OneSpan Inc

Previous wording

In conjunction with the 2022 strategic plan, effective with the quarter ended June 30, 2022, we began reporting under the following two lines of business, which are our reportable operating segments: Digital Agreements and Security Solutions.

Current wording

We report our financial results under the following two lines of business, which are our reportable operating segments: Security Solutions and Digital Agreements.

Previous wording

•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.

Current wording

•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 on-premises and, to a lesser extent, cloud software products, and include multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.

Previous wording

•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, OneSpan Notary and OneSpan Trust Vault. This segment also includes costs attributable to our transaction cloud platform.

Current wording

•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, OneSpan Notary, and Identity Verification.

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 2022 and the first half of 2023, OneSpan was operating under a three-year strategic plan that focused on driving revenue growth in Digital Agreements. However, in mid-2023, we determined that we were unlikely to achieve the revenue growth levels set forth in that strategic plan within the contemplated three-year timeframe due to a number of factors, including 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.

Previous wording

In response to these challenges in growing our Digital Agreements revenue, we modified our strategy to focus more heavily on improving Adjusted EBITDA margin across the business. To this end, in August 2023, our Board approved the 2023 Actions described in Item 1, Business, to seek to drive higher levels of Adjusted EBITDA while maintaining our long-term growth potential. We intend to continue to pursue the overall strategy set forth in the 2022 strategic plan, including driving efficient growth in Digital Agreements and managing Security Solutions for modest growth and cash flow, while implementing adjustments to our operating model that are intended to achieve greater operational efficiency and strengthen our ability to create value for our shareholders.

Current wording

In response to these challenges, we modified our strategy to focus more heavily on improving profitability across the business. To this end, in August 2023, our Board approved the 2023 Actions (discussed below) to achieve higher levels of profitability while maintaining the Company's long-term growth potential. .

Previous wording

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

Current wording

In December 2021, our Board approved a restructuring plan designed to advance our operating model, streamline our business, improve efficiency, and enhance our capital resources. The first phase of this restructuring plan began and was substantially completed during the three months ended March 31, 2022. In May 2022, our Board approved additional actions related to the restructuring plan through the year ending December 31, 2025. The additional actions consisted primarily of headcount-related reductions designed to continue to advance the same objectives as the first phase of the plan.

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, and anticipate that these charges will consist primarily of charges related to employee transition and severance payments and employee benefits, with a significantly smaller amount of charges relating to vendor contract termination and rationalization actions. We currently expect that we will incur restructuring charges of approximately $11.0 million to $12.0 million in employee transition and severance payments related to the 2023 Actions and approximately $2.0 million to $3.0 million in vendor contract termination and rationalization charges. We incurred approximately $9.0 million of these expected restructuring charges in 2023.

Current wording

In August 3, 2023, our Board of Directors approved further cost reduction actions (the "2023 Actions"). In connection with the 2023 Actions, we have incurred and expect to continue to incur restructuring charges, most of which relate to employee transition and severance payments and employee benefits, with a significantly smaller amount of charges relating to vendor contract termination and rationalization actions. We currently expect that we will incur restructuring charges of approximately $0.5 million to $1.0 million related to the 2023 Actions in periods after 2024, substantially all of which relate to employee transition and severance payments.

Previous wording

We completed a substantial majority of the workforce reductions that are 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 as several Company projects are completed during the year. The vendor contract component of the 2023 Actions is planned for completion by the end of 2025.

Current wording

We plan to incrementally take actions under the restructuring plan until December 31, 2025, when the plan terminates. We completed substantially all of the workforce reductions planned as part of the 2023 Actions in 2023 and 2024. The vendor contract component of the 2023 Actions is planned for completion by the end of 2025.

Previous wording

As part of the restructuring plan (including the 2023 Actions), we reduced headcount by eliminating approximately 270 positions. We incurred severance and related benefits costs, recorded in “Restructuring and other related charges” in the consolidated statement of operations for the year ended December 31, 2023.

Current wording

As part of the restructuring plan (including the 2023 Actions), we reduced headcount by eliminating approximately 330 positions. We incurred severance and related benefits costs, recorded in “Restructuring and other related charges” in the consolidated statements of operations for the years ended December 31, 2024, 2023 and 2022.

Previous wording

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates in 2023 compared to 2022 resulted in an increase in operating expenses of approximately $0.9 million in 2023.

Current wording

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates in 2024 compared to 2023 resulted in a decrease in operating expenses of less than $0.1 million in 2024.

Previous wording

The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. In 2023, 2022, and 2021, operating expenses included $14.6 million, $8.8 million, and $5.2 million, respectively, of expenses related to stock-based and long-term incentive plans. Stock-based compensation expense during 2023 included the impact of a significant number of new grants to executives hired in 2022 as well as an overall expansion of the equity incentive program in 2022 in order to promote the long-term retention of our employees. Long-term incentive plan compensation expense consists of stock-based incentives and an immaterial amount of cash-based incentives.

Current wording

The comparison of operating expenses can also be impacted significantly by costs related to our share-based and long-term incentive plans. In 2024, 2023, and 2022, operating expenses included $9.2 million, $14.6 million, and $8.8 million, respectively, of expenses related to share-based and long-term incentive plans. For the year ended December 31, 2024, stock-based compensation declined as compared to the year ended December 31, 2023, which was largely due to the departure of our former CEO and forfeitures recorded upon his termination, timing of annual grants, and a lower level of employee equity awards granted in 2024 compared to 2023. However, this decline was partially offset by the awards granted to our current CEO when he accepted his permanent role of President and CEO in 2024. Long-term incentive plan compensation expense consists of share-based incentives and an immaterial amount of cash-based incentives.

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 as result of the 2023 Actions. 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 a result of 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 as a result of 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

•Restructuring and other related charges. Restructuring and other related charges consists of employee costs which include severance and related benefits incurred from headcount reductions as part of our restructuring plan, including the 2023 Actions; real estate rationalization costs incurred to optimize our real estate footprint which include lease contract termination costs, fixed asset write-off charges, and lease right-of-use asset and lease liability write-off gains or losses; and vendor rationalization costs for contractually committed services that we are no longer utilizing. We plan to incrementally incur additional restructuring costs through December 31, 2025, when the restructuring plan terminates and the 2023 Actions are completed.

Current wording

•Restructuring and other related charges. Restructuring and other related charges consists of employee costs which include severance, retention pay, and related benefits incurred in connection with headcount reductions as part of our restructuring plan, including the 2023 Actions; real estate rationalization costs incurred to optimize our real estate footprint which include lease contract termination costs, asset impairment charges, and lease right-of-use asset and lease liability write-off gains or losses; product and services optimization costs incurred to advance our operating model, which include write-offs of capitalized software assets no longer in use; write-offs of acquired blockchain technology and related capitalized software due to the discontinuation of incremental development investments in this technology and related commercial efforts; and vendor rationalization costs for contractually committed services that we are no longer utilizing. We plan to incrementally incur additional restructuring costs through December 31, 2025, when the restructuring plan terminates and the 2023 Actions are completed.

Previous wording

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

Current wording

•Amortization of intangible assets. Acquired intangible assets are amortized over their respective amortization periods and are periodically evaluated for impairment or changes in estimated useful life.

Previous wording

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

Current wording

Segment operating income (loss) consists of the revenue generated by a segment, less the direct costs of revenue, sales and marketing, research and development and amortization and any impairment charges that are incurred directly by a segment. Unallocated corporate costs include general and administrative expense and other company-wide costs that are not attributable to a particular segment. Financial results by operating segment are included below under Results of Operations. As of December 31, 2024, we adopted ASU 2023-07, Segment Reporting (Topic 280) to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. See Note 3, Segment Information, for additional information.

Previous wording

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

Current wording

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

Previous wording

Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). The majority of our IP in our Security Solutions business is owned by two subsidiaries, one in the U.S. and one in Switzerland. The e-signature IP in our Digital Agreements business is owned by a subsidiary in Canada. These subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to the IP owners on either a percentage of revenue or on a cost plus basis, or both. In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products. Under this structure, the earnings of our service provider subsidiaries are relatively constant. These service provider companies tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings flow to the IP owners.

Current wording

Agreements business is owned by a subsidiary in Canada. These subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to the IP owners on a cost plus basis. In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products. Under this structure, the earnings of our service provider and distributor subsidiaries are relatively constant. These subsidiaries tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings flow to the IP owners.

Previous wording

We recorded changes in valuation allowance of $8.5 million and $4.4 million, as of December 31, 2023 and 2022, respectively, against deferred tax assets that, based on management’s assessment are considered not to be more likely than not to be realized. The increase in the valuation allowance in 2023 reflects Net Operating Losses (“NOLs”), other deduction carryforwards, and credits for which the realization is not more likely than not. The change in valuation allowance also reflects other factors including, but not limited to, changes in management’s assessment of the ability to use existing deferred tax assets, including NOLs and other deduction carryforwards.

Current wording

We record changes in valuation allowance against deferred tax assets that, based on management’s assessment, are considered not to be more likely than not to be realized. The decrease in the valuation allowance in 2024 reflects a change in management's assessment of the ability to use existing deferred tax assets, including NOLs, due to an increase in the operating profit and intra-entity asset transfer of certain intellectual property ("IP Transfer") discussed in Note 13, Income Taxes. The increase in the valuation allowance in 2023 reflects Net Operating Losses (“NOLs”), other deduction carryforwards, and credits for which the realization is not more likely than not. The change in valuation allowance in 2024 also reflects other factors including, but not limited to, changes in management’s assessment of the ability to use existing deferred tax assets, including NOLs and other deduction carryforwards.

Previous wording

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 reviewed 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. Management continues to maintain a valuation allowance against certain deferred tax assets in jurisdictions where assets are not more likely than not to be realized. For all other remaining deferred tax assets, management believes it is still more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

Current wording

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. Management continues to maintain a valuation allowance against certain deferred tax assets in jurisdictions where assets are not more likely than not to be realized. For all other remaining deferred tax assets, management believes it is still more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

Previous wording

In 2023 and 2022, we generated approximately 83% and 83% of our revenues and incurred approximately 58% and 66% of our operating expenses outside of the U.S., respectively. 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

In 2024 and 2023, we generated approximately 83% of our revenue for both years and incurred approximately 59% and 58% of our operating expenses outside of the U.S., respectively. 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 year ended December 31, 2023 was denominated in U.S. dollars. In 2023, approximately 53% of our revenue was denominated in U.S. dollars, 43% was denominated in Euros and 4% was denominated in other currencies. In 2022, approximately 54% of our revenue was denominated in U.S. dollars, 42% was denominated in Euros and 4% was denominated in other currencies.

Current wording

While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the year ended December 31, 2024 was denominated in U.S. dollars. In 2024, approximately 55% of our revenue was denominated in U.S. dollars, 41% was denominated in Euros and 4% was denominated in other currencies. In 2023, approximately 53% of our revenue was denominated in U.S. dollars, 43% was denominated in Euros and 4% 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 are translated into U.S. dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates generated comprehensive income of $3.7 million in 2023 and a comprehensive loss of $7.2 million in 2022. These amounts are included as a separate component of stockholders’ equity.

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 are translated into U.S. dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates generated comprehensive loss of $3.3 million in 2024 and a comprehensive gain of $3.7 million in 2023. These amounts are included as a separate component of stockholders’ equity.

Previous wording

Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense). Foreign exchange transaction losses aggregated $1.1 million and $1.9 million for the years ended December 31, 2023 and 2022, respectively.

Current wording

Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense). Foreign exchange transaction losses aggregated $0.9 million and $1.1 million for the years ended December 31, 2024 and 2023, respectively.

Previous wording

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

Current wording

The following table sets forth information about the Company's two operating segments, for the periods indicated, and selected segment and consolidated operating results. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment.

Previous wording

(2)Professional services and other includes perpetual software licenses revenue, which was approximately 1% of total revenue for the year ended December 31, 2023 and approximately 2% of revenue for the year ended December 31, 2022.

Current wording

(1)Professional services and other includes perpetual software licenses revenue, which was immaterial for the year ended December 31, 2024 and approximately 1% of total revenue for the year ended December 31, 2023.

Previous wording

For the year ended December 31, 2023, total revenue increased by $16.1 million, or 7%, compared to the year ended December 31, 2022. Changes in foreign exchange rates as compared to the same period in 2022 favorably impacted total revenue by approximately $2.3 million.

Current wording

For the year ended December 31, 2024, total revenue increased by $8.1 million, or 3%, compared to the year ended December 31, 2023. Changes in foreign exchange rates as compared to the same period in 2023 negatively impacted total revenue by approximately $0.1 million.

Previous wording

•Digital Agreements revenue increased $2.5 million, or approximately 5%, during the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in Digital Agreements revenue was driven by higher cloud subscription revenue from existing customer expansion, including some of our clients purchasing and running our on-premise and SaaS products simultaneously during their product migrations, partially offset by contraction related to our strategy of sunsetting our on-premises e-signature product. Changes in foreign exchange rates as compared to the same period in 2022 favorably impacted Digital Agreements revenue by less than $0.1 million.

Current wording

•Digital Agreements revenue increased $10.1 million, or approximately 20%, during the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in Digital Agreements revenue was driven by higher cloud subscription revenue from existing customer expansion and new customers (which we sometimes refer to as "new logos"), partially offset by lower maintenance revenue related to the sunsetting of our on-premises e-signature product. Changes in foreign exchange rates as compared to the same period in 2023 favorably impacted Digital Agreements revenue by less than $0.1 million.

Previous wording

The cost of services and other revenue increased $3.4 million or 13% for the year ended December 31, 2023, compared to the year ended December 31, 2022. This increase was largely due to a one-time credit from a cloud service provider in the prior year period, along with higher cloud platform costs related to higher volume usage, higher depreciation of our capitalized software costs, and increased amortization associated with the ProvenDB acquisition.

Current wording

The cost of services and other revenue increased $3.2 million or 11% for the year ended December 31, 2024, compared to the year ended December 31, 2023. This increase was largely due to higher cloud platform costs related to higher volume usage and the write-off of acquired technology and capitalized internally developed software costs due to our decision to discontinue our investment in blockchain technology in 2024.

Previous wording

Gross profit increased $9.1 million, or 6% for the year ended December 31, 2023 compared to the year ended December 31, 2022. Total gross margin was 67% for the year ended December 31, 2023, compared to 68% for the year ended December 31, 2022. The increase in total gross profit was driven by the increased revenue and the higher costs of revenues discussed above.

Current wording

Gross profit increased $16.9 million, or 11% for the year ended December 31, 2024 compared to the year ended December 31, 2023. Total gross margin was 72% for the year ended December 31, 2024, compared to 67% for the year ended December 31, 2023. The increase in total gross profit was driven by higher software versus hardware revenue mix and the changes in cost of revenue 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, although over 90% of our sales are either in U.S. dollars or Euros. The impact of changes in currency rates are estimated to have had a unfavorable impact on overall cost of goods sold of approximately $0.2 million for the year ended December 31, 2023. Had currency rates in 2023 been equal to rates in the comparable period of 2022, the gross profit margin would have been less than 1 percentage point higher for the year ended December 31, 2023.

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 a unfavorable impact on overall cost of goods sold of approximately $0.8 million for the year ended December 31, 2024. Had currency rates in 2024 been equal to rates in the comparable period of 2023, the gross profit margin would have been less than 1 percentage point higher for the year ended December 31, 2024.

Previous wording

•Security Solutions gross profit increased $8.9 million, or approximately 8%, for the year ended December 31, 2023 compared to the prior year. The increase in gross profit was primarily driven by higher overall revenue. Security Solutions gross margin was 65% for each of the years ended December 31, 2023 and 2022, respectively.

Current wording

•Security Solutions gross profit increased $12.9 million, or approximately 11%, for the year ended December 31, 2024 compared to the prior year. The increase in gross profit was primarily driven by an increase in subscription revenue. Security Solutions gross margin was 73% and 65% for the years ended December 31, 2024 and 2023, respectively. The increase in gross margin is primarily the result of increased subscription revenue which is a higher margin product, combined with a decline in hardware revenue, which has lower margins.

Previous wording

•Digital Agreements gross profit increased $0.3 million, or approximately 1%, for the year ended December 31, 2023 compared to the prior year. The increase in gross profit was driven by higher overall revenue, partially offset by increased costs of sales depreciation and amortization included in cost of goods sold. Digital Agreements gross margin for the years ended December 31, 2023 and 2022 was 74% and 77%, respectively. The decrease in gross margin is related to the increase in depreciation and amortization included in cost of goods sold in 2023 as compared to 2022.

Current wording

•Digital Agreements gross profit increased $4.0 million, or approximately 11%, for the year ended December 31, 2024 compared to the prior year. The increase in gross profit was driven by higher overall revenue, partially offset by higher cloud platform costs and higher depreciation of capitalized software costs. Digital Agreements gross margin for the years ended December 31, 2024 and 2023 was 68% and 74%, respectively. The decrease in gross margin is primarily the result of an increase in depreciation of capitalized software costs and the write-off in 2024 of the previously capitalized software costs discussed above.

Previous wording

For the year ended December 31, 2023, operating expenses increased by $10.9 million, or 6%, compared to the year ended December 31, 2022. Changes in foreign exchange rates unfavorably impacted operating expenses by approximately $0.9 million as compared to the year ended December 31, 2022.

Current wording

For the year ended December 31, 2024, operating expenses decreased by $56.8 million, or 30%, compared to the year ended December 31, 2023. Changes in foreign exchange rates favorably impacted operating expenses by approximately less than $0.1 million as compared to the year ended December 31, 2023.

Previous wording

Average full-time sales and marketing employee headcount for year ended December 31, 2023 was 339, compared to 344 for year ended December 31, 2022. Average headcount in 2023 was 1% lower than in 2022.

Current wording

Average full-time sales and marketing employee headcount for year ended December 31, 2024 was 161, compared to 339 for year ended December 31, 2023. Average headcount in 2024 was 53% lower than in 2023 due to the restructuring activities discussed elsewhere in this Item 7.

Previous wording

Average full-time research and development employee headcount for year ended December 31, 2023 was 305, compared to 340 for year ended December 31, 2022. Average headcount in 2023 was 10% lower than in 2022.

Current wording

Average full-time research and development employee headcount for the year ended December 31, 2024 was 234, compared to 305 for year ended December 31, 2023. Average headcount in 2024 was 23% lower than in 2023 due to the restructuring activities discussed elsewhere in this Item 7.

Previous wording

•Security Solutions For the year ended December 31, 2023, Security Solutions operating income was $60.2 million, which was $28.1 million, or 88%, higher than the prior year. This increase was driven by higher revenue, a change in expense allocations between the segments primarily impacting operating expenses, lower research and development costs, and lower amortization as a result of the Dealflo intangible asset impairment of $3.8 million in 2022.

Current wording

•Security Solutions: For the year ended December 31, 2024, Security Solutions operating income was $90.1 million, which was $29.9 million, or 50%, higher than the prior year. This increase was driven by higher gross profit (discussed above), a result of favorable product and revenue mix, and lower sales and marketing expenses, research and development expenses, and restructuring expenses all largely due to lower employee costs due to lower headcount.

Previous wording

We recorded income taxes expense of $2.5 million and $2.7 million for the years ended December 31, 2023 and 2022, respectively. The decrease in expense recorded for the year ended December 31, 2023 was primarily attributable to the jurisdictional mix of profits, and a higher loss before taxes in 2023 compared to 2022.

Current wording

We recorded an income tax benefit of $10.6 million and income tax expense of $2.5 million for the years ended December 31, 2024 and 2023, respectively. The income tax benefit recorded for the year ended December 31, 2024 was primarily attributable to the worthless stock deduction, release of valuation allowance, income tax benefit attributable to the IP Transfer, offset by income tax expense attributable to an increase in income before taxes.

Previous wording

At December 31, 2023, we have gross deferred tax assets of $53.3 million resulting from U.S. federal, foreign and state NOL carryforwards of $182.3 million and other foreign deductible carryforwards of $117.0 million. At December 31, 2023, we have a valuation allowance of $45.9 million against deferred tax assets related to certain carryforwards.

Current wording

At December 31, 2024, we have gross deferred tax assets of $56.8 million resulting from U.S. federal, foreign and state NOL carryforwards of $183.7 million and other foreign deductible carryforwards of $130.3 million. At December 31, 2024, we have a valuation allowance of $37.2 million against deferred tax assets related to certain carryforwards (see Note 13, Income Taxes.