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 ~~2017~~, 2019

☐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

~~VASCO Data Security International,~~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.)

~~1901 South Meyers Road,~~121 West Wacker Drive, Suite ~~210~~2050

~~Oakbrook Terrace,~~Chicago, Illinois ~~60181~~60601

(Address of Principal Executive Offices)~~(Zip~~ (Zip Code)

~~(630) 932‑8844~~(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 ☒ ~~Yes~~No ◻ No

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 ~~40,170,~~40,201,365~~047~~shares of Common Stock, $.001 par value per share, outstanding at October ~~27, 2017.~~28, 2019.

Table of Contents

~~VASCO Data Security International,~~OneSpan Inc.

Form 10‑Q

For ~~The Quarterly Period~~the Quarter Ended September 30, ~~2017~~2019

Table of Contents


		~~Page No.~~
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2019 (Unaudited) and December 31, ~~2016~~2018	3

	Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	5

	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2019 and 2018	6

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	68

	Notes to Condensed Consolidated Financial Statements (Unaudited)	79

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1922

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3034

Item 4.	Controls and Procedures	3034

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3135

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

~~Item 5.~~	~~Other Information~~	33 35

Item 6.	Exhibits	3436

SIGNATURES		3537

This report contains trademarks of VASCO Data Security International, Inc. and its subsidiaries, which include VASCO, the VASCO “V” design, Digipass as a Service, MYDIGIPASS.COM, DIGIPASS, VACMAN, aXsGUARD, IDENTIKEY, Cronto, and eSignLive.

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~~VASCO Data Security International,~~OneSpan Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)


	September 30,		December 31,
	2017		2016		September 30,		December 31,
	(unaudited)				2019		2018
ASSETS
Current assets
Cash and equivalents	$	49,261	$	49,345	$	54,889	$	76,708
Short term investments		109,463		94,856		26,442		22,789
Accounts receivable, net of allowance for doubtful accounts of $533 in 2017 and $535 in 2016		34,612		36,693
Accounts receivable, net of allowances of $1,562 in 2019 and $1,152 in 2018						76,571		59,631
Inventories, net		17,395		17,420		18,977		14,428
Prepaid expenses		4,000		3,249		6,645		4,733
Contract assets						6,138		7,962
Other current assets		4,705		5,596		8,218		5,705
Total current assets		219,436		207,159		197,880		191,956
Property and equipment:
Furniture and fixtures		6,415		5,547		10,726		7,613
Office equipment		14,454		13,028		11,896		11,059
		20,869		18,575
Total Property and equipment:						22,622		18,672
Accumulated depreciation		(17,056)		(15,294)		(13,826)		(12,422)
Property and equipment, net		3,813		3,281		8,796		6,250
Operating lease right-of-use assets						10,903		—
Goodwill		56,384		54,409		91,037		91,841
Intangible assets, net of accumulated amortization		40,084		46,549		37,752		45,462
Deferred income taxes						5,542		5,601
Contract assets - non-current						5,213		3,316
Other assets		15,969		15,872		8,154		8,400
Total assets	$	335,686	$	327,270	$	365,277	$	352,826
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	6,038	$	8,915	$	13,074	$	7,202
Deferred revenue		31,331		36,364		29,456		33,633
Accrued wages and payroll taxes		12,317		10,894		13,693		13,932
Income taxes payable		2,625		4,594
Short-term income taxes payable						4,735		6,905
Other accrued expenses		6,682		5,464		9,163		9,323
Deferred compensation		1,073		1,729		1,315		1,362
Total current liabilities		60,066		67,960		71,436		72,357
Long-term deferred revenue						12,075		10,672
Lease liability long term						11,304		—
Other long-term liabilities		9,516		1,878		5,518		7,075
Long-term income taxes payable						7,111		7,620
Deferred income taxes		795		853		3,758		2,661
Total liabilities		70,377		70,691		111,202		100,385
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at September 30, 2017 or December 31, 2016		—		—
Common stock: $.001 par value per share, 75,000 shares authorized; 40,170 and 40,097 issued and outstanding at September 30, 2017 and December 31, 2016, respectively		40		40
Preferred stock: 500 shares authorized, none issued and outstanding at December 31, 2019 and 2018						—		—
Common stock: $.001 par value per share, 75,000 shares authorized; 40,193 and 40,225 issued and outstanding at September 30, 2019 and December 31, 2018, respectively						40		40
Additional paid-in capital		89,125		87,481		94,694		93,310
Accumulated income		181,989		178,551		176,118		172,378
Accumulated other comprehensive loss		(5,845)		(9,493)		(16,777)		(13,287)
Total stockholders' equity		265,309		256,579		254,075		252,441
Total liabilities and stockholders' equity	$	335,686	$	327,270	$	365,277	$	352,826

See accompanying notes to unaudited condensed consolidated financial statements.

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~~VASCO Data Security International,~~OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three months ended				Nine months ended				Three months ended				Nine months ended
	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Revenue
Product and license	$	38,421	$	34,251	$	104,454	$	118,786	$	61,181	$	36,882	$	133,159	$	105,362
Services and other		12,705		9,397		34,331		25,922		18,544		15,613		50,408		42,119
Total revenue		51,126		43,648		138,785		144,708		79,725		52,495		183,567		147,481

Cost of goods sold
Products and license		12,083		11,400		32,668		39,925
Product and license										22,199		14,321		46,966		32,897
Services and other		2,397		2,198		7,511		6,078		4,470		3,631		13,622		9,363
Total cost of goods sold		14,480		13,598		40,179		46,003		26,669		17,952		60,588		42,260

Gross profit		36,646		30,050		98,606		98,705		53,056		34,543		122,979		105,221

Operating costs:
Operating costs
Sales and marketing		13,956		13,453		42,997		41,982		14,156		16,039		44,579		46,938
Research and development		5,493		5,807		17,669		17,617		9,956		8,992		32,428		22,805
General and administrative		9,882		7,682		26,323		25,071		9,490		10,184		29,540		32,168
Amortization of purchased intangible assets		2,203		2,196		6,603		6,622
Amortization / impairment of intangible assets										2,335		2,442		7,051		7,387
Total operating costs		31,534		29,138		93,592		91,292		35,937		37,657		113,598		109,298

Operating income		5,112		912		5,014		7,413
Operating income (loss)										17,119		(3,114)		9,381		(4,077)

Interest income, net		386		229		1,016		504		228		258		432		991
Other income (expense), net		(185)		118		402		731		(1,611)		246		(1,711)		2,025

Income before income taxes		5,313		1,259		6,432		8,648
Income (loss) before income taxes										15,736		(2,610)		8,102		(1,061)
Provision for income taxes		2,558		781		2,994		3,146		3,864		(1,702)		4,363		(943)

Net income	$	2,755	$	478	$	3,438	$	5,502
Net income (loss)									$	11,872	$	(908)	$	3,739	$	(118)

Basic income per share	$	0.07	$	0.01	$	0.09	$	0.14
Diluted income per share	$	0.07	$	0.01	$	0.09	$	0.14

Weighted average common shares outstanding:
Net income (loss) per share
Basic		39,811		39,736		39,792		39,709	$	0.30	$	(0.02)	$	0.09	$	(0.00)
Diluted		39,821		39,834		39,802		39,786	$	0.30	$	(0.02)	$	0.09	$	(0.00)

Weighted average common shares outstanding
Basic										40,062		39,922		40,037		39,924
Diluted										40,129		39,922		40,099		39,924

See accompanying notes to unaudited condensed consolidated financial statements.

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~~VASCO Data Security International,~~OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in ~~thousands, unaudited)~~thousands)

(unaudited)

Three months ended

Nine months ended

September 30,

September 30,


2017

2016

2017

2016

Net income

$
2,755

$
478

$
3,438

$
5,502

Other Comprehensive income (loss):

Cumulative translation adjustment, net

1,203

7

3,633

(425)

Pension adjustment, net of tax

4

—

15

—

Comprehensive income

$
3,962

$
485

$
7,086

$
5,077


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Net income (loss)	$	11,872	$	(908)	$	3,739	$	(118)
Other comprehensive income (loss)
Cumulative translation adjustment, net		(3,022)		(1,244)		(3,450)		(3,266)
Pension adjustment, net		(12)		3		(40)		37
Comprehensive income (loss)	$	8,838	$	(2,149)	$	249	$	(3,347)

See accompanying notes to unaudited condensed consolidated financial statements.

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~~VASCO Data Security International,~~OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

For the nine months ended September 30, 2019:


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Stockholders'
Description	Shares	Amount		Capital		Income		Income (Loss)		Equity
Balance at December 31, 2018	40,225		40		93,310		172,378		(13,287)		252,441
Net income (loss)	—		—		—		(5,671)		—		(5,671)
Foreign currency translation adjustment, net of tax	—		—		—		—		870		870
Restricted stock awards	(10)		—		552		—		—		552
Tax payments for stock issuances	—		—		(218)		—		—		(218)
Pension adjustment, net of tax	—		—		—		—		(16)		(16)
Balance at March 31, 2019	40,215	$	40	$	93,644	$	166,707	$	(12,433)	$	247,958
Net income (loss)	—		—		—		(2,461)		—		(2,461)
Foreign currency translation adjustment, net of tax	—		—		—		—		(1,298)		(1,298)
Restricted stock awards	117		—		677		—		—		677
Tax payments for stock issuances	(4)		—		(49)		—		—		(49)
Pension adjustment, net of tax	—		—		—		—		(12)		(12)
Balance at June 30, 2019	40,328	$	40	$	94,272	$	164,246	$	(13,743)	$	244,815
Net income (loss)	—		—		—		11,872		—		11,872
Foreign currency translation adjustment, net of tax	—		—		—		—		(3,022)		(3,022)
Restricted stock awards	10		—		549		—		—		549
Tax payments for stock issuances	(145)		—		(127)		—		—		(127)
Pension adjustment, net of tax	—		—		—		—		(12)		(12)
Balance at September 30, 2019	40,193	$	40	$	94,694	$	176,118	$	(16,777)	$	254,075

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 nine months ended September 30, 2018:


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Stockholders'
Description	Shares	Amount		Capital		Income		Income (Loss)		Equity
Balance at December 31, 2017	40,086		40		90,307		156,151		(8,568)		237,930
Cumulative impact of change in accounting principles, net of tax	—		—		—		12,376		—		12,376
Net income (loss)	—		—		—		1,792		—		1,792
Foreign currency translation adjustment, net of tax	—		—		—		—		1,318		1,318
Restricted stock awards	226		—		799		—		—		799
Pension adjustment, net of tax	—		—		—		—		12		12
Balance at March 31, 2018	40,312	$	40	$	91,106	$	170,319	$	(7,239)	$	254,226
Net income (loss)	—		—		—		(1,002)		—		(1,002)
Foreign currency translation adjustment, net of tax	—		—		—		—		(3,339)		(3,339)
Restricted stock awards	(79)		—		1,009		—		—		1,009
Pension adjustment, net of tax	—		—		—		—		22		22
Balance at June 30, 2018	40,233	$	40	$	92,115	$	169,317	$	(10,556)	$	250,916
Net income (loss)	—		—		—		(908)		—		(908)
Foreign currency translation adjustment, net of tax	—		—		—		—		(1,244)		(1,244)
Restricted stock awards	(147)		—		1,109		—		—		1,109
Tax payments for stock issuances	—		—		—		—		—		—
Pension adjustment, net of tax	—		—		—		—		3		3
Balance at September 30, 2018	40,086	$	40	$	93,224	$	168,409	$	(11,797)	$	249,876

See accompanying notes to unaudited condensed consolidated financial statements.

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OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine months ended September 30,
	2019		2018
Cash flows from operating activities:
Net income (loss)	$	3,739	$	(118)
Adjustments to reconcile net income (loss) from operations to net cash provided by (used in) operations:
Depreciation, amortization, and impairment of intangible assets		8,579		9,066
Loss (gain) on disposal of assets		—		(49)
Deferred tax expense (benefit)		(508)		(3,020)
Stock-based compensation		1,778		2,916
Accounts receivable, net		(18,988)		6,183
Inventories, net		(4,549)		(3,267)
Contract assets		(74)		(2,892)
Accounts payable		5,895		(5,258)
Income taxes payable		(2,587)		(8,433)
Accrued expenses		(2,351)		(911)
Deferred compensation		(47)		(541)
Deferred revenue		(2,318)		(405)
Other assets and liabilities		(2,231)		(2,476)
Net cash used in operating activities		(13,662)		(9,205)

Cash flows from investing activities:
Purchase of short term investments		(24,663)		—
Maturities of short term investments		21,250		80,000
Purchase of Dealflo, net of cash acquired		—		(53,065)
Additions to property and equipment		(4,196)		(3,410)
Net cash provided by (used in) investing activities		(7,609)		23,525

Cash flows from financing activities:
Tax payments for restricted stock issuances		(394)		(399)
Net cash used in financing activities		(394)		(399)

Effect of exchange rate changes on cash		(154)		(647)

Net increase (decrease) in cash		(21,819)		13,274
Cash, cash equivalents, and restricted cash, beginning of period		77,555		78,661
Cash, cash equivalents, and restricted cash, end of period (1.)	$	55,736	$	91,935

Nine months ended September 30,


2017

2016

Cash flows from operating activities:





Net income

$
3,438

$
5,502

Adjustments to reconcile net income to net cash provided:





Depreciation and amortization

7,893

7,930

Loss on disposal of assets

227

14

Deferred tax expense (benefit)

73

(1,816)

Stock-based compensation

1,901

4,066

Changes in assets and liabilities





Accounts receivable, net

3,854

2,545

Inventories, net

(97)

2,179

Other current assets

(751)

608

Accounts payable

(2,808)

(2,132)

Income taxes payable

(2,089)

(651)

Accrued expenses

2,096

(882)

Deferred compensation

(656)

(488)

Deferred revenue

2,093

8,021

Other long-term liabilities

(125)

(10)

Net cash provided by operating activities

15,049

24,886

Cash flows from investing activities:





Purchase of short term investments

(168,731)

(159,771)

Maturities of short term investments

155,000

94,653

Additions to property and equipment

(1,323)

(2,004)

Additions to intangible assets

(65)

(85)

Other assets

(397)

(4,095)

Net cash used in investing activities

(15,516)

(71,302)

Cash flows from financing activities:





Tax payments for restricted stock issuances

(257)

(1,000)

Net cash used in financing activities

(257)

(1,000)

Effect of exchange rate changes on cash

640

351

Net decrease in cash

(84)

(47,065)

Cash and equivalents, beginning of period

49,345

78,522

Cash and equivalents, end of period

$
49,261

$
31,457

(1.)

The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to amounts reported within the unaudited condensed consolidated balance sheet as of September 30, 2019 and December 31, 2018 and amounts previously reported within the unaudited condensed consolidated balance sheet in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 (in thousands):


	September 30, 2019		September 30, 2018		December 31, 2018

Cash and cash equivalents	$	54,889	$	91,935	$	76,708
Restricted cash included in other non-current assets		847		—		847
Cash, cash equivalents and restricted cash	$	55,736	$	91,935	$	77,555

See accompanying notes to unaudited condensed consolidated financial statements.

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~~VASCO Data Security International, Inc.~~OneSpan Inc.

Notes to Condensed Consolidated Financial Statements

~~(All amounts are in thousands, except per share data)~~

~~(Unaudited)~~(unaudited)

Unless otherwise noted, references in this Quarterly Report on Form ~~10‑Q~~10-Q to ~~“VASCO,~~“OneSpan,” ~~“company,~~“Company,” “we,” “our,” and “us,” refer to ~~VASCO Data Security International,~~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 and market digital solutions for identity, security, and business productivity that protect and facilitate electronic transactions via mobile and connected devices. OneSpan has operations in Austria, Australia, Belgium, Brazil, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K.), and the United States (U.S.).

Our operations are reported 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, 2018.

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 significant intercompany accounts and transactions have been eliminated. The operating results for the interim periods presented are not necessarily indicative of the results expected for a full year.

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 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 consolidated statements of operations in other income (expense), net. Foreign exchange transaction losses aggregated $1.9 million for the three months ended September 30, 2019, compared to net losses aggregated of

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$0.1 million for the three months ended September 30, 2018. During the nine months ended September 30, 2019, foreign exchange transaction losses aggregated $2.6 million, compared to net losses aggregated of $0.2 million during the nine months ended September 30, 2018.

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 ~~1 -~~2 – Summary of Significant Accounting Policies

~~Nature of Operations~~

~~VASCO Data Security International, Inc. (“VASCO”) and its wholly owned subsidiaries design, develop, market and support hardware and software security systems~~Except for the accounting policies related to lease accounting that manage and secure access to information assets. VASCO has operations in Austria, Australia, Belgium, Brazil, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom, and the United States (“U.S.”).

~~In accordance with ASC 280, Segment Reporting, our operations are reported~~were updated as a ~~single operating segment.~~

~~Basis~~result of ~~Presentation~~

~~The accompanying unaudited condensed consolidated financial statements include~~ the ~~accounts~~adoption of ~~VASCO and its subsidiaries and~~Accounting Standards Update (“ASU”) No. 2016-02, Leases (Accounting Standards Codification (“ASC”) Topic 842) issued by the Financial Accounting Standards Board (the “FASB”), there have been ~~prepared pursuant~~no changes to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally acceptedsignificant accounting ~~principles for complete financial statements and should be read~~policies described in ~~conjunction with~~ the ~~audited consolidated financial statements included in the company’s~~ Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2016.~~

In2018, filed with the ~~opinion of management,~~SEC on March 15, 2019 that have had a material impact on the ~~accompanying unaudited~~Company’s condensed consolidated financial statements ~~have been prepared~~and related notes. See Note 8 - Leases, for updated policies related to lease accounting.

Cash and Cash Equivalents

During the year ended December 31, 2018, we entered into a new lease agreement that required a letter of credit in the amount of $0.8 million to secure the obligation. The restricted cash related to this letter of credit is recorded in other non-current assets on the ~~same basis~~Condensed Consolidated Balance Sheet at September 30, 2019 and December 31, 2018.

Short Term Investments

Short term investments consist of U.S. treasury bills and notes, U.S. government agency notes, corporate notes, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months. Fair value is determined using Level 2 inputs as defined by ASC 820, Fair Value Measurements.

The hierarchy requires entities to maximize the ~~audited consolidated financial statements,~~use of observable inputs and ~~include all adjustments, consisting only~~minimize the use of ~~normal recurring adjustments, necessary for the~~unobservable inputs. The three levels of inputs used to measure fair ~~presentation of the results of the interim periods presented. All significant intercompany accounts~~value are as follows:

Level 1 – Quoted prices in active markets for identical assets and liabilities.

Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial investment.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Property and ~~transactions have been eliminated. The operating results for the interim periods presented are not necessarily indicative of the results expected for a full year.~~Equipment

~~Revision of Previously Issued Financial Statements~~

~~Cost of goods sold, gross profit~~Depreciation expense was $0.5 million and ~~operating expenses~~$1.5 million for the three and nine months ended September 30, ~~2016 reflected in the statements of operations have been revised from amounts previously reported~~2019, respectively, compared to correct immaterial errors previously disclosed in Note 1, Revision of Previously Issued Financial Statements in our Annual Report on Form 10‑K for the year ended December 31, 2016. Specifically,$0.6 million and $1.7 million for the three and nine months ended September 30, ~~2016, cost~~2018, respectively.

Leases

The Company adopted ASU 2016-02 as of ~~goods sold increased by $2,051 and $5,849 and gross profit and operating expenses each decreased from~~January 1, 2019, using the ~~respective~~modified retrospective approach. Prior period amounts ~~previously reported by $2,051 and $5,849, respectively.~~

have not been adjusted. In addition, in accordance with SEC requirements, revenue is presented in two categories, Product and License Revenue and Service and Other Revenue. Product and License Revenue includes hardware products and software licenses. Service and Other Revenue includes software as a service (“SaaS”) solutions, maintenance and support, and professional services. Additional adjustments were made to present cost of goods sold consistent with these two categories.the Company elected the following practical expedients:

~~Principles of Consolidation~~

~~The consolidated financial statements include the accounts of VASCO and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.~~

The package of practical expedients permitted under the transition guidance within the new standard. The practical expedient package applies to leases commenced prior to adoption of the new standard and permits companies not to reassess whether existing or expired contracts contain a lease, the lease classification, and any initial direct costs for existing leases.

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~~Estimates and Assumptions~~

~~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. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net.

The financial position and results of operations of our operations in Canada, Singapore and Switzerland 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.

~~For the three and nine months ended September 30, 2017, foreign currency transactions resulted in a loss of $273 and $320, respectively, compared to a loss of $110 and a gain of $152 for the same periods in 2016.~~

~~Revenue Recognition~~

~~We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985‑605,~~ ~~Software – Revenue Recognition, ASC 985‑605‑25,~~ ~~Revenue Recognition – Multiple Element Arrangements,~~ ~~and Staff Accounting Bulletin 104.~~

~~Product and License Revenue includes hardware products and software licenses. Services and Other includes software as a service (“SaaS”), maintenance and support, and professional services.~~

~~Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the revenue is probable.~~

In multiple-element arrangements, some of our products are accounted for under the software provisions of ASC 985‑605 and others under the provisions that relate to the sale of non-software products.

~~In our typical multiple-element arrangement, the primary deliverables include:~~

1.·

~~a client component (i.e., an item that is used by~~The short-term lease practical expedient, which allowed the ~~person being authenticated~~Company to exclude short-term leases from recognition in the ~~form of either a new standalone hardware device or software that is downloaded onto a device the customer already owns),~~unaudited consolidated balance sheets;

2.·

~~host system software~~We have lease agreements that ~~is installed on the customer’s systems (i.e., software on the host system that verifies the identity of the person being authenticated) or licenses~~contain lease and non-lease components. For automobile leases, we account for ~~additional users on the host system software, if the host system software had been installed previously,~~lease and non-lease components together. For office leases, we account for these components separately using a relative standalone selling price basis; and

3.·

~~post contract support (“PCS”)~~We apply the portfolio approach to automobile leases with similar characteristics that commence in the ~~form of maintenance on the host system software or support.~~same period.

~~Our multiple-element arrangements may also include other items that are usually delivered prior to~~ The adoption of this accounting standard resulted in the ~~recognition~~recording of ~~any revenue~~Operating lease right-of-use (“ROU”) assets and ~~incidental to~~Operating lease liabilities of $9.2 million and $11.0 million, respectively, as of January 1, 2019. The difference between the ~~overall transaction,~~asset and liability is a result of lease incentives, such as initialization of the hardware device, customization of the hardware device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer’s end-use customer or employeetenant improvement allowances, and ~~in some limited cases, professional services to assist with the initial implementation of a new customer.~~

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In multiple-element arrangements that include a hardware client device, we allocate the selling price among all elements, delivered and undelivered, based on our internal price lists and the percentage of the selling price of that element, per the price list, to the total of the estimated selling price of all of the elements per the price list. Our internal price lists for both delivered and undelivered elements were determined to be reasonable estimates of the selling price of each element based on a comparison of actual sales made to the price list.

In multiple-element arrangements that include a software client device, we account for each element under the standards of ASC 985‑605 related to software. When software client device and host software are delivered elements, we use the Residual Method (ASC 605‑25) for determining the amount of revenue to recognize for token and software licenses if we have vendor-specific objective evidence (“VSOE”) for all of the undelivered elements. Any discount provided to the customer is applied fully to the delivered elements in such an arrangement. VSOE for undelivered elements is established using the “bell curve method.” Under this method, we conclude VSOE exists when a substantial majority of PCS renewals are within a narrow range of pricing. The estimated selling price of PCS items is based on an established percentage of the user license fee attributable to the specific software. In sales arrangements where VSOE of fair value has not been established, revenue for all elements is deferred ~~and amortized over the life of the arrangement.~~

~~For transactions other than multiple-element arrangements, we recognize revenue as follows:~~

~~Product and License Revenue:~~ Revenue from the sale of computer security hardware or the license of software is recorded upon shipment or, if an acceptance period is allowed, at the latter of shipment or customer acceptance. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized.

~~SaaS:~~ We generate SaaS revenues from our cloud services offerings. SaaS revenues include fees from customers for access to the eSignLive suite of solutions. Our standard customer arrangements generally do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract.

~~Maintenance and Support Agreements:~~ Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. Revenue on maintenance and technical support is deferred and recognized ratably over the term of the applicable maintenance and support agreement.

~~Professional Services:~~ ~~We provide professional services to our customers. Revenue from such services is recognized during the period in which the services are performed.~~

~~We recognize revenue from sales to distributors and resellers~~rent on the same basis as sales made directly to customers. We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectionbalance sheet at transition. The adoption of ~~the revenue is probable.~~ASU 2016-02 had no impact on Retained earnings. See Note 8 - Leases for additional information.

For large-volume transactions, we may negotiate a specific price that is based on the number of users of the software license or quantities of hardware supplied. The per unit prices for large-volume transactions are generally lower than transactions for smaller quantities and the price differences are commonly referred to as volume-purchase discounts.

~~All revenue is reported on a net basis, excluding any sales taxes or value added taxes.~~

~~Long-term deferred revenue of $7,455 is included in Other long-term liabilities at September 30, 2017.~~

~~Cash and Cash Equivalents~~

Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are high-quality short term money market instruments and commercial paper, with original maturities of

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~~three months or less. Cash is held by a number of U.S. and non-U.S. commercial banks and money market investment funds.~~

~~Short Term Investments~~

Short term investments are stated at cost plus accrued interest, which approximates fair value. Short term investments consist of bank certificates of deposit and high quality commercial paper with original maturities of more than three and less than twelve months.

~~Accounts Receivable and Allowance for Doubtful Accounts~~

The creditworthiness of customers (including distributors and resellers) is reviewed prior to shipment. A reasonable assurance of collection is a requirement for revenue recognition. Verification of credit and/or the establishment of credit limits are part of the customer contract administration process. Credit limit adjustments for existing customers may result from the periodic review of outstanding accounts receivable. The company records trade accounts receivable at invoice values, which are generally equal to fair value.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for goods and services. We analyze accounts receivable balances, customer credit-worthiness, current economic trends and changes in our customer payment timing when evaluating the adequacy of the allowance for doubtful accounts. The allowance is based on a specific review of all significant past-due accounts. If the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

~~Inventories, net~~

Inventories, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the first-in-first-out (FIFO) method. We write down inventory when it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume in the form of sales to new customers as well as sales to previous customers, the expected sales price and the cost of making the sale when evaluating the valuation of our inventory. If the sales volume or sales price of a specific model declines significantly, additional write downs may be required.

~~Property and Equipment~~

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to seven years. Additions and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses resulting from sales, disposals, or retirements are recorded as incurred, at which time related costs and accumulated depreciation are removed from the accounts.

Long Term Investments

Included in Other Assets ~~are~~is a minority equity ~~investments~~investment accounted for under the cost-method in ~~companies~~a company we believe may be beneficial in executing our strategy. At September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, investments were ~~$4,073. In accordance with ASC 325, the investments are recorded at cost~~$4.1 million and ~~evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.~~$4.1 million, respectively.

~~Cost of Goods Sold~~

Included in product cost of goods sold are direct product costs. Cost of goods sold related to service revenues are primarily costs related to SaaS solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance and support.

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~~Research and Development Costs~~

Costs for research and development, principally the design and development of hardware, and the design and development of software prior to the determination of technological feasibility, are expensed as incurred on a project-by-project basis.

~~Software Development Costs~~

~~We capitalize software development costs in accordance with ASC 985‑20,~~ ~~Costs of Software to be Sold, Leased, or Marketed~~. Research costs and software development costs, prior to the establishment of technological feasibility, determined based upon the creation of a working model, are expensed as incurred. Our software capitalization policy defines technological feasibility as a functioning beta test prototype with confirmed manufacturability (a working model), within a reasonably predictable range of costs. Additional criteria include receptive customers, or potential customers, as evidenced by interest expressed in a beta test prototype, at some suggested selling price. Our policy is to amortize capitalized costs by the greater of (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product or (b) the straight-line method over the remaining estimated economic life of the product, generally two to five years, including the period being reported on. No software development costs were capitalized during the three and nine months ended September 30, 2017.

~~Income Taxes~~

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date.

~~We monitor our potential income tax exposures as required by ASC 740‑10,~~ ~~Income Taxes~~.

We have significant foreign tax credit, net operating loss, and other deductible carryforwards in certain jurisdictions available to reduce the liability on future taxable income. A valuation reserve has been provided to offset some of these future benefits because we have not determined that their realization is more likely than not.

Fair Value of Financial Instruments

At September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, our financial instruments were cash and equivalents, short term investments, accounts receivable, accounts payable and accrued liabilities. The estimated fair value of our financial instruments has been determined by using ~~level one inputs~~available market information and appropriate valuation methodologies, as defined in ASC 820, Fair Value Measurements ~~and Disclosures~~. The fair values of the financial instruments were not materially different from their carrying amounts at September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASU’s clarifying certain aspects of ASU 2016-02. The new guidance supersedes the lease guidance under FASB Accounting Standards Codification (“ASC”) Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a lessee to recognize on the Balance Sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for ~~Leases~~

~~All of our leases are~~the lease term for both finance and operating leases. ~~Rent expense~~Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02. The Company adopted the new guidance effective January 1, 2019, using the modified retrospective method, which did not require the Company to adjust comparative periods. See the Adoption of ASU 2016-02 section in Note 2 – Summary of Significant Accounting Policies for additional information.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on ~~facility leases~~Financial Instruments (“ASU 2016-13”). The new guidance provides financial statement users with improved information about the expected credit losses on trade receivables and other financial instruments held by a reporting entity at each reporting date. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. ASU 2016-13 is ~~charged evenly over~~effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the ~~life~~impact of adopting ASU 2016-13 on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the ~~lease, regardless~~current guidance), instead measuring the impairment charge as the excess of the ~~timing of actual payments.~~

~~Goodwill and Other Intangibles~~

~~Intangible assets arising from business combinations such as acquired technology, customer relationships, and other intangible assets, are originally recorded at~~reporting unit's carrying amount over its fair value. Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for proprietary technology and five to twelve years for customer relationships. Patents are amortized over the lifevalue (i.e. Step 1 of the ~~patent, generally 20 years~~current guidance). The guidance is effective for us beginning in the ~~U.S.~~

first quarter of 2020, and should be applied prospectively. Early adoption is permitted

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for impairment testing dates after January 1, 2017. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee share-based payment accounting, which is intended to reduce the cost and complexity of accounting for, and improve financial reporting for share-based payments to nonemployees for goods and services. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. The guidance should be applied prospectively and early adoption is permitted.We adopted this standard on January 1, 2019 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted for removed or modified disclosures, and delayed adoption of the additional disclosures until their effective date. We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14),which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a hosted CCA service. Under ASU 2018-15, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The new standard is effective for us on January 1, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

Note 3 – Business Acquisitions

On May 30, 2018, OneSpan acquired the remaining interest in Dealflo Limited and its subsidiaries (“Dealflo”), increasing our ownership percentage to 100% from 1%. Dealflo, formerly a privately-held company based in the United Kingdom, provides identity verification and end-to-end financial agreement solutions. Upon acquisition, Dealflo became a wholly-owned subsidiary of OneSpan.

Dealflo’s total purchase price consideration was $53.9 million, net of $5.7 million of cash acquired. The total purchase price consideration includes $53.1 million of cash paid to acquire the remaining 99% interest in Dealflo, as well as $0.8 million of fair value of our previous 1% ownership interest.

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~~Goodwill represents~~The acquisition is accounted for as a business combination using the acquisition method of accounting, which requires the net assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date. During the nine months ended September 30, 2019, we recorded certain measurement period adjustments to amounts previously reported, comprised primarily of a $1.8 million increase to the deferred tax liability and a $0.6 million increase to other current assets. The effect of the measurement period adjustments recorded before the measurement period ended during the nine months ended September 30, 2019 have been determined as if such adjustments had been accounted for at the acquisition date. The net effect of the measurement period adjustments increased goodwill by $1.1 million. The measurement period adjustments did not result in material income statement effects for the nine months ended September 30, 2019. The measurement period closed on May 30, 2019.

The following table summarizes our final allocation of the purchase price consideration based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (net of cash acquired):


		Total
		(in thousands)
Acquired tangible assets	$	2,700
Acquired identifiable intangible assets		17,900
Liabilities assumed		(6,041)
Goodwill		39,295
Total purchase price consideration	$	53,854

The excess of purchase ~~price~~consideration over net assets assumed was recorded as goodwill, which represents the ~~fair~~strategic value assigned to Dealflo, including expected benefits from synergies resulting from the acquisition, as well as the knowledge and experience of ~~net identifiable assets acquired~~the workforce in ~~a business combination. We assess the~~place. In accordance with applicable accounting standards, goodwill is not amortized and will be tested for impairment ~~of goodwill~~at least annually, or more frequently, if certain indicators are present. Goodwill and intangible assets ~~with indefinite lives each November 30 or whenever events or changes in circumstances indicate that~~related to this acquisition are not deductible for foreign tax purposes.

Based on the carrying value may not be recoverable. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performancefinal results of the ~~reporting units against~~acquisition valuation, $17.9 million of the ~~planned~~purchase price consideration has been allocated to identifiable intangible assets. The following table summarizes the major classes of identifiable intangible assets, as well as the estimated weighted-average amortization periods:


		Estimated Fair Value	Weighted Average Amortization Period
Identifiable Intangible Assets		(in thousands)	(Years)
Customer relationships	$	11,800	7
Technology		5,900	4
Trademarks		200	3
	$	17,900

The results ~~used~~of operations of Dealflo subsequent to the acquisition date have been included in the ~~last quantitative goodwill impairment test. Additionally, each reporting unit’s fair value is assessed in light~~consolidated statement of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity- and reporting unit specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgments and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under the two-step assessment is determined using a combination of both income and market-based variation approaches. The inputs and assumptions to valuation methods used to estimate the fair value of reporting units involves significant judgments.

~~During 2017, we determined certain events and circumstances resulted in a change in the composition of our reporting units. Previously, we considered the Company to be two reporting units, the~~ operations of eSignLive and the remainder of our operations. Due to the continued integration of eSignLive operations and changes in management, we now consider the Company to be a single reporting unit. We have not recorded any goodwill impairment charges for the three ~~or nine-month periods~~and nine months ended September 30, ~~2017. The change~~2019 and September 30, 2018. Revenue generated by Dealflo for the three and nine months ended September 30, 2019 was $1.6 million and $5.6 million, respectively, compared to $1.8 million and $2.3 million generated during the three and nine months ended September 30, 2018, respectively. Dealflo net losses included in the ~~composition~~results of ~~our reporting units will be reflected in our annual impairment test performed as~~operations for the three and nine months ended September 30, 2019 was $1.9 million and $5.3 million, respectively, compared to net losses of ~~November 30.~~$2.1 million and $2.9 million for the three and nine months ended September 30, 2018, respectively.

~~Stock-Based Compensation~~

~~We have stock-based employee compensation plans, described in Note 6. ASC 718‑10,~~ ~~Stock Compensation~~ ~~requires us to estimate~~Unaudited Pro Forma Financial Information

The following presents the ~~fair value~~unaudited pro forma combined results of ~~restricted stock granted to employees, directors and others and to record compensation expense equal to~~operations of the ~~estimated fair value. Compensation expense is recorded on a straight-line basis over~~Company with Dealflo for the ~~vesting period. Forfeitures are recorded as incurred.~~

~~Retirement Benefits~~

We record annual expenses relating to our pension benefit plans based on calculations which include various actuarial assumptions, including discount rates, assumed asset rates of return, compensation increases, and turnover rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends. The effects of gains, losses, and prior service costs and credits are amortized over the average service life. The funded status, or projected benefit obligation less plan assets, for each plan, is reflected in our consolidated balance sheets using a December 31 measurement date.

~~Warranty~~

~~Warranties are provided on the sale of certain of our products and an accrual for estimated future claims is recorded~~nine months ended September 30, 2018, assuming Dealflo was acquired at the ~~time revenue is recognized. We estimate~~beginning of 2017, and after giving effect to certain pro forma adjustments. Pro forma adjustments for the ~~cost based on past claims experience, sales history and other considerations. We regularly assess~~nine months ended September 30, 2018 reflect estimated amortization expense for intangible assets purchased of $2.2 million, the ~~adequacy~~elimination of ~~our estimates and adjust the amounts as necessary. Our standard practice is to provide a warranty on our hardware products for either a one or two year period after the date~~$0.4 million of ~~purchase. Customers may purchase extended warranties covering periods from one to four years after the standard warranty period.~~

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revenue related to intercompany transactions, and the elimination of $1.1 million of non-recurring acquisition related costs.

These unaudited pro forma results are not necessarily indicative of the actual consolidated results of operations had the acquisition actually occurred on January 1, 2017 or of the future results of operations of the consolidated entities (in thousands except per share data):


		Nine months ended September 30,
	2018

Revenue	$	153,049
Net loss		(7,112)
Basic net loss per share		(0.18)
Diluted net loss per share		(0.18)
Shares used in computing basic and diluted net loss per share		39,924

Note 4 – Revenue

We ~~defer the~~recognize revenue ~~associated~~in accordance with ~~the extended warranty and recognize it into income on a straight-line basis over the extended warranty period. We have historically experienced minimal actual claims over the warranty period.~~

~~Recently Issued Accounting Pronouncements~~

~~In May 2014, the FASB issued Accounting Standards Update No. 2014‑09, Revenue~~ASC 606 “Revenue from Contracts with ~~Customers (ASU 2014‑09)~~Customers” (“Topic 606”), ~~which supersedes nearly all existing revenue recognition guidance under U.S. GAAP.~~ as described below.

Disaggregation of Revenues

The ~~core principle of ASU 2014‑09 is to recognize~~following tables present our revenues ~~when promised goods or~~disaggregated by major products and services, are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard creates a five-step model to achieve its core principle: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations in the contract;geographical region and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition, entities must disclose sufficient information to enable users of financial statements to understand the nature, amount, timing ~~and uncertainty~~ of revenue and cash flows arising from contracts with customers. Qualitative and quantitative disclosures are required about: (i) the entity’s contracts with customers; (ii) the significant judgments, and changes in judgments, made in applying the guidance to those contracts; and (iii) any assets recognized from the costs to obtain or fulfill a contract with a customer.recognition.

ASU 2014‑09 is effective for annual periods beginning after December 15, 2016, and interim periods within such annual periods, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) an approach with the cumulative effect of initially adopting ASU 2014‑09 recognized at the date of adoption.

~~In August 2015,~~Revenue by major products (in thousands)


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Hardware products	$	42,027	$	27,056	$	95,356	$	69,123
Software licenses		19,154		9,826		37,803		36,239
Subscription		5,547		4,161		16,136		10,949
Professional services		2,338		1,594		3,995		3,715
Maintenance, support and other		10,659		9,858		30,277		27,455
Total Revenue	$	79,725	$	52,495	$	183,567	$	147,481

Revenue by location of customer for the ~~FASB issued Accounting Standards Update No. 2015‑14,~~ ~~Revenue from Contracts with Customers: Deferral of Effective Date~~ ~~deferring the new revenue standard one year~~three months ended September 30, 2019 and ~~allowing adoption as of the original effective date.~~2018 (in thousands)

~~In March 2016, the FASB issued ASU No. 2016‑08,~~ ~~Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which provides guidance on assessing whether an entity is a principal or an agent in a revenue transaction and whether an entity reports revenue on a gross or net basis.~~


	EMEA			Americas			APAC			Total
Total Revenue:
2019	$	48,728		$	15,605		$	15,392		$	79,725
2018	$	25,281		$	11,055		$	16,159		$	52,495

Percent of Total:
2019		61	%		20	%		19	%		100	%
2018		48	%		21	%		31	%		100	%

~~In April 2016, the FASB issued ASU No. 2016‑10,~~ ~~Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which provides guidance on identifying performance obligations and accounting for licenses of intellectual property.~~

~~In May 2016, the FASB issued ASU No. 2016‑12,~~ ~~Revenue from Contracts with Customers: Narrow-scope Improvements and Practical Expedients, which makes narrow-scope amendments to ASU No. 2014‑09 and provides practical expedients to simplify the transition to the new standard and clarify certain aspects of the standard.~~

~~In December 2016, FASB issued ASU No. 2016‑20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which makes narrow-scope amendments to ASU No. 2014‑09.~~

We are currently evaluating the impact of the new revenue recognition guidance including any impacts on associated processes, systems, and internal controls. Our evaluation includes determining the unit of account (i.e., performance obligations) and standalone selling price of each performance obligation. Standalone selling prices under the new guidance may not be substantially different from our current methodologies of establishing fair value on multiple element arrangements. Based on initial assessments, we have identified certain arrangements where revenue may be recognized earlier as compared to current practice. We expect to recognize term license revenue upon delivery, rather than over the term of the arrangement. We expect to capitalize certain sales commissions upon adoption of the new standard and are currently in the process of evaluating the period over which to amortize these capitalized costs. We continue to evaluate the impact of this guidance and subsequent amendments on our consolidated financial position, results of operations, and cash flows, and any preliminary assessments are subject to change. We will adopt this guidance as of the first quarter of 2018 using the cumulative effect transition method.

1314

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Revenue by location of customer for the nine months ended September 30, 2019 and 2018 (in thousands)



	EMEA			Americas			APAC			Total
Total Revenue:
2019	$	108,168		$	42,762		$	32,637		$	183,567
2018	$	65,148		$	40,246		$	42,087		$	147,481

Percent of Total:
2019		59	%		23	%		18	%		100	%
2018		44	%		27	%		29	%		100	%

Timing of revenue recognition (in thousands)


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Products, Licenses transferred at a point in time	$	61,181	$	36,882	$	133,159	$	105,362
Services transferred over time		18,544		15,613		50,408		42,119
Total Revenue	$	79,725	$	52,495	$	183,567	$	147,481

Contract balances

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


	September 30,		December 31,
	2019		2018
Receivables, inclusive of trade and unbilled	$	76,571	$	59,631
Contract Assets (current and non-current)	$	11,351	$	11,278
Contract Liabilities (Deferred Revenue current and non-current)	$	41,531	$	44,305

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 ~~adopted ASU 2015‑11,~~ ~~Inventory (Topic 330) – Simplifying~~do not typically include extended payment terms in our contracts with customers.

Revenue recognized during the ~~Measurement~~nine months ended September 30, 2019 included $26.4 million that was included on the December 31, 2018 balance sheet in contract liabilities. Deferred revenue decreased in the same period due to timing of ~~Inventory~~ asannual renewals.

Table of ~~January 1, 2017. ASU 2015‑11 requires measurement of inventory~~Contents

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 ~~lower~~end of ~~cost~~the reporting period.


in thousands	2019		2020		2021		Beyond 2021		Total
Future revenue related to current unsatisfied performance obligations	$	3,401		10,226	$	6,468	$	14,507	$	34,602

The Company applies practical expedients and does not disclose information about remaining performance obligations (a) that have original expected durations of one year or ~~net realizable value, defined~~less, or (b) where revenue is recognized as ~~estimated selling price~~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 ~~ordinary course~~Statements of ~~business, less reasonably predictable~~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 consolidated statements of operations.

Applying the practical expedient, the Company recognizes the incremental costs of ~~completion, disposal~~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 ~~transportation. Adoption of ASU 2015‑11 did not have a significant impact on our financial statements.~~

~~In February 2016, The FASB issued Accounting Standards Update No. 2016‑02,~~ ~~Leases~~, which among other things, requires lessees to recognize most leases on balance sheet. ASU 2016‑02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018 and mandates a modified retrospective transition method. We are currently evaluating the impact of ASU 2016‑02 on our consolidated financial statements.

~~In January 2017, The FASB issued ASU No. 2017‑01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017‑01 defines a business~~Marketing expense in the ~~context~~consolidated statements of a set of transferred assets and activities. ASU 2017‑01 is effective for annual and interim periods in fiscal years beginning after December 15, 2017 and applied prospectively. Early adoption is permitted. operations.

The ~~Company is currently evaluating the effect the guidance will have on the Company’s financial statements.~~

~~In January 2017, the FASB issued ASU 2017‑04,~~ ~~Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.~~ ASU 2017‑04 eliminates Step 2 of the goodwill impairment test, requiring determination of the implied fair value of goodwill by allocating the reporting unit fair value to assets and liabilities as if the reporting unit was acquired in a business acquisition. Updated guidance is effective beginning January 1, 2020 and will be applied on a prospective basis. Early adoption is permitted. We are currently evaluating the impact of this updated guidance.

~~In March 2017, the FASB issued ASU No. 2017‑07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The updated accounting guidance requires changes~~following tables provide information related to the ~~presentation of the components of net periodic benefit cost on the income statement by requiring service cost be presented with other employee compensation~~capitalized costs and ~~other components~~amortization recognized in the current and prior periods:



in thousands		September 30, 2019		December 31, 2018
Capitalized costs to obtain contracts, current	$	553	$	413
Capitalized costs to obtain contracts, non-current	$	2,648	$	2,150


		Three months ended September 30,				Nine months ended September 30,
in thousands		2019		2018		2019		2018
Amortization of capitalized costs to obtain contracts	$	110	$	85	$	329	$	205
Impairments of capitalized costs to obtain contracts	$	-	$	-	$	-	$	-

Table of net periodic pension cost be presented outside of any subtotal of operating income. The ASU also stipulates that only the service costs component of net benefit cost is eligible for capitalization. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on the Company’s financial statements.Contents

Note 25 – Inventories, net

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

Inventories, net are comprised of the following:


					September 30,		December 31,
	September 30,		December 31,		2019		2018
	2017		2016		(in thousands)
Component parts	$	5,278	$	8,360	$	5,841	$	5,445
Work-in-process and finished goods		12,117		9,060		13,136		8,983
Total	$	17,395	$	17,420	$	18,977	$	14,428

Note 36 – Goodwill

Goodwill activity for the nine months ended September 30, ~~2017~~2019 consisted of the following:

Net balance at December 31, 2016

$
54,409
Additions

—
Net foreign currency translation

1,975
Net balance at September 30, 2017

$
56,384


in thousands
Net balance at December 31, 2018	$	91,841
Adjustment to provisional estimate of acquisition date fair values		1,128
Net foreign currency translation		(1,932)
Net balance at September 30, 2019	$	91,037

~~Table~~Prior to the end of ~~Contents~~

~~Certain portions~~the measurement period during the nine months ended September 30, 2019, we recorded $1.1 million of measurement period adjustments related to the Dealflo acquisition. See note 3 – Business Acquisitions for additional detail. No impairment of goodwill ~~are denominated in local currencies and are subject to currency fluctuations.~~was recorded during the nine months ended September 30, 2019 or September 30, 2018.

Note 47 – Intangible Assets

Intangible asset activity for the nine months ended September 30, ~~2017~~2019 is detailed in the following table.

Capitalized

Customer



Total Intangible


Technology

Relationships

Other

Assets
Net balance at December 31, 2016

$
11,392

$
24,774

$
10,383

$
46,549
Additions-Other

—

—

65

65
Net foreign currency translation

16

13

44

73
Amortization expense

(3,346)

(1,641)

(1,616)

(6,603)
Net balance at September 30, 2017

$
8,062

$
23,146

$
8,876

$
40,084

September 30, 2017 balance at cost

$
37,256

$
27,825

$
13,371

$
78,452
Accumulated amortization

(29,194)

(4,679)

(4,495)

(38,368)
Net balance at September 30, 2017

$
8,062

$
23,146

$
8,876

$
40,084



in thousands	Acquired Technology		Customer Relationships		Other		Total Intangible Assets
Net balance at December 31, 2018	$	8,795	$	30,408	$	6,259	$	45,462
Net foreign currency translation		(132)		(510)		(17)		(659)
Amortization expense		(2,597)		(2,682)		(1,772)		(7,051)
Net balance at September 30, 2019	$	6,066	$	27,216	$	4,470	$	37,752

September 30, 2019 balance at cost	$	42,012	$	38,664	$	13,688	$	94,364
Accumulated amortization		(35,946)		(11,448)		(9,218)		(56,612)
Net balance at September 30, 2019	$	6,066	$	27,216	$	4,470	$	37,752

Certain intangible assets are denominated in local currencies and are subject to currency fluctuations. As a result of the Company rebranding, the value of certain intangible assets was written down, and impairment charges of $0.5 million were recorded during the nine months ended September 30, 2018.

Note 58 – Leases

As mentioned in Note 2 – Summary of Significant Accounting Policies, the Company adopted ASU 2016-02, Leases on January 1, 2019, using the modified retrospective approach. The adoption of this accounting standard resulted in the recording of operating lease right-of-use (“ROU”) assets of $9.2 million in Operating lease right-of use assets, and

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operating lease liabilities of $2.5 million and $8.5 million in Other accrued expenses and Long-term lease liabilities, respectively, as of January 1, 2019, to capture the cumulative effect of the standard. The difference between the asset and liability is a result of lease incentives, such as tenant improvement allowances, and deferred rent on the balance sheet at transition.

The Company leases certain real estate and automobiles. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the unaudited consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company determines if an arrangement is a lease at inception. All of our leases are operating leases.

Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s leases do not provide an implicit rate of return, the Company uses its imputed collateralized rate based on the information available at the commencement date in determining the present value of lease payments. Operating lease ROU assets are comprised of the lease liability plus prepaid rents and are reduced by lease incentives or deferred rents. The Company has lease agreements with non-lease components which are not bifurcated.

Some of our leases include one or more options to renew, with renewal terms that can extend the lease from one to five years. The exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options to purchase the leased property at fair value. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. Certain of the Company’s lease agreements include payments adjusted periodically for inflation based on the consumer price index. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating lease cost details for the three and nine months ended September 30, 2019 and 2018 are as follows:


	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
	(in thousands)				(in thousands)
Building rent	$	955	$	885	$	2,676	$	2,846
Automobile rentals		603		297		1,113		958
Total net operating lease costs	$	1,558	$	1,182	$	3,789	$	3,804

Short term lease costs and variable lease costs recognized during the three and nine months ended September 30, 2019 are immaterial.

Supplemental unaudited consolidated balance sheet information related to leases is as follows:


	September 30, 2019
in thousands
Leases
Assets		10,903
Operating lease assets	$	10,903

Liabilities
Current
Operating lease liabilities	$	2,924

Noncurrent
Operating lease liabilities		11,304
Total lease liabilities	$	14,228

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The weighted average remaining lease term for our operating leases is 6.8 years. The weighted-average discount rate for our operating leases is 5.0%.

Supplemental unaudited interim consolidated cash flow information related to leases is as follows:


	Nine months ended
	September 30, 2019
	(in $ thousands)
Supplemental cash flow and other information related to leases was as follows:

Operating cash payments from operating leases	$	2,736

ROU assets obtained in exchange for new operating lease liabilities	$	4,262

Maturities of our operating leases are as follows:


	As of September 30, 2019
		(in $ thousands)
2019 (remaining three months)	$	956
2020		3,176
2021		2,731
2022		2,269
2023		1,851
Later years		6,151
Less imputed interest		(2,906)
Total lease obligations	$	14,228

Disclosures related to periods prior to adoption of ASU 2016-02

Operating lease rent expense was $4.9 million for the year ended December 31, 2018. Future minimum lease payments under non-cancelable rental and lease agreements which had initial or remaining terms in excess of one year are as follows:


	As of December 31, 2018
		(in $ thousands)
2019	$	3,817
2020		3,081
2021		2,671
2022		2,244
2023		1,941
Later years		8,870
Minimum lease commitments	$	22,624

During the year ended December 31, 2018, we entered into a new lease agreement of which a portion commenced during the three months ended September 30, 2019, and remainder will commence during the three months ended March 31, 2020. We estimated as of January 1, 2019 and September 30, 2019 that the undiscounted future minimum obligations related to the portion of the lease not yet commenced to be approximately $7.4 million and $2.0 million, respectively. The $7.4 million obligation is disclosed as part of our future minimum lease obligations table above.

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Note 9 – Income Taxes

Our estimated annual tax rate for ~~2017~~2019 before discrete items is expected to be ~~40%~~approximately 43%. ~~This~~Our global effective tax rate is higher than the U.S. statutory tax rate of ~~34%~~21% primarily due to forecasted losses in jurisdictions for which a valuation allowances on taxable losses, primarily in Canada, partially offset by income in foreign jurisdictions taxed at lower rates. Our effective tax rate for the third quarter was 48%. The effective rate in the third quarter was impacted by the mix of earnings in various jurisdictions. allowance will be required. Our ultimate tax ~~rate~~expense will depend on the mix of earnings in various jurisdictions. Income taxes paid during the three and nine months ended September 30, 2019 was $0.7 million and $7.5 million, respectively.

As of the third quarter of 2016, our estimated annual tax rate for 2016 before discrete items was expected to be 28%. The estimated rate was lower than the U.S. statutory rate primarily due to income in foreign jurisdictions taxed at lower rates, partially offset by valuation allowances on taxable losses. Discrete items related to changes in estimates upon completion of tax filings and a measurement period adjustment increased the full-year 2016 effective rate to 37%. The effective tax rate for the third quarter of 2016 was 61%.

~~At December 31, 2016, we had foreign tax credit carryforwards of $7,027~~ for future U.S. tax returns. These foreign tax credits expire in 2023 through 2026. We have not provided a valuation reserve for the foreign tax credits as we believe it is more likely than not that they will be realized.

At December 31, ~~2016,~~2018, we had deferred tax assets of ~~$16,655~~$24.6 million resulting from foreign and state NOL carryforwards of ~~$58,110~~$132.2 million and other foreign deductible carryforwards of ~~$16,817.~~$37.0 million. At December 31, ~~2016,~~2018, we had a valuation allowance of ~~$6,192~~$15.2 million against deferred tax assets related to certain carryforwards.

Certain of our non-U.S. operations have incurred net operating losses (NOLs), which 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. Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in the period.

Note 610 – Long-Term Compensation Plan and Stock Based Compensation (share counts in thousands)

~~Under~~The OneSpan Inc. 2019 Omnibus Incentive Plan (“2019 Plan”) was adopted by the ~~VASCO Data Security International,~~Board of Directors on February 1, 2019, and was approved by the stockholders on June 12, 2019. Awards were previously granted under the OneSpan Inc. 2009 Equity Incentive Plan (“2009 ~~Equity Incentive~~ Plan”),. The 2009 Plan terminated on December 19, 2018, and no additional securities remained for issuance.

Under the 2019 Plan, we awarded ~~237~~385 shares of restricted stock induring the ~~first quarter of 2017~~nine months ended September 30, 2019 consisting of ~~126~~248 unissued shares subject to future performance criteria and ~~111~~137 issued time-based shares. During the second quarter of 2017, we awarded an additional 23 shares of restricted stock consisting of 14 unissued shares subject to future performance criteria and 9 issued shares. No additional shares were issued in the third quarter of 2017. The market value of the ~~120~~137 issued restricted shares ~~of $1,764~~was $2.0 million at the date of grant, and is being amortized over the vesting period of one to four years. The market value of the ~~140~~248 unissued shares subject to performance criteria ~~of $2,046~~was $3.6 million at the date of grant, and is being amortized over the vesting period of three years.

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The following table details long-term compensation plan and stock-based compensation expense for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:


	Three months ended				Nine months ended				Three months ended				Nine months ended
	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016		2019		2018		2019		2018
in thousands									(in thousands)				(in thousands)
Restricted stock	$	825	$	1,123	$	1,901	$	4,066	$	549	$	1,107	$	1,778	$	2,916
Long-term compensation plan		442		456		1,298		1,391		280		526		1,538		1,467
Total Compensation	$	1,267	$	1,579	$	3,199	$	5,457
Total compensation									$	829	$	1,633	$	3,316	$	4,383

Note 711 – ~~Common Stock and~~ Earnings per Share

~~In connection with the 2009 Equity Incentive Plan, during the nine months ended September 30, 2017, we issued 131 total shares of restricted common stock, 120 shares for awards granted~~ (share counts in ~~2017 and 11 performance shares related to awards provisioned in prior years.~~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. For the three and nine months ended September 30, 2019, the anti-dilutive effect of our securities is immaterial. Because

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the Company is in a net loss position for the three and nine months ended September 30, 2018, diluted net loss per share for these periods exclude 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, ~~2017~~2019 and ~~2016 follow:~~2018 are as follows:


	Three months ended				Nine months ended				Three months ended				Nine months ended
	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016
Net income	$	2,755	$	478	$	3,438	$	5,502
in thousands, except per share data									2019		2018		2019		2018
Net income (loss)									$	11,872	$	(908)	$	3,739	$	(118)
Weighted average common shares outstanding:
Basic		39,811		39,736		39,792		39,709		40,062		39,922		40,037		39,924
Incremental shares with dilutive effect:
Restricted stock awards		10		98		10		77		67		—		62		—
Diluted		39,821		39,834		39,802		39,786		40,129		39,922		40,099		39,924

Basic income per share	$	0.07	$	0.01	$	0.09	$	0.14
Diluted income per share	$	0.07	$	0.01	$	0.09	$	0.14
Net income (loss) per share:
Basic									$	0.30	$	(0.02)	$	0.09	$	(0.00)
Diluted									$	0.30	$	(0.02)	$	0.09	$	(0.00)

Note 812 – Legal Proceedings and Contingencies

~~During~~We are a party to or have intellectual property subject to litigation and other proceedings that arise in the ~~second quarter of 2015, our management became aware that certain~~ordinary course of our ~~products which were sold by our European subsidiary to a third-party distributor may have been resold by~~business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the ~~distributor to parties in Iran, potentially including parties whose property and interests in property may be blocked pursuant to Executive Order 13224, Executive Order 13382 or~~probability is remote that ~~may be identified under Section 560.304~~the outcome of ~~31 C.F.R. Part 560 as the “Government of Iran”.~~

We ceased shipping to such distributor. In addition, the Audit Committee of the Company’s Board of Directors initiated an internal review of this matter with the assistance of outside counsel. As a precautionary matter, concurrent initial notices of voluntary disclosure were submitted on June 25, 2015 to each of these matters, including the ~~U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”), and the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”).~~

The Audit Committee with the assistance of outside counsel completed their review in 2015. On December 15, 2015, we filed a letter with BIS (Office of Export Enforcement) with the conclusion that the products supplied to the distributor were not subject to United States Export Control jurisdiction. The Office of Export Enforcement issued a “no action” letter, concluding the voluntary self-disclosure process under the Export Administration Regulations.

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On January 13, 2016, we filed a letter with OFAC, with the conclusions that VASCO and its subsidiaries made no direct sales to Iran or any party listed by OFAC as a Specially Designated National over the five-year period under review (i.e., June 1, 2010 to June 30, 2015). The letter further noted that the investigation did not identify any involvement on the part of senior management officials of VASCO, and to the contrary, noted that VASCO executive management officials had sought to implement procedures and provided notices to VASCO’s sales personnel to prevent the diversion of VASCO products to unauthorized destinations and end users.

We have not received any response to the letter to OFAC and we cannot predict when OFAC will conclude their review of our voluntary self-disclosures. Based upon the OFAC guidelines for monetary penalties, in the fourth quarter of 2015, we accrued $900 for potential penalties if they are assessed by OFAC. Ultimately no penalty may be assessed or the penalty may be less or greater than the accrual, but in any event we do not believe that the final settlementlegal proceedings described below, will have a material adverse ~~impact~~effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our ~~business.~~

~~On July 28, 2015 a putative class action complaint was filed~~financial results in any particular interim reporting period. Among the ~~United States District Court for~~factors that we consider in this assessment are the ~~Northern District~~nature of ~~Illinois, captioned Linda J. Rossbach v. Vasco Data Security International, Inc.~~existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), ~~et al., case number 1:15‑cv‑06605, naming VASCO and certain of its current and former executive officers as defendants and alleging violations under~~ the Securities Exchange Act of 1934, as amended. The suit was purportedly filed on behalf of a putative class of investors who purchased VASCO securities between April 28, 2015 and July 28, 2015, and seeks to recover damages allegedly caused by the defendants’ alleged violationsprogress of the ~~federal securities laws~~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 ~~pursue remedies under Sections 10(b)~~us at the time of assessment and ~~20(a)~~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 ~~Securities Exchange Act~~reasonably possible loss or range of ~~1934 and Rule 10b‑5 promulgated thereunder. The complaint seeks certification as~~loss or make a ~~class action and unspecified compensatory damages plus interest and attorneys’ fees. Pursuant to~~statement that such an estimate cannot be made. We follow a September 1, 2015 scheduling order entered by the court, the lead plaintiff, once appointed, will have sixty days to file an amended complaint or notify the defendants that the lead plaintiff intends to rely on the current complaint. On January 30, 2017, the appointed lead plaintiff filed an amended complaintprocess in which we seek to estimate the ~~allegations regarding OFAC related matters were dropped~~reasonably possible loss or range of loss, and ~~replaced with allegations regarding public disclosures made by the defendants in April 2015 as compared~~only if we are unable to ~~public statements made in July 2015, generally regarding the strength of the Company’s business~~make such an estimate do we conclude and its future prospects. This case is now referred to by the name of the new lead plaintiff, Bunk. The defendants filed a motion to dismiss the Bunk complaint on March 31, 2017. Although the ultimate outcome of litigationdisclose that an estimate cannot be ~~predicted~~made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with ~~certainty, the Company believes that this lawsuit is without merit and intends~~any individual legal proceeding cannot be estimated.

We include various types of indemnification clauses in our agreements. These indemnifications may include, but are not limited to, ~~defend against the action vigorously. VASCO is indemnifying its officers and directors for this matter.~~

On October 9, 2015, a derivative complaint was filed in the United States District Court for the Northern District of Illinois, captioned Elizabeth Herrera v. Hunt, et al., case number 1:15‑cv‑08937, naming VASCO’s Board of Directors and certain of its current and former executive officers as individual defendants and the Company as a nominal defendant. The plaintiff in the Herrera case voluntarily dismissed the action on July 12, 2017. Two additional complaints, captioned Beth Seltzer v. Hunt, et al., case number 2015‑ch‑15541, and William Hooper v. Hunt, et al., case number 2016‑ch‑04054, were filed on October 22, 2015 and March 22, 2016, respectively, in the Circuit Court of Cook County, Illinois naming the same defendants.

The complaints assert, among other things, that the individual defendants breached their fiduciary duties by making material misstatements in, and omitting material information from, the Company’s public disclosures and by failing to maintain adequate internal controls and properly manage the Company. Among other things, the complaints seek unspecified compensatory damages and injunctive relief.

On October 29, 2015, a defendant removed the Seltzer action to the United States District Court for the Northern District of Illinois. Thereafter, the plaintiff led a motion to remand the action back to the Circuit Court of Cook County, Illinois, which was denied on February 3, 2016. On February 9, 2016, the court granted an agreed motion for voluntary dismissal of the Seltzer action, which dismissed the action with prejudice as to the named plaintiff’s individual claims. As for the Hooper action, the court granted a stay on June 8, 2016 and on July 18, 2017, the plaintiff in Hooper amended the complaint to largely mirror the amended complaint in Bunk.

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defendants and the Company as a nominal defendant. This complaint largely follows the allegations in the Bunk case. The D’Angelo case has been consolidated with the Hooper case and remains subject to stay.

~~In February 2017, we learned that one of our integrated reseller customers, and certain of its end customers, were named as defendants in a patent~~ infringement ~~lawsuit in Japan~~claims related to our ~~CRONTO technology.~~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 ~~indemnification obligations in favor~~no liabilities recorded for these clauses as of our customer and are working with them to defend such suit. We believe there are strong grounds to argue that the plaintiff’s patent is invalid and we are defending our technology vigorously. However, the outcome of this suit is uncertain. If the plaintiff were able to succeed in this case and impede our ability to sell, and our customers’ ability to use, products utilizing our CRONTO technology, then such result could have a material adverse impact on our business and results of operations.September 30, 2019.

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allegations of patent infringement. The parties ~~are currently~~then engaged in ~~early~~ motion practice and discovery in the case. The plaintiff has also brought suit against various other companies in the cybersecurity industry. ~~Although~~In one such suit in the ~~ultimate outcome~~federal district court for the Central District of ~~litigation cannot~~California, on December 1, 2017, the court granted defendant’s motion to dismiss, finding that the StrikeForce asserted claims are invalid. StrikeForce appealed such decision. In light of such ruling, on December 20, 2017, the court in the Company’s case granted a stay of the proceedings pending the appeal in the related case. On April 16, 2019, the Court dismissed the claims of StrikeForce against us with prejudice. We consider this case to be ~~predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend itself vigorously.~~

~~Note 9 – Related Party~~closed.

~~In August 2017, Able N.V. (“Able”),~~From time to time, we have been involved in the litigation incidental to the conduct of our business. Excluding matters disclosed above, we are not a ~~wholly-owned subsidiary, was sold~~party to ~~an employee of Able for~~any lawsuit or proceeding that, in management’s opinion, is likely to have a ~~de minimis amount. The operating~~material adverse effect on its business, financial condition or results of Able through the date of sale are included in the consolidated financial statements and are not significant to our consolidated results. In addition, our results for the third quarter include a loss on sale of approximately $227, recorded within general and administrative expenses.operations.

Concurrent with the sale, we provided Able an unsecured line of credit of 1,500 Euro ($1,770 at an exchange rate of $1.18 dollars per Euro). Interest accrues at the rate of 2% per annum. Beginning in August 2017, Able may take advances against the line of credit for a period of eighteen months followed by twelve quarterly repayments. As of September 30, 2017, no amounts have been advanced. In addition, we entered into a transition services agreement with Able whereby we agreed to provide certain administrative services for a period of three months and Able agreed to provide office space and consulting services for an agreed upon periodic fee as long as the services are provided.

~~Note 10 – Subsequent Event~~

Our office facilities are leased under operating lease agreements. Subsequent to September 30, 2017, we entered into an operating lease agreement for office facilities to replace an existing facility. Future minimum rental payments under the operating lease are as follows:

Year

Amount
2018

$
-
2019

462
2020

513
2021

523
2022

534
Thereafter

3,484
Total

$
5,516

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Item 2.2 - 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 ~~“VASCO,~~“OneSpan,” ~~“company,~~“Company,” “we,” “our,” and “us” refer to ~~VASCO Data Security International,~~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 ~~Management’s~~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 acquisitions to date and our strategy related to future acquisitions; 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", and statements that an event or result "may", "will", "should", "could", or "might" occur or be achieved and any other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions which, 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; our ability to effectively identify, purchase and integrate acquisitions; 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; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; exposure to increased economic and operational uncertainties from operating a global business as well as those factors set forth in our Form 10-K (and other forms) filed with the Securities and Exchange Commission. In particular, we direct you to the risk factors contained under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations ~~and Quantitative and Qualitative Disclosures About Market Risk contains forward-looking~~" in our Form 10-K. In addition, we direct you to our financial statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933, as amended concerning, among other things, our expectations regarding the prospects of, and developments and business strategies for, VASCO and our operations, including the development and marketing of certain new products and services and the ~~anticipated future growth~~accompanying Notes to Financial Statements contained in certain markets in which we currently market and sell our products and services or anticipate selling and marketing our products or services in the future. These forward-looking statements (1) are identified by use of terms and phrases such as “expect”, “believe”, “will”, “anticipate”, “emerging”, “intend”, “plan”, “could”, “may”, “estimate”, “should”, “objective”, “goal”, “possible”, “potential”, “projected” and similar words and expressions, but such words and phrases are not the exclusive means of identifying them, and (2) are subject to risks and uncertainties and represent our present expectations or beliefs concerning future events. VASCO cautions that the forward-looking statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. These additional risks, uncertaintiesthis Report. Our SEC filings and other ~~factors have been described in greater detail in~~important information can be found on the Investor Relations section of our Annual Report on Form 10‑K for the year ended December 31, 2016 and include, but are not limited to, (a) risks of general market conditions, including currency fluctuations and the uncertainties resulting from turmoil in world economic and financial markets, (b) risks inherent to the computer and network security industry, including rapidly changing technology, evolving industry standards, increasingly sophisticated hacking attempts, increasing numbers of patent infringement claims, changes in customer requirements, price competitive bidding, and changing government regulations, and (c) risks specific to VASCO, including, demand for our products and services, competition from more established firms and others, pressures on price levels and our historical dependence on relatively few products, certain suppliers and certain key customers. These risks, uncertainties and other factors include the risk that VASCO will not integrate eSignLive into the global business of VASCO successfully and the amount of time and expense spent and incurred in connection with the integration; the risk that the revenue synergies, cost savings and other economic benefits that VASCO anticipates as a result of the acquisition are not fully realized or take longer to realize than expected. Thus, the results that we actually achieve may differ materially from any anticipated results included in, or implied by these statements. Except for our ongoing obligations to disclose material information as required by the U.S. federal securities laws, wewebsite at ir.onespan.com. We do not have any ~~obligations or intention~~intent, and disclaim any obligation, to ~~release publicly any revisions to any~~update the forward-looking ~~statements~~information to reflect events that occur, circumstances that exist, or ~~circumstances~~changes in our expectations after the ~~future or to reflect the occurrence~~date of ~~unanticipated events.~~this Report.

~~General~~

The following discussion is based upon our consolidated results of operations for the three and nine months ended September 30, 2017 and 2016 (percentages in the discussion, except for returns on average net cash balances, are rounded to the closest full percentage point) and should be read in conjunction with our consolidated financial statements included elsewhere in this Quarterly Report on Form 10‑Q.Overview

We design, develop and market digital solutions for identity, security, and business productivity that protect and facilitate electronic transactions ~~online,~~ via mobile ~~devices,~~ and ~~in-person.~~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 ~~transactions involving the signing, sending,~~identity verification, customer due diligence, electronic signature, secure storage and ~~managing of documents.~~document management. Our core technologies, multi-factor authentication, identity verification and transaction signing,

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strengthen the process of preventing hacking attacks against online and mobile transactions to allow companies to transact business safely with remote customers.

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~~Our~~We offer cloud based and on premises solutions ~~include~~using both open ~~standards-based~~standards and proprietary ~~solutions, some~~technologies. Some of ~~which~~our proprietary technologies are ~~patented~~patented. Our products and services are used for authentication, fraud mitigation, e-signing transactions and documents, and identity ~~management.~~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 ~~primary product and service lines consist of four categories:~~

~~On-premises Solutions~~

~~VACMAN Controller: Core host system software authentication platform.~~

~~IDENTIKEY Authentication Server and Appliances: Software that adds full server functionality to the VACMAN core authentication platform.~~

~~eSignLive: Electronic signature and document management solution.~~

~~IDENTIKEY Risk Manager (IRM): Risk analysis solution that enables a proactive, real-time approach to fraud prevention.~~

~~Client-based Anti-fraud Solutions~~

DIGIPASS Hardware Authenticators: A broad family of multi-application hardware authenticators in a variety of form factors and feature sets to meet the diverse security needs of clients across multiple vertical markets.

~~DIGIPASS Software-based Solutions: Authenticators operating on non-VASCO devices, such as PCs, mobile phones, and tablets. Software authenticators include DIGIPASS for Apps, and DIGIPASS for Mobile.~~

~~Cloud Solutions~~

~~eSignLive: Electronic signature and document management solution provided on a SaaS basis.~~

~~MYDIGIPASS: Cloud-based identity solution for e-government and eID services.~~

~~Developer Tools~~

~~DIGIPASS for Apps: Enables user authentication and fraud detection in mobile applications and protects mobile applications from reverse engineering and cloning.~~

~~Our security~~ solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and ~~systems integrators.~~original equipment manufacturers. Our sales force is able to offer ~~each customer~~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.

Our product offerings, including authentication, anti-fraud, and electronic signature solutions, provide a flexible and affordable means of establishing trust in users, their devices, and the transactions that they are conducting. Many of our authentication products calculate dynamic passwords, also known as one-time passwords (“OTP”) that authenticate users logging into applications and onto corporate networks. In addition, our anti-fraud products can be used to enable electronic signatures to protect electronic transactions and the integrity of the contents of such transactions.Industry Growth

~~Industry Growth:~~ ~~We do not believe that there are accurate measurements of the total industry’s size or the industry’s growth rate.~~ We believe ~~however,~~ the ~~market~~markets for authentication, ~~anti-fraud,~~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 ~~commerce transacted electronically.~~electronic commerce. The issues driving ~~the~~ growth are ~~global issues and~~global; however, the rate of adoption in each country is a function of ~~that country’s~~local culture, ~~the~~ competitive position, ~~of businesses operating in that country, the~~

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~~country’s overall~~ economic conditions, and the ~~degree to which businesses and consumers within the country~~ use ~~technology.~~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~~banking market may have a significant effect on our revenue.

There continues to be significant global economic uncertainty, including in Europe, our most important market. While the European Union and European Central Bank continue to implement programs in response to changing economic conditions, Europe continues to struggle with sovereign debt issues and weakening currencies. As a result, Europe may continue to face difficult economic conditions in the remainder of 2017 and into 2018. Should the sovereign debt issue escalate, economic difficulties may negatively impact the global economy and our business.Cybersecurity Risks

During June 2016, voters in the United Kingdom passed a referendum providing for withdrawal from the European Union. While customer revenues from the United Kingdom and transactions denominated in British pounds are not significant, uncertainty surrounding withdrawal of the United Kingdom from the European Union may be a negative influence on normal ordering patterns within the European Banking market.

The European Banking market has been challenged by weak economic conditions and increased regulatory and risk mandates. Strategic priorities of many banks include improving efficiencies, and addressing regulatory and risk issues. To improve efficiencies, many banks have significantly reduced headcount while pursuing enhanced online and mobile customer services. Bank regulation periodically addresses enhanced cyber and data security. We believe our products are well positioned for online and mobile offerings and provide enhanced security, however, economic conditions, reduced headcount, and the transitioning of priorities may cause disruption in normal ordering patterns.

In the third quarter and first nine months of 2017, revenue from our Europe, Middle East and Africa (“EMEA”) region comprised 45% of total revenue compared 52% and 47% for the same periods in 2016.

~~Cybersecurity:~~Our use of technology is increasing and is critical in three primary areas of our business:

Software and information systems that we use to help us run our business more efficiently and cost effectively;

~~Our~~The products we have traditionally sold and continue to sell to our customers for integration into ~~customer~~their software applications contain technology ~~incorporating~~that incorporates the use of secret numbers and encryption technology; and

~~Products~~New products and services that ~~process~~we introduced to the market are focused on processing information through our servers ~~(or~~or in the ~~cloud from our customers’ perspective).~~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

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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 ~~integrated into customer software applications,~~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 ~~VASCO~~OneSpan networks, and similarly, is not connected to the ~~internet.~~

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Internet.

In the case of our ~~products and services that include~~cloud-based solutions, which involve the ~~active daily~~ processing of ~~the~~ customer information, ~~on our servers or servers managed by others in a hosted environment,~~ we believe a cyber incident could have a material impact on our ~~future~~ business. ~~We also~~While our revenue from cloud-based solutions comprises a minority of our revenue today, we believe that these ~~products may be more susceptible to cyber-attacks than our other products since it involves the active processing of customer information.~~solutions will provide substantial future growth. A cyber incident involving these ~~products~~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 ~~programs~~code we are currently ~~in use~~using as well as ~~new forms of cyber incidents~~the hosting platforms and ~~new or updated software programs~~procedures that ~~may be available in the market that would help~~we employ. We mitigate the risk of ~~incidents.~~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 2019 that had a significant impact on our business, it is possible that we could experience an incident in 2019 or future years, which could result in unanticipated costs.

Currency Fluctuation

During the three and nine months ended September 30, 2019, approximately 80% and 77%, respectively, of our revenue was generated outside of the United States. While the majority of our revenues are generated outside of the United States, the majority of our revenue earned during the three months and nine months ended September 30, 2019 was denominated in U.S. Dollars. During the three and nine months ended September 30, 2019, we estimate that approximately 64% and 65%, respectively, of our revenue was denominated in U.S. Dollars.

In addition, during the three and nine months ended September 30, 2019, approximately 72% and 73%, respectively, 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.

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 $3.0 million and $3.5 million for the three and nine months ended September 30, 2019, respectively, and other comprehensive loss of $1.2 million and $3.3 million for the three and nine months ended September 30, 2018, respectively. 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.

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Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net. Foreign exchange transaction losses aggregated $1.9 million for the three months ended September 30, 2019, compared to losses of $0.1 million for the three months ended September 30, 2018. During the nine months ended September 30, 2019, foreign exchange transaction losses aggregated $2.6 million, compared to losses aggregated of $0.2 million during the nine months ended September 30, 2018.

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.

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.

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 60% 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.

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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 2019 compared to the same period in 2018 resulted in a decrease in operating expenses of approximately $2.8 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, 2019 included $0.8 million and $3.3 million, respectively, of expenses related to long-term incentive plan costs compared to $1.6 million and $4.4 million of long-term incentive plan costs for the three and nine months ended September 30, 2018, respectively.

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 and impairment of intangible assets. Acquired intangible assets are amortized over their respective amortization periods, and are periodically evaluated for impairment.

Interest Income, ~~Taxes:~~ Net

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

Other Income (Expense), Net

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

Income Taxes

Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). All our IP in our traditional authentication business is owned by two subsidiaries, one in the U.S. and one in Switzerland. These two subsidiaries have entered into agreements with most of the other ~~VASCO~~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 ~~the~~ Swiss company. ~~Earnings~~In 2019, earnings flowing to the U.S. company are expected to be taxed at a rate of ~~35%~~21% to ~~40%~~25%, while earnings flowing to the Swiss company are expected to be taxed at a rate ranging from ~~10%~~11% to 12%. ~~Our~~A Canadian and UK subsidiary currently ~~sells~~sell and ~~services directly to~~service global ~~customers.~~customers directly.

~~With~~

As the majority of our revenues ~~being~~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

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reflect changes in the geographic mix of ~~where the~~ earnings ~~are realized~~ and the tax rates in each of the countries in which it is earned. The statutory tax ~~rates~~rate for the primary foreign tax jurisdictions ~~range~~ranges from 8%11% to ~~34%~~35%.

The geographic mix of earnings of our foreign subsidiaries ~~will~~ primarily ~~depend~~depends on the level of pretax income of our service provider ~~subsidiaries’ pretax income, which is recorded as an expense by the U.S. and Swiss~~ subsidiaries and the benefit ~~that is~~ realized in ~~the U.S. and~~ Switzerland through the sales of product. The level of pretax income in our service provider subsidiaries is expected to vary based on:

the staff, programs and services offered on a yearly basis by the various subsidiaries as determined by management, or

the changes in exchange rates related to the currencies in the service provider subsidiaries, or

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 ~~eSignLive,~~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 ~~net of deferred tax liabilities,~~ 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 the loss carryforwards will be reserved to the extent they exceed the deferred tax liabilities recognized upon acquisition as realization has not been deemed more likely than not.

2227

Table of Contents

~~Comparison~~Results of ~~Results~~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,
	2019	2018	% Change	2019	2018	% Change
	(in thousands)			(in thousands)
Revenue
Product and license	$ 61,181	$ 36,882	66%	$ 133,159	$ 105,362	26%
Services and other	18,544	15,613	19%	50,408	42,119	20%
Total revenue	$ 79,725	$ 52,495	52%	$ 183,567	$ 147,481	24%

% of Total Revenue
Product and license	77%	70%		73%	71%
Services and other	23%	30%		27%	29%

Total revenue increased $27.2 million or 52%, during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, total revenue increased $36.1 million or 24% compared to the nine months ended September 30, 2018.

Product and license revenue increased by $24.3 million or 66% during the three months ended September 30, 2019 compared to the three months ended September 30, 2018, which was driven by higher sales of both hardware products and software licenses. For the nine months ended September 30, 2019, product and license revenue increased $27.8 million or 26% compared to the nine months ended September 30, 2018. The increase in product and license revenue for the ~~Three and Nine Months Ended~~nine month period ended September 30, ~~2017~~2019 is driven primarily by an increase in hardware product revenue.

Services and ~~2016~~

~~Currency Fluctuations:~~ Inother revenue increased by $2.9 million, or 19% during the ~~third quarter and first~~three months ended September 30, 2019 compared to the three months ended September 30, 2018. For the nine months ~~of 2017, approximately 76%~~ended September 30, 2019, services and ~~77%, respectively, of our~~other revenue ~~was generated outside~~increased $8.3 million or 20% compared to the ~~United States. While the majority of our revenues are generated outside of the United States, the majority of our revenue in the third quarter and first~~ nine months ~~of 2017 was denominated in U.S. Dollars. We estimate that 67%~~ended September 30, 2018. The increase for both the three and ~~65% of our revenues for the third quarter and first~~ nine months of 2017 were denominated in U.S. Dollars. In addition, in the third quarter and first nine months of 2017, approximately 81% and 76%, respectively, of our operating expenses were incurred outside of the United States. As a result, changes in currency exchange rates, especially the Euro to U.S. Dollar exchange rate and the Canadian Dollar to U.S. 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 being 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 denominated in Euros continues as it is now or declines, we do not expect that we will be able to balance fully the exposures of currency exchange rates on revenue and operating expenses.

~~The Euro, on average, strengthened against the U.S. dollar approximately 5% for the third quarter and weakened 0.3% for the first nine months of 2017, as~~periods ended September 30, 2019 compared to the same periods in ~~2016.~~ 2018 was due to higher subscription and maintenance revenue.

We ~~estimate~~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 change in currency rates in 2017 compared to 2016 resulted in an increase in revenue of approximately $903 and a decrease of $195 for the quarter and nine months ended September 30, 2017, respectively, compared to the same periods in 2016 and an increase in operating expenses of approximately~~$576 for the quarter and a decrease of $576 for the nine months ended September 30, 2017 compared to the same periods in 2016.~~

~~The financial position and the results of operations of most~~overall strength of our ~~foreign subsidiaries, with~~business is best evaluated over a longer term where the ~~exception~~impact of ~~our subsidiaries~~transactions in ~~Canada, Switzerland and Singapore, are measured using the local currency~~any given period is not as ~~the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates~~significant 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 income of $1,203 and $3,633 for the third quarter and first nine months of 2017, and other comprehensive income of $7 and loss of $425 for the third quarter and first nine months of 2016. These amounts are included as a ~~separate component of stockholders’ equity. The functional currency for our subsidiaries in Canada, Switzerland and Singapore is the U.S. Dollar.~~quarter-over-quarter comparison.

Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net. Foreign exchange transaction losses aggregating $273 in the third quarter of 2017 compare to losses of $110 in the third quarter of 2016. Foreign exchange transaction losses aggregating $320 in the first nine months of 2017 compare to transaction gains of $152 in the first nine months of 2016.

~~Table of Contents~~

~~Revenue~~

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

Table of Contents

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:~~

EMEA

Americas

APAC

Total

Total Revenue:









2017

$
22,768

$
14,419

$
13,939

$
51,126

2016

$
22,770

$
8,089

$
12,789

$
43,648

Percent of Total:









2017

45
%

28
%

27
%

100
%
2016

52
%

19
%

29
%

100
%


	Three months ended September 30,			Nine months ended September 30,
	2019	2018	% Change	2019	2018	% Change
	(in thousands)			(in thousands)
Revenue
EMEA	$ 48,728	$ 25,281	93%	$ 108,168	$ 65,148	66%
Americas	15,605	11,055	41%	42,762	40,246	6%
APAC	15,392	16,159	-5%	32,637	42,087	-22%
Total revenue	$ 79,725	$ 52,495	52%	$ 183,567	$ 147,481	24%

% of Total Revenue
EMEA	61%	48%		59%	44%
Americas	20%	21%		23%	27%
APAC	19%	31%		18%	29%

~~Nine months ended September 30:~~

EMEA

Americas

APAC

Total

Total Revenue:









2017

$
62,868

$
37,880

$
38,037

$
138,785

2016

$
67,465

$
24,318

$
52,925

$
144,708

Percent of Total:









2017

45
%

27
%

28
%

100
%
2016

47
%

17
%

36
%

100
%

Total revenue of $51,126 for the third quarter of 2017 increased $7,478, or 17%, from the third quarter of 2016. For the first nine months of 2017, total revenue of $138,785 decreased $5,923 or 4% from the first nine months of 2016.

Revenue generated in EMEA during the ~~third quarter of 2017~~three months ended September 30, 2019 was ~~$22,768, approximately equal to~~$23.4 million, or 93% higher than the ~~third quarter of 2016.~~three months ended September 30, 2018, driven by higher hardware sales, higher software license sales, and maintenance revenue. For the ~~first~~ nine months ~~of 2017,~~ended September 30, 2019, revenue generated in EMEA was ~~$62,868,~~$43.0 million or ~~7% lower~~66% higher than the ~~first nine months of 2016.~~same period in 2018. The ~~decrease~~increase in ~~revenues~~revenue for ~~the first nine months of 2017 was primarily~~both periods is driven by ~~a decline in the lower margin segment of our~~higher hardware ~~business, partially offset by an increase in software products.~~and maintenance revenue.

Revenue generated in the Americas ~~for~~during the ~~third quarter of 2017~~three months ended September 30, 2019 was ~~$14,419,~~$4.6 million, or ~~78%,~~41% higher than the ~~third quarter of 2016.~~three months ended September 30, 2018, driven by an increase in software and maintenance revenue. For the ~~first~~ nine months ~~of 2017,~~ended September 30, 2019, revenue generated in the Americas was ~~$37,880,~~$2.5 million, or ~~56%~~6% higher than the ~~first nine months of 2016.~~same period in 2018. The increase for the ~~third quarter and first~~ nine months ~~of 2017~~ended September 30, 2019 compared to the same period in ~~2016~~2018 was ~~primarily due to increased revenues from non-hardware products, including eSignLive.~~driven by an increase in software license revenue.

Revenue generated in the Asia Pacific region during the ~~third quarter of 2017~~three months ended September 30, 2019 was ~~$13,939,~~$0.8 million, or ~~9%, higher than the third quarter of 2016. For the first nine months of 2017, revenue was $38,037, or 28%~~5% lower than the ~~first~~three months ended September 30, 2018, driven by lower hardware revenue. For the nine months ended September 30, 2019, revenue generated in the Asia Pacific Region was $9.5 million, or 22% lower than the same period in 2018, driven by lower software, maintenance, and hardware revenue.

Cost of ~~2016. The revenue decline for first nine months of 2017 was attributed to lower hardware revenues.~~

~~We believe comparison of revenues between periods is heavily influenced by the timing of orders~~Goods Sold and shipments reflecting the transactional nature of our business. As a result of the volatility in our business, we believe 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.Gross Margin


	Three months ended September 30,			Nine months ended September 30,
	2019	2018	% Change	2019	2018	% Change
	(in thousands)			(in thousands)
Cost of goods sold
Product and license	$ 22,199	$ 14,321	55%	$ 46,966	$ 32,897	43%
Services and other	4,470	3,631	23%	13,622	9,363	45%
Total cost of goods sold	$ 26,669	$ 17,952	49%	$ 60,588	$ 42,260	43%

Gross profit	$ 53,056	$ 34,543	54%	$ 122,979	$ 105,221	17%

Gross margin
Product and license	64%	61%		65%	69%
Services and other	76%	77%		73%	78%
Total gross margin	67%	66%		67%	71%

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Table of Contents

~~Gross Profit~~The cost of product and ~~Operating Expenses~~

license revenue increased $7.9 million, or 55% during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. During the nine months ended September 30, 2019, the cost of product and license revenue increased $14.1 million or 43% compared to the nine months ended September 30, 2018. The ~~following table sets forth, for the~~increase in cost of product and license during both periods ~~indicated, certain consolidated financial data~~was due to higher token costs, driven by higher hardware sales as a percentage of total revenue.

The cost of services and other revenue increased by $0.8 million, or 23% during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. During the nine months ended September 30, 2019 the cost of services and other revenue increased by $4.3 million or 45% compared to the nine months ended September 30, 2018. The increase in cost of services and other revenue during both periods is reflective of higher subscription revenue, which has increased cloud-based infrastructure costs.

Gross profit increased $18.5 million, or 54% during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. During the nine months ended September 30, 2019 gross profit increased by $17.8 million, or 17% compared to the nine months ended September 30, 2018. Gross profit margin was 67% and 67% for the three and nine months ended September 30, ~~2017~~2019, respectively, compared to 66% and ~~2016:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

Revenue

Products

75.1
%
78.5
%
75.3
%
82.1
%
Services and other

24.9
%
21.5
%
24.7
%
17.9
%
Total revenue

100.0
%
100.0
%
100.0
%
100.0
%
Cost of goods sold

Products

23.6
%
26.1
%
23.5
%
27.6
%
Services and other

4.7
%
5.0
%
5.4
%
4.2
%
Total cost of goods sold

28.3
%
31.1
%
28.9
%
31.8
%
Gross profit

71.7
%
68.9
%
71.1
%
68.2
%

Operating costs









Sales and marketing

27.3
%
30.8
%
31.0
%
29.0
%
Research and development

10.7
%
13.3
%
12.7
%
12.2
%
General and administrative

19.3
%
17.6
%
19.0
%
17.3
%
Amortization of purchased intangible assets

4.3
%
5.0
%
4.8
%
4.6
%
Total operating costs

61.6
%
66.7
%
67.5
%
63.1
%

Operating income

10.1
%
2.2
%
3.6
%
5.1
%
Interest income, net

0.8
%
0.5
%
0.7
%
0.3
%
Other income (expense), net

(0.4)
%
0.3
%
0.3
%
0.5
%

Income before income taxes

10.5
%
3.0
%
4.6
%
5.9
%
Provision for income taxes

5.0
%
1.8
%
2.2
%
2.2
%
Net income

5.5
%
1.2
%
2.4
%
3.7
%

~~Gross Profit~~

~~Gross profit~~71% for the ~~quarter~~three and nine months ended September 30, ~~2017 was $36,646, an increase of $6,596, or 22%, from the quarter ended September 30, 2016. Gross~~2018, respectively. The overall decrease in profit as a percentage of revenue (gross profit margin) was 72% for the quarter ended September 30, 2017, as compared to 69% for the quarter ended September 30, 2016. The increase in gross profit as a percentage of revenue for the third quarter of 2017 compared to 2016 primarily reflects an increase in software solutions as a percentage of total revenues.

~~Gross profit~~margins for the nine months ended September 30, ~~2017~~2019 was ~~$98,606, a decrease of $99, from~~driven by both lower product and license margins, as well as lower services and other margins compared to the comparable ~~period~~periods in ~~2016. Gross profit as a percentage of revenue (gross profit margin) was 71% for~~ the nine months ended September 30, 2017 and 68% for the nine months ended September 30, 2016. The increase in gross profit as a percentage of revenue for the first nine months of 2017 compared to 2016 primarily reflects an increase in software solutions as a percentage of total revenues.prior year.

The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies including the Euro. As the U.S. Dollar weakened against the Euro in the third quarter of 2017 compared to the same period in 2016, revenue from sales in Euros increased, as measured in U.S. Dollars, without a corresponding change in cost of goods sold. The impact of changes in currency rates are estimated to have increased revenue by approximately $903 in the third quarter of 2017. Had currency rates in the third quarter of 2017 been equal to rates in the same period in 2016, the gross profit margin would have been approximately 0.5 percentage points lower for the third quarter of 2017.

~~Table of Contents~~

For the nine months ended September 30, 2017, as the U.S. Dollar strengthened against the Euro compared to the same periods of 2016, revenue from sales in Euros, as measured in U. S. Dollars, decreased, without a corresponding change in the cost of goods sold. The impact of changes in currency rates are estimated to have decreased revenue by approximately $195 for the first nine months of 2017. Had currency rates in 2017 been equal to rates in the same period in 2016, the gross profit margin would have been approximately 0.04 percentage points higher for the first nine months of 2017.

~~Operating Expenses~~

~~Our operating expenses are generally based on anticipated revenue levels~~$2.4 million and are fixed over short periods of time. As a result, small variations in revenue may cause significant variations in quarter-to-quarter comparisons of operating income or operating income as a percentage of revenue.

Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 55% and 65% of our operating expenses. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive. For the third quarter and first nine months of 2017, average headcount was 1% lower and 4% higher, respectively, than the same periods in 2016.

Historically, operating expenses can be impacted by changes in foreign exchange rates. As noted above, we estimate that the change in currency rates in 2017 compared to 2016 resulted in an increase in operating expenses of approximately~~$576 for the three months ended September 30, 2017 and a decrease of $576 for the nine months ended September 30, 2017, compared to the same periods in 2016.~~

~~The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. Operating expenses~~$6.4 million for the three and nine months ended September 30, ~~2017 included $1,267~~2019, respectively. Had currency rates in 2019 been equal to rates in 2018, the gross profit margin would have been approximately 3.0 percentage points and ~~$3,199, respectively, of expense related to the stock-based and long-term incentive plans compared to $1,579 and $5,457~~3.5 percentage points higher for the three and nine months ended September 30, ~~2016,~~2019, respectively.

Operating Expenses


	Three months ended September 30,					Nine months ended September 30,
	2019		2018		% Change	2019		2018		% Change
	(in thousands)					(in thousands)
Operating costs
Sales and marketing	$	14,156	$	16,039	-12%	$	44,579	$	46,938	-5%
Research and development		9,956		8,992	11%		32,428		22,805	42%
General and administrative		9,490		10,184	-7%		29,540		32,168	-8%
Amortization / impairment of intangible assets		2,335		2,442	-4%		7,051		7,387	-5%
Total operating costs	$	35,937	$	37,657	-5%	$	113,598	$	109,298	4%

Sales and Marketing Expenses

Sales and marketing expenses for the ~~quarter~~three months ended September 30, ~~2017~~2019 were ~~$13,956, an increase~~$14.2 million, a decrease of ~~$503,~~$1.9 million, or 4%12%, from the ~~third quarter of 2016.~~three months ended September 30, 2018. Sales and marketing expenses for the nine months ended September 30, ~~2017,~~2019, were ~~$42,997, an increase~~$44.6 million, a decrease of ~~$1,015,~~$2.4 million, or 2%5%, from the same period of ~~2016.~~2018. The decrease in expense for the three and nine months ended September 30, 2019 compared to the same periods in 2018 was primarily attributable to lower headcount and rebranding costs of $0.5 million incurred during the nine months ended September 30, 2018.

Average full-time sales, marketing, support, and operating employee headcount for the three and nine months ended September 30, ~~2017~~2019 was ~~312~~318 and ~~307,~~319, respectively, compared to ~~299~~352 and ~~285~~332 for the three and nine months ended September 30, ~~2016,~~2018, respectively. Headcount was 10% and 4% ~~higher~~lower for the ~~third quarter of 2017 compared to the third quarter of 2016,~~three and ~~8% higher for the~~ nine months ended September 30, ~~2017 when~~2019, respectively, compared to the same ~~period~~periods in ~~2016.~~2018.

Table of Contents

Research and Development Expenses

Research and development expenses for the ~~quarter~~three months ended September 30, ~~2017,~~2019, were ~~$5,493, a decrease~~$10.0 million, an increase of ~~$314,~~$1.0 million, or 5%11%, from the ~~third quarter of 2016.~~three months ended September 30, 2018. Research and development costs for the nine months ended September 30, ~~2017,~~2019 were ~~$17,669,~~$32.4 million, an increase of ~~$52,~~$9.6 million, or 3%42%, from the same period of ~~2016.~~2018. The increases in expense for both the three and nine month periods ended September 30, 2019 were primarily driven by higher employee headcount.

Average full-time research and development employee headcount for the three and nine months ended September 30, ~~2017~~2019 was ~~205~~304 and ~~218,~~301, respectively, compared to ~~232~~277 and ~~224~~236 for the ~~third quarter~~three and nine months ended September 30, ~~2016,~~2018, respectively. ~~Headcount~~Average headcount was ~~12% lower~~approximately 10% and ~~3% lower~~27% higher for the ~~third quarter~~three and ~~first~~ nine months ~~of 2017,~~ended September 30, 2019, respectively, when compared to the same periods in 2016. The headcount decrease is partially attributable to the divestiture of a non-strategic business line in August 2017. Overall, we expect research and development expenses to increase as we invest in developing new products.

~~Table of Contents~~

2018.

General and Administrative Expenses

General and administrative expenses for the ~~quarter~~three months ended September 30, ~~2017,~~2019, were ~~$9,882, an increase~~$9.5 million, a decrease of ~~$2,200,~~$0.7 million, or ~~29%~~7%, from the ~~third quarter of 2016.~~three months ended September 30, 2018. General and administrative expenses for the nine months ended September 30, ~~2017,~~2019, were ~~$26,323, an increase~~$29.5 million, a decrease of ~~$1,252,~~$2.6 million, or 5%8%, compared to the same period of ~~2016.~~2018. The ~~increase~~decrease in general and administrative expenses for the three months ended September 30, 2019, compared to the same period in 2018 was primarily driven by lower personnel costs. The decrease in general and administrative expense for the ~~third quarter~~nine months ended September 30, 2019, compared to the same period in 2018 was driven primarily ~~reflect increased headcount,~~by lower personnel costs, due to turnover of higher paid employees, and by professional ~~fees and facilities expense. Professional fees primarily relate to internal controls, legal and internal systems.~~costs incurred during 2018 for the acquisition of Dealflo.

Average full-time general and administrative employee headcount for the three and nine months ended September 30, ~~2017~~2019 was 93115 and ~~90, respectively,~~112, compared to 84108 and ~~82 for the same periods in 2016. Headcount was approximately 11% higher, and 10% higher for the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016.~~

~~Amortization of Intangible Assets~~

~~Amortization of intangible assets for three and nine months ended September 30, 2017 was $2,203 and $6,603, respectively, an increase of $7 and a decrease of $19 for the comparable periods in 2016.~~

~~Interest Income~~

~~Consolidated net interest income was $386 and $1,016~~103 for the three and nine months ended September 30, ~~2017, as compared to $229~~2018, respectively. Average headcount was approximately 6% and ~~$504~~9% higher for the ~~same periods in 2016. The increase in interest income for 2017~~three and nine months ended September 30, 2019, respectively, when compared to the same periods in ~~2016~~2018.

Amortization / impairment of Intangible Assets

Amortization / impairment of intangible assets for the three and nine months ended September 30, 2019 was $2.3 million and $7.1 million, respectively, a decrease of $0.1 million or 4% and $0.3 million or 5% from the comparable periods in 2018. The decrease in amortization / impairment expense for the nine month periods ended September 30, 2019 was driven by expense recognized during the nine months ended September 30, 2018 for assets that were considered impaired as a result of the rebranding.

Interest Income, net


	Three months ended September 30,			Nine months ended September 30,
	2019	2018	% Change	2019	2018	% Change
	(in thousands)			(in thousands)
Interest income, net	$ 228	$ 258	-12%	$ 432	$ 991	-56%

Interest income, net was $0.2 million and $0.4 million for the three and nine months ended September 30, 2019, as compared to $0.3 million and $1.0 million for the same periods in 2018. The decrease in interest income, net for both the three and nine months ended September 30, 2019 compared to the same periods in 2018 reflects ~~an increase~~both a decrease in our short term investment balance and a decrease to the average interest rate earned on ~~invested balances and an increase in the average invested balance.~~our cash equivalents.

Table of Contents

Other Income (Expense), ~~Net~~net


	Three months ended September 30,			Nine months ended September 30,
	2019	2018	% Change	2019	2018	% Change
	(in thousands)			(in thousands)
Other income (expense), net	$ (1,611)	$ 246	-755%	$ (1,711)	$ 2,025	-184%

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

Other income (expense), net for the three and nine months ended September 30, ~~2017~~2019 was ~~($185)~~$(1.6) million and ~~$402,~~$(1.7) million, respectively, compared to ~~$118~~$0.2 million and ~~$731~~$2.0 million for the comparable periods of ~~2016. Other income (expense), net included exchange losses of $273 and $320~~2018. The expense recognized for the ~~three and~~ nine months ended September 30, ~~2017 compared~~2019 was attributable to exchange ~~losses of $110~~losses. Income recognized during the nine months ended September 30, 2018 was attributable to government subsidies and ~~gains of $152~~exchange gains.

Provision (Benefit) for ~~the same periods in 2016.~~

Income Taxes


	Three months ended September 30,			Nine months ended September 30,
	2019	2018	% Change	2019	2018	% Change
	(in thousands)			(in thousands)
Provision (benefit) for income taxes	$ 3,864	$ (1,702)	-327%	$ 4,363	$ (943)	-563%

~~Income~~

The Company recorded income tax expense for the three ~~and~~months ended September 30, 2019 of $3.9 million, compared to a benefit of $(1.7) million for the three months ended September 30, 2018. The increase was attributable to increased profits in the period excluding losses at entities where we cannot record a tax benefit.

The Company recorded income tax expense for the nine months ended September 30, ~~2017 was $2,558 and $2,994, respectively, an increase~~2019 of ~~$1,777 and~~$4.4 million, compared to a ~~decrease~~benefit of $152 from the same periods in 2016. The increase in tax expense in 2017 from 2016 for the third quarter is primarily due to higher pretax income in the third quarter of 2017. The decrease in tax expense in 2017 from 2016$0.9 million for the nine months ~~is primarily~~ended September 30, 2018. The increase was attributable to ~~lower pretax income, partially offset by discrete items~~increased profits in the period excluding losses at entities where we cannot record a tax benefit (See Note 9 – Income Taxes). Additionally, the nine months ended September 30, 2018 included a $2.5 million favorable tax adjustment related to ~~changes~~US tax reform.

Liquidity and Capital Resources

At September 30, 2019, we had net cash balances (total cash and cash equivalents) of $54.9 million and short-term investments of $26.4 million. Short term investments consist of U.S. treasury bills and notes, government agency notes, corporate notes and bonds, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months.

At December 31, 2018, we had net cash balances of $76.7 million and short-term investments of $22.8 million.

During the year ended December 31, 2018, we entered into a new lease agreement that required a letter of credit in ~~estimates upon completion~~the amount of ~~tax filings~~$0.8 million to secure the obligation. The restricted cash related to this letter of credit is recorded in other non-current assets on the Consolidated Balance Sheet at September 30, 2019 and ~~a measurement period adjustment in 2016.~~December 31, 2018.

Our ~~estimated annual tax rate for 2017 before discrete items is expected~~working capital at September 30, 2019 was $126.4 million compared to ~~be 40%. This is higher than the U.S. statutory rate primarily due to valuation allowances on taxable losses, primarily in Canada, partially offset by income in foreign jurisdictions taxed~~$119.6 million at ~~lower rates. Our ultimate tax rate will depend on the mix of earnings in various jurisdictions.~~December 31, 2018.

As of the third quarter of 2016, our estimated annual tax rate for 2016 before discrete items was expected to be 28%. The rate was lower than the U.S. statutory rate primarily due to income in foreign jurisdictions taxed at lower rates, partly offset by valuation allowances on taxable losses. Discrete items related to changes in estimates upon completion

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~~of tax filings and a measurement period adjustment increased the full-year 2016 effective rate to 37% and increased the nine month effective rate to 36%.~~

At December 31, 2016, we had foreign tax credit carryforwards of $7,027 for future U.S. tax returns. These foreign tax credits expire in 2023 through 2026. We have not provided a valuation reserve for the foreign tax credits as we believe it is more likely than not that they will be realized.

At December 31, 2016, we had deferred tax assets of $16,655 resulting from foreign and state NOL carryforwards of $58,110 and other foreign deductible carryforwards of $16,817. At December 31, 2016, we had a valuation allowance of $6,192 against deferred tax assets related to certain carryforwards.

~~Liquidity and Capital Resources~~

At September 30, 2017, we had net cash balances (total cash, cash equivalents and restricted cash less bank borrowings) of $49,261 and short-term investments of $109,463. At December 31, 2016, we had net cash balances of $49,345 and short-term investments of $94,856. We had no outstanding debt or restricted cash at September 30, 2017, or December 31, 2016.

Short-term investments at September 30, 2017, and December 31, 2016, consisting of high quality commercial paper with maturities of less than nine months, were held by our U.S. and Swiss entities and issued by domestic and foreign corporations.

Our working capital at September 30, 2017 was $159,370, an increase of $20,171 or 15% from $139,199 at December 31, 2016. The increase in the combined balance of cash and short-term investments as well as the increase in working capital at September 30, 2017 from December 31, 2016 primarily reflects the benefit of cash flow from operations for 2017.

As of September 30, ~~2017,~~2019, we held ~~$30,757~~$41.1 million of cash and ~~short-term investments~~cash equivalents in ~~banks~~subsidiaries outside of the United States. Of that amount, ~~$30,546~~$40.8 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.

~~Recently Issued Accounting Pronouncements~~

In May 2014, the FASB issued Accounting Standards Update No. 2014‑09, Revenue from Contracts with Customers (ASU 2014‑09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014‑09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard creates a five-step model to achieve its core principle: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition, entities must disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue andOur cash flows ~~arising from contracts with customers. Qualitative and quantitative disclosures~~ are ~~required about: (i) the entity’s contracts with customers; (ii) the significant judgments,~~as follows:


	Nine months ended September 30,
	2019	2018
	(in thousands)
Cash provided by (used in):
Operating activities	$ (13,662)	$ (9,205)
Investing activities	(7,609)	23,525
Financing activities	(394)	(399)
Effect of foreign exchange rate changes on cash and cash equivalents	(154)	(647)

Operating Activities

Cash generated by operating activities is primarily comprised of net income, as adjusted for non-cash items, and changes in ~~judgments, made~~operating assets and liabilities. Non-cash adjustments consist primarily of amortization and impairment of intangible assets, depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in ~~applying~~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 ~~guidance~~nine months ended September 30, 2019, net cash used in operating activities was $13.7 million, compared to ~~those contracts;~~net cash used in operating activities of $9.2 million during the nine months ended September 30, 2018. The increase is primarily driven by the timing of receivables and ~~(iii) any assets recognized~~higher inventory purchases.

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 ~~costs~~continued growth of our business as well to ~~obtain or fulfill a contract~~continue to invest in our infrastructure and activity in connection with ~~a customer.~~acquisitions.

~~ASU 2014‑09~~

For the nine months ended September 30, 2019, net cash used in investing activities was $7.6 million, compared to net cash provided by investing activities of $23.5 million for the nine months ended September 30, 2018. The decrease is ~~effective~~largely attributable to the maturity of $80.0 million of investments during the nine months ended September 30, 2018, offset by the $53.1 million purchase of Dealflo during the same period.

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 ~~annual periods beginning after~~the year ended December ~~15, 2016,~~31, 2018 and ~~interim periods within such annual periods, using either~~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 ~~following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting~~quarterly period ~~with the option to elect certain practical expedients, or (ii) an approach with the cumulative effect of initially adopting ASU 2014‑09 recognized at the date of adoption.~~ended September 30, 2019. We believe our most critical accounting policies include revenue recognition, purchase accounting and related fair value measurements and accounting for income taxes.

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~~In August 2015, the FASB issued Accounting Standards Update No. 2015‑14,~~ ~~Revenue from Contracts with Customers: Deferral of Effective Date~~ ~~deferring the new revenue standard one year and allowing adoption as of the original effective date.~~

~~In March 2016, the FASB issued ASU No.2016‑08,~~ ~~Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),~~ ~~which provides guidance on assessing whether an entity is a principal or an agent in a revenue transaction and whether an entity reports revenue on a gross or net basis.~~

~~In April 2016, the FASB issued ASU No. 2016‑10,~~ ~~Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,~~ ~~which provides guidance on identifying performance obligations and accounting for licenses of intellectual property.~~

~~In May 2016, the FASB issued ASU No. 2016‑12,~~ ~~Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,~~ ~~which makes narrow-scope amendments to ASU No. 2014‑09 and provides practical expedients to simplify the transition to the new standard and clarify certain aspects of the standard.~~

~~In December 2016, the FASB issued ASU No. 2016‑20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,~~ ~~which makes narrow-scope amendments to ASU No. 2014‑09.~~

~~We adopted ASU 2015‑11,~~ ~~Inventory (Topic 330) – Simplifying the Measurement of Inventory~~ as of January 1, 2017. ASU 2015‑11 requires measurement of inventory at the lower of cost or net realizable value, defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Adoption of ASU 2015‑11 did not have a significant impact on our financial statements.

~~In January 2017, The FASB issued ASU No. 2017‑01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~. ASU 2017‑01 defines a business in the context of a set of transferred assets and activities. ASU 2017‑01 is effective for annual and interim periods in fiscal years beginning after December 15, 2017 and applied prospectively. Early adoption is permitted. The Company is currently evaluating the effect the guidance will have on the Company’s financial statements.

~~In January 2017, the FASB issued ASU 2017‑04,~~ ~~Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.~~ ASU 2017‑04 eliminates Step 2 of the goodwill impairment test, requiring determination of the implied fair value of goodwill by allocating the reporting unit fair value to assets and liabilities as if the reporting unit was acquired in a business acquisition. Updated guidance requires goodwill impairment equal to the excess of the carrying value over the fair value of the respective reporting unit. Updated guidance is effective beginning January 1, 2020 and will be applied on a prospective basis. Early adoption is permitted. We are currently evaluating the impact of this updated guidance.

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~~In March 2017, the FASB issued ASU No. 2017‑07,~~ ~~Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~. The updated accounting guidance requires changes to the presentation of the components of net periodic benefit cost on the income statement by requiring service cost be presented with other employee compensation costs and other components of net periodic pension cost be presented outside of any subtotal of operating income. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on the Company’s 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 impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

Item 3.3 - Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our market risk during the ~~three and~~ nine months ended September 30, ~~2017.~~2019. For additional information, refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk”, included in our Annual Report on Form ~~10‑K~~10-K for the fiscal year ended December 31, ~~2016.~~2018.

Item 4.4 - Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who, respectively, are our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule ~~13a‑15(e)~~13a-15(e) and Rule ~~15d‑15(e)~~15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form ~~10‑Q.~~10-Q. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure (i) the information required to be disclosed by us in our reports that we file or submit 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 (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to the material weakness in our internal control over financial reporting described below and further in our Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2016,~~2018, that our disclosure controls and procedures were not effective as of September 30, ~~2017.~~2019.

Changes in Internal Controls

As discussed in Item 9A. of our Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2016, management~~2018, Management identified control deficiencies that constituted a material weakness in our internal control over financial reporting as of December 31, ~~2016. The deficiencies related to the acquisition and integration of Silanis Technology, Inc.~~2018.

The Company has implemented additional controls and is in the process of executing a remediation plan. Management expects remediation of the material weakness will be completed in the fiscal year ~~2017.~~2019.

Additionally, the Company concluded the implementation of a new global enterprise resource planning (“ERP”) system during the nine months ended September 30, 2019. This ERP system has replaced our existing operating and financial systems and is designed to accurately maintain the Company’s financial records, enhance operational functionality, and provide timely information to the Company’s management team related to the operation of the business.

Subject to the foregoing, there were no changes in our internal control over financial reporting during ~~our quarter~~the three months ended September 30, ~~2017 which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a‑15 and 15d‑15 under the Exchange Act~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Inherent Limitations on the Effectiveness of Controls

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. However, our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of

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the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

PART II. OTHER INFORMATION

Item 1.1 - Legal ~~Proceedings.~~Proceedings

~~In addition~~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 ~~matters~~proceedings described below, we are, from time to time, involved in routine legal matters incidental to the conduct of our business, including legal matters such as to protect our intellectual property rights and resolve employment claims. We believe that the ultimate resolution of any such current routine matter will ~~not~~ 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 ~~continued~~ financial ~~position,~~ results in any particular interim reporting period.

We cannot predict the outcome of ~~operations~~legal or ~~cash flows.~~

~~On January 10, 2011, we purchased~~other proceedings with certainty, including the legal proceedings which are summarized in “Note 12 – Legal Proceedings and Contingencies” included in our ~~wholly-owned subsidiary, DigiNotar B.V., a private company organized~~Notes to Condensed Consolidated Financial Statements, incorporated herein by reference, and ~~existing~~“Note 12 – Commitments and Contingencies” in The Netherlands from the shareholders (“Sellers”). On September 19, 2011, DigiNotar B.V. filed a bankruptcy petition under Article 4 of the Dutch Bankruptcy Act in the Haarlem District Court, The Netherlands. On September 20, 2011, the court declared DigiNotar B.V. bankrupt and appointed a bankruptcy trustee and a bankruptcy judge to manage all affairs of DigiNotar B.V. through the bankruptcy process. The trustee took over management of DigiNotar B.V.’s business activities and is responsibleour Annual Report on Form 10-K for the ~~administration and liquidation of DigiNotar B.V. In connection with the bankruptcy of DigiNotar B.V., subsequent to September 20, 2011, a number of claims and counter-claims were~~year ended December 31, 2018 filed with the ~~courts~~U.S. Securities and Exchange Commission. Any reasonably possible loss or range of loss associated with any individual legal proceeding that can be estimated, is provided in ~~The Netherlands (collectively, the “Court”) related~~Note 12 to ~~discontinued assets and discontinued liabilities and other available remedies.~~Condensed Consolidated Financial Statements contained herein.

In January 2015, we received a notice of potential claim by the trustee against all of the individuals who served as Directors of DigiNotar, both before and after our acquisition of DigiNotar. T. Kendall Hunt, Jan Valcke, and Clifford K. Bown were the Directors of DigiNotar following its purchase by VASCO. The basis for the potential claim from the trustee appears to be based primarily on the same arguments that VASCO presented in its case against the sellers, which were adjudicated in VASCO’s favor. While we believe that we have strong defenses against the claim, we have also notified our provider of director and officer insurance should a claim be filed and we do not expect the resolution of the potential claim to have a material adverse effect on our business, financial condition or results of operations. VASCO is indemnifying Messrs. Hunt, Valcke, and Bown for this matter.

On July 28, 2015 a putative class action complaint was filed in the United States District Court for the Northern District of Illinois, captioned Linda J. Rossbach v. Vasco Data Security International, Inc., et al., case number 1:15‑cv‑06605, naming VASCO and certain of its current and former executive officers as defendants and alleging violations under the Securities Exchange Act of 1934, as amended. The suit was purportedly filed on behalf of a putative class of investors who purchased VASCO securities between April 28, 2015 and July 28, 2015, and seeks to recover damages allegedly caused by the defendants’ alleged violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b‑5 promulgated thereunder. The

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complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys’ fees. Pursuant to a September 1, 2015 scheduling order entered by the court, the lead plaintiff, once appointed, will have sixty days to file an amended complaint or notify the defendants that the lead plaintiff intends to rely on the current complaint. On January 30, 2017, the appointed lead plaintiff filed an amended complaint in which the allegations regarding OFAC related matters were dropped and replaced with allegations regarding public disclosures made by the defendants in April 2015 as compared to public statements made in July 2015, generally regarding the strength of the Company’s business and its future prospects. This case is now referred to by the name of the new lead plaintiff, Bunk. The defendants filed a motion to dismiss the Bunk complaint on March 31, 2017. Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend against the action vigorously. VASCO is indemnifying its officers and directors for this matter.

On October 29, 2015, a defendant removed the Seltzer action to the United States District Court for the Northern District of Illinois. Thereafter, the plaintiff filed a motion to remand the action back to the Circuit Court of Cook County, Illinois, which was denied on February 3, 2016. On February 9, 2016, the court granted an agreed motion for voluntary dismissal of the Seltzer action, which dismissed the action with prejudice as to the named plaintiff’s individual claims. As for the Hooper action, the court granted a stay on June 8, 2016 and on July 18, 2017, the plaintiff in Hooper amended the complaint to largely mirror the amended complaint in Bunk.

On July 19, 2017, a derivative complaint was filed in the Circuit Court of Cook County, Illinois, captioned Fancesco D’Angelo v. Hunt, et. al., naming VASCO’s Board of Directors and certain former officers as individual defendants and the Company as a nominal defendant. This complaint largely follows the allegations in the Bunk case. The D’Angelo case has been consolidated with the Hooper case and remains subject to stay.

In February 2017, we learned that one of our integrated reseller customers, and certain of its end customers, were named as defendants in a patent infringement lawsuit in Japan related to our CRONTO technology. We have indemnification obligations in favor of our customer and are working with them to defend such suit. We believe there are strong grounds to argue that the plaintiff’s patent is invalid and we are defending our technology vigorously. However, the outcome of this suit is uncertain. If the plaintiff were able to succeed in this case and impede our ability to sell, and our customers’ ability to use, products utilizing our CRONTO technology, then such result could have a material adverse impact on our business and results of operations.

On March 14, 2017, a complaint was filed in the United States District Court for the District of Massachusetts, captioned StrikeForce Technologies, Inc. v. Vasco Data Security International, Inc., et al., claiming VASCO infringed on certain patent rights of the plaintiff. On May 8, 2017, VASCO answered the complaint denying the allegations of patent infringement. The parties are currently engaged in motion practice and discovery in the case. The plaintiff has also brought suit against various other companies in the cybersecurity industry. Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend itself vigorously.

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~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.~~Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

~~(c)~~ The following table provides information about purchases by the Company of its shares of common stock during the ~~three month period ended September 30, 2017:~~third quarter of 2019:

Total Number

of Shares

Maximum

Purchased as

Number 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, 2017 through July 31, 2017

4,055

$
14.15

—

—
August 1, 2017 through August 31, 2017

—

—

—

—
September 1, 2017 through September 30, 2017

—

—

—

—


				Total Number
				of Shares	Maximum
				Purchased as	Number 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, 2019 through July 31, 2019	7,013	$	13.71	—	—
August 1, 2019 through August 31, 2019	3,899		14.59	—	—
September 1, 2019 through September 30, 2019	974	$	13.38	—	—

(1.)

All transactions represent surrender of vested shares in satisfaction of tax withholdings by grantees under the 2009 Equity Incentive Plan.

(2.)

The Company has no publicly announced plans or programs to repurchase its shares.

~~Item 5. Other Information.~~

During the second quarter of 2015, our management became aware that certain of our products which were sold by our European subsidiary to a third-party distributor may have been resold by the distributor to parties in Iran, potentially including parties whose property and interests in property may be blocked pursuant to Executive Order 13224, Executive Order 13382 or that may be identified under Section 560.304 of 31 C.F.R. Part 560 as the “Government of Iran”.

We ceased shipping to such distributor. In addition, the Audit Committee of the Company’s Board of Directors initiated an internal review of this matter with the assistance of outside counsel. As a precautionary matter, concurrent initial notices of voluntary disclosure were submitted on June 25, 2015 to each of the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”), and the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”).

The Audit Committee with the assistance of outside counsel has completed their review. On December 15, 2015, we filed a letter with BIS (Office of Export Enforcement) with the conclusion that the products supplied to the distributor were not subject to United States Export Control jurisdiction. The Office of Export Enforcement issued a “no action” letter, concluding the voluntary self-disclosure process under the Export Administration Regulations.

In addition, on January 13, 2016, we filed a letter with OFAC, with the conclusions that VASCO and its subsidiaries made no direct sales to Iran or any party listed by OFAC as a Specially Designated National over the five-year period under review (i.e., June 1, 2010 to June 30, 2015). The letter further noted that the investigation did not identify any involvement on the part of senior management officials of VASCO, and to the contrary, noted that VASCO executive management officials had sought to implement procedures and provided notices to VASCO’s sales personnel to prevent the diversion of VASCO products to unauthorized destinations and end users.

We have not received any response to the letter to OFAC and we cannot predict when OFAC will conclude their review of our voluntary self-disclosures. Based upon the OFAC guidelines for monetary penalties, in the fourth quarter of 2015, we accrued $900 for potential penalties if they are assessed by OFAC. Ultimately no penalty may be assessed or the penalty may be less or greater than the accrual, but in any event we do not believe that the final settlement will have a material adverse impact on our business.

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Item ~~6. Exhibits.~~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, 2017.~~October 29, 2019.

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, 2017.~~October 29, 2019.

Exhibit 32.1 - Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated ~~November 2, 2017.~~October 29, 2019.

Exhibit 32.2 - Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated ~~November 2, 2017.~~October 29, 2019.

Exhibit 101.INS – XBRL Instance 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

*Certain exhibits, schedules and annexes have been omitted pursuant to Item 601(b)(2) of Regulation S-K. ~~VASCO~~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, 2017.~~October 30, 2019.


	~~VASCO Data Security International,~~OneSpan Inc.


	/s/ Scott Clements
	Scott Clements
	Chief Executive Officer (Principal Executive Officer)


	/s/ Mark S. Hoyt
	Mark S. Hoyt
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

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Net balance at December 31, 2016	$	54,409
Additions		—
Net foreign currency translation		1,975
Net balance at September 30, 2017	$	56,384


	Capitalized		Customer				Total Intangible
	Technology		Relationships		Other		Assets
Net balance at December 31, 2016	$	11,392	$	24,774	$	10,383	$	46,549
Additions-Other		—		—		65		65
Net foreign currency translation		16		13		44		73
Amortization expense		(3,346)		(1,641)		(1,616)		(6,603)
Net balance at September 30, 2017	$	8,062	$	23,146	$	8,876	$	40,084

September 30, 2017 balance at cost	$	37,256	$	27,825	$	13,371	$	78,452
Accumulated amortization		(29,194)		(4,679)		(4,495)		(38,368)
Net balance at September 30, 2017	$	8,062	$	23,146	$	8,876	$	40,084


Year	Amount
2018	$	-
2019		462
2020		513
2021		523
2022		534
Thereafter		3,484
Total	$	5,516