OneSpan Inc

Previous wording

This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of OneSpan for the three- and six-month periods ended June 30, 2024 and 2023 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, 2023 (the “Form 10-K”).

Current wording

This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of OneSpan for the three- and nine-month periods ended September 30, 2024 and 2023 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, 2023 (the “Form 10-K”).

Previous wording

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 updated strategic transformation plan and cost reduction and restructuring actions approved in August 2023 and in prior periods, including the ability of those actions to allow us to accelerate Adjusted EBITDA growth and drive value creation by growing revenue efficiently and profitably; estimates concerning the timing and amount of savings, Adjusted EBITDA improvements, and/or restructuring charges that may result from our cost reduction and restructuring actions; our plans for managing our Digital Agreements and Security Solutions segments; expectations about trends in our cost of goods sold, gross margin, and sales and marketing, research and development, and general and administrative expenses; the impact of foreign currency rate fluctuations; expectations regarding sources and uses of cash; and our general expectations regarding our operational or financial performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate", "anticipate", “expect", "intend", "continue", "outlook", "may", "will", "should", "could", or "might", and other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could materially affect our business and financial results include, but are not limited to: our ability to execute our updated strategic transformation plan and cost reduction and restructuring actions in the expected timeframe and to achieve the outcomes we expect from them; unintended costs and consequences of our cost reduction and restructuring actions, including higher than anticipated restructuring charges, disruption to our operations, litigation or regulatory actions, reduced employee morale, attrition of valued employees, adverse effects on our reputation as an employer, loss of institutional know-how, slower customer service response times, and reduced ability to complete or undertake new product development projects and other business, product, technical, compliance or risk mitigation initiatives; our ability to attract new customers and retain and expand sales to existing customers; our ability to successfully develop and market new product offerings and product enhancements; changes in customer requirements; the potential effects of technological changes; the loss of one or more large customers; difficulties enhancing and maintaining our brand recognition; competition; lengthy sales cycles; challenges retaining key employees and successfully hiring and training qualified new employees; security breaches or cyber-attacks; real or perceived malfunctions or errors in …

Excerpt shortened here; the source contains the full paragraph.

Current wording

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 updated strategic transformation plan and cost reduction and restructuring actions approved in August 2023 and in prior periods, including the ability of those actions to allow us to accelerate Adjusted EBITDA growth and drive value creation by growing revenue efficiently and profitably; estimates concerning the timing and amount of savings, Adjusted EBITDA improvements, and/or restructuring charges that may result from our cost reduction and restructuring actions; our plans for managing our Digital Agreements and Security Solutions segments; expectations about trends in our cost of goods sold, gross margin, and sales and marketing, research and development, and general and administrative expenses; the impact of foreign currency rate fluctuations; expectations regarding sources and uses of cash; and our general expectations regarding our operational or financial performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate", "anticipate", “expect", "intend", "continue", "outlook", "may", "will", "should", "could", or "might", and other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could materially affect our business and financial results include, but are not limited to: our ability to execute our updated strategic transformation plan and cost reduction and restructuring actions in the expected timeframe and to achieve the outcomes we expect from them; unintended costs and consequences of our cost reduction and restructuring actions, including higher than anticipated restructuring charges, disruption to our operations, litigation or regulatory actions, or employee turnover; our ability to attract new customers and retain and expand sales to existing customers; our ability to successfully develop and market new product offerings and product enhancements; changes in customer requirements; the potential effects of technological changes; the loss of one or more large customers; difficulties enhancing and maintaining our brand recognition; competition; lengthy sales cycles; challenges retaining key employees and successfully hiring and training qualified new employees; security breaches or cyber-attacks; real or perceived malfunctions or errors in our products; interruptions or delays in the performance of our products and solutions; reliance on third parties for certain products and data center services; our ability to effectively manage third party partnerships, acquisitions, divestitures, alliances, or joint ventures; economic recession, inflation, and pol…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

Agreements, we deliver 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.

Current wording

OneSpan provides security, identity, electronic signature (“e-signature”) and digital workflow solutions that protect and facilitate digital transactions and agreements. Through our two business units, Security Solutions and Digital Agreements, we deliver 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.

Previous wording

During the quarter ended June 30, 2023, we determined that we were unlikely to achieve the revenue growth levels set forth in our 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, including: macroeconomic uncertainties in the banking and financial services segments, which have resulted in longer sales cycles and greater price sensitivity on the part of customers; increasing maturity and competitiveness in the market for e-signature solutions; limited awareness of our brand among buyers of e-signature tools; and higher pricing aggressiveness from competitors. These and other factors made it more difficult than we originally anticipated to build our Digital Agreements sales pipeline, generate demand for our Digital Agreements solutions through marketing efforts, and improve our sales force productivity levels.

Current wording

During the quarter ended June 30, 2023, we determined that we were unlikely to achieve the revenue growth levels set forth in our 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, including: macroeconomic uncertainties in the banking and financial services segments, which resulted in longer sales cycles and greater price sensitivity on the part of customers; increasing maturity and competitiveness in the market for e-signature solutions; limited awareness of our brand among buyers of e-signature tools; and higher pricing aggressiveness from competitors. These and other factors made it more difficult than we originally anticipated to build our Digital Agreements sales pipeline, generate demand for our Digital Agreements solutions through marketing efforts, and improve our sales force productivity levels.

Previous wording

On August 3, 2023, our Board of Directors approved the 2023 Actions. We have incurred and expect to continue to incur restructuring charges in connection with the 2023 Actions, most of which are related to employee transition and severance payments and employee benefits, with a significantly smaller amount of charges related to vendor contract termination and rationalization actions. We currently expect that we will incur restructuring charges of approximately $1.0 million to $2.0 million related to the 2023 Actions in future periods, substantially all of which relate to employee transition and severance payments.

Current wording

On August 3, 2023, our Board of Directors approved the 2023 Actions. We have incurred and expect to continue to incur restructuring charges in connection with the 2023 Actions, most of which are related to employee transition and severance payments and employee benefits, with a significantly smaller amount of charges related to vendor contract termination and rationalization actions. We currently expect that we will incur restructuring charges of approximately $0.5 million to $1.5 million related to the 2023 Actions in future periods, substantially all of which relate to employee transition and severance payments.

Previous wording

•We have reduced headcount by eliminating approximately 320 redundant positions and incurred severance, related benefits, and retention pay costs.

Current wording

•We have reduced headcount by eliminating approximately 330 redundant positions and incurred severance, related benefits, and retention pay costs.

Previous wording

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

Current wording

•In June 2023, we vacated our Chicago leased office space and abandoned the underlying lease, and, in future periods, plan to further align our real estate footprint with our operating needs. We recorded lease termination costs, write-offs related to the vacated location's fixed assets, and a gain on the underlying right-of-use asset and liability write-off. In August 2024, we finalized our early termination agreement with the landlord to terminate and release any further obligations for either party.

Previous wording

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

Current wording

•We evaluated our vendor spend and updated or eliminated service providers in instances where there are cost-saving opportunities and where redundancies exist. Vendor rationalization costs include costs for contractually committed services we are no longer utilizing.

Previous wording

We completed a majority of the workforce reductions planned as part of the 2023 Actions by the end of 2023, and we expect that most of the remaining workforce reductions will occur over the course of 2024. The vendor contract component of the 2023 Actions is planned for completion by the end of 2025.

Current wording

We completed a majority of the workforce reductions planned as part of the 2023 Actions by the end of 2023, and we expect that the remaining workforce reductions will occur by the end of 2024. The vendor contract component of the 2023 Actions is planned for completion by the end of 2025.

Previous wording

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates during the three months ended June 30, 2024 compared to the comparable prior year period resulted in a decrease in operating expenses of approximately $0.1 million. We estimate the change in currency rates during the six months ended June 30, 2024 compared to the comparable prior year period resulted in a decrease in operating expenses of approximately $0.1 million.

Current wording

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates during the three months ended September 30, 2024 compared to the comparable prior year period resulted in an increase in operating expenses of less than $0.1 million. We estimate the change in currency rates during the nine months ended September 30, 2024 compared to the comparable prior year period resulted in an increase in operating expenses of less than $0.1 million.

Previous wording

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 stock-based incentives and an immaterial amount of cash-based incentives. During the three months ended June 30, 2024 and 2023, operating expenses included $2.0 million and $4.6 million, respectively, of expenses related to stock-based and long-term incentive plans. During the six months ended June 30, 2024 and 2023, operating expenses included $3.6 million and $8.5 million, respectively, of expenses related to stock-based and long-term incentive plans.

Current wording

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 stock-based incentives and an immaterial amount of cash-based incentives. During the three months ended September 30, 2024 and 2023, operating expenses included $2.7 million and $1.9 million, respectively, of expenses related to stock-based and long-term incentive plans. During the nine months ended September 30, 2024 and 2023, operating expenses included $6.4 million and $10.4 million, respectively, of expenses related to stock-based and long-term incentive plans.

Previous wording

•Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. We expect sales and marketing expenses to decrease in absolute dollars as we continue to implement the 2023 Actions described in "Business Transformation" above. However, our sales and marketing expenses may fluctuate as a percentage of total revenue.

Current wording

•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. Our sales and marketing expenses may fluctuate as a percentage of total revenue.

Previous wording

•Research and development. Research and development expenses consist primarily of personnel costs and long-term incentive compensation. We expect research and development costs to decrease in absolute dollars as we continue to implement the 2023 Actions, and as we capitalize certain costs related to the expansion of our cloud product portfolio. However, our research and development expenses may fluctuate as a percentage of total revenue.

Current wording

•Research and development. Research and development expenses consist primarily of personnel costs and long-term incentive compensation. Our research and development expenses may fluctuate as a percentage of total revenue.

Previous wording

•General and administrative. General and administrative expenses consist primarily of personnel costs, legal, consulting and other professional fees, and long-term incentive compensation. We expect general and administrative expenses to decrease in absolute dollars (excluding non-recurring items) as we continue to implement the 2023 Actions, although our general and administrative expenses may fluctuate as a percentage of total revenue.

Current wording

•General and administrative. General and administrative expenses consist primarily of personnel costs, legal, consulting and other professional fees, and long-term incentive compensation. Our general and administrative expenses may fluctuate as a percentage of total revenue.

Previous wording

During the three months ended June 30, 2024 and 2023, we generated approximately 85% and 83% of our revenues and incurred approximately 60% and 55% of our operating expenses, respectively, outside of the U.S. During the six months ended June 30, 2024 and 2023, we generated approximately 84% and 82% of our revenues and incurred approximately 61% and 55% of our operating expenses, respectively, 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.

Current wording

During the three months ended September 30, 2024 and 2023, we generated approximately 81% and 83% of our revenues and incurred approximately 58% and 61% of our operating expenses, respectively, outside of the U.S. During the nine months ended September 30, 2024 and 2023, we generated approximately 83% and 82% of our revenues and incurred approximately 60% and 58% of our operating expenses, respectively, 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.

Previous wording

While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the six months ended June 30, 2024 was denominated in U.S. Dollars. For the six months ended June 30, 2024, approximately 54% of our revenue was denominated in U.S. Dollars, 42% was denominated in Euros and 4% was denominated in other currencies. For the six months ended June 30, 2023, approximately 52% of our revenue was denominated in U.S. Dollars, 43% was denominated in Euros and 5% was denominated in other currencies.

Current wording

September 30, 2024, approximately 55% of our revenue was denominated in U.S. Dollars, 41% was denominated in Euros and 4% was denominated in other currencies. For the nine months ended September 30, 2023, approximately 52% of our revenue was denominated in U.S. Dollars, 43% was denominated in Euros and 5% was denominated in other currencies.

Previous wording

The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar. Accordingly, assets and liabilities of our foreign subsidiaries are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates generated a comprehensive loss of $0.5 million and $2.1 million during the three and six months ended June 30, 2024, respectively. For the three and six months ended June 30, 2023, translation adjustments arising from differences in exchange rates generated a comprehensive gain of $1.0 million and $2.7 million, respectively.

Current wording

The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar. Accordingly, assets and liabilities of our foreign subsidiaries are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates generated a comprehensive gain of $5.9 million and $3.8 million during the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2023, translation adjustments arising from differences in exchange rates generated a comprehensive loss of $2.6 million and comprehensive gain of $0.1 million, respectively.

Previous wording

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 aggregated $0.1 million and $0.2 million for the three and six months ended June 30, 2024, respectively. For the three and six months ended June 30, 2023, losses resulting from foreign currency transactions were $0.2 million and $0.4 million, respectively.

Current wording

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 $2.0 million and $1.8 million for the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2023, losses resulting from foreign currency transactions were $0.1 million and $0.5 million, respectively.

Previous wording

Revenue by products and services allocated to the segments for the three and six months ended June 30, 2024, and 2023 is as follows:

Current wording

Revenue by products and services allocated to the segments for the three and nine months ended September 30, 2024, and 2023 is as follows:

Previous wording

(1) Professional services and other includes perpetual software licenses revenue, which was approximately 1% of total revenue for both the three and six months ended June 30, 2024 and approximately 1% of total revenue for both the three and six months ended June 30, 2023.

Current wording

(1) Professional services and other includes perpetual software licenses revenue, which was less than 1% of total revenue for both the three and nine months ended September 30, 2024 and approximately 1% of total revenue for both the three and nine months ended September 30, 2023.

Previous wording

Total revenue increased by $5.2 million, or 9%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Changes in foreign exchange rates as compared to the same period in 2023 negatively impacted revenue by approximately $0.2 million. For the six months ended June 30, 2024, revenue increased by $12.4 million, or 11%, compared to the six months ended June 30, 2023. Changes in foreign exchange rates as compared to the same period in 2023 favorably impacted revenue by approximately $0.1 million.

Current wording

Total revenue decreased by $2.6 million, or 4%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Changes in foreign exchange rates as compared to the same period in 2023 favorably impacted revenue by approximately $0.2 million. For the nine months ended September 30, 2024, revenue increased by $9.8 million, or 6%, compared to the nine months ended September 30, 2023. Changes in foreign exchange rates as compared to the same period in 2023 favorably impacted revenue by approximately $0.3 million.

Previous wording

•Digital Agreements revenue increased $3.6 million, or 30%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, Digital Agreements revenue increased $6.5 million, or 28%. The increase in Digital Agreements revenue for both periods was primarily attributable to existing customer expansions and new logos. Changes in foreign currency rates compared to the same period in 2023 negatively impacted Digital Agreements revenue by less than $0.1 million for the three months ended June 30, 2024. Changes in foreign currency rates compared to the same period in 2023 favorably impacted Digital Agreements revenue by less than $0.1 million for the six months ended June 30, 2024.

Current wording

•Digital Agreements revenue increased $2.4 million, or 18%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, Digital Agreements revenue increased $8.9 million, or 24%. The increase in Digital Agreements revenue for both periods was primarily attributable to higher cloud subscription revenue from existing customer expansions and new logos. Changes in foreign currency rates compared to the same period in 2023 favorably impacted Digital Agreements revenue by less than $0.1 million for the three months ended September 30, 2024. Changes in foreign currency rates compared to the same period in 2023 favorably impacted Digital Agreements revenue by less than $0.1 million for the nine months ended September 30, 2024.

Previous wording

•Security Solutions revenue increased $1.6 million, or approximately 4%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase in Security Solutions revenue was primarily attributable to an increase in demand for authentication solutions from existing customers, partially offset by modest declines in maintenance revenue as we transition legacy perpetual contracts to subscription licenses. Changes in foreign exchange rates for the three months ended June 30, 2024 compared to the same period in 2023 negatively impacted Security Solutions revenue by $0.2 million. For the six months ended June 30, 2024, Security Solutions revenue increased $6.0 million, or 7%, which was driven by an increase in demand for authentication solutions from existing customers, partially offset by modest declines in maintenance revenue, identity verification revenue, and lower quantities of hardware devices sold. Changes in foreign exchange rates for the six months ended June 30, 2024 compared to the same period in 2023 favorably impacted Security Solutions revenue by $0.1 million.

Current wording

•Security Solutions revenue decreased $5.0 million, or approximately 11%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease in Security Solutions revenue was primarily attributable to lower volumes of hardware devices sold, and lower maintenance revenue due to our transition from legacy perpetual contracts to subscription licenses, partially offset by an increase in on-premises subscription revenue specific to authentication solution products from existing customer expansions. Changes in foreign exchange rates for the three months ended September 30, 2024 compared to the same period in 2023 favorably impacted Security Solutions revenue by $0.1 million. For the nine months ended September 30, 2024, Security Solutions revenue increased $1.0 million, or 1%, which was driven by an increase in on-premises subscription revenue from existing customer expansion and higher year over year renewals, partially offset by a decline in maintenance revenue, and lower volumes of hardware devices sold. Changes in foreign exchange rates for the nine months ended September 30, 2024 compared to the same period in 2023 favorably impacted Security Solutions revenue by $0.2 million.

Previous wording

For the three months ended June 30, 2024, revenue generated in EMEA was $1.3 million, or 5%, lower than the same period in 2023, primarily due to a decrease in mobile solution products and lower hardware volumes from existing customers. For the six months ended June 30, 2024, revenue generated in EMEA was $2.7 million, or 5%, higher than the same period in 2023, primarily due to an increase in on-premises term subscription revenue from existing customer expansions in authentication products, partially offset by lower hardware revenue and mobile application security solutions.

Current wording

For the three months ended September 30, 2024, revenue generated in EMEA was $3.9 million, or 15%, lower than the same period in 2023, primarily due to a decrease in hardware volumes from existing customers, and the impact of an end-of-life product. For the nine months ended September 30, 2024, revenue generated in EMEA was $1.2 million, or 2%, lower than the same period in 2023, primarily due to a decrease in hardware volumes sold, the impact of end-of-life products, partially offset by higher on-premises subscription revenue from existing customer expansions in authentication solution products.

Previous wording

For the three months ended June 30, 2024, revenue generated in the Americas was $2.8 million, or 15%, higher than the three months ended June 30, 2023. The increase was primarily driven by an increase in Digital Agreements revenue. For the six months ended June 30, 2024, revenue generated in the Americas was $3.6 million, or 9%, higher than the same period in 2023, primarily due to an increase in Digital Agreements revenue and software authentication products, partially offset by lower hardware revenue.

Current wording

For the three months ended September 30, 2024, revenue generated in the Americas was $2.1 million, or 11%, higher than the three months ended September 30, 2023. The increase was primarily driven by an increase in Digital Agreements revenue. For the nine months ended September 30, 2024, revenue generated in the Americas was $5.7 million, or 10%, higher than the same period in 2023, primarily due to an increase in Digital Agreements e-signature revenue and software authentication products, partially offset by lower hardware revenue.

Previous wording

For the three months ended June 30, 2024, revenue generated in APAC was $3.8 million, or 35%, higher than the three months ended June 30, 2023. For the six months ended June 30, 2024, revenue generated in APAC was $6.1 million, or 30%, higher than the same period in 2023. The increase for both periods was driven by customer expansion in authentication and mobile solutions, higher customer purchase volumes of hardware products, and a higher average selling price.

Current wording

For the three months ended September 30, 2024, revenue generated in APAC was $0.8 million, or 6%, lower than the three months ended September 30, 2023, largely due to a decrease in hardware volumes sold. For the nine months ended September 30, 2024, revenue generated in APAC was $5.3 million, or 16%, higher than the same period in 2023, primarily due to customer expansion in authentication and mobile security solutions products.

Previous wording

The following table presents cost of goods sold for our products and services for the three and six months ended June 30, 2024 and 2023:

Current wording

The following table presents cost of goods sold for our products and services for the three and nine months ended September 30, 2024 and 2023:

Previous wording

The cost of product and license revenue decreased by $2.8 million, or 20%, and $4.4 million, or 17% during the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023. The decrease in cost of product and license revenue for both the three and six months ended June 30, 2024 was driven primarily by flat to lower hardware revenue and lower third-party license costs, and the $1.6 million inventory non-cash impairment recognized in the prior year in conjunction with the discontinuation of investments in our Digipass CX product.

Current wording

The cost of product and license revenue decreased by $3.6 million, or 33%, and $8.0 million, or 22% during the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023. The decrease in cost of product and license revenue for both the three and nine months ended September 30, 2024 was driven primarily by lower hardware revenue and lower third-party license costs, and the $1.6 million inventory non-cash impairment recognized in the prior year in conjunction with the discontinuation of investments in our Digipass CX product.

Previous wording

The cost of services and other revenue increased by $1.9 million, or 26%, and $2.6 million, or 18%, during the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023. The increase in cost of services for both three and six months ended June 30, 2024 was largely due to higher cloud platform costs related to higher volume usage and the write-off associated with acquired technology and capitalized internally-developed software costs due to the decision to discontinue investment in blockchain technology.

Current wording

The cost of services and other revenue increased by $0.1 million, or 2%, and $2.8 million, or 13%, during the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023. The increase in cost of services for both three and nine months ended September 30, 2024 was largely due to higher cloud platform costs related to higher volume usage and the write-off associated with acquired technology and capitalized internally-developed software costs due to the decision to discontinue investment in blockchain technology for the nine months ended September 30, 2024.

Previous wording

Gross profit increased $6.0 million, or 18%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Gross profit margin was 66% for the three months ended June 30, 2024, compared to 62% for the three months ended June 30, 2023. Gross profit increased $14.2 million, or 19% during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Gross profit margin was 70% for the six months ended June 30, 2024, compared to 65% for the six months ended June 30, 2023. The change in profit margin was driven primarily by higher revenue and the changes in costs of revenues discussed above.

Current wording

Gross profit increased $0.9 million, or 2%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Gross profit margin was 74% for the three months ended September 30, 2024, compared to 69% for the three months ended September 30, 2023. Gross profit increased $15.0 million, or 13% during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Gross profit margin was 71% for the nine months ended September 30, 2024, compared to 66% for the nine months ended September 30, 2023. The change in profit margin was driven primarily by higher software versus hardware revenue mix and the changes in costs of revenues discussed above.

Previous wording

The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies, including the Euro. The impact of changes in currency rates are estimated to have had an favorable impact on overall cost of goods sold of less than $0.1 million for the three months ended June 30, 2024 and no impact on overall cost of goods sold for the six months ended June 30, 2024. Had currency rates during the three months ended June 30, 2024 been equal to rates in the comparable period of 2023, the gross profit margin would have been less than 1 percentage point lower, driven by the unfavorable currency rate impact to revenue. Had currency rates during the six months ended June 30, 2024 been equal to rates in the comparable period of 2023, the gross profit margin would have been less than 1 percentage point higher, driven by the favorable currency rate impact to revenue.

Current wording

The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies, including the Euro. The impact of changes in currency rates are estimated to have had an favorable impact on overall cost of goods sold of $0.3 million for both the three and nine months ended September 30, 2024. Had currency rates during the three months ended September 30, 2024 been equal to rates in the comparable period of 2023, the gross profit margin would have been less than 1 percentage point lower, driven by the favorable currency rate impact to revenue. Had currency rates during the nine months ended September 30, 2024 been equal to rates in the comparable period of 2023, the gross profit margin would have been less than 1 percentage point lower, driven by the favorable currency rate impact to revenue.

Previous wording

•Digital Agreements gross profit increased $1.2 million, or 13%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Digital Agreements gross margin for the three months ended June 30, 2024 was 63%, compared to 72% for the three months ended June 30, 2023. For the six months ended June 30, 2024, Digital Agreements gross profit increased $2.6 million, or 15%, compared to the comparable period in 2023. Digital Agreements gross margin for the six months ended June 30, 2024 was 66%, compared to 73% for the six months ended June 30, 2023. The increase in gross profit for both periods was driven by higher overall revenue, partially offset by higher cloud platform costs, higher depreciation of capitalized software costs, The decrease in gross margin for both periods is primarily the result of an increase in depreciation of capitalized software costs, including the write-off of the previously capitalized software, as compared to prior year.

Current wording

•Digital Agreements gross profit increased $1.2 million, or 12%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Digital Agreements gross margin for the three months ended September 30, 2024 was 72%, compared to 75% for the three months ended September 30, 2023. For the nine months ended September 30, 2024, Digital Agreements gross profit increased $3.8 million, or 14%, compared to the comparable period in 2023. Digital Agreements gross margin for the nine months ended September 30, 2024 was 68%, compared to 74% for the nine months ended September 30, 2023. The increase in gross profit for both periods was driven by higher overall revenue, partially offset by higher cloud platform costs and higher depreciation of capitalized software costs. The decrease in gross margin for both periods is primarily the result of an increase in depreciation of capitalized software costs and the write-off of the previously capitalized software for the nine months ended September 30, 2024 only, as compared to prior year.

Previous wording

•Security Solutions gross profit increased $4.9 million, or 19%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, driven primarily by an increase in subscription revenue. Security Solutions gross margin for the three months ended June 30, 2024 was 67%, compared to 59% for the three months ended June 30, 2023. The increase in gross margin was primarily due to lower overall costs and the inventory impairment recognized in the prior year period. For the six months ended June 30, 2024, Security Solutions gross profit increased $11.6 million, or 20%, compared to the comparable period in 2023. The increase in gross profit was driven by an increase in subscription revenue, lower third-party license costs, and inventory impairments recognized in the prior year period. Security Solutions gross margin for the six months ended June 30, 2024 was 71%, compared to 63% for the six months ended June 30, 2023. The increase in gross margin was primarily due to more favorable revenue mix between software and hardware, more favorable customer mix in our hardware business, lower third-party license costs, and inventory impairments recognized in the prior year period.

Current wording

•Security Solutions gross profit decreased $0.3 million, or 1%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Security Solutions gross margin for the three months ended September 30, 2024 was 75%, compared to 67% for the three months ended September 30, 2023. The increase in gross margin was primarily due to higher software versus hardware revenue mix, which has a direct correlation to gross profit. For the nine months ended September 30, 2024, Security Solutions gross profit increased $11.2 million, or 13%, compared to the comparable period in 2023. The increase in gross profit was driven by an increase in subscription revenue, lower third-party license costs, and inventory impairments recognized in the prior year period. Security Solutions gross margin for the nine months ended September 30, 2024 was 72%, compared to 64% for the nine months ended September 30, 2023. The increase in gross margin was primarily due to more favorable revenue mix between software and hardware, more favorable customer mix in our hardware business, lower third-party license costs, and inventory impairments recognized in the prior year period.

Previous wording

Operating expenses decreased by $19.4 million, or 37%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. For the three months ended June 30, 2024, changes in foreign exchange rates favorably impacted operating expenses by approximately $0.1 million as compared to the same period in 2023. Operating expenses decreased by $33.5 million, or 34%, during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. For the six months ended June 30, 2024, changes in foreign exchange rates favorably impacted operating expenses by approximately $0.1 million as compared to the same period in 2023.

Current wording

Operating expenses decreased by $15.2 million, or 33%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. For the three months ended September 30, 2024, changes in foreign exchange rates negatively impacted operating expenses by less than $0.1 million as compared to the same period in 2023. Operating expenses decreased by $48.7 million, or 34%, during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. For the nine months ended September 30, 2024, changes in foreign exchange rates negatively impacted operating expenses by less than $0.1 million as compared to the same period in 2023.

Previous wording

Sales and marketing expenses for the three months ended June 30, 2024 decreased by $9.2 million, or 47%, compared to the three months ended June 30, 2023. Sales and marketing expenses for the six months ended June 30, 2024 decreased by $16.3 million, or 41%, compared to the six months ended June 30, 2023. The decreases were driven primarily by lower employee compensation costs which included decreases in commissions, salaries, and benefits as a result of headcount reductions, along with decreased marketing costs and travel and entertainment expenses.

Current wording

Sales and marketing expenses for the three months ended September 30, 2024 decreased by $6.5 million, or 39%, compared to the three months ended September 30, 2023. Sales and marketing expenses for the nine months ended September 30, 2024 decreased by $22.8 million, or 40%, compared to the nine months ended September 30, 2023. The decreases were driven primarily by lower employee compensation costs which included decreases in commissions, salaries, and benefits as a result of headcount reductions, along with decreased consulting and marketing costs related to our strategic plan, and lower travel and entertainment expenses.

Previous wording

Average full-time sales, marketing, support, and operating employee headcount for the three and six months ended June 30, 2024 was 166 and 175, respectively, compared to 380 and 368 for the three and six months ended June 30, 2023, respectively. Average headcount was 56% and 52% lower for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023.

Current wording

Average full-time sales, marketing, support, and operating employee headcount for the three and nine months ended September 30, 2024 was 148 and 166, respectively, compared to 336 and 357 for the three and nine months ended

Previous wording

2024 decreased by $3.0 million, or 15%, compared to the six months ended June 30, 2023. The decrease in expense was driven primarily by lower compensation costs as a result of lower headcount and lower consulting expenses related to our strategic transformation plan partially offset by lower year over year capitalized software.

Current wording

Research and development expenses for the three months ended September 30, 2024 decreased by $2.6 million, or 26%, compared to the three months ended September 30, 2023. Research and development expenses for the nine months ended September 30, 2024 decreased by $5.6 million, or 19%, compared to the nine months ended September 30, 2023. The decrease in expense was driven primarily by lower compensation costs as a result of lower headcount and lower consulting expenses related to our strategic transformation plan, partially offset by increased bonus expense accruals.

Previous wording

Average full-time research and development employee headcount for the three and six months ended June 30, 2024 was 239 and 245, respectively, compared to 319 and 317 for the three and six months ended June 30, 2023, respectively. Average headcount was 25% and 23% lower for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023.

Current wording

Average full-time research and development employee headcount for the three and nine months ended September 30, 2024 was 228 and 239, respectively, compared to 305 and 313 for the three and nine months ended September 30, 2023, respectively. Average headcount was 25% and 24% lower for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023.

Previous wording

General and administrative expenses for the three months ended June 30, 2024 decreased by $4.3 million, or 27%, compared to the three months ended June 30, 2023. General and administrative expenses for the six months ended June 30, 2024 decreased by $10.9 million, or 34%, compared to the six months ended June 30, 2023. The decrease in expense for the both the three and six months ended June 30, 2024 as compared to the prior year period was largely driven by lower employee compensation costs, which included a decrease in salaries, payroll taxes, and related benefits as a result of lower headcount. Also, stock-based compensation expense was lower due to lower headcount, including the termination of our former CEO, and lower annual equity awards granted to employees. These decreases were offset by higher bonus accruals and other non-recurring expenses.

Current wording

General and administrative expenses for the three months ended September 30, 2024 decreased by $0.2 million, or 2%, compared to the three months ended September 30, 2023. General and administrative expenses for the nine months ended September 30, 2024 decreased by $11.1 million, or 25%, compared to the nine months ended September 30, 2023. The decrease in expense for both the three and nine months ended September 30, 2024 as compared to the prior year period was largely driven by lower employee compensation costs, which included a decrease in salaries, payroll taxes, and related benefits as a result of lower headcount. Also, stock-based compensation expense was higher during the quarter due to awards granted to the former interim President and CEO upon accepting the permanent role of President and CEO, but was lower year over year due to lower headcount, including the termination of our former CEO, and lower annual equity awards granted to employees. These decreases were offset by higher bonus accruals and other non-recurring expenses.

Previous wording

Average full-time general and administrative employee headcount for the three and six months ended June 30, 2024 was 101 and 106, respectively, compared to 149 and 148 for the three and six months ended June 30, 2023, respectively. Average headcount was 32% and 28% lower for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023.

Current wording

Average full-time general and administrative employee headcount for the three and nine months ended September 30, 2024 was 95 and 102, respectively, compared to 136 and 144 for the three and nine months ended September 30, 2023, respectively. Average headcount was 30% and 29% lower for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023.