OneSpan Inc.: Form 10-Q for the period ended Mar 31, 2025

Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us” refer to OneSpan Inc. and its subsidiaries.

This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of OneSpan for the three-month periods ended March 31, 2025 and 2024 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, 2024 (the “Form 10-K”).

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of applicable U.S. securities laws, including statements regarding our goal of driving profitable, efficient growth in both operating segments, with a particular emphasis on subscription revenue growth; our focus on high-margin software solutions and continued investment in hardware authentication solutions; revenue trends, including revenue expectations for our hardware business; estimates concerning the timing and amount of savings, improvements in Adjusted EBITDA, and/or restructuring charges that may result from our cost reduction and restructuring actions; our plans for managing our Security Solutions and Digital Agreements 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 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; 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; 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, tariffs or trade disputes, and political instability; claims that we have infringed the intellectual property rights of others; changing laws, government regulations or policies; pressures on price levels; component shortages; delays and disruption in global transportation and supply chains; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; actions of activist stockholders; and exposure to increased economic and operational uncertainties from operating a global business, as well as other factors described in the “Risk Factors” section of our most recent Annual Report on Form 10-K. Our filings with the Securities and Exchange Commission (the “SEC”) and other important information can be found in the Investor Relations section of our website at investors.onespan.com. We do not have any intent, and disclaim any obligation, to update the forward-looking information to reflect events that occur, circumstances that exist or changes in our expectations after the date of this Form 10-Q, except as required by law.

Our website address is included in this Quarterly Report on Form 10-Q as an inactive textual reference only.

Overview

OneSpan delivers cutting-edge solutions in two key areas: advanced secure authentication and digital agreements. Our secure authentication solutions protect devices, users, and applications with robust multi-factor and passwordless authentication and other fraud prevention technologies. Our digital agreements solutions combined identity verification, electric signatures, and digital workflows to streamline agreements, enhance compliance, and accelerate business processes. We empower organizations to automate and secure both customer-facing and revenue-generating processes, supporting a wide range of use cases—from simple transactions to complex workflows requiring elevated security. Trusted by global blue-chip enterprises, including more than 60% of the world’s 100 largest banks, OneSpan processes millions of digital agreements and billions of transactions in more than 100 countries annually.

We offer our products primarily through a subscription licensing model and provide multiple deployment options, including cloud-based and on-premises solutions. Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers.

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

• 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.
• 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.

We seek to drive profitable, efficient growth in both operating segments, with a particular emphasis on subscription revenue growth. Both operating segments were profitable for the quarter ended March 31, 2025, and Security Solutions and Digital Agreements subscription revenue grew 7% and 13% as compared to the quarter ended March 31, 2024, respectively.

Restructuring Plan

In 2021 and 2022, our Board approved cost reduction actions designed to advance our operating model, streamline our business, improve efficiency, and enhance our capital resources.

On 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 related to vendor contract termination and rationalization actions. We currently expect that we will incur restructuring charges of approximately $0.1 million to $0.6 million related to the 2023 Actions in future periods, substantially all of which relate to employee transition and severance payments.

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.

As part of the restructuring plan (including the 2023 Actions), we reduced headcount by eliminating approximately 335 positions. We incurred severance and related benefits costs, recorded in “Restructuring and other related charges” in the consolidated statements of operations.

Components of Operating Results

Revenue

We generate revenue from the sale of our subscriptions, maintenance and support, professional services, and Digipass hardware products. We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments, reflecting the transactional nature of significant parts of our business.

• Product and license revenue. Product and license revenue includes Digipass hardware products and software licenses, which are provided on a perpetual or term basis subscription model.
• Service and other revenue. Service and other revenue includes solutions that are provided on a cloud-based subscription model, maintenance and support, and professional services.

Cost of Goods Sold

Our total cost of goods sold consists of cost of product and license revenue and cost of service and other revenue. We expect our cost of goods sold to increase in absolute dollars as our business grows, although it may fluctuate as a percentage of total revenue from period to period.

• Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs, including personnel costs, production costs, freight, and inventory write-off adjustments for discontinued products and services.
• Cost of service and other revenue. Cost of service and other revenue primarily consists of costs related to cloud subscription solutions, including personnel and equipment costs, depreciation, amortization, and personnel costs of employees providing professional services and maintenance and support.

Gross Profit

Gross profit is revenue net of the cost of goods sold. Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including our average selling price, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.

Operating Expenses

Our operating expenses are generally based on anticipated revenue levels and fixed over short periods of time. As a result, small variations in revenue may cause significant variations in the period-to-period comparisons of operating income or operating income as a percentage of revenue.

Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 50% and 60% of our operating expenses. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive.

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates during the three months ended March 31, 2025 compared to the comparable prior year period resulted in a decrease in operating expenses of less than $0.3 million.

The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. Long-term incentive plan compensation expense includes both stock-based incentives and an immaterial amount of cash-based incentives. During the three months ended March 31, 2025 and 2024, operating expenses included $2.8 million and $1.6 million, respectively, of expenses related to stock-based and long-term incentive plans as well as payroll taxes on employee stock-based awards.

Our operating expenses consist of:

• Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. Our sales and marketing expenses may fluctuate as a percentage of total revenue.
• Research and development. Research and development expenses consist primarily of personnel costs and long-term incentive compensation. Our research and development expenses may fluctuate as a percentage of total revenue.
• 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.
• 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.
• Restructuring and related charges. Restructuring and other related charges consist of employee costs which include severance, retention pay, 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, 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 and related commercial efforts; and vendor rationalization costs for contractually committed services the Company is 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.

Segment Results

Segment operating income (loss) consists of the revenue generated by a segment, less the direct costs of revenue, sales and marketing, research and development 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 reportable 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.

Interest Income, Net

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

Other Income (Expense), Net

Other income (expense), net, primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and development in those countries and other miscellaneous non-operational expenses.

Income Taxes

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

As the majority of our revenue is generated outside of the U.S., our consolidated effective tax rate is strongly influenced by our foreign operations, including the tax rates in the countries in which we operate and by cross border tax laws in the U.S. Changes in the effective rate related to foreign operations reflect changes in the geographic mix of earnings and the tax rates in each of the countries in which it is earned. The statutory tax rate for the primary foreign tax jurisdictions ranges from 17% to 30%.

Impact of Currency Fluctuations

During the three months ended March 31, 2025 and 2024, we generated approximately 84% and 84% of our revenues and incurred approximately 58% and 61% 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.

While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the three months ended March 31, 2025 was denominated in U.S. Dollars. For the three months ended March 31, 2025, approximately 55% of our revenue was denominated in U.S. Dollars, 43% was denominated in Euros and 2% was denominated in other currencies. For the three months ended March 31, 2024, approximately 53% of our revenue was denominated in U.S. Dollars, 43% was denominated in Euros and 4% was denominated in other currencies.

In general, to minimize the net impact of currency fluctuations on operating income, we attempt to denominate an amount of billings in a currency such that it would provide a natural hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. If the amount of our revenue in Europe denominated in Euros continues as it is now or declines, we may not be able to balance fully the exposures of currency exchange rates on revenue and operating expenses.

The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. 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 $2.7 million during the three months ended March 31, 2025. For the three months ended March 31, 2024, translation adjustments arising from differences in exchange rates generated a comprehensive loss of $1.7 million.

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 $(0.2) million and $0.1 million for the three months ended March 31, 2025 and 2024, respectively.

Results of Operations

The following table sets forth, for information about the Company's two operating segments, for the periods indicated, and selected segment and condensed 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.

(In thousands, except percentages)

24

(In thousands, except percentages)

*Percentage not meaningful.

(1) Security Solutions other segment items includes general and administrative expense and restructuring and other related charges for the three months ended March 31, 2025 and 2024.

(2) Security Solutions operating income includes $0.2 million of total amortization and depreciation expense for the three months ended March 31, 2025 and 2024.

Security Solutions operating income includes $0.2 million and $1.1 million of restructuring and other related charges for the three months ended March 31, 2025 and 2024, respectively.

(3) Digital Agreements other segment items includes general and administrative expense, restructuring and other related charges, and amortization of intangibles for the three months ended March 31, 2025 and 2024.

(4) Digital Agreements operating income (loss) includes $1.7 million and $1.6 million of total amortization and depreciation expense for the three months ended March 31, 2025 and 2024, respectively.

Digital Agreements operating income (loss) includes $0.2 million and $0.1 million of restructuring and other related charges for the three months ended March 31, 2025 and 2024, respectively.

Revenue

Revenue by products and services allocated to the segments for the three months ended March 31, 2025, and 2024 is as follows:

(In thousands)

25

(1) Professional services and other includes perpetual software licenses revenue, which was immaterial for the three months ended March 31, 2025 and approximately 1% of total revenue for the three months ended March 31, 2024.

Total revenue decreased by $1.5 million, or 2%, during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Changes in foreign exchange rates as compared to the same period in 2024 negatively impacted revenue by approximately $1.1 million.

Additional information on our revenue by segment follows.

• Security Solutions revenue decreased $2.7 million, or approximately 5%, during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The decrease in Security Solutions revenue was primarily attributable to lower volumes of hardware devices sold, and lower perpetual-based maintenance and professional services revenues due to our transition to term licenses and cloud subscription license models. The decrease was partially offset by higher on-premises and cloud subscription revenue from existing customer expansions. Changes in foreign exchange rates for the three months ended March 31, 2025 compared to the same period in 2024 negatively impacted Security Solutions revenue by $1.1 million.
• Digital Agreements revenue increased $1.2 million, or 9%, during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increase in Digital Agreements revenue was primarily attributable to higher cloud subscription revenue from existing customer expansions and, to a lesser extent, new logos, partially offset by lower term-based maintenance revenue due to our transition to cloud subscription licenses. Changes in foreign exchange rates compared to the same period in 2024 negatively impacted Digital Agreements revenue by less than $0.1 million for the three months ended March 31, 2025.

Our revenue is heavily influenced by the timing of orders and shipments, as well as the timing of customer renewals in any given period. As a result, we believe that the overall strength of our business is best evaluated over a longer term where the impact of transactions in any given period is not as significant as in a quarter-over-quarter comparison.

Revenue by Geographic Regions: We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes sales in North, Central, and South America; and 3) Asia Pacific (APAC), which also includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:

(In thousands, except percentages)

For the three months ended March 31, 2025, revenue generated in EMEA was $0.8 million, or 3%, lower than the same period in 2024, primarily due to a decrease in hardware revenue due to lower volumes sold.

For the three months ended March 31, 2025, revenue generated in the Americas was $0.2 million, or 1%, lower than the three months ended March 31, 2024.

For the three months ended March 31, 2025, revenue generated in APAC was $0.4 million, or 3%, lower than the three months ended March 31, 2024, largely due to a decrease in hardware revenue due to lower volumes sold.

Cost of Goods Sold and Gross Margin

The following table presents cost of goods sold for our products and services for the three months ended March 31, 2025 and 2024:

(In thousands, except percentages)

The cost of product and license revenue decreased by $1.0 million, or 10%, during the three months ended March 31, 2025, respectively, compared to the three months ended March 31, 2024. The decrease in cost of product and license revenue for the three months ended March 31, 2025 was driven primarily by lower hardware revenue, partially offset by higher third-party license costs.

The cost of services and other revenue decreased by $0.2 million, or 2%, during the three months ended March 31, 2025, compared to the three months ended March 31, 2024.

Gross profit decreased slightly by $0.3 million, or 1%, during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Gross margin was 74% for the three months ended March 31, 2025, compared to 73% for the three months ended March 31, 2024. The increase in gross margin was primarily driven by favorable product mix and improved operational efficiencies in both business units.

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 $0.2 million for three months ended March 31, 2025. Had currency rates during the three months ended March 31, 2025 been equal to rates in the comparable period of 2024, the gross margin would have been less than 1 percentage point lower, driven by the favorable currency rate impact to revenue.

Additional information on our gross profit by segment follows.

• Security Solutions gross profit decreased $1.4 million, or 4%, during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Security Solutions gross margin for the three months ended March 31, 2025 was 76%, compared to 74% for the three months ended March 31, 2024. The increase in gross margin was primarily due to a higher software to hardware revenue mix, which has a direct correlation to gross profit.
• Digital Agreements gross profit increased $1.1 million, or 11%, during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Digital Agreements gross margin for the three months ended March 31, 2025 was 70%, compared to 69% for the three months ended March 31, 2024. The increase in gross profit and gross margin was driven by higher cloud subscription revenue, partially offset by lower term-based maintenance revenue.

Operating Expenses

Operating expenses decreased by $3.4 million, or 10%, during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. For the three months ended March 31, 2025, changes in foreign exchange rates favorably impacted operating expenses by less than $0.3 million as compared to the same period in 2024.

The following table presents the breakout of operating expenses by category as of March 31, 2025 and 2024:

(In thousands)

Sales and Marketing Expenses

Sales and marketing expenses for the three months ended March 31, 2025 decreased by $1.5 million, or 11%, compared to the three months ended March 31, 2024. 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.

Average full-time sales, marketing, support, and operating employee headcount for the three months ended March 31, 2025 was 158 compared to 183 for the three months ended March 31, 2024. Average headcount was 14% lower for the three months ended March 31, 2025 compared to the same period in 2024.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2025 decreased by $0.3 million, or 4%, compared to the three months ended March 31, 2024. 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.

Average full-time research and development employee headcount for the three months ended March 31, 2025 was 222 compared to 250 for the three months ended March 31, 2024. Average headcount was 11% lower for the three months ended March 31, 2025, compared to the same period in 2024.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2025 decreased by $0.5 million, or 5%, compared to the three months ended March 31, 2024. The decrease in expense for three months ended March 31, 2025 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 as well as lower bonus accruals. This decrease was partially offset by increased stock-based compensation expense and higher consulting costs in 2025 compared to prior year.

Average full-time general and administrative employee headcount for the three months ended March 31, 2025 was 85 compared to 111 for the three months ended March 31, 2024. Average headcount was 23% lower for the three months ended March 31, 2025, compared to the same period in 2024.

Restructuring and Other Related Charges

Restructuring and other related charges for the three months ended March 31, 2025 decreased by $1.1 million, or 72%, compared to the three months ended March 31, 2024, driven by minimal headcount reduction and vendor rationalization costs in 2025 compared to severance costs of $1.4 million incurred in 2024.

Amortization of Intangible Assets

Amortization of intangible assets expense for the three months ended March 31, 2025 decreased by less than $0.1 million, or 7%, compared to the three months ended March 31, 2024.

Segment Operating Income (Loss)

Information on our operating income (loss) by segment follows.

• Security Solutions operating income for the three months ended March 31, 2025 was $24.2 million, which was a year-over-year decrease of $1.7 million, or 7%, from the three months ended March 31, 2024. The decrease was largely due to lower overall revenue and higher sales and marketing expenses, research and development expenses, and restructuring expenses.
• Digital Agreements operating income for the three months ended March 31, 2025 was $3.4 million, compared to an operating loss of $0.3 million, for the three months ended March 31, 2024. The improvement in operating income for the three months ended March 31, 2025 was driven by higher overall revenue and gross profit and lower sales and marketing and research and development expenses, including lower employee compensation costs, marketing expenses, and travel and entertainment costs, partially offset by increased general and administrative expenses.

Interest income, net

(In thousands)

Interest income, net, was $0.7 million and $0.1 million for the three months ended March 31, 2025 and 2024, respectively. The increase in interest income was due to higher average excess cash invested in the period compared to last year.

Other Income (Expense), net

(In thousands)

Other income (expense), net, primarily includes subsidies received from foreign governments in support of our research and development in those countries, exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, and other miscellaneous non-operational, non-recurring expenses.

Other income (expense), net, for the three months ended March 31, 2025 and 2024 was less than $(0.1) million and $0.3 million, respectively.

Provision for Income Taxes

(In thousands)

29

We recorded income tax expense of $3.4 million and $1.0 million for the three months ended March 31, 2025 and 2024, respectively. Higher income tax expense for the three months ended March 31, 2025 was primarily attributable to an increase in income before taxes and a $1.1 million tax benefit recorded during the three months ended March 31, 2024 in connection with a Mutual Agreement Procedure request. In addition, the prior year tax reflected valuation allowance releases for entities with income and a valuation allowance.

Liquidity and Capital Resources

At March 31, 2025, we had cash and cash equivalent balances of $105.2 million. Our cash and cash equivalents balance includes money market funds and U.S. treasury bills with maturities at acquisition of less than three months.

At December 31, 2024, we had cash and cash equivalent balances of $83.2 million.

We are party to lease agreements that require letters of credit to secure the obligations which totaled $0.2 million at both March 31, 2025 and December 31, 2024. The restricted cash related to the letters of credit will be held for a period greater than 12 months, and therefore, is recorded as "Restricted cash" and a long-term asset on the condensed consolidated balance sheets.

As of March 31, 2025, we held $42.8 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $41.9 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.

We believe that our financial resources are adequate to meet our operating needs over the next twelve months.

Our cash flows are as follows:

(In thousands)

Operating Activities

Cash used in operating activities primarily consists of net income, as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of allowance for credit losses, amortization of intangible assets, deferred taxes, depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel and vendor costs. We expect cash outflows from operating activities to be affected by changes in personnel costs and the timing of payment of expenditures.

For the three months ended March 31, 2025, $29.4 million of cash was provided by operating activities. This was driven by a net income for the period and a decrease in our accounts receivable balance, partially offset by a decrease in deferred revenue. For the three months ended March 31, 2024, $27.0 million of cash was provided by operating activities.

Our working capital at March 31, 2025 was $83.5 million compared to $64.6 million at December 31, 2024. The increase was driven by lower deferred revenue, accrued wages and payroll taxes, and other accrued expenses and increased cash and cash equivalents, partially offset by lower accounts receivable.

Investing Activities

The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of investments, purchases of property and equipment, capitalized software activities, and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the growth of our business as well as to continue to invest in our infrastructure and activity in connection with acquisitions.

For the three months ended March 31, 2025, net cash used in investing activities was $1.6 million, compared to net cash used in investing activities of $3.1 million for the three months ended March 31, 2024. Cash used in investing activities primarily consisted of additions to property and equipment.

Financing Activities

The changes in cash flows from financing activities primarily relate to a dividend, the purchases of common stock under our share repurchase program and tax payments for restricted stock issuances.

Cash of $5.9 million used in financing activities during the three months ended March 31, 2025 was attributable to dividends paid and tax payments for stock issuances. Cash of $1.8 million used in financing activities during the three months ended March 31, 2024 was attributable to tax payments for stock issuances and cash paid for the holdback component of a prior year acquisition.

Key Business Metrics and Non-GAAP Financial Measures

In our quarterly earnings press releases and conference calls, we discuss the below key metrics and financial measures that are not calculated according to generally accepted accounting principles (“GAAP”). These metrics and non-GAAP financial measures help us monitor and evaluate the effectiveness of our operations and evaluate period-to-period comparisons. Management believes that these metrics and non-GAAP financial measures help illustrate underlying trends in our business. We use these metrics and non-GAAP financial measures to establish budgets and operational goals (communicated internally and externally), manage our business and evaluate our performance. We also believe that both management and investors benefit from referring to these metrics and non-GAAP financial measures as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. We believe these metrics and non-GAAP financial measures are useful to investors both because they allow for greater transparency with respect to financial measures used by management in their financial and operational decision-making and also because they are used by investors and the analyst community to help evaluate the health of our business.

Annual Recurring Revenue

We use annual recurring revenue, or ARR, as an approximate measure to monitor the growth of our recurring business. ARR represents the annualized value of the active portion of SaaS, term-based license, and maintenance and support contracts at the end of the reporting period. ARR is calculated as the approximate annualized value of our customer recurring contracts as of the measurement date. These include subscription, term-based license, and maintenance and support contracts and exclude one-time fees. For term-based license arrangements, the amount included in ARR is consistent with the amount that we invoice the customer annually for the term-based license transaction. A customer with a one-year term-based license contract will be invoiced for the total value of the contract at the beginning of the contractual term, while a customer with a multi-year term-based license contract will be invoiced for each annual period at the beginning of each year of the contract. For contracts that include annual values that increase over time because there are additional deliverables in subsequent periods, we include in ARR only the annualized value of components of the contract that are considered active as of the date of the ARR calculation. We do not include the future committed increases in the contract value as of the date of the ARR calculation.

We consider a contract to be active from when the product or service contractual term commences (the “start date”) until the right to use the product or service ends (the “expiration date”). Even if the contract with the customer is executed before the start date, the contract will not count toward ARR until the customer right to receive the benefit of the products or services has commenced.

To the extent that we are negotiating a renewal with a customer within 90 days after the expiration of a recurring contract, we continue to include that revenue in ARR if we are actively in discussions with the customer for a new recurring contract or renewal and the customer has not notified us of an intention not to renew. We exclude from the calculation of ARR renewal contracts that are more than 90 days after their expiration date, even if we are continuing to negotiate a renewal at that time.

ARR is not calculated based on recognized or unearned revenue and there is no direct relationship between revenue recognized in accordance with ASC 606 and the Company’s ARR business metric. We believe ARR is a valuable operating measure to assess the health of our SaaS, term-based license, and maintenance and support contracts because it illustrates our customer recurring contracts as of the measurement date. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates, and does not include revenue from perpetual licenses, purchases of Digipass authenticators, training, professional services or other sources of revenue that are not deemed to be recurring in nature.

ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. Investors should consider our ARR operating measure only in conjunction with our GAAP financial results.

At March 31, 2025, we reported ARR of $168.4 million, which was 9% higher than ARR of $154.6 million at March 31, 2024. Changes in foreign exchange rates during the three months ended March 31, 2025 as compared to the prior year negatively impacted ARR by approximately $0.7 million. ARR growth was primarily driven by an increase in subscription contracts and new logos.

Net Retention Rate

Net Retention Rate, or NRR, is defined as the approximate year-over-year percentage growth in ARR from the same set of customers at the end of the prior year period. It measures our ability to increase revenue across our existing customer base through expanded use of our platform, offset by customers whose subscription contracts with us are not renewed or renew at a lower amount. Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers. NRR is an important way in which we track our performance in this area.

We reported NRR of 107% at both March 31, 2025 and 2024. Year-over-year, NRR was primarily impacted by the same factors that affected ARR, as discussed above.

Adjusted EBITDA

We define Adjusted EBITDA as net income before interest, taxes, depreciation, amortization, long-term incentive compensation and related payroll tax expense, restructuring and other related charges, and certain non-recurring items, including acquisition related costs, rebranding costs, and non-routine shareholder matters. Adjusted EBITDA is a non-GAAP financial metric. We use Adjusted EBITDA as a simplified measure of performance for use in communicating our performance to investors and analysts and for comparisons to other companies within our industry. As a performance measure, we believe that Adjusted EBITDA presents a view of our operating results that is most closely related to serving our customers. By excluding interest, taxes, depreciation, amortization, long-term incentive compensation and related payroll tax expense, restructuring costs, and certain other non-recurring items, we are able to evaluate performance without considering decisions that, in most cases, are not directly related to meeting our customers’ requirements and were either made in prior periods (e.g., depreciation, amortization, long-term incentive compensation and related payroll tax expense, non-routine shareholder matters), deal with the structure or financing of the business (e.g., interest, one-time strategic action costs, restructuring costs, impairment charges) or reflect the application of regulations that are outside of the control of our management team (e.g., taxes). In addition, removing the impact of these items helps us compare our core business performance with that of our competitors.

The following table reconciles net income as reported on our condensed consolidated statements of operations to Adjusted EBITDA:

(In thousands)

(1) Includes cost of sales depreciation and amortization expense directly related to delivering cloud subscription revenue of $1.1 million and $0.8 million for the three months ended March 31, 2025 and 2024, respectively, and are recorded in "Services and other cost of goods sold" on the condensed consolidated statements of operations.

(2) Long-term incentive compensation and related payroll tax expense includes stock-based compensation and related payroll tax expense, and cash incentive grants awarded to employees located in jurisdictions where we do not issue stock-based compensation due to tax, regulatory or similar reasons. The immaterial expense associated with these cash incentive grants was less than $0.1 million and $0.1 million for the three months ended March 31, 2025 and 2024, respectively.

Starting January 1, 2025, employer payroll taxes related to employee stock-based award transactions are included in long-term incentive compensation and related payroll tax expense. Prior period amounts have been adjusted to reflect these changes. We are excluding these payroll taxes from Adjusted EBITDA results since they are tied to the timing and size of the vesting of the underlying stock-based awards and the price of our common stock at the time of vesting, which may vary from period to period independent of our operating performance. Employer payroll taxes related to employee stock-based award transactions amounted to $0.5 million and $0.4 million for the three months ended March 31, 2025 and 2024, respectively.

(3) Includes restructuring and other related charges of less than $0.1 million for both the three months ended March 31, 2025 and 2024. These charges are recorded in "Services and other cost of goods sold" on the condensed consolidated statements of operations.

(4) For the three months ended March 31, 2025 and 2024, other non-recurring items consist of less than $0.1 million and $0.2 million, respectively, of fees related to non-recurring projects.

Adjusted EBITDA for the three months ended March 31, 2025 was $23.0 million compared to $20.2 million for the three months ended March 31, 2024. The increase was driven largely by lower operating expenses as described elsewhere in this Item 2. Year-over-year changes in foreign exchange rates unfavorably impacted Adjusted EBITDA by approximately $0.3 million for the three months ended March 31, 2025.

Critical Accounting Policies

Our accounting policies are fully described in Note 1, Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2024 and Note 2, Summary of Significant Accounting Policies, of our interim Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the three months ended March 31, 2025.

There have been no material changes in our market risk during the three months ended March 31, 2025. For additional information, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our Form 10-K.

Management’s Evaluation of Disclosure Controls and Procedures

Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2025. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2025, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended March 31, 2025.

Except as set forth below, there have been no material changes in or additions to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on February 27, 2025.

Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, could have a material adverse impact on our business.

Our Digipass authentication devices are assembled by third-party manufacturers located in China and Romania, using components from suppliers in a wide range of geographic locations, including China. The U.S. presidential administration recently imposed new or additional tariffs on foreign goods, including very high tariffs on certain Chinese imports. Although sales to U.S. customers account for a small portion of our Digipass sales, these tariffs could negatively impact our financial results. In some cases, we may not be able to pass the cost of the tariffs to our customers, which would negatively affect our profit margin. Even if we can pass on these costs, the tariffs and the economic uncertainty they cause may discourage customers from placing Digipass orders or lead them to decrease or delay such orders. Additional expansion of or increases to tariffs would exacerbate these impacts. Although we are planning measures to mitigate the potential impact of the China tariffs on our business, including moving more of our Digipass production to Romania, these measures are unlikely to fully offset the impact, particularly in the near term.

In addition, in response to tariffs, other countries have implemented, or may implement in the future, retaliatory tariffs on U.S. goods. Political tensions as a result of trade policies could reduce trade volume, investment, technological exchange, and other economic activities between major international economies, resulting in a material adverse effect on global economic conditions and the stability of global financial markets, which could in turn have a material adverse impact on our business and financial condition.