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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number 000-24389
OneSpan Inc.
(Exact Name of Registrant as Specified in Its Charter)
121 West Wacker Drive, Suite 2050
Chicago, Illinois60601
(Address of Principal Executive Offices)(Zip Code)
Registrant’s telephone number, including area code:
312-766-4001
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of exchange on which registered
Common Stock, par value $.001 per share OSPN NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the act. Yes ☐No☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2021, the aggregate market value of voting and non-voting common equity (based upon the last sale price of the common stock as reported on the NASDAQ Capital Market on June 30, 2021) held by non-affiliates of the registrant was $1,025,956,051 at $25.54 per share.
As of February 18, 2022, there were 40,001,425 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant’s Notice of Annual Meeting of Stockholders and Proxy Statement for its 2022 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
Auditor Name: KPMG LLP Auditor Location: Chicago, IL Auditor Firm ID: 185
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 29
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Mine Safety Disclosures 30
PART II
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48
Item 8. Financial Statements and Supplementary Data 48
Item 9A. Controls and Procedures 49
PART III
Item 10. Directors, Executive Officers and Corporate Governance 53
Item 11. Executive Compensation 53
Item 14. Principal Accounting Fees and Services 54
PART IV
Item 15. Exhibits, Financial Statement Schedules 54
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE F-1
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Forward Looking Statement
This Annual Report on Form 10-K contains forward-looking statements within the meaning of applicable U.S. securities laws, including statements regarding the potential benefits, performance and functionality of our products and solutions, including future offerings; our expectations, beliefs, plans, operations and strategies relating to our business and the future of our business; our strategic plans regarding our portfolio, including acquisitions and dispositions; and our expectations regarding our 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: market acceptance of our products and solutions and competitors’ offerings; the potential effects of technological changes; the impact of the COVID-19 pandemic and actions taken to contain it; disruption in global transportation and supply chains; our ability to effectively manage acquisitions, divestitures, alliances, joint ventures and other portfolio actions; the execution of our transformative strategy on a global scale; the increasing frequency and sophistication of cybersecurity attacks; claims that we have infringed the intellectual property rights of others; changes in customer requirements; price competitive bidding; changing laws, government regulations or policies; pressures on price levels; investments in new products or businesses that may not achieve expected returns; 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 those factors described in the “Risk Factors” section of this 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-K, except as required by law.
Unless otherwise noted, references in this Annual Report on Form 10-K to “OneSpan”, “Company”, “we”, “our”, and “us” refer to OneSpan Inc. and its subsidiaries.
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PART I
Item 1 – Business
Overview
OneSpan Inc. and its wholly owned subsidiaries design, develop and market digital solutions for identity, security, and business productivity that protect and facilitate electronic transactions via mobile and connected devices. We are a global leader in digital identity and anti-fraud solutions to financial institutions and other businesses. We establish trust in people’s identities, the devices they use, and the transactions they execute. We make digital banking accessible, secure, easy, and valuable. Our solutions secure access to online accounts, data, assets, and applications for global enterprises; provide tools for application developers to easily integrate security functions into their web-based and mobile applications; and facilitate end-to-end financial agreement automation. Our solutions enhance the ability of companies to onboard new customers and prevent hacking attacks against online and mobile transactions while providing an exceptional experience for remote customers.
We offer cloud based and on-premises solutions using both open standards and proprietary technologies. Some of our proprietary technologies are patented. Our products and services are used for a wide range of use cases including e-signing Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and Business-to-Consumer (“B2C”) agreements, delivering passwordless authentication experiences, mitigating fraud, authorizing financial transactions, and achieving regulatory compliance.
Online and mobile application owners and publishers benefit from our expertise in multi-factor authentication, document signing, transaction signing, application security, remote customer onboarding, and in mitigating hacking attacks. Our convenient and proven security solutions enable low friction and trusted interactions between businesses, employees, and consumers across a variety of online and mobile platforms.
Our primary growth objectives include:
● Making digital banking more accessible, secure, easy and valuable;
● Increasing sales to existing customers and acquiring new customers;
● Expanding our channel partner ecosystem; and
Impact of COVID-19 pandemic
We continue to actively address the effects of the COVID-19 pandemic and its impact globally. Due to economic uncertainty connected to the COVID-19 pandemic, we have experienced lengthened sales cycles and reduced demand for some of our security solutions.
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In the current and future periods, we may experience weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results.
As we cannot predict the duration or scope of the pandemic or its impact on the economy, financial markets and our customers, any negative impact to our results cannot be reasonably estimated, but it could be material. We continue to closely monitor the Company’s financial health and liquidity and the impact of the pandemic on the Company. We are able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. See Part I – Item 1A – Risk Factors of this Form 10-K for additional information regarding the potential impact of COVID-19 on the Company.
Industry Background
Rapid global growth in cloud and mobile banking transactions is driving increased demand for multi-channel security solutions and enhanced user experiences across the financial services industry. Similarly, increasing remote corporate access of important resources by employees, business partners and customers is introducing new security risks for participants. Large and powerful criminal hacking organizations are launching more sophisticated hacking attacks with greater frequency. The criminal activities of private and state-sponsored hacking organizations have driven an increased need for security solutions and expansion of regulations requiring improved security measures to protect against hacking attacks and breaches. Several governments worldwide have issued specific recommendations either requiring or advocating multi-factor authentication and other security measures to improve the security of remote banking transactions. We believe these global trends have been accelerated by the pandemic and will continue and that the market for authentication, anti-fraud, and e-signature solutions will continue to grow driven by growth in digital banking transactions, digital commerce, work-from-home corporate access requirements, growing awareness of the impact of cyber-crime, and new government regulations.
Our Background
Our predecessor company, VASCO Corp., entered the data security business in 1991 through the acquisition of a controlling interest in ThumbScan, Inc., which we renamed as VASCO Data Security, Inc.
In 1996, we expanded our computer security business by acquiring Lintel Security NV/SA, a Belgian corporation, which included assets associated with the development of security tokens and security technologies for personal computers and computer networks. Also in 1996, we acquired Digipass NV/SA, a Belgian corporation, which was also a developer of security tokens and security technologies. In 1997, the acquired entity was renamed VASCO Data Security NV/SA.
In 1997, VASCO Data Security International, Inc. was incorporated and in 1998, we completed a registered exchange offer with the holders of the outstanding securities of VASCO Corp., becoming a publicly traded company.
In 2006, we opened our international headquarters in Zurich, Switzerland.
In 2013, we acquired Cronto Limited (“Cronto”), a provider of secure visual transaction authentication solutions for online banking.
In 2014, we acquired Risk IDS, a provider of risk analysis solutions to the banking community.
In 2015, we acquired Silanis Technology Inc., a leading provider of electronic signature (e-signature) and digital transaction solutions used to electronically sign, send, and manage documents. The solution is sold under the OneSpan Sign (formerly eSignLive) name and is trusted by many of the largest banks, insurers, and government agencies.
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In May 2018, we acquired Dealflo Limited, a leading provider of identity verification and end-to-end financial automation solutions.
Also in May 2018, VASCO Data Security international, Inc. changed its name to OneSpan Inc. The Company’s name change reflects a shift in our strategy and solution offerings.
Including our predecessor companies, we have engaged in sixteen acquisitions and two dispositions.
Our Products and Services Portfolio
Digital Agreements
OneSpan Sign supports a broad range of e-signature requirements from simple to complex, and from the occasional agreement to processing tens of thousands of transactions. OneSpan Sign provides multiple deployment options including public cloud, private cloud, or on-premises without compromising security or functionality. The solution is also available in a Federal Risk and Authorization Management Program (FedRAMP) SaaS-level compliant cloud, allowing U.S. government agencies to implement e-signatures in the cloud and meet GSA security requirements.
Customers can configure OneSpan Sign to reinforce their brand for a seamless signing experience. Each step of the digital agreement workflow can be customized, from authentication to e-signing and secure storage. OneSpan Sign also provides comprehensive and secure electronic evidence for strong legal protection by capturing all actions that took place during the agreement process. This reduces the time and cost of gathering evidence and demonstrating legal and regulatory compliance. Electronic signature capabilities can be a critical component of the account opening and onboarding processes, providing a secure and user-friendly way to execute legally binding agreements.
The OneSpan Sign Virtual Room option adds videoconferencing and collaboration capabilities to OneSpan Sign to support human-mediated agreement processes. This helps businesses deliver secure, interactive experiences for complex agreements that require human assistance.
Digital Identity & Authentication
OneSpan Cloud Authentication is a quick-to-deploy, cloud-based multifactor authentication solution that supports a full range of authentication options including biometrics, push notification, visual cryptograms for transaction data signing, SMS and hardware authenticators. It eliminates cost associated with managing legacy on-premises authentication technology and provides a seamless upgrade path to more comprehensive capabilities such as Intelligent Adaptive Authentication, which applies a precise level of security for each unique customer interaction using advanced real-time risk analysis and scoring.
Mobile Security Suite is a comprehensive software development kit that allows application developers to natively integrate security features including geolocation, device identification, jailbreak and root detection, fingerprint and face recognition, one-time password delivery via push notification, and electronic signing, among others. Through a comprehensive library of APIs, application developers can extend and strengthen application security, deliver enhanced convenience to their application users, and streamline application deployment and lifecycle management processes. Mobile Security Suite also includes a Runtime Application Self-Protection module, which can detect and mitigate malicious app activity and potential loss to hacking activities.
Mobile Authenticator Studio is a user-friendly and secure mobile authenticator that operates as a discrete mobile application. It includes many of the features of the Mobile Security Suite and can easily be tailored to meet the needs of numerous authentication processes. It can be customized and deployed rapidly without extensive technical support ensuring strong security with compelling value.
Mobile App Shielding protects a mobile banking app from the inside out. It allows the app to securely operate even in potentially hostile environments, such as jailbroken or rooted devices – and only deny service when necessary.
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OneSpan Identity Verification gives banks and other financial institutions access to a wide range of identity verification services – all through a single API integration. This includes identity document (e.g., driver’s license, passport, etc.) capture and real-time authenticity verification, as well as facial comparison (“selfie”) and liveness detection to establish that the individual presenting the identity document is the same person whose picture appears on the authenticated identity document.
Authentication Server resides on-premises and incorporates a range of strong authentication utilities and solutions designed to allow organizations to securely authenticate users and transactions. The solution, once integrated, becomes largely transparent to users, minimizing rollout and support issues. Authentication Server encompasses multiple authentication technologies (e.g., passwords, dynamic password technologies, certificates, and biometrics) and allows the use of any combination of those technologies simultaneously.
We also offer a wide variety of hardware authenticators, each of which has its own distinct characteristics to meet the needs of our customers. All models of the Digipass family of authenticators are designed to work together so customers can switch devices without changes to their existing infrastructure. Our models range from one-button devices and smart card readers to devices that include more advanced technologies, such as public key infrastructure (“PKI”) and visual cryptography.
Intellectual Property and Proprietary Rights and Licenses
We rely on a combination of patent, copyright, trademark, design, and trade secret laws, as well as employee and third-party non-disclosure agreements to protect our proprietary rights. In particular, we hold several patents in the U.S. and in other countries, which cover multiple aspects of our technology. These patents expire between now and more than 10 years from now. In addition to the issued patents, we also have several patent applications pending in the U.S., Europe, and other countries. The majority of our issued and pending patents cover our Digipass product line. We believe these patents to be valuable property rights and we rely on the strength of our patents and on trade secret law to protect our proprietary technology. We furthermore have registrations for most of our trademarks in most of the markets where we sell the corresponding products and services and registrations of the designs of many of our hardware products primarily in the EU and China. To the extent that we believe our intellectual property rights are being infringed upon, we intend to assert vigorously our intellectual property rights, including but not limited to, pursuing all available legal remedies.
Research and Development
Our research and development efforts historically have been, and will continue to be, concentrated on solution enhancement, new technology development, and related new software introductions. We employ a team of full-time engineers and, from time to time, also engage independent engineering firms to conduct non-strategic product development efforts on our behalf. For fiscal years ended December 31, 2021, 2020, and 2019, we incurred expenses of $47.4 million, $41.2 million, and $42.5 million, respectively, for research and development.
Production
Our Digipass security hardware products are manufactured by third party manufacturers pursuant to purchase orders that we issue. Our hardware Digipass products are made primarily from commercially available electronic components purchased globally. Our software solutions are produced in-house or developed by third parties and sold under license.
Hardware Digipass products utilize commercially available programmable microprocessors purchased from several suppliers. The microprocessors are the most important components of our security authenticators that are not commodity items readily available on the open market. Some microprocessors are single sourced. Orders of microprocessors generally require a lead-time of 12-16 weeks. We attempt to maintain a sufficient inventory of all parts to handle short-term increases in orders.
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Large orders that would significantly deplete our inventory are typically required to be placed with more than twelve weeks of lead-time, allowing us to make appropriate arrangements with our suppliers. We purchase microprocessors and arrange for shipment to third parties for assembly and testing in accordance with our design specifications. The majority of our Digipass products are manufactured by four independent factories in Southern China and one in Romania. Purchases are made on a volume purchase order basis. We supply product test equipment at the point of assembly. We maintain local teams in China and Romania to conduct quality control and quality assurance procedures. Periodic visits are conducted by our personnel for quality management, assembly process review, and supplier relations.
The COVID-19 pandemic resulted in a temporary closure of some component suppliers and third party manufacturers, and a reduction in global marine and to some degree air transportation capacity. Adjustments to our supply chain, manufacturing and transportation workflow processes have enabled us to meet customer delivery requirements.
Competition
The market for digital solutions for identity, security, and business productivity solutions is very competitive and, like most technology-driven markets, is subject to rapid change and constantly evolving solutions and services. Our anti-fraud products are designed to allow authorized users access to a computing environment or application, in some cases using patented technology, as a replacement for or supplement to a static password. Although certain of our security technologies are patented, there are other organizations that offer anti-fraud solutions that compete with us for market share. Our main competitors in our anti-fraud markets are Gemalto, a subsidiary of Thales Group, and RSA Security. There are many other companies, such as Transmit Security, Yubico, Symantec, Forgerock and Early Warning that offer competing services. In addition to these companies, we face competition from many small authentication solution providers, many of whom offer new technologies and niche solutions such as biometric or behavioral analysis. We believe that competition in this market is likely to intensify as a result of increasing demand for security products. Our primary competitors for electronic signature solutions include DocuSign and Adobe Systems. Both companies are significantly larger than us. In addition to these companies, there are dozens of smaller and regional providers of electronic signing solutions.
We believe that the principal competitive factors affecting the market for digital solutions for identity, security, and business productivity, as well as electronic signatures include the strength and effectiveness of the solution, technical features, ease of use, quality and reliability, customer service and support, brand recognition, customer base, distribution channels, and the total cost of ownership of the solution. Although we believe that our products currently compete favorably with respect to such factors, there can be no assurance that we can maintain our competitive position against current and potential competitors.
Some of our present and potential competitors have significantly greater financial, technical, marketing, purchasing, and other resources. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of products, or to deliver competitive products at a lower end-user price. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. It is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Accordingly, we have forged, and will continue to forge, our own partnerships to offer a broader range of products and capabilities to the market.
Sales and Marketing
Our solutions are sold worldwide through our direct sales force as well as through distributors, resellers, systems integrators, and original equipment manufacturers. Our sales staff coordinates sales activity through both our sales channels and those of our partners making direct sales calls either alone or with the sales personnel of our partners. Our sales staff also provides product education seminars to sales and technical personnel of resellers and distributors with whom we have working relationships and to potential end-users of our products.
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We offer customers a choice between SaaS, private cloud, and traditional on-premise software deployments.
Part of our expanded selling effort includes finding additional applications for our products. In addition, our marketing plan calls for the identification of new business opportunities that may require enhanced security or areas where we do not currently market our products.
Customers and Markets
We generally focus our sales and marketing efforts in three primary areas. The first is financial institutions where the majority of our revenue is derived. This segment includes traditional banks, credit unions, and online-only banks. We also sell to the enterprise market segment and the government, healthcare and insurance market segments in select regions around the globe. We believe there are substantial opportunities for future growth in the market segments we serve as we expand our product portfolio of digital agreement and digital identity and authentication solutions.
Our top 10 customers contributed 22%, 21%, and 29%, in 2021, 2020, and 2019, respectively, of total worldwide revenue.
A significant portion of our sales is denominated in foreign currencies and changes in exchange rates impact results of operations. To mitigate exposure to risks associated with fluctuations in currency exchange rates, we attempt to denominate an amount of billings in a currency such that it would provide a hedge against operating expenses being incurred in that currency. For additional information regarding how currency fluctuations can affect our business, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk.”
We also experience seasonality or variation across the year in our markets. These trends can include lower sales during the summer months, particularly in EMEA.
Financial Information Relating to Foreign and Domestic Operations
For financial information regarding OneSpan, see our Consolidated Financial Statements and the related Notes, which are included in this Annual Report on Form 10-K. We have a single operating segment for all our products and operations. See Note 17 in the Notes to Consolidated Financial Statements for a breakdown of revenue, gross profit and long-lived assets between the U.S. and other regions.
Government Regulation
As a global cybersecurity company, we are subject to complex and evolving global regulations in the various jurisdictions in which our products and services are used. The most significant government regulations that impact our business are discussed below. For further discussion of how global regulations may impact our business, see Item 1A – Risk Factors.
We are subject to anti-corruption laws and regulations, including the U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and other laws that generally prohibit the making or offering of improper payments to foreign government officials and political figures for the purpose of obtaining or retaining business or to gain an unfair business advantage.
In addition, we are subject to economic and trade sanctions programs administered by the Office of Foreign Assets Control (OFAC) in the U.S. Therefore, we do not permit financial institutions or entities that are domiciled in countries or territories subject to comprehensive OFAC trade sanctions (currently, Cuba, Iran, North Korea, Syria and Crimea), or that are included on OFAC’s list of Specially Designated Nationals and Blocked persons, to purchase OneSpan products and services or engage in transactions using our services.
The European General Data Production Regulation (GDPR) took effect in May 2019 and applies to certain of our products and services used by customers in Europe. The GDPR includes operational requirements for companies that
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receive or process personal data of residents of the European Union that are different from those previously in place in the European Union, and includes significant penalties for non-compliance. Other jurisdictions, such as Canada and Australia have enacted data privacy or data protection laws. As these laws continue to emerge in the countries where we or our customers operate, we need to analyze each of them to determine the applicability to our corporate operations and the applicability to our solutions and customers.
We are subject to the Restriction on the Use of Hazardous Substances Directive 2002/95/EC (also known as the “RoHS Directive”) and the Waste Electrical and Electronic Equipment Directive (also known as the “WEEE Directive”). These directives restrict the distribution of products containing certain substances, including lead, within applicable geographies and require a manufacturer or importer to recycle products containing those substances. These directives affect the worldwide electronics and electronics components industries as a whole.
Because banking and financial services is our largest industry target market, the government regulations affecting our customers in this area have a significant indirect effect on our business. For example, regulatory changes in Europe to promote a more open and connected digital banking ecosystem create compliance needs for our customers as well as market opportunities for those market participants that move to capitalize on these changes. Similar regulatory dynamics occur in the other primary markets where we have customers, such as healthcare and government. Additional proposed or new legislation and regulations could also significantly affect our business.
Human Capital
OneSpan’s values focus on developing and maintaining a world class innovative workforce through collaboration, accountability, transparency, and speed. Our talented teams are carefully managed to ensure retention and ability to sustain business performance with an eye toward the future.
Our talent management and succession plan process at OneSpan includes the identification of key positions based on current and future business strategies, the identification of potential successors, and a plan for talent development. In addition to deep technical and skill development opportunities that enable OneSpan to foster employee engagement, we conduct extensive compliance-related training which is completed by all employees annually. Our managers of people are offered a variety of leadership development modules. Moreover, all employees are empowered to lead from any seat.
OneSpan strives to offer competitive base and variable pay programs. We use market benchmarks to ensure external competitiveness while maintaining internal value or equity within the organization. Our short-term and long-term incentive plans are designed to provide a variable pay opportunity to reward the attainment of key financial and operational goals and shareholder value creation. The mix among base compensation, short-term incentives and long-term incentives is designed to align with the competitive market.
OneSpan is committed to fostering, cultivating, and preserving a culture of diversity, equality and inclusion. Our vision is to embrace an inclusive and engaged culture that drives a sense of belonging and respects and celebrates our differences. In addition, we have an evolving program and sets of policies and procedures regarding corporate social responsibility, privacy, compliance and security. We believe these issues are important not only to our customers and investors, but also to our employees. Certain highlights on these matters are presented publicly on our website onespan.com under the About Us section.
As of December 31, 2021, we had 879 total employees, including 463 located in the Americas, 381 located in EMEA (Europe, the Middle East and Africa), and 35 located in Asia Pacific. Of the total employees, 367 were involved in sales, marketing, operations, and customer support, 373 in research and development and 139 in general and administration.
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Item 1A - Risk Factors
You should carefully consider the following risk factors, which we consider the most significant, as well as other information contained in this Annual Report on Form 10-K. In addition, there are a number of less significant and other general risk factors that could affect our future results. If any of the events described in the risk factors were to occur, our business, financial condition or operating results could be materially and adversely affected. We have grouped our Risk Factors under captions that we believe describe various categories of potential risk. For the reader’s convenience, we have not duplicated risk factors that could be considered to be included in more than one category.
Summary of Risk Factors
We are providing the following summary of the risk factors contained in this Form 10-K to enhance the readability and accessibility of our risk factor disclosures. We encourage our stockholders to carefully review the full risk factors contained in this Form 10-K in their entirety for additional information regarding the risks and uncertainties that could cause our actual results to vary materially from recent results or from our anticipated future results.
Risks Related to our Business
● We have a long operating history, but only modest accumulated profit.
● We derive revenue from a limited number of products.
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Risks Related to the Market
Risks Related to Technology and Intellectual Property
● Our patents may not provide us with competitive advantages.
● We are subject to warranty and product liability risks.
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Risks Related to International Operations
Risks Related to Our Business
While we believe the coronavirus may have a negative impact on our financial results, the impact is difficult to assess at this time.
The effects of the COVID-19 pandemic and its variations have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. A significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the broader economies, financial markets and overall demand environment for our products.
As a result of the COVID-19 pandemic, we temporarily closed our offices in March 2020 (including our corporate headquarters) in many countries except where we have been able to accommodate limited essential employees such as for the shipping of our hardware authentication tokens under revised procedures. Subsequently, certain geographies have experienced progress and regression in addressing the pandemic, including the distribution of vaccines, and therefore progress has been uneven and difficult to predict. We re-opened a limited number of our offices during 2020 and continued to date with limited capacity under revised procedures. We are unable to predict further re-openings or whether the initial re-openings will be successful or remain in place. We implemented certain travel restrictions, remote work arrangements and other measures and while our experience with this new situation has been mostly satisfactory to date, it has disrupted how we normally operate our business and may in the longer term impact our productivity, innovation and effectiveness such that our results are adversely affected. We have shifted customer events
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to virtual-only experiences and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Because we operate in multiple international locations, we expect there to be variability and additional complications from differing conditions and inconsistent guidance from numerous public health agencies.
In our hardware business, we are exposed to specific risks related to manufacturing, supply chain, shipping and distribution- all of which have been impacted by the COVID-19 pandemic. As a result of COVID-19, we have experienced, and may continue to experience, delays and increased costs related to fulfilling our hardware orders. Such issues have been managed however continuing disruptions in global transportation means we may be unable to satisfy certain customer orders for our products in the future if orders substantially increase and/or further supply chain problems emerge. In order to meet our customers’ needs, we have and may continue to incur increased costs which reduce our margins. In addition, the global economic uncertainty associated with the COVID-19 pandemic has affected many of our customers differently and we believe those effects may include changes to ordering of hardware authentication tokens, mobile authentication software and delays in implementing certain security software projects. We are not able to predict at this time whether the COVID-19 pandemic will continue to affect ordering patterns, and to what extent such orders may return or in what specific quantities. This risk is in addition to the other risks associated with our business as stated elsewhere in “Risk Factors.”
In our software business, we experienced some increased sales for products used in remote employee access and electronic signature in 2020 that we attribute in part to the COVID-19 pandemic. This increase may have been temporary, and we are unable to predict whether it will continue or decline. Moreover, the conditions caused by the COVID-19 pandemic can affect the rate of IT spending, the decision to start new IT projects, the timing of existing projects and the priority our customers place on various projects. While these factors may be positive for some of our software solutions such as electronic signature, these factors may be negative for our other software solutions. The COVID-19 pandemic could adversely affect our customers’ ability or willingness to attend our events or to purchase our offerings, delay prospective customers’ purchasing decisions, adversely impact our ability to provide on-site sales meetings or professional services to our customers, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of their contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance. During the Summer of 2020, we began to experience some of the aforementioned scenarios, and this continued through the present, due in part to, we believe, global economic uncertainty connected with the continued seriousness of the COVID-19 pandemic. While we hope that the negative consequences on our business associated with the COVID-19 pandemic will subside, we cannot predict the impact with certainty.
If the restrictions on our employees, customers and others in the world continue or increase in order to limit the spread of COVID-19, the potential effects could continue and could be exacerbated, and our results of operations and overall financial performance may be harmed. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity, new strains and transmission rate of the virus, the extent and effectiveness of containment actions and vaccines, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.
A significant portion of our sales are to a limited number of customers. The loss of substantial sales to any one of them could have an adverse effect on revenues and profits.
We derive a substantial portion of our revenue from a limited number of customers, many of which are financial institutions. The loss of substantial sales to any one of them could adversely affect our operations and results. In fiscal 2021, 2020, and 2019, our top 10 largest customers contributed 22%, 21%, and 29%, respectively, of total worldwide revenue.
The return of a worldwide recession and/or regional economic downturns may further impact our business.
Our business is subject to economic conditions that may fluctuate in the major markets in which we operate. Factors that could cause economic conditions to fluctuate include, without limitation, recession, inflation, deflation,
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interest rates, unemployment, consumer debt levels, general retail or commercial markets and consumer or business purchasing power or preferences.
If global economic and financial market conditions remain uncertain and/or weak for an extended period of time, any of the following factors, among others, could have a material adverse effect on our financial condition and results of operations:
We are unable to predict potential future economic conditions, disruptions in the sovereign debt markets or other financial markets, regional recessions, or the effect of any such disruption or disruptions on our business and results of operations, but the consequences may be materially adverse. We believe that our business in the banking and financial services market in Europe would be impacted most directly by any such disruption and that the consequences may be materially adverse, as approximately 49% of our consolidated revenues originated in the EMEA region in 2021.
Disruptions in markets or the European Union may affect our liquidity and capital resources.
We believe our financial resources are adequate to meet our operating needs. However, disruptions in the sovereign debt markets or other financial markets, the Euro Monetary Union or the European Union, could materially adversely affect our liquidity and capital resources and expose us to additional currency fluctuation risk. Sufficiently adverse effects could cause us to modify our business plans.
Furthermore, in an adverse economic environment there is a risk that customers may delay their orders until the economic conditions improve further. If a significant number of orders are delayed for an indefinite period of time, our revenue and cash receipts may not be sufficient to meet the operating needs of the business. If this is the case, we may
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need to significantly reduce our workforce, sell certain of our assets, enter into strategic relationships or business combinations, discontinue some or all of our operations, or take other similar restructuring actions. While we expect that these actions would result in a reduction of recurring costs, they also may result in a reduction of recurring revenue and cash receipts. It is also likely that we would incur substantial non-recurring costs to implement one or more of these restructuring actions.
We could incur substantial accounting related costs if we are unable to maintain an effective system of internal control over financial reporting.
In response to the material weakness in our internal control over financial reporting disclosed as of December 31, 2019, we expended significant resources to improve our internal control over financial reporting and the effectiveness of our disclosure controls and procedures. We expended significant resources, including accounting related costs and significant management oversight as we corrected the deficiencies. Management has determined that full remediation of the prior deficiencies in internal control over financial reporting that led to this material weakness occurred, disclosed in Item 9A of the annual report on Form 10-K for the year ended December 31, 2020. Investments will continue to be made to improve the control environment.
We cannot provide absolute assurance that additional material weaknesses, or significant deficiencies, in our internal controls will not be identified in the future. Failure to maintain effective controls or implement new or improved controls could result in significant deficiencies or material weaknesses, affect management evaluations and auditor attestations regarding the effectiveness of our internal controls, failure to meet periodic reporting obligations, and material misstatements in our financial statements. Material misstatement of our financial statements may result in a restatement, loss of investor and customer confidence, a decline in the market price of the Company’s common stock, and potential sanctions or investigations by NASDAQ, the Securities and Exchange Commission or other regulatory authorities. Failure to remedy any material weakness in the Company’s internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict the Company’s future access to the capital markets.
We have a long operating history, but only modest accumulated profit.
Although we have reported net income (loss) of $(30.6) million, $(5.5) million, and $7.9 million for the years ended December 31, 2021, 2020, and 2019, respectively, our retained earnings were $143.2 million at December 31, 2021. Over our approximately 30 year operating history, we have operated at a loss for many of those years. Depending on the economic environment’s changing conditions, business volatility, applicable rules and regulations, and our investment strategies, it may be difficult for us to sustain profitability on a GAAP basis. We may choose to invest for long term value which could decrease or eliminate short-term profit. We have now operated at a net loss for two years in a row and we cannot predict with certainty whether this will change in the future.
We derive revenue from a limited number of products.
A significant portion of our revenue is derived from the sales of our legacy authentication hardware, software, and related services. We anticipate a substantial portion of future revenue, will be derived from the same. If the sale of these products and services is impeded for any reason and we have not diversified our offerings into more products or markets, our business and results of operations would be negatively impacted. Further, we expect the growth of our hardware product sales to be minimal or negative over the long term in our traditional markets. If the rate of decline is more than expected and the aforementioned diversification is not enough to offset the decline, our results could be uneven and overall could be negative.
The sales cycle for our products and technology is often long, and we may incur substantial expenses for sales that do not occur when anticipated.
The sales cycle for our products, which is the period of time between the identification of a potential customer and completion of the sale, is typically lengthy and subject to a number of significant risks over which we have little control. If revenue falls significantly below anticipated levels, our business would be seriously harmed.
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A typical sales cycle in the financial services market is often six months or more. Larger banking transactions may take up to 18 months or more. Purchasing decisions for our products and services may be subject to delays due to many factors that are not within our control, such as:
● Changes to the regulatory framework;
● Significant expense of many security products and systems;
● Customer budgeting process; and
● Customer evaluation, testing and approval process.
As our operating expenses are based on anticipated revenue levels, a small fluctuation in the timing of sales can cause our operating results to vary significantly between periods.
We have a great dependence on a limited number of suppliers and the loss of their manufacturing capability, components and technology could materially impact our operations.
In the event that the supply of components or finished products is interrupted or relations with any of our principal vendors is terminated, there could be increased costs and considerable delay in finding suitable replacement sources to manufacture our hardware products. Our hardware Digipass authentication devices are assembled at facilities located in mainland China and Romania. The importation of these products from China and Romania exposes us to the possibility of product supply disruption and increased costs in the event of changes in the policies of the Chinese government, political unrest or unstable economic conditions in China or developments in the United States or European Union that are adverse to trade, including enactment of protectionist legislation. In 2020, a portion of our hardware products became subject to tariffs. If such tariffs increase in amount or scope, our financial results could be negatively affected. In part to address these risks of manufacturing in mainland China, in 2020 we launched an initiative to establish limited manufacturing in the European Union. At this time, we do not know whether this project will be successful or how much this project could mitigate the risks related to Chinese manufacturing. Regardless of the location of manufacturing, we continue to be exposed to supply chain risks and uncertainties related to disruptions caused by the COVID-19 pandemic. In addition, portions of our software solutions are materially dependent on third parties who supply the underlying technology. Should we lose the ability to utilize such technology, or do so at a commercially reasonable price, our results of operations could be adversely affected.
We order some hardware components, such as processors, in advance of expected use and often produce finished goods prior to the receipt of executed customer orders. If orders are not received, we could suffer losses related to inventory that cannot be sold at full value.
In an attempt to minimize the risk of not having an adequate supply of component parts to meet demand and to take advantage of volume purchasing benefits, especially in situations where we have been notified that key processors will no longer be manufactured or supply chain difficulties emerge, we sometimes purchase multiple years’ supply of parts based on internal forecasts of demand. In addition, to meet customers’ demands for accelerated delivery of product, we sometimes produce finished product for existing customers before we receive the executed order from the customer. Should our forecasts of future demand be inaccurate or if we produce product that is never ordered, we could incur substantial losses related to the realization of our inventory.
Our success depends on establishing and maintaining strategic relationships with other companies to distribute our technology and products and, in some cases, for us to incorporate their technology into our products and services.
Part of our business strategy is to enter into strategic alliances and other cooperative arrangements with other companies in our industry. We currently are involved in cooperative efforts with respect to the incorporation of our products into products of others and vice versa, research and development efforts, marketing efforts and reseller arrangements. These relationships are generally non-exclusive, and some of our strategic partners also have cooperative
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relationships with certain of our competitors. If we are unable to enter cooperative arrangements in the future or if we lose any of our current strategic or cooperative relationships, our business could be harmed. We do not control the time and resources devoted to such activities by parties with whom we have relationships. In addition, we may not have the resources available to satisfy expectations, which may adversely affect these relationships. These relationships may not continue, may not be commercially successful, or may require our expenditure of significant financial, personnel and administrative resources from time to time. Further, certain of our products and services compete with the products and services of our strategic partners.
We may not be able to maintain effective product distribution channels, which could result in decreased revenue.
We rely on both our direct sales force and an indirect channel distribution strategy for the sale and marketing of our products. We may be unable to attract distributors, resellers and integrators, as planned, that can market our products effectively and provide timely and cost-effective customer support and service. There is also a risk that some or all of our distributors, resellers or integrators may be acquired, may change their business models or may go out of business, any of which could have an adverse effect on our business. Further, our distributors, integrators and resellers may sell competing products. The loss of important sales personnel, distributors, integrators or resellers could adversely affect us.
We depend on our key personnel for the success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business or could be negatively perceived in the capital markets.
Our success and our ability to manage our business depend, in large part, upon the efforts and continued service of our senior management team. The loss of one or more of our key personnel could have a material adverse effect on our business and operations. It could be difficult for us to find replacements for our key personnel, as competition for such personnel is often intense. For example, in 2021, our Chief Executive Officer and Chief Financial Officer left the Company. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.
If we fail to continue to attract and retain qualified personnel, our business may be harmed.
Our future success depends upon our ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is often intense and there can be no assurance that we can attract other highly qualified personnel in the future or may be able to do so only at significantly increased compensation. If we cannot retain or are unable to hire such key personnel, our business, financial condition and results of operations could be significantly adversely affected.
Changes in our effective tax rate may have an adverse effect on our results of operations.
Our future effective tax rates may be adversely affected by a number of factors including changes in the volume and mix of earnings and losses in jurisdictions with different statutory rates, changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances, increases in expenses not deductible for tax purposes, including the impairment of goodwill in connection with acquisitions, changes in share-based compensation expense, changes in available tax credits, the resolution of tax audits, adjustments to income taxes upon finalization of returns, and changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles. Any significant increase in our future effective tax rates could adversely impact net income for future periods.
Our worldwide income tax provisions and other tax accruals may be insufficient if any taxing authorities assume taxing positions that are contrary to our positions.
Significant judgment is required in determining our provision for income taxes and other taxes such as sales and VAT taxes. There are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of intercompany agreements to purchase intellectual properties, allocate revenue and costs, determination of permanent establishment and other factors, each of which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although we believe that our approach to determining the amount of
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such arrangements is reasonable, we cannot be certain that the final tax authority review of these matters will not differ materially from what is reflected in our historical income tax provisions and other tax accruals. Such differences could have a material effect on our income tax provisions or benefits, or other tax accruals, in the period in which such determination is made, and consequently, on our results of operations for such period.
Changes in global tax laws or in their interpretation or enforcement, could have a material adverse effect on our effective tax rate, results of operations, cash flows and financial condition.
We could be materially adversely affected by future changes in tax law or policy (or in their interpretation or enforcement) in the jurisdictions where we operate. These changes could be exacerbated by economic, budget or other challenges facing these jurisdictions. For example, foreign jurisdictions could impose tax rate changes along with additional corporate tax provisions that would disallow or tax perceived “base erosion” or profit shifting amongst jurisdictions. In addition, aspects of U.S. tax reform may lead foreign jurisdictions to respond by enacting additional tax legislation that results in an adverse effect on our effective tax rate, results of operations, cash flows and financial condition.
Acquisitions, divestitures and other strategic transactions present many risks, and failure to realize the financial and strategic goals we anticipate could have a material adverse effect on our business, results of operations, cash flows and financial condition.
We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, complementary businesses, technologies, services, products and other assets, divestitures, alliances, joint ventures and other portfolio actions. We also may enter into relationships with other businesses to expand our products and platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies.
Our success depends, in part, upon our ability to identify suitable transactions; negotiate favorable contractual terms; comply with applicable regulations and receive necessary consents, clearances and approvals (including regulatory and antitrust clearances and approvals); integrate or separate businesses, operations technology and personnel; realize the full extent of the benefits, cost savings or synergies presented by strategic transactions; minimize potential losses of customers, business partners and key technical and managerial personnel; and minimize indemnities and potential disputes with buyers, sellers and strategic partners. In addition, execution or oversight of strategic transactions may result in the diversion of management attention from our existing business and may present financial, managerial and operational risks, including disruptions in our business because of the allocation of resources to consummate these transactions. Moreover, we might incur asset impairment charges related to acquisitions or divestitures that reduce our earnings.
With respect to acquisitions in particular, our failure to successfully structure or manage the transactions could seriously harm our financial condition or operating results. The expected benefits of any acquisition may not be realized. In connection with our recent acquisitions and any future purchases, we could face additional financial and operational risks beyond those described above, including: dilution of our stockholders, if we issue equity to fund these transactions; reduced liquidity, increased debt and higher amortization expenses; assumption of operating losses, increased expenses and liabilities; discovery of unanticipated issues and liabilities; failure to meet expected returns; and difficulty in maintaining financial reporting and internal control processes needed to be compliant with requirements applicable to companies subject to SEC reporting.
We also regularly review our portfolio for contributions to our objectives and alignment with our strategy, and we may pursue divestiture activities as a result of these reviews. However, we may not be successful in separating any underperforming or non-strategic assets, and gains or losses on any divestiture of, or lost operating income from, such assets may adversely affect our results of operations. Divestitures could also expose us to unanticipated liabilities or result in ongoing obligations, including transition service obligations and indemnity obligations.
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Reported revenue may fluctuate widely due to the interpretation or application of accounting rules.
Our sales arrangements often include multiple elements, including hardware, services, software, maintenance and support. In addition, we have sold software related arrangements in multiple forms, including perpetual licenses, term-based licenses and SaaS subscriptions, each of which may be treated differently under accounting rules. The accounting rules for such arrangements are complex and subject to change from time to time. The nature of the arrangement can create variations in the timing of revenue recognition.
Provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with customers, solution partners and channel partners generally include provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for damages caused by us to property or persons or for other damages. In addition, we make certain representations and warranties and incur obligations under our contracts in the ordinary course of business, including for items related to data security and potential data privacy breaches. Not all of our potential losses under our contracts are covered by insurance policies, which could increase the impact of any such loss should it occur. Large indemnity payments or damages resulting from our contractual obligations could harm our business, operating results and financial condition.
The evolution of our business requires more complex development and go-to-market strategies, which involve significant risk.
Our increasing focus on developing and marketing a platform of solutions for identity management, authentication, risk analysis, fraud detection, digital business processes and related areas requires different development and go-to-market strategies than our historic hardware authentication business. We are developing, buying and licensing technology weighted toward software solutions and investment in research, development, product management, sales training and senior management. This transformation strategy has been in process for multiple years and currently continues and brings with it significant risks related to our choice of solutions and our ability to execute the strategy successfully. This strategy requires a greater focus on marketing and selling product suites and software solutions rather than selling hardware products for authentication and transaction signing. Consequently, we are developing, and must continue to develop, new strategies for marketing and selling our offerings. In addition, marketing and selling new solutions to enterprises requires significant investment of time and resources in order to train our employees and educate our customers on the benefits of our product offerings. These investments can be costly and the additional effort required to educate both customers and our own sales force can distract from efforts to sell existing products and services, or may not produce the desired results.
Risks Related to the Market
We face significant competition and if we lose or fail to gain market share our financial results will suffer.
The market for security and electronic signature products and services is highly competitive. Our competitors include organizations that provide products based upon approaches similar to and different from those that we employ. Many of our competitors have significantly greater financial, marketing, technical and other competitive resources than we do. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products.
A decrease of average selling prices for our products and services could adversely affect our business.
The average selling prices for our products and services may decline as a result of competitive pricing pressures or a change in our mix of products, software and services. In addition, competition continues to increase in the market segments in which we participate and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Furthermore, we anticipate that the average selling prices and gross profits for our products will decrease over product life cycles. To maintain or realize our revenue and gross margins, we must continue to
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develop, or purchase and introduce new products and services that incorporate new technologies or increased functionality. If we experience such pricing pressures or fail to deliver new products and services relevant to our markets, our revenue and gross margins could decline, which could harm our business, financial condition and results of operations.
We may need additional capital in the future and our failure to obtain capital would interfere with our growth strategy.
Our ability to obtain financing will depend on a number of factors, including market conditions, our operating performance and investor or creditor interest. These factors may make the timing, amount, terms and conditions of any financing unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. If adequate funds are not available or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, defer our product development activities, or delay the introduction of new products.
We experience variations in quarterly operating results and sales are subject to seasonality, both of which may result in a volatile stock price.
In the future, as in the past, our quarterly operating results may vary significantly, resulting in a volatile stock price. Factors affecting our operating results include:
● The level of competition;
● The size, timing, cancellation or rescheduling of significant orders;
● New product announcements or introductions by competitors;
● Changes in pricing by competitors;
● Component costs and availability;
● Our success in expanding our sales and marketing programs;
● Market acceptance of new products and product enhancements;
● Changes in foreign currency exchange rates; and
● General economic conditions in the countries in which we operate.
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We also experience seasonality or variation across the year in our markets. These trends can include the summer months, particularly in Europe, or the second half of the fiscal year is generally higher than the first half in terms of sales.
Our stock price may be volatile for reasons other than variations in our quarterly operating results, such as due to the limited number of our shares that trade in the public markets.
The market price of our common stock may fluctuate significantly in response to factors, some of which are beyond our control, including the following:
● Additions or departures of key personnel;
● Trading volume fluctuations; and
Our stock repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock
On June 10, 2020, the Board of Directors authorized a share repurchase program (“program”). Under the program, we are authorized to repurchase shares of our common stock from time to time in the open market, in privately negotiated transactions, or otherwise, at prices that the Company deems appropriate and subject to market conditions, applicable law and other factors deemed relevant in the Company’s sole discretion, up to an aggregate purchase price of $50.0 million. The timing and actual number of shares repurchased depend on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements, and other market conditions. The program does not obligate the Company to repurchase any dollar amount or number of shares of common stock. The authorization is effective until June 10, 2022. Repurchases pursuant to our stock repurchase program could affect our stock price and increase its volatility. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of common stock. Although our stock repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness.
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A small group of persons control a substantial amount of our common stock and could promote, delay or prevent a change of control.
Mr. T. Kendall Hunt, our founder and former Chairman of the Board, beneficially owns approximately 10.2% of the outstanding shares of our common stock. In addition, Blackrock, Inc. holds approximately 12.8% of ownership, Legion Partners Asset Management holds approximately 6.9% of ownership, The Vanguard Group holds approximately 5.6% of ownership, and Legal & General Investment Management LTD holds approximately 5.1% of ownership.
The concentration of ownership may have the effect of a small number of investors promoting, discouraging, delaying or preventing a change in control and may also have an adverse effect on the market price of our common stock.
Certain provisions of our charter and of Delaware law make a takeover of our Company more difficult.
Our corporate charter and Delaware law contain provisions, such as a class of authorized but unissued preferred stock which may be issued by our board without stockholder approval that might enable our management to resist a takeover of our Company. Delaware law also limits business combinations with interested stockholders. These provisions might discourage, delay or prevent a change in control or a change in our management. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.
Future issuances of blank check preferred stock may reduce voting power of common stock and may have anti-takeover effects that could prevent a change in control.
Our corporate charter authorizes the issuance of up to 500,000 shares of preferred stock with such designations, rights, powers and preferences as may be determined from time to time by our Board of Directors, including such dividend, liquidation, conversion, voting or other rights, powers and preferences as may be determined from time to time by the Board of Directors without further stockholder approval. The issuance of preferred stock could adversely affect the voting power or other rights of the holders of common stock. In addition, the authorized shares of preferred stock and common stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control.
Our business could be adversely affected as a result of actions of activist stockholders.
Although we strive to maintain constructive, ongoing communications with all of our stockholders, and welcome their views and opinions with the goal of enhancing value for all of our stockholders, our stockholders may from time to time engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes or acquire control of the Company. Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming and could divert the attention of our Board of Directors and senior management from the management of our operations and the pursuit of our business strategy.
Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy or changes to the composition of our Board of Directors or senior management team arising from proposals by activist stockholders or a proxy contest could lead to the perception of a change in the direction of our business or instability that may be exploited by our competitors and/or other activist stockholders, result in the loss of potential business opportunities, result in the loss of our employees and business partners and make it more difficult to pursue our strategic initiatives or attract and retain qualified personnel and business partners, any of which could have an adverse effect on our business, financial condition and operating results.
Further, actual or perceived actions of activist stockholders may cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the Company’s
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underlying fundamentals and prospects. In 2021, Legion Partners Asset Management launched a proxy contest that settled prior to our annual stockholder meeting in June 2021. Pursuant to that settlement (which was disclosed at that time) we made certain changes to our Board of Directors. Such proxy contest and related matters required significant time and attention from our directors and officers, and we incurred significant incremental expenses. We cannot predict whether additional proxy contests or related matters will occur in the future and the time and cost associated with such matters.
Risks Related to Technology and Intellectual Property
Technological changes occur rapidly in our industry and our development of new products and features is critical to maintain our revenue. New or disruptive technology from competitors or future competitors could decrease the amount of business from our current customers which represent a large majority of our revenue.
The introduction by our competitors of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable. Our future revenue growth and operating profit will depend in part upon our ability to enhance our current products and develop innovative new solutions to distinguish us from the competition and to meet customers’ changing needs. Product developments and technology innovations by others may adversely affect our competitive position and we may not successfully anticipate or adapt to changing technology, industry standards or customer requirements on a timely basis. In addition, a substantial number of our competitors are much larger organizations with many more financial and human resources.
Our business could be negatively impacted by cyber security incidents and other disruptions.
Our use of technology is increasing and is critical in at least three primary areas of our business:
1.Software and information systems that we use to help us run our business more efficiently and cost effectively, which are increasingly cloud-based tools;
2.The products we have traditionally sold and continue to sell to our customers contain technology that incorporates the use of secret numbers and encryption technology; and
3.Solutions delivered on a software-as-a-service basis, from both public and private cloud models, which may process and store confidential, personal, health and financial information and which may rely on third parties for some or all of the solution.
A cyber incident in any of these areas of our business could disrupt our ability to take orders or deliver products or services to our customers, cause us to suffer significant monetary and other losses and significant reputational harm, or substantially impair our ability to grow the business. We expect that there will continue to be unauthorized attempts intended to capture business information or exploit computing power to impede the performance of our products, to access our customers’ information, or harm our reputation as a company. The processes used by hackers to access or sabotage technology products, services and networks are evolving in sophistication and increasing in frequency. We could experience a security incident due to various causes including intentional or unintentional conduct of our employees, vendors, technology partners and others that have access to or store our information.
In July 2011, we discovered a cyber-incident related to DigiNotar B.V. shortly after we purchased the company. The hacking incident at DigiNotar B.V. led to the termination of DigiNotar B.V’s registration as a certification service provider and DigiNotar B.V.’s bankruptcy. Since that time, we have experienced several security incidents, although none have been material. Even though we have established teams, processes and strategies to protect our corporate and solution assets, we may incur losses from such events as a result of unanticipated costs associated with data security incidents.
In addition, because we are in the cyber security industry, we could be targeted by hackers more than other companies and if a material cyber security breach occurred related to corporate or customer information, the reputational harm and potential lost future business could be greater than other companies not in our industry. We have taken various
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measures to strengthen the security of our products and our systems, to establish information security governance procedures and to train our employees. However, we are the subject of a large volume of hacking attempts and our defenses might not always be effective. If a hacking attempt were to be successful and lead to a material data breach, then it could harm our business, financial condition and results of operations, both in the current period and for a significant future period of time.
We rely upon Amazon Web Services to operate portions of our platform and any disruption of or interference with our use of Amazon Web Services or other vendors’ material would adversely affect our business, results of operations and financial condition
We outsource portions of our cloud infrastructure to Amazon Web Services, or AWS. Customers of our products need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. We have experienced and expect that in the future we may experience interruptions, delays and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In addition, if our security, or that of AWS, is compromised, our products or platform are unavailable or our users are unable to use our products within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times, as our products become more complex and the usage of our products increases. To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in service levels from AWS may adversely affect our ability to meet our customers' requirements.
Any of the above circumstances or events may harm our reputation, possibly move customers to stop using our products, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and financial condition. These risks are also present with our other cloud service infrastructure vendors beside AWS. In addition, we also utilize strategic vendors to resell or incorporate third party technology and if these material vendors experienced a data breach, outage in service or other failure, we could be prevented from meeting our customers’ requirements.
Some of our products contain third-party, open-source software and failure to comply with the terms of the underlying open-source software licenses could restrict our ability to sell our products or otherwise result in claims against us.
Our products are distributed with software programs licensed to us by third-party authors under open-source licenses, which may include the GNU General Public License, the GNU Lesser Public License, the BSD License and the Apache License. Third-party, open-source programs are typically licensed to us for no fee and the underlying license agreements could require us to make available to users the source code for such programs, as well as the source code for any modifications or derivative works we create based on these third-party, open-source software programs.
We do not provide end users a copy of the source code to our proprietary software because we believe that the manner in which our proprietary software is aligned or communicates with the relevant open-source programs does not create a modification, derivative work or extended version of, or a work based on, that open-source program requiring the distribution of our proprietary source code.
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Our ability to commercialize our products by incorporating third-party, open-source software may be restricted because, among other reasons:
We must continue to attract and retain highly skilled technical personnel for our research and development efforts.
The market for highly skilled technical talent is highly competitive. If we fail to attract, train, assimilate and retain qualified technical personnel for our research and development and product management efforts, we will experience delays or failures in introductions of new or modified products, and services, failures in adequate analysis of technology or acquisitions in the market, loss of clients and market share and a reduction in revenue.
We cannot be certain that our research and development activities will be successful.
While management is committed to enhancing our current product offerings and introducing new products, we cannot be certain our research and development activities will be successful. Furthermore, we may not have sufficient financial resources to identify and develop new technologies and bring new products to market in a timely and cost effective manner, and we cannot ensure that any such products will be commercially successful.
Failure to effectively manage our product and service lifecycles could harm our business.
As part of the natural lifecycle of our products and services, we periodically inform customers that products or services will be reaching their end of life or end of availability and will no longer be supported or receive updates and security patches. Failure to effectively manage our product and service lifecycles could lead to customer dissatisfaction and contractual liabilities, which could adversely affect our business and operating results. In addition, the failure to realize new revenue to replace and/or expand the revenue realized from discontinued products or services could adversely affect our business and operating results.
SaaS offerings, which involve various risks, constitute an important part of our business.
As we continue to grow SaaS products, we will need to continue to evolve our processes to meet a number of regulatory, intellectual property, contractual and service compliance challenges. These challenges include compliance with licenses for open source and third party software embedded in our SaaS offerings, maintaining compliance with export control and privacy regulations, including HIPAA and GDPR, protecting our services from external threats, maintaining continuous service levels and data security expected by our customers, preventing inappropriate use of our services, incurring significant up-front costs where desired higher margins are dependent on achieving significant sales volume and adapting our go-to-market efforts. In addition to using our internal resources, we also utilize third party resources to deliver SaaS offerings, such as third party data hosting vendors. The failure of a third party provider to prevent service disruptions, data losses or security breaches may require us to issue credits or refunds or indemnify or otherwise be liable to customers or third parties for damages that may occur. Additionally, if these third-party providers fail to deliver on their obligations, our reputation could be damaged, our customers could lose confidence in us and our
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ability to maintain and expand our SaaS offerings. Finally, our SaaS offerings need to be designed to operate at significant transaction volumes. When combined with third party software and hosting infrastructure, our SaaS offerings may not perform as designed which could lead to service disruptions and associated damages.
We depend significantly upon our proprietary technology and intellectual property and the loss of or successful challenge to our proprietary rights could require us to divert management attention and could reduce revenue and increase our operating costs.
From time to time, we receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights, and trademarks. Because of constant technological change in the segments in which we compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents, it is possible that the number of these claims may grow. In addition, former employers of our former, current, or future employees may assert claims that such employees have improperly disclosed to us the confidential or proprietary information of these former employers. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not successful in defending such claims, we could be required to stop selling, delay shipments, redesign our products, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations with our customers. Royalty or licensing arrangements we may seek in such circumstances may not be available to us on commercially reasonable terms or at all. We have made and expect to continue making significant expenditures to establish our intellectual property rights and to investigate, defend and settle claims related to the use of technology and intellectual property rights as part of our strategy to manage this risk. In addition, we license and use software from third parties in our business. These third party software licenses may not continue to be available to us on acceptable terms or at all, and may expose us to additional liability. This liability, or our inability to use any of this third party software or technology, could result in shipment delays or other disruptions in our business that could materially and adversely affect our operating results.
We rely principally on trade secrets to protect much of our intellectual property in cases where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information. We may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position. If we are unable to prevent third parties from infringing or misappropriating our copyrights, trademarks or other proprietary information, our competitive position could be adversely affected. In the course of conducting our business, we may inadvertently infringe the intellectual property rights of others, resulting in claims against us or our customers. Our contracts generally indemnify our customers for third-party claims for intellectual property infringement by the services and products we provide. In the past, we have resolved several claims of patent infringement brought against us and a claim brought against a customer related to our technology. None of these claims were material to our financial results but this may not always be the case. The expense of defending these claims may adversely affect our financial results and may not be covered by any insurance policies we maintain. In addition, any such disputes and litigation could divert management attention and harm our reputation in the market.
Our patents may not provide us with competitive advantages.
We hold numerous patents in the United States and in other countries, which cover multiple aspects of our technology. A substantial part of our patents cover the Digipass product line. Our patents expire between now and more than 10 years from now. There can be no assurance that we will continue to develop proprietary products or technologies that are patentable, that any issued patent will provide us with any competitive advantages or will not be challenged by third parties, or that patents of others will not hinder our competitive advantage. Although certain of our technologies are patented, there are other organizations that offer products with comparable functionality that employ different technological solutions and compete with us for market share.
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We are subject to warranty and product liability risks.
A malfunction of or design defect in our products which results in a breach of a legal obligation or physical harm or damage from our products could result in tort or warranty claims against us. We seek to reduce the risk of these losses by using qualified engineers in the design, manufacturing and testing of our hardware products, proper development and testing of our software solutions, attempting to negotiate warranty disclaimers and liability limitation clauses in our sales agreements, and maintaining customary insurance coverage. However, these measures may ultimately prove ineffective in limiting our liability for damages.
In addition to any monetary liability for the failure of our products, an actual or perceived breach of network or security at one of our customers or publicly known defect or perceived defect in our products could adversely affect the market’s perception of us and our products, and could have an adverse effect on our reputation and the demand for our products. Similarly, an actual or perceived breach of security within our own systems could damage our reputation and have an adverse effect on the demand for our products.
There is significant government regulation of technology imports and exports and to the extent we cannot meet the requirements of the regulations we may be prohibited from exporting some of our products, which could negatively impact our revenue.
Our international sales and operations are subject to risks such as the imposition of government controls, new or changed export license requirements, restrictions on the export of critical technology, trade restrictions and changes in tariffs. If we are unable to obtain regulatory approvals on a timely basis our business may be impacted. Certain of our products are subject to export controls under U.S. law. The list of products and countries for which export approval is required, and the regulatory policies with respect thereto, may be revised from time to time and our inability to obtain required approvals under these regulations could materially and adversely affect our ability to make international sales. Violations of export control and international trade laws could result in penalties, fines, adverse reputational consequences, and other materially adverse consequences. In the past, we voluntarily disclosed a trade control matter to the U.S. government. Although this matter was closed during 2019 with no fines, penalties, or finding of wrongdoing, we cannot guarantee that such issues will not arise in the future. In addition, we cannot predict the future government regulation of aspects of our business and such regulation could be detrimental to our results.
We employ cryptographic technology in our authentication products that uses complex mathematical formulations.
A portion of our products are based on cryptographic technology. With cryptographic technology, a user is given a key that is required to encrypt and decode messages. The security afforded by this technology depends on the integrity of a user’s key and in part on the application of algorithms, which are advanced mathematical factoring equations. These codes may eventually be broken or become subject to government regulation regarding their use, which would render our technology and products less effective. The occurrence of any one of the following could result in a decline in demand for our technology and products:
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Risks Related to International Operations
We face a number of risks associated with our international operations, any or all of which could result in a disruption in our business and a decrease in our revenue.
In 2021, approximately 86% of our revenue and approximately 68% of our operating expenses were generated/incurred outside of the U.S. In 2020, approximately 88% of our revenue and approximately 73% of our operating expenses were generated/incurred outside of the U.S. In 2019, approximately 89% of our revenue and approximately 72% of our operating expenses were generated/incurred outside of the U.S. A severe economic decline in any of our major foreign markets could adversely affect our results of operations and financial condition.
In addition to exposures to changes in the economic conditions of our major foreign markets, we are subject to a number of risks any or all of which could result in a disruption in our business and a decrease in our revenue. These include:
● Inconsistent regulations and unexpected changes in regulatory requirements;
● Export controls relating to our technology;
● Potentially adverse tax consequences;
● Wage and price controls or protection;
● Imposition of trade barriers;
● Differing technology standards;
● Linguistic and cultural differences;
● A widely distributed workforce;
● Social unrest, health crises, and cultural barriers or changes.
We are subject to foreign currency exchange rate fluctuations and risks, and improper management of that risk could adversely affect our business, results of operations, and financial conditions.
Because a significant number of our principal customers are located outside the United States, we expect that international sales will continue to generate a significant portion of our total revenue. We are subject to foreign exchange fluctuations and risks because the majority of our product costs are denominated in U.S. Dollars, whereas a significant portion of the sales and expenses of our foreign operating subsidiaries are denominated in various foreign currencies. A decrease in the value of any of these foreign currencies relative to the U.S. Dollar could adversely affect our revenue and
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profitability in U.S. Dollars of our products sold in these markets. We do not currently hold forward exchange contracts to exchange foreign currencies for U.S. Dollars to offset currency rate fluctuations.
Changes in the European regulatory environment regarding privacy and data protection regulations could have a material adverse impact on our results of operations.
In Europe, we are subject to the 1995 European Union (“EU”) Directive on Data Protection (“1995 Data Protection Directive”), which requires EU member states to impose minimum restrictions on the collection and use of personal data that, in some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States. We may also face audits or investigations by one or more foreign government agencies relating to our compliance with these regulations that could result in the imposition of penalties or fines. The EU member state regulations establish several obligations that organizations must follow with respect to use of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not protect personal data to an adequate level of privacy or security. In addition, certain member states have adopted more stringent data protection standards. The Company addressed these requirements by certification to the U.S.-EU Safe Harbor Frameworks prior to such Frameworks being invalidated in October 2015 by the European Court of Justice. The Company continues to adapt its compliance through the use of standard contractual clauses and other methods however it is difficult to be certain that compliance has been achieved. The General Data Protection Regulation (“GDPR”) replaced the 1995 Data Protection Directive effective May 25, 2019, creating significant impacts on how businesses can collect and process the personal data of EU individuals. We have expended significant resources to comply, but those methods may be subject to scrutiny by data protection authorities in EU member states. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us may limit our use of personal data and solutions and could have a material adverse impact on our results of operations.
We must comply with governmental regulations setting environmental standards. In addition, governments or customers may demand increased disclosure related to environment, social and other issues.
Governmental regulations setting environmental standards influence the design, components or operation of our products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Our failure to comply with these regulations may prevent us from selling our products in a certain country. In addition, these regulations may increase our cost of supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these cases, we may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring products into compliance. This could have an adverse effect on our revenues, gross profit margins and results of operations and increase the volatility of our financial results.
We are subject to the Restriction on the Use of Hazardous Substances Directive 2002/95/EC (also known as the “RoHS Directive”) and the Waste Electrical and Electronic Equipment Directive (also known as the “WEEE Directive”). These directives restrict the distribution of products containing certain substances, including lead, within applicable geographies and require a manufacturer or importer to recycle products containing those substances.
These directives affect the worldwide electronics and electronics components industries as a whole. If we or our customers fail to comply with such laws and regulations, we could incur liabilities and fines and our operations could be suspended. In addition to these laws and regulations, we may be subject to increased disclosure obligations related to environmental, social or other issues from governments or customers. If we do not make such disclosures, or do so in a way that is not perceived as positive, our business could be adversely affected.
The vote by the United Kingdom (UK) to leave the European Union (EU) or the actions by China in Hong Kong could adversely affect our financial results.
In June 2016, UK voters approved a referendum to withdraw the UK's membership from the EU, which is commonly referred to as "Brexit". We have operations in the UK and the EU, and as a result, we face risks associated with the potential uncertainty and disruptions that may follow Brexit, including with respect to volatility in exchange
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rates and interest rates and potential material changes to the regulatory regime applicable to our operations in the UK. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. Any of these effects of Brexit, and others we cannot anticipate or that may evolve over time, could adversely affect our business, financial condition, and operating results. We have customers and manufacturing partners connected to Hong Kong. The recent unrest in Hong Kong and the related actions by China could adversely affect our business.
We or our suppliers may be impacted by new regulations related to climate change.
In addition to the European environmental regulations noted above, we or our suppliers may become subject to new laws enacted with regards to climate change. In the event that new laws are enacted or current laws are modified in countries in which we or our suppliers operate, our flow of product may be impacted and/or the costs associated with our products may increase dramatically, either of which could result in a significant negative impact on our ability to operate or operate profitably. In addition, disclosures we may be required to make with respect to climate change may damage our reputation and have an adverse impact on our business.
The effects of regulations relating to conflict minerals may adversely affect our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals and derivatives (collectively “Conflict Minerals”) which may originate from the conflict zones of the Democratic Republic of Congo (DRC) and adjoining countries (collectively, “Covered Countries”). As a result, in August 2012 the SEC established annual disclosure and reporting requirements for companies using Conflict Minerals in their products, including products manufactured by third parties. Like many electronic devices, our hardware products contain Conflict Minerals and are subject to the disclosure and reporting requirements. Compliance with these rules also requires due diligence including country of origin inquiries to determine the sources of Conflict Minerals used in our products.
As required, we filed our annual reports related to products manufactured. We reported that we determined we had no reason to believe Conflict Minerals used in our products may have originated in Covered Countries.
We may incur continued costs associated with complying with these disclosure requirements. These requirements may affect pricing, sourcing and availability of Conflict Minerals used to produce our devices. We may be unable to verify the origin of all Conflict Minerals in our products. We may encounter challenges with customers and stakeholders if we are unable to certify that our products are conflict free.
U.S. investors may have difficulties in making claims for any breach of their rights as holders of shares because some of our assets and key employees are not located in the United States.
Several of our key employees are full-time or part-time residents of foreign countries, and a substantial portion of our assets and those of some of our key employees are located in foreign countries. As a result, it may not be possible for investors to effect service of process on those persons located in foreign countries, or to enforce judgments against some of our key employees based upon the securities or other laws of jurisdictions in those foreign countries.
Our business in countries with a history of corruption and transactions with foreign governments increase the risks associated with our international activities.
We are subject to the U.S. Foreign Corrupt Practices Act (FCPA), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. We have operations, deal with and make sales to governmental or quasi-governmental customers in countries known to experience corruption, particularly certain countries in the Middle East, Africa, East Asia and South and Central America, and further expansion of our international selling efforts may involve additional regions. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or channel partners that could be in violation of various laws, including the FCPA and the U.K. Bribery Act, even though these parties are not
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always subject to our control. Violations of the FCPA may result in severe criminal or civil sanctions, including suspension or debarment from U.S. government contracting, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. Violations of the U.K. Bribery Act may result in severe criminal or civil sanctions and we may be subject to other liabilities that could negatively affect our business operating results and financial condition.
Item 1B - Unresolved Staff Comments
None.
Item 2 - Properties
Our corporate headquarters is located in Chicago, Illinois. Our international headquarters is in Zurich, Switzerland. Our European operational headquarters is in Brussels, Belgium, along with our logistics facility. We conduct sales and marketing, research and development and customer support activities from various locations. Our primary global research and development center is in Montreal, Canada. We have additional research and development facilities in the Netherlands, Cambridge, United Kingdom, Bordeaux, France and Vienna, Austria.
We have sales personnel in our offices near Brussels, Belgium, Singapore, Tokyo, Japan,Dubai, Zurich, Switzerland, Chicago, Illinois, London, United Kingdom, Boston, Massachusetts, and in several field offices around the world.
All of our properties are leased.
Item 3 - Legal Proceedings
We are a party to or have intellectual property subject to litigation and other proceedings that arise in the ordinary course of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our financial results in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
We include various types of indemnification clauses in our agreements. These indemnifications may include, but are not limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have no liabilities recorded for these clauses as of December 31, 2021.
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A complaint was filed on August 20, 2020 against OneSpan and certain of its officers, asserting claims for purported violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and SEC Rule 10b-5 promulgated thereunder, based on certain alleged material misstatements and omissions. The case is captioned Almendariz v. OneSpan Inc., et al., No. 1:20-cv-04906 (N.D. Ill.) (the “Securities Class Action”). Specifically, the plaintiff in the Securities Class Action alleges, among other things, that certain statements about OneSpan’s business were misleading because of defendants’ failure to disclose that OneSpan purportedly had inadequate internal procedures and controls over financial reporting and related disclosures; and OneSpan purportedly downplayed the negative impacts of immaterial errors in its financial statements. On April 28, 2021, the Securities Class Action was dismissed by the court without prejudice.
A complaint, related in subject matter to the Securities Class Action, was filed on October 23, 2020 against certain of OneSpan’s officers and directors, and names OneSpan as a nominal defendant. The case is captioned Klein v. Boroditzky, et al., No. 1:20-cv-06310 (N.D. Ill.) (the “Derivative Action” and, collectively with the Securities Class Action, the “Litigation”). The plaintiff asserts claims for breach of fiduciary duty, abuse of control and corporate waste, as well as a claim for contribution under Sections 10(b) and 21D of the Exchange Act, based on the same alleged wrongdoing pled in the Securities Class Action. On February 16, 2021, on the parties’ agreed motion, the court stayed the action pending a decision on the then-anticipated motion to dismiss in the Securities Class Action. On June 28, 2021 the Klein case was dismissed by the court without prejudice.
On April 2, 2021, a different purported shareholder of the Company, represented by one of the same law firms representing plaintiff in the Klein case, filed second derivative suit in the Northern District of Illinois arising out of the same events that led to the filing of the Securities Class Action. The case is captioned Herrera v. Boroditsky, et al., 1:21-cv-01789 (N.D. Ill.). The factual allegations are substantially similar to those in Klein, except that the complaint does not contain express allegations regarding the pendency of the Securities Class Action and only one cause of action, for breach of fiduciary duty, is asserted. On June 28, 2021 the Herrera case was dismissed by the court without prejudice.
From time to time, we have been involved in litigation and claims incidental to the conduct of our business, such as compensation claims from current or former employees, or commercial disputes with vendors. We expect that to continue. Excluding matters specifically disclosed above, we are not a party to any lawsuit or proceeding that, in management’s opinion, is likely to have a material adverse effect on its business, financial condition or results of operations.
Item 4 - Mine Safety Disclosures
Not applicable.
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PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock, par value $0.001 per share, trades on the NASDAQ Capital Market under the symbol OSPN.
The following table sets forth the range of high and low daily closing prices of our common stock on the NASDAQ Capital Market for the past two years.
On February 18, 2022, there were 153 registered holders and approximately 9,860 street name holders of the Company’s common stock.
We have not paid any dividends on our common stock since incorporation. The declaration and payment of dividends will be at the sole discretion of the Board of Directors and subject to certain limitations under the General Corporation Law of the State of Delaware. The timing, amount and form of dividends, if any, will depend, among other things, on the Company’s results of operations, financial condition, cash requirements, plans for expansion and other factors deemed relevant by the Board of Directors. The Company intends to retain any future earnings for use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
During the year ended December 31, 2020, the Board of Directors authorized a share repurchase program (“program”), pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. Share purchases under the program will take place in open market transactions or in privately negotiated transactions and may be made from time to time depending on market conditions, share price, trading volume, and other factors. The timing of the repurchases and the amount of stock repurchased in each transaction is subject to OneSpan’s sole discretion and will depend upon market and business conditions, applicable legal and credit requirements and other corporate considerations. The authorization is effective until June 10, 2022 unless the total amount has been used or authorization has been cancelled.
During the year ended December 31, 2021, the Company repurchased 0.3 million shares of the Company’s stock for $7.5 million in the aggregate at an average cost of $21.82 per share under its repurchase program. An additional 0.3 million shares of its common stock were withheld to satisfy the mandatory tax withholding requirements upon vesting of restricted stock and restricted stock units. There were no shares of stock repurchased during the fourth quarter of 2021.
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Stock Performance Graph
The Stock Performance Graph below compares the cumulative total return through December 31, 2021 assuming reinvestment of dividends, by an investor who invested $100.00 on December 31, 2015, in each of (i) our common stock, (ii) the Russell 2000 index, (iii) the Standard Industrial Code Index 3577 – Computer Peripheral Equipment, NEC and (iv) a comparable industry (the peer group) index selected by the Company. The peer group for this purpose consists of: American Software, Inc., Appian Corporation, BlackLine, Inc., CPI Card Group, Inc., Mandiant, Inc., ProofPoint, Inc., PROS Holdings, Inc., Q2 Holdings, Inc., QAD, Inc., Qualys, Inc., Rapid7, Inc., Seachange, Inc., SecureWorks Corp., Varonis Systems, Inc. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
Item 6.
[Reserved]
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except head count, ratios, time periods and percentages)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Item 1A – Risk Factors and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below. Please see “Forward Looking Statements” at the beginning of this Form 10-K.
The Company has excluded discussion of the comparison of the years ended December 31, 2020 and 2019 from this Form 10-K., which can be found in the annual report on Form 10-K for the period ended December 31, 2020, filed on February 25, 2021.
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Revision of Previously Issued Financial Statements
This information should be read in conjunction with the consolidated financial statements and the notes thereto included in this Annual Report. We have revised our prior period financial statements to reflect the correction of immaterial errors as described in this Annual Report in Notes to the Consolidated Financial Statements, Note 3 – Revision of Previously Issued Financial Statements.
COVID-19 Pandemic Response and Impact
We continue to actively address the effects of the COVID-19 pandemic and its impact globally. Due to economic uncertainty connected to the COVID-19 pandemic, we have experienced lengthened sales cycles and reduced demand for some of our security solutions.
Financial Results and Outlook
In the current and future periods, we may experience weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results.
We believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on the global economy and our business results. See Part I – Item 1A – Risk Factors of this Form 10-K for additional information regarding the potential impact of COVID-19 on the Company.
Overview
OneSpan Inc. and its wholly owned subsidiaries design, develop and market digital solutions for identity, security, and business productivity that protect and facilitate electronic transactions via mobile and connected devices. We are a global leader in digital identity and anti-fraud solutions to financial institutions and other businesses. We establish trust in people’s identities, the devices they use, and the transactions they execute. We make digital banking accessible, secure, easy, and valuable. Our solutions secure access to online accounts, data, assets, and applications for global enterprises; provide tools for application developers to easily integrate security functions into their web-based and mobile applications; and facilitate end-to-end financial agreement automation. Our solutions enhance the ability of companies to onboard new customers and prevent hacking attacks against online and mobile transactions while providing an exceptional experience for remote customers.
We offer cloud based and on-premises solutions using both open standards and proprietary technologies. Some of our proprietary technologies are patented. Our products and services are used for a wide range of use cases including e-signing Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and Business-to-Consumer (“B2C”) agreements, delivering passwordless authentication experiences, mitigating fraud, authorizing financial transactions, and achieving regulatory compliance.
Online and mobile application owners and publishers benefit from our expertise in multi-factor authentication, document signing, transaction signing, application security, remote customer onboarding, and in mitigating hacking attacks. Our convenient and proven security solutions enable low friction and trusted interactions between businesses, employees, and consumers across a variety of online and mobile platforms.
Our primary growth objectives include:
● Making digital banking more accessible, secure, easy and valuable;
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● Increasing sales to existing customers and acquiring new customers;
● Expanding our channel partner ecosystem; and
Our Business Model
We offer our products through a product sales and licensing model or through our services platform, which includes our cloud-based service offerings.
Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers. Our sales force is able to offer customers a choice of an on-site implementation using our traditional on-premises model or a cloud implementation for some solutions using our services platform.
Industry Growth
Economic instability related to the COVID-19 pandemic impacted our results for the year ended December 31, 2021. As economic conditions recover, we believe the global markets for authentication, fraud mitigation, agreement automation, and electronic signature solutions will continue to grow driven by dynamic and growing threat environments, increased focus on the digital experience for mobile and online users, new government regulations, and continued growth in electronic commerce. The rate of growth in each country around the world may vary significantly based on local culture, competitive position, economic conditions, and the use of technology.
Economic Conditions
Our revenue may vary significantly with changes in the economic conditions in the countries in which we currently sell products. With our current concentration of revenue in Europe and specifically in the banking and finance vertical market, significant changes in the economic outlook for the European Banking market and its regulatory framework may have a significant effect on our revenue.
The COVID-19 pandemic and the various responses of governments around the world have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate. See Part I, Item 1A – Risk Factors of this Form 10-K for additional information regarding the potential impact of COVID-19 on the Company.
Cybersecurity Risks
Our use of technology is increasing and is critical in three primary areas of our business:
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We believe that the risks and consequences of potential incidents in each of the above areas are different.
In the case of the information systems we use to help us run our business, we believe that an incident could disrupt our ability to take orders or deliver product to our customers, but such a delay in these activities would not have a material impact on our overall results. To minimize this risk, we actively use various forms of security and monitor the use of our systems regularly to detect potential incidents as soon as possible.
In the case of products that we have traditionally sold, we believe that the risk of a potential cyber incident is minimal. We offer our customers the ability to either create the secret numbers themselves or have us create the numbers on their behalf. When asked to create the numbers, we do so in a secure environment with limited physical access and store the numbers on a system that is not connected to any other network, including other OneSpan networks, and similarly, is not connected to the Internet.
In the case of our cloud-based solutions, which involve the processing of customer information, we believe a cyber incident could have a material impact on our business. While our revenue from cloud-based solutions comprises a minority of our revenue today, we believe that these solutions will provide substantial future growth. A cyber incident involving these solutions in the future could substantially impair our ability to grow the business and we could suffer significant monetary and other losses and significant reputational harm.
To minimize the risk, we review our product security and procedures on a regular basis. Our reviews include the processes and software code we are currently using as well as the hosting platforms and procedures that we employ. We mitigate the risk of cyber incidents through a series of reviews, tests, tools and training. Certain insurance coverages may apply to certain cyber incidents. Overall, we expect the cost of securing our networks will increase in future periods, whether through increased staff, systems or insurance coverage.
While we are not aware of any cyber incidents during the year ended December 31, 2021 that had a significant impact on our business, it is possible that we could experience an incident in future years, which could result in unanticipated costs.
Currency Fluctuations
In 2021, approximately 86% of our revenue and approximately 68% of our operating expenses were generated/incurred outside of the U.S. In 2020, approximately 88% of our revenue and approximately 73% of our operating expenses were generated/incurred outside of the U.S. In 2019, approximately 89% of our revenue and approximately 72% of our operating expenses were generated/incurred 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 revenue and expenses.
While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the year ended December 31, 2021 was denominated in U.S. Dollars. In 2021, approximately 51% of our revenue was denominated in U.S. Dollars, 44% was denominated in Euros and 5% was denominated in other currencies. In 2020, approximately 44% of our revenue was denominated in U.S. Dollars, 51% was denominated in Euros and 5% was denominated in other currencies. In 2019, approximately 47% of our revenue was denominated in U.S. Dollars, 49% 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 hedge against the operating expenses being incurred in
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that currency. We expect that changes in currency rates may also 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 loss of $3.0 million in 2021, comprehensive gain of $4.5 million in 2020 and comprehensive gain of $1.5 million in 2019. These amounts are included as a separate component of stockholders’ equity. 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 consolidated statements of operations in other income (expense). Foreign exchange transaction gains aggregated less than $0.1 million and less than $0.1 million for the years ended December 31, 2021 and December 21, 2020, respectively. We reported foreign exchange transaction losses of $1.5 million during the year ended December 31, 2019.
Restructuring Plan
During the fourth quarter of 2021, the Board approved a restructuring plan (“Plan”) designed to advance the Company’s operating model, streamline its business, and enhance its capital resources. The Plan began the first of two phases constituting a multi-year strategic plan on December 16, 2021. The Company did not take any actions or record any charges in connection with the Plan during the year ended December 31, 2021.
Components of Operating Results
Revenue
We generate revenue from the sale of our hardware products, software licenses, subscriptions, maintenance and support, and professional services. 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.
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.
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Gross Profit
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 55% and 65% 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 in 2021 compared to 2020 resulted in an increase in operating expenses of approximately $2.4 million in 2021.
The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. For full-year 2021, 2020, and 2019, operating expenses included $5.2 million, $6.0 million, and $5.3 million, respectively, related to stock-based and long-term incentive plans. Long-term incentive plan compensation expense includes both cash and stock-based incentives.
Interest Income, Net
Interest income 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.
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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”). All our IP in our traditional authentication business is owned by two subsidiaries, one in the U.S. and one in Switzerland. These two subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to our U.S. and Swiss subsidiaries 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 tend to flow to the U.S. company and Swiss company. In 2021, losses flowing to the U.S. company are expected to be taxed at a rate of 21% to 25%, while losses flowing to the Swiss company are expected to be taxed at a rate ranging from 11% to 15%, plus Swiss withholding tax of an additional 5%. A Canadian and UK subsidiary currently sell to and service global customers directly. In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products.
As the majority of our revenues are generated outside of the U.S., our consolidated effective tax rate is 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%.
The geographic mix of earnings of our foreign subsidiaries primarily depends on the level of pretax income of our service provider subsidiaries and the benefit realized in Switzerland through the sales of product. The level of pretax income in our service provider subsidiaries is expected to vary based on:
3. the amount of revenues that the service provider subsidiaries generate.
For items 1 and 2 above, there is a direct impact in the opposite direction on earnings of the U.S. and Swiss entities. Any change from item 3 is generally expected to result in a larger change in income in the U.S. and Swiss entities in the direction of the change (increased revenues expected to result in increased margins/pretax profits and conversely decreased revenues expected to result in decreased margins/pretax profits).
In addition to the provision of services, the intercompany agreements transfer the majority of the business risk to our U.S. and Swiss subsidiaries. As a result, the contracting subsidiaries’ pretax income is reasonably assured while the pretax income of the U.S. and Swiss subsidiaries varies directly with our overall success in the market.
In November 2015, we acquired OneSpan Canada Inc. (formerly eSignLive), a foreign company with substantial IP and net operating losses and other tax carryforwards. The tax benefit of the carryforwards has been fully reserved as realization has not been deemed more likely than not.
In May 2019, we acquired Dealflo Limited (“Dealflo”), a foreign company with substantial IP and net operating losses. The tax benefit of existing loss carryforwards at the time of acquisition was not recorded as the Company determined they were not more likely than not to be realized.
The Company recorded changes in valuation allowance of $15.0 million and $2.7 million, as of December 31, 2021 and 2020, respectively, against deferred tax assets that, based on Management’s assessment are considered not to
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be more likely than not to be realized. The increase in the valuation allowance in 2021 reflects Net Operating Losses ( “NOLs”), other deduction carryforwards, and credits for which the realization is not more likely than not. The change in valuation allowance also reflects other factors including, but not limited to, changes in Management’s assessment of the ability to use existing deferred tax assets, including NOLs and other deduction carryforwards.
Management assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of negative evidence such as 3-year cumulative losses are considered. Management also reviewed reversal patterns of temporary differences to determine if the Company would have sufficient taxable income due to the reversal of temporary differences to support the realization of deferred tax assets. In 2021 Management made the decision to establish a valuation allowance against certain deferred tax assets in jurisdictions that were not previously valued as the deferred tax assets were no longer more likely than not to be realized. Management continues to maintain a valuation allowance against certain deferred tax assets in other jurisdictions where assets had been previously valued. For all other remaining deferred tax assets, Management believes it is still more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
Results of Operations
The following tables summarize our consolidated results of operations for the periods presented.
Revenue
Revenue by Product: We generate revenue from the sale of our hardware products, software licenses, subscriptions, professional services, and maintenance and support. Product and license revenue includes hardware products and software licenses. Service and other revenue includes subscription solutions (which is our definition of software-as-a-service solutions), maintenance and support, and professional services.
Years ended December 31, Change
(in thousands)
Revenue
Total revenue decreased $1.2 million or 1%, during the year ended December 31, 2021 compared to the year ended December 31, 2020. The overall decrease in revenue was comprised of a $16.0 million decrease in perpetual software license revenue and a $2.3 million decrease in hardware revenue, partially offset by an increase in recurring revenue, which is the portion of our revenue subject to future renewal. Recurring revenue, comprised of subscription, term-based software license, and maintenance, support and other revenue, increased $18.2 million or 18% during the year ended December 31, 2021, compared to the year ended December 31, 2020. An increase in recurring revenue is reflective of the company’s strategy to increase its recurring revenue through an expanded recurring revenue customer base.
Product and license revenue decreased $12.6 million or 9% during the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was largely driven by lower perpetual software license sales, partially offset by an increase in term-based software license sales, which we attribute to our strategy focused on growing recurring software revenue over perpetual licenses combined with softened demand as a result of the pandemic.
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Services and other revenue increased by $11.4 million, or 14% during the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase for the year ended December 31, 2021 compared to the same period in 2020 was driven by higher subscription and maintenance revenue, which is reflective of the company’s strategy to increase its recurring revenue through an expanded recurring revenue customer base.
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. Factors affecting our results include the size, timing, cancellation or rescheduling of significant orders. Revenue realized from individual customers can also vary widely as their buying patterns can change from period to period. We also experience seasonality or variation across the year in our markets. These trends can include lower sales during the summer months, particularly in EMEA. As a result of the volatility in our business, 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:
Years ended December 31,
(in thousands)
Revenue
% of Total Revenue
EMEA 49% 54%
Americas 32% 25%
APAC 19% 21%