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 any discussion on the comparison of the financial years ended
annual report on Form 10-K for the period ended
32 Table of Contents
Review 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.
Response and impact of the 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.
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.
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 main growth objectives include:
? Make digital banking more accessible, secure, simple and valuable;
33 Table of Contents
Expand our portfolio of solutions that enable institutions to mitigate
? fraud, reduce operational costs, comply with regulations, easily integrate
customers, adaptively authenticate transactions and reduce deployment time;
Automate and secure digital customer journeys to verify remotely
? identities, mitigate application fraud, and secure account openings and
? Increase sales to existing customers and acquire new customers;
? Drive increased demand for our products in new applications, new markets and
? Develop our ecosystem of distribution partners; and
? Strategically acquire businesses that expand our technology portfolio or
customers and increase our recurring revenues.
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.
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.
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
Europeand 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.
Our use of technology is increasing and is essential in three main areas of our business:
1. Software and information systems we use to help us better manage our business
efficiently and cost effectively; 34 Table of Contents
The products we traditionally sell and continue to sell to our customers
2. for integration into their software applications contain technology that
incorporates the use of secret numbers and encryption technology; and
3. The new products and services we introduced to the market are focused on
process information through our servers or in the cloud.
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
OneSpannetworks, 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, 2021that 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.
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, 2021was 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 35
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
Europedenominated 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, Singaporeand 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 millionin 2021, comprehensive gain of $4.5 millionin 2020 and comprehensive gain of $1.5 millionin 2019. These amounts are included as a separate component of stockholders' equity. The functional currency for our subsidiaries in Switzerland, Singaporeand Canadais 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 millionand less than $0.1 millionfor the years ended December 31, 2021and December 21, 2020, respectively. We reported foreign exchange transaction losses of $1.5 millionduring the year ended December 31, 2019.
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
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.
Revenue from products and licenses. Revenue from products and licenses includes hardware
? software products and licenses, which can be provided on an indefinite or fixed-term basis
Service and other income. Service and other revenue includes subscription
? solutions (which is our definition of software solutions as a service),
maintenance and support, and professional services.
Cost of Goods Sold
Our total cost of goods sold consists of cost of product and license revenue and cost of service and other revenue. We expect our cost of goods sold to increase in absolute dollars as our business grows, although it may fluctuate as a percentage of total revenue from period to period.
? Product cost and license revenue. Product cost and license revenue
consists primarily of direct product and license costs.
Cost of service and other income. Mainly cost of service and other income
? includes costs related to subscription solutions, including staff and
equipment costs, and personnel costs of employees providing professional services and maintenance and support. 36 Table of Contents 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.
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 millionin 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.
Sales and Marketing. Sales and marketing expenses consist mainly of
personnel costs, commissions and bonuses, trade shows, marketing programs and
other marketing activities, travel, outpatient and long-term expenses
? incentive compensation. We expect sales and marketing expenses to increase in
in absolute dollars as we continue to invest in sales resources as a priority
areas, although our sales and marketing spend may fluctuate as a percentage
of total income.
Research and development. Research and development costs mainly consist of
personnel costs and long-term incentive compensation. We expect research and
? development spending will increase in absolute dollars as we continue to invest
in our future solutions, although our research and development expenses may
fluctuate as a percentage of total revenue. General and administrative. General and administrative expenses consist
primarily personnel costs, legal and other professional fees, and
? incentive compensation. We expect general and administrative costs
increase in absolute dollars although our general and administrative expenses
may fluctuate as a percentage of total income.
Amortization/depreciation of intangible assets. Intangible fixed assets acquired are
? amortized over their respective amortization periods, and are periodically
evaluated for impairment. 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. 37 Table of Contents 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.
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 OneSpanentities 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 UKsubsidiary currently sell to and service global customers directly. In addition, many of our OneSpanentities operate as distributors for all of our OneSpanproducts. 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 Switzerlandthrough the sales of product. The level of pretax income in our service provider subsidiaries is expected to vary based on:
1. the personnel, programs and services offered annually by the various
subsidiaries as determined by management, or
2. variations in exchange rates linked to the currencies of the service
affiliates of the supplier, or
3. the amount of revenue generated by the affiliates of the service provider.
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.
The Company recorded changes in valuation allowance of
$15.0 millionand $2.7 million, as of December 31, 2021and 2020, respectively, against deferred tax assets that, based on Management's assessment are considered not to 38
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.
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 2021 2020 $ % (in thousands) Revenue Hardware
$ 79,501 $ 81,849 $ (2,348)(3)% Software licenses 40,857 51,137 (10,280) (20)% Subscription 38,213 27,788 10,425 38% Professional services 4,634 5,689 (1,055) (19)%
Maintenance, support and other 51,276 49,228
2,048 4% Total revenue
$ 214,481 $ 215,691 $ (1,210)(1)%
Total revenue decreased
$1.2 millionor 1%, during the year ended December 31, 2021compared to the year ended December 31, 2020. The overall decrease in revenue was comprised of a $16.0 milliondecrease in perpetual software license revenue and a $2.3 milliondecrease 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 millionor 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 millionor 9% during the year ended December 31, 2021compared 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. 39
Services and other revenue increased by
$11.4 million, or 14% during the year ended December 31, 2021compared to the year ended December 31, 2020. The increase for the year ended December 31, 2021compared 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 Eastand 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, 2021 2020 $ Change % Change (in thousands) Revenue EMEA $ 104,878 $ 117,086( $ 12,208) (10)% Americas 68,646 53,171 15,475 29% APAC 40,957 45,434 (4,477) (10)% Total revenue $ 214,481 $ 215,691( $ 1,210) (1)% % of Total Revenue EMEA 49% 54% Americas 32% 25% APAC 19% 21%
For the year ended
For the year ended
For the year ended
the region was
Cost of Goods Sold and Gross Margin
Years ended December 31, 2021 2020 $ % Change (in thousands) Cost of goods sold Product and license
$ 46,196 $ 46,013 $ 1830% Services and other 25,350 21,619 3,731 17% Total cost of goods sold $ 71,546 $ 67,632 $ 3,9146% Gross profit $ 142,935 $ 148,059(5,124) (3)% 40 Table of Contents Gross margin Product and license 62% 65% Services and other 73% 74% Total gross margin 67% 69%
The cost of product and license revenue increased
$0.2 millionor 0% during the year ended December 31, 2021compared to the year ended December 31, 2020. The increase in cost of product and license was driven by higher RASP licensing costs in conjunction with higher software license sales, as well as higher shipping costs for certain hardware products. The cost of services and other revenue increased by $3.7 million, or 17% during the year ended December 31, 2021compared to the year ended December 31, 2020. The increase in cost of services and other revenue is reflective of higher subscription revenue, which has increased cloud-based infrastructure costs and higher third-party app shielding costs. Gross profit decreased $5.1 million, or 3% during the year ended December 31, 2021compared to the year ended December 31, 2020. Gross profit margin was 67% for the year ended December 31, 2021, compared to 69% for the year ended December 31, 2020. The decrease in profit margin for the year ended December 31, 2021reflects higher cloud-based services costs and increased shipping costs for certain hardware products. The majority of our inventory purchases are denominated in U.S.Dollars. Our sales are denominated in various currencies including the Euro. The impact of changes in currency rates are estimated to have increased revenue by $3.8 millionfor the year ended December 31, 2021. Had currency rates in 2021 been equal to rates in 2020, the gross profit margins would have been approximately 2 percentage point lower for the year ended December 31, 2021. Operating Expenses Years ended December 31, 2021 2020 $ % Change (in thousands) Operating costs Sales and marketing $ 62,730 $ 56,663 $ 6,06711% Research and development 47,414 41,194 6,220 15% General and administrative 53,031 46,338 6,693 14% Amortization of intangible assets 5,888 9,122 (3,234) (35)% Total operating costs $ 169,063 $ 153,317 $ 15,74610% Sales and Marketing Expenses
Sales and marketing expenses increased
Average number of full-time sales and marketing employees for the year ended
Research and development costs
Research and development expenses increased
$6.2 million, or 15% during the year ended December 31, 2021compared to the year ended December 31, 2020. The increase in expense for the year ended December 31, 2021was primarily driven by higher personnel costs due to higher headcount and higher expense per head. 41
Average full-time research and development employee headcount for year ended
December 31, 2021was 363, compared to 328 for year ended December 31, 2020. Average headcount in 2021 was 11% higher than in 2020.
General and administrative expenses
General and administrative expenses increased
$6.7 million, or 14% during the year ended December 31, 2021compared to the year ended December 31, 2020. The increase in general and administrative expenses was driven by higher personnel costs, outside professional services fees related to our second quarter proxy contest, and consulting fees related to our strategic action plan. Average full-time general and administrative employee headcount for year ended December 31, 2021was 135, compared to 125 for the year ended December 31, 2020. Average headcount in 2021 was 8% higher than in 2020.
Amortization of intangible assets
Amortization of intangible assets for the year ended
Interest income (expense), net
Years ended December 31, 2021 2020 $
Change % Change
(in thousands) Interest income (expense), net (
$ 1) $ 404($
Interest income (expense), net, was less than
Other Income (Expense), Net Years ended December 31, 2021 2020 $ Change % Change (in thousands) Other income (expense), net (
$ 14) $ 1,434( $ 1,448) -101% 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, non-recurring expenses. Other income (expense), net for the year ended December 31, 2021was less than $(0.1) million, compared to $1.4 millionfor the year ended December 31, 2020. Lower income was driven by losses resulting from exchange losses on transactions. Provision for income taxes Years ended December 31, 2021 2020 $ % Change (in thousands) Provision for income taxes $ 4,441 $ 2,035 $ 2,406118% 42 Table of Contents The Company recorded income tax expense for the year ended December 31, 2021of $4.4 millioncompared to $2.0 millionfor the year ended December 31, 2020. The increase in expense recorded for the year ended December 31, 2021was primarily attributable to an increase in the valuation allowance recorded on U.S.deferred tax assets.
Loss reports available
December 31, 2021, we have gross deferred tax assets of $43.7 millionresulting from US, foreign and state NOL carryforwards of $148.6 millionand other foreign deductible carryforwards of $97.5 million. At December 31, 2021, we have a valuation allowance of $31.3 millionagainst deferred tax assets related to certain carryforwards. See Note 13 - Income taxes for more information regarding carryforwards and valuation allowances.
Cash and capital resources
December 31, 2021, we had net cash balances (total cash and cash equivalents) of $63.4 millionand short-term investments of $35.1 million. Short-term investments consist of U.S.treasury bills and notes, government agency notes, corporate notes and bonds, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months. At December 31, 2020, we had net cash balances of $88.4 millionand short-term investments of $26.9 million. We are in lease agreements that require letters of credit to secure the obligations. The restricted cash related to these letters of credit is recorded in non-current assets on the Consolidated Balance sheet in the amounts of $0.8 millionand $0.8 millionat December 31, 2021and December 31, 2020, respectively. As of December 31, 2021, we held $45.0 millionof cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $43.9 millionis not subject to repatriation restrictions, but may be subject to taxes upon repatriation.
We estimate that our financial resources are sufficient to meet our operating needs over the next twelve months.
Our cash flows are as follows:
Years ended December 31, 2021 2020 (in thousands) Cash provided by (used in): Operating activities (
$ 2,745) $ 14,922Investing activities (10,980) (4,664) Financing activities (10,394) (7,060)
Effect of foreign exchange rate changes on cash and cash equivalents
(895) 914 Operating Activities
Cash generated by (used in) operating activities is primarily comprised of net income (loss), as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of amortization and impairment of intangible assets, deferred taxes, depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs. We expect cash outflows from operating activities to be affected by increases in personnel cost as we grow our business. For the year ended
December 31, 2021, $2.7 millionof cash was used in operating activities. Cash of $14.9 millionand $18.2 millionwas provided by operating activities for the years ended December 31, 2020and 2019, respectively. 43
Our working capital at
December 31, 2021was $98.0 million, a decrease of $33.9 millionor 26% from $131.9 millionat December 31, 2020. The decrease is due to a lower operating income driven largely by higher personnel costs and certain non-recurring expenses related to our proxy contest and strategic action plan.
The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of investments, purchases of property and equipment, and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the continued growth of our business as well to continue to invest in our infrastructure and activity in connection with acquisitions. For the year ended
December 31, 2021and December 31, 2020cash of $11.0 millionand $4.7 million, respectively, was used in investing activities. The increase in cash used in investing activities during the year ended December 31, 2021compared to the year ended December 31, 2020, was primarily driven by the timing of short-term investment purchases and maturities.
The changes in cash flows from financing activities primarily related to the purchases of common stock under our share repurchase program and tax payments for restricted stock issuances. For the year ended
December 31, 2021, net cash used in financing activities was $10.4 million, which was comprised of $7.5 millionof common stock repurchased and $2.9 millionof tax payments for restricted stock issuances. For the year ended December 31, 2020, net cash used in financing activities was $7.1 million, which was comprised of $5.0 millionof common stock repurchased and $2.0 millionof tax payments for restricted stock issuances.
Off-balance sheet arrangements
The Company has no off-balance sheet arrangements.
Contractual obligations and commitments
We have purchase obligations of
$45.6 million, including $15.4 millionof inventory purchase obligations which are expected to be consummated in the next 12 months, $26.9 millionof committed hosting arrangements which will be used in the next one to three years, and $3.3 millionfor other software agreements related to the administration of our business which range from one to five years. We have operating lease obligations of $12.7 millionwhich will expire in the next one to eight years The operating lease obligations do not include common area maintenance ("CAM") charges or real estate taxes under our operating leases, for which the Company is also obligated. These charges are generally not fixed and can fluctuate from year to year. We have taxes payable of $5.6 milliondue within the next one to three years, which primarily represent deemed repatriation tax from 2017. The Company had $0.5 millionand $0.5 millionof unrecognized tax benefits as of December 31, 2021and December 31, 2020, respectively, which have been set aside in a reserve in accordance with ASC 740 Income Taxes. The amounts are not included in the tax payable amounts above as the timing of payment of such obligations, if any, is not determinable.
Significant Accounting Policies and Estimates
The Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in
The preparation of these financial statements requires management to make estimates and
44 Table of Contents assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, net realizable value of inventory and intangible assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect significant judgments and estimates used in the preparation of its consolidated financial statements.
We determine revenue recognition through the following steps:
? Identification of the contract(s) with a customer;
? Identification of performance obligations in the contract;
? Determination of the transaction price;
? Allocation of the transaction price to the performance obligations in the
? Revenue recognition when, or over time, we satisfy a performance obligation.
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services, which excludes any sales incentives and amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of goods and services
We derive our revenues primarily from Product and License Revenue, which includes hardware products and software licenses, and Services and Other, which is inclusive of software-as-a-service (which we refer to as "subscription", or "SaaS"), maintenance and support, and professional services. Product Revenue: Revenue from the sale of security hardware is recorded upon shipment, which is the point at which control of the goods are transferred and the completion of the performance obligations, unless there are specific terms that would suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer invoices and subsequent payments normally correspond with delivery. License Revenue: Revenue from the sale of software licenses is recorded upon the latter of when the customer receives the ability to access the software or when they are legally allowed to use the software. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited access to the software, and term licenses which limit the customer's access to the software to a specific time period. We offer term licenses ranging from one to five years in length. Customer payments normally correspond with delivery for perpetual licenses. For term licenses, payments are either on installment or in advance. In limited circumstances, we integrate third party software solutions into our software products. We have determined that, consistent with our conclusion under prior revenue recognition rules, generally we act as the principal with respect to the satisfaction of the related performance obligation and record the corresponding revenue on a gross basis from these transactions. For transactions in which we do not act as the principal, we would recognize revenue on a net basis. The fees owed to the third parties are recognized as a component of cost of goods sold when the revenue is recognized. 45 Table of Contents Subscription Revenue: We generate subscription revenues from our digital agreements and digital security cloud service offerings. Our standard customer arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract. Customer payments are normally in advance for annual service. Maintenance, Support and Other: Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. The annual fee for maintenance and technical support is recognized ratably over the term of the maintenance and support agreement as this is the period the services are delivered. Customer payments are normally in advance for annual service. Professional Services: Professional services revenues are primarily comprised of implementing, automating and extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized over time as services are rendered, usually over a period of time that is generally less than a few months. Most projects are performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee. For time and material contracts, revenues are generally recognized and invoiced by multiplying the number of hours expended in the performance of the contract by the contractual hourly rates. For fixed fee contracts, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours to complete the services. Customer payments normally correspond with delivery.
In our typical multi-element arrangement, key deliverables include:
1.A client component (i.e. an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a device that the customer already owns); 2.Server system software that is installed on the customer's systems (i.e., software on the server system that verifies the identity of the person being authenticated) or licenses for additional users on the server system software if the server system software had been installed previously; and 3.Post contract support (PCS) in the form of maintenance on the server system software or support. Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of any revenue are incidental to the overall transaction such as initialization of the hardware device, customization of the hardware device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer's end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.
We enter into contracts to deliver a combination of hardware devices, software licenses, subscriptions, maintenance and support and, in some situations, professional services. The Company evaluates the nature of the goods or services promised in these arrangements to identify the distinct performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment depending on the terms and conditions of the respective customer arrangement. When a hardware client device and licenses to server software are sold in a contract, they are treated as a single performance obligation because the software license is deemed to be a component of the hardware that is integral to the functionality of the hardware that is used by our customers for identity authentication. When a software client device is sold in a contract server software, the licenses are considered a single performance obligation to deliver the authentication solution to the customer. In either of these types of arrangements, maintenance and support and professional services are typically distinct separate performance obligations from the hardware or software solutions. Our contracts to deliver subscription services typically do not include multiple performance obligations; however, in certain limited cases customers may purchase professional services that are distinct performance obligations. 46
For contracts that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on their estimated relative standalone selling price. Judgment is required to determine the stand-alone selling price ("SSP") of each distinct performance obligation. We determine SSP for maintenance and support and professional services based on observable inputs; specifically, the range of prices charged to customers to renew annual maintenance and support contracts and the range of hourly rates we charge our customers in standalone professional services contracts. In instances where SSP is not directly observable, and when we sell at a highly variable price range, such as for transactions involving software licenses or subscriptions, we determine the SSP for those performance obligations using
the residual method. Credit Losses In accordance with ASU No. 2016-13, the Company evaluates its allowance based on expected losses rather than incurred losses, which is known as the current expected credit loss ("CECL") model. The allowance is determined using the loss rate approach and is measured on a collective (pool) basis when similar risk characteristics exist. Where financial instruments do not share risk characteristics, they are evaluated on an individual basis. The allowance is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, and tax planning opportunities available in each tax jurisdiction. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of a change in tax rates on deferred tax assets and liabilities and in income in the period that includes the enactment date. We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments, and the use of estimates are required in determining whether the "more likely than not" standard has been met when developing the provision for income taxes.
We recognize the tax implications of including certain foreign income in
taxable income as the cost of the period. We have accounted for local country deferred income taxes and withholding taxes that may be incurred on distributions from non-
We monitor changes in tax laws and reflect the impacts of changes in tax laws during the period of enactment.
Recently issued accounting pronouncements
December 2019, the FASB issued ASU 2019-12, Simplification for Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 47
2020-12 was effective beginning
January 1, 2021. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and can be applied through December 31, 2022. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements. In November 2021, the FASB issued ASU 2021-10, Government Assistance: Disclosures by Business Entities about Government Assistance, which requires business entities to disclose certain information about certain government assistance they receive. ASU 2021-10 is effective for annual periods beginning after December 15, 2021. We are currently assessing the effect that the ASU will have on our consolidated financial statements and related disclosures. From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
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