OneSpan Inc.

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

(unaudited)


	Three months ended				Six months ended
	June 30,				June 30,
	2021		2020		2021		2020
Revenue
Product and license	$	28,378	$	35,384	$	56,823	$	73,644
Services and other		23,899		19,570		46,229		37,680
Total revenue		52,277		54,954		103,052		111,324

Cost of goods sold
Product and license		9,589		12,576		19,130		23,314
Services and other		6,881		5,649		12,662		10,981
Total cost of goods sold		16,470		18,225		31,792		34,295

Gross profit		35,807		36,729		71,260		77,029

Operating costs
Sales and marketing		15,997		14,694		34,376		29,553
Research and development		12,096		10,541		24,340		20,535
General and administrative		15,039		10,846		27,590		23,114
Amortization of intangible assets		1,534		2,335		3,107		4,689
Total operating costs		44,666		38,416		89,413		77,891

Operating loss		(8,859)		(1,687)		(18,153)		(862)

Interest income, net		2		126		6		333
Other income, net		1,029		509		667		171

Loss before income taxes		(7,828)		(1,052)		(17,480)		(358)
Provision (benefit) for income taxes		(1,143)		973		(1,644)		1,663

Net loss	$	(6,685)	$	(2,025)	$	(15,836)	$	(2,021)

Net loss per share
Basic	$	(0.17)	$	(0.05)	$	(0.40)	$	(0.05)
Diluted	$	(0.17)	$	(0.05)	$	(0.40)	$	(0.05)

Weighted average common shares outstanding
Basic		39,694		40,028		39,692		40,059
Diluted		39,694		40,028		39,692		40,059

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 June 30,				Six months ended June 30,
	2021		2020		2021		2020
Net loss	$	(6,685)	$	(2,025)	$	(15,836)	$	(2,021)
Other comprehensive loss
Cumulative translation adjustment, net of tax		549		446		(370)		(3,832)
Unrealized gains (losses) on available-for-sale securities		8		—		(7)		—
Pension adjustment, net of tax		—		(6)		—		(12)
Comprehensive loss	$	(6,128)	$	(1,585)	$	(16,213)	$	(5,865)

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 six months ended June 30, 2021:


											Accumulated
							Additional				Other		Total
	Common Stock			Treasury - Common Stock			Paid-In		Retained		Comprehensive		Stockholders'
Description	Shares	Amount		Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balance at December 31, 2020	40,103	$	40	250		(5,030)	$	98,819	$	173,731	$	(10,220)	$	257,340
Net income (loss)	—		—	—		—		—		(9,151)		—		(9,151)
Foreign currency translation adjustment, net of tax	—		—	—		—		—		22		(919)		(897)
Restricted stock awards	248		—	—		—		1,342		—		—		1,342
Tax payments for stock issuances	(86)		—	—		—		(2,139)		—		—		(2,139)
Unrealized gain (loss) on available-for-sale securities	—		—	—		—		—		—		(15)		(15)
Balance at March 31, 2021	40,265	$	40	250	$	(5,030)	$	98,022	$	164,602	$	(11,154)	$	246,480
Net income (loss)	—		—	—		—		—		(6,685)		—		(6,685)
Foreign currency translation adjustment, net of tax	—		—	—		—		—		—		549		549
Restricted stock awards	24		—	—		—		1,292		—		—		1,292
Tax payments for stock issuances	(7)		—	—		—		(91)		—		—		(91)
Share repurchase	(111)		—	111		(2,908)		—		—				(2,908)
Unrealized gain (loss) on available-for-sale securities	—		—	—		—		—		—		8		8
Balance at June 30, 2021	40,171	$	40	361	$	(7,938)	$	99,223	$	157,917	$	(10,597)	$	238,645

For the three and six months ended June 30, 2020:


											Accumulated
							Additional				Other		Total
	Common Stock			Treasury - Common Stock			Paid-In		Retained		Comprehensive		Stockholders'
Description	Shares	Amount		Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balance at December 31, 2019	40,207		40	—		—	$	96,109	$	179,440	$	(13,295)	$	262,294
Cumulative effect of change related to adoption of ASU 2016-13, net of tax	—		—	—		—		—		(254)		0		(254)
Net income	—		—	—		—		—		4		—		4
Foreign currency translation adjustment , net	—		—	—		—		—		—		(4,278)		(4,278)
Restricted stock awards	168		—	—		—		1,350		—		—		1,350
Tax payments for stock issuances	(61)		—	—		—		(293)		—		—		(293)
Pension adjustment, net of tax	—		—	—		—		—		—		(6)		(6)
Balance at March 31, 2020	40,314	$	40	—		—	$	97,166	$	179,190	$	(17,579)	$	258,817
Net loss	—		—	—		—		—		(2,025)		—		(2,025)
Foreign currency translation adjustment, net	—		—	—		—		—		—		446		446
Restricted stock awards	19		—	—		—		860		—		—		860
Tax payments for stock issuances	(4)		—	—		—		(886)		—		—		(886)
Pension adjustment, net of tax	—		—	—		—		—		—		(6)		(6)
Balance at June 30, 2020	40,329		40	—		—		97,140		177,165		(17,139)		257,206

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

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 $0.6 million and foreign transaction losses aggregated less than $0.1 million for the three and six months ended June 30, 2021, respectively. Foreign exchange transaction gains aggregated less than $0.1 million and foreign transaction losses aggregated $0.5 million for the three and six months ended June 30, 2020, respectively.

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

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

~~Nature of Operations~~

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

In2020, filed with the ~~opinion of management,~~SEC on February 25, 2021 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 lease agreements that require letters of credit to secure the obligations. The restricted cash related to these letters of credit is recorded in other non-current assets on the ~~same basis~~Condensed Consolidated Balance Sheet in the amounts of $0.9 million and $0.8 million at June 30, 2021 and December 31, 2020, respectively.

Equity Method Investment

We apply the equity method of accounting to our investment in Promon AS (Promon), because we exercise significant influence, but not controlling interest, in the investee. Promon is a technology company headquartered in Norway that specializes in mobile app security, whose solutions focus largely on Runtime Application Self-Protection (RASP). We exercise significant influence over Promon as a result of our 17% ownership interest in Promon, our representation on Promon’s Board of Directors, and the ~~audited consolidated financial statements, and include all adjustments, consisting only~~significance to Promon of ~~normal recurring adjustments, necessary for~~our business activities with them. We integrate Promon’s RASP technology into our mobile security offerings, which are then licensed to our customers. Under the ~~fair presentation~~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~~six months ended ~~September~~June 30, ~~2016 reflected~~2021 and 2020 as were the relative size of Promon’s assets and operations in relation to the Company’s. The carrying value of our equity method investment is reported in other noncurrent assets in the 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.~~

~~Table of Contents~~

~~Estimates and Assumptions~~

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

~~Foreign Currency Translation and Transactions~~

The financial position and results of the operations of the majority of the company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income. 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.

~~Table of Contents~~

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

~~Table of Contents~~

~~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 ~~may not be recoverable.~~

~~Cost of Goods Sold~~

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

~~Table of Contents~~

~~Research and Development Costs~~

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

~~Software Development Costs~~

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

~~Income Taxes~~

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

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

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

~~Fair Value of Financial Instruments~~

At September 30, 2017 and December 31, 2016, our financial instruments were cash equivalents, short term investments, accounts receivable, 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 valueinvestment may not be recoverable. The ~~Company’s~~Company did not record any impairment ~~assessment begins with a qualitative assessment~~charges during the six month periods ended June 30, 2021 and 2020. The Company recorded $0.5 million and $0.1 million in cost of sales during the three months ended June 30, 2021 and June 30, 2020, respectively, for license fees owed to ~~determine whether it is more likely than not that the fair value~~Promon for use 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 eventstheir software and ~~circumstances, including macroeconomic conditions, industry~~technology, and ~~market considerations, cost factors,~~recorded $2.0 million 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$1.4 million for the ~~reporting unit~~six months ended June 30, 2021 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.2020, respectively. 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 performedowed Promon $1.2 million as of ~~November 30.~~June 30, 2021, which is included in accounts payable and accrued liabilities.

~~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 2016,~~2019, the FASB issued ASU ~~No. 2016‑08,~~ ~~Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~2019-12, Simplification for Accounting for Income Taxes, which ~~provides~~removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2020-12 was effective beginning January 1, 2021. The adoption of this standard did not have a material impact on ~~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.~~the Company’s condensed consolidated financial statements.

In ~~April 2016,~~March 2020, the FASB issued ASU ~~No. 2016‑10,~~ ~~Revenue from Contracts with Customers: Identifying Performance Obligations~~2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and ~~Licensing, which provides~~exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and can be applied through December 31, 2022. The adoption of this standard did not have a material impact on ~~identifying performance obligations and~~the Company’s condensed consolidated financial statements.

From time to time, new accounting ~~for licenses of intellectual property.~~

~~In May 2016,~~pronouncements are issued by 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~~or other standard ~~and clarify certain aspects~~setting bodies that are adopted by us as of the ~~standard.~~

~~In December 2016, FASB~~specified effective date. Unless otherwise discussed, our management believes that the 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.~~

Westandards that are ~~currently evaluating the~~not yet effective will not have a material 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~~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 ~~operations,~~Revenues

The following tables present our revenues disaggregated by major products and ~~cash flows,~~services, geographical region and ~~any preliminary assessments~~timing of revenue recognition.

Revenue by major products (in thousands)


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020


Hardware products	$	19,451	$	24,188	$	37,119	$	43,926
Software licenses		8,927		11,196		19,704		29,718
Subscription		9,824		6,133		18,229		11,840
Professional services		1,041		1,326		2,443		2,747
Maintenance, support, and other		13,034		12,111		25,557		23,093
Total Revenue	$	52,277	$	54,954	$	103,052	$	111,324

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~~On July 28, 2015~~Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a ~~putative class action~~reasonable possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.

We include various types of indemnification clauses in our customer agreements. These indemnifications may include, but are not limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have 0 liabilities recorded for these clauses as of June 30, 2021.

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~~case is captioned Almendariz v. OneSpan Inc., et al., No. 1:20-cv-04906 (N.D. Ill.) (the “Securities Class Action”). Specifically, the plaintiff in the Securities Class Action alleges, among other things, that certain statements about OneSpan’s business were misleading because of defendants’ failure to disclose that OneSpan purportedly had inadequate internal procedures and ~~unspecified compensatory damages plus interest~~controls over financial reporting and ~~attorneys’ fees. Pursuant to a September 1, 2015 scheduling order entered~~related disclosures; and OneSpan purportedly downplayed the negative impacts of immaterial errors in its financial statements. On April 28, 2021, the Securities Class Action was dismissed by the court without prejudice.

A complaint, related in subject matter to the ~~lead~~Securities Class Action, was filed on October 23, 2020 against certain of OneSpan’s officers and directors, and names OneSpan as a nominal defendant. The case is captioned Klein v. Boroditzky, et al., No. 1:20-cv-06310 (N.D. Ill.) (the “Derivative Action” and, collectively with the Securities Class Action, the “Litigation”). The plaintiff ~~once appointed, will have sixty days to file an amended complaint or notify~~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 ~~defendants that the lead plaintiff intends to rely~~Exchange Act, based on the ~~current complaint.~~same alleged wrongdoing pled in the Securities Class Action. On ~~January 30, 2017,~~February 16, 2021, on the ~~appointed lead plaintiff filed an amended complaint in which~~parties’ agreed motion, the ~~allegations regarding OFAC related matters were dropped and replaced with allegations regarding public disclosures made by~~court stayed the ~~defendants in April 2015 as compared to public statements made in July 2015, generally regarding~~action pending a decision on 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~~then-anticipated motion to dismiss in the ~~Bunk complaint on March 31, 2017. Although~~Securities Class Action. On June 28, 2021 the ~~ultimate outcome~~Klein case was dismissed by the court without prejudice.

On April 2, 2021, a different purported shareholder of ~~litigation cannot be predicted with certainty,~~ the Company, ~~believes that this lawsuit is without merit and intends to defend against~~represented by one of the ~~action vigorously. VASCO is indemnifying its officers and directors for this matter.~~

~~On October 9, 2015, a derivative complaint was filed~~same law firms representing plaintiff in the ~~United States District Court for~~Klein case, filed second derivative suit in the Northern District of Illinois arising out of the same events that led to the filing of the Securities Class Action. The case is captioned ~~Elizabeth~~ Herrera v. ~~Hunt,~~Boroditsky, et al., ~~case number~~ 1:~~15‑cv‑08937, naming VASCO’s Board~~21-cv-01789 (N.D. Ill.). The factual allegations are substantially similar to those in Klein, except that the complaint does not contain express allegations regarding the pendency of ~~Directors~~the Securities Class Action and ~~certain~~only one cause of ~~its current and former executive officers as individual defendants and the Company as a nominal defendant. The plaintiff in~~action, for breach of fiduciary duty, is asserted. On June 28, 2021 the Herrera case ~~voluntarily~~was dismissed by the ~~action on July 12, 2017. Two additional complaints, captioned Beth Seltzer v. Hunt, et al., case number 2015‑ch‑15541,~~court without prejudice.

From time to time, we have been involved in litigation and William Hooper v. Hunt, et al., case number 2016‑ch‑04054, were filed on October 22, 2015 and March 22, 2016, respectively, in the Circuit Court of Cook County, Illinois naming the same defendants.

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

~~On October 29, 2015, a defendant removed the Seltzer action~~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 1015 – Subsequent ~~Event~~Events

~~Our office facilities are leased under operating lease agreements. Subsequent~~As previously disclosed, pursuant to that certain Cooperation Agreement by and among OneSpan Inc. (the “Company” or “OneSpan”), on the one hand, and Legion Partners Asset Management, LLC, John N. Fox, Jr. will resign from the Company’s Board of Directors (the “Board”) on or prior 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

2021. On July 29, 2021, Mr. Fox

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notified the Board that he will resign from the Board effective August 4, 2021. Mr. Fox did not advise the Company of any disagreement with the Company on any matter relating to its operations, policies or practices.

On August 4, 2021, the Company announced that Scott M. Clements, the Company’s President and Chief Executive Officer and a director, left the Company (including the Board) effective August 2, 2021. Mr. Clements’ departure is not related to any disagreement with the Company on any matter relating to its operations, policies or practices. Mr. Clements’ employment agreement with the Company dated December 1, 2015, as amended effective November 15, 2016 and July 28, 2017, provides that he will receive certain severance payments in connection with a termination without Cause (as defined therein), subject to his execution of a customary release in form and substance reasonably acceptable to the Company. For a description of such compensation, please refer to the Company’s definitive proxy statement for the Company’s 2021 annual meeting of stockholders filed on April 26, 2021.

On August 4, 2021, the Company announced the appointment of Steven R. Worth as Interim President and Chief Executive Officer, effective August 2, 2021. Mr. Worth has served as OneSpan’s General Counsel, Chief Compliance Officer and Corporate Secretary since 2016 and has served as OneSpan’s Interim Chief Financial Officer and Treasurer since June 9, 2021. Following his appointment as Interim President and Chief Executive Officer, he continues to serve in the roles of General Counsel, Chief Compliance Officer and Corporate Secretary and has executive responsibility for information security, legal, compliance and intellectual property matters. At this time, any compensation adjustments in connection with Mr. Worth’s appointment have not been determined.

On August 4, 2021, in connection with Mr. Worth’s appointment as Interim President and Chief Executive Officer, the Company announced the appointment of John Bosshart as Interim Chief Financial Officer and Treasurer, effective August 2, 2021. Mr. Bosshart has served as OneSpan’s Chief Accounting Officer since November 2020. At this time, any compensation adjustments in connection with Mr. Bosshart’s appointment have not been determined.

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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, including Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk~~10-Q contains forward-looking statements within the meaning of ~~Section 21E~~applicable U.S. securities laws, including statements regarding the potential benefits, performance and functionality of our products and solutions, including future offerings; our expectations, beliefs, plans, operations and strategies relating to our business and the ~~Securities Exchange Act~~future of ~~1934, as amended~~our business; our strategic plans regarding our portfolio, including acquisitions and ~~Section 27A of the Securities Act of 1933, as amended concerning, among other things,~~dispositions; and 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 in certain markets in which we currently market and sell our products and services or anticipate selling and marketing our products or servicesfinancial performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate", "anticipate", “expect", "intend", "continue", "outlook", "may", "will", "should", "could", or "might", and other similar expressions. These forward-looking statements (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 toinvolve risks and uncertainties, ~~and represent our present expectations~~as well as assumptions that, if they do not fully materialize or ~~beliefs concerning future events. VASCO cautions that the forward-looking statements are qualified by important factors that~~prove incorrect, could cause ~~actual~~our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could materially affect our business and financial results include, but are not limited to: market acceptance of our products and solutions and competitors’ offerings; the potential effects of technological changes; the impact of the COVID-19 pandemic and actions taken to contain it; our ability to effectively manage acquisitions, divestitures, alliances, joint ventures and other portfolio actions; the execution of our transformative strategy on a global scale; the increasing frequency and sophistication of hacking attacks; claims that we have infringed the intellectual property rights of others; changes in customer requirements; price competitive bidding; changing laws, government regulations or policies; pressures on price levels; investments in new products or businesses that may not achieve expected returns; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; actions of activist stockholders; and exposure to increased economic and operational uncertainties from operating a global business, as well as those factors described in the ~~forward-looking statements. These additional risks, uncertainties and other factors have been described in greater detail in~~“Risk Factors” section of our Annual Report on Form ~~10‑K for~~10-K. Our filings with the ~~year ended December 31, 2016~~Securities 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, uncertaintiesExchange Commission (the “SEC”) and other ~~factors include~~important information can be found in the ~~risk that VASCO will not integrate eSignLive into the global business~~Investor Relations section 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, we~~website 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 date of this Form 10-Q, except as required by law.

Outlook and Financial Results

We continue to actively address the effects of the COVID-19 pandemic and its impact globally. Beginning in the ~~future or~~Summer of 2020 and continuing through the present, we have experienced lengthened sales cycles and reduced demand for some of our security solutions due to ~~reflect~~economic uncertainty connected to the ~~occurrence~~COVID-19 pandemic. The most significant impact of ~~unanticipated events.~~

~~General~~

~~The following discussion is based upon~~the pandemic on our ~~consolidated results of operations~~business has been a drop in demand for ~~the three~~our hardware authentication products and ~~nine months ended September 30, 2017 and 2016 (percentages~~delays in the ~~discussion, except~~implementation of certain software solutions.

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

We believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on ~~average net cash balances, are rounded to~~ the ~~closest full percentage point)~~global economy and ~~should be read in conjunction with~~ our ~~consolidated financial statements included elsewhere in~~business results. See Part II – Item 1A – Risk Factors of this ~~Quarterly Report~~Form 10-Q for additional information regarding the potential impact of COVID-19 on ~~Form 10‑Q.~~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

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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 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 the remainder of 2017 and into 2018. Should the sovereign debt issue escalate, economic difficulties may negatively impact the global economy and our business.which we operate.

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

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~~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 six months of 2021 that had a significant impact on our business, it is possible that we could experience an incident in 2021 or future years, which could result in unanticipated costs.

Currency Fluctuation

During the three and six months ended June 30, 2021, approximately 85% and 86%, respectively, of our revenue was generated outside of the United States. While the majority of our revenues are generated outside of the United States, a significant amount of our revenue earned during the three and six months ended June 30, 2021 was denominated in U.S. Dollars. During the three and six months ended June 30, 2021, we estimate that approximately 49% and 49%, respectively, of our revenue was denominated in U.S. Dollars.

In addition, during the three and six months ended June 30, 2021, approximately 67% and 69% of our operating expenses were incurred outside of the United States. As a result, changes in currency exchange rates, especially the Euro exchange rate and the Canadian Dollar exchange rate, can have a significant impact on revenue and expenses.

In general, to minimize the net impact of currency fluctuations on operating income, we attempt to denominate an amount of billings in a currency such that it would provide a hedge against the operating expenses incurred in that currency. We expect that changes in currency rates may also impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. If the amount of our revenue in Europe denominated in Euros continues as it is now or declines, we may not be able to balance fully the exposures of currency exchange rates on revenue and operating expenses.

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

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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 $0.5 million for the three months ended June 30, 2021 and other comprehensive loss of $0.4 million for the six months ended June 30, 2021. Translation adjustments arising from differences in exchange rates generated other comprehensive gain of $0.4 million for the three months ended June 30, 2020 and other comprehensive loss of $3.8 million for the six months ended June 30, 2020. These amounts are included as a separate component of stockholders’ equity. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar.

Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net. Foreign exchange transaction gains aggregated $0.6 million for the three months ended June 30, 2021, compared to less than $0.1 million of gains aggregated for the three months ended June 30, 2020. During the six months ended June 30, 2021, foreign exchange transaction losses aggregated less than $0.1 million compared to losses aggregated of $0.5 million during the six months ended June 30, 2020.

Components of Operating Results

Revenue

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

●

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

●

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

Cost of Goods Sold

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

●

Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs.

●

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

Gross Profit

Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including our average selling price, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.

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.

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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 six months of 2021 compared to the same period in 2020 resulted in an increase in operating expenses of approximately $2.8 million.

The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. Operating expenses for the three and six months ended June 30, 2021 included $1.6 million and $3.1 million, respectively of expenses related to stock-based and long-term incentive plan costs compared to $1.2 million and $2.9 million of stock-based and long-term incentive plan cost for the three and six months ended June 30, 2020, respectively.

●

Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. We expect sales and marketing expenses to increase in absolute dollars as we continue to invest in sales resources in key focus areas, although our sales and marketing expenses may fluctuate as a percentage of total revenue.

●

Research and development. Research and development expenses consist primarily of personnel costs and long-term incentive compensation. We expect research and development expenses to increase in absolute dollars as we continue to invest in our future solutions, although our research and development expenses may fluctuate as a percentage of total revenue.

●

General and administrative. General and administrative expenses consist primarily of personnel costs, legal and other professional fees, and long term incentive compensation. We expect general and administrative expenses to increase in absolute dollars although our general and administrative expenses may fluctuate as a percentage of total revenue.

●

Amortization 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 2021, earnings flowing to the U.S. company are expected to be taxed at a rate of ~~35%~~

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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%12% to ~~34%~~35%.

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

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

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

the amount of revenues that the service provider subsidiaries generate.

For items 1 and 2 above, there is a direct impact in the opposite direction on earnings of the U.S. and Swiss entities. Any change from item 3 is generally expected to result in a larger change in income in the U.S. and Swiss entities in the direction of the change (increased revenues expected to result in increased margins/pretax profits and conversely decreased revenues expected to result in decreased margins/pretax profits).

In addition to the provision of services, the intercompany agreements transfer the majority of the business risk to our U.S. and Swiss subsidiaries. As a result, the contracting subsidiaries’ pretax income is reasonably assured while the pretax income of the U.S. and Swiss subsidiaries varies directly with our overall success in the market.

In November 2015, we acquired ~~eSignLive,~~OneSpan Canada Inc. (formerly eSignLive), a foreign company with substantial IP and net operating losses and other tax carryforwards. The tax benefit of the carryforwards ~~net of deferred tax liabilities,~~ has been fully reserved as realization has not been deemed more likely than not.

In May 2018, we acquired Dealflo Limited (“Dealflo”), a foreign company with substantial IP and net operating losses. The tax benefit of existing loss carryforwards at the time of acquisition was not recorded as the Company determined they were not more likely than not to be realized.

2225

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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 June 30,				Six months ended June 30,
	2021		2020		2021		2020

					(in thousands)
Hardware products	$	19,451	$	24,188	$	37,119	$	43,926
Software licenses		8,927		11,196		19,704		29,718
Subscription		9,824		6,133		18,229		11,840
Professional services		1,041		1,326		2,443		2,747
Maintenance, support, and other		13,034		12,111		25,557		23,093
Total Revenue	$	52,277	$	54,954	$	103,052	$	111,324

Total revenue decreased $2.7 million or 5%, during the ~~Three and Nine Months Ended September~~three months ended June 30, ~~2017 and 2016~~

~~Currency Fluctuations:~~ In2021 compared to the ~~third quarter and first nine~~three months ~~of 2017, approximately 76% and 77%, respectively,~~ended June 30, 2020, driven primarily by a $4.7 million decrease in hardware revenue, offset by an increase in recurring revenue, which is the portion of our revenue ~~was generated outside~~subject to future renewal. Recurring revenue, comprised of subscription, term-based software licenses, and maintenance, support and other revenue, increased $5.5 million or 24% during the ~~United States. While~~three months ended June 30, 2021, compared to the ~~majority of our revenues are generated outside of~~three months ended June 30, 2020. Total revenue decreased $8.3 million or 7%, during the ~~United States,~~six months ended June 30, 2021 compared to the ~~majority of our~~six months ended June 30, 2020, driven primarily by decreases in hardware and perpetual software license revenue, partially offset by an increase in recurring revenue. Recurring revenue increased $8.6 million or 17% during the ~~third quarter~~six months ended June 30, 2021, compared to the six months ended June 30, 2020.

Product and ~~first nine~~license revenue decreased by $7.0 million or 20% during the three months ~~of 2017 was denominated~~ended June 30, 2021 compared to the three months ended June 30, 2020. For the six months ended June 30, 2020, product and license revenue decreased $16.8 million or 23% compared to the six months ended June 30, 2020. The decrease in ~~U.S. Dollars. We estimate that 67%~~both periods is due to lower hardware and ~~65% of our revenues~~software license sales.

Services and other revenue increased by $4.3 million, or 22% during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, services and other revenue increased $8.5 million or 23% compared to the six months ended June 30, 2020. The increase for both the ~~third quarter~~three and first nine months of 2017 were denominated in U.S. Dollars. In addition, in the third quarter and first nine months of 2017, approximately 81% and 76%, respectively, of our operating expenses were incurred outside of the United States. As a result, changes in currency exchange rates, especially the Euro to U.S. Dollar exchange rate and the Canadian Dollar to U.S. Dollar exchange rate, can have a significant impact on revenue and expenses.

In general, to minimize the net impact of currency fluctuations on operating income, we attempt to denominate an amount of billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may also impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. If the amount of our revenue denominated in Euros continues as it is now or declines, we do not expect that we will be able to balance fully the exposures of currency exchange rates on revenue and operating expenses.

~~The Euro, on average, strengthened against the U.S. dollar approximately 5% for the third quarter and weakened 0.3% for the first nine months of 2017, as~~six month periods ended June 30, 2021 compared to the same periods in ~~2016.~~ 2020 was driven by higher maintenance and subscription revenue.

We ~~estimate~~believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments reflecting the transactional nature of significant parts of our business. As a result of the volatility in our business, we believe that the change in currency rates in 2017 compared to 2016 resulted in an increase in revenue of approximately $903 and a decrease of $195 for the quarter and nine months ended September 30, 2017, respectively, compared to the same periods in 2016 and an increase in operating expenses of approximately~~$576 for the quarter and a decrease of $576 for the nine months ended September 30, 2017 compared to the same periods in 2016.~~

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

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

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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

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South America; and 3) Asia Pacific (APAC), which also includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:

~~Three months ended September 30:~~


	Three months ended June 30,		Six months ended June 30,
	2021	2020	2021	2020

	(in thousands)		(in thousands)
Revenue
EMEA	$ 24,830	$ 28,336	$ 51,819	$ 61,940
Americas	17,011	13,932	33,539	26,265
APAC	10,436	12,686	17,694	23,119
Total revenue	$ 52,277	$ 54,954	$ 103,052	$ 111,324

% of Total Revenue
EMEA	47%	52%	50%	56%
Americas	33%	25%	33%	24%
APAC	20%	23%	17%	21%

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 June 30, 2021 was ~~$22,768, approximately equal to~~$3.5 million, or 12% lower than the ~~third quarter of 2016.~~three months ended June 30, 2020, driven primarily by lower hardware sales. For the ~~first nine~~six months ~~of 2017,~~ended June 30, 2021, revenue generated in EMEA was ~~$62,868,~~$10.1 million or 7%16% lower than the ~~first nine months of 2016. The decrease~~same period in ~~revenues for the first nine months of 2017 was primarily~~2020, driven by ~~a decline in the~~ lower ~~margin segment of our~~software license revenue and lower hardware ~~business, partially offset by an increase in software products.~~revenue.

Revenue generated in the Americas ~~for~~during the ~~third quarter of 2017~~three months ended June 30, 2021 was ~~$14,419,~~$3.1 million, or ~~78%,~~22% higher than the ~~third quarter of 2016.~~three months ended June 30, 2020, driven primarily by increases in software license revenue and subscription revenue. For the ~~first nine~~six months ~~of 2017,~~ended June 30, 2021, revenue generated in the Americas was ~~$37,880,~~$7.3 million or ~~56%~~28% higher 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.~~2020, driven largely by higher subscription revenue.

Revenue generated in the Asia Pacific region during the ~~third quarter of 2017~~three months ended June 30, 2021 was ~~$13,939,~~$2.3 million, or ~~9%, higher than the third quarter of 2016. For the first nine months of 2017, revenue was $38,037, or 28%~~18% lower than the ~~first nine~~three months ended June 30, 2020, driven by lower revenue from software licenses and hardware. For the six months ended June 30, 2021, revenue generated in the Asia Pacific region was $5.4 million or 23% lower than the same period in 2020, driven by lower software, maintenance, and hardware revenue.

Cost of ~~2016.~~ Goods Sold and Gross Margin


	Three months ended June 30,		Six months ended June 30,
	2021	2020	2021	2020
	(in thousands)		(in thousands)
Cost of goods sold
Product and license	$ 9,589	$ 12,576	$ 19,130	$ 23,314
Services and other	6,881	5,649	12,662	10,981
Total cost of goods sold	$ 16,470	$ 18,225	$ 31,792	$ 34,295

Gross profit	$ 35,807	$ 36,729	$ 71,260	$ 77,029

Gross margin
Product and license	66%	64%	66%	68%
Services and other	71%	71%	73%	71%
Total gross margin	68%	67%	69%	69%

The cost of product and license revenue ~~decline for first nine~~decreased $3.0 million or 24% during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. During the six months ended June 30, 2021, the cost of ~~2017~~product and license revenue decreased $4.2 million or 18% compared to the six months ended June 30, 2020. The decrease in cost of product and license during both periods was ~~attributed~~due to lower token costs, driven by lower hardware ~~revenues.~~

We believe comparison of revenues between periods is heavily influenced by the timing of orders 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 for the three and nine months ended September 30, 2017 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 for the quarter ended September 30, 2017 was $36,646, an increase of $6,596, or 22%, from the quarter ended September 30, 2016. Gross profit as a percentage of revenue (gross profit margin) was 72% for the quarter ended September 30, 2017, as compared to 69% for the quarter ended September 30, 2016. The increase in gross profit as a percentage of revenue for the third quarter of 2017 compared to 2016 primarily reflects an increase in software solutionssales as a percentage of total ~~revenues.~~revenue.

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~~Gross profit for~~The cost of services and other revenue increased by $1.2 million, or 22% during the ~~nine~~three months ended ~~September~~June 30, ~~2017 was $98,606, a decrease of $99, from~~2021 compared to the ~~comparable period in 2016. Gross profit as a percentage of revenue (gross profit margin) was 71% for the nine~~three months ended ~~September~~June 30, ~~2017 and 68% for~~2020. For the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021, the cost of services and other revenue increased by $1.7 million, or 15% compared to the six months ended June 30, 2020. The increase in cost of services and other revenue for both periods is reflective of higher subscription revenue, which has increased cloud-based infrastructure costs.

Gross profit decreased $0.9 million, or 3% during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. During the six months ended June 30, 2021 gross profit ~~as a percentage of revenue~~decreased by $5.8 million, or 7% compared to the six months ended June 30, 2020. Gross profit margin was 68% and 69% for the ~~first nine~~three and six months ~~of 2017~~ended June 30, 2021, respectively, compared to ~~2016 primarily reflects an~~67% and 69% for the three and six months ended June 30, 2020, respectively. The increase in ~~software solutions as a percentage of total revenues.~~profit margins for the three months ended June 30, 2021 was driven by stronger margins for product and license.

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~~$2.4 million and $4.6 million for the ~~third quarter of 2017.~~three and six months ended June 30, 2021, respectively. Had currency rates in ~~the third quarter of 2017~~2021 been equal to rates in ~~the same period in 2016,~~2020, the gross profit margin would have been approximately ~~0.5~~5 percentage ~~points~~point lower for both the ~~third quarter of 2017.~~

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~~For the nine~~three and six months ended ~~September~~June 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 2017.2021.

Operating Expenses


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020

	(in thousands)				(in thousands)
Operating costs
Sales and marketing	$	15,997	$	14,694	$	34,376	$	29,553
Research and development		12,096		10,541		24,340		20,535
General and administrative		15,039		10,846		27,590		23,114
Amortization of intangible assets		1,534		2,335		3,107		4,689
Total operating costs	$	44,666	$	38,416	$	89,413	$	77,891

Sales and Marketing Expenses

~~Our operating~~

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

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

Historically, operating expenses can be impacted by changes in foreign exchange rates. As noted above, we estimate that the change in currency rates in 2017 compared to 2016 resulted in an increase in operating expenses of approximately~~$576~~ for the three months ended ~~September~~June 30, ~~2017~~2021 were $16.0 million, an increase of $1.3 million or 9%, from the three months ended June 30, 2020. Sales and ~~a decrease of $576~~marketing expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021 were $34.4 million, an increase of $4.8 million or 16% from the same period in 2020. The increase in expense for the three and six months ended June 30, 2021 compared to the same periods in ~~2016.~~

~~The comparison of operating expenses can also be impacted significantly~~2020 was driven by ~~costs related to our stock-based~~higher headcount and long-term incentive plans. Operating expenses for the three and nine months ended September 30, 2017 included $1,267 and $3,199, respectively, of expense related to the stock-based and long-term incentive plans compared to $1,579 and $5,457 for the three and nine months ended September 30, 2016, respectively.

~~Sales and Marketing Expenses~~

~~Sales and marketing expenses for the quarter ended September 30, 2017 were $13,956,~~ an increase ~~of $503, or 4%, from~~in the ~~third quarter of 2016. Sales and marketing expenses for the nine months ended September 30, 2017, were $42,997, an increase of $1,015, or 2%, from the same period of 2016.~~average cost per employee.

Average full-time sales, marketing, support, and operating employee headcount for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 was ~~312~~379 and ~~307,~~374, respectively, compared to ~~299~~342 and ~~285~~335 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2020, respectively. Headcount was 4%11% and 12% higher for the ~~third quarter of 2017 compared to the third quarter of 2016,~~three and ~~8% higher for the nine~~six months ended ~~September~~June 30, ~~2017 when~~2021, respectively, compared to the same ~~period~~periods in ~~2016.~~2020.

Research and Development Expenses

Research and development expenses for the ~~quarter~~three months ended ~~September~~June 30, ~~2017,~~2021, were ~~$5,493, a decrease~~$12.1 million, an increase of ~~$314,~~$1.6 million, or 5%15%, from the ~~third quarter of 2016.~~three months ended June 30, 2020. Research and development ~~costs~~expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, were ~~$17,669,~~$24.3 million, an increase of ~~$52,~~$3.8 million, or 3%19%, from the ~~same period~~six months ended June 30, 2020. The increase in both periods was driven primarily by higher personnel costs due to higher headcount, partially offset by lower travel costs.

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Average full-time research and development employee headcount for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 was ~~205~~352 and ~~218, respectively,~~355, compared to ~~232~~320 and ~~224~~316 for the ~~third quarter~~three and ~~nine~~six months ended ~~September~~June 30, ~~2016, respectively. Headcount~~2020, respectively.. Average headcount was approximately 12% ~~lower and 3% lower~~higher for the ~~third quarter~~three and ~~first nine~~six months ~~of 2017, respectively,~~ended June 30, 2021, when compared to the same ~~periods~~period 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.2020.

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General and Administrative Expenses

General and administrative expenses for the ~~quarter~~three months ended ~~September~~June 30, ~~2017,~~2021, were ~~$9,882,~~$15.0 million, an increase of ~~$2,200,~~$4.2 million or ~~29%~~39%, from the ~~third quarter of 2016.~~three months ended June 30, 2020. General and administrative expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, were ~~$26,323,~~$27.6 million, an increase of ~~$1,252,~~$4.5 million or 5%19%, ~~compared to~~from the ~~same period of 2016.~~six months ended June 30, 2020. The increase in general and administrative expenses for the three and six months ended June 30, 2021, compared to the same periods in ~~the third quarter primarily reflect increased headcount,~~2020 was driven by higher personnel cost and higher outside professional ~~fees and facilities expense. Professional fees primarily relate to internal controls, legal and internal systems.~~services spend, partially offset by lower travel costs.

Average full-time general and administrative employee headcount for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 was 93134 and ~~90,~~134, respectively, compared to 84120 and 82118 for the ~~same periods in 2016. Headcount~~three and six months ended June 30, 2020, respectively. Average headcount was approximately 11% ~~higher,~~ and ~~10%~~13% higher for the ~~third quarter~~three and ~~first nine~~six months ~~of 2017,~~ended June 30, 2021, respectively, when compared to the same periods in ~~2016.~~2020.

Amortization of Intangible Assets

Amortization of intangible assets for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 was ~~$2,203~~$1.5 million and ~~$6,603,~~$3.1 million, respectively, ~~an increase of $7~~compared to $2.3 million and $4.7 million for the three and six months ended June 30, 2020, respectively. For both periods, there was a decrease of ~~$19 for~~34% from the comparable periods in ~~2016.~~2020. The decrease was driven by certain assets acquired in the Silanis acquisition becoming fully amortized.

Interest Income, net


	Three months ended June 30,		Six months ended June 30,
	2021	2020	2021	2020
	(in thousands)		(in thousands)
Interest income, net	$ 2	$ 126	$ 6	$ 333

~~Consolidated~~Interest income, net ~~interest income~~ was ~~$386 and $1,016~~less than $0.1 million for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, as compared to ~~$229~~less than $0.1 million and ~~$504~~$0.3 million for the same periods in ~~2016.~~2020. The ~~increase~~decrease in interest income, net for ~~2017~~both the three and six months ended June 30, 2021 compared to the same periods in ~~2016~~2020 reflects ~~an increase~~a decrease in ~~the average~~our cash equivalents and short term investment balance and lower interest ~~rate earned on invested balances and an increase in the average invested balance.~~rates.

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


	Three months ended June 30,		Six months ended June 30,
	2021	2020	2021	2020

	(in thousands)		(in thousands)
Other income, net	$ 1,029	$ 509	$ 667	$ 171

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~~six months ended ~~September~~June 30, ~~2017~~2021 was ~~($185)~~$1.0 million and ~~$402,~~$0.7 million, respectively, compared to ~~$118~~$0.5 million and ~~$731~~$0.2 million for the comparable periods of ~~2016. Other~~2020. Higher income ~~(expense), net included exchange losses~~was driven by gains resulting from foreign currency translation.

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Provision for Income Taxes


	Three months ended June 30,		Six months ended June 30,
	2021	2020	2021	2020

	(in thousands)		(in thousands)
Provision (benefit) for income taxes	($ 1,143)	$ 973	($ 1,644)	$ 1,663

The Company recorded income tax benefit for the three months ended June 30, 2021 of $1.1 million, compared to income tax expense of $1.0 million for the three months ended June 30, 2020. The Company recorded income tax benefit for the six months ended June 30, 2021 of $1.6 million, compared to income tax expense of $1.7 million for the six months ended June 30, 2020. The benefit recorded for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 compared~~2021 was attributable to ~~exchange losses of $110 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~~net loss in the ~~third quarter of 2017. The decrease in~~period excluding losses at entities where we cannot record a tax ~~expense in 2017 from 2016~~benefit, as well as tax benefit 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.certain stock compensation deductions.

Our estimated annual tax rate for 2017 before discrete items is expected to be 40%. This is higher than the U.S. statutory rate primarily due to valuation allowances on taxable losses, primarily in Canada, partially offset by income in foreign jurisdictions taxed at lower rates. Our ultimate tax rate will depend on the mix of earnings in various jurisdictions.

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

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

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

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

Liquidity and Capital Resources

At ~~September~~June 30, ~~2017,~~2021, we had net cash balances (total cash and cash ~~equivalents and restricted cash less bank borrowings)~~equivalents) of ~~$49,261~~$66.5 million and short-term investments of ~~$109,463.~~ $42.7 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,~~2020, we had net cash balances of ~~$49,345~~$88.4 million and short-term investments of ~~$94,856.~~ $26.9 million.

We ~~had no outstanding debt or~~are in lease agreements that require letters of credit to secure the obligations. The restricted cash related to these letters of credit is recorded in other non-current assets on the Condensed Consolidated Balance Sheet in the amounts of $0.9 million and $0.8 million at ~~September~~June 30, ~~2017, or December 31, 2016.~~

~~Short-term investments at September 30, 2017,~~2021 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.~~2020, respectively.

Our working capital at ~~September~~June 30, ~~2017~~2021 was ~~$159,370, an increase of $20,171 or 15% from $139,199~~$110.6 million compared to $131.9 million at December 31, ~~2016. The increase in the combined balance~~2020.

As of June 30, 2021, we held $55.1 million of cash and ~~short-term investments as well as the increase~~cash equivalents in ~~working capital at September 30, 2017 from December 31, 2016 primarily reflects the benefit of cash flow from operations for 2017.~~

~~As of September 30, 2017, we held $30,757 of cash and short-term investments in banks~~subsidiaries outside of the United States. Of that amount, ~~$30,546~~$54.1 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:


	Six months ended June 30,
	2021	2020
	(in thousands)
Cash provided by (used in):
Operating activities	$ 1,184	$ 4,381
Investing activities	(17,378)	(3,520)
Financing activities	(5,138)	(1,179)
Effect of foreign exchange rate changes on cash and cash equivalents	(511)	20

Operating Activities

Cash generated by operating activities is primarily comprised of net income, as adjusted for non-cash items, and changes in ~~judgments, made~~operating assets and liabilities. Non-cash adjustments consist primarily of amortization of intangible assets, depreciation of property and equipment, deferred tax benefit, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in ~~applying~~sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs. We expect cash outflows from operating activities to be affected by increases in personnel cost as we grow our business.

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For the ~~guidance~~six months ended June 30, 2021, net cash provided by operating activities was $1.2 million, compared to ~~those contracts;~~net cash provided by operating activities of $4.4 million during the six months ended June 30, 2020. The fluctuation is primarily driven by a more significant net loss, partially offset by a lower accounts receivable balance, lower contract assets, and ~~(iii) any assets recognized~~higher accrued expenses.

Investing Activities

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

~~ASU 2014‑09~~

For the six months ended June 30, 2021, net cash used in investing activities was $17.4 million, compared to net cash used in investing activities of $3.5 million for the six months ended June 30, 2020. The fluctuation is ~~effective for annual periods beginning after December 15, 2016, and interim periods within such annual periods, using either~~related to the timing of the ~~following transition methods: (i)~~purchases and maturities of our short term investments, as well as a ~~full retrospective approach reflecting~~higher short term investment balance.

Financing Activities

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

For the ~~standard~~six months ended June 30, 2021, net cash used in ~~each prior reporting~~financing activities was $5.1 million, compared to net cash used in financing activities of $1.2 million for the six months ended June 30, 2020. The increase is primarily due to a higher volume of share repurchases during the six months ended June 30, 2021, compared to the comparable period ~~with~~in 2020.

Critical Accounting Policy

Our accounting policies are fully described in Note 1 - Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Annual Report on Form 10-K for the ~~option~~year ended December 31, 2020 and Note 2 – Summary of Significant Accounting Policies to ~~elect certain practical expedients, or (ii) an approach with~~our Interim Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for 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~~quarterly period ended June 30, 2021. 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~~June 30, ~~2017.~~2021. 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.~~2020.

Item 4.4 - Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who, respectively, are our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule ~~13a‑15(e)~~13a-15(e) and Rule ~~15d‑15(e)~~15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form ~~10‑Q.~~10-Q. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure (i) the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive

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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 interim 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 ~~during our quarter ended September 30, 2017 which were identified~~(as that term is defined in ~~connection with management’s evaluation required by paragraph (d) of Rules 13a‑15~~Rule 13a-15(f) and ~~15d‑15~~15d-15(f) under the Exchange ~~Act~~Act) during the three months ended June 30, 2021, 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, 2020 filed with the U.S. Securities and Exchange Commission. Any reasonably possible material loss or range of loss associated with any individual legal proceeding that can be estimated, is provided in Note 14 to the Condensed Consolidated Financial Statements contained herein.

Item 1A – Risk Factors

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

While we believe the coronavirus has had, and could continue to have, a negative impact on our financial results, the impact is difficult to assess at this time.

The effects of the COVID-19 pandemic 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 2020 with limited capacity under revised procedures. Subsequently, certain geographies have experienced progress and regression in addressing the pandemic, including the distribution of vaccines, and therefore progress has been uneven and difficult to predict. We are unable to predict further re-openings or whether the initial re-openings will be successful or remain in place. We implemented certain travel restrictions, remote work arrangements and other measures and while our experience with this new situation has been mostly satisfactory to date, it has disrupted how we normally operate our business and may in the longer term impact our productivity, innovation and effectiveness such that our results are adversely affected. We have shifted customer events to virtual-only experiences and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Because we operate in multiple international locations, we expect there to be variability and additional complications from differing conditions and inconsistent guidance from numerous public health agencies.

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

In our software business, we experienced some increased sales for products used in remote employee access and electronic signature in 2020 that we attribute in part to the COVID-19 pandemic. This increase may have been temporary, and we are unable to predict whether it will continue or decline. Moreover, the conditions caused by the COVID-19 pandemic can affect the rate of IT spending, the decision to start new IT projects, the timing of existing projects and the priority our customers place on various projects. While these factors may be positive for some of our software solutions such as electronic signature, these factors may be negative for our other software solutions. The ~~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 of DigiNotar B.V.’s business activities and is responsible for the administration and liquidation of DigiNotar B.V. In connection~~present, due in part 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, 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, new strains 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~~vaccines, and the impact of these

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

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

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

~~On October 29, 2015, a defendant removed the Seltzer action to the United States District Court for the Northern District~~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.~~

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 cannotwill be ~~predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend itself vigorously.~~harmed.

~~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:~~

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.)~~

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

~~(2.)~~

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

~~Item 5. Other Information.~~

~~During the~~ second quarter of 2015, our management became aware that certain of our products which were sold by our European subsidiary to a third-party distributor may have been resold by the distributor to parties in Iran, potentially including parties whose property and interests in property may be blocked pursuant to Executive Order 13224, Executive Order 13382 or that may be identified under Section 560.304 of 31 C.F.R. Part 560 as the “Government of Iran”.2021:


				Total Number
				of Shares	Maximum
				Purchased as	Dollar Value of Shares
	Total			Part of Publicly	that May Yet Be
	Number of	Average		Announced	Purchased Under
	Shares Purchased	Price Paid		Plans or	the Plans or
Period		per Share		Programs (1)	Programs (1)
April 1, 2021 through April 30, 2021	—	$	—	—	44,969,863
May 1, 2021 through May 31, 2021	—	$	—	—	44,969,863
June 1, 2021 through June 30, 2021	111,000	$	26.17	111,000	42,062,363

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

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

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

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

(1.)

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

(2.)

In addition to the shares repurchased under the program, during the three months ended June 30, 2021, 3,905 shares were purchased by the company in order to satisfy employee tax withholding obligations upon the vesting of restricted stock and restricted stock units. These shares were not acquired pursuant to any publicly announced purchase plan or program.

3334

Table of Contents

Item ~~6. Exhibits.~~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.~~August 4, 2021.

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.~~August 4, 2021.

Exhibit 32.1 -– Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated ~~November 2, 2017.~~August 4, 2021.

Exhibit 32.2 -– Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated ~~November 2, 2017.~~August 4, 2021.

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

Exhibit 101.SCH – XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document

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

Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF – XBRL Taxonomy Extension Definition Linkbase Document

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

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

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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.~~August 4, 2021.


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


	/s/ ~~Scott Clements~~Steven R. Worth
	~~Scott Clements~~Steven R. Worth
	Interim Chief Executive Officer (Principal Executive Officer)


	/s/ ~~Mark S. Hoyt~~John Bosshart
	~~Mark S. Hoyt~~John Bosshart
	Interim Chief Financial Officer and Chief Accounting Officer
	(Interim Principal Financial Officer and Principal Accounting Officer)

3536


DELAWARE	36-4169320
~~DELAWARE~~	~~36‑4169320~~
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Shares	OSPN	NASDAQ


Large accelerated filer	☐⌧	Accelerated filer	☒☐
Non-accelerated filer	☐◻	Emerging growth company	☐
		Smaller reporting company	☐



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

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2021 (Unaudited) and December 31, ~~2016~~2020	3


	Condensed Consolidated Statements of Operations (Unaudited) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020	4


	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020	5


	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 30, 2021 and 2020	6

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020	6
		7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7 8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30 31

Item 4.	Controls and Procedures	30 31

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31 32

Item 2.1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33 34

Item 5.6.	~~Other Information~~Exhibits	3335

~~Item 6.~~SIGNATURES		~~Exhibits~~	34
		36
~~SIGNATURES~~		35


	June 30,		December 31,
	2021		2020
ASSETS
Current assets
Cash and equivalents	$	66,530	$	88,394
Short term investments		42,726		26,859
Accounts receivable, net of allowances of $3,147 in 2021 and $4,135 in 2020		45,762		57,537
Inventories, net		9,498		13,093
Prepaid expenses		7,823		7,837
Contract assets		5,243		7,202
Other current assets		9,860		6,256
Total current assets		187,442		207,178
Property and equipment, net		11,468		11,835
Operating lease right-of-use assets		10,035		11,356
Goodwill		97,842		97,552
Intangible assets, net of accumulated amortization		24,227		27,196
Deferred income taxes		8,942		7,030
Contract assets - non-current		1,634		1,877
Other assets		12,738		11,179
Total assets	$	354,328	$	375,203
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	6,918	$	5,684
Deferred revenue		43,058		43,417
Accrued wages and payroll taxes		15,146		13,649
Short-term income taxes payable		997		2,618
Other accrued expenses		10,190		8,334
Deferred compensation		571		1,602
Total current liabilities		76,880		75,304
Long-term deferred revenue		10,676		11,730
Long-term lease liabilities		11,154		12,399
Other long-term liabilities		10,195		10,423
Long-term income taxes payable		5,042		6,095
Deferred income taxes		1,736		1,912
Total liabilities		115,683		117,863
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at June 30, 2021 and December 31, 2020		—		—
Common stock: $.001 par value per share, 75,000 shares authorized; 40,171 and 40,103 shares issued; 40,171 and 40,103 shares outstanding at June 30, 2021 and December 31, 2020, respectively		40		40
Additional paid-in capital		99,223		98,819
Treasury stock, at cost, 361 and 250 shares outstanding at June 30, 2021 and December 31, 2020, respectively		(7,938)		(5,030)
Retained earnings		157,917		173,731
Accumulated other comprehensive loss		(10,597)		(10,220)
Total stockholders' equity		238,645		257,340
Total liabilities and stockholders' equity	$	354,328	$	375,203


	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


	EMEA			Americas			APAC			Total
Total Revenue:
2021	$	24,830		$	17,011		$	10,436		$	52,277
2020	$	28,336		$	13,932		$	12,686		$	54,954

Percent of Total:
2021		47	%		33	%		20	%		100	%
2020		52	%		25	%		23	%		100	%


in thousands	2021		2022		2023		Beyond 2023		Total
Future revenue related to current unsatisfied performance obligations	$	14,877	$	19,855	$	12,057	$	7,043	$	53,832



in thousands		June 30, 2021		December 31, 2020
Capitalized costs to obtain contracts, current	$	1,622	$	1,222
Capitalized costs to obtain contracts, non-current	$	6,706	$	5,464


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


in thousands
Net balance at December 31, 2020	$	97,552
Net foreign currency translation		290
Net balance at June 30, 2021	$	97,842


	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, 2020	$	2,277	$	23,200	$	1,719	$	27,196
Additions		2		—		14		16
Disposals		—		—		(21)		(21)
Net foreign currency translation		31		106		6		143
Amortization expense		(778)		(2,004)		(325)		(3,107)
Net balance at June 30, 2021	$	1,532	$	21,302	$	1,393	$	24,227

June 30, 2021 balance at cost	$	43,436	$	40,121	$	13,559	$	97,116
Accumulated amortization		(41,904)		(18,819)		(12,166)		(72,889)
Net balance at June 30, 2021	$	1,532	$	21,302	$	1,393	$	24,227


			Fair Value Measurement at Reporting Date Using
in thousands		June 30, 2021	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury Notes	$	2,422	-	$	2,422	-
Corporate Notes / Bonds	$	12,252	-	$	12,252	-
Commercial Paper	$	8,097	-	$	8,097	-
U.S. Treasury Bills	$	3,789	-	$	3,789	-
U.S. Government Agencies	$	16,166	-	$	16,166	-


in thousands
Balance at December 31, 2020	$	4,135
Provision		660
Write-offs		(1,645)
Net foreign currency translation		(3)
Balance at June 30, 2021	$	3,147


	As of June 30, 2021
		(in $ thousands)
2021	$	1,682
2022		3,156
2023		2,551
2024		1,738
2025		1,603
Later years		5,972
Less imputed interest		(2,847)
Total lease liabilities	$	13,855


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	—		—	—	—