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OneSpan Inc. - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)

DELAWARE

36-4169320

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

121 West Wacker Drive, Suite 2050

Chicago, Illinois 60601

(Address of Principal Executive Offices) (Zip Code)

(312) 766-4001

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Shares

OSPN

NASDAQ

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 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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Emerging growth company

Smaller reporting company

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 provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  No

There were 39,965,506 shares of Common Stock, $.001 par value per share, outstanding at October 29, 2021.

Table of Contents

OneSpan Inc.

Form 10-Q

For the Quarter Ended September 30, 2021

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2021 and December 31, 2020

3

Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2021 and 2020

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, 2021 and 2020

5

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2021 and 2020

6

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2021 and 2020

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4.

Controls and Procedures

32

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 5.

Other Information

35

Item 6.

Exhibits

35

SIGNATURES

36

2

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OneSpan Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

September 30,

December 31, 

2021

    

2020

ASSETS

 

Current assets

 

  

 

  

Cash and equivalents

$

58,633

$

88,394

Short term investments

 

39,182

 

26,859

Accounts receivable, net of allowances of $2,426 in 2021 and $4,135 in 2020

 

44,752

 

57,537

Inventories, net

 

11,715

 

13,093

Prepaid expenses

 

8,362

 

7,837

Contract assets

4,618

7,202

Other current assets

 

10,992

 

6,256

Total current assets

 

178,254

 

207,178

Property and equipment, net

 

10,962

 

11,835

Operating lease right-of-use assets

9,654

11,356

Goodwill

 

96,223

 

97,552

Intangible assets, net of accumulated amortization

 

22,614

 

27,196

Deferred income taxes

10,294

7,030

Contract assets - non-current

373

1,877

Other assets

 

12,971

 

11,179

Total assets

$

341,345

$

375,203

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

7,881

$

5,684

Deferred revenue

 

42,375

 

43,417

Accrued wages and payroll taxes

 

14,199

 

13,649

Short-term income taxes payable

 

985

 

2,618

Other accrued expenses

 

7,180

 

8,334

Deferred compensation

 

706

 

1,602

Total current liabilities

 

73,326

 

75,304

Long-term deferred revenue

10,021

11,730

Long-term lease liabilities

10,579

12,399

Other long-term liabilities

 

10,117

 

10,423

Long-term income taxes payable

5,042

6,095

Deferred income taxes

 

1,641

 

1,912

Total liabilities

 

110,726

 

117,863

Stockholders' equity

 

  

 

  

Preferred stock: 500 shares authorized, none issued and outstanding at September 30, 2021 and December 31, 2020

 

 

Common stock: $.001 par value per share, 75,000 shares authorized; 40,558 and 40,353 shares issued; 39,966 and 40,353 shares outstanding at September 30, 2021 and December 31, 2020, respectively

 

40

 

40

Additional paid-in capital

 

99,018

 

98,819

Treasury stock, at cost, 592 and 250 shares outstanding at September 30, 2021 and December 31, 2020, respectively

(12,501)

(5,030)

Retained earnings

 

156,946

 

173,731

Accumulated other comprehensive loss

 

(12,884)

 

(10,220)

Total stockholders' equity

 

230,619

 

257,340

Total liabilities and stockholders' equity

$

341,345

$

375,203

See accompanying notes to unaudited condensed consolidated financial statements.

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OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

(unaudited)

Three months ended

Nine months ended

September 30,

September 30,

    

2021

    

2020

    

2021

    

2020

Revenue

 

  

 

  

 

  

 

  

 

Product and license

$

28,193

$

30,249

$

85,016

$

103,893

Services and other

 

24,083

 

21,190

 

70,312

 

58,870

Total revenue

 

52,276

 

51,439

 

155,328

 

162,763

Cost of goods sold

 

  

 

  

 

  

 

  

Product and license

 

8,477

 

10,064

 

27,607

 

33,378

Services and other

 

6,379

 

5,414

 

19,041

 

16,395

Total cost of goods sold

 

14,856

 

15,478

 

46,648

 

49,773

Gross profit

 

37,420

 

35,961

 

108,680

 

112,990

Operating costs

 

  

 

  

 

  

 

  

Sales and marketing

 

15,474

 

14,576

 

49,850

 

44,129

Research and development

 

11,359

 

10,643

 

35,699

 

31,178

General and administrative

 

11,207

 

10,737

 

38,797

 

33,851

Amortization of intangible assets

 

1,396

 

2,360

 

4,503

 

7,049

Total operating costs

 

39,436

 

38,316

 

128,849

 

116,207

Operating loss

 

(2,016)

 

(2,355)

 

(20,169)

 

(3,217)

Interest income (expense), net

 

(4)

 

56

 

2

 

389

Other income, net

 

283

 

716

 

950

 

887

Loss before income taxes

 

(1,737)

 

(1,583)

 

(19,217)

 

(1,941)

Provision (benefit) for income taxes

 

(762)

 

95

 

(2,406)

 

1,758

Net loss

$

(975)

$

(1,678)

$

(16,811)

$

(3,699)

Net loss per share

 

  

 

 

  

 

  

Basic

$

(0.02)

$

(0.04)

$

(0.42)

$

(0.09)

Diluted

$

(0.02)

$

(0.04)

$

(0.42)

$

(0.09)

Weighted average common shares outstanding

 

  

 

  

 

  

 

  

Basic

 

39,629

 

40,033

 

39,688

 

40,050

Diluted

 

39,629

 

40,033

 

39,688

 

40,050

See accompanying notes to unaudited condensed consolidated financial statements.

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OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

Three months ended September 30, 

Nine months ended September 30,

    

2021

    

2020

    

2021

    

2020

Net loss

 

$

(975)

 

$

(1,678)

 

$

(16,811)

 

$

(3,699)

 

Other comprehensive loss

Cumulative translation adjustment, net of tax

 

(2,287)

 

3,455

 

(2,657)

 

(377)

 

Unrealized losses on available-for-sale securities

(7)

Pension adjustment, net of tax

 

 

(6)

 

 

(18)

 

Comprehensive loss

 

$

(3,262)

 

$

1,771

 

$

(19,475)

 

$

(4,094)

 

See accompanying notes to unaudited condensed consolidated financial statements.

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OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

For the three and nine months ended September 30, 2021:

    

    

    

    

    

    

    

    

    

Accumulated

    

    

Additional

Other

Total

Common Stock

Treasury - Common Stock

Paid-In

Retained

Comprehensive

Stockholders'

Description

Shares

Amount

Shares

Amount

Capital

Earnings

Income (Loss)

Equity

Balance at December 31, 2020

 

40,103

$

40

250

(5,030)

$

98,819

$

173,731

$

(10,220)

$

257,340

Net income (loss)

 

 

 

 

(9,151)

 

 

(9,151)

Foreign currency translation adjustment, net of tax

 

 

 

 

22

 

(919)

 

(897)

Restricted stock awards

 

248

 

 

1,342

 

 

 

1,342

Tax payments for stock issuances

 

(86)

 

 

(2,139)

 

 

 

(2,139)

Unrealized gain (loss) on available-for-sale securities

(15)

(15)

Balance at March 31, 2021

 

40,265

$

40

250

$

(5,030)

$

98,022

$

164,602

$

(11,154)

$

246,480

Net income (loss)

 

 

 

 

(6,685)

 

 

(6,685)

Foreign currency translation adjustment, net of tax

 

 

 

 

 

549

 

549

Restricted stock awards

 

24

 

 

1,292

 

 

 

1,292

Tax payments for stock issuances

 

(7)

 

 

(91)

 

 

 

(91)

Share repurchase

(111)

111

(2,908)

(2,908)

Unrealized gain (loss) on available-for-sale securities

8

8

Balance at June 30, 2021

 

40,171

$

40

361

$

(7,938)

$

99,223

$

157,917

$

(10,597)

$

238,645

Net income (loss)

 

 

 

 

(975)

 

 

(975)

Foreign currency translation adjustment, net of tax

 

 

 

 

4

 

(2,287)

 

(2,283)

Restricted stock awards

 

57

 

 

347

 

 

 

347

Tax payments for stock issuances

 

(31)

 

 

(552)

 

 

 

(552)

Share repurchase

(231)

231

(4,563)

(4,563)

Balance at September 30, 2021

 

39,966

$

40

592

$

(12,501)

$

99,018

$

156,946

$

(12,884)

$

230,619

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For the three and nine months ended September 30, 2020:

    

    

    

    

    

    

    

    

    

    

Accumulated

    

    

Additional

Other

Total

Common Stock

Treasury - Common Stock

Paid-In

Retained

Comprehensive

Stockholders'

Description

Shares

Amount

Shares

Amount

Capital

Earnings

Income (Loss)

Equity

Balance at December 31, 2019

 

40,207

 

40

$

96,109

$

179,440

$

(13,295)

$

262,294

Cumulative effect of change related to adoption of ASU 2016-13, net of tax

(253)

0

(253)

Net income

 

 

 

 

4

 

 

4

Foreign currency translation adjustment , net

 

 

 

 

 

(4,278)

 

(4,278)

Restricted stock awards

 

168

 

 

1,350

 

 

 

1,350

Tax payments for stock issuances

 

(61)

 

 

(293)

 

 

 

(293)

Pension adjustment, net of tax

(6)

(6)

Balance at March 31, 2020

 

40,314

$

40

$

97,166

$

179,191

$

(17,579)

$

258,818

Net loss

 

 

 

 

(2,025)

 

 

(2,025)

Foreign currency translation adjustment, net

 

 

 

 

 

446

 

446

Restricted stock awards

 

19

 

 

860

 

 

 

860

Tax payments for stock issuances

 

(4)

 

 

(886)

 

 

 

(886)

Pension adjustment, net of tax

 

 

 

 

 

(6)

 

(6)

Balance at June 30, 2020

 

40,329

 

40

 

97,140

 

177,166

 

(17,139)

 

257,207

Net income (loss)

 

 

 

 

(1,678)

 

 

(1,678)

Foreign currency translation adjustment, net of tax

 

 

 

 

 

3,455

 

3,455

Restricted stock awards

 

55

 

 

1,022

 

 

 

1,022

Tax payments for stock issuances

 

(28)

 

 

(784)

 

 

 

(784)

Pension adjustment, net of tax

 

 

 

 

 

(6)

 

(6)

Balance at September 30, 2020

 

40,356

$

40

$

97,378

$

175,488

$

(13,690)

$

259,216

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OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Nine months ended September 30,

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net loss from operations

$

(16,811)

$

(3,699)

Adjustments to reconcile net loss from operations to net cash provided by (used in) operations:

 

 

  

Depreciation and amortization of intangible assets

 

6,760

 

9,193

Loss on disposal of assets

 

8

 

75

Deferred tax benefit

 

(3,701)

 

(356)

Stock-based compensation

 

2,981

 

3,232

Changes in operating assets and liabilities:

 

 

Accounts receivable, net

 

11,480

 

8,589

Inventories, net

 

1,101

 

5,790

Contract assets

 

3,764

 

(379)

Accounts payable

 

2,347

 

(5,551)

Income taxes payable

 

(2,661)

 

(5,985)

Accrued expenses

 

(27)

 

(3,694)

Deferred compensation

 

(897)

 

322

Deferred revenue

 

(1,860)

 

3,268

Other assets and liabilities

 

(6,913)

 

(3,376)

Net cash provided by (used in) operating activities

 

(4,429)

 

7,429

Cash flows from investing activities:

 

  

 

  

Purchase of short term investments

 

(45,882)

 

(23,295)

Maturities of short term investments

 

33,129

 

21,980

Additions to property and equipment

 

(1,529)

 

(2,710)

Other

 

(17)

 

(98)

Net cash used in investing activities

 

(14,299)

 

(4,123)

Cash flows from financing activities:

 

  

 

  

Repurchase of common stock

(7,471)

Tax payments for restricted stock issuances

 

(2,782)

 

(1,963)

Net cash used in financing activities

 

(10,253)

(1,963)

Effect of exchange rate changes on cash

 

(760)

 

306

Net increase (decrease) in cash

 

(29,741)

 

1,649

Cash, cash equivalents, and restricted cash, beginning of period

 

89,241

 

85,129

Cash, cash equivalents, and restricted cash, end of period (1.)

$

59,500

$

86,778

(1.)End of period cash, cash equivalents, and restricted cash includes $0.9 million and $0.8 million of restricted cash at September 30, 2021 and September 30, 2020, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

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OneSpan Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

Note 1 – Description of the Company and Basis of Presentation

Description of the Company

OneSpan Inc. and its wholly owned subsidiaries design, develop, market and support hardware and software security systems that manage and secure access to information assets. OneSpan has operations in Austria, Australia, Belgium, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K), and the United States (U.S.).

In accordance with ASC 280, Segment Reporting, our operations are reported as a single operating segment. The chief operating decision maker is the interim Chief Executive Officer who reviews the statement of operations of the Company on a consolidated basis, makes decisions and manages the operations of the Company as a single operating segment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of OneSpan and its subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All intercompany accounts and transactions have been eliminated. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021, particularly in light of the novel coronavirus (COVID-19) pandemic and its effects on domestic and global economies.

We continue to actively address the effects of the COVID-19 pandemic and its impact globally. Beginning in the Summer of 2020 through the present, we have experienced lengthened sales cycles and reduced demand for some of our security solutions due to economic uncertainty connected to 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.

Principles of Consolidation

The consolidated financial statements include the accounts of OneSpan Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and

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disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation and Transactions

The financial position and results of the operations of the majority of the Company’s foreign subsidiaries 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. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other income (expense), net. Foreign exchange transaction losses aggregated less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2021, respectively. Foreign exchange transaction gains aggregated $0.4 million and foreign transaction losses aggregated $0.1 million for the three and nine months ended September 30, 2020, respectively.

The financial position and results of our operations in Singapore, Switzerland, and Canada are measured in U.S. Dollars. For these subsidiaries, gains and losses that result from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net.

Note 2 – Summary of Significant Accounting Policies

There have been no changes to the significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

Cash, Cash Equivalents and Restricted Cash

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 other non-current assets on the Condensed Consolidated Balance Sheet in the amounts of $0.9 million and $0.8 million at September 30, 2021 and December 31, 2020, respectively.

Equity Method Investment

We apply the equity method of accounting to our investment in Promon AS (Promon), because we exercise significant influence, but not controlling interest, in the investee. Promon is a technology company headquartered in Norway that specializes in mobile app security, whose solutions focus largely on Runtime Application Self-Protection (RASP). We exercise significant influence over Promon as a result of our 17% ownership interest in Promon, our representation on Promon’s Board of Directors, and the significance to Promon of our business activities with them. We integrate Promon’s RASP technology into our mobile security offerings, which are then licensed to our customers. Under the equity method of accounting, the Company’s proportionate share of the net earnings (losses) of Promon is reported in other income (expense), net in our condensed consolidated Statements of Operations. The impact of the proportionate share of net earnings (losses) were immaterial for the three and nine months ended September 30, 2021 and 2020 as were the relative size of Promon’s assets and operations in relation to the Company’s. The carrying value of our equity method investment is reported in other noncurrent assets in the condensed consolidated Balance Sheets and is reported originally at cost and adjusted each period for the Company’s share of the investee’s earnings (losses) and dividends paid, if any. The Company also assesses the investment for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may not be recoverable. The Company did not record any impairment charges during the nine-month periods ended September 30, 2021 and 2020. The Company recorded $1.0 million and $0.2 million in cost of sales during the three months ended September 30, 2021 and September 30, 2020, respectively, for license fees owed to Promon for use of their software and technology, and recorded $3.0 million and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively. The Company owed Promon $1.4 million as of September 30, 2021, which is included in accounts payable and accrued liabilities.

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Recently Issued Accounting Pronouncements

In 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 intraperiod 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 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.

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.

Note 3 – Revenue

We recognize revenue in accordance with ASC 606 “Revenue from Contracts with Customers” (“Topic 606”), as described below.

Disaggregation of Revenues

The following tables present our revenues disaggregated by major products and services, geographical region and timing of revenue recognition.

Revenue by major products (in thousands)

Three months ended September 30,

Nine months ended September 30, 

    

2021

    

2020

    

2021

    

2020

Hardware products

$

17,908

$

21,687

$

55,027

$

65,613

Software licenses

10,285

8,562

29,989

38,280

Subscription

10,197

7,446

28,426

19,286

Professional services

1,152

1,353

3,595

4,100

Maintenance, support, and other

12,734

12,391

38,291

35,484

Total Revenue

$

52,276

$

51,439

$

155,328

$

162,763

Revenue by location of customer for the three months ended September 30, 2021 and 2020 (in thousands)

EMEA

    

Americas

    

APAC

    

Total

Total Revenue:

 

  

 

  

 

  

 

2021

$

21,965

$

17,621

$

12,690

$

52,276

2020

$

26,684

$

12,305

$

12,450

$

51,439

Percent of Total:

 

 

 

 

2021

 

42

%  

 

34

%  

 

24

%  

 

100

%

2020

 

52

%  

 

24

%  

 

24

%  

 

100

%

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Revenue by location of customer for the nine months ended September 30, 2021 and 2020 (in thousands)

    

EMEA

    

Americas

    

APAC

    

Total

 

Total Revenue:

 

  

 

  

 

  

 

  

2021

$

73,784

$

51,160

$

30,384

$

155,328

2020

$

88,624

$

38,570

$

35,569

$

162,763

Percent of Total:

 

  

 

  

 

  

 

  

2021

 

48

%  

 

32

%  

 

20

%  

 

100

%

2020

 

54

%  

 

24

%  

 

22

%  

 

100

%

Timing of revenue recognition (in thousands)

Three months ended September 30, 

Nine months ended September 30, 

2021

    

2020

2021

2020

Products and Licenses transferred at a point in time

$

28,193

$

30,249

$

85,016

$

103,893

Services transferred over time

24,083

21,190

70,312

58,870

Total Revenue

$

52,276

$

51,439

$

155,328

$

162,763

Contract balances (in thousands)

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.

September 30,

December 31,

in thousands

2021

2020

Receivables, inclusive of trade and unbilled

$

44,752

$

57,537

Contract Assets (current and non-current)

$

4,991

$

9,079

Contract Liabilities (Deferred Revenue current and non-current)

$

52,396

$

55,147

Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings. These contract assets are transferred to receivables when the right to billing occurs, which is normally over 3-5 years. The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services. Revenue is recognized for these services over time.

As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. We do not typically include extended payment terms in our contracts with customers.

Revenue recognized during the nine months ended September 30, 2021 included $34.5 million that was included on the December 31, 2020 balance sheet in contract liabilities. Deferred revenue increased in the same period due to timing of annual renewals.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.

in thousands

2021

2022

2023

Beyond 2023

Total

Future revenue related to current unsatisfied performance obligations

$

8,236

$

22,064

$

13,162

$

7,839

$

51,301

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The Company applies practical expedients and does not disclose information about remaining performance obligations (a) that have original expected durations of one year or less, or (b) where revenue is recognized as invoiced.

Costs of obtaining a contract

The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. The Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of benefit based on the transfer of goods or services that we have determined to be up to seven years. The Amortization is reflected in Sales and Marketing in the Statements of Operations. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors, including customer attrition. Commissions are earned upon invoicing to the customer. For contracts with multiple year payment terms, as the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. Commissions and amortization expense are included in Sales and Marketing expenses on the condensed consolidated statements of operations.

Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less. These costs are included in Sales and Marketing expense in the condensed consolidated statements of operations.

The following tables provide information related to the capitalized costs and amortization recognized in the current and prior periods:

in thousands

September 30,  2021

December 31, 2020

Capitalized costs to obtain contracts, current

$

1,764

$

1,222

Capitalized costs to obtain contracts, non-current

$

7,093

$

5,464

Three months ended September 30, 

Nine months ended September 30, 

in thousands

2021

2020

2021

2020

Amortization of capitalized costs to obtain contracts

$

419

$

251

$

1,090

$

620

Impairments of capitalized costs to obtain contracts

$

-

$

-

$

-

$

-

Note 4 – Inventories, net

Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the FIFO method.

Inventories, net are comprised of the following:

September 30, 

December 31, 

    

2021

    

2020

(in thousands)

Component parts

$

4,555

$

5,439

Work-in-process and finished goods

 

7,160

 

7,654

Total

$

11,715

$

13,093

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Note 5 – Goodwill

Goodwill activity for the nine months ended September 30, 2021 consisted of the following:

in thousands

Net balance at December 31, 2020

    

$

97,552

Net foreign currency translation

 

(1,329)

Net balance at September 30, 2021

$

96,223

No impairment of goodwill was recorded during the nine months ended September 30, 2021 or September 30, 2020.

Note 6 – Intangible Assets

Intangible asset activity for the nine months ended September 30, 2021 is detailed in the following table.

    

in thousands

    

Acquired Technology

    

Customer Relationships

    

              Other              

    

Total Intangible Assets

Net balance at December 31, 2020

$

2,277

$

23,200

$

1,719

$

27,196

Additions

 

3

14

 

17

Disposals

(21)

(21)

Net foreign currency translation

 

(70)

(5)

 

(75)

Amortization expense

 

(1,164)

(3,003)

(336)

 

(4,503)

Net balance at September 30, 2021

$

1,116

$

20,127

$

1,371

$

22,614

September 30, 2021 balance at cost

$

43,046

$

39,764

$

13,546

$

96,356

Accumulated amortization

 

(41,930)

 

(19,637)

 

(12,175)

 

(73,742)

Net balance at September 30, 2021

$

1,116

$

20,127

$

1,371

$

22,614

Certain intangible assets are denominated in functional currencies besides the U.S. dollar and are subject to currency fluctuations. No impairment of intangible assets was recorded during the nine months ended September 30, 2021 or September 30, 2020.

Note 7 – Property and Equipment

The major classes of property and equipment are as follows:

in thousands

    

September 30, 2021

    

December 31, 2020

Office equipment and software

$

14,336

$

13,540

Leasehold improvements

10,362

10,593

Furniture and fixtures

 

3,950

 

3,827

Total

 

28,648

 

27,960

Accumulated depreciation

 

(17,686)

 

(16,125)

Property and equipment, net

$

10,962

$

11,835

Depreciation expense was $0.8 million and $2.3 million for the three and nine months ended September 30, 2021, respectively, compared to $0.7 million and $2.1 million for the three and nine months ended September 30, 2020.

Note 8 – Fair Value Measurements

The fair values of cash equivalents, receivables, net, and accounts payable approximate their carrying amounts

due to their short duration. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would

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use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing base upon its own market assumptions.

The Company classifies its investments in debt securities as available-for-sale. In accordance with ASU 2016-13, Measurement of Credit Losses on Financial Instruments, we review available-for-sale debt securities for impairments related to losses and other factors each quarter. Unrealized gains and losses are recorded to other comprehensive income. The unrealized gains and losses on the available-for-sale debt securities were not material as of September 30, 2021 and December 31, 2020.

The estimated fair value of our financial instruments has been determined by using available market information and appropriate valuation methodologies, as defined in ASC 820, Fair Value Measurements. The fair value hierarchy consists of the following three levels:

Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived primarily from or corroborated by observable market data.
Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The following tables summarize assets that are measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:

Fair Value Measurement at Reporting Date Using

in thousands

September 30, 2021

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Assets:

U.S. Treasury Notes

$

2,405

-

$

2,405

-

Corporate Notes / Bonds

$

13,642

-

$

13,642

-

Commercial Paper

$

11,994

-

$

11,994

-

U.S. Government Agencies

$

11,141

-

$

11,141

-

Fair Value Measurement at Reporting Date Using

in thousands

December 31, 2020

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Assets:

U.S. Treasury Notes

$

4,951

-

$

4,951

-

Corporate Notes / Bonds

$

8,780

-

$

8,780

-

Commercial Paper

$

4,098

-

$

4,098

-

U.S. Treasury Bills

$

5,292

-

$

5,292

-

U.S. Government Agencies

$

3,738

-

$

3,738

-

Note 9 – Allowance for credit losses

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The changes in the allowance for credit losses during the nine months ended September 30, 2021 were as follows:

in thousands

Balance at December 31, 2020

$

4,135

Provision

771

Write-offs

(2,470)

Net foreign currency translation

(10)

Balance at September 30, 2021

$

2,426

During the nine months ended September 30, 2021, we wrote off $2.5 million of accounts receivable that were fully reserved for and no longer deemed collectible.

Note 10 – Leases

Operating lease cost details for the three and nine months ended September 30, 2021 and 2020 are as follows:

Three months ended

Nine months ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

(in thousands)

(in thousands)

Building rent

$

667

$

808

$

1,914

$

2,264

Automobile rentals

 

385

 

426

 

1,129

 

1,137

Total net operating lease costs

$

1,052

$

1,234

$

3,043

$

3,401

At September 30, 2021, the weighted average remaining lease term for our operating leases is 6.5 years. The weighted average discount rate for our operating leases is 5%.

During the nine months ended September 30, 2021, there were $2.8 million of operating cash payments for lease liabilities, and $0.3 million of right-of use assets obtained in exchange for new lease liabilities.

Maturities of our operating leases are as follows:

As of September 30, 2021

(in $ thousands)

2021

$

702

2022

3,238

2023

2,564

2024

1,771

2025

1,639

Later years

5,930

Less imputed interest

(2,646)

Total lease liabilities

$

13,198

Note 11 – Income Taxes

Given our expected projected loss (before tax) for the year, our estimated annual effective tax rate for 2021 before discrete items is expected to be approximately 10%. Our global effective tax rate is lower than the U.S. statutory tax rate of 21% primarily due to losses in jurisdictions for which a valuation allowance is required and therefore no benefit is received, along with nondeductible expenses. Our ultimate tax expense will depend on the mix of earnings in various jurisdictions. Income taxes of $0.7 million and $7.2 million were paid during the three and nine months ended September 30, 2021, respectively.

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At December 31, 2020, we had deferred tax assets of $30.0 million resulting from foreign and state NOL carryforwards of $119.5 million and other foreign deductible carryforwards of $64.7 million. At December 31, 2020, we had a valuation allowance of $19.8 million against deferred tax assets related to certain carryforwards.

Certain non-U.S. operations have incurred net operating losses (NOLs), which are currently subject to a valuation allowance. These NOLs may become deductible to the extent these operations become profitable. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain non-U.S. operations record a loss, we do not recognize a corresponding tax benefit, thus increasing our effective tax rate, or decreasing our effective tax rate when reporting a loss. Upon determining that it is more likely than not that the NOLs will be realized, we will reduce the tax valuation allowances related to these NOLs, which will result in a reduction of our income tax expense and our effective tax rate in the period.

Note 12 – Long-Term Compensation Plan and Stock Based Compensation (share counts in thousands)

Under the OneSpan Inc. 2019 Omnibus Incentive Plan, we award restricted stock units subject to time-based vesting, restricted stock units which are subject to the achievement of future performance criteria and restricted stock units that are subject to the achievement of market conditions. Other long-term incentive plan compensation expense includes cash incentives.

We awarded 242 restricted stock units during the nine months ended September 30, 2021, subject to time-based vesting. The fair value of the unissued time-based restricted stock unit grants was $6.2 million at the dates of grant and the grants are being amortized over the vesting periods of one to four years.

We awarded restricted stock unit grants during the nine months ended September 30, 2021, subject to the achievement of market and service conditions, which allow for up to 53 shares to be earned if the market conditions are fully achieved. The fair value of these awards was $2.2 million at the dates of grant and the awards are being amortized over the vesting period of three years. The Company currently believes that 45 of these shares are expected to be earned.

We awarded restricted stock units subject to the achievement of service and future performance criteria during the nine months ended September 30, 2021, which allow for up to 201 shares to be earned if the performance criteria are fully achieved. The fair value of these awards was $4.8 million at the dates of grant and the awards are being amortized over the vesting period of one to three years. The Company currently believes that 184 of these shares are expected to be earned.

The following table details long-term compensation plan and stock-based compensation expense for the three and nine months ended September 30, 2021 and 2020:

Three months ended

Nine months ended

September 30, 

September 30, 

    

    

2021

    

2020

    

2021

    

2020

in thousands

(in thousands)

(in thousands)

Stock-based compensation

$

347

$

1,021

$

2,981

$

3,231

Other long-term incentive plan compensation

 

165

 

260

 

640

 

930

Total compensation

$

512

$

1,281

$

3,621

$

4,161

Note 13 – Earnings per Share (share counts in thousands)

Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of common stock equivalents to the extent they are not anti-dilutive. Because the Company is in a net loss position for the three and nine months ended September 30, 2021 and September

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30, 2020, diluted net loss per share for these periods excludes the effects of common stock equivalents, which are anti-dilutive.

The details of the earnings per share calculations for the three and nine months ended September 30, 2021 and 2020 are as follows:

Three months ended

Nine months ended

September 30, 

September 30, 

    

in thousands, except per share data

    

2021

    

2020

    

2021

    

2020

Net loss

$

(975)

$

(1,678)

$

(16,811)

$

(3,699)

Weighted average common shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

39,629

 

40,033

 

39,688

 

40,050

Incremental shares with dilutive effect:

 

  

 

 

 

  

Restricted stock awards

 

 

 

 

Diluted

 

39,629

 

40,033

 

39,688

 

40,050

Net loss per share:

 

  

 

  

 

  

 

  

Basic

$

(0.02)

$

(0.04)

$

(0.42)

$

(0.09)

Diluted

$

(0.02)

$

(0.04)

$

(0.42)

$

(0.09)

Note 14 – Legal Proceedings and Contingencies

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 customer 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 September 30, 2021.

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

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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 in Europe 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.

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except headcount, ratios, time periods and percentages)

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of applicable U.S. securities laws, including statements regarding the 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; 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 hacking 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; disruption in global transportation and supply chains; reliance on third parties for certain products and data center services, impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; actions of activist stockholders; and exposure to increased economic and operational uncertainties from operating a global business, as well as those factors described in the “Risk Factors” section of our Annual Report on Form 10-K. Our filings with the Securities and Exchange Commission (the “SEC”) and other important information can be found in the Investor Relations section of our website at investors.onespan.com. We do not have any intent, and disclaim any obligation, to update the forward-looking information to reflect events that occur, circumstances that exist or changes in our expectations after the date of this Form 10-Q, except as required by law.

Outlook and Financial Results

We continue to actively address the effects of the COVID-19 pandemic and its impact globally. Beginning in the Summer of 2020 and continuing through the present, we have experienced lengthened sales cycles and reduced demand for some of our security solutions due to economic uncertainty connected to the COVID-19 pandemic. The most significant impact of the pandemic on our business has been a drop in demand for our hardware authentication products and delays in the implementation of certain software solutions.

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 II – Item 1A – Risk Factors of this Form 10-Q for additional information regarding the potential impact of COVID-19 on the Company.

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Overview

We 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 providing anti-fraud and digital transaction management solutions to financial institutions and other businesses. 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 including digital identity verification, customer due diligence, electronic signature, secure storage and document management. Our core technologies, multi-factor authentication, identity verification and transaction signing, strengthen the process of preventing hacking attacks against online and mobile transactions to allow companies to transact business safely with 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 authentication, fraud mitigation, e-signing transactions and documents, and identity management in Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and Business-to-Consumer (“B2C”) environments. Our target market is business processes using electronic interface, particularly the Internet, where there is risk of unauthorized access. Our products can increase security associated with accessing business processes, reduce losses from unauthorized access and reduce the cost of the process by automating activities previously performed manually.

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 offering.

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

We believe the markets for authentication, fraud mitigation, agreement automation, and electronic signature solutions will continue to grow driven by new government regulations, growing awareness of the impact of cyber-crime, increasing focus on the digital experience for mobile and online users, and the growth in electronic commerce. The issues driving growth are global; however, the rate of adoption in each country is a function of local culture, competitive position, economic conditions, and the use of technology may vary significantly.

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 may have a significant effect on our revenue.

The COVID-19 pandemic and the various governments’ response have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate.

Cybersecurity Risks

Our use of technology is increasing and is critical in 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;

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2.The products we have traditionally sold and continue to sell to our customers for integration into their software applications contain technology that incorporates the use of secret numbers and encryption technology; and
3.New products and services that we introduced to the market are focused on processing 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 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 did not experience any cyber incidents in the first nine months of 2021 that had a significant impact on our business, it is possible that we could experience an incident in 2021 or future years, which could result in unanticipated costs.

Currency Fluctuation

During the three and nine months ended September 30, 2021, approximately 85% and 86%, respectively, of our revenue was generated outside of the United States. While the majority of our revenues are generated outside of the United States, a significant amount of our revenue earned during the three and nine months ended September 30, 2021 was denominated in U.S. Dollars. During the three and nine months ended September 30, 2021, we estimate that approximately 58% and 52%, respectively, of our revenue was denominated in U.S. Dollars.

In addition, during the three and nine months ended September 30, 2021, approximately 70% and 69% of our operating expenses were incurred outside of the United States. 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.

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 incurred in 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.

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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 period. Translation adjustments arising from differences in exchange rates generated other comprehensive loss of $2.3 million and $2.7 million for the three and nine months ended September 30, 2021, respectively. Translation adjustments arising from differences in exchange rates generated other comprehensive gain of $3.5 million for the three months ended September 30, 2020 and other comprehensive loss of $0.4 million for the nine months ended September 30, 2020. 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 condensed consolidated statements of operations in other income (expense), net. Foreign exchange transaction losses aggregated less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2021, respectively. Foreign exchange transaction gains aggregated $0.4 million and foreign transaction losses aggregated $0.1 million for the three and nine months ended September 30, 2020, respectively.

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.

Product and license revenue. Product and license revenue includes hardware products and software licenses, which can be provided on a perpetual or term basis.
Service and other revenue. Service and other revenue includes subscription solutions (which is our definition of software-as-a-service solutions), maintenance and support, and professional services.

Cost of Goods Sold

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

Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs.
Cost of service and other revenue. Cost of service and other revenue primarily consists of costs related to subscription solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance and support.

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.

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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, respectively. 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 the first nine months of 2021 compared to the same period in 2020 resulted in an increase in operating expenses of approximately $3.0 million.

The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. Operating expenses for the three and nine months ended September 30, 2021 included $0.5 million and $3.6 million, respectively of expenses related to stock-based and long-term incentive plan costs compared to $1.3 million and $4.2 million of stock-based and long-term incentive plan cost for the three and nine months ended September 30, 2020, respectively. Stock-based compensation expense during the three and nine months ended September 30, 2021 was favorably impacted by the forfeiture of unvested awards by certain severed sales management and executive management during the periods.

Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. We expect sales and marketing expenses to increase in absolute dollars as we continue to invest in sales resources in key focus areas, although our sales and marketing expenses may fluctuate as a percentage of total revenue.
Research and development. Research and development expenses consist primarily of personnel costs and long-term incentive compensation. We expect research and development expenses to 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 of personnel costs, legal and other professional fees, and long term incentive compensation. We expect general and administrative expenses to increase in absolute dollars although our general and administrative expenses may fluctuate as a percentage of total revenue.
Amortization of intangible assets. Acquired intangible assets are amortized over their respective amortization periods, and are periodically evaluated for impairment.

Interest Income, Net

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

Other Income (Expense), Net

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

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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, earnings flowing to the U.S. company are expected to be taxed at a rate of 21% to 25%, while earnings 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 strongly influenced by the effective tax rate of our foreign operations. Changes in the effective rate related to foreign operations reflect changes in the geographic mix of earnings and the tax rates in each of the countries in which it is earned. The statutory tax rate for the primary foreign tax jurisdictions ranges from 11% to 35%.

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:

1.the staff, programs and services offered on a yearly basis by the various subsidiaries as determined by management, or
2.the changes in exchange rates related to the currencies in the service provider subsidiaries, or
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 2018, 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.

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Results of Operations

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.

Three months ended September 30,

Nine months ended September 30, 

    

2021

    

2020

    

2021

    

2020

Hardware products

$

17,908

$

21,687

$

55,027

$

65,613

Software licenses

10,285

8,562

29,989

38,280

Subscription

10,197

7,446

28,426

19,286

Professional services

1,152

1,353

3,595

4,100

Maintenance, support, and other

12,734

12,391

38,291

35,484

Total Revenue

$

52,276

$

51,439

$

155,328

$

162,763

Total revenue increased $0.8 million or 2%, during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, driven primarily by an $8.4 million or 38% increase in recurring revenue, partially offset by a $3.8 million or 17% decrease in hardware revenue and a $3.6 million or 57% decrease in perpetual software license revenue. Recurring revenue is the portion of our revenue subject to future renewal and is comprised of subscription, term-based software licenses, and maintenance, support and other revenue. Total revenue decreased $7.4 million or 5%, during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, driven primarily by a decrease in hardware revenue of $10.6 million or 16%, and a decrease in perpetual software license revenue of $13.3 million or 61%. The decreases in hardware and perpetual software license revenue were partially offset by an increase in recurring revenue of $17.0 million or 24%. Increases in recurring revenue for both the three and nine month periods ended September 30, 2021 are reflective of the company’s strategy to increase its recurring revenue contracts.

Product and license revenue decreased by $2.1 million or 7% during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, driven by lower hardware revenue of $3.8 million or 17%, partially offset by higher software licenses revenue of $1.7 million or 20%. For the nine months ended September 30, 2021, product and license revenue decreased $18.9 million or 18% compared to the nine months ended September 30, 2020, which was driven by a $10.6 million or 16% decrease in hardware revenue and an $8.3 million or 22% decrease in software license revenue. Lower hardware revenue for both the three and nine month periods ended September 30, 2021 are partially driven by shipping delays related to disruptions in global transportation and supply chains.

Services and other revenue increased by $2.9 million, or 14% during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, which was primarily driven by a $2.8 million or 37% increase in subscription revenue. For the nine months ended September 30, 2021, services and other revenue increased $11.4 million or 19% compared to the nine months ended September 30, 2020, which was driven by a $9.1 million or 47% increase in subscription revenue and a $2.8 million or 8% increase in maintenance, support, and other revenue.

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. 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

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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:

Three months ended September 30, 

Nine months ended September 30, 

    

2021

2020

2021

    

2020

(in thousands)

(in thousands)

Revenue

 

  

  

  

 

  

EMEA

$ 21,965

$ 26,684

$ 73,784

$ 88,624

Americas

17,621

12,305

 

51,160

38,570

APAC

12,690

12,450

30,384

35,569

Total revenue

$ 52,276

$ 51,439

 

$ 155,328

$ 162,763

 

% of Total Revenue

EMEA

42%

52%

48%

54%

Americas

34%

24%

32%

24%

APAC

24%

24%

20%

22%

Revenue generated in EMEA during the three months ended September 30, 2021 was $4.7 million, or 18% lower than the three months ended September 30, 2020, driven primarily by lower hardware sales. For the nine months ended September 30, 2021, revenue generated in EMEA was $14.8 million or 17% lower than the same period in 2020, driven by lower software license revenue and lower hardware revenue.

Revenue generated in the Americas during the three months ended September 30, 2021 was $5.3 million, or 43% higher than the three months ended September 30, 2020, driven primarily by increases in software license revenue and subscription revenue. For the nine months ended September 30, 2021, revenue generated in the Americas was $12.6 million or 33% higher than the same period in 2020, driven largely by higher subscription revenue.

Revenue generated in the Asia Pacific region during the three months ended September 30, 2021 was $0.2 million, or 2% higher than the three months ended September 30, 2020, driven by higher revenue from software licenses. For the nine months ended September 30, 2021, revenue generated in the Asia Pacific region was $5.2 million or 15% lower than the same period in 2020, driven by lower software license and hardware revenue.

Cost of Goods Sold and Gross Margin

Three months ended September 30, 

Nine months ended September 30, 

    

2021

2020

2021

2020

(in thousands)

(in thousands)

Cost of goods sold

 

  

 

  

  

 

  

Product and license

$ 8,477

$ 10,064

$ 27,607

$ 33,378

Services and other

6,379

5,414

 

19,041

16,395

Total cost of goods sold

$ 14,856

$ 15,478

 

$ 46,648

$ 49,773

Gross profit

$ 37,420

$ 35,961

$ 108,680

$ 112,990

Gross margin

Product and license

70%

67%

68%

68%

Services and other

74%

74%

73%

72%

Total gross margin

72%

70%

70%

69%

The cost of product and license revenue decreased $1.6 million or 16% during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to a 17% decrease in hardware revenue during the period. During the nine months ended September 30, 2021, the cost of product and license revenue decreased $5.8 million or 17% compared to the nine months ended September 30, 2020 primarily due to a 16% decrease in hardware revenue during the period.

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The cost of services and other revenue increased by $1.0 million, or 18% during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. For the nine months ended September 30, 2021, the cost of services and other revenue increased by $2.6 million, or 16% compared to the nine months ended September 30, 2020. The increase in cost of services and other revenue for both periods is reflective of higher subscription revenue, which has increased cloud-based infrastructure costs.

Gross profit increased $1.5 million, or 4% during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. During the nine months ended September 30, 2021 gross profit decreased by $4.3 million, or 4% compared to the nine months ended September 30, 2020. Gross profit margin was 72% and 70% for the three and nine months ended September 30, 2021, respectively, compared to 70% and 69% for the three and nine months ended September 30, 2020, respectively. The increase in profit margins for the three months ended September 30, 2021 reflects a shift in product mix to increased term-based software and subscription revenue and lower hardware revenue.

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 approximately $0.3 million and $4.8 million for the three and nine months ended September 30, 2021, respectively. Had currency rates in 2021 been equal to rates in 2020, the gross profit margin would have been approximately 3 percentage point lower for both the three and nine months ended September 30, 2021.

Operating Expenses

Three months ended September 30, 

Nine months ended September 30, 

    

2021

2020

2021

2020

(in thousands)

(in thousands)

Operating costs

 

  

 

  

  

 

  

Sales and marketing

$

15,474

$

14,576

$

49,850

$

44,129

Research and development

11,359

10,643

35,699

31,178

 

General and administrative

11,207

10,737

38,797

33,851

 

Amortization of intangible assets

1,396

2,360

4,503

7,049

 

Total operating costs

$

39,436

$

38,316

$

128,849

$

116,207

 

Sales and Marketing Expenses

Sales and marketing expenses for the three months ended September 30, 2021 were $15.5 million, an increase of $0.9 million or 6%, from the three months ended September 30, 2020. Sales and marketing expenses for the nine months ended September 30, 2021 were $49.9 million, an increase of $5.7 million or 13% from the same period in 2020. The increase in expense for the three and nine months ended September 30, 2021 compared to the same periods in 2020 was driven by higher headcount and an increase in the average cost per employee.

Average full-time sales, marketing, support, and operating employee headcount for the three and nine months ended September 30, 2021 was 363 and 368, respectively, compared to 353 and 345 for the three and nine months ended September 30, 2020, respectively. Headcount was 3% and 7% higher for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

Research and Development Expenses

Research and development expenses for the three months ended September 30, 2021, were $11.4 million, an increase of $0.7 million, or 7%, from the three months ended September 30, 2020. Research and development expenses for the nine months ended September 30, 2021, were $35.7 million, an increase of $4.5 million, or 15%, from the nine months ended September 30, 2020. The increase in both periods was driven primarily by higher personnel costs due to higher headcount.

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Average full-time research and development employee headcount for the three and nine months ended September 30, 2021 was 364 and 359, compared to 326 and 322 for the three and nine months ended September 30, 2020, respectively. Average headcount was approximately 11% and 12% higher for the three and nine months ended September 30, 2021, respectively, when compared to the same periods in 2020.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2021, were $11.2 million, an increase of $0.5 million or 4%, from the three months ended September 30, 2020. The increase in general and administrative expenses for the three months ended September 30, 2021 was driven by higher personnel costs and consulting fees related to our strategic action plan, partially offset by the forfeiture of unvested stock based compensation by employees who left the company. General and administrative expenses for the nine months ended September 30, 2021, were $38.8 million, an increase of $4.9 million or 15%, from the nine months ended September 30, 2020. The increase in general and administrative expenses for the nine months ended September 30, 2021, compared to the same periods in 2020 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 the three and nine months ended September 30, 2021 was 134 and 134, respectively, compared to 126 and 122 for the three and nine months ended September 30, 2020, respectively. Average headcount was approximately 6% and 10% higher for the three and nine months ended September 30, 2021, respectively, when compared to the same periods in 2020.

Amortization of Intangible Assets

Amortization of intangible assets for the three and nine months ended September 30, 2021 was $1.4 million and $4.5 million, respectively, compared to $2.4 million and $7.0 million for the three and nine months ended September 30, 2020, respectively. Amortization expense decreased 41% and 36% for the three and nine months ended September 30, 2021, respectively. The decrease was driven by certain assets acquired in the Silanis acquisition becoming fully amortized.

Interest income (expense), net

Three months ended September 30, 

Nine months ended September 30, 

    

2021

2020

2021

2020

(in thousands)

(in thousands)

Interest income (expense), net

($ 4)

$ 56

$ 2

$ 389

Interest income (expense), net was less than $0.1 million for both the three and nine months ended September 30, 2021, as compared to less than $0.1 million and $0.4 million for the same periods in 2020. The decrease in interest income for both periods reflects a decrease in our cash equivalents and short term investment balance and lower interest rates.

Other income, net

Three months ended September 30, 

Nine months ended September 30, 

    

2021

2020

2021

2020

(in thousands)

(in thousands)

Other income, net

$ 283

$ 716

$ 950

$ 887

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

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Other income, net for the three and nine months ended September 30, 2021 was $0.3 million and $1.0 million, respectively, compared to $0.7 million and $0.9 million for the comparable periods of 2020. Lower income was driven by losses resulting from foreign currency translation.

Provision for Income Taxes

Three months ended September 30, 

Nine months ended September 30, 

    

2021

2020

2021

2020

(in thousands)

(in thousands)

Provision (benefit) for income taxes

($ 762)

$ 95

($ 2,406)

$ 1,758

The Company recorded income tax benefit for the three months ended September 30, 2021 of $0.8 million, compared to income tax expense of $0.1 million for the three months ended September 30, 2020. The Company recorded income tax benefit for the nine months ended September 30, 2021 of $2.4 million, compared to income tax expense of $1.8 million for the nine months ended September 30, 2020. The benefit recorded for the three and nine months ended September 30, 2021 was attributable to a net loss in the periods excluding losses at entities where we cannot record a tax benefit, as well as tax benefit for certain stock compensation deductions.

Liquidity and Capital Resources

At September 30, 2021, we had cash balances (total cash and cash equivalents) of $58.6 million and short-term investments of $39.2 million. Short term investments consist of U.S. treasury 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 cash balances of $88.4 million and 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 other non-current assets on the Condensed Consolidated Balance Sheet in the amounts of $0.9 million and $0.8 million at September 30, 2021 and December 31, 2020, respectively.

Our working capital at September 30, 2021 was $104.9 million compared to $131.9 million at December 31, 2020.

As of September 30, 2021, we held $45.7 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $44.6 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.

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

Our cash flows are as follows:

Nine months ended September 30, 

    

2021

2020

(in thousands)

Cash provided by (used in):

 

  

 

  

Operating activities

($ 4,429)

$ 7,429

Investing activities

(14,299)

(4,123)

 

Financing activities

(10,253)

(1,963)

Effect of foreign exchange rate changes on cash and cash equivalents

(760)

306

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Operating Activities

Cash generated by operating activities is primarily comprised of net income, as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of amortization of intangible assets, depreciation of property and equipment, deferred tax benefit, 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 nine months ended September 30, 2021, net cash used in operating activities was $4.4 million, compared to net cash provided by operating activities of $7.4 million during the nine months ended September 30, 2020. The fluctuation is primarily driven by a more significant net loss, partially offset by a lower accounts receivable balance and lower contract assets.

Investing Activities

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

For the nine months ended September 30, 2021, net cash used in investing activities was $14.3 million, compared to net cash used in investing activities of $4.1 million for the nine months ended September 30, 2020. The fluctuation is related primarily to the timing of the purchases and maturities of our short term investments, as well as property and equipment purchases.

Financing Activities

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

For the nine months ended September 30, 2021, net cash used in financing activities was $10.3 million, compared to net cash used in financing activities of $2.0 million for the nine months ended September 30, 2020. The increase is primarily driven by share repurchases of $7.5 million during the nine months ended September 30, 2021, compared to no share repurchases during the nine months ended September 30, 2020, as well higher tax payments for restricted stock issuances which increased in conjunction with the expansion of our employee stock based compensation program.

Critical Accounting Policy

Our accounting policies are fully described in Note 1 - Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020 and Note 2 – Summary of Significant Accounting Policies to our Interim Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021. We believe our most critical accounting policies include revenue recognition, purchase accounting and related fair value measurements and accounting for income taxes.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our market risk during the three months ended September 30, 2021. For additional information, refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk”, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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Item 4 - Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

The Company carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal interim financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls

There have been no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended September 30, 2021. We have not experienced any material impact to our internal controls over financial reporting due to COVID-19. We are continually monitoring and assessing the effects of COVID-19 on our internal controls to minimize the impact to their design and operating effectiveness.

PART II. OTHER INFORMATION

Item 1 - 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.

We cannot predict the outcome of legal or other proceedings with certainty, including the legal proceedings which are summarized in “Note 14 – Legal Proceedings and Contingencies” included in our Notes to Condensed Consolidated Financial Statements, incorporated herein by reference, and “Note 15 – Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission. Any reasonably possible material loss or range of loss associated with any individual legal proceeding that can be estimated, is provided in Note 14 to the Condensed Consolidated Financial Statements contained herein.

Item 1A – Risk Factors

The following risk factor is provided to update the risk factors previously disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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While we believe the coronavirus has had, and could continue to 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. We re-opened a limited number of our offices during 2020 with limited capacity 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 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 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 experienced some delays and increased costs related to fulfilling our hardware orders. Such issues have been primarily resolved 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 addition, the global economic uncertainty associated with the COVID-19 pandemic has affected many of our customers and we believe those effects include decreased orders 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 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

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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.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases by the Company of its shares of common stock during the third quarter of 2021:

Total Number

of Shares

Maximum

Purchased as

Dollar Value of Shares

Total

Part of Publicly

that May Yet Be

Number of

Average

Announced

Purchased Under

Shares Purchased 

Price Paid

Plans or

the Plans or

Period

    

(1)

    

per Share

    

Programs (2)

    

Programs (2)

July 1, 2021 through July 31, 2021

 

$

 

 

42,062,363

August 1, 2021 through August 31, 2021

 

231,068

$

19.72

37,498,973

September 1, 2021 through September 30, 2021

 

$

37,498,973

(1.)On June 10, 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.
(2.)In addition to the shares repurchased under the program, during the three months ended September 30, 2021, 30,538 shares were purchased by the company in order to satisfy employee tax withholding obligations upon the vesting of restricted stock and restricted stock units. These shares were not acquired pursuant to any publicly announced purchase plan or program.

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Item 5 – Other Information

On October 29, 2021, we entered into an agreement with Steven Worth to provide a supplemental compensation amount of $50,000 per month for each month or portion thereof in which he serves as our Interim President and CEO. This arrangement is effective as of October 1, 2021.

The related letter agreement is filed as an exhibit to this quarterly report on Form 10-Q.

Item 6 - Exhibits

Exhibit 31.1 – Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 2, 2021.

Exhibit 31.2 – Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 2, 2021.

Exhibit 32.1 – Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 2, 2021.

Exhibit 32.2 – Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 2, 2021.

Exhibit 10.1 – Letter Agreement between interim CEO Steven R. Worth and OneSpan Inc., dated November 1, 2021.

Exhibit 101.INS – XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

Exhibit 101.SCH – XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB  XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF – XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 104 – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*Certain exhibits, schedules and annexes have been omitted pursuant to Item 601(b)(2) of Regulation S-K. OneSpan undertakes to furnish copies of any such omitted items upon request by the Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 2, 2021.

OneSpan Inc.

/s/ Steven R. Worth

Steven R. Worth

Interim Chief Executive Officer

(Principal Executive Officer)

/s/ Jan Kees van Gaalen

Jan Kees van Gaalen

Interim Chief Financial Officer

(Principal Financial Officer)

/s/ John Bosshart

John Bosshart

Chief Accounting Officer

(Principal Accounting Officer)

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