# OneSpan Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [OneSpan Inc.](/companies/ospn.md) (CIK 1044777)
- Form: 10-Q
- Filed: 2023-08-09
- Accepted by EDGAR: Aug 9, 2023, 17:14 ET
- Period: 2023-06-30
- Accession: 0001628280-23-028665
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1044777/000162828023028665/ospn-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1044777/000162828023028665/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $21.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $39.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $34.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $73.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-04-01 to 2023-06-30 | $10.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-01-01 to 2023-06-30 | $19.6m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | −$17.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | −$25.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $601.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $1.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | −$17.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$26.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.44 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.44 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.65 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 40,399,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 40,435,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$6.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $6.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $83.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $160.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $298.6m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $97.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $112.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $186.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 68,483 characters.

*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 periods ended June 30,, 2023 and 2022 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, 2022 (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 the outcomes we expect from our strategic transformation plan and our recently approved cost reduction actions, including the ability of those actions and restructuring plan originally approved in December 2021 to enable us to accelerate adjusted EBITDA growth, enable us to return capital to stockholders, and drive value creation by growing profitably over the long term; estimates concerning the timing and amount of savings, adjusted EBITDA improvements, and/or restructuring charges that may result the recently approved cost reduction actions and our prior restructuring plan; our plans for managing our Digital Agreements and Security Solutions segments; our expectations regarding our use of technology acquired in our ProvenDB acquisition or other acquisitions we may complete in the future; 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", "confident", 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. Important factors that could materially affect our business and financial results include, but are not limited to: our ability to execute our strategic transformation plan and the additional actions under our restructuring plan in the expected timeframe and to achieve the outcomes we expect from them; unintended costs and consequences of our revised restructuring plan, 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 effectively develop and expand our sales and marketing capabilities; our ability to hire, train, and retain sales and other employees necessary to implement our strategic transformation plan; our ability to successfully develop and market new product offerings and product enhancements; the loss of one or more large customers; difficulties enhancing and maintaining our brand recognition; competition; lengthy sales cycles; departures of senior management or other key employees; changes in customer requirements; interruptions or delays in the performance of our products and solutions; real or perceived malfunctions or errors in our products; the potential effects of technological changes; economic recession, inflation, and political instability; our ability to effectively manage third party partnerships, acquisitions, divestitures, alliances, or joint ventures; security breaches or cyber-attacks; claims that we have infringed the intellectual property rights of others; litigation or regulatory actions; price competitive bidding; changing laws, government regulations or policies; pressures on price levels; component shortages; delays and disruption in global transportation and supply chains; reliance on third parties for certain products and data center services; 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, as updated by the “Risk Factors” section of this Quarterly Report on Form 10-Q. 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 helps organizations accelerate digital transformations by enabling secure, compliant, and refreshingly easy digital customer agreements and transaction experiences. We deliver digital agreement products and services that automate and secure customer-facing and revenue-generating business processes. Our solutions help organizations streamline and secure user experiences, which in turn allows them to drive growth, reduce risk, and unlock their business potential.

We are a global leader in providing high-assurance identity and authentication security as well as enterprise-grade electronic signature (e-signature) solutions, for use cases ranging from simple transactions to workflows that are complex or require higher levels of security. Our solutions help our clients ensure the integrity of the people and records associated with digital agreements, transactions, and interactions in industries including banking, financial services, healthcare and professional services. We are trusted by global blue-chip enterprises, including more than 60% of the world’s largest 100 banks, and process millions of digital agreements and billions of transactions in more than 100 countries annually.

Our solutions are powered by a portfolio of products and services across identity verification, authentication, virtual interactions and transactions, and secure digital storage. These products and services can be acquired and embedded individually within enterprise business workflows or assembled into tailored solutions for simple yet secure business-to-business, business-to-employee, and business-to-customer experiences.

We offer our solutions through cloud-based and, in select cases, on-premises solutions using both open standards and proprietary technologies. We offer our products primarily through a subscription licensing model. Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers.

### Business Transformation

We are currently in the midst of a business transformation. In May 2022, we announced a three-year strategic transformation plan that began on January 1, 2023 (the “Strategic Plan”). In conjunction with the Strategic Plan and to enable a more efficient capital deployment model, 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.

- **Digital Agreements.** Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include OneSpan Sign e-signature and OneSpan Notary. This segment also includes costs attributable to our transaction cloud platform.
- **Security Solutions.** Security Solutions consists of our broad portfolio of software products, software development kits (SDKs) and Digipass authenticator devices that are used to build applications designed to defend against attacks on digital transactions across online environments, devices, and applications. The software products and SDKs included in the Security Solutions segment are largely on-premises software products and include identity verification, multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.

In connection with the Strategic Plan, during the six months ended June 30, 2023 we changed our methodology for allocating expenses between the segments to better reflect the shift in employee time, effort, and costs toward supporting the growth of our Digital Agreements segment instead of our Security Solutions segment.

During the quarter ended June 30, 2023, we determined that it will take longer than originally expected to achieve the revenue growth levels contemplated by our Strategic Plan. It has been more time consuming than we projected to build our Digital Agreements sales pipeline, generate demand for our Digital Agreements solutions through marketing efforts, and improve our sales force productivity levels. A number of factors have contributed to the challenges achieving the originally planned growth levels on the timeframes set forth in the Strategic Plan, including: macroeconomic uncertainties, 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; and higher pricing aggressiveness from competitors in recent months.

As a result of the additional insights we have gained into our business transformation process, our Board of Directors (the "Board") recently approved cost reduction actions to seek to drive higher levels of adjusted EBITDA while maintaining our long-term growth potential. Please see “Recent Developments” below for further information about these cost reduction actions. We intend to continue to pursue the overall strategy set forth in our original Strategic Plan while implementing adjustments to our operating model that are intended to achieve greater operational efficiency, drive higher levels of adjusted EBITDA, and strengthen OneSpan's ability to create value for our shareholders over the long term.

Our updated Strategic Plan, the cost reduction actions we are undertaking, and our restructuring plan originally adopted in December 2021 involve numerous risks and uncertainties. For additional details please see Item IA, Risk Factors, below and Part 1, Item 1A, Risk Factors in our Form 10-K.

### Restructuring Plan

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 are designed to continue to advance the same objectives as the first phase of the plan.

Actions taken under the plan consist of the following:

- We have reduced headcount by eliminating approximately 140 redundant positions and incurred

severance, related benefits, and retention pay costs.

- During the three months ended June 30, 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, non-cash impairment charges related to the vacated location's fixed assets, and a gain on the underlying right-of-use asset and liability write-off for the three and six months ended June 30, 2023.
- We are evaluating our product and service offerings to enhance our operating efficiency. As a result of this evaluation, the Company made the decision to discontinue investments in its Digipass CX product and incurred non-cash impairment charges for capitalized software for the three and six months ended June 30, 2023.
- We are evaluating our vendor spend and updating or eliminating 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.

We plan to incrementally take actions under the restructuring plan until December 31, 2025, when the plan terminates.

### Business Acquisitions

On February 22, 2023, we acquired substantially all of the assets of the ProvenDB business of Southbank Software Pty Ltd. ("ProvenDB") under the terms of an asset purchase agreement. ProvenDB is a developer of secure storage that leverages blockchain technology in order to prevent data tampering or alteration of documents. The technology acquired in the acquisition is expected to provide a foundational architecture for future blockchain-based digital solutions, including secure storage. The results of operations since the acquisition date are included in our Digital Agreements reportable operating segment.

### Macroeconomic Conditions

During the first six months of 2023, we continued to operate under uncertain market conditions, influenced by instability in certain parts of the banking sector, supply chain constraints, the inflationary cost environment, and general concerns about economic conditions. Our customers have increased scrutiny on spending decisions, which has resulted in longer sales cycles for both existing customer and new customer opportunities. For a complete discussion of the risks we encounter in our business, please refer to Item IA, Risk Factors, below and Part 1, Item 1A, *Risk Factors*, in our Form 10-K.

### Recent Developments

On August 3, 2023, our Board of Directors approved cost reduction actions (the “Actions”) intended to achieve greater operational efficiency, drive higher levels of adjusted EBITDA, and strengthen our ability to create value for our shareholders over the long term.

We anticipate incurring restructuring charges in connection with the Actions, and expect that these charges will consist primarily of charges related to employee transition and severance payments, employee benefits and retention related payments, and share-based compensation, with a significantly smaller amount of charges relating to vendor contract termination and rationalization actions. We preliminarily estimate that we will incur from $15 million to $20 million in total restructuring charges associated with the Actions, a significant majority of which are expected to relate to the workforce related component of the Actions.

The workforce related component of the Actions is expected to be substantially complete by mid-2024, subject to local law and consultation requirements. The vendor contract component of the Actions is planned for completion by the end of 2025.

### 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 impairments 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 June 30, 2023 compared to the comparable prior year period resulted in an increase in operating expenses of approximately $0.1 million. We estimate the change in currency rates during the six months ended June 30, 2023 compared to the comparable prior year period resulted in a decrease in operating expenses of approximately $0.5 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 June 30, 2023 and 2022, operating expenses included $4.6 million and $1.3 million, respectively, of expenses related to stock-based and long-term incentive plans. During the six months ended June 30, 2023 and 2022, operating expenses included $8.5 million and $2.5 million, respectively, of expenses related to stock-based and long-term incentive plans.

Stock-based compensation expense for the three and six months ended June 30, 2023 reflected our 2023 annual equity grant to executives and other employees who were hired in the second and third quarters of 2022, including the impact of an overall expansion of the equity incentive program that we put in place during 2022 for the long-term retention of our employees. The reversal in the three and six months ended June 30, 2022 of certain long-term incentive plan compensation accruals and unvested stock-based incentives for employees who were severed from the Company during that period was also a factor in the year-over-year increase in stock-based compensation expense.

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. We expect sales and marketing expenses to decrease in absolute dollars as we take the Actions described in "Recent Developments" above. However, 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. We expect research and development costs to decrease in absolute dollars as we implement the 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.
- *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 we implement the Actions, although 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.
- *Restructuring and related charges.* Restructuring and other related charges consist of employee costs which include severance and related benefits incurred from headcount reductions as part of our restructuring plan and the 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 impairments of capitalized software assets no longer in use; 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 plan terminates.

### 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 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.

### Interest Income, Net

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.

### Other (Expense) Income, Net

Other (expense) income, 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 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. 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 revenues are generated outside of the U.S., our consolidated effective tax rate is strongly influenced by the effective tax rate of our foreign operations. 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 11% to 35%.

### Impact of Currency Fluctuations

During the three months ended June 30, 2023 and 2022, respectively, we generated approximately 83% and 81% of our revenues and incurred approximately 55% and 69% of our operating expenses outside of the U.S. During the six months ended June 30, 2023 and 2022, respectively, we generated approximately 82% and 85% of our revenues and incurred approximately 55% and 69% of our operating expenses 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 six months ended June 30, 2023 was denominated in U.S. Dollars. 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. For the six months ended June 30, 2022, approximately 55% of our revenue was denominated in U.S. Dollars, 40% was denominated in Euros and 5% 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 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. 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 gain of $1.0 million and $2.7 million during the three and six months ended June 30, 2023, respectively. For the three and six months ended June 30, 2022, translation adjustments arising from differences in exchange rates generated comprehensive loss of $5.3 million and $7.3 million, respectively. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar.

Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other (expense) income, net. Losses resulting from foreign currency transactions were $0.2 million and $0.4 million for the three and six months ended June 30, 2023, respectively. For the three and six months ended June 30, 2022, losses resulting from foreign currency transactions were $0.9 million and $1.3 million, respectively.

### Results of Operations

In conjunction with our strategic transformation 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.

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

*(In thousands, except percentages)*

| Digital Agreements | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $11,862 | $10,454 | $23,414 | $23,755 |
| Gross profit | $8,583 | $7,647 | $17,031 | $17,933 |
| Gross margin | 72% | 73% | 73% | 75% |
| Operating income (loss) | $(7,121) | $(462) | $(13,154) | $664 |
| **Security Solutions** |  |  |  |  |
| Revenue | $43,871 | $42,336 | $89,926 | $81,482 |
| Gross profit | $25,711 | $27,859 | $56,549 | $54,251 |
| Gross margin | 59% | 66% | 63% | 67% |
| Operating income | $8,523 | $7,999 | $24,154 | $15,688 |
| **Total Company:** |  |  |  |  |
| Revenue | $55,733 | $52,790 | $113,340 | $105,237 |
| Gross profit | $34,294 | $35,506 | $73,580 | $72,184 |
| Gross margin | 62% | 67% | 65% | 69% |
| **Statements of Operations reconciliation:** |  |  |  |  |
| Segment operating income | $1,402 | $7,537 | $11,000 | $16,352 |
| Corporate operating expenses not allocated at the segment level | (19,166) | (15,775) | (36,894) | (33,833) |
| Total Company operating loss | $(17,764) | $(8,238) | $(25,894) | $(17,481) |

### Revenue

Revenue by products and services allocated to the segments for the three and six months ended June 30, 2023 and 2022 is as follows:

*(In thousands)*

|  | Three Months Ended June 30, 2023 Digital Agreements | Security Solutions | 2022 Digital Agreements | Security Solutions |
| --- | ---: | ---: | ---: | ---: |
| Subscription | $10,486 | $12,499 | $8,736 | $11,093 |
| Maintenance and support | 1,130 | 10,473 | 1,408 | 10,770 |
| Professional services and other (1) | 246 | 1,253 | 310 | 1,690 |
| Hardware products | — | 19,646 | — | 18,783 |
| Total Revenue | $11,862 | $43,871 | $10,454 | $42,336 |

29

*(In thousands)*

|  | Six Months Ended June 30, 2023 Digital Agreements | Security Solutions | 2022 Digital Agreements | Security Solutions |
| --- | ---: | ---: | ---: | ---: |
| Subscription | $20,834 | $32,107 | $20,407 | $22,691 |
| Maintenance and support | 2,126 | 20,638 | 2,760 | 21,364 |
| Professional services and other (1) | 454 | 2,669 | 588 | 3,293 |
| Hardware products | — | 34,512 | — | 34,134 |
| Total Revenue | $23,414 | $89,926 | $23,755 | $81,482 |

(1) Professional services and other includes perpetual software licenses revenue, which was less than 2% of total revenue for the three and six months ended June 30, 2023 and 2022, respectively.

Total revenue increased by $2.9 million, or 6%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Changes in foreign exchange rates as compared to the same period in 2022 favorably impacted revenue by approximately $0.5 million. For the six months ended June 30, 2023, revenue increased by $8.1 million, or 8%, compared to the six months ended June 30, 2022. Changes in foreign exchange rates as compared to the same period in 2022 negatively impacted revenue by approximately $0.9 million.

Additional information on our revenue by segment follows.

- **Digital Agreements** revenue increased $1.4 million, or 13%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase in Digital Agreements revenue was attributable to higher cloud subscription revenue, driven by both new customers and existing customer expansion. For the six months ended June 30, 2023, Digital Agreements revenue decreased $0.3 million, or 1%. Higher cloud subscription revenue was offset by lower on-premises subscription revenue, which was driven by the non-renewal of several contracts and contraction due to our strategy of sunsetting our on-premises e-signature product. Changes in foreign currency rates compared to the same periods in 2022 negatively impacted Digital Agreements revenue by less than $0.1 million for both the three and six months ended June 30, 2023.
- **Security Solutions** revenue increased $1.5 million, or approximately 4%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase in Security Solutions revenue was attributable to higher on-premises term subscription revenue, which was driven by existing customer expansion and, to a lesser extent, new customer revenue. Higher hardware revenue also contributed to the increase. Changes in foreign exchange rates for the three months ended June 30, 2023 compared to the same period in 2022 favorably impacted Security Solutions revenue by $0.5 million. For the six months ended June 30, 2023, Security Solutions revenue increased $8.4 million, or 10%, which was driven primarily by higher on-premises term subscription revenue and an increase in hardware revenue, as a result of a higher average selling price, partially offset by lower volumes. Changes in foreign exchange rates for the six months ended June 30, 2023 compared to the same period in 2022 negatively impacted Security Solutions revenue by $0.8 million.

Our revenue is heavily influenced by the timing of orders and shipments. 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. In particular, our Security Solutions revenue for the six months ended June 30, 2023 benefited from the timing of certain contract renewals.

*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 includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:

*(In thousands, except percentages)*

| Revenue | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| EMEA | $26,539 | $23,521 | $54,359 | $48,397 |
| Americas | 18,331 | 19,329 | 38,829 | 36,578 |
| APAC | 10,863 | 9,940 | 20,152 | 20,262 |
| Total revenue | $55,733 | $52,790 | $113,340 | $105,237 |
| % of Total Revenue |  |  |  |  |
| EMEA | 48% | 44% | 48% | 46% |
| Americas | 33% | 37% | 34% | 35% |
| APAC | 19% | 19% | 18% | 19% |

For the three months ended June 30, 2023, revenue generated in EMEA was $3.0 million, or 13%, higher than the same period in 2022, primarily due to an increase in on-premises term subscription revenue from existing customer expansion and new customers, as well as an increase in hardware revenue. For the six months ended June 30, 2023, revenue generated in EMEA was $6.0 million, or 12%, higher than the same period in 2022 driven by an increase in on-premises term subscription revenue, partially offset by lower hardware revenue.

For the three months ended June 30, 2023, revenue generated in the Americas was $1.0 million, or 5%, lower than the three months ended June 30, 2022. The decrease was driven by lower maintenance on on-premises subscription revenue and lower customer purchase volumes of hardware. For the six months ended June 30, 2023, revenue generated in the Americas was $2.3 million, or 6%, higher than the six months ended June 30, 2022. The increase was primarily driven by both higher cloud subscription revenue and higher hardware revenue, driven by both increased customer purchase volumes and a higher average selling price due to customer mix.

For the three months ended June 30, 2023, revenue generated in APAC was $0.9 million, or 9%, higher than the three months ended June 30, 2022, driven by higher customer purchase volumes of hardware products and a higher average selling price. For the six months ended June 30, 2023, revenue generated in APAC was $0.1 million, or less than 1%, lower than the three months ended June 30, 2022.

### Cost of Goods Sold and Gross Margin

The following table presents cost of goods sold for our products and services for the three and six months ended June 30, 2023 and 2022:

*(In thousands, except percentages)*

| Cost of goods sold | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Product and license | $14,038 | $10,947 | $25,326 | $20,026 |
| Services and other | 7,401 | 6,337 | 14,434 | 13,027 |
| Total cost of goods sold | $21,439 | $17,284 | $39,760 | $33,053 |
| Gross profit | $34,294 | $35,506 | $73,580 | $72,184 |
| Gross margin |  |  |  |  |
| Product and license | 54% | 62% | 60% | 66% |
| Services and other | 71% | 74% | 71% | 72% |
| Total gross margin | 62% | 67% | 65% | 69% |

The cost of product and license revenue increased by $3.1 million, or 28%, and $5.3 million, or 26%, during the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022. Cost of goods sold for both the three and six months ended June 30, 2023 was driven by $1.6 million of inventory impairments in conjunction with the discontinuation of investments in our Digipass CX product. The increase for both periods was also impacted by price increases for our hardware components, higher freight costs, and higher third-party license costs than the prior year.

The cost of services and other revenue increased by $1.1 million, or 17%, and $1.4 million, or 11%,during the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022. The increase for both periods was due to the amortization of our capitalized software and higher cloud platform costs, due primarily to higher volume usage.

Gross profit decreased $1.2 million, or 3%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Gross profit margin was 62% for the three months ended June 30, 2023, compared to 67% for the three months ended June 30, 2022. Gross profit increased $1.4 million, or 2%, during the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Gross profit margin was 65% for the six months ended June 30, 2023, compared to 69% for the six months ended June 30, 2022.The decrease in profit margin for both the three and six months ended June 30, 2023 was driven by inventory impairments, customer and product mix, and higher freight costs in our hardware business.

The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies, including the Euro. Overall, cost of goods sold are estimated to have been impacted by changes in currency rates. The impact of changes in currency rates are estimated to have had an unfavorable impact on overall cost of goods sold of less than $0.1 million for the three months ended June 30, 2023 and a favorable impact on overall cost of goods sold of $0.2 million for the six months ended June 30, 2023. Had currency rates during the three months ended June 30, 2023 been equal to rates in the comparable period of 2022, the gross profit margin would have been less than 1 percentage point higher, driven by the favorable currency rate impact to revenue. Had currency rates during the six months ended June 30, 2023 been equal to rates in the comparable period of 2022, the gross profit margin would have been less than 1 percentage point lower, driven by the unfavorable currency rate impact to revenue.

Additional information on our gross profit by segment follows.

- **Digital Agreements** gross profit increased $0.9 million, or 12%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022, driven by higher overall revenue. Digital Agreements gross margin for the three months ended June 30, 2023 was 72%, compared to 73% for the three

months ended June 30, 2022. For the six months ended June 30, 2023, Digital Agreements gross profit decreased $0.9 million, or 5%, compared to the comparable period in 2022. The decrease in gross profit was driven by less favorable customer mix and revenue mix. Digital Agreements gross margin for the six months ended June 30, 2023 was 73%, compared to 75% for the six months ended June 30, 2022.

- **Security Solutions** gross profit decreased $2.1 million, or approximately 8%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022, driven by inventory impairments and product mix. Security Solutions gross margin for the three months ended June 30, 2023 was 59%, compared to 66% for the three months ended June 30, 2022, as a result of inventory impairments and higher hardware costs. For the six months ended June 30, 2023, Security Solutions gross profit increased 2.3 million, or 4%, compared to the comparable period in 2022. The increase in gross profit was driven by higher overall revenue, partially offset by inventory impairments. Security Solutions gross margin for the six months ended June 30, 2023 was 63%, compared to 67% for the six months ended June 30, 2022. The decrease was driven by inventory impairments and higher hardware costs.

### Operating Expenses

Operating expenses increased by $8.3 million, or 19%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. For the three months ended June 30, 2023, changes in foreign exchange rates negatively impacted operating expenses by approximately $0.1 million as compared to the same period in 2022. Operating expenses increased by $9.8 million, or 11%, during the six months ended June 30, 2023 compared to the six months ended June 30, 2022. For the six months ended June 30, 2023, changes in foreign exchange rates favorably impacted operating expenses by approximately $0.5 million as compared to the same period in 2022.

The following table presents the breakout of operating expenses by category as of June 30, 2023 and 2022:

*(In thousands)*

| Operating costs | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Sales and marketing | $19,713 | $14,928 | $39,724 | $29,928 |
| Research and development | 10,090 | 11,959 | 19,553 | 24,055 |
| General and administrative | 15,826 | 12,952 | 32,479 | 27,736 |
| Restructuring and other related charges | 5,846 | 2,688 | 6,552 | 5,347 |
| Amortization of intangible assets | 583 | 1,217 | 1,166 | 2,599 |
| Total operating costs | $52,058 | $43,744 | $99,474 | $89,665 |

#### Sales and Marketing Expenses

Sales and marketing expenses for the three months ended June 30, 2023 increased by $4.8 million, or 32%, compared to the three months ended June 30, 2022. The increase was driven by higher employee compensation costs which included increases in commissions, annual bonus, and long-term incentive plan expenses. Costs incurred to expand our digital marketing initiatives also contributed to the increase. Sales and marketing expenses for the six months ended June 30, 2023 increased by $9.8 million, or 33%, compared to the six months ended June 30, 2022. The increase was driven by higher expenses for sales-related activities, higher employee compensation costs, and costs to expand our digital marketing initiatives.

Average full-time sales, marketing, support, and operating employee headcount for the three and six months ended June 30, 2023 was 374 and 362, respectively, compared to 343 and 351 for the three and six months ended June 30, 2022, respectively. Average headcount was 9% and 3% higher for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

#### Research and Development Expenses

Research and development expenses for the three months ended June 30, 2023 decreased by $1.9 million, or 16%, compared to the three months ended June 30, 2022, driven primarily by the capitalization of expanded research and development costs of $2.6 million to enhance our transaction cloud platform and our Digital Agreements product offerings. The overall decrease in expense was partially offset by higher outside services costs. Research and development expenses for the six months ended June 30, 2023 decreased by $4.5 million, or 19%, compared to the six months ended June 30, 2022. The decrease in expense was driven primarily by the capitalization of research and development costs of $2.7 million, partially offset by higher outside services costs and higher travel and entertainment costs.

Average full-time research and development employee headcount for the three and six months ended June 30, 2023 was 319 and 315, respectively, compared to 349 and 357 for the three and six months ended June 30, 2022, respectively. Average headcount was 9% and 12% lower for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

#### General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2023 increased by $2.9 million, or 22%, compared to the three months ended June 30, 2022. General and administrative expenses for the six months ended June 30, 2023 increased by $4.7 million, or 17%, compared to the six months ended June 30, 2022. The increase in expense for both the three and six months ended June 30, 2023 was driven by higher long-term incentive plan expense and the expansion of our executive team. The increase in expense was partially offset by a decrease in consulting fees related to our strategic transformation plan incurred during the period compared to the three and six months ended June 30, 2022.

Average full-time general and administrative employee headcount for the three and six months ended June 30, 2023 was 146 and 145, respectively, compared to 138 for both the three and six months ended June 30, 2022, respectively. Average headcount was 6% and 5% higher for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

#### Restructuring and Other Related Charges

Restructuring and other related charges for the three months ended June 30, 2023 increased by $3.2 million, or 117%, compared to the three months ended June 30, 2022, driven by real estate rationalization costs, product and services optimization costs, and vendor rationalization spend. Restructuring and other related charges for the six months ended June 30, 2023 increased by $1.2 million, or 23%, compared to the six months ended June 30, 2022. The increase was driven by product and services optimization costs, partially offset by a more significant number of headcount reductions taken during the six months ended June 30, 2022 in conjunction with our restructuring plan.

#### Amortization of Intangible Assets

Amortization of intangible assets expense for the three months ended June 30, 2023 decreased by $0.6 million, or 52%, compared to the three months ended June 30, 2022. Amortization of intangible assets expense for the six months ended June 30, 2023 decreased by $1.4 million, or 55%, compared to the three months ended June 30, 2022. The decrease in expense in both periods was driven by certain intangible assets acquired in prior years becoming fully amortized or impaired during 2022.

#### Segment Operating Income (Loss)

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

- **Digital Agreements** operating loss for the three and six months ended June 30, 2023 was $7.1 million and $13.2 million, respectively, compared to operating income of $(0.5) million and $0.7 million for the three and six months ended June 30, 2022, respectively. Operating loss for the three and six months ended June 30, 2023 was largely attributable to the change in expense allocations between the segments primarily impacting operating expenses, higher sales and marketing expense which was driven by higher travel and entertainment costs, higher employee compensation costs, and additional headcount on our sales team, partially offset by lower research and development expenses driven by software capitalization.
- **Security Solutions** operating income for the three months ended June 30, 2023 was $8.5 million, which was a year-over-year increase of $0.5 million, or 7%, from the three months ended June 30, 2022. Operating income for the six months ended June 30, 2023 was $24.2 million, which was a year-over-year increase of $8.5 million, or 54% from the six months ended June 30, 2022. The increase for both periods was driven by

the change in expense allocations between the segments primarily impacting operating expenses, higher on-premises subscription revenue, lower research and development expense, and lower amortization as a result of the Dealflo intangible asset impairment in 2022. The increase was partially offset by higher personnel costs, asset impairments, and freight costs.

### Interest income, net

*(In thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Interest income, net | $585 | $35 | $1,088 | $18 |

Interest income, net was $0.6 million for the three months ended June 30, 2023 compared to interest income, net of less than $0.1 million for the three months ended June 30, 2022. Interest income, net was $1.1 million for the six months ended June 30, 2023 compared to interest income, net of less than $0.1 million for the six months ended June 30, 2022. The increase in interest income is related to higher interest rates.

### Other Income (Expense), net

*(In thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Other income (expense), net | $29 | $(675) | $(11) | $14,972 |

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 and six months ended June 30, 2023 was less than $0.1 million. Other income (expense), net for the three months ended June 30, 2022 of $(0.7) million consisted mostly of exchange losses. Other income (expense), net for the six months ended June 30, 2022 primarily consisted of the $14.8 million gain on sale of our equity-method investment in Promon AS ("Promon").

### Provision for Income Taxes

*(In thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Provision for income taxes | $601 | $472 | $1,290 | $1,645 |

We recorded income tax expense of $0.6 million and $0.5 million for the three months ended June 30, 2023 and 2022, respectively. Higher income tax expense for the three months ended June 30, 2023 was primarily attributable to earnings at subsidiaries without a valuation allowance. We recorded income tax expense of $1.3 million and $1.6 million for the six months ended June 30, 2023 and 2022, respectively. Lower income tax expense for the six months ended June 30, 2023 was primarily attributable to tax on the gain on sale of our investment in Promon recorded during the six months ended June 30, 2022.

### Liquidity and Capital Resources

At June 30, 2023, we had cash balances (total cash and cash equivalents) of $83.1 million. Our cash and cash equivalents balance includes U.S. treasury notes and bills, money market funds, and high quality commercial paper with maturities at acquisition of less than three months.

At December 31, 2022, we had cash balances of $96.2 million and short-term investments of $2.3 million.

The Company is party to lease agreements that require letters of credit to secure the obligations which totaled $0.9 million and $1.1 million at June 30, 2023 and December 31, 2022, respectively. Additionally, the Company maintained a cash guarantee with a payroll vendor in the amount of $0.1 million at both June 30, 2023 and December 31, 2022. The restricted cash related to the letters of credit and the payroll vendor cash guarantee is recorded in "Restricted cash" on the condensed consolidated balance sheets.

As of June 30, 2023, we held $43.2 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $42.6 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)*

| Cash provided by (used in): | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | $(6,390) | $(11,284) |
| Investing activities | (5,975) | 32,560 |
| Financing activities | (1,546) | (6,443) |
| Effect of foreign exchange rate changes on cash and cash equivalents | 624 | (631) |

### Operating Activities

Cash used in operating activities primarily consists of net income (loss), as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of 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 and payment of expenditures. 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 increases in personnel costs as we grow our business.

For the six months ended June 30, 2023, $6.4 million of cash was used in operating activities. This was driven by a decrease in our accounts receivable balance during the period, partially offset by a decrease in deferred revenue and an increase in inventories, net. For the six months ended June 30, 2022, $11.3 million of cash was used in operating activities.

Our working capital at June 30, 2023 was $62.6 million compared to $87.6 million at December 31, 2022. The decrease was driven by a lower accounts receivable balance and a lower deferred revenue balance, partially offset by a higher inventory balance. The decrease was also driven by a $26.1 million net loss for the six months ended June 30, 2023 which resulted primarily from increased investments in our sales, marketing and executive leadership functions as we continue to execute our multiyear transformation plan.

### 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, 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 six months ended June 30, 2023, net cash used in in investing activities was $6.0 million, compared to net cash provided by investing activities of $32.6 million for the six months ended June 30, 2022. Cash used in investing activities consisted of additions to property and equipment, net, and the purchase of ProvenDB. Cash usage during the period was partially offset by the maturity of our entire short-term investments balance. For the six months ended June 30, 2022, net cash provided by investing activities consisted of the $18.9 million sale of our investment in Promon and maturities of short-term investments.

### Financing Activities

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

Cash of $1.5 million used in financing activities during the six months ended June 30, 2023 was attributable to tax payments for stock issuances. Cash of $6.4 million used in financing activities during the six months ended June 30, 2022 was attributable to repurchases of common stock and tax payments for stock issuances.

### 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 June 30, 2023, we reported ARR of $144.4 million, which was 8% higher than ARR of $134.3 million at June 30, 2022. Changes in foreign exchange rates during the six months ended June 30, 2023 as compared to the prior year negatively impacted ARR by approximately $1.9 million. ARR growth was primarily driven by an increase in subscription contracts, offset by foreign exchange rate impacts and the same factors that affected NRR, as discussed below.

### 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. The Company’s 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 106% and 116% at June 30, 2023 and 2022, respectively. Year-over-year, NRR was impacted by foreign exchange rate impacts, longer sales cycles, timing related to contract renewals, a small number of lost contracts in 2022, and our decision to discontinue certain product portfolio offerings.

### Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, amortization, long-term incentive compensation, 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, impairment of intangible assets, 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, 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 (loss) as reported on our condensed consolidated statements of operations to Adjusted EBITDA:

*(In thousands)*

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net loss | $(17,751) | $(9,350) | $(26,107) | $(4,136) |
| Interest income, net | (585) | (35) | (1,088) | (18) |
| Provision for income taxes | 601 | 472 | 1,290 | 1,645 |
| Depreciation and amortization of intangible assets (1) | 1,516 | 1,946 | 2,835 | 4,043 |
| Long-term incentive compensation (2) | 4,571 | 1,277 | 8,494 | 2,501 |
| Restructuring and other related charges | 5,846 | 2,688 | 6,552 | 5,347 |
| Other non-recurring items (3) | 1,974 | 1,462 | 2,559 | (10,682) |
| Adjusted EBITDA | $(3,828) | $(1,540) | $(5,465) | $(1,300) |

*(1) Includes depreciation and amortization expense directly related to generating cloud subscription revenue of $0.1 million and $0.3 million for the three and six months ended June 30,2023, respectively, and $0 for the three and six*

*months ended June 30, 2022. Costs are recorded in Cost of service and other revenue.*

*(2) Long-term incentive compensation includes immaterial expense for 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 expense associated with these cash incentive grants was $0.1 million and less than $0.1 million for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and less than $0.1 million for the six months ended June 30, 2023 and 2022, respectively.*

*(3) For the three months ended June 30, 2023, other non-recurring items consist of $1.6 million of inventory impairment charges and $0.4 million of fees related to non-recurring projects.*

*For the three months ended June 30, 2022, other non-recurring items consist of outside services related to our strategic action plan.*

*For the six months ended June 30, 2023, other non-recurring items consist of $1.6 million of inventory impairment charges and $1.0 million of fees related to non-recurring projects and our acquisition of ProvenDB.*

*For the six months ended June 30, 2022, other non-recurring items include a $(14.8) million non-operating gain on sale of our investment in Promon and $4.2 million of outside services related to our strategic action plan.*

Adjusted EBITDA for the three months ended June 30, 2023 was $(3.8) million compared to $(1.5) million for the three months ended June 30, 2022. Adjusted EBITDA for the six months ended June 30, 2023 was $(5.5) million compared to $(1.3) million for the six months ended June 30, 2022. The decrease for both periods was driven by higher operating expenses as we increased investments in our sales and marketing function to drive top line growth, as well as by higher compensation in our executive team due to 2022 executive hires, both in connection with our business transformation.

Year-over-year changes in foreign exchange rates favorably impacted Adjusted EBITDA by approximately $0.2 million for the three months ended June 30, 2023 and negatively impacted Adjusted EBITDA by approximately $0.9 million for the six months ended June 30, 2023.

### 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, 2022 and Note 2, *Summary of Significant Accounting Policies,* to our interim Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the period ended June 30, 2023. We believe our most critical accounting policies include revenue recognition, credit losses, and accounting for income taxes.

## Market risk

As filed, 243 characters.

There have been no material changes in our market risk during the three months ended June 30, 2023. For additional information, refer to Part II, Item 7A, *Quantitative and Qualitative Disclosures about Market Risk*, included in our Form 10-K.

## Controls and procedures

As filed, 1,169 characters.

### 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 June 30, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2023, 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 quarter ended June 30, 2023.

## Risk factors

As filed, 2,863 characters.

There were no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023, except as set forth below.

***Our planned cost reduction actions and our restructuring plan originally approved in December 2021 involve numerous risks and may not achieve the results we expect.***

In May 2022, we announced our three-year Strategic Plan, which began on January 1, 2023. During the quarter ended June 30, 2023, we determined that it will take longer than originally expected to achieve the revenue growth levels contemplated by our Strategic Plan. It has been more time consuming than we projected to build our Digital Agreements sales pipeline, generate demand for our Digital Agreements solutions through marketing efforts, and improve our sales force productivity levels. A number of factors have contributed to the challenges achieving the originally planned growth levels on the timeframes set forth in the Strategic Plan, including: macroeconomic uncertainties, 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; and higher pricing aggressiveness from competitors in recent months.

As a result of the additional insights we have gained into our business transformation process, our Board recently approved cost reduction Actions to seek to drive higher levels of adjusted EBITDA while maintaining our long-term growth potential. The Actions are expected to consist primarily of workforce related reductions, with a significantly smaller contribution from vendor contract termination and rationalization actions. Further information about the Actions, including associated expected restructuring charges, can be found in “*Management’s Discussion and Analysis”*. The Actions and our previously adopted restructuring plan may yield unintended consequences and costs, such as: higher than anticipated restructuring charges; disruption to our operations; litigation and regulatory actions; reduced employee morale, attrition of valued employees, and 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. In addition, our ability to complete the Actions and achieve the anticipated benefits from the Actions within the expected time frame or at all is subject to estimates and assumptions and may vary materially from our expectations, including as a result of factors that are beyond our control, such that we may not succeed in achieving all or part of the intended benefits of the Actions.

Filed Aug 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-028665. Last ingested by Listed: Oct 31, 2026, 14:07 ET. No prices; not investment advice.