ospn-20240331

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, 2024


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.)

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)

_____________________________________

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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Emerging growth company

Smaller reporting company

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 37,845,509 shares of Common Stock, $0.001 par value per share, outstanding at April 26, 2024.

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OneSpan Inc.

Form 10-Q

For the Quarter Ended March 31, 2024

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PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of Mar ch 3 1 , 202 4 and December 31, 20 23	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023	4

	Condensed Consolidated Statements of Comprehensive Income (Loss ) for the Three Months Ended March 3 1 , 202 4 and 20 23	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 3 1 , 202 4 and 20 23	6

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 3 1 , 20 24 and 202 3	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	35

Item 6.	Exhibits	36

SIGNATURES		37

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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,
	2024		2023
ASSETS
Current assets
Cash and cash equivalents	$	63,859	$	42,493
Restricted cash	1,022		1,037

Accounts receivable, net of allowances of $1,472 at March 31, 2024 and $1,536 at December 31, 2023	32,382		64,387
Inventories, net	14,594		15,553
Prepaid expenses	6,835		6,575
Contract assets	4,867		5,139
Other current assets	10,608		11,159
Total current assets	134,167		146,343
Property and equipment, net	20,346		18,722
Operating lease right-of-use assets	6,215		6,171
Goodwill	93,069		93,684
Intangible assets, net of accumulated amortization	10,146		10,832
Deferred income taxes	1,682		1,721
Other assets	11,517		11,718
Total assets	$	277,142	$	289,191
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	12,148	$	17,452
Deferred revenue	55,573		69,331
Accrued wages and payroll taxes	12,066		14,335
Short-term income taxes payable	4,544		2,646
Other accrued expenses	7,775		10,684
Deferred compensation	65		382
Total current liabilities	92,171		114,830
Long-term deferred revenue	3,916		4,152
Long-term lease liabilities	6,008		6,824

Deferred income taxes	1,001		1,067
Other long-term liabilities	3,177		3,177
Total liabilities	106,273		130,050
Commitments and contingencies
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at March 31, 2024 and December 31, 2023	—		—
Common stock: $0.001 par value per share, 75,000 shares authorized; 41,492 and 41,243 shares issued; 37,768 and 37,519 shares outstanding at March 31, 2024 and December 31, 2023, respectively	38		38
Additional paid-in capital	118,565		118,620
Treasury stock, at cost: 3,724 shares outstanding at March 31, 2024 and December 31, 2023	(47,377)		(47,377)
Retained earnings	112,407		98,939
Accumulated other comprehensive loss	(12,764)		(11,079)
Total stockholders' equity	170,869		159,141
Total liabilities and stockholders' equity	$	277,142	$	289,191

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 March 31,
	2024		2023
Revenue
Product and license	$	37,798	$	33,146
Services and other	27,045		24,461
Total revenue	64,843		57,607

Cost of goods sold
Product and license	9,706		11,288
Services and other	7,742		7,033
Total cost of goods sold	17,448		18,321

Gross profit	47,395		39,286

Operating costs
Sales and marketing	12,927		20,011
Research and development	8,259		9,463
General and administrative	10,007		16,653

Restructuring and other related charges	1,497		706
Amortization of intangible assets	595		583
Total operating costs	33,285		47,416

Operating income (loss)	14,110		(8,130)

Interest income, net	101		503
Other income (expense), net	291		(40)

Income (loss) before income taxes	14,502		(7,667)
Provision for income taxes	1,034		689

Net income (loss)	$	13,468	$	(8,356)

Net income (loss) per share
Basic	$	0.35	$	(0.21)
Diluted	$	0.35	$	(0.21)

Weighted average common shares outstanding
Basic	38,060		40,057
Diluted	38,463		40,057

See accompanying notes to condensed consolidated financial statements.

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OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2024		2023
Net income (loss)	$	13,468	$	(8,356)
Other comprehensive income (loss)
Cumulative translation adjustment, net of tax	(1,655)		1,715
Pension adjustment, net of tax	(30)		(60)
Unrealized gains (loss) on available-for-sale securities	—		7
Comprehensive income (loss)	$	11,783	$	(6,694)

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 Three Months Ended March 31, 2024:


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, 2023	37,519	$	38	3,724	$	(47,377)	$	118,620	$	98,939	$	(11,079)	$	159,141
Net income	—	—		—	—		—		13,468		—		13,468
Foreign currency translation adjustment, net of tax	—	—		—	—		—		—		(1,655)		(1,655)
Share-based compensation	—	—		—	—		1,540		—		—		1,540
Vesting of restricted stock awards	402	—		—	—		—		—		—		—
Tax payments for stock issuances	(153)	—		—	—		(1,595)		—		—		(1,595)


Pension adjustment, net of tax	—	—		—	—		—		—		(30)		(30)
Balance at March 31, 2024	37,768	$	38	3,724	$	(47,377)	$	118,565	$	112,407	$	(12,764)	$	170,869

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 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

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OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2024		2023
Cash flows from operating activities:
Net income (loss)	$	13,468	$	(8,356)
Adjustments to reconcile net income (loss) from operations to net cash used in operations:
Depreciation and amortization of intangible assets	2,082		1,319





Deferred tax benefit	(80)		8
Stock-based compensation	1,540		3,812
Allowance for doubtful accounts	(63)		75
Changes in operating assets and liabilities:
Accounts receivable	31,468		33,059
Inventories, net	623		(3,361)
Contract assets	(376)		278
Accounts payable	(5,137)		(273)
Income taxes payable	1,915		(512)
Accrued expenses	(4,758)		(1,963)
Deferred compensation	(317)		(151)
Deferred revenue	(13,547)		(11,390)
Other assets and liabilities	142		692
Net cash provided by operating activities	26,960		13,237

Cash flows from investing activities:

Maturities of short-term investments	—		2,330
Additions to property and equipment	(3,045)		(3,069)
Additions to intangible assets	(35)		(7)
Cash paid for acquisition of business	—		(1,800)

Net cash used in investing activities	(3,080)		(2,546)

Cash flows from financing activities:
Contingent payment related to acquisition	(200)		—
Tax payments for restricted stock issuances	(1,595)		(1,098)

Net cash used in financing activities	(1,795)		(1,098)

Effect of exchange rate changes on cash	(734)		569

Net increase in cash	21,351		10,162
Cash, cash equivalents, and restricted cash, beginning of period	43,530		97,374
Cash, cash equivalents, and restricted cash, end of period	$	64,881	$	107,536

See accompanying notes to condensed consolidated financial statements.

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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 provides security, identity, electronic signature (“e-signature”) and digital workflow solutions that protect and facilitate digital transactions and agreements. The Company delivers products and services that automate and secure customer-facing and revenue-generating business processes for use cases ranging from simple transactions to workflows that are complex or require higher levels of security. The Company’s solutions help its customers 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. 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.).

Business Transformation

In December 2021, the Company's Board of Directors approved a restructuring plan (the "restructuring plan") designed to advance the Company's operating model, streamline its business, improve efficiency, and enhance its capital resources. The first phase of this restructuring plan began and was substantially completed during the three months ended March 31, 2022. In May 2022, the Company's Board of Directors announced a three-year strategic transformation plan that began on January 1, 2023 (the "2022 strategic plan"). In conjunction with the 2022 strategic 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. For further information regarding the Company’s reportable segments, see Note 3, Segment Information.

During the quarter ended June 30, 2023, the Company determined that it was unlikely to achieve the revenue growth levels set forth in its 2022 strategic plan within the contemplated three-year timeframe. A number of factors contributed to the challenges achieving the originally planned growth levels, particularly in Digital Agreements, on the timeframes set forth in the 2022 strategic plan.

In response to these challenges, the Company modified its strategy to focus more heavily on improving profitability margins across the business. To this end, in August 2023, the Company’s Board approved cost reduction actions (the “2023 Actions”) to seek to drive higher levels of profitability while maintaining the Company’s long-term growth potential.

Basis of Presentation and Principles of Consolidation

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, 2023.

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, 2024 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.

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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 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 gains (losses) aggregated $0.1 million and $(0.2) million for the three months ended March 31, 2024 and 2023, 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, 2023 filed with the SEC on March 6, 2024 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 $0.9 million at both March 31, 2024 and December 31, 2023. Additionally, the Company maintained a cash guarantee with a payroll vendor in the amount of $0.1 million at both March 31, 2024 and December 31, 2023. 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 the Company as of the specified effective date.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures, to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impact the adoption of this guidance will have on its condensed consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision usefulness of income tax disclosures. Public business entities are required to adopt for annual fiscal periods beginning after December 31, 2024 and early adoption is permitted. The Company is evaluating the impact the adoption of this guidance will have on its condensed consolidated financial statements and related disclosures.

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

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consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include OneSpan Sign e-signature, OneSpan Notary, Identity Verification, and OneSpan Trust Vault. 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 multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.

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.

The tables below set forth information about the Company’s reportable operating segments for the three months ended March 31, 2024 and 2023, 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)	2024			2023
Digital Agreements
Revenue	$	14,414		$	11,552
Gross profit	$	9,892		$	8,448
Gross margin	69		%	73		%
Operating loss (1)	$	(265)		$	(6,033)

Security Solutions
Revenue	$	50,429		$	46,055
Gross profit	$	37,503		$	30,838
Gross margin	74		%	67		%
Operating income	$	25,878		$	15,631

Total Company:
Revenue	$	64,843		$	57,607
Gross profit	$	47,395		$	39,286
Gross margin	73		%	68		%

Statements of Operations reconciliation:
Segment operating income	$	25,613		$	9,598
Corporate operating expenses not allocated at the segment level	11,503			17,728
Operating income (loss)	$	14,110		$	(8,130)
Interest income, net	101			503
Other income (expense), net	291			(40)
Income (loss) before income taxes	$	14,502		$	(7,667)

(1) Digital Agreements operating loss includes $0.6 million of amortization of intangible assets expense for both the three months ended March 31, 2024 and 2023.

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The following tables illustrate the disaggregation of revenues by category and services, including a reconciliation of the disaggregated revenues to revenues from the Company’s two reportable operating segments for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

SEC Form 10-Q filed by OneSpan Inc.