OneSpan Inc.

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

(unaudited)


	March 31,
	2022		2021
Revenue
Product and license	$	29,485	$	28,445
Services and other		22,962		22,330
Total revenue		52,447		50,775

Cost of goods sold
Product and license		9,079		10,752
Services and other		6,690		5,781
Total cost of goods sold		15,769		16,533

Gross profit		36,678		34,242

Operating costs
Sales and marketing		15,895		17,168
Research and development		13,749		12,244
General and administrative		14,895		12,551
Amortization of intangible assets		1,382		1,573
Total operating costs		45,921		43,536

Operating loss		(9,243)		(9,294)

Interest income (expense), net		(17)		4
Other income (expense), net		15,647		(362)

Income (loss) before income taxes		6,387		(9,652)
Provision (benefit) for income taxes		1,173		(501)

Net income (loss)	$	5,214	$	(9,151)

Net income (loss) per share
Basic	$	0.13	$	(0.23)
Diluted	$	0.13	$	(0.23)

Weighted average common shares outstanding
Basic		39,577		39,996
Diluted		39,687		39,996

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 March 31,
	2022		2021
Net income (loss)	$	5,214	$	(9,151)
Other comprehensive loss
Cumulative translation adjustment, net of tax		(2,020)		(919)
Pension adjustment, net of tax		(25)		—
Unrealized losses on available-for-sale securities		(79)		(15)
Comprehensive income (loss)	$	3,090	$	(10,085)

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 months ended March 31, 2022:


											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, 2021	40,001	$	40	592		(12,501)	$	100,250	$	143,173	$	(11,182)	$	219,780
Net income (loss)	—		—	—		—		—		5,214		—		5,214
Foreign currency translation adjustment, net of tax	—		—	—		—		—		—		(2,020)		(2,020)
Restricted stock awards	34		—	—		—		1,360		—		—		1,360
Tax payments for stock issuances	(14)		—	—		—		(635)		—		—		(635)
Unrealized gain (loss) on available-for-sale securities	—		—	—		—		—		—		(79)		(79)
Pension adjustment, net of tax	—		—	—		—		—		—		(25)		(25)
Balance at March 31, 2022	40,021	$	40	592	$	(12,501)	$	100,975	$	148,387	$	(13,306)	$	223,595

For the three months ended March 31, 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)
Pension adjustment, net of tax	—		—	—		—		—		—		—		—
Balance at March 31, 2021	40,265	$	40	250	$	(5,030)	$	98,022	$	164,602	$	(11,154)	$	246,480

Three months ended

Nine months ended

September 30,

September 30,


2017

2016

2017

2016

Net income

$
2,755

$
478

$
3,438

$
5,502

Other Comprehensive income (loss):

Cumulative translation adjustment, net

1,203

7

3,633

(425)

Pension adjustment, net of tax

4

—

15

—

Comprehensive income

$
3,962

$
485

$
7,086

$
5,077

Table of Contents

OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three months ended March 31,
	2022		2021
Cash flows from operating activities:
Net income (loss) from operations	$	5,214	$	(9,151)
Adjustments to reconcile net loss from operations to net cash provided by (used in) operations:
Depreciation and amortization of intangible assets		2,097		2,310
Loss on disposal of assets		1		22
Gain on sale of equity-method investment		(14,810)		—
Deferred tax benefit		794		(732)
Stock-based compensation		1,360		1,342
Changes in operating assets and liabilities:
Accounts receivable		19,893		8,554
Allowance for doubtful accounts		666		34
Inventories, net		(260)		1,748
Contract assets		(904)		2,346
Accounts payable		(941)		140
Income taxes payable		(332)		(1,634)
Accrued expenses		(2,723)		3,090
Deferred compensation		(797)		(1,527)
Deferred revenue		(5,156)		322
Other assets and liabilities		(442)		(3,281)
Net cash provided by operating activities		3,660		3,583

Cash flows from investing activities:

Purchase of short term investments		(15,812)		(25,234)
Maturities of short term investments		14,500		7,565
Additions to property and equipment		(272)		(755)
Additions to intangible assets		(7)		(16)
Sale of equity-method investment		18,874		—
Net cash provided by (used in) investing activities		17,283		(18,440)

Cash flows from financing activities:
Tax payments for restricted stock issuances		(635)		(2,139)
Net cash used in financing activities		(635)		(2,139)

Effect of exchange rate changes on cash		(45)		(558)

Net increase (decrease) in cash		20,263		(17,554)
Cash, cash equivalents, and restricted cash, beginning of period		64,228		89,241
Cash, cash equivalents, and restricted cash, end of period (1.)	$	84,491	$	71,687

(1.)	End of period cash, cash equivalents, and restricted cash includes $0.8 million and $0.9 million of restricted cash at March 31, 2022 and March 31, 2021, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

~~VASCO Data Security International, Inc.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

OneSpan Inc.

~~(in thousands)~~

~~(unaudited)~~

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

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Table of Contents~~

~~VASCO Data Security International, Inc.~~

Notes to Condensed Consolidated Financial Statements

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

~~(Unaudited)~~

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

Note 1 – Description of the Company and Basis of Presentation

Description of the Company

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

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of OneSpan and its subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All intercompany accounts and transactions have been eliminated. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ended December 31, 2022, particularly in light of the novel coronavirus (COVID-19) pandemic and its effects on domestic and global economies.

We continue to actively address the effects of the COVID-19 pandemic and its impact globally. During the three months ended March 31, 2022, we experienced lengthened sales cycles and supply chain constraints in connection with the COVID-19 pandemic. In prior periods, we also experienced reduced demand for certain of our hardware products and software solutions. While we hope that the negative consequences on our business associated with the COVID-19 pandemic will subside, we cannot predict the impact with certainty.

Revision of Previously Issued Financial Statements

We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q related to immaterial errors. The errors relate to certain costs directly related to the production and distribution of hardware products. The costs were not properly categorized in prior periods, which led to an understatement of product and license cost of goods sold and an overstatement of sales and marketing expense. There was no impact to previously reported revenue or net income.

We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our

Table of Contents

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.~~

In2021, filed with the ~~opinion of management,~~SEC on February 22, 2022 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 as~~Condensed Consolidated Balance Sheet in the ~~audited consolidated financial statements,~~amounts of $0.8 million and ~~include all adjustments, consisting only~~$0.8 million at March 31, 2022 and December 31, 2021, respectively.

Sale of ~~normal recurring adjustments, necessary~~Equity Method Investment

On January 31, 2022, we sold our equity interest in Promon AS (Promon) for $18.9 million, and recorded the ~~fair presentation~~gain on sale of $14.8 million in other income (expense) on the Condensed Consolidated Statement of Operations during the three months ended March 31, 2022. Promon is a technology company headquartered in Norway that specializes in mobile app security, whose solutions focus largely on Runtime Application Self-Protection (RASP).

Prior to January 31, 2022, we held a 17% interest in Promon and applied the equity method of accounting to our investment in Promon because we exercised significant influence, but not controlling interest, in the investee. Under the equity method of accounting, the Company’s proportionate share of the ~~results~~net earnings (losses) of the interim periods presented. All significant intercompany accounts and transactions have been eliminated. The operating results for the interim periods presented are not necessarily indicative of the results expected for a full year.

~~Revision of Previously Issued Financial Statements~~

~~Cost of goods sold, gross profit and operating expenses for the three and nine months ended September 30, 2016 reflected in the statements of operations have been revised from amounts previously~~Promon is 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 three 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.~~

net in our condensed consolidated Statements of Operations. The ~~financial position~~impact of the proportionate share of net earnings (losses) were immaterial for the three months ended March 31, 2022 and ~~results~~2021 as were the relative size of ~~operations of our~~Promon’s assets and operations in ~~Canada, Singapore~~relation to the Company’s.

We intend to continue to purchase and ~~Switzerland~~integrate Promon’s RASP technology into our customer software solutions.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are ~~measured in U.S. Dollars. For these subsidiaries, gains and losses~~issued by the FASB or other standard setting bodies that ~~result from foreign currency transactions~~ are ~~included in~~adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the issued standards that are not yet effective will not have a material impact on our consolidated financial statements ~~of operations in other income (expense), net.~~upon adoption.

~~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~~

Note 3 – Revenue

We recognize revenue in accordance with ~~Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985‑605,~~ ~~Software – Revenue Recognition~~ASC 606 “Revenue from Contracts with Customers” (“Topic 606”), ~~ASC 985‑605‑25,~~ ~~Revenue Recognition – Multiple Element Arrangements,~~ ~~and Staff Accounting Bulletin 104.~~as described below.

~~Product and License Revenue includes hardware~~Disaggregation of Revenues

The following tables present our revenues disaggregated by major products and ~~software licenses. Services~~services, geographical region 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 amounttiming 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.recognition.

~~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 recorded at cost and evaluated 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

Revenue by major products (in thousands)

~~Research~~


	Three months ended March 31,
	2022		2021

Hardware products	$	15,352	$	17,668
Software licenses		14,133		10,777
Subscription		10,117		8,405
Professional services		900		1,402
Maintenance, support, and other		11,945		12,523
Total Revenue	$	52,447	$	50,775

Revenue by location of customer for the three months ended March 31, 2022 and ~~Development Costs~~2021 (in thousands)

~~Costs for research~~


	EMEA			Americas			APAC			Total
Total Revenue:
2022	$	24,876		$	17,249		$	10,322		$	52,447
2021	$	26,989		$	16,528		$	7,258		$	50,775

Percent of Total:
2022		47	%		33	%		20	%		100	%
2021		53	%		33	%		14	%		100	%

Timing of revenue recognition (in thousands)


	Three Months ended March 31,
	2022		2021
Products and Licenses transferred at a point in time	$	29,485	$	28,445
Services transferred over time		22,962		22,330
Total Revenue	$	52,447	$	50,775

Contract balances (in thousands)

The following table provides information about receivables, contract assets and ~~development, principally the design and development of hardware,~~contract liabilities from contracts with customers.


		March 31,		December 31,
in thousands	2022		2021
Receivables, inclusive of trade and unbilled	$	35,704	$	56,612
Contract Assets (current and non-current)	$	5,728	$	4,889
Contract Liabilities (Deferred Revenue current and non-current)	$	58,314	$	63,742

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

As a practical expedient, we do not adjust the promised amount of ~~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~~consideration for the ~~establishment of technological feasibility, determined based upon the creation~~effects of a ~~working model, are expensed as incurred. Our software capitalization policy defines technological feasibility as~~significant financing component when we expect, at contract inception, that the period between our transfer of a ~~functioning beta test prototype with confirmed manufacturability (a working model), within~~promised product or service to 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 bycustomer and when the ~~greater of (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue~~customer pays for that product or ~~(b) the straight-line method over the remaining estimated economic life~~service will be one year or less. We do not typically include extended payment terms in our contracts with customers.

Table of ~~the product, generally two to five years, including the period being reported on. No software development costs were capitalized~~Contents

Revenue recognized during the three ~~and nine~~ months ended ~~September 30, 2017.~~

~~Income Taxes~~

~~We account for income taxes under~~March 31, 2022 included $18.9 million that was included on the ~~asset and liability method.~~December 31, 2021 balance sheet in contract liabilities. 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 incomerevenue increased in the ~~years in which those temporary differences are~~same period due to timing of annual renewals.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be ~~recovered or settled. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in income~~recognized in the ~~period~~future related to performance obligations that ~~includes~~are unsatisfied (or partially unsatisfied) at 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.

~~Table of Contents~~

Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination. We assess the impairment of goodwill and intangible assets with indefinite lives each November 30 or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performanceend of the reporting ~~units against~~period.


in thousands	2022		2023		2024		Beyond 2024		Total
Future revenue related to current unsatisfied performance obligations	$	26,140	$	18,421	$	9,547	$	5,581	$	59,689

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

Costs of obtaining a contract

The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. The Company capitalizes commissions associated with certain new contracts and amortizes the ~~planned results used in~~costs over a period of benefit based on the ~~last quantitative goodwill impairment test. Additionally, each reporting unit’s fair value is assessed in light~~transfer of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity- and reporting unit specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than notgoods or services that ~~the fair value of a reporting unit exceeds the carrying value involves significant judgments and estimates. If it is~~we have determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement)up to seven years. ~~Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.~~ The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under the two-step assessment is determined using a combination of both income and market-based variation approaches. The inputs and assumptions to valuation methods used to estimate the fair value of reporting units involves significant judgments.

During 2017, we determined certain events and circumstances resulted in a change in the composition of our reporting units. Previously, we considered the Company to be two reporting units, the operations of eSignLive and the remainder of our operations. Due to the continued integration of eSignLive operations and changes in management, we now consider the Company to be a single reporting unit. We have not recorded any goodwill impairment charges for the three or nine-month periods ended September 30, 2017. The change in the composition of our reporting units will be reflected in our annual impairment test performed as of November 30.

~~Stock-Based Compensation~~

~~We have stock-based employee compensation plans, described in Note 6. ASC 718‑10,~~ ~~Stock Compensation~~ requires us to estimate the fair value of restricted stock granted to employees, directors and others and to record compensation expense equal to the estimated fair value. Compensation expense is recorded on a straight-line basis over the vesting period. Forfeitures are recorded as incurred.

~~Retirement Benefits~~

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

~~Warranty~~

~~Warranties~~customer contracts, our technology and other factors, including customer attrition. Commissions are ~~provided~~earned upon invoicing to the customer. For contracts with multiple year payment terms, as the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. Commissions and amortization expense are included in Sales and Marketing expenses on the ~~sale~~condensed consolidated statements of ~~certain~~operations.

Applying the practical expedient, the Company recognizes the incremental costs of ~~our products~~obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less. These costs are included in Sales and ~~an accrual for estimated future claims is recorded at~~Marketing expense in the ~~time revenue is recognized. We estimate~~condensed consolidated statements of operations.

The following tables provide information related to the ~~cost based on past claims experience, sales history~~capitalized costs and ~~other considerations. We regularly assess~~amortization recognized in the ~~adequacy of our estimates~~current 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.prior period:



in thousands		March 31, 2022		December 31, 2021
Capitalized costs to obtain contracts, current	$	2,246	$	2,134
Capitalized costs to obtain contracts, non-current	$	8,781	$	8,675


		Three months ended March 31,
in thousands		2022		2021
Amortization of capitalized costs to obtain contracts	$	541	$	310
Impairments of capitalized costs to obtain contracts	$	-	$	-

Table of Contents

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

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

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

~~In December 2016, 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.

~~Table of Contents~~

~~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 is effective beginning January 1, 2020 and will be applied on a prospective basis. Early adoption is permitted. We are currently evaluating the impact of this updated guidance.

~~In March 2017, the FASB issued ASU No. 2017‑07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~. The updated accounting guidance requires changes 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 costs component of net benefit cost is eligible for capitalization. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on the Company’s financial statements.

Note 24 – Inventories, net

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

Inventories, net are comprised of the following:

September 30,

December 31,

2017

2016
Component parts

$
5,278

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

12,117

9,060
Total

$
17,395

$
17,420


	March 31,		December 31,
	2022		2021

	(in thousands)
Component parts	$	4,263	$	3,841
Work-in-process and finished goods		6,125		6,504
Total	$	10,388	$	10,345

Note 35 – Goodwill

Goodwill activity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 consisted of the following:

Net balance at December 31, 2016

$
54,409
Additions

—
Net foreign currency translation

1,975
Net balance at September 30, 2017

$
56,384


in thousands
Net balance at December 31, 2021	$	96,174
Net foreign currency translation		(1,588)
Net balance at March 31, 2022	$	94,586

~~Table of Contents~~

~~Certain portions~~NaN impairment of goodwill ~~are denominated in local currencies and are subject to currency fluctuations.~~was recorded during the three months ended March 31, 2022 or March 31, 2021.

Note 46 – Intangible Assets

Intangible asset activity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 is detailed in the following table.

Capitalized

Customer



Total Intangible


Technology

Relationships

Other

Assets
Net balance at December 31, 2016

$
11,392

$
24,774

$
10,383

$
46,549
Additions-Other

—

—

65

65
Net foreign currency translation

16

13

44

73
Amortization expense

(3,346)

(1,641)

(1,616)

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

$
8,062

$
23,146

$
8,876

$
40,084

September 30, 2017 balance at cost

$
37,256

$
27,825

$
13,371

$
78,452
Accumulated amortization

(29,194)

(4,679)

(4,495)

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

$
8,062

$
23,146

$
8,876

$
40,084



in thousands	Acquired Technology		Customer Relationships		Other		Total Intangible Assets
Net balance at December 31, 2021	$	753	$	19,161	$	1,356	$	21,270
Additions		3		—		6		9
Net foreign currency translation		(11)		(155)		(3)		(169)
Amortization expense		(376)		(988)		(18)		(1,382)
Net balance at March 31, 2022	$	369	$	18,018	$	1,341	$	19,728

March 31, 2022 balance at cost	$	42,903	$	39,455	$	13,542	$	95,900
Accumulated amortization		(42,534)		(21,437)		(12,201)		(76,172)
Net balance at March 31, 2022	$	369	$	18,018	$	1,341	$	19,728

Certain intangible assets are denominated in ~~local~~functional currencies besides the U.S. dollar and are subject to currency fluctuations. NaN impairment of intangible assets was recorded during the three months ended March 31, 2022 or March 31, 2021.

Table of Contents

achieved. The ~~market~~fair value of ~~the 140 unissued shares subject to performance criteria of $2,046~~these awards was $0.8 million at the ~~date~~dates of grant isand the awards are being amortized over the vesting period of three years. The Company currently believes that all of these shares are expected to be earned.

~~Table~~During the period ended March 31, 2022, other long-term incentive plan compensation accruals were reversed for certain employees who were severed from the Company. The reversal of ~~Contents~~

the accrued long-term incentive plan compensation for the severed employees offset the expense for the period. The following table details long-term compensation plan and stock-based compensation expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 and ~~2016:~~

Three months ended

Nine months ended

September 30,

September 30,


2017

2016

2017

2016

Restricted stock

$
825

$
1,123

$
1,901

$
4,066

Long-term compensation plan

442

456

1,298

1,391

Total Compensation

$
1,267

$
1,579

$
3,199

$
5,457

2021:


	March 31,
	2022		2021

in thousands	(in thousands)
Stock-based compensation	$	1,360	$	1,342
Other long-term incentive plan compensation		(136)		200
Total compensation	$	1,224	$	1,542

Note 713 – ~~Common Stock and~~ Earnings per Share

~~In connection with the 2009 Equity Incentive Plan, during the nine months ended September 30, 2017, we issued 131 total shares of restricted common stock, 120 shares for awards granted~~ (share counts in ~~2017 and 11 performance shares related to awards provisioned in prior years.~~thousands)

Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of common stock equivalents to the extent they are not anti-dilutive. For the three months ended March 31, 2022, the anti-dilutive effect of our securities is immaterial. Because the Company is in a net loss position for the three months ended March 31, 2021, diluted net loss per share for this period excludes the effects of common stock equivalents, which are anti-dilutive.

The details of the earnings per share calculations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 and ~~2016 follow:~~

Three months ended

Nine months ended

September 30,

September 30,



2017

2016

2017

2016

Net income

$
2,755

$
478

$
3,438

$
5,502

Weighted average common shares outstanding:









Basic

39,811

39,736

39,792

39,709

Incremental shares with dilutive effect:









Restricted stock awards

10

98

10

77

Diluted

39,821

39,834

39,802

39,786

Basic income per share

$
0.07

$
0.01

$
0.09

$
0.14

Diluted income per share

$
0.07

$
0.01

$
0.09

$
0.14

2021 are as follows:


	March 31,
in thousands, except per share data	2022		2021
Net loss	$	5,214	$	(9,151)
Weighted average common shares outstanding:
Basic		39,577		39,996
Incremental shares with dilutive effect:
Restricted stock awards		110		—
Diluted		39,687		39,996

Net loss per share:
Basic	$	0.13	$	(0.23)
Diluted	$	0.13	$	(0.23)

Note 814 – Legal Proceedings and Contingencies

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

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

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

~~Table of Contents~~

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

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

~~On July 28, 2015 a putative class action complaint was filed~~financial results in any particular interim reporting period. Among the ~~United States District Court for~~factors that we consider in this assessment are the ~~Northern District~~nature of ~~Illinois, captioned Linda J. Rossbach v. Vasco Data Security International, Inc.~~existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), ~~et al., case number 1:15‑cv‑06605, naming VASCO and certain of its current and former executive officers as defendants and alleging violations under~~ the Securities Exchange Act of 1934, as amended. The suit was purportedly filed on behalf of a putative class of investors who purchased VASCO securities between April 28, 2015 and July 28, 2015, and seeks to recover damages allegedly caused by the defendants’ alleged violationsprogress of the ~~federal securities laws~~case, existing law and ~~to pursue remedies under Sections 10(b)~~precedent, the opinions or views of legal counsel and 20(a) of the Securities Exchange Act of 1934 and Rule 10b‑5 promulgated thereunder. The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys’ fees. Pursuant to a September 1, 2015 scheduling order entered by the court, the lead plaintiff, once appointed, will have sixty days to file an amended complaint or notify the defendants that the lead plaintiff intends to rely on the current complaint. On January 30, 2017, the appointed lead plaintiff filed an amended complaintother advisers, our experience 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 defendantssimilar cases and the ~~Company as a nominal defendant. The plaintiff in~~experience of other companies, the ~~Herrera case voluntarily dismissed~~facts available to us at the ~~action on July 12, 2017. Two additional complaints, captioned Beth Seltzer v. Hunt, et al., case number 2015‑ch‑15541,~~time of assessment 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 failinghow we intend 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~~respond 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.

Table of Contents

~~defendants~~the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.

Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a process in which we seek to estimate the reasonably possible loss or range of loss, and ~~the Company as~~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 ~~nominal defendant. This complaint largely follows the allegations~~reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.

We include various types of indemnification clauses in ~~the Bunk case. The D’Angelo case has been consolidated with the Hooper case and remains subject~~our customer agreements. These indemnifications may include, but are not limited to, ~~stay.~~

~~In February 2017, we learned that one of our integrated reseller customers, and certain of its end customers, were named as defendants in a patent~~ infringement ~~lawsuit in Japan~~claims related to our ~~CRONTO technology.~~intellectual property, direct damages and consequential damages. The type and amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have ~~indemnification obligations~~0 liabilities recorded for these clauses as of March 31, 2022.

From time to time, we have been involved in ~~favor~~litigation and claims incidental to the conduct of our ~~customer and are working~~business, such as compensation claims from current or former employees in Europe or commercial disputes with ~~them~~vendors. We expect that to ~~defend such suit. We believe there are strong grounds to argue that the plaintiff’s patent is invalid and~~continue. 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, financial condition or results of operations.

Note 15 – Restructuring Plan

In December 2021, the Board approved a restructuring plan (“Plan”) designed to advance the Company’s model, streamline its business, and ~~results~~enhance its capital resources. The first phase began and was substantially completed during the three months ended March 31, 2022.

As part of ~~operations.~~

~~On March 14, 2017, a complaint was filed~~the first phase of the Plan, we reduced headcount by eliminating positions in certain areas of the Company. The Company incurred severance and related benefits costs, which are recorded 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 meritsales 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 statementsmarketing, research 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~~development, and general and administrative ~~expenses.~~

~~Concurrent with~~expense financial statement line items in 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~~condensed consolidated income statement for the rate of 2% per annum. Beginning in August 2017, Able may take advances against the line of credit for a period of eighteen months followed by twelve quarterly repayments. As of September 30, 2017, no amounts have been advanced. In addition, we entered into a transition services agreement with Able whereby we agreed to provide certain administrative services for a period of three months ~~and Able agreed to provide office space and consulting services for an agreed upon periodic fee as long as the services are provided.~~

~~Note 10 – Subsequent Event~~

Our office facilities are leased under operating lease agreements. Subsequent to September 30, 2017, we entered into an operating lease agreement for office facilities to replace an existing facility. Future minimum rental payments under the operating lease areended March 31, 2022, as follows:

Year

Amount
2018

$
-
2019

462
2020

513
2021

523
2022

534
Thereafter

3,484
Total

$
5,516


		Three months ended
		March 31,
		2022
in thousands
Operating costs
	Sales and marketing	$	895
	Research and development		1,652
	General and administrative		112
	Total restructuring related expenses	$	2,659

There are $1.6 million of restructuring related expenses recorded in Accrued Wages and Payroll Expenses on the Company’s condensed consolidated Balance Sheet at March 31, 2022.

The Company expects to finalize additional details regarding future phases of the multi-year strategic plan during the three months ended June 30, 2022.

Table of Contents

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

Outlook and Financial Results

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

We believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on the global economy and our business results. See Part 1 – Item 1A - Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2021 for additional information regarding the potential impact of COVID-19 on the Company.

Table of Contents

Economic Conditions:

Our revenue may vary significantly with changes in the economic conditions in the countries in which we currently sell products. With our current concentration of revenue in Europe and specifically in the banking and finance vertical market, significant changes in the economic outlook for the European ~~Banking~~banking market may have a significant effect on our revenue.

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

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

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

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

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

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

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

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

cloud.

We believe that the risks and consequences of potential incidents in each of the above areas are different.

In the case of the information systems we use to help us run our business, we believe that an incident could disrupt our ability to take orders or deliver product to our customers, but such a delay in these activities would not have a 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.~~

~~Table of Contents~~

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 three months of 2022 that had a significant impact on our business, it is possible that we could experience an incident in 2022 or future years, which could result in unanticipated costs.

Currency Fluctuation

During the three months ended March 31, 2022, approximately 88% 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

Table of Contents

our revenue earned during the three months ended March 31, 2022 was denominated in U.S. Dollars. During the three months ended March 31, 2022, we estimate that approximately 57% of our revenue was denominated in U.S. Dollars.

In addition, during the three months ended March 31, 2022, approximately 68% of our operating expenses were incurred outside of the United States. As a result, changes in currency exchange rates, especially the Euro exchange rate and the Canadian Dollar exchange rate, can have a significant impact on revenue and expenses.

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

The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the period. Translation adjustments arising from differences in exchange rates generated other comprehensive loss of $2.0 million for the three months ended March 31, 2022. Translation adjustments arising from differences in exchange rates generated other comprehensive loss of $0.9 million for the three months ended March 31, 2021. These amounts are included as a separate component of stockholders’ equity. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar.

Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other income (expense), net. Foreign exchange transaction losses aggregated $0.4 million for the three months ended March 31, 2022. Foreign exchange transaction losses aggregated $0.7 million for the three months ended March 31, 2021.

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.

Table of Contents

Gross Profit

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

Operating Expenses

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

Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 55% and 65% of our operating expenses, respectively. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive.

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates in the first three months of 2022 compared to the same period in 2021 resulted in a decrease in operating expenses of approximately $1.1 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 months ended March 31, 2022 included $1.4 million and less than $0.1 million, respectively of expenses related to stock-based and long-term incentive plan costs compared to $1.3 million and $0.2 million of stock-based and long-term incentive plan cost for the three months ended March 31, 2021, respectively. Stock-based compensation expense during the three months ended March 31, 2022 was favorably impacted by the forfeiture of unvested awards by certain severed sales management and executive management during the periods, offset by new grants.

●

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, cash equivalents and short term investments. Our cash equivalents and short term investments are invested in short-term instruments at current market rates.

Table of Contents

Other Income (Expense), Net

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

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 2022, earnings flowing to the U.S. company are expected to be taxed at a rate of ~~35%~~21% to ~~40%~~25%, while earnings flowing to the Swiss company are expected to be taxed at a rate ranging from ~~10%~~11% to ~~12%~~15%, plus Swiss federal withholding tax of an additional 5%. ~~Our~~A Canadian and UK subsidiary currently ~~sells~~sell to and ~~services directly to~~service global ~~customers.~~customers directly. In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products.

~~With~~

As the majority of our revenues ~~being~~are generated outside of the U.S., our consolidated effective tax rate is strongly influenced by the effective tax rate of our foreign operations. Changes in the effective rate related to foreign operations reflect changes in the geographic mix of ~~where the~~ earnings ~~are realized~~ and the tax rates in each of the countries in which it is earned. The statutory tax ~~rates~~rate for the primary foreign tax jurisdictions ~~range~~ranges from 8%11% to ~~34%~~35%.

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

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

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

the amount of revenues that the service provider subsidiaries generate.

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

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

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.

2224

Table of Contents

Management assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of negative evidence such as 3-year cumulative losses are considered.

~~Comparison~~

Results of ~~Results for~~Operations

Revenue

Revenue by Product: We generate revenue from the ~~Three~~sale of our hardware products, software licenses, subscriptions, professional services, and ~~Nine Months Ended September 30, 2017~~maintenance and ~~2016~~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.

~~Currency Fluctuations:~~ In


	Three months ended March 31,
	2022		2021

Hardware products	$	15,352	$	17,668
Software licenses		14,133		10,777
Subscription		10,117		8,405
Professional services		900		1,402
Maintenance, support, and other		11,945		12,523
Total Revenue	$	52,447	$	50,775

Total revenue increased $1.7 million or 3%, during the ~~third quarter~~three months ended March 31, 2022 compared to the three months ended March 31, 2021, driven primarily by a $6.3 million or 22% increase in recurring revenue, partially offset by a $2.3 million or 13% decrease in hardware revenue and ~~first nine months of 2017, approximately 76% and 77%, respectively,~~a $1.8 million or 65% decrease in perpetual software license revenue. Recurring revenue is the portion of our revenue subject to future renewal and is comprised of subscription, term-based software licenses, and maintenance, support and other revenue.

Product and license revenue increased by $1.0 million or 4% during the three months ended March 31, 2022 compared to the three months ended March 31, 2021, driven by higher software license sales of $3.4 million, partially offset by lower hardware revenue of $2.3 million or 13%. Lower hardware revenue was ~~generated outside~~partially driven by shipping delays related to disruptions in global transportation and supply chains.

Services and other revenue increased by $0.6 million, or 3% during the ~~United States. While~~three months ended March 31, 2022 compared to the ~~majority~~three months ended March 31, 2021, which was primarily driven by a $1.7 million or 20% increase in subscription revenue, partially offset by reductions in professional services and maintenance, support, and other revenue of $0.5 million and $0.6 million, respectively.

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 revenues are generated outside of the United States, the majority of our revenue in the third quarter and first nine months of 2017 was denominated in U.S. Dollars. We estimate that 67% and 65% of our revenues for the third quarter and first nine months of 2017 were denominated in U.S. Dollars. In addition, in the third quarter and first nine months of 2017, approximately 81% and 76%, respectively, of our operating expenses were incurred outside of the United States.business. As a result ~~changes~~of the volatility in ~~currency exchange rates, especially~~our business, we believe that the ~~Euro to U.S. Dollar exchange rate and~~overall strength of our business is best evaluated over a longer term where 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~~transactions in any given period is not as significant as 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.quarter-over-quarter comparison.

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 compared to the same periods in 2016. We estimate 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 of our foreign subsidiaries, with the exception of our subsidiaries in Canada, Switzerland and Singapore, are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the period. Translation adjustments arising from differences in exchange rates generated other comprehensive 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.

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

~~Table of Contents~~

~~Revenue~~

Revenue by Geographic Regions:We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes sales in North, Central, and

Table of Contents

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

~~Three months ended September 30:~~


	Three months ended March 31,
	2022	2021	$ Change	% Change

	(in thousands)
Revenue
EMEA	$ 24,876	$ 26,989	($ 2,113)	(8)%
Americas	17,249	16,528	721	4%
APAC	10,322	7,258	3,064	42%
Total revenue	$ 52,447	$ 50,775	$ 1,672	3%

% of Total Revenue
EMEA	47%	53%
Americas	33%	33%
APAC	20%	14%

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 March 31, 2022 was ~~$22,768, approximately equal to the third quarter of 2016. For the first nine months of 2017, revenue generated in EMEA was $62,868,~~$2.1 million, or 7%8% lower than the ~~first nine~~three months ~~of 2016. The decrease in revenues for the first nine months of 2017 was~~ended March 31, 2021, driven primarily ~~driven~~ by ~~a decline in the~~ lower ~~margin segment of our~~ hardware ~~business, partially offset by an increase in software products.~~sales.

Revenue generated in the Americas ~~for~~during the ~~third quarter of 2017~~three months ended March 31, 2022 was ~~$14,419,~~$0.7 million, or ~~78%,~~4% higher than the ~~third quarter of 2016. For the first nine~~three months ~~of 2017,~~ended March 31, 2021, driven primarily by increases in software license revenue ~~generated in the Americas was $37,880, or 56% 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.~~subscription revenue

Revenue generated in the Asia Pacific region during the ~~third quarter of 2017~~three months ended March 31, 2022 was ~~$13,939,~~$3.1 million, or ~~9%,~~42% higher than the ~~third quarter~~three months ended March 31, 2021, driven by higher revenue from software licenses and subscription.

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


	Three months ended March 31,
	2022	2021	$	% Change

	(in thousands)
Cost of goods sold
Product and license	$ 9,079	$ 10,752	($ 1,673)	(16)%
Services and other	6,690	5,781	909	16%
Total cost of goods sold	$ 15,769	$ 16,533	($ 764)	(5)%

Gross profit	$ 36,678	$ 34,242	2,436	7%

Gross margin
Product and license	69%	62%
Services and other	71%	74%
Total gross margin	70%	67%

The cost of product and license revenue decreased $1.7 million or 16% during the ~~first nine~~three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to a 13% decrease in hardware revenue during the period.

The cost of ~~2017,~~services and other revenue ~~was $38,037,~~increased by $0.9 million, or ~~28% lower than~~16% during the ~~first nine~~three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase in cost of ~~2016. The~~services and other revenue ~~decline for first nine months~~is reflective of ~~2017 was attributed to lower hardware revenues.~~higher subscription revenue, which has increased cloud-based infrastructure costs.

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.

2426

Table of Contents

Gross ~~Profit and Operating Expenses~~

~~The following table sets forth, for~~profit increased $2.4 million, or 7% during the ~~periods indicated, certain consolidated financial data as a percentage of revenue~~three months ended March 31, 2022 compared to the three months ended March 31, 2021. Gross profit margin was 70% 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~~March 31, 2022, compared to 67% for the ~~quarter~~three months 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.March 31, 2021. The increase in ~~gross~~ profit ~~as a percentage of revenue~~margins for the ~~third quarter of 2017 compared to 2016 primarily reflects an increase in software solutions as a percentage of total revenues.~~

~~Gross profit for the nine~~three months ended ~~September 30, 2017 was $98,606,~~March 31, 2022 reflects a ~~decrease of $99, from the comparable period~~shift in ~~2016. Gross profit as a percentage of~~product mix to increased term-based software and subscription revenue ~~(gross profit margin) was 71% for the nine months ended September 30, 2017~~ and 68% for the nine months ended September 30, 2016. The increase in gross profit as a percentage of revenue for the first nine months of 2017 compared to 2016 primarily reflects an increase in software solutions as a percentage of total revenues.lower hardware revenue.

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

~~Table of Contents~~

For the nine months ended September 30, 2017, as the U.S. Dollar strengthened against the Euro compared to the same periods of 2016, revenue from sales in Euros, as measured in U. S. Dollars, decreased, without a corresponding change in the cost of goods sold. The impact of changes in currency rates are estimated to have decreased revenue by approximately ~~$195~~$1.6 million for the ~~first nine~~three months ~~of 2017.~~ended March 31, 2022. Had currency rates in ~~2017~~2021 been equal to rates in ~~the same period in 2016,~~2021, the gross profit margin would have been approximately ~~0.04~~3 percentage ~~points~~point higher ~~for the first nine months of 2017.~~

~~Operating Expenses~~

Our operating 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 30, 2017 and a decrease of $576 for the nine months ended September 30, 2017, compared to the same periods in 2016.~~March 31, 2022.

~~The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans.~~

Operating expenses for the three and nine months ended September 30, 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.Expenses


	Three months ended March 31,
	2022		2021		$	% Change

	(in thousands)
Operating costs
Sales and marketing	$	15,895	$	17,168	($ 1,273)	(7)%
Research and development		13,749		12,244	1,505	12%
General and administrative		14,895		12,551	2,344	19%
Amortization of intangible assets		1,382		1,573	(191)	(12)%
Total operating costs	$	45,921	$	43,536	$ 2,385	5%

Sales and Marketing Expenses

Sales and marketing expenses for the ~~quarter~~three months ended ~~September 30, 2017~~March 31, 2022 were ~~$13,956, an increase~~$15.9 million, a decrease of ~~$503,~~$1.3 million or 4%7%, from the ~~third quarter of 2016. Sales and marketing expenses~~three months ended March 31, 2021. The decrease in expense for the ~~nine~~three months ended ~~September 30, 2017, were $42,997, an increase of $1,015, or 2%, from~~March 31, 2022 compared to the same period ~~of 2016.~~in 2021 was driven by lower headcount in conjunction with our restructuring plan, partially offset by severance and related benefits expense recognized during the three months ended March 31, 2022.

Average full-time sales, marketing, support, and operating employee headcount for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 was ~~312 and 307, respectively,~~361, compared to ~~299 and 285~~385 for the three ~~and nine~~ months ended ~~September 30, 2016, respectively. Headcount~~March 31, 2021. Average headcount was ~~4% higher~~6% lower for the ~~third quarter of 2017 compared to the third quarter of 2016, and 8% higher for the nine~~three months ended ~~September 30, 2017 when~~March 31, 2022, compared to the same period in ~~2016.~~2021.

Research and Development Expenses

Research and development expenses for the ~~quarter~~three months ended ~~September 30, 2017,~~March 31, 2022, were ~~$5,493, a decrease~~$13.8 million, an increase of ~~$314,~~$1.5 million, or 5%12%, from the ~~third quarter of 2016. Research and development costs for the nine~~three months ended ~~September 30, 2017, were $17,669, an~~March 31, 2021. The increase was driven primarily by $1.7 million of ~~$52, or 3%, from the same period~~severance and related expenses incurred as part of ~~2016.~~our restructuring plan.

Average full-time research and development employee headcount for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 was ~~205 and 218, respectively,~~367, compared to ~~232 and 224~~349 for the ~~third quarter and nine~~three months ended ~~September 30, 2016, respectively. Headcount~~March 31, 2021. Average headcount was ~~12% lower and 3% lower~~approximately 5% higher for the ~~third quarter and first nine~~three months ~~of 2017, respectively,~~ended March 31, 2022, 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.2021.

~~Table of Contents~~

General and Administrative Expenses

General and administrative expenses for the ~~quarter~~three months ended ~~September 30, 2017,~~March 31, 2022, were ~~$9,882,~~$14.9 million, an increase of ~~$2,200,~~$2.3 million or ~~29%~~19%, from the ~~third quarter of 2016. General and administrative expenses for the nine~~three months ended ~~September 30, 2017, were $26,323, an increase of $1,252, or 5%, compared to the same period of 2016.~~March 31, 2021. The increase in general and administrative expenses infor the ~~third quarter primarily reflect increased headcount, professional~~three months ended March 31, 2022 was driven by higher consulting fees related to our strategic action plan and ~~facilities expense. Professional fees primarily relate to internal controls, legal~~ higher bad debt expense, partially offset by the forfeiture of unvested stock based compensation

Table of Contents

and ~~internal systems.~~long-term incentive plan benefits by employees who left the company, as well as outside service costs for our proxy contest incurred during the three months ended March 31, 2021.

Average full-time general and administrative employee headcount for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 was ~~93 and 90, respectively,~~138, compared to ~~84 and 82~~134 for the ~~same periods in 2016. Headcount~~three months ended March 31, 2021. Average headcount was approximately ~~11% higher, and 10%~~3% higher for the ~~third quarter and first nine~~three months ~~of 2017, respectively,~~ended March 31, 2022, when compared to the same ~~periods~~period in ~~2016.~~2021.

Amortization of Intangible Assets

Amortization of intangible assets for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 was ~~$2,203 and $6,603, respectively, an increase of $7 and a decrease of $19 for the comparable periods in 2016.~~

~~Interest Income~~

~~Consolidated net interest income was $386 and $1,016~~$1.4 million, compared to $1.6 million for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2021. Amortization expense decreased 12%, which was driven by certain assets acquired in the Silanis acquisition becoming fully amortized.

Interest income (expense), net


	Three months ended March 31,
	2022	2021	$ Change	% Change
	(in thousands)
Interest income (expense), net	($ 17)	$ 4	($ 21)	NM

Interest income (expense), net was less than $0.1 million for the three months ended March 31, 2022, as compared to ~~$229 and $504~~less than $0.1 million for the same ~~periods~~period in ~~2016.~~2021. The ~~increase~~fluctuation is reflective of changing interest rates in ~~interest~~our cash accounts held in various countries across the globe.

Other income, ~~for 2017 compared to the same periods in 2016 reflects an increase in the average interest rate earned on invested balances and an increase in the average invested balance.~~net


	Three months ended March 31,
	2022	2021	$ Change	% Change

	(in thousands)
Other income (expense), net	$ 15,647	($ 362)	$ 16,009	NM

~~Other Income (Expense), Net~~

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

Other income (expense), net for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 was ~~($185) and $402, respectively,~~$15.6 million, compared to ~~$118 and $731~~$(0.4) million for the comparable ~~periods~~period of ~~2016. Other income (expense), net included exchange losses~~2021. The fluctuation was primarily driven by $14.8 million gain on sale of ~~$273 and $320~~our investment in Promon AS.

Provision for ~~the three and nine months ended September 30, 2017 compared to exchange losses of $110 and gains of $152 for the same periods in 2016.~~

Income Taxes


	Three months ended March 31,
	2022	2021	$	% Change

	(in thousands)
Provision (benefit) for income taxes	$ 1,173	($ 501)	$ 1,674	NM

~~Income~~The Company recorded income tax expense for the three ~~and nine~~ months ended ~~September 30, 2017 was $2,558 and $2,994, respectively, an increase~~March 31, 2022 of ~~$1,777 and a decrease~~$1.2 million, compared to income tax benefit of ~~$152 from the same periods in 2016. The increase in tax expense in 2017 from 2016~~$0.5 million for the ~~third quarter is primarily due to higher pretax income in the third quarter of 2017.~~three months ended March 31, 2021. The ~~decrease in tax~~ expense ~~in 2017 from 2016~~recorded for the ~~nine~~three months isended March 31, 2022 was primarily attributable to ~~lower pretax income, partially offset by discrete items related to changes in estimates upon completion of tax filings and a measurement period adjustment in 2016.~~

~~Our estimated annual 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 dependgain recognized on the ~~mix~~sale of ~~earnings~~our investment in ~~various jurisdictions.~~Promon.

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

2728

Table of Contents

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

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

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

Liquidity and Capital Resources

At ~~September 30, 2017,~~March 31, 2022, we had ~~net~~ cash balances (total cash and cash ~~equivalents and restricted cash less bank borrowings)~~equivalents) of ~~$49,261~~$83.6 million and short-term investments of ~~$109,463. At December 31, 2016, we had net cash balances~~$36.3 million. Short term investments consist of ~~$49,345~~U.S. treasury notes and ~~short-term investments of $94,856. We had no outstanding debt or restricted cash at September 30, 2017, or December 31, 2016.~~

~~Short-term investments at September 30, 2017,~~bills, corporate notes and ~~December 31, 2016, consisting of~~bonds, and high quality commercial paper with maturities at acquisition of more than three months and less than ~~nine months, were held by our U.S.~~twelve months.

At December 31, 2021, we had cash balances of $63.4 million and ~~Swiss entities~~short-term investments of $35.1 million.

We are in lease agreements that require letters of credit to secure the obligations. The restricted cash related to these letters of credit is recorded in other non-current assets on the Condensed Consolidated Balance Sheet in the amounts of $0.8 million and ~~issued by domestic~~$0.8 million at March 31, 2022 and ~~foreign corporations.~~December 31, 2021, respectively.

Our working capital at ~~September 30, 2017~~March 31, 2022 was ~~$159,370, an increase of $20,171 or 15% from $139,199~~$108.3 million compared to $98.0 million at December 31, ~~2016. The increase in the combined balance~~2021.

As of March 31, 2022, we held $70.3 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~~$69.6 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.

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

~~Recently Issued Accounting Pronouncements~~

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


	Three months ended March 31,
	2022	2021
	(in thousands)
Cash provided by (used in):
Operating activities	$ 3,660	$ 3,583
Investing activities	17,283	(18,440)
Financing activities	(635)	(2,139)
Effect of foreign exchange rate changes on cash and cash equivalents	(45)	(558)

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.

For the ~~guidance~~three months ended March 31, 2022, net cash provided by operating activities was $3.7 million, compared to ~~those contracts;~~net cash provided by operating activities of $3.6 million during the three months ended March 31, 2021.

Investing Activities

The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and ~~(iii) any assets recognized from~~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 is effective~~For the three months ended March 31, 2022, net cash provided by investing activities was $17.3 million, compared to net cash used in investing activities of $18.4 million for ~~annual periods beginning after December 15, 2016, and interim periods within such annual periods, using either~~the three months ended March 31, 2021. Cash provided by investing activities during the three months ended March 31, 2022 was primarily driven by the $18.9 million sale of our investment in Promon AS. Cash used in investing activities during the three months ended March 31,

Table of Contents

2021 was driven by the timing of the ~~following transition methods: (i) a full retrospective approach reflecting~~purchases and maturities of our short term investments, as well as property and equipment purchases.

Financing Activities

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

For the ~~standard~~three months ended March 31, 2022, net cash used in ~~each prior reporting~~financing activities was $0.6 million, compared to net cash used in financing activities of $2.1 million for the three months ended March 31, 2021. The decrease is driven by lower tax payments for restricted stock issuances.

Critical Accounting Policy

Our accounting policies are fully described in Note 1 - Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021 and Note 2 – Summary of Significant Accounting Policies to our Interim Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the quarterly period ~~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.~~

~~Table of Contents~~

~~In August 2015, the FASB issued Accounting Standards Update No. 2015‑14,~~ ~~Revenue from Contracts with Customers: Deferral of Effective Date~~ ~~deferring the new~~ended March 31, 2022. We believe our most critical accounting policies include revenue ~~standard one year and allowing adoption as of the original effective date.~~

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

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

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

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

~~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.

~~Table of Contents~~

~~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.taxes.

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

Item 3.3 - Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our market risk during the three ~~and nine~~ months ended ~~September 30, 2017.~~March 31, 2022. 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.~~2021.

Item 4.4 - Controls and Procedures

~~Our management, with the participation~~Management’s Evaluation of ~~our Chief Executive Officer~~Disclosure Controls and ~~Chief Financial Officer, who, respectively, are our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our~~Procedures

The Company maintains 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,~~1934), as amended (the “Exchange Act”)~~) as of the end of the period covered by this Quarterly Report on Form 10‑Q. Disclosure controls and procedures include, without limitation, controls and procedures~~ that are designed to ensure ~~(i) the~~that information required to be disclosed ~~by us~~ in ~~our~~its reports ~~that we file~~filed or ~~submit~~submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange ~~Commission’s~~Commission's rules and forms, and ~~(ii)~~that such 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~~the Company’s management, including ~~our~~its principal executive officer and principal financial ~~officers, or persons performing similar functions,~~officer as appropriate, to allow timely decisions regarding required disclosure.

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

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

Changes in ~~our~~Internal Controls

There have been no changes in the Company’s internal control over financial reporting ~~described below and further in our Annual Report on Form 10‑K for the year ended December 31, 2016, our disclosure controls and procedures were not effective as of September 30, 2017.~~

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

reporting during the quarter ended March 31, 2022. We have not experienced any material impact to our internal controls over financial reporting due to COVID-19. We are continually monitoring and assessing the effects of COVID-19 on our internal controls to minimize the impact to their design and operating effectiveness.

Table of Contents

~~Inherent Limitations on the Effectiveness of Controls~~

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. However, our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

PART II. OTHER INFORMATION

Item 1 - 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 ~~operations~~legal or ~~cash flows.~~

~~On January 10, 2011, we purchased~~other proceedings with certainty, including the legal proceedings which are summarized in “Note 14 – Legal Proceedings and Contingencies” included in our ~~wholly-owned subsidiary, DigiNotar B.V., a private company organized~~Notes to Condensed Consolidated Financial Statements, incorporated herein by reference, and ~~existing~~“Note 18 – Commitments and Contingencies” in The Netherlands from the shareholders (“Sellers”). On September 19, 2011, DigiNotar B.V. filed a bankruptcy petition under Article 4 of the Dutch Bankruptcy Act in the Haarlem District Court, The Netherlands. On September 20, 2011, the court declared DigiNotar B.V. bankrupt and appointed a bankruptcy trustee and a bankruptcy judge to manage all affairs of DigiNotar B.V. through the bankruptcy process. The trustee took over management of DigiNotar B.V.’s business activities and is responsibleour Annual Report on Form 10-K for the ~~administration and liquidation of DigiNotar B.V. In connection with the bankruptcy of DigiNotar B.V., subsequent to September 20, 2011, a number of claims and counter-claims were~~year ended December 31, 2021 filed with the ~~courts~~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 ~~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 of the individuals who served as Directors of DigiNotar, both before and after our acquisition of DigiNotar. T. Kendall Hunt, Jan Valcke, and Clifford K. Bown were the Directors of DigiNotar following its purchase by VASCO. The basis for the potential claim from the trustee appears to be based primarily on the same arguments that VASCO presented in its case against the sellers, which were adjudicated in VASCO’s favor. While we believe that we have strong defenses against the claim, we have also notified our provider of director and officer insurance should a claim be filed and we do not expect the resolution of the potential claim to have a material adverse effect on our business, financial condition or results of operations. VASCO is indemnifying Messrs. Hunt, Valcke, and Bown for this matter.

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

~~Table of Contents~~

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

On October 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~~Note 14 to the United States District Court for the Northern District of Illinois. Thereafter, the plaintiff filed a motion to remand the action back to the Circuit Court of Cook County, Illinois, which was denied on February 3, 2016. On February 9, 2016, the court granted an agreed motion for voluntary dismissal of the Seltzer action, which dismissed the action with prejudice as to the named plaintiff’s individual claims. As for the Hooper action, the court granted a stay on June 8, 2016 and on July 18, 2017, the plaintiff in Hooper amended the complaint to largely mirror the amended complaint in Bunk.Condensed Consolidated Financial Statements contained herein.

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

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

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

~~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:~~first quarter of 2022:

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~~			Total Number
						of ~~vested shares in satisfaction~~Shares	Maximum
						Purchased as	Dollar Value of ~~tax withholdings by grantees~~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)
January 1, 2022 through January 31, 2022		—		$	—	—	37,498,973
February 1, 2022 through February 28, 2022		—		$	—	—	37,498,973
March 1, 2022 through March 31, 2022		—		$	—	—	37,498,973

(1.)

On June 10, 2021, 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 ~~2009 Equity Incentive Plan.~~

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.)

~~(2.)~~

~~The Company has~~There were no ~~publicly announced plans or programs to~~shares repurchased under the repurchase ~~its shares.~~

program during the first quarter of 2022.

~~Item 5. Other Information.~~

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

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

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

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

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

3331

Table of Contents

Item 6 - Exhibits

~~Item 6. Exhibits.~~

Exhibit 31.1 -– Rule ~~13a‑14(a)~~13a-14(a)/~~15d‑14(a)~~15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated ~~November 2, 2017.~~May 3, 2022.

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.~~May 3, 2022.

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.~~May 3, 2022.

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.~~May 3, 2022.

Exhibit 101.INS – Inline 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 – Inline XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL – Inline XBRL Taxonomy Extension Calculation Linkbase Document

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

Exhibit 101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF – Inline 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.

3432

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.~~May 3, 2022.


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


	/s/ ~~Scott Clements~~Matthew P. Moynahan
	~~Scott Clements~~Matthew P. Moynahan
	Chief Executive Officer (Principal Executive Officer)


	/s/ ~~Mark S. Hoyt~~Jan Kees van Gaalen
	~~Mark S. Hoyt~~Jan Kees van Gaalen
	Interim Chief Financial Officer
	(Principal Financial Officer)

	/s/ John Bosshart
	John Bosshart
	Chief Accounting Officer ~~and~~
	(Principal Accounting Officer)

3533


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	☐


	March 31,		December 31,
	2022		2021
ASSETS
Current assets
Cash and equivalents	$	83,645	$	63,380
Short term investments		36,302		35,108
Accounts receivable, net of allowances of $2,292 in 2022 and $1,419 in 2021		35,704		56,612
Inventories, net		10,388		10,345
Prepaid expenses		7,656		7,594
Contract assets		5,410		4,694
Other current assets		9,591		9,356
Total current assets		188,696		187,089
Property and equipment, net		10,253		10,757
Operating lease right-of-use assets		8,849		9,197
Goodwill		94,586		96,174
Intangible assets, net of accumulated amortization		19,728		21,270
Deferred income taxes		3,679		3,786
Contract assets - non-current		318		195
Other assets		9,802		13,803
Total assets	$	335,911	$	342,271
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	7,231	$	8,204
Deferred revenue		50,988		54,617
Accrued wages and payroll taxes		14,109		16,607
Short-term income taxes payable		735		1,103
Other accrued expenses		7,297		7,668
Deferred compensation		80		877
Total current liabilities		80,440		89,076
Long-term deferred revenue		7,326		9,125
Long-term lease liabilities		9,932		10,180
Other long-term liabilities		7,554		7,770
Long-term income taxes payable		5,054		5,054
Deferred income taxes		2,010		1,286
Total liabilities		112,316		122,491
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at March 31, 2022 and December 31, 2021		—		—
Common stock: $.001 par value per share, 75,000 shares authorized; 40,613 and 40,593 shares issued; 40,021 and 40,001 shares outstanding at March 31, 2022 and December 31, 2021, respectively		40		40
Additional paid-in capital		100,975		100,250
Treasury stock, at cost, 592 and 592 shares outstanding at March 31, 2022 and December 31, 2021, respectively		(12,501)		(12,501)
Retained earnings		148,387		143,173
Accumulated other comprehensive loss		(13,306)		(11,182)
Total stockholders' equity		223,595		219,780
Total liabilities and stockholders' equity	$	335,911	$	342,271


	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



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

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (Unaudited) as of ~~September 30, 2017 (Unaudited)~~March 31, 2022 and December 31, ~~2016~~2021	3


	Condensed Consolidated Statements of Operations (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	4


	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	5


	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2022 and 2021	6

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33 31

Item 5.6.	~~Other Information~~Exhibits	32

SIGNATURES		33

~~Item 6.~~	~~Exhibits~~	34

~~SIGNATURES~~		35


	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


	Three Months Ended March 31, 2021
in thousands	As Previously Reported		Adjustments		As Revised
Cost of goods sold
Product and license	$	9,541	$	1,211	$	10,752
Total cost of goods sold		15,322		1,211		16,533

Gross profit		35,453		(1,211)		34,242

Operating costs
Sales and marketing		18,379		(1,211)		17,168
Total operating costs		44,747		(1,211)		43,536


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


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

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


			Fair Value Measurement at Reporting Date Using
in thousands		March 31, 2022	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury Notes	$	4,010	-	$	4,010	-
Corporate Notes / Bonds	$	9,378	-	$	9,378	-
Commercial Paper	$	9,959	-	$	9,959	-
U.S. Treasury Bills	$	12,955	-	$	12,955	-


in thousands
Balance at December 31, 2021	$	1,419
Provision		875
Write-offs		19
Net foreign currency translation		(21)
Balance at March 31, 2022	$	2,292


	As of March 31, 2022
		(in $ thousands)
2022	$	2,216
2023		2,627
2024		1,885
2025		1,776
2026		1,714
Later years		4,391
Less imputed interest		(2,333)
Total lease liabilities	$	12,276


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	—		—	—	—