UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10‑Q~~10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, ~~2017~~2020

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

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

FOR THE TRANSITION PERIOD FROMTO

Commission file number ~~000‑24389~~000-24389

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

(Exact Name of Registrant as Specified in Its Charter)


DELAWARE	36-4169320
~~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 ⌧ 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~~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~~12b-2 of the Exchange Act). ◻☐ Yes ☒No

There were ~~40,170,047~~40,634,029shares of Common Stock, $.001 par value per share, outstanding at ~~October 27, 2017.~~November 1, 2020.

OneSpan Inc.

~~VASCO Data Security International, Inc.~~

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)


	September 30,		December 31,
	2020		2019
ASSETS
Current assets
Cash and equivalents	$	85,931	$	84,282
Short term investments		26,811		25,511
Accounts receivable, net of allowances of $3,837 in 2020 and $2,524 in 2019		54,475		62,405
Inventories, net		14,029		19,819
Prepaid expenses		6,439		6,198
Contract assets		6,609		5,240
Other current assets		7,831		6,346
Total current assets		202,125		209,801
Property and equipment, net		12,060		11,454
Operating lease right-of-use assets		11,508		10,580
Goodwill		94,159		94,612
Intangible assets, net of accumulated amortization		28,743		36,209
Deferred income taxes		8,158		7,863
Contract assets - non-current		2,329		3,355
Other assets		10,451		8,668
Total assets	$	369,533	$	382,542
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	5,300	$	10,835
Deferred revenue		36,607		30,338
Accrued wages and payroll taxes		12,631		15,415
Short-term income taxes payable		2,459		7,410
Other accrued expenses		8,292		8,786
Deferred compensation		1,350		1,028
Total current liabilities		66,639		73,812
Long-term deferred revenue		12,644		15,259
Long-term lease liability		12,523		11,299
Other long-term liabilities		8,227		8,297
Long-term income taxes payable		5,905		6,958
Deferred income taxes		4,379		4,623
Total liabilities		110,317		120,248
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at December 31, 2020 and 2019		—		—
Common stock: $.001 par value per share, 75,000 shares authorized; 40,356 and 40,207 issued and outstanding at September 30, 2020 and December 31, 2019, respectively		40		40
Additional paid-in capital		97,378		96,109
Accumulated income		175,488		179,440
Accumulated other comprehensive loss		(13,690)		(13,295)
Total stockholders' equity		259,216		262,294
Total liabilities and stockholders' equity	$	369,533	$	382,542

See accompanying notes to unaudited condensed consolidated financial statements.

September 30,

December 31,

2017

2016

(unaudited)

ASSETS

Current assets




Cash and equivalents

$
49,261

$
49,345
Short term investments

109,463

94,856
Accounts receivable, net of allowance for doubtful accounts of $533 in 2017 and $535 in 2016

34,612

36,693
Inventories, net

17,395

17,420
Prepaid expenses

4,000

3,249
Other current assets

4,705

5,596
        Total current assets

219,436

207,159
Property and equipment:




     Furniture and fixtures

6,415

5,547
     Office equipment

14,454

13,028

20,869

18,575
     Accumulated depreciation

(17,056)

(15,294)
         Property and equipment, net

3,813

3,281
Goodwill

56,384

54,409
Intangible assets, net of accumulated amortization

40,084

46,549
Other assets

15,969

15,872
        Total assets

$
335,686

$
327,270
LIABILITIES AND STOCKHOLDERS' EQUITY




Current liabilities




     Accounts payable

$
6,038

$
8,915
     Deferred revenue

31,331

36,364
     Accrued wages and payroll taxes

12,317

10,894
     Income taxes payable

2,625

4,594
     Other accrued expenses

6,682

5,464
     Deferred compensation

1,073

1,729
        Total current liabilities

60,066

67,960
Other long-term liabilities

9,516

1,878
Deferred income taxes

795

853
        Total liabilities

70,377

70,691
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
Additional paid-in capital

89,125

87,481
Accumulated income

181,989

178,551
Accumulated other comprehensive loss

(5,845)

(9,493)
Total stockholders' equity

265,309

256,579
Total liabilities and stockholders' equity

$
335,686

$
327,270

Table of Contents

OneSpan Inc.

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

(unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenue
Product and license	$	30,249	$	61,215	$	103,893	$	132,675
Services and other		21,190		18,476		58,870		50,278
Total revenue		51,439		79,691		162,763		182,953

Cost of goods sold
Product and license		10,064		22,199		33,378		46,966
Services and other		5,414		4,470		16,395		13,622
Total cost of goods sold		15,478		26,669		49,773		60,588

Gross profit		35,961		53,022		112,990		122,365

Operating costs
Sales and marketing		14,576		14,156		44,129		44,579
Research and development		10,643		9,956		31,178		32,428
General and administrative		10,737		9,490		33,851		29,540
Amortization of intangible assets		2,360		2,335		7,049		7,051
Total operating costs		38,316		35,937		116,207		113,598

Operating income (loss)		(2,355)		17,085		(3,217)		8,767

Interest income, net		56		228		389		432
Other income (expense), net		716		(1,611)		887		(1,711)

Income (loss) before income taxes		(1,583)		15,702		(1,941)		7,488
Provision for income taxes		95		3,855		1,758		4,208

Net income (loss)	$	(1,678)	$	11,847	$	(3,699)	$	3,280

Net income (loss) per share
Basic	$	(0.04)	$	0.30	$	(0.09)	$	0.08
Diluted	$	(0.04)	$	0.30	$	(0.09)	$	0.08

Weighted average common shares outstanding
Basic		40,033		40,062		40,050		40,037
Diluted		40,033		40,129		40,050		40,099

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

OneSpan Inc.

~~VASCO Data Security International, Inc.~~

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~COMPREHENSIVE INCOME (LOSS)

(in ~~thousands, except per share data)~~thousands)

(unaudited)

Three months ended

Nine months ended

September 30,

September 30,


2017

2016

2017

2016

Revenue









Product and license

$
38,421

$
34,251

$
104,454

$
118,786

Services and other

12,705

9,397

34,331

25,922

Total revenue

51,126

43,648

138,785

144,708

Cost of goods sold









Products and license

12,083

11,400

32,668

39,925

Services and other

2,397

2,198

7,511

6,078

Total cost of goods sold

14,480

13,598

40,179

46,003

Gross profit

36,646

30,050

98,606

98,705

Operating costs:









Sales and marketing

13,956

13,453

42,997

41,982

Research and development

5,493

5,807

17,669

17,617

General and administrative

9,882

7,682

26,323

25,071

Amortization of purchased intangible assets

2,203

2,196

6,603

6,622

Total operating costs

31,534

29,138

93,592

91,292

Operating income

5,112

912

5,014

7,413

Interest income, net

386

229

1,016

504

Other income (expense), net

(185)

118

402

731

Income before income taxes

5,313

1,259

6,432

8,648

Provision for income taxes

2,558

781

2,994

3,146

Net income

$
2,755

$
478

$
3,438

$
5,502

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:









Basic

39,811

39,736

39,792

39,709

Diluted

39,821

39,834

39,802

39,786


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net income (loss)	$	(1,678)	$	11,847	$	(3,699)	$	3,280
Other comprehensive loss
Cumulative translation adjustment, net of tax		3,455		(3,022)		(377)		(3,450)
Pension adjustment, net of tax		(6)		(12)		(18)		(40)
Comprehensive income (loss)	$	1,771	$	8,813	$	(4,094)	$	(210)

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

OneSpan Inc.

~~VASCO Data Security International, Inc.~~

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~STOCKHOLDERS’ EQUITY

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

(unaudited)

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


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Stockholders'
Description	Shares	Amount		Capital		Income		Income (Loss)		Equity
Balance at December 31, 2019	40,207	$	40	$	96,109	$	179,440	$	(13,295)	$	262,294
Cumulative impact of change in accounting principle, net of tax	—		—		—		(253)		—		(253)
Net income (loss)	—		—		—		4		—		4
Foreign currency translation adjustment, net of tax	—		—		—		—		(4,278)		(4,278)
Restricted stock awards	168		—		1,350		—		—		1,350
Tax payments for stock issuances	(61)		—		(293)		—		—		(293)
Pension adjustment, net of tax	—		—		—		—		(6)		(6)
Balance at March 31, 2020	40,314	$	40	$	97,166	$	179,191	$	(17,579)	$	258,818
Net income (loss)	—		—		—		(2,025)		—		(2,025)
Foreign currency translation adjustment, net of tax	—		—		—		—		446		446
Restricted stock awards	19		—		860		—		—		860
Tax payments for stock issuances	(4)		—		(886)		—		—		(886)
Pension adjustment, net of tax	—		—		—		—		(6)		(6)
Balance at June 30, 2020	40,329	$	40	$	97,140	$	177,166	$	(17,139)	$	257,207
Net income (loss)	—		—		—		(1,678)		—		(1,678)
Foreign currency translation adjustment, net of tax	—		—		—		—		3,455		3,455
Restricted stock awards	55		—		1,022		—		—		1,022
Tax payments for stock issuances	(28)		—		(784)		—		—		(784)
Pension adjustment, net of tax	—		—		—		—		(6)		(6)
Balance at September 30, 2020	40,356	$	40	$	97,378	$	175,488	$	(13,690)	$	259,216

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

Table of Contents

OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

For the three and 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		171,576		(13,287)		251,639
Net income (loss)	—		—		—		(6,056)		—		(6,056)
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	$	165,520	$	(12,433)	$	246,771
Net income (loss)	—		—		—		(2,511)		—		(2,511)
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	$	163,009	$	(13,743)	$	243,578
Net income (loss)	—		—		—		11,847		—		11,847
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	$	174,856	$	(16,777)	$	252,813

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

OneSpan Inc.

~~VASCO Data Security International, Inc.~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine months ended September 30,
	2020		2019
Cash flows from operating activities:
Net income (loss)	$	(3,699)	$	3,280
Adjustments to reconcile net income (loss) from operations to net cash provided by (used in) operations:
Depreciation and amortization of intangible assets		9,193		8,579
Loss on disposal of assets		75		—
Deferred tax benefit		(356)		(508)
Stock-based compensation		3,232		1,778
Changes in operating assets and liabilities:
Accounts receivable, net		8,589		(18,988)
Inventories, net		5,790		(4,549)
Contract assets		(379)		540
Accounts payable		(5,551)		5,895
Income taxes payable		(5,985)		(2,742)
Accrued expenses		(3,694)		(2,351)
Deferred compensation		322		(47)
Deferred revenue		3,268		(2,318)
Other assets and liabilities		(3,376)		(2,231)
Net cash provided by (used in) operating activities		7,429		(13,662)

Cash flows from investing activities:
Purchase of short term investments		(23,295)		(24,663)
Maturities of short term investments		21,980		21,250
Additions to property and equipment		(2,710)		(4,196)
Other		(98)		—
Net cash used in investing activities		(4,123)		(7,609)

Cash flows from financing activities:
Tax payments for restricted stock issuances		(1,963)		(394)
Net cash used in financing activities		(1,963)		(394)

Effect of exchange rate changes on cash		306		(154)

Net increase (decrease) in cash		1,649		(21,819)
Cash, cash equivalents, and restricted cash, beginning of period		85,129		77,555
Cash, cash equivalents, and restricted cash, end of period (1.)	$	86,778	$	55,736

(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, 2020 and December 31, 2019 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, 2019 (in thousands):

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


	September 30, 2020		September 30, 2019		December 31, 2019

Cash and cash equivalents	$	85,931	$	54,889	$	84,282
Restricted cash included in other non-current assets		847		847		847
Cash, cash equivalents and restricted cash	$	86,778	$	55,736	$	85,129

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

OneSpan Inc.

~~VASCO Data Security International, 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, market and support hardware and software security systems that manage and secure access to information assets. 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.).

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of OneSpan and its subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020, particularly in light of the novel coronavirus (COVID-19) pandemic and its effects on domestic and global economies. To limit the spread of COVID-19, governments have imposed, and may continue to impose, among other things, travel and business operation restrictions and stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. These disruptions and restrictions could adversely affect our operating results due to, among other things, reduced demand for our services and solutions as a result of our customers having to adjust, reduce or suspend operating activities. Beginning in the Summer of 2020 and continuing through the third quarter ended September 30, 2020, we have experienced softened demand for certain of our products and services due to, we believe, global economic uncertainty connected with the continued seriousness of the COVID-19 pandemic.

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

Revision of Previously Issued Financial Statements

We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q related to immaterial errors. The errors relate to certain contracts with customers involving term-based software licenses and related maintenance and support services. The net contract assets that originated from a portion of these contracts in prior periods were not properly accounted for in subsequent periods, which caused overstatements of revenue in prior periods.

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We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Reports on Form 10-K for the years ended December 31, 2019 and 2018, or for any quarterly periods included therein or through our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

The following tables present the effects of the aforementioned revisions on our condensed consolidated balance sheet as of December 31, 2019, our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2019, our unaudited condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2019, our unaudited condensed consolidated statement of stockholders’ equity for the three and nine months ended September 30, 2019, our unaudited condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2020, and our unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2019 (in thousands).

Condensed Consolidated Balance Sheet


	December 31, 2019
in thousands	As Previously Reported		Adjustments		As Revised
Contract assets	$	7,058	$	(1,818)	$	5,240
Total current assets		211,619		(1,818)		209,801
Contract assets - non-current		3,565		(210)		3,355
Total assets		384,570		(2,028)		382,542

Short-term income taxes payable		7,711		(301)		7,410
Total current liabilities		74,113		(301)		73,812
Long-term deferred revenue		15,259		—		15,259
Long-term income taxes payable		6,958		—		6,958
Total liabilities		120,549		(301)		120,248

Accumulated income		181,167		(1,727)		179,440
Accumulated other comprehensive loss				—
Total stockholders' equity		264,021		(1,727)		262,294
Total liabilities and stockholders' equity		384,570		(2,028)		382,542

Condensed Consolidated Statements of Operations (Unaudited)


	Three Months ended September 30, 2019						Nine Months ended September 30, 2019
	As Previously Reported		Adjustments		As Revised		As Previously Reported		Adjustments		As Revised
Revenue
Product and license	$	61,181	$	34	$	61,215	$	133,159	$	(484)	$	132,675
Services and other		18,544		(68)		18,476		50,408		(130)		50,278
Total revenue		79,725		(34)		79,691		183,567		(614)		182,953

Gross Profit		53,056		(34)		53,022		122,979		(614)		122,365

Operating income		17,119		(34)		17,085		9,381		(614)		8,767

Income before income taxes		15,736		(34)		15,702		8,102		(614)		7,488
Provision for income taxes		3,864		(9)		3,855		4,363		(155)		4,208

Net Income		11,872		(25)		11,847		3,739		(459)		3,280

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Condensed Consolidated Statements of Comprehensive Loss (Unaudited)


	Three Months ended September 30, 2019						Nine Months ended September 30, 2019
	As Previously Reported		Adjustments		As Revised		As Previously Reported		Adjustments		As Revised
Net income	$	11,872	$	(25)	$	11,847	$	3,739	$	(459)	$	3,280
Comprehensive income (loss)		8,838		(25)		8,813		249		(459)		(210)

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)


	Total Stockholders' Equity
in thousands		As Previously Reported		Adjustments		As Revised
Balance at December 31, 2018		$	252,441	$	(802)	$	251,639
Net income (loss)			(5,671)		(385)		(6,056)
Balance at March 31, 2019			247,958		(1,187)		246,771
Net income (loss)			(2,461)		(50)		(2,511)
Balance at June 30, 2019			244,815		(1,237)		243,578
Net income (loss)			11,872		(25)		11,847
Balance at September 30, 2019			254,075		(1,262)		252,813

Balance at December 31, 2019		$	264,021	$	(1,727)	$	262,294
Net income (loss)			98		(94)		4
Balance at March 31, 2020			260,639		(1,821)		258,818

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Nine Months ended September 30, 2019
in thousands	As Previously Reported		Adjustments		As Revised
Cash flows from operating activities:
Net income	$	3,739	$	(459)	$	3,280
Changes in operating assets and liabilities:
Contract assets		(74)		614		540
Income taxes payable		(2,587)		(155)		(2,742)
Net cash used in operating activities		(13,662)		—		(13,662)

For the three months ended March 31, 2020, the impacts of the adjustments resulted in a decrease of $0.1 million to income before taxes, and a decrease of $0.1 million to net income, compared to the amounts previously reported.

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.

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Foreign Currency Translation and Transactions

The financial position and results of the operations of the majority of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other income (expense), net. Foreign exchange transaction gains aggregated $0.4 million for the three months ended September 30, 2020, and foreign exchange transaction losses aggregate $1.9 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, foreign exchange loss aggregated $0.1 million, and foreign exchange transaction losses aggregated $2.6 million for the nine months ended September 30, 2019.

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.

Share Repurchase Program

On June 10, 2020, the Board of Directors authorized a share repurchase program (“program”), pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. Share purchases under the program will take place in open market transactions or in privately negotiated transactions and may be made from time to time depending on market conditions, share price, trading volume, and other factors. The timing of the repurchases and the amount of stock repurchased in each transaction is subject to OneSpan’s sole discretion and will depend upon market and business conditions, applicable legal and credit requirements and other corporate considerations. As of September 30, 2020, 0 shares had been repurchased under the program. The authorization is effective until June 10, 2022 unless the total amount has been used or authorization has been cancelled.

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

~~Nature~~Except for certain changes which resulted from the adoption of ~~Operations~~

VASCO Data Security International, Inc. (“VASCO”) and its wholly owned subsidiaries design, develop, market and support hardware and software security systems 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 as a single operating segment.~~

~~Basis of Presentation~~

~~The accompanying unaudited condensed consolidated financial statements include the accounts of VASCO and its subsidiaries and~~ASU 2016-13, 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 accepted~~significant accounting ~~principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements included~~policies described in the ~~company’s~~ Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2016.~~

In2019, filed with the ~~opinion of management,~~SEC on March 16, 2020 that have had a material impact on the ~~accompanying unaudited~~Company’s condensed consolidated financial statements ~~have been prepared~~and related notes.

Cash, Cash Equivalents and Restricted Cash.

We are in a 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, 2020 and December 31, 2019.

Short Term Investments

The Company’s short term investments are in debt securities which 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 The Company classifies its investments in debt securities as available-for-sale. The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020, which amended our accounting for available-for-sale debt securities. Credit impairments are recorded through an allowance rather than a direct write-down of the security and are recorded through a charge to the condensed consolidated statement of operations. Unrealized gains or losses not related to credit impairments are recorded in accumulated other comprehensive gain/(loss) in the condensed consolidated balance sheets. The Company reviews available-for-sale debt securities for impairments related to credit losses and other factors each quarter. As of September 30, 2020 and December 31, 2019, the unrealized gains and losses were not material.

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Accounts Receivable, net of Allowance for Credit Losses

The Company adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. As a result of the adoption, the Company amended its accounting policies for the allowance for credit losses. In accordance with ASU No. 2016-13, the Company evaluates its allowance based on expected losses rather than incurred losses, which is known as the ~~audited consolidated~~current expected credit loss (“CECL”) model. The allowance is determined using the loss rate approach and is measured on a collective (pool) basis when similar risk characteristics exist. Where financial ~~statements,~~instruments do not share risk characteristics, they are evaluated on an individual basis. The allowance is based on relevant available information, from internal and ~~include all adjustments, consisting only~~external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Equity Method Investment

We apply the equity method of ~~normal recurring adjustments, necessary for~~accounting to our investment in Promon AS (Promon), because we exercise significant influence, but not controlling interest, in the ~~fair presentation~~investee. Promon is a technology company headquartered in Norway that specializes in mobile app security, whose solutions focus largely on Runtime Application Self-Protection (RASP). We exercise significant influence over Promon as a result of our 17% ownership interest in Promon, our representation on Promon’s Board of Directors, and the significance to Promon of our business activities with them. We integrate Promon’s RASP technology into our software solution, which are licensed to our customers. Under the equity method of accounting, the Company’s proportionate share of the ~~results~~net earnings (losses) of Promon is reported in other income (expense), net in our condensed consolidated Statements of Operations. The impact 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~~proportionate share of ~~the results expected for a full year.~~

~~Revision of Previously Issued Financial Statements~~

~~Cost of goods sold, gross profit and operating expenses~~net earnings (losses) were immaterial for the three and nine months ended September 30, ~~2016 reflected~~2020 and 2019 as were the relative size of Promon’s assets and operations in relation to the Company’s. The carrying value of our equity method investment is reported in other noncurrent assets in the statements of operations have been revised from amounts previously reported 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, for the threecondensed consolidated Balance Sheets and nine months ended September 30, 2016, cost of goods sold increased by $2,051 and $5,849 and gross profit and operating expenses each decreased from the respective amounts previously reported by $2,051 and $5,849, respectively.

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.

~~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.~~

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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:~~

a client component (i.e., an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a device the customer already owns),

host system software 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 for additional users on the host system software, if the host system software had been installed previously, and

~~post contract support (“PCS”) in the form of maintenance on the host system software or support.~~

Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of any revenue and incidental to the overall transaction, such as initialization of the hardware device, customization of the hardware device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer’s end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.

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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 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 collection of the revenue is probable.

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 minority equity investments in companies we believe may be beneficial in executing our strategy. At September 30, 2017 and December 31, 2016, investments were $4,073. In accordance with ASC 325, the investments are recordedoriginally at cost and ~~evaluated~~adjusted each period for the Company’s share of the investee’s earnings (losses) and dividends paid, if any. The Company also assesses the investment for impairment ~~annually or~~ whenever events or changes in circumstances indicate that the carrying value of the investment may not be recoverable.

~~Cost of Goods Sold~~

~~Included~~ The Company did not record any impairment charges during the nine month periods ended September 30, 2020 and 2019. The Company recorded $0.2 million and $1.2 million 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 capitalizedsales during the three months ended September 30, 2020 and September 30, 2019, respectively for license fees owed to Promon for use of their software and technology, and recorded $1.6 million and $2.4 million for the nine months ended September 30, ~~2017.~~

~~Income Taxes~~

~~We account for income taxes under the asset~~2020 and ~~liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts~~2019, respectively. The Company owed Promon $1.5 million as 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 and December 31, 2016, our financial instruments were cash equivalents, short term investments, accounts receivable,~~2020, which is included in accounts payable and accrued liabilities. ~~The estimated fair value of our financial instruments has been determined using level one inputs 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 and December 31, 2016.~~

~~Accounting for Leases~~

~~All of our leases are operating leases. Rent expense on facility leases is charged evenly over the life of the lease, regardless 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 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 life of the patent, generally 20 years in the U.S.

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Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination. We assess the impairment of goodwill and intangible assets with indefinite lives each November 30 or whenever events or changes in circumstances indicate that 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 performance of the reporting units against the planned results used in the last quantitative goodwill impairment test. Additionally, each reporting unit’s fair value is assessed in light 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 ended September 30, 2017. The change in the composition of our reporting units will be reflected in our annual impairment test performed as of November 30.

~~Stock-Based Compensation~~

~~We have stock-based employee compensation plans, described in Note 6. ASC 718‑10,~~ ~~Stock Compensation~~ requires us to estimate the fair value of restricted stock granted to employees, directors and others and to record compensation expense equal to the estimated fair value. Compensation expense is recorded on a straight-line basis over 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 at the time revenue is recognized. We estimate the cost based on past claims experience, sales history and other considerations. We regularly assess the adequacy 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 of purchase. Customers may purchase extended warranties covering periods from one to four years after the standard warranty period.

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We defer the revenue associated 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 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 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.

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, 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~~September 2016, the FASB issued ASU ~~No. 2016‑08,~~ ~~Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which ~~provides~~amends the Board’s guidance on ~~assessing whether~~the impairment of financial instruments. The ASU adds an ~~entity~~impairment model that is ~~a principal or an agent in a revenue transaction and whether an entity reports revenue~~based 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, 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,expected losses rather than ~~over~~incurred losses, which is known as the ~~term of the arrangement. We expect~~current expected credit loss (“CECL”) model. The CECL model applies to ~~capitalize certain sales commissions upon adoption of the new standard~~most debt instruments (other than those measured at fair value), trade 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~~other receivables, financial guarantee contracts, 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.

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~~We adopted~~loan commitments. This 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 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 in the context of a set of transferred assets and activities. ASU 2017‑01 is effective for annual~~2019, and interim periods inwithin those fiscal ~~years beginning after December 15, 2017 and applied prospectively. Early adoption is permitted.~~years. The Company ~~is currently evaluating~~adopted ASC 326 as of January 1, 2020, using the ~~effect~~cumulative-effect transition method with the ~~guidance will have on~~required prospective approach. The cumulative-effect transition method enables an entity to record an allowance for expected credit losses at the ~~Company’s financial statements.~~date of adoption without restating comparative periods. The cumulative-effect adjustment for adoption of ASC 326 resulted in a decrease of $0.3 million in Accounts receivable, net of allowances and Accumulated Income as of January 1, 2020.

In January 2017, the FASB issued ASU ~~2017‑04,~~ ~~Intangibles – Goodwill~~2017-04, Intangibles-Goodwill and Other (Topic 350): – Simplifying the Test for Goodwill ~~Impairment.~~ ~~ASU 2017‑04~~Impairment. This standard eliminates ~~Step 2 of~~ the ~~goodwill impairment test, requiring determination of~~requirement to calculate the implied fair value of goodwill ~~by allocating~~to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting ~~unit~~unit's carrying amount over its fair value ~~to assets~~(i.e. Step 1 of the current guidance). The guidance was effective for us beginning in the first quarter of 2020, and ~~liabilities as if the reporting unit was acquired in a business acquisition. Updated guidance~~should be applied prospectively. Early adoption is ~~effective beginning~~permitted for impairment testing dates after January 1, 2017. We adopted this standard on January 1, 2020 ~~and will be applied~~ on a prospective basis. ~~Early~~The adoption of this standard did not have a material impact on our consolidated financial statements.

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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 adopted this standard on January 1, 2020 on a retrospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

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. We adopted this standard on January 1, 2020 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 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 ~~impact of this updated guidance.~~effect that the ASU will have on our consolidated financial statements and related disclosures.

In ~~March 2017,~~December 2019, the FASB issued ASU ~~No. 2017‑07,~~ ~~Compensation – Retirement Benefits~~2019-12, Simplification for Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective beginning January 1, 2021. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic ~~715)~~321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): ~~Improving~~Clarifying the ~~Presentation of Net Periodic Pension Cost~~Interactions between Topics 321, 323 and ~~Net Periodic Postretirement Benefit Cost~~815. The ~~updated~~new standard addresses accounting ~~guidance~~for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. The standard is effective for the Company for annual and interim periods beginning after July 1, 2022, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. The Company is evaluating the ~~presentation~~impact of adoption of the ~~components of net periodic benefit cost~~new standard on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Statements. The amendments in this update represent changes to clarify or improve codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a material impact on the ~~income statement by requiring service cost~~Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be 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 costs component of net benefit cost is eligible for capitalization.discontinued. The guidance is effective ~~for interim~~upon issuance and ~~annual periods beginning after~~can be applied through December ~~15, 2017.~~31, 2022. The Company is currently evaluating the ~~effect~~potential impact of the ~~guidance~~new standard on its consolidated financial statements.

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issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

Note 3 – Revenue

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

Disaggregation of Revenues

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

Revenue by major products (in thousands)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Hardware products	$	21,687	$	42,027	$	65,613	$	95,356
Software licenses		8,562		19,188		38,280		37,319
Subscription		7,446		5,556		19,286		16,163
Professional services		1,353		2,338		4,100		3,995
Maintenance, support and other		12,391		10,582		35,484		30,120
Total Revenue	$	51,439	$	79,691	$	162,763	$	182,953

Revenue by location of customer for the three months ended September 30, 2020 and 2019 (in thousands)


	EMEA			Americas			APAC			Total
Total Revenue:
2020	$	26,684		$	12,305		$	12,450		$	51,439
2019	$	48,694		$	15,605		$	15,392		$	79,691

Percent of Total:
2020		52	%		24	%		24	%		100	%
2019		61	%		20	%		19	%		100	%

Revenue by location of customer for the nine months ended September 30, 2020 and 2019 (in thousands)


	EMEA			Americas			APAC			Total
Total Revenue:
2020	$	88,624		$	38,570		$	35,569		$	162,763
2019	$	107,554		$	42,762		$	32,637		$	182,953

Percent of Total:
2020		54	%		24	%		22	%		100	%
2019		59	%		23	%		18	%		100	%

Timing of revenue recognition (in thousands)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Products and Licenses transferred at a point in time	$	30,249	$	61,215	$	103,893	$	132,675
Services transferred over time		21,190		18,476		58,870		50,278
Total Revenue	$	51,439	$	79,691	$	162,763	$	182,953

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Contract balances

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


		September 30,		December 31,
	2020		2019
Receivables, inclusive of trade and unbilled	$	54,475	$	62,405
Contract Assets (current and non-current)	$	8,938	$	8,595
Contract Liabilities (Deferred Revenue current and non-current)	$	49,251	$	45,597

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

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

Revenue recognized during the nine months ended September 30, 2020 included $29.2 million that was included on the ~~Company’s financial statements.~~December 31, 2019 balance sheet in contract liabilities. Deferred revenue increased in the same period due to timing of annual renewals.

Transaction price allocated to the remaining performance obligations

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


in thousands	2020		2021		2022		Beyond 2022		Total
Future revenue related to current unsatisfied performance obligations	$	3,418	$	11,820	$	8,825	$	12,686	$	36,749

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

Costs of obtaining a contract

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

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

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



in thousands		September 30, 2020		December 31, 2019
Capitalized costs to obtain contracts, current	$	1,054	$	676
Capitalized costs to obtain contracts, non-current	$	4,871	$	3,222


		Three months ended September 30,				Nine months ended September 30,
in thousands		2020		2019		2020		2019
Amortization of capitalized costs to obtain contracts	$	251	$	110	$	620	$	329
Impairments of capitalized costs to obtain contracts	$	-	$	-	$	-	$	-

Note 24 – 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,

2017

2016
Component parts

$
5,278

$
8,360
Work-in-process and finished goods

12,117

9,060
Total

$
17,395

$
17,420


	September 30,		December 31,
	2020		2019

	(in thousands)
Component parts	$	6,360	$	7,429
Work-in-process and finished goods		7,669		12,390
Total	$	14,029	$	19,819

Note 35 – Goodwill

Goodwill activity for the three months ended September 30, 2020 consisted of the following:


in thousands
Net balance at December 31, 2019	$	94,612
Net foreign currency translation		(453)
Net balance at September 30, 2020	$	94,159

NaN impairment of goodwill was recorded during the nine months ended September 30, ~~2017 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

2020 or September 30, 2019.

1417

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~~Certain portions of goodwill are denominated in local currencies and are subject to currency fluctuations.~~

Note 46 – Intangible Assets

Intangible asset activity for the nine months ended September 30, ~~2017~~2020 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, 2019	$	5,454	$	26,884	$	3,871	$	36,209
Additions		43		—		55		98
Disposals		—		—		(6)		(6)
Net foreign currency translation		(91)		(418)		—		(509)
Amortization expense		(2,576)		(2,708)		(1,765)		(7,049)
Net balance at September 30, 2020	$	2,830	$	23,758	$	2,155	$	28,743

September 30, 2020 balance at cost	$	42,739	$	39,207	$	13,726	$	95,672
Accumulated amortization		(39,909)		(15,449)		(11,571)		(66,929)
Net balance at September 30, 2020	$	2,830	$	23,758	$	2,155	$	28,743

Certain intangible assets are denominated in ~~local~~functional currencies besides the U.S. dollar and are subject to currency fluctuations. NaN impairment of intangible assets was recorded during the nine months ended September 30, 2020 or September 30, 2019.

Note 7 – Property and Equipment

The major classes of property and equipment are as follows:


in thousands	September 30, 2020		December 31, 2019
Office equipment and software	$	14,921	$	14,595
Leasehold improvements		10,657		9,417
Furniture and fixtures		3,935		3,717
Total		29,513		27,729
Accumulated depreciation		(17,453)		(16,275)
Property and equipment, net	$	12,060	$	11,454

Depreciation expense was $0.7 and $2.1 million for the three and nine months ended September 30, 2020, respectively, compared to $0.5 million and $1.5 million for the three and nine months ended September 30, 2019, respectively.

Note 8 – Fair Value Measurements

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

due to their short duration. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing base upon its own market assumptions.

The Company classifies its investments in debt securities as available-for-sale. As described in Note 2- Summary of Significant Accounting Policies, the January 1, 2020 adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, amended our accounting for available-for-sale debt securities. We review available-for-sale det securities for impairments related to losses and other factors each quarter. The unrealized gains and losses on the available-for-sale debt securities were not material as of September 30, 2020 and December 31, 2019.

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

●

Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.

●

Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived primarily from or corroborated by observable market data.

●

Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The following tables summarize assets that are measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:


			Fair Value Measurement at Reporting Date Using
in thousands		September 30, 2020	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury Notes	$	4,500	-	$	4,500	-
Corporate Notes / Bonds	$	10,711	-	$	10,711	-
Commercial Paper	$	2,599	-	$	2,599	-
U.S. Treasury Bills	$	5,257	-	$	5,257	-
U.S. Government Agencies	$	3,744	-	$	3,744	-


			Fair Value Measurement at Reporting Date Using
in thousands		December 31, 2019	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury Notes	$	9,225	-	$	9,225	-
Corporate Notes / Bonds	$	8,169	-	$	8,169	-
Commercial Paper	$	3,482	-	$	3,482	-
U.S. Treasury Bills	$	2,385	-	$	2,385	-
U.S. Government Agencies	$	2,249	-	$	2,249	-

Note 9 – Allowance for credit losses

As described in Note 2 - Summary of Significant Accounting Policies, the January 1, 2020 adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, amended our accounting policies for the allowance for credit losses.

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The changes in the allowance for credit losses during the nine months ended September 30, 2020 were as follows:


in thousands
Balance at December 31, 2019	$	2,524
Impact of ASU 2016-13 adoption		288
Balance at January 1, 2020		2,812
Provision		1,510
Write-offs		(488)
Net foreign currency translation		3
Balance at September 30, 2020	$	3,837

A higher allowance for credit losses was recorded during the nine months ended September 30, 2020 primarily due to the adverse impact the COVID-19 pandemic has had on factors that affect our estimate of future credit losses.

Note 10 – Leases

Operating lease cost details for the three and nine months ended September 30, 2020 and 2019 are as follows:


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019

	(in thousands)				(in thousands)
Building rent	$	808	$	955	$	2,264	$	2,676
Automobile rentals		426		603		1,137		1,113
Total net operating lease costs	$	1,234	$	1,558	$	3,401	$	3,789

At September 30, 2020, the weighted average remaining lease term for our operating leases is 7.0 years. The weighted average discount rate for our operating leases is 5%.

During the nine months ended September 30, 2020, there were $3.0 million of operating cash payments for lease liabilities, and $3.2 million of right-of use assets obtained in exchange for new lease liabilities.

Maturities of our operating leases are as follows:


	As of September 30, 2020
		(in $ thousands)
2020 (remaining 3 months)	$	661
2021		3,413
2022		3,010
2023		2,429
2024		1,635
Later years		7,277
Less imputed interest		(3,291)
Total lease liabilities	$	15,134

Note 511 – Income Taxes

~~Our~~For the three and nine months ended September 30, 2020, the Company utilized the discrete effective tax rate method, as allowed by ASC 740-270-30-18, “Income Taxes—Interim Reporting,” to calculate its interim income tax provision. The discrete method is applied when the application of the estimate annual effective tax rate yields an estimate that is not reliable and the actual effective rate for the year-to-date is the best estimate of the annual effective tax rate. The Company believes that the use of the estimated annual effective tax rate ~~for 2017 before discrete items~~method is ~~expected to be 40%. This~~not reliable since small changes in the projected ordinary annual income would result in significant changes in the estimated annual effective tax

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rate. Our global effective tax rate is higher than the U.S. statutory tax rate of ~~34%~~21% primarily due to 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 is required. Our ultimate tax ~~rate~~expense will depend on the mix of earnings in various jurisdictions. Income taxes of $0.2 million and $8.0 million were paid during the three and nine months ended September 30, 2020, 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,~~2019, we had deferred tax assets of ~~$16,655~~$24.9 million resulting from foreign and state NOL carryforwards of ~~$58,110~~$16.6 million and other foreign deductible carryforwards of ~~$16,817.~~$8.3 million. At December 31, ~~2016,~~2019, we had a valuation allowance of ~~$6,192~~$17.3 million against deferred tax assets related to certain carryforwards.

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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. Among other provision, the law provides relief to U.S. federal corporate taxpayers through temporary adjustments to net operating loss rules, changes to limitations on interest expense deductibility, the acceleration of available refunds for minimum tax credit carryforwards, and depreciation method changes. We do not expect the provisions of the legislation to have a significant impact on our effective tax rate nor the income tax payable and deferred income tax positions of the Company.

Note 612 – Long-Term Compensation Plan and Stock Based Compensation (share counts in thousands)

Under the ~~VASCO Data Security International,~~OneSpan Inc. ~~2009 Equity~~2019 Omnibus Incentive Plan, ~~(“2009 Equity Incentive Plan”),~~ we ~~awarded 237 shares of~~award restricted stock inunits subject to time-based vesting, restricted stock units which are subject to the ~~first quarter~~achievement of ~~2017 consisting of 126 unissued shares subject to~~ future performance criteria and ~~111 issued shares. During the second quarter of 2017, we awarded an additional 23 shares of~~ restricted stock ~~consisting of 14 unissued shares~~units that are subject to ~~future performance criteria and 9 issued shares. No additional shares were issued in~~ the ~~third quarter~~achievement of ~~2017.~~market conditions.

We awarded 321 restricted stock units during the nine months ended September 30, 2020, subject to time-based vesting. The ~~market~~fair value of the ~~120 issued~~unissued time-based restricted ~~shares of $1,764~~stock unit grants was $5.7 million at the ~~date~~dates of grant isand the grants are being amortized over the vesting ~~period~~periods of one to four years.

We awarded restricted stock unit grants during the nine months ended September 30, 2020, subject to the achievement of market and service conditions, which allow for up to 88 shares to be earned if the market conditions are fully achieved. The ~~market~~fair value of ~~the 140 unissued shares subject to performance criteria of $2,046~~these awards was $1.6 million at the ~~date~~dates of grant isand the awards are being amortized over the vesting period of three years.

We awarded restricted stock units subject to the achievement of service and future performance criteria during the nine months ended September 30, 2020, which allow for up to 198 shares to be earned if the performance criteria are fully achieved. The fair value of these awards was $4.1 million at the dates of grant. The Company currently believes that none of these shares will be earned, and the compensation costs recorded through the six months ended June 30, 2020 for these unvested shares issued with performance criteria that are no longer considered probable of achievement have been reversed during the three months ended September 30, 2020.

The Company currently believes that certain restricted stock units subject to the achievement of future performance criteria, awarded during the twelve months ended December 31, 2019 and 2018, will not be earned. The compensation costs recorded for the 8 and 106 unvested shares issued during the twelve months ended December 31, 2019 and 2018, respectively, with performance criteria that are no longer considered probable of achievement have been reversed during the three months ended September 30, 2020.

1521

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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~~2020 and ~~2016:~~

Three months ended

Nine months ended

September 30,

September 30,


2017

2016

2017

2016

Restricted stock

$
825

$
1,123

$
1,901

$
4,066

Long-term compensation plan

442

456

1,298

1,391

Total Compensation

$
1,267

$
1,579

$
3,199

$
5,457

2019:


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019

in thousands	(in thousands)				(in thousands)
Restricted stock	$	1,021	$	549	$	3,231	$	1,778
Long-term compensation plan		260		280		930		1,538
Total compensation	$	1,281	$	829	$	4,161	$	3,316

Note 713 – ~~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. Because the Company is in a net loss position for the three and nine months ended September 30, 2020, diluted net loss per share for these periods excludes the effects of common stock equivalents, which are anti-dilutive. For the three and nine months ended September 30, 2019, the anti-dilutive effect of our securities is immaterial.

The details of the earnings per share calculations for the three and nine months ended September 30, ~~2017~~2020 and ~~2016 follow:~~

Three months ended

Nine months ended

September 30,

September 30,



2017

2016

2017

2016

Net income

$
2,755

$
478

$
3,438

$
5,502

Weighted average common shares outstanding:









Basic

39,811

39,736

39,792

39,709

Incremental shares with dilutive effect:









Restricted stock awards

10

98

10

77

Diluted

39,821

39,834

39,802

39,786

Basic income per share

$
0.07

$
0.01

$
0.09

$
0.14

Diluted income per share

$
0.07

$
0.01

$
0.09

$
0.14

2019 are as follows:


	September 30,				September 30,
in thousands, except per share data	2020		2019		2020		2019
Net income (loss)	$	(1,678)	$	11,847	$	(3,699)	$	3,280
Weighted average common shares outstanding:
Basic		40,033		40,062		40,050		40,037
Incremental shares with dilutive effect:
Restricted stock awards		—		67		—		62
Diluted		40,033		40,129		40,050		40,099

Net income (loss) per share:
Basic	$	(0.04)	$	0.30	$	(0.09)	$	0.08
Diluted	$	(0.04)	$	0.30	$	(0.09)	$	0.08

Note 814 – 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.~~financial results in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.

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Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.

~~On July 28, 2015~~We include various types of indemnification clauses in our agreements. These indemnifications may include, but are not limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have no liabilities recorded for these clauses as of September 30, 2020.

We have been involved in an ongoing dispute with a ~~putative class action~~German company, Onespin solutions GmbH, regarding the co-existence of, or alleged infringement with, its trademark in certain jurisdictions for “ONESPIN” and our trademark in certain jurisdictions for “ONESPAN”. Onespin sells integrated circuit integrity verification solutions for use in the system on chip software development process flow. Subsequent to the end of the third quarter we reached an immaterial settlement with OneSpin on these matters. While certain administrative steps and filings will occur pursuant to the settlement, we consider this matter to now be closed.

A 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~~on August 20, 2020 against OneSpan 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’ allegedasserting claims for purported violations of ~~the federal securities laws and to pursue remedies under~~ Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and SEC Rule ~~10b‑5~~10b-5 promulgated ~~thereunder.~~thereunder, based on certain alleged material misstatements and omissions. The 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~~captioned Almendariz v. OneSpan Inc., et al., No. 1:20-cv-04906 (N.D. Ill.) (the “Securities Class Action”). Specifically, the plaintiff in the Securities Class Action alleges, among other things, that certain statements about OneSpan’s business were misleading because of defendants’ failure to bydisclose that OneSpan purportedly had inadequate internal procedures and controls over financial reporting and related disclosures; and OneSpan purportedly downplayed the ~~name~~negative impacts of immaterial errors in its financial statements.

A complaint, related in subject matter to the ~~new lead plaintiff, Bunk. The defendants~~Securities Class Action, was filed ~~a motion to dismiss the Bunk complaint~~ on ~~March 31, 2017. Although the ultimate outcome~~October 23, 2020 against certain 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~~OneSpan’s 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~~names OneSpan as a nominal defendant. The case is captioned Klein v. Boroditzky, et al., No. 1:20-cv-06310 (N.D. Ill.) (the “Derivative Action” and, collectively with the Securities Class Action, the “Litigation”). The plaintiff asserts claims for breach of fiduciary duty, abuse of control and corporate waste, as well as a claim for contribution under Sections 10(b) and 21D of the Exchange Act, based on the same alleged wrongdoing pled in the ~~Herrera case voluntarily dismissed~~Securities Class Action. We believe that 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,claims in the ~~Circuit Court of Cook County, Illinois naming the same defendants.~~Litigation are meritless and intend to defend against them vigorously.

~~The complaints assert, among other things, that the individual defendants breached their fiduciary duties by making material misstatements~~

From time to time, we have been involved in litigation 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~~claims incidental 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~~conduct of our ~~integrated reseller customers, and certain of its end customers, were named~~business, such as ~~defendants~~compensation claims from current or former employees in ~~a patent infringement lawsuit in Japan related~~Europe. We expect that 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 andcontinue. Excluding matters specifically disclosed above, we are ~~defending our technology vigorously. However, the outcome of this suit~~not a party to any lawsuit or proceeding that, in management’s opinion, is ~~uncertain. If the plaintiff were able~~likely 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~~effect on ~~our~~its business, ~~and~~financial condition or 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 early motion practice 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.

~~Note 9 – Related Party~~

In August 2017, Able N.V. (“Able”), a wholly-owned subsidiary, was sold to an employee of Able for a de minimis amount. The operating 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.

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~~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,~~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

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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 investors.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~~Revision of Previously Issued Financial Statements

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

This information should be read in conjunction with ~~our~~the condensed consolidated financial statements and the notes thereto included ~~elsewhere~~in “Part I, Item 1” of this Quarterly Report. We have revised our prior period financial statements to reflect the correction of immaterial errors as described in this Quarterly Report in Notes to Condensed Consolidated Financial Statements, Note 1 – Description of the Company and Basis of Presentation, “Revision of Previously Issued Financial Statements”.

COVID-19 Pandemic Response and Impact

In March 2020, the World Health Organization recognized a novel strain of coronavirus (COVID-19) as a pandemic. In response to the pandemic, the United States and various foreign, state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. The pandemic and the various governments’ response have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate.

Outlook and Financial Results

Beginning in the Summer of 2020 and continuing through the three months ended September 30, 2020, we have experienced softened demand for certain of our products and services due to economic uncertainty connected with the continued seriousness of the COVID-19 pandemic.

In addition, we have begun to experience less demand than originally projected in our hardware business. As a result, our hardware revenues for 2020 could be substantially below such revenues as compared to 2019. We believe this is primarily due to the increased hardware demand we saw last year in Europe due to our customers needing to meet banking regulations imposed by Payment Services Directive 2 (“PSD2”). In addition, other factors could be contributing to the current and expected demand environment such as less demand for hardware in a pandemic environment, a more pronounced shift to digital alternatives, and fewer large projects that often had a significant positive effect on hardware revenue results in the past.

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In the current and future periods, we may experience weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results.

As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets, any negative impact to our results cannot be reasonably estimated, but it could be material. We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. We are able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. See Part II – Item 1A – Risk Factors of this Form ~~10‑Q.~~10-Q for additional information regarding the potential impact of COVID-19 on the Company.

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, 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 ~~primary~~Business Model

We offer our products through a product sales and licensing model or through our services platform, which includes our cloud-based service ~~lines consist of four categories:~~offering.

~~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

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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~~The COVID-19 pandemic and the various governments’ response have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global ~~economic uncertainty,~~economies, including in ~~Europe, our most important market. While~~ the ~~European Union and European Central Bank continue to implement programs~~regions 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~~which we operate. See Part II, Item 1A – Risk Factors of this Form 10-Q for additional information regarding the ~~remainder~~potential impact of ~~2017 and into 2018. Should~~COVID-19 on the ~~sovereign debt issue escalate, economic difficulties may negatively impact the global economy and our business.~~Company.

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.Cybersecurity Risks

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 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 2020 that had a significant impact on our business, it is possible that we could experience an incident in 2020 or future years, which could result in unanticipated costs.

Currency Fluctuation

During the three and nine months ended September 30, 2020, approximately 90% and 89%, respectively, of our revenue was generated outside of the United States. While the majority of our revenues are generated outside of the

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United States, a significant amount of our revenue earned during the three and nine months ended September 30, 2020 was denominated in U.S. Dollars. During the three and nine months ended September 30, 2020, we estimate that approximately 33% and 42%, respectively, of our revenue was denominated in U.S. Dollars.

In addition, during the three and nine months ended September 30, 2020, approximately 73% and 73% 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 gain of $3.5 million for the three months ended September 30, 2020 and other comprehensive loss of $0.4 million for the nine months ended September 30, 2020. For the three and nine months ended September 30, 2019, translation adjustments generated other comprehensive loss of $3.0 million and $3.5 million, 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.

Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net. Foreign exchange transaction gains aggregated $0.4 million for the three months ended September 30, 2020, compared to $1.9 million of foreign exchange transaction losses aggregated for the three months ended September 30, 2019. During the nine months ended September 30, 2020, foreign exchange transaction losses aggregated $0.1 million compared to losses aggregated of $2.6 million during the nine months ended September 30, 2019.

Components of Operating Results

Revenue

We generate revenue from the sale of our hardware products, software licenses, subscriptions, maintenance and support, and professional services. We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments reflecting the transactional nature of significant parts of our business.

●

Product and license revenue. Product and license revenue includes hardware products and software licenses, which can be provided on a perpetual or term basis.

●

Service and other revenue. Service and other revenue includes subscription solutions (which is our definition of software-as-a-service solutions), maintenance and support, and professional services.

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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 55% and 65% of our operating expenses, respectively. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive.

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates in the first nine months of 2020 compared to the same period in 2019 resulted in an increase in operating expenses of approximately $0.2 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, 2020 included $1.3 million and $4.2 million, respectively of expenses related to stock-based and long-term incentive plan costs compared to $0.8 million and $3.3 million of stock-based and long-term incentive plan cost for the three and nine months ended September 30, 2019, 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

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administrative expenses to increase in absolute dollars although our general and administrative expenses may fluctuate as a percentage of total revenue.

●

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

Interest Income, ~~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 2020, 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%, plus Swiss withholding tax of an additional 5%. ~~Our~~A Canadian and UK subsidiary currently ~~sells~~sell to and ~~services directly to~~service global ~~customers.~~customers directly. In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products.

~~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 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.

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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.

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Results of Operations

~~Comparison~~Revenue

Revenue by Product: We generate revenue from the sale of ~~Results for~~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,
	2020	2019	% Change	2020	2019	% Change

	(in thousands)			(in thousands)
Revenue
Product and license	$ 30,249	$ 61,215	-51%	$ 103,893	$ 132,675	-22%
Services and other	21,190	18,476	15%	58,870	50,278	17%
Total revenue	$ 51,439	$ 79,691	-35%	$ 162,763	$ 182,953	-11%

% of Total Revenue
Product and license	59%	77%		64%	73%
Services and other	41%	23%		36%	27%

Total revenue decreased $28.3 million or 35%, during the ~~Three and Nine Months Ended~~three months ended September 30, ~~2017~~2020 compared to the three months ended September 30, 2019. The overall decrease in revenue was comprised of a $20.3 million decrease in hardware revenue, a $5.8 million decrease in perpetual software license revenue, and ~~2016~~

~~Currency Fluctuations:~~ Ina decrease in recurring revenue, which is the ~~third quarter and first nine months of 2017, approximately 76% and 77%, respectively,~~portion of our revenue ~~was generated outside~~subject to future renewal. Recurring revenue, comprised of subscription, term-based software license, and maintenance, support and other revenue, decreased $1.2 million or 5% during the ~~United States. While~~three months ended September 30, 2020, compared to the ~~majority~~three months ended September 30, 2019. Total revenue decreased $20.2 million or 11%, during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, driven by a $29.7 million decrease in hardware revenue and a $5.8 million decrease in perpetual software license revenue, partially offset by an increase in recurring revenue. Recurring revenue increased $15.2 million or 27% during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. Year-over-year revenue comparisons were affected by the one-time positive impact on 2019 revenue from the PSD2 regulation deadline. We also experienced reduced demand for our hardware and term software license products due to an uncertain near-term business outlook for certain of our ~~revenues are generated outside~~customers as a result of the ~~United States,~~pandemic.

Product and license revenue decreased $31.0 million or 51% during the ~~majority~~three months ended September 30, 2020 compared to the three months ended September 30, 2019, which was largely driven by a decrease in hardware sales. Hardware sales were heightened during the three months ended September 30, 2019 because of ~~our revenue in~~ the ~~third quarter and first~~PSD2 regulation deadline, as well as lower demand due to the pandemic. Software license sales also decreased during the three months ended September 30, 2020 compared to the three months ended September 30, 2019, which we attribute to softened demand as a result of the pandemic. For the nine months ~~of 2017 was denominated in U.S. Dollars. We estimate that 67%~~ended September 30, 2020, product and ~~65% of our revenues for~~license revenue decreased $28.8 million or 22% compared to the ~~third quarter and first~~ nine months ~~of 2017 were denominated~~ended September 30, 2019, which was driven by lower hardware sales, partially offset by higher software license revenue. The software license revenue increase was driven by an increase in ~~U.S. Dollars. In addition, in~~revenue generated from term-based software licenses. The hardware sales decrease was primarily driven by PSD2 driven demand during the ~~third quarter and first~~ nine months ~~of 2017, approximately 81%~~ended September 30, 2019, as well as softened demand due to the pandemic.

Services and ~~76%, respectively, of our operating expenses were incurred outside of~~other revenue increased by $2.7 million, or 15% during the ~~United States. As a result, changes in currency exchange rates, especially~~three months ended September 30, 2020 compared to the ~~Euro to U.S. Dollar exchange rate and~~three months ended September 30, 2019. For 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~~ended September 30, 2020, services and other revenue increased $8.6 million or 17% compared to the nine months ended September 30, 2019. The increase for both the three and nine month periods ended September 30, 2020 compared to the same periods in ~~2016.~~ 2019 was driven by higher subscription and maintenance revenue.

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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.

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~~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 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:~~


	Three months ended September 30,			Nine months ended September 30,
	2020	2019	% Change	2020	2019	% Change

	(in thousands)			(in thousands)
Revenue
EMEA	$ 26,684	$ 48,694	-45%	$ 88,624	$ 107,554	-18%
Americas	12,305	15,605	-21%	38,570	42,762	-10%
APAC	12,450	15,392	-19%	35,569	32,637	9%
Total revenue	$ 51,439	$ 79,691	-35%	$ 162,763	$ 182,953	-11%

% of Total Revenue
EMEA	52%	61%		54%	59%
Americas	24%	20%		24%	23%
APAC	24%	19%		22%	18%

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
%

~~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, 2020 was ~~$22,768, approximately equal to~~$22.0 million, or 45% lower than the ~~third quarter of 2016.~~three months ended September 30, 2019. For the ~~first~~ nine months ~~of 2017,~~ended September 30, 2020, revenue generated in EMEA was ~~$62,868,~~$18.9 million or 7%18% lower than the ~~first nine months of 2016. The decrease~~same period in ~~revenues for the first nine months of 2017 was primarily~~2019, driven by ~~a decline in the~~ lower ~~margin segment of our~~ hardware ~~business,~~sales, partially offset by ~~an increase in~~higher software ~~products.~~license revenue and higher maintenance revenue. Hardware revenue comparisons for both periods were affected by the one-time positive impact on 2019 revenue from the PSD2 regulation deadline.

Revenue generated in the Americas ~~for~~during the ~~third quarter of 2017~~three months ended September 30, 2020 was ~~$14,419,~~$3.3 million, or ~~78%, higher~~21% lower than the ~~third quarter of 2016.~~three months ended September 30, 2019, driven by a decrease in software license revenue. For the ~~first~~ nine months ~~of 2017,~~ended September 30, 2020, revenue generated in the Americas was ~~$37,880,~~$4.2 million or ~~56% higher~~10% lower than ~~the first nine months of 2016. The increase for the third quarter and first nine months of 2017 compared to~~ the same period in ~~2016 was primarily due to increased revenues from non-hardware products, including eSignLive.~~2019, driven by lower software license revenue.

Revenue generated in the Asia Pacific region during the ~~third quarter of 2017~~three months ended September 30, 2020 was ~~$13,939,~~$2.9 million, or 19% lower than the three months ended September 30, 2019, driven by lower revenue from software licenses, hardware and maintenance. For the nine months ended September 30, 2020, revenue generated in the Asia Pacific region was $2.9 million or 9%, higher than the ~~third quarter~~same period in 2019, driven by higher software, maintenance, and hardware revenue.

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Cost of Goods Sold and Gross Margin


	Three months ended September 30,			Nine months ended September 30,
	2020	2019	% Change	2020	2019	% Change

	(in thousands)			(in thousands)
Cost of goods sold
Product and license	$ 10,064	$ 22,199	-55%	$ 33,378	$ 46,966	-29%
Services and other	5,414	4,470	21%	16,395	13,622	20%
Total cost of goods sold	$ 15,478	$ 26,669	-42%	$ 49,773	$ 60,588	-18%

Gross profit	$ 35,961	$ 53,022	-32%	$ 112,990	$ 122,365	-8%

Gross margin
Product and license	67%	64%		68%	65%
Services and other	74%	76%		72%	73%
Total gross margin	70%	67%		69%	67%

The cost of product and license revenue decreased $12.1 million or 55% during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. During the nine months ended September 30, 2020, the cost of product and license revenue decreased $13.6 million or 29% compared to the nine months ended September 30, 2019. The decrease in cost of product and license during both periods was primarily driven by lower hardware sales.

The cost of services and other revenue increased by $0.9 million, or 21% during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. For the ~~first~~ nine months ended September 30, 2020, the cost of ~~2017,~~services and other revenue ~~was $38,037,~~increased by $2.8 million, or ~~28% lower than~~20% compared to the ~~first~~ nine months ended September 30, 2019. The increase in cost of ~~2016. The~~services and other revenue ~~decline~~ for ~~first~~both periods is reflective of higher subscription revenue, which has increased cloud-based infrastructure costs.

Gross profit decreased $17.1 million, or 32% during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. During the nine months ~~of 2017~~ended September 30, 2020 gross profit decreased by $9.4 million, or 8% compared to the nine months ended September 30, 2019. Gross profit margin was ~~attributed to lower hardware revenues.~~

~~We believe comparison of revenues between periods is heavily influenced by the timing of orders~~70% 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.

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~~Gross Profit and Operating Expenses~~

~~The following table sets forth, for the periods indicated, certain consolidated financial data as a percentage of revenue~~69% for the three and nine months ended September 30, ~~2017~~2020, respectively, compared to 67% 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~~67% for the ~~quarter~~three and nine months ended September 30, ~~2017 was $36,646, an~~2019, respectively. The overall increase ~~of $6,596, or 22%, from~~in profit margins for the ~~quarter~~three months ended September 30, ~~2016. Gross profit~~2020 was driven by higher product and license margins, largely attributable to lower hardware revenue 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.~~overall sales. 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~~2020 was ~~$98,606, a decrease of $99, from the comparable period in 2016. Gross profit~~driven by stronger margins for product and license as ~~a percentage of revenue (gross profit margin) was 71% for the nine months ended September 30, 2017~~well as services 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.other.

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.

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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~~$1.8 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,less 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~~$0.1 million for the three and nine months ended September 30, ~~2017 included $1,267~~2020, respectively. Had currency rates in 2020 been equal to rates in 2019, the gross profit margins would have been approximately 3.4 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~~zero percentage points lower for the three and nine months ended September 30, ~~2016,~~2020, respectively.

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Operating Expenses


	Three months ended September 30,					Nine months ended September 30,
	2020		2019		% Change	2020		2019		% Change

	(in thousands)					(in thousands)
Operating costs
Sales and marketing	$	14,576	$	14,156	3%	$	44,129	$	44,579	-1%
Research and development		10,643		9,956	7%		31,178		32,428	-4%
General and administrative		10,737		9,490	13%		33,851		29,540	15%
Amortization of intangible assets		2,360		2,335	1%		7,049		7,051	--
Total operating costs	$	38,316	$	35,937	7%	$	116,207	$	113,598	2%

Sales and Marketing Expenses

Sales and marketing expenses for the ~~quarter~~three months ended September 30, ~~2017~~2020 were ~~$13,956,~~$14.6 million, an increase of ~~$503,~~$0.4 million or 4%3%, from the ~~third quarter of 2016.~~three months ended September 30, 2019. The increase in expense for the three months ended September 30, 2020 was primarily driven by higher personnel costs due to higher headcount, as well as increased marketing spend, partially offset by lower travel costs. Sales and marketing expenses for the nine months ended September 30, ~~2017,~~2020 were ~~$42,997, an increase~~$44.1 million, a decrease of ~~$1,015, or 2%,~~$0.5 million from the same period ~~of 2016.~~in 2019. Costs associate with higher headcount during the nine months ended September 30, 2020 were partially offset by lower outside service and travel spend.

Average full-time sales, marketing, support, and operating employee headcount for the three and nine months ended September 30, ~~2017~~2020 was ~~312~~353 and ~~307,~~345, respectively, compared to ~~299~~318 and ~~285~~319 for the three and nine months ended September 30, ~~2016,~~2019, respectively. Headcount was ~~4% higher for the third quarter of 2017 compared to the third quarter of 2016,~~11% and 8% higher for the three and nine months ended September 30, ~~2017 when~~2020, respectively, compared to the same ~~period~~periods in ~~2016.~~2019.

Research and Development Expenses

Research and development expenses for the ~~quarter~~three months ended September 30, ~~2017,~~2020, were ~~$5,493, a decrease~~$10.6 million, an increase of ~~$314,~~$0.7 million, or 5%7%, from the ~~third quarter of 2016.~~three months ended September 30, 2019, driven primarily by higher personnel due to higher headcount. Research and development costs for the nine months ended September 30, ~~2017,~~2020 were ~~$17,669, an increase~~$31.2 million, a decrease of ~~$52,~~$1.3 million or 3%4%, from the same period ~~of 2016.~~in 2019. The decreases in expense for the nine month period ended September 30, 2020 was primarily driven by lower cloud computing costs for our test environment and lower travel costs, partially offset by higher personnel costs.

Average full-time research and development employee headcount for the three and nine months ended September 30, ~~2017~~2020 was ~~205~~326 and ~~218,~~322, respectively, compared to ~~232~~304 and ~~224~~301 for the ~~third quarter~~three and nine months ended September 30, ~~2016,~~2019, respectively. ~~Headcount~~Average headcount was ~~12% lower~~approximately 7% higher for both the three and ~~3% lower for the third quarter and first~~ nine months ~~of 2017, respectively,~~ended September 30, 2020, 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.2019.

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General and Administrative Expenses

General and administrative expenses for the ~~quarter~~three months ended September 30, ~~2017,~~2020, were ~~$9,882,~~$10.7 million, an increase of ~~$2,200,~~$1.2 million or ~~29%~~13%, from the ~~third quarter of 2016.~~three months ended September 30, 2019. General and administrative expenses for the nine months ended September 30, ~~2017,~~2020, were ~~$26,323,~~$33.9 million, an increase of ~~$1,252,~~$4.3 million or 5%15%, compared to the same period ~~of 2016.~~in 2019. The increase in general and administrative expenses for the three and nine months ended September 30, 2020, compared to the same periods in 2019 was primarily driven by higher personnel costs which included additional stock comp due to an increase in eligible participants. The increase in expense was also driven by higher consulting spend, additional expense for subscription software tools implemented throughout 2019, and higher bad debt expense driven by a higher allowance for the ~~third quarter primarily reflect increased headcount, professional fees and facilities expense. Professional fees primarily relate to internal controls, legal and internal systems.~~likely adverse impact of the COVID-19 pandemic. Lower travel costs partially offset spend increases.

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Average full-time general and administrative employee headcount for the three and nine months ended September 30, ~~2017~~2020 was 93126 and ~~90, respectively,~~122, compared to 84115 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~~112 for the three and nine months ended September 30, ~~2017, as compared to $229~~2019, respectively. Average headcount was approximately 10% and ~~$504~~9% higher for the ~~same periods in 2016. The increase in interest income for 2017~~three and nine months ended September 30, 2020, respectively, when compared to the same periods in ~~2016 reflects~~2019.

Amortization of Intangible Assets

Amortization of intangible assets for the three and nine months ended September 30, 2020 was $2.4 million and $7.0 million, respectively. There was an increase of less than $0.1 million or 1% for the three months ended September 30, 2020 compared to the same period in the ~~average interest rate earned on invested balances and an increase~~prior year. For the nine months ended September 30, 2020, the expense decreased by less than $0.1 million or less than 1% compared to the same period in the ~~average invested balance.~~prior year.

Interest Income, net

Three months ended September 30,

Nine months ended September 30,

2020

2019

% Change

2020

2019

% Change

(in thousands)

Interest income, net

$ 56

$ 228

-75%

$ 389

$ 432

-10%

Interest income, net was less than $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, as compared to $0.2 million and $0.4 million for the same periods in 2019. The decrease in interest income, net for both the three and nine months ended September 30, 2020 compared to the same periods in 2019 reflects a decrease in interest rates during the nine months ended September 30, 2020.

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

Three months ended September 30,

Nine months ended September 30,

2020

2019

% Change

2020

2019

% Change

(in thousands)

Other income (expense), net

$ 716

$ (1,611)

$ 887

$ (1,711)

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~~2020 was ~~($185)~~$0.7 million and ~~$402,~~$0.9 million, respectively, compared to ~~$118~~$(1.6) million and ~~$731~~$(1.7) million for the comparable periods of ~~2016. Other~~2019. Higher income ~~(expense), net included~~for both the three and nine month periods ended September 30, 2020 was primarily driven by exchange gains on transactions that are denominated in currencies other than our subsidiaries’ functional currencies.

Provision for Income Taxes

Three months ended September 30,

Nine months ended September 30,

2020

2019

% Change

2020

2019

% Change

(in thousands)

Provision for income taxes

$ 95

$ 3,855

-98%

$ 1,758

$ 4,208

-58%

The Company recorded income tax expense of $0.1 million for the three months ended September 30, 2020 compared to $3.9 million for the three months ended September 30, 2029. The Company recorded income tax expense for the nine months ended September 30, 2020 of $1.8 million, compared to $4.2 million for the nine months ended September 30, 2019. The decrease in expense for both periods was attributable to decreased profits in the period excluding losses at entities where we cannot record a tax benefit.

Table of ~~$273 and $320 for~~Contents

For the three and nine months ended September 30, ~~2017 compared~~2020, the Company utilized the discrete effective tax rate method, as allowed by ASC 740-270-30-18, “Income Taxes—Interim Reporting,” to ~~exchange losses~~calculate its interim income tax provision. The discrete method is applied when the application of ~~$110~~the estimate annual effective tax rate yields an estimate that is not reliable and ~~gains of $152 for~~ the ~~same periods in 2016.~~

~~Income Taxes~~

Income tax expense for the three and nine months ended September 30, 2017 was $2,558 and $2,994, respectively, an increase of $1,777 and a decrease 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 for the nine months is primarily attributable to lower pretax income, partially offset by discrete items related to changes in estimates upon completion of tax filings and a measurement period adjustment in 2016.

~~Our estimated annual~~actual effective tax rate for ~~2017 before~~the year-to-date is the best estimate of the annual effective tax rate. The discrete ~~items is expected~~method treats the year to ~~be 40%. This is higher than~~date period as if it was the ~~U.S. statutory rate primarily due to valuation allowances~~annual period and determines the income tax expense or benefit on ~~taxable losses, primarily in Canada, partially offset by income in foreign jurisdictions taxed at lower rates. Our ultimate~~that basis. The Company believes that the use of the estimated annual effective tax rate ~~will depend on~~method is not reliable since small changes in the ~~mix of earnings~~projected ordinary annual income would result in ~~various jurisdictions.~~

~~As of~~significant changes in the ~~third quarter of 2016, our~~ estimated annual effective 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%.~~rate.

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,~~2020, we had net cash balances (total cash and cash ~~equivalents and restricted cash less bank borrowings)~~equivalents) of ~~$49,261~~$85.9 million and short-term investments of ~~$109,463.~~ $26.8 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, ~~2016,~~2019, we had net cash balances of ~~$49,345~~$84.3 million and short-term investments of ~~$94,856.~~ $25.5 million.

We ~~had no outstanding debt or~~are in a 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 Condensed Consolidated Balance Sheet at September 30, ~~2017, or December 31, 2016.~~

~~Short-term investments at September 30, 2017,~~2020 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.~~

2019. Our working capital at September 30, ~~2017~~2020 was ~~$159,370, an increase of $20,171 or 15% from $139,199~~$135.5 million compared to $136.0 million 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 2017.2019.

As of September 30, ~~2017,~~2020, we held ~~$30,757~~$83.2 million of cash and ~~short-term investments~~cash equivalents in ~~banks~~subsidiaries outside of the United States. Of that amount, ~~$30,546~~$82.6 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.

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

~~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,
	2020	2019
	(in thousands)
Cash provided by (used in):
Operating activities	$ 7,429	$ (13,662)
Investing activities	(4,123)	(7,609)
Financing activities	(1,963)	(394)
Effect of foreign exchange rate changes on cash and cash equivalents	306	(154)

Operating Activities

Cash generated by operating activities is primarily comprised of net income, as adjusted for non-cash items, and changes in ~~judgments,~~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 sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs. We expect cash outflows from operating activities to be affected by increases in personnel cost as we grow our business.

For the nine months ended September 30, 2020, net cash provided by operating activities was $7.4 million, compared to net cash used in operating activities of $13.7 million during the nine months ended September 30, 2019. The fluctuation is primarily driven by a lower accounts receivable balance, a lower inventory balance, and the timing of cash receipts accrued in deferred revenue.

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Investing Activities

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

For the nine months ended September 30, 2020, net cash used in investing activities was $4.1 million, compared to net cash used in investing activities of $7.6 million for the nine months ended September 30, 2019. The decrease is related to the timing of the purchases and maturities of our short term investments.

Financing Activities

Cash used in financing activities is comprised of tax payments for restricted stock issuances.

For the nine months ended September 30, 2020, net cash used in financing activities was $2.0 million, compared to net cash used in financing activities of $0.4 million for the nine months ended September 30, 2019. The increase is due to a higher volume of vested shares during the nine months ended September 30, 2020, compared to the comparable period in 2019.

On June 10, 2020, the Board of Directors authorized a share repurchase program (“program”), pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. Share purchases under the program will take place in open market transactions or in privately negotiated transactions and may be made from time to time depending on market conditions, share price, trading volume, and other factors. The timing of the repurchases and the amount of stock repurchased in ~~applying~~each transaction is subject to OneSpan’s sole discretion and will depend upon market and business conditions, applicable legal and credit requirements and other corporate considerations. As of September 30, 2020, no shares had been repurchased under the ~~guidance to those contracts; and (iii) any assets recognized from the costs to obtain or fulfill a contract with a customer.~~

~~ASU 2014‑09~~program. The authorization is effective until June 10, 2022 unless the total amount has been used or authorization has been cancelled.

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, 2019 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.~~

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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~~ended September 30, 2020. We believe our most critical accounting policies include revenue ~~standard one year~~recognition, purchase accounting 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~~related fair value measurements and accounting for ~~licenses of intellectual property.~~income taxes.

~~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 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.

~~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 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 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.~~2020. 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.~~2019.

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

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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. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on ~~this~~that evaluation, ~~our~~the Chief Executive Officer and Chief Financial Officer have concluded that, ~~due to~~as of the ~~material weakness in our internal control over financial reporting described below and further in our Annual Report on Form 10‑K for~~end of the ~~year ended December 31, 2016,~~period covered by this report, our disclosure controls and procedures were ~~not~~ effective ~~as of September 30, 2017.~~at the reasonable assurance level.

Changes in Internal Controls

As discussed in our Annual Report on Form 10‑K for the year ended December 31, 2016, 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.

~~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 fiscal year 2017.~~

~~Subject to the foregoing, there~~There were no changes in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) 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~~2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting

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Inherent Limitations on the Effectiveness of Controls

~~Our disclosure controls~~

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and ~~procedures are designed~~compliance and is subject to ~~provide reasonable assurance~~lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of ~~achieving their objectives. However, our management, including our Chief Executive Officer and Chief Financial Officer, do~~such limitations, there is a risk that material misstatements will not ~~expect that our disclosure controls and procedures~~be prevented or detected on a timely basis by 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 therereporting. However, these inherent limitations are ~~resource constraints, and the benefits of controls must be considered relative to their costs. Because~~known features 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 includefinancial reporting process. Therefore, it is possible to design into 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 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. Projectionsprocess safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of ~~controls’~~ effectiveness to future periods are subject to ~~risks. Over time,~~the risk that controls may become inadequate because of changes in conditions, or ~~deterioration in~~that the degree of compliance with the policies ~~or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud~~and procedures may ~~occur and may not be detected.~~deteriorate.

PART II. OTHER INFORMATION

Item 1 - Legal Proceedings

~~Item 1. Legal 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 legal or other proceedings with certainty, including the legal proceedings which are summarized in “Note 14 – Legal Proceedings and Contingencies” included in our Notes to Condensed Consolidated Financial Statements, incorporated herein by reference, and “Note 15 – Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission. Any reasonably possible material loss or range of loss associated with any individual legal proceeding that can be estimated, is provided in Note 14 to the Condensed Consolidated Financial Statements contained herein.

Item 1A – Risk Factors

The following risk factor is provided to update the risk factors previously disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

While we believe the coronavirus could have a negative impact on our financial results in the future, the impact is difficult to assess at this time.

The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations ~~or cash flows.~~and overall financial performance remains uncertain.

Table of Contents

In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On ~~January 10, 2011, we purchased our wholly-owned subsidiary, DigiNotar B.V., a private company organized and existing in The Netherlands from~~February 28, 2020, the ~~shareholders (“Sellers”). On September 19, 2011, DigiNotar B.V. filed a bankruptcy petition under Article 4~~WHO raised its assessment of the ~~Dutch Bankruptcy Act~~COVID-19 threat from high to very high at a global level due to the continued increase in the ~~Haarlem District Court,~~number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. A significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the broader economies, financial markets and overall demand environment for our products.

As a result of the COVID-19 pandemic, we temporarily closed our offices in March 2020 (including our corporate headquarters) in many countries except where we have been able to accommodate limited essential employees such as for the shipping of our hardware authentication tokens under revised procedures.We re-opened a limited number of our offices during the third quarter of 2020 with limited capacity under revised procedures. We are unable to predict further re-openings or whether the initial re-openings will be successful or remain in place. We implemented certain travel restrictions, remote work arrangements and other measures and while our early experience with this new situation has been satisfactory to date, it has disrupted how we normally operate our business and may in the longer term impact our productivity, innovation and effectiveness such that our results are adversely affected. We have shifted certain of our customer events to virtual-only experiences and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Because we operate in multiple international locations, we expect there to be variability and additional complications from differing conditions and inconsistent guidance from numerous public health agencies.

In our hardware business, we are exposed to specific risks related to manufacturing, supply chain, shipping and distribution- all of which have been impacted by the COVID-19 pandemic. As a result of COVID-19, we experienced some delays and increased costs related to fulfilling our hardware orders. Such issues have been primarily resolved however we may be unable to satisfy certain customer orders for our products in the future if orders substantially increase and/or supply chain problems emerge. In addition, the global economic uncertainty associated with the COVID-19 pandemic has affected many of our customers and we believe one of those effects has been decreased orders of hardware authentication tokens. We are not able to predict at this time whether and to what extent such orders may return or in what specific quantities. This risk is in addition to the other risks associated with our hardware business as stated elsewhere in “Risk Factors.”

In our software business, we experienced some increased sales for products used in remote employee access and electronic signature in 2020 that we attribute in part to the COVID-19 pandemic. This increase may have been temporary, and we are unable to predict whether it will continue or decline. Moreover, the conditions caused by the COVID-19 pandemic can affect the rate of IT spending, the decision to start new IT projects, the timing of existing projects and the priority our customers place on various projects. While these factors may be positive for some of our software solutions such as electronic signature, these factors may be negative for our other software solutions, such as risk analysis software. The ~~Netherlands. On September 20, 2011,~~COVID-19 pandemic could adversely affect our customers’ ability or willingness to attend our events or to purchase our offerings, delay prospective customers’ purchasing decisions, adversely impact our ability to provide on-site sales meetings or professional services to our customers, delay the ~~court declared DigiNotar B.V. bankrupt~~provisioning of our offerings, lengthen payment terms, reduce the value or duration of their contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and ~~appointed a bankruptcy trustee~~overall financial performance. During the Summer of 2020, we began to experience some of the aforementioned scenarios, and ~~a bankruptcy judge to manage all affairs of DigiNotar B.V.~~this continued through the ~~bankruptcy process. The trustee took over management~~Fall of ~~DigiNotar B.V.’s business activities and is responsible for the administration and liquidation of DigiNotar B.V. In connection~~2020, due to, we believe, global economic uncertainty connected with the bankruptcy of DigiNotar B.V., subsequent to September 20, 2011, a number of claims and counter-claims were filed with the courts in The Netherlands (collectively, the “Court”) related to discontinued assets and discontinued liabilities and other available remedies.

~~In January 2015, we received a notice of potential claim by the trustee against all~~continued seriousness 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.COVID-19 pandemic. While we ~~believe~~hope 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~~negative consequences on our business ~~financial condition~~associated with the COVID-19 pandemic will subside in 2021, we cannot predict the impact with certainty.

If the restrictions on our employees, customers and others in the world continue or increase in order to limit the spread of COVID-19, the potential effects could continue and could be exacerbated, and our results of ~~operations. VASCO is indemnifying Messrs. Hunt, Valcke,~~operations 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 VASCOoverall financial performance may be harmed. The duration 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 violationsextent of the ~~federal securities laws~~impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and ~~to pursue remedies under Sections 10(b) and 20(a)~~transmission rate of the ~~Securities Exchange Act~~virus, the extent and effectiveness of ~~1934~~containment actions and ~~Rule 10b‑5 promulgated thereunder. The~~the impact of these and other factors on our

3139

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~~complaint seeks certification as a class action~~employees, customers, partners and ~~unspecified compensatory damages plus interest~~vendors. If we are not able to respond to 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.

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~~impact 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 onevents effectively, our business ~~and results of operations.~~will be harmed.

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.

~~Table of Contents~~

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:~~second quarter of 2020:


				Total Number
				of Shares	Maximum
				Purchased as	Dollar Value of Shares
	Total			Part of Publicly	that May Yet Be
	Number of	Average		Announced	Purchased Under
	Shares Purchased	Price Paid		Plans or	the Plans or
Period	(1)	per Share		Programs (2)	Programs (2)
July 1, 2020 through July 31, 2020	21,720	$	27.58	—	50,000,000
August 1, 2020 through August 31, 2020	5,340	$	31.14	—	50,000,000
September 1, 2020 through September 30, 2020	1,351	$	20.79	—	50,000,000

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

—

—

—

—

(1.)

~~(1.)~~

All transactions represent surrender of vested shares in satisfaction of tax withholdings by grantees under the ~~2009 Equity~~2019 Omnibus Incentive Plan.

(2.)

~~(2.~~On June 10, 2020, the Board of Directors authorized a share repurchase program (“program”)

, pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. Share purchases under the program will take place in open market transactions or in privately negotiated transactions and may be made from time to time depending on market conditions, share price, trading volume, and other factors. The ~~Company~~timing of the repurchases and the amount of stock repurchased in each transaction is subject to OneSpan’s sole discretion and will depend upon market and business conditions, applicable legal and credit requirements and other corporate considerations. The authorization is effective until June 10, 2022 unless the total amount has ~~no publicly announced plans~~been used or ~~programs to repurchase its shares.~~

authorization has been cancelled.

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Item 5.5 – Other ~~Information.~~Information

~~During~~

As disclosed in the ~~second quarter~~Company’s current report on Form 8-K filed June 15, 2020, the Company held its annual meeting of ~~2015, our management became aware that certain of our products which were sold by our European subsidiary~~stockholders on June 10, 2020. Among the matters submitted 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~~vote of the stockholders was an advisory vote to approve the frequency of future advisory votes on executive compensation. The stockholders approved, on an advisory basis, a frequency of every year for future advisory votes to approve the Company’s executive compensation (“say on pay”). There were 19,121,924 votes cast for a frequency of every year; 25,085 votes cast for a frequency of every two years; 13,861,687 votes cast for a frequency of every three years; and 18,235 abstentions.

Based on these results, the 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~~determined that the ~~products supplied to~~Company will hold say on pay votes every year, until 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 involvementnext required advisory vote on the ~~part~~frequency 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.say on pay votes.

Item 6 - Exhibits

~~Table of Contents~~

~~Item 6. Exhibits.~~

Exhibit 31.1 -– Rule ~~13a‑14(a)~~13a-14(a)/~~15d‑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.~~5, 2020.

Exhibit 31.2 -– Rule ~~13a‑14(a)~~13a-14(a)/~~15d‑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.~~5, 2020.

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.~~5, 2020.

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.~~5, 2020.

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

Exhibit 101.SCH – XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB -– XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF – XBRL Taxonomy Extension Definition Linkbase Document

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

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

3441

Table of Contents

~~SIGNATURES~~

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.~~5, 2020.


	~~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)

3542



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

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2020 (Unaudited) and December 31, ~~2016~~2019	3


	Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019	4


	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019	5


	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2020 and 2019	6

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019	6
		8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7 9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30 37

Item 4.	Controls and Procedures	30 37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31 38

Item 2.1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33 40

Item 5.	Other Information	3341

Item 6.	Exhibits	34 41

SIGNATURES		35 42


	September 30,		December 31,
	2017		2016
	(unaudited)
ASSETS
Current assets
Cash and equivalents	$	49,261	$	49,345
Short term investments		109,463		94,856
Accounts receivable, net of allowance for doubtful accounts of $533 in 2017 and $535 in 2016		34,612		36,693
Inventories, net		17,395		17,420
Prepaid expenses		4,000		3,249
Other current assets		4,705		5,596
Total current assets		219,436		207,159
Property and equipment:
Furniture and fixtures		6,415		5,547
Office equipment		14,454		13,028
		20,869		18,575
Accumulated depreciation		(17,056)		(15,294)
Property and equipment, net		3,813		3,281
Goodwill		56,384		54,409
Intangible assets, net of accumulated amortization		40,084		46,549
Other assets		15,969		15,872
Total assets	$	335,686	$	327,270
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	6,038	$	8,915
Deferred revenue		31,331		36,364
Accrued wages and payroll taxes		12,317		10,894
Income taxes payable		2,625		4,594
Other accrued expenses		6,682		5,464
Deferred compensation		1,073		1,729
Total current liabilities		60,066		67,960
Other long-term liabilities		9,516		1,878
Deferred income taxes		795		853
Total liabilities		70,377		70,691
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
Additional paid-in capital		89,125		87,481
Accumulated income		181,989		178,551
Accumulated other comprehensive loss		(5,845)		(9,493)
Total stockholders' equity		265,309		256,579
Total liabilities and stockholders' equity	$	335,686	$	327,270


	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
Revenue
Product and license	$	38,421	$	34,251	$	104,454	$	118,786
Services and other		12,705		9,397		34,331		25,922
Total revenue		51,126		43,648		138,785		144,708

Cost of goods sold
Products and license		12,083		11,400		32,668		39,925
Services and other		2,397		2,198		7,511		6,078
Total cost of goods sold		14,480		13,598		40,179		46,003

Gross profit		36,646		30,050		98,606		98,705

Operating costs:
Sales and marketing		13,956		13,453		42,997		41,982
Research and development		5,493		5,807		17,669		17,617
General and administrative		9,882		7,682		26,323		25,071
Amortization of purchased intangible assets		2,203		2,196		6,603		6,622
Total operating costs		31,534		29,138		93,592		91,292

Operating income		5,112		912		5,014		7,413

Interest income, net		386		229		1,016		504
Other income (expense), net		(185)		118		402		731

Income before income taxes		5,313		1,259		6,432		8,648
Provision for income taxes		2,558		781		2,994		3,146

Net income	$	2,755	$	478	$	3,438	$	5,502

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:
Basic		39,811		39,736		39,792		39,709
Diluted		39,821		39,834		39,802		39,786


	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


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


				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	—		—	—	—