan (see Note 16, Restructuring and Other Related Charges), the Company vacated its Chicago office space and abandoned the underlying leases during June 2023. The Company accrued a $1.4 million early lease termination fee, which is reflected on the condensed consolidated statements of operations for the nine months ended September 30, 2023 in "Restructuring and other related charges". The underlying lease right-of-use asset and lease liability for the Chicago leased office space were written off, and a $0.3 million gain related to rent concessions and tenant improvement allowances was recorded on the condensed consolidated statements of operations for the nine months ended September 30, 2023 in "Restructuring and other related charges".
In September 2023, the Company vacated its Brussels office and terminated the lease as of September 30, 2023. The Company accrued a $0.3 million early lease termination fee, which is reflected on the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 in "Restructuring and other related charges". The underlying lease right-of-use asset and lease liability for the Brussels leased office space were written off, and a $0.6 million loss related to rent concessions and tenant improvement allowances was recorded on the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 in "Restructuring and other related charges".
18
Maturities of the Company’s operating leases as of September 30, 2023 are as follows:
As of
September 30, 2023
(In thousands)
2023$608 
20242,099 
20251,227 
20261,136 
2027956 
Later years1,266 
Less imputed interest(742)
Total lease liabilities$6,550 
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 25%. The Company’s global effective tax rate is higher than the U.S. statutory tax rate of 21% primarily due to foreign tax rate differences and nondeductible expenses. The ultimate tax expense will depend on the mix of earnings in various jurisdictions. Income taxes, net of refunds, of $4.4 million were paid during the nine months ended September 30, 2023. Income taxes, net of refunds, of $1.7 million were paid during the nine months ended September 30, 2022.
Management assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of negative evidence such as 3-year cumulative losses are considered. Management also reviews reversal patterns of temporary differences to determine if the Company would have sufficient taxable income due to the reversal of temporary differences to support the realization of deferred tax assets.
Certain operations have incurred net operating losses (NOLs), which are currently subject to a valuation allowance. These NOLs may become deductible to the extent these operations become profitable. For each of its operations, the Company evaluates whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, the Company considers evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain operations record a loss, the Company does not recognize a corresponding tax benefit, thus increasing its effective tax rate, or decreasing its effective tax rate when reporting income in a jurisdiction that has a valuation allowance. Upon determining that it is more likely than not that the NOLs will be realized, the Company will reduce the tax valuation allowances related to these NOLs, which will result in a reduction of its income tax expense and its effective tax rate in the period.
At December 31, 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 0.9 million restricted stock units during the nine months ended September 30, 2023, subject to time-based vesting. The fair value of the unissued time-based restricted stock unit grants was $11.9 million at the dates of grant and the grants are being amortized over the vesting periods of one to three years.
19
The Company awarded restricted stock units subject to the achievement of service and future performance criteria during the nine months ended September 30, 2023, which allow for up to 0.8 million shares to be earned if the performance criteria are achieved at the target level. The fair value of these awards was $11.9 million at the dates of grant and the awards are being amortized over the requisite service period of one to three years. The Company currently believes that approximately 12% of these shares are expected to be earned.
During the nine months ended September 30, 2023 and 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 and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(In thousands)
Stock-based compensation$1,878 $2,884 $