UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCHMARCH 31, 20192020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 000‑24389
OneSpan Inc.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE | 36‑4169320 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
121 West Wacker Drive, Suite 2050
Chicago, Illinois 60601
(Address of Principal Executive Offices)(Zip (Zip Code)
(312) 766‑4001
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
Common Shares |
| OSPN |
| NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer ,a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Emerging growth company | ☐ |
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| Smaller reporting company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ◻☐ Yes ☒ No
There were 40,214,52940,313,630 shares of Common Stock, $.001 par value per share, outstanding at April 30, 2019.May 1, 2020.
OneSpan Inc.
Form 10‑Q
For the Quarter Ended March 31, 20192020
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PART I. FINANCIAL INFORMATION |
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| Condensed Consolidated Balance Sheets as of March 31, | 3 |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) | 8 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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32 | ||
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2
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
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| March 31, |
| December 31, | ||
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| 2020 |
| 2019 | ||
ASSETS |
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Current assets |
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Cash and equivalents |
| $ | 79,624 |
| $ | 84,282 |
Short term investments |
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| 25,652 |
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| 25,511 |
Accounts receivable, net of allowances of $3,165 in 2020 and $2,524 in 2019 |
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| 62,971 |
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| 62,405 |
Inventories, net |
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| 18,373 |
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| 19,819 |
Prepaid expenses |
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| 6,334 |
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| 6,198 |
Contract assets |
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| 7,389 |
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| 7,058 |
Other current assets |
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| 7,626 |
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| 6,346 |
Total current assets |
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| 207,969 |
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| 211,619 |
Property and equipment, net |
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| 12,157 |
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| 11,454 |
Operating lease right-of-use assets |
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| 11,538 |
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| 10,580 |
Goodwill |
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| 91,556 |
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| 94,612 |
Intangible assets, net of accumulated amortization |
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| 33,052 |
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| 36,209 |
Deferred income taxes |
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| 7,966 |
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| 7,863 |
Contract assets - non-current |
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| 3,792 |
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| 3,565 |
Other assets |
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| 8,967 |
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| 8,668 |
Total assets |
| $ | 376,997 |
| $ | 384,570 |
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable |
| $ | 9,113 |
| $ | 10,835 |
Deferred revenue |
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| 33,349 |
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| 30,338 |
Accrued wages and payroll taxes |
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| 10,706 |
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| 15,415 |
Short-term income taxes payable |
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| 2,974 |
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| 7,711 |
Other accrued expenses |
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| 11,081 |
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| 8,786 |
Deferred compensation |
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| 1,446 |
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| 1,028 |
Total current liabilities |
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| 68,669 |
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| 74,113 |
Long-term deferred revenue |
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| 16,033 |
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| 15,259 |
Long-term lease liability |
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| 12,600 |
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| 11,299 |
Other long-term liabilities |
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| 7,711 |
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| 8,297 |
Long-term income taxes payable |
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| 6,958 |
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| 6,958 |
Deferred income taxes |
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| 4,387 |
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| 4,623 |
Total liabilities |
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| 116,358 |
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| 120,549 |
Stockholders' equity |
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Preferred stock: 500 shares authorized, none issued and outstanding at December 31, 2020 and 2019 |
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| — |
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| — |
Common stock: $.001 par value per share, 75,000 shares authorized; 40,314 and 40,207 issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
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| 40 |
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| 40 |
Additional paid-in capital |
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| 97,166 |
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| 96,109 |
Accumulated income |
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| 181,012 |
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| 181,167 |
Accumulated other comprehensive loss |
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| (17,579) |
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| (13,295) |
Total stockholders' equity |
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| 260,639 |
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| 264,021 |
Total liabilities and stockholders' equity |
| $ | 376,997 |
| $ | 384,570 |
See accompanying notes to unaudited condensed consolidated financial statements.
3
OneSpan Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)
(unaudited)
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| March 31, |
| December 31, | ||
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| 2019 |
| 2018 | ||
ASSETS |
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Current assets |
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Cash and equivalents |
| $ | 69,907 |
| $ | 76,708 |
Short term investments |
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| 25,363 |
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| 22,789 |
Accounts receivable, net of allowances of $1,339 in 2019 and $1,152 in 2018 |
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| 59,084 |
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| 59,631 |
Inventories, net |
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| 15,241 |
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| 14,428 |
Prepaid expenses |
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| 5,720 |
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| 4,733 |
Contract assets |
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| 4,672 |
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| 7,962 |
Other current assets |
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| 6,731 |
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| 5,705 |
Total current assets |
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| 186,718 |
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| 191,956 |
Property and equipment: |
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Furniture and fixtures |
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| 7,688 |
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| 7,613 |
Office equipment |
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| 11,077 |
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| 11,059 |
Total Property and equipment: |
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| 18,765 |
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| 18,672 |
Accumulated depreciation |
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| (12,886) |
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| (12,422) |
Property and equipment, net |
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| 5,879 |
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| 6,250 |
Operating lease right-of-use assets |
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| 8,768 |
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| — |
Goodwill |
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| 92,730 |
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| 91,841 |
Intangible assets, net of accumulated amortization |
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| 43,436 |
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| 45,462 |
Deferred income taxes |
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| 5,581 |
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| 5,601 |
Contract assets - non-current |
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| 4,027 |
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| 3,316 |
Other assets |
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| 8,340 |
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| 8,400 |
Total assets |
| $ | 355,479 |
| $ | 352,826 |
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable |
| $ | 14,957 |
| $ | 7,202 |
Deferred revenue |
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| 33,356 |
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| 33,633 |
Accrued wages and payroll taxes |
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| 10,443 |
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| 13,932 |
Short-term income taxes payable |
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| 3,429 |
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| 6,905 |
Other accrued expenses |
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| 9,931 |
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| 9,323 |
Deferred compensation |
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| 1,235 |
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| 1,362 |
Total current liabilities |
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| 73,351 |
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| 72,357 |
Long-term deferred revenue |
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| 10,428 |
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| 10,672 |
Lease liability long term |
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| 7,852 |
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Other long-term liabilities |
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| 5,605 |
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| 7,075 |
Long-term income taxes payable |
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| 7,617 |
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| 7,620 |
Deferred income taxes |
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| 2,668 |
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| 2,661 |
Total liabilities |
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| 107,521 |
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| 100,385 |
Stockholders' equity |
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Preferred stock: 500 shares authorized, none issued and outstanding at December 31, 2019 and 2018 |
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Common stock: $.001 par value per share, 75,000 shares authorized; 40,215 and 40,225 issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
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| 40 |
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| 40 |
Additional paid-in capital |
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| 93,644 |
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| 93,310 |
Accumulated income |
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| 166,707 |
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| 172,378 |
Accumulated other comprehensive loss |
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| (12,433) |
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| (13,287) |
Total stockholders' equity |
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| 247,958 |
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| 252,441 |
Total liabilities and stockholders' equity |
| $ | 355,479 |
| $ | 352,826 |
See accompanying notes to unaudited condensed consolidated financial statements.
3
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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| Three months ended |
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| March 31, |
| Three Months ended March 31, |
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| 2019 |
| 2018 |
| 2020 |
| 2019 |
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Revenue |
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Product and license |
| $ | 31,861 |
| $ | 33,494 |
| $ | 38,260 |
| $ | 31,861 |
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Services and other |
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| 15,747 |
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| 11,938 |
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| 18,232 |
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| 15,747 |
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Total revenue |
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| 47,608 |
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| 45,432 |
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| 56,492 |
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| 47,608 |
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Cost of goods sold |
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Product and license |
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| 11,316 |
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| 8,185 |
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| 10,738 |
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| 11,316 |
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Services and other |
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| 4,723 |
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| 2,550 |
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| 5,332 |
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| 4,723 |
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Total cost of goods sold |
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| 16,039 |
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| 10,735 |
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| 16,070 |
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| 16,039 |
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Gross profit |
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| 31,569 |
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| 34,697 |
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| 40,422 |
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| 31,569 |
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Operating costs |
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Sales and marketing |
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| 14,383 |
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| 14,277 |
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| 14,859 |
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| 14,383 |
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Research and development |
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| 10,495 |
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| 5,797 |
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| 9,994 |
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| 10,495 |
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General and administrative |
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| 9,870 |
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| 10,774 |
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| 12,268 |
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| 9,870 |
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Amortization of intangible assets |
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| 2,348 |
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| 2,201 |
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| 2,354 |
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| 2,348 |
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Total operating costs |
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| 37,096 |
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| 33,049 |
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| 39,475 |
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| 37,096 |
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Operating income (loss) |
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| (5,527) |
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| 1,648 |
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| 947 |
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| (5,527) |
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Interest income, net |
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| 135 |
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| 393 |
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| 207 |
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| 135 |
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Other income (expense), net |
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| (551) |
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| 380 | |||||||
Other expense, net |
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| (338) |
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| (551) |
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Income (loss) before income taxes |
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| (5,943) |
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| 2,421 |
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| 816 |
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| (5,943) |
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Provision (benefit) for income taxes |
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| (272) |
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| 629 |
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| 718 |
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| (272) |
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Net income (loss) |
| $ | (5,671) |
| $ | 1,792 |
| $ | 98 |
| $ | (5,671) |
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Net income (loss) per share |
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Basic |
| $ | (0.14) |
| $ | 0.04 |
| $ | 0.00 |
| $ | (0.14) |
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Diluted |
| $ | (0.14) |
| $ | 0.04 |
| $ | 0.00 |
| $ | (0.14) |
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Weighted average common shares outstanding |
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Basic |
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| 40,036 |
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| 39,910 |
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| 40,127 |
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| 40,036 |
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Diluted |
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| 40,036 |
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| 40,059 |
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| 40,338 |
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| 40,036 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
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| Three months ended March 31, | ||||
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| 2019 |
| 2018 | ||
Net income (loss) |
| $ | (5,671) |
| $ | 1,792 |
Other comprehensive income (loss) |
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Cumulative translation adjustment, net |
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| 870 |
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| 1,318 |
Pension adjustment, net |
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| (16) |
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| 12 |
Comprehensive income (loss) |
| $ | (4,817) |
| $ | 3,122 |
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| Three months ended March 31, |
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| 2020 |
| 2019 |
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Net income (loss) |
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| $ | 98 |
| $ | (5,671) |
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Other comprehensive income (loss) |
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Cumulative translation adjustment, net of tax |
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| (4,278) |
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| 870 |
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Pension adjustment, net of tax |
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| (6) |
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| (16) |
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Comprehensive income (loss) |
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| $ | (4,186) |
| $ | (4,817) |
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See accompanying notes to unaudited condensed consolidated financial statements.
5
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
For the three months ended March 31, 2019:
2020:
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| Accumulated |
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| Accumulated |
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| Additional |
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| Other |
| Total |
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| Additional |
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| Other |
| Total | ||||||
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| Common Stock |
| Paid-In |
| Accumulated |
| Comprehensive |
| Stockholders' |
| Common Stock |
| Paid-In |
| Accumulated |
| Comprehensive |
| Stockholders' | ||||||||||||||
Description |
| Shares |
| Amount |
| Capital |
| Income |
| Income (Loss) |
| Equity |
| Shares |
| Amount |
| Capital |
| Income |
| Income (Loss) |
| Equity | ||||||||||
Balance at December 31, 2018 |
| 40,225 |
|
| 40 |
| 93,310 |
| 172,378 |
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| (13,287) |
| 252,441 | ||||||||||||||||||||
Balance at December 31, 2019 |
| 40,207 |
| $ | 40 |
| $ | 96,109 |
| $ | 181,167 |
| $ | (13,295) |
| $ | 264,021 | |||||||||||||||||
Cumulative impact of change in accounting principle, net of tax |
| — |
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| — |
| — |
| (253) |
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| — |
| (253) | ||||||||||||||||||||
Net income (loss) |
| — |
|
| — |
| — |
| (5,671) |
|
| — |
| (5,671) |
| — |
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| — |
| — |
| 98 |
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| — |
| 98 | ||||||
Foreign currency translation adjustment, net |
| — |
|
| — |
| — |
| — |
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| 870 |
| 870 | ||||||||||||||||||||
Foreign currency translation adjustment, net of tax |
| — |
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| — |
| — |
| — |
|
| (4,278) |
| (4,278) | ||||||||||||||||||||
Restricted stock awards |
| (10) |
|
| — |
| 552 |
| — |
|
| — |
| 552 |
| 168 |
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| — |
| 1,350 |
| — |
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| — |
| 1,350 | ||||||
Tax payments for stock issuances |
| — |
|
| — |
| (218) |
| — |
|
| — |
| (218) |
| (61) |
|
| — |
| (293) |
| — |
|
| — |
| (293) | ||||||
Pension adjustment, net |
| — |
|
| — |
| — |
| — |
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| (16) |
| (16) | ||||||||||||||||||||
Balance at March 31, 2019 |
| 40,215 |
| $ | 40 |
| $ | 93,644 |
| $ | 166,707 |
| $ | (12,433) |
| $ | 247,958 | |||||||||||||||||
Pension adjustment, net of tax |
| — |
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| — |
| — |
| — |
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| (6) |
| (6) | ||||||||||||||||||||
Balance at March 31, 2020 |
| 40,314 |
| $ | 40 |
| $ | 97,166 |
| $ | 181,012 |
| $ | (17,579) |
| $ | 260,639 |
For the three months ended March 31, 2018:2019:
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| Accumulated |
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| Additional |
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| Other |
| Total | |||
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| Common Stock |
| Paid-In |
| Accumulated |
| Comprehensive |
| Stockholders' | |||||||
Description |
| Shares |
| Amount |
| Capital |
| Income |
| Income (Loss) |
| Equity | |||||
Balance at December 31, 2018 |
| 40,225 |
|
| 40 |
|
| 93,310 |
|
| 172,378 |
|
| (13,287) |
|
| 252,441 |
Net income (loss) |
| — |
|
| — |
|
| — |
|
| (5,671) |
|
| — |
|
| (5,671) |
Foreign currency translation adjustment, net of tax |
| — |
|
| — |
|
| — |
|
| — |
|
| 870 |
|
| 870 |
Restricted stock awards |
| (10) |
|
| — |
|
| 552 |
|
| — |
|
| — |
|
| 552 |
Tax payments for stock issuances |
| — |
|
| — |
|
| (218) |
|
| — |
|
| — |
|
| (218) |
Pension adjustment, net of tax |
| — |
|
| — |
|
| — |
|
| — |
|
| (16) |
|
| (16) |
Balance at March 31, 2019 |
| 40,215 |
| $ | 40 |
| $ | 93,644 |
| $ | 166,707 |
| $ | (12,433) |
| $ | 247,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
| Total | |||
|
| Common Stock |
| Paid-In |
| Accumulated |
| Comprehensive |
| Stockholders' | |||||||
Description |
| Shares |
| Amount |
| Capital |
| Income |
| Income (Loss) |
| Equity | |||||
Balance at December 31, 2017 |
| 40,086 |
|
| 40 |
|
| 90,307 |
|
| 156,151 |
|
| (8,568) |
|
| 237,930 |
Cumulative impact of change in accounting principles, net of tax |
| — |
|
| — |
|
| — |
|
| 12,376 |
|
| — |
|
| 12,376 |
Net income |
| — |
|
| — |
|
| — |
|
| 1,792 |
|
| — |
|
| 1,792 |
Foreign currency translation adjustment, net |
| — |
|
| — |
|
| — |
|
| — |
|
| 1,318 |
|
| 1,318 |
Restricted stock awards |
| 226 |
|
| — |
|
| 799 |
|
| — |
|
| — |
|
| 799 |
Pension adjustment, net |
| — |
|
| — |
|
| — |
|
| — |
|
| 12 |
|
| 12 |
Balance at March 31, 2018 |
| 40,312 |
| $ | 40 |
| $ | 91,106 |
| $ | 170,319 |
| $ | (7,239) |
| $ | 254,226 |
See accompanying notes to unaudited condensed consolidated financial statements.
6
OneSpan Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| ||||
|
| 2020 |
| 2019 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income (loss) |
| $ | 98 |
| $ | (5,671) |
|
Adjustments to reconcile net income (loss) from operations to net cash provided by (used in) operations: |
|
|
|
|
|
|
|
Depreciation and amortization of intangible assets |
|
| 3,019 |
|
| 2,862 |
|
Loss (gain) on disposal of assets |
|
| 88 |
|
| — |
|
Deferred tax benefit |
|
| (306) |
|
| (4) |
|
Stock-based compensation |
|
| 1,350 |
|
| 552 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable, net |
|
| (1,817) |
|
| 79 |
|
Inventories, net |
|
| 1,445 |
|
| (813) |
|
Contract assets |
|
| (564) |
|
| 2,578 |
|
Accounts payable |
|
| (1,663) |
|
| 7,797 |
|
Income taxes payable |
|
| (4,707) |
|
| (3,491) |
|
Accrued expenses |
|
| (2,104) |
|
| (5,560) |
|
Deferred compensation |
|
| 418 |
|
| (126) |
|
Deferred revenue |
|
| 4,166 |
|
| (455) |
|
Other assets and liabilities |
|
| (1,775) |
|
| (1,485) |
|
Net cash used in operating activities |
|
| (2,352) |
|
| (3,737) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Purchase of short term investments |
|
| (6,642) |
|
| (4,475) |
|
Maturities of short term investments |
|
| 6,500 |
|
| 2,000 |
|
Additions to property and equipment |
|
| (1,516) |
|
| (176) |
|
Other |
|
| (13) |
|
| — |
|
Net cash provided by (used in) investing activities |
|
| (1,671) |
|
| (2,651) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Tax payments for restricted stock issuances |
|
| (293) |
|
| (218) |
|
Net cash used in financing activities |
|
| (293) |
|
| (218) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| (342) |
|
| (195) |
|
|
|
|
|
|
|
|
|
Net decrease in cash |
|
| (4,658) |
|
| (6,801) |
|
Cash, cash equivalents, and restricted cash, beginning of period |
|
| 85,129 |
|
| 77,555 |
|
Cash, cash equivalents, and restricted cash, end of period (1.) |
| $ | 80,471 |
| $ | 70,754 |
|
|
|
|
|
|
|
|
|
| Three months ended March 31, | ||||
|
| 2019 |
| 2018 | ||
Cash flows from operating activities: |
|
|
|
|
|
|
Net income (loss) |
| $ | (5,671) |
| $ | 1,792 |
Adjustments to reconcile net income (loss) from operations to net cash provided by (used in) operations: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,862 |
|
| 2,747 |
Deferred tax expense (benefit) |
|
| (4) |
|
| (9) |
Stock-based compensation |
|
| 552 |
|
| 800 |
Accounts receivable, net |
|
| 79 |
|
| 14,185 |
Inventories, net |
|
| (813) |
|
| 535 |
Contract assets |
|
| 2,578 |
|
| (4,195) |
Accounts payable |
|
| 7,797 |
|
| (3,360) |
Income taxes payable |
|
| (3,491) |
|
| (3,012) |
Accrued expenses |
|
| (5,560) |
|
| (821) |
Deferred compensation |
|
| (126) |
|
| (1,258) |
Deferred revenue |
|
| (455) |
|
| 3,424 |
Other assets and liabilities |
|
| (1,485) |
|
| (1,102) |
Net cash provided by (used in) operating activities |
|
| (3,737) |
|
| 9,726 |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
Purchase of short term investments |
|
| (4,475) |
|
| — |
Maturities of short term investments |
|
| 2,000 |
|
| 40,000 |
Additions to property and equipment |
|
| (176) |
|
| (2,296) |
Net cash provided by (used in) investing activities |
|
| (2,651) |
|
| 37,704 |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
Tax payments for restricted stock issuances |
|
| (218) |
|
| (179) |
Net cash used in financing activities |
|
| (218) |
|
| (179) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| (195) |
|
| 572 |
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
| (6,801) |
|
| 47,823 |
Cash, cash equivalents, and restricted cash, beginning of period |
|
| 77,555 |
|
| 78,661 |
Cash, cash equivalents, and restricted cash, end of period |
| $ | 70,754 |
| $ | 126,484 |
(1.) | The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to amounts reported within the unaudited condensed consolidated balance sheet as of March 31, 2020 and December 31, 2019 and amounts previously reported within the unaudited condensed consolidated balance sheet in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019 (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2020 |
| March 31, 2019 |
| December 31, 2019 | |||
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 79,624 |
| $ | 69,907 |
| $ | 84,282 |
Restricted cash included in other non-current assets |
|
| 847 |
|
| 847 |
|
| 847 |
Cash, cash equivalents and restricted cash |
| $ | 80,471 |
| $ | 70,754 |
| $ | 85,129 |
See accompanying notes to unaudited condensed consolidated financial statements.
7
Notes to Condensed Consolidated Financial Statements
(unaudited)
Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us,” refer to OneSpan Inc. and its subsidiaries.
Note 1 – Description of the Company and Basis of Presentation
Description of the Company
OneSpan Inc. and its wholly owned subsidiaries design, develop, market and market digital solutions for identity,support hardware and software security systems that manage and business productivity that protect and facilitate electronic transactions via mobile and connected devices.secure access to information assets. OneSpan has operations in Austria, Australia, Belgium, Brazil, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K.)(U.K), and the United States (U.S.).
OurIn 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, 2018.2019.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All significant intercompany accounts and transactions have been eliminated. The operatingOperating results for the interim periods presentedthree months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020, particularly in light of the novel coronavirus (COVID-19) pandemic and its effects on domestic and global economies. To limit the spread of COVID-19, governments have imposed, and may continue to impose, among other things, travel and business operation restrictions and stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. These disruptions and restrictions could adversely affect our operating results due to, among other things, reduced demand for our services and solutions as a full year.result of our customers having to adjust, reduce or suspend operating activities. For additional information, see Part II, Item 1A – Risk Factorsof this Form 10-Q for additional information regarding the potential impact of COVID-19 on the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of OneSpan Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
8
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation and Transactions
The financial position and results of the operations of the majority of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net. ForForeign exchange transaction losses aggregated $0.5 and $0.9 million for the three months ended
8
March 31, 2020 and March 31, 2019, foreign currency transactions resulted in a net loss of $0.9 million, compared to a net gain of $0.2 million for the same period in 2018.respectively.
The financial position and results of our operations in Singapore, Switzerland, and Canada are measured in U.S. Dollars. For these subsidiaries, gains and losses that result from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net.
Note 2 – Summary of Significant Accounting Policies
Revenue Recognition
We recognize revenue in accordance with ASC 606 “Revenue from Contracts with Customers” (“Topic 606”). See Note 4 - RevenueExcept for further details.
We determine revenue recognition through the following steps:
|
|
|
|
|
|
|
|
|
|
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services,certain changes which excludes any sales incentives and amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
We derive our revenues primarily from Product and License Revenue, which includes hardware products and software licenses, and Services and Other, which is inclusive of software-as-a-service (which we refer to as “subscription”), maintenance and support, and professional services.
Product Revenue:Revenueresulted from the saleadoption of security hardware is recorded upon shipment, which is the point at which control of the goods are transferred and the completion of the performance obligations, unlessASU 2016-13, there are specific terms that would suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer payments normally correspond with delivery.
License Revenue: Revenue from the sale of software licensing is recorded upon the latter of when the customer receives the ability to access the software or when they are legally allowed to use the software. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited accesshave been no changes to the software, and term licenses which limit the customer’s access to the software to a specific time period. The typical term license length is three years. Customer payments normally correspond with delivery for perpetual licenses. For term licenses, payments are made either on installment or upon initial delivery. In limited circumstances, we integrate third party software solutions into our software products. We have determined that, generally
9
we act as the principal with respect to the satisfaction of the related performance obligation and record the corresponding revenue on a gross basis from these transactions. For transactions in which we do not act as the principal, we would recognize revenue on a net basis. The fees paid to the third parties are recognized as a component of cost of goods sold when the revenue is recognized.
Subscription Revenue: We generate subscription revenues from our cloud services offerings. Subscription revenues mostly include fees from customers for access to the OneSpan Sign and Dealflo solutions. Our standard customer arrangements 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 or based on customer usage. Customer payments are normally in advance for an annual subscription period.
Maintenance, Support and Other: Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. The annual fee for maintenance and technical support is recognized ratably over the term of the maintenance and support agreement. Customer payments are normally in advance for annual service.
Professional Services:Professional services revenues are primarily comprised of implementing, automating and extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized over time as services are rendered. Most projects are performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee basis. For time and material contracts, revenues are generally recognized and invoiced by multiplying the number of hours expendedsignificant accounting policies described in the performance of the contract by the hourly rates. For fixed fee contracts, revenues are generally recognized using an input method basedAnnual Report on the ratio of hours expended to total estimated hours.
Significant Judgments
We enter into contracts to deliver a combination of hardware devices, software licenses, subscriptions, maintenance and support and, in some situations, professional services. The Company evaluates the nature of the goods or services promised in these arrangements to identify the distinct performance obligations. Determining whether products and services are considered distinct performance obligations that should be accountedForm 10-K for separately versus together may require significant judgment. When a hardware client device and licenses to host software are sold in a contract, they are treated as a single performance obligation because the software license is deemed to be a component of the hardware that is integral to the functionality of the hardware that is used by our customers for identity authentication. When a software client device is sold in a contract with host software, the licenses are considered a single performance obligation to deliver the authentication solution to the customer. In either of these types of arrangements, maintenance and support and professional services are typically distinct separate performance obligations from the hardware or software solutions. Our contracts to deliver subscription services typically do not include multiple performance obligations; however, in certain limited cases, customers may purchase professional services that are distinct performance obligations.
For contracts that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on their estimated relative stand-alone selling price (“SSP”). Judgment is required to determine the stand-alone selling price of each distinct performance obligation. We determine SSP for maintenance and support and professional services based on observable inputs; specifically, the range of prices charged to customers to renew annual maintenance and support contracts and the range of hourly rates we charge our customers in standalone professional services contracts. In instances where SSP is not directly observable, and when we sell at a highly variable price range, such as for transactions involving software licenses or subscriptions, we determine the SSP for those performance obligations using the residual method.
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 maturities at acquisition of
10
three months or less. Cash and cash equivalents are held by a number of U.S. and non-U.S. commercial banks and money market investment funds. During the year ended December 31, 2018, we entered into2019, filed with the SEC on March 16, 2020 that have had a newmaterial impact on the Company’s condensed consolidated financial statements and related notes.
Cash, Cash Equivalents and Restricted Cash.
We are in a lease agreement that required a letter of credit in the amount of $0.8 million to secure the obligation. The restricted cash related to this letter of credit is recorded in other non-current assets on the Condensed Consolidated Balance SheetsSheet at March 31, 20192020 and December 31, 2018.2019.
Short Term Investments
Short
The Company’s short term investments are in debt securities which consist of U.S.U.S treasury bills and notes, U.S. government agency notes, corporate notes, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months. Fair valuemonths The Company classifies its investments in debt securities as available-for-sale. The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020, which amended our accounting for available-for-sale debt securities. Credit impairments are recorded through an allowance rather than a direct write-down of the security and are recorded through a charge to the condensed consolidated statement of operations. Unrealized gains or losses not related to credit impairments are recorded in accumulated other comprehensive gain/(loss) in the condensed consolidated balance sheets. The Company reviews available-for-sale debt securities for impairments related to credit losses and other factors each quarter. As of March 31, 2020 and December 31, 2019, the unrealized gains and losses were not material.
Accounts Receivable, net of Allowance for Credit Losses
The Company adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. As a result of the adoption, the Company amended its accounting policies for the allowance for credit losses. In accordance with ASU No. 2016-13, the Company evaluates its allowance based on expected losses rather than incurred losses, which is known as the current expected credit loss (“CECL”) model. The allowance is determined using Level 2 inputs as defined by ASC 820, Fair Value Measurements.
The hierarchy requires entities to maximize the use of observable inputsloss rate approach and minimize the use of unobservable inputs. The three levels of inputs used to measure fair valueis measured on a collective (pool) basis when similar risk characteristics exist. Where financial instruments do not share risk characteristics, they are as follows:
• Level 1 – Quoted prices in active markets for identical assets and liabilities.
• Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for
the asset or liability, either directly or indirectly, for substantially the full term of the financial
investment.
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets and liabilities. This includes certain pricing models, discounted cash flow
methodologies and similar techniques that use significant unobservable inputs.
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.evaluated on an individual basis. 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 abilityrelevant available information, from internal and external sources, relating to make payments, additional allowances may be required.
Inventories
Inventories, consisting principally of hardwarepast events, current conditions, 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 pricereasonable 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.supportable forecasts.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to ten years. Leasehold improvements are depreciated over the lesser of the remaining lease term or 10 years. Additions and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses resulting from sales or retirements are
119
recorded
Equity Method Investment
We apply the equity method of accounting to our investment in Promon AS (Promon), because we exercise significant influence, but not controlling interest, in the investee. Promon is a technology company headquartered in Norway that specializes in mobile app security, whose solutions focus largely on Runtime Application Self-Protection (RASP). We exercise significant influence over Promon as incurred, ata result of our 17% ownership interest in Promon, our representation on Promon’s Board of Directors, and the significance to Promon of our business activities with them. We integrate Promon’s RASP technology into our software solution, which time related costs and accumulated depreciation are removed fromlicensed to our customers. Under the accounts. Depreciation expenseequity method of accounting, the Company’s proportionate share of the net earnings (losses) of Promon is reported in other income (expense), net in our consolidated Statements of Operations. The impact of the proportionate share of net earnings (losses) were immaterial for the three months ended March 31, 2020 and 2019 and 2018as were the relative size of $0.5 million and $0.5 million, respectively, is included in operating expenses.
Leases
The Company adopted ASU 2016-02 as of January 1, 2019, using the modified retrospective approach. Prior period amounts have not been adjusted. In addition, the Company elected the following practical expedients:
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|
|
|
|
|
|
|
The adoption of this accounting standard resulted in the recording of Operating lease right-of-use (“ROU”)Promon’s assets and Operating lease liabilities of $9.2 million and $11.0 million, respectively, as of January 1, 2019. The difference between the asset and liability is a result of lease incentives, such as tenant improvement allowances, and deferred rent on the balance sheet at transition. The adoption of ASU 2016-02 had no impact on Retained earnings. See Note 8 - Leases for additional information.
Long Term Investments
Includedoperations in Other Assets is a minority equity investment in a company we believe may be beneficial in executing our strategy. At March 31, 2019 and December 31, 2018, investments were $4.1 million and $4.1 million, respectively. In accordance with ASC 325, Investments – Other , the investments are recorded at fair value using the alternative measurement method allowed for in ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), and are 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 and license cost of goods sold are direct product costs. Cost of goods sold related to service revenues are primarily costs related to subscription solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance support.
Research and Development Costs
Costs for research and development, principally the design and development of hardware, and the design and development of software priorrelation to the determination of technological feasibility, are expensed as incurred on a project-by-project basis.
Software Development Costs
Software development costs are accounted for in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed. Research costs and software development costs, prior to the establishment of technological feasibility, determined based upon the creation of a working model, are expensed as incurred. Our software
12
capitalization policy defines technological feasibility as a functioning beta test prototype with confirmed manufacturability (a working model), within a reasonably predictable range of costs. Additional criteria include receptive customers, or potential customers, as evidenced by interest expressed in a beta test prototype, at some suggested selling price. Our policy is to amortize capitalized costs by the greater of (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product or (b) the straight-line method over the remaining estimated economic life of the product, generally two to five years, including the period being reported on. No material software development costs were capitalized during the three months ended March 31, 2019 and 2018.
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 provision for income taxes includes amounts payable or refundable for the current year, the effects of deferred taxes and impacts from uncertain tax positions. We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of our assets and liabilities, operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those differences are expected to reverse.
Company’s. The realization of certain deferred tax assets is dependent on generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. When assessing the need for a valuation allowance, we consider any carryback potential, future reversals of existing taxable temporary differences (including liabilities for unrecognized tax benefits), future taxable income and tax planning strategies.
We have significant net operating loss and other deductible carryforwards in certain jurisdictions available to reduce the liability on future taxable income. A valuation allowance has been provided to offset some of these future benefits because we have not determined that their realization is more likely than not.
We recognize tax benefits in our financial statements from uncertain tax positions only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon resolution. Future changes related to the expected resolution of uncertain tax positions could affect tax expense in the period when the change occurs.
We monitor for changes in tax laws and reflect the impacts of tax law changes in the period of enactment.
Fair Value of Financial Instruments
At March 31, 2019 and December 31, 2018, our financial instruments were cash and equivalents, short term investments, accounts receivable, accounts payable and accrued liabilities. The estimated faircarrying value of our financial instruments has been determined by using available market informationequity method investment is reported in other noncurrent assets in the consolidated Balance Sheets and appropriate valuation methodologies, as defined in ASC 820, Fair Value Measurements. The fair valuesis reported originally at cost and adjusted each period for the Company’s share of the financial instruments were not materially different from their carrying amounts at March 31, 2019investee’s earnings (losses) and December 31, 2018.
Impairment of Long-Lived and Intangible Assets
Definite-lived intangible assets include proprietary technology, customer relationships, and other intangible assets. Intangible assets other than patents with definite lives are amortized overdividends paid, if any. The Company also assesses the useful life, generally three to seven
13
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. Intangible assets arising from business combinations, such as acquired technology, customer relationships, and other intangible assets, are originally recorded at fair value.
Long-lived assets, including property, plant and equipment, definite-lived intangible assets being amortized and capitalized software costs, are reviewedinvestment for impairment whenever events or changes in circumstances indicate that the carrying amountvalue of the long-lived asset group may not be recoverable. An impairment loss shall be recognized if the carrying amount of a long-lived asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset group exceeds its fair value. Long-lived assets held for sale are reported at the lower of carrying value or fair value less cost to sell.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination. We assess the impairment of goodwill and intangible assets with indefinite lives each November 30 or whenever events or changes in circumstances indicate that the carrying valueinvestment may not be recoverable. The Company’sCompany did not record any impairment assessment begins with a qualitative assessment to determine whether it is more likely than not thatcharges during the fair valuethree month periods ended March 31, 2020 and 2019. The Company recorded $1.2 million and $0.6 million in costs of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the reporting unit against the planned results used in the last quantitative goodwill impairment test. Additionally, the reporting unit’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity- and reporting unit specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of the reporting unit exceeds the carrying value involves significant judgments and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under the two-step assessment is determined using a combination of both income and market-based variation approaches. The inputs and assumptions to valuation methods used to estimate the fair value of reporting units involves significant judgments.
We operate in one reporting unit and have had no goodwill impairment recorded forsales during the three months ended March 31, 2020 and March 31, 2019, respectively for license fees owed to Promon for use of their software and 2018.technology. The Company owed Promon $3.2 million as of March 31, 2020, which is included in accounts payable and accrued liabilities.
Stock-Based Compensation
We have stock-based employee compensation plans, described in Note 10 – Long-Term Compensation Plan and Stock Based Compensation. ASC 718, 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 for time-based awards and on a graded basis for performance-based awards. Forfeitures are recorded as incurred.
Retirement Benefits
We record annual expenses relating to our defined benefit pension 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
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average service life. The funded status, or projected benefit obligation less plan assets, for each plan, is reflected in our consolidated balance sheets using a December 31 measurement date.
Recently Issued Accounting Pronouncements
In FebruaryJune 2016, the FASB issued ASU 2016-02,2016-13, Leases. Since that date, the FASB has issued additional ASU’s clarifying certain aspectsMeasurement of ASU 2016-02. The new guidance supersedes the lease guidance under FASB Accounting Standards Codification (“ASC”) Topic 840, LeasesCredit Losses on Financial Instruments (Topic 326), resulting inwhich amends the creation of FASB ASC Topic 842, Leases. TheBoard’s guidance requires a lessee to recognize on the Balance Sheet a liabilityimpairment of financial instruments. The ASU adds an impairment model that is based on expected losses rather than incurred losses, which is known as the current expected credit loss (“CECL”) model. The CECL model applies to make lease paymentsmost debt instruments (other than those measured at fair value), trade and a right-of-use asset representing its right to use the underlying assetother receivables, financial guarantee contracts, and loan commitments. This ASU is effective for the lease term for both financefiscal years beginning after December 15, 2019, and operating leases. Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02.interim periods within those fiscal years. The Company adopted the new guidance effectiveASC 326 as of January 1, 2019,2020, using the modified retrospectivecumulative-effect transition method which did not requirewith the Companyrequired prospective approach. The cumulative-effect transition method enables an entity to adjustan record allowance for expected credit losses at the date of adoption without restating comparative periods. See the AdoptionThe cumulative effect adjustment for adoption of ASU 2016-02 sectionASC 326 resulted in Note 2 – Summarya decrease of Significant Accounting Policies for additional information.$0.3 million in Accounts receivable, net of allowances and Accumulated Income as of January 1, 2020.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for us beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee share-based payment accounting, which is intended to reduce the cost and complexity of accounting for, and improve financial reporting for share-based payments to nonemployees for goods and services. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. The guidance should be applied prospectively and early adoption is permitted.We adopted this standard on January 1, 20192020 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted for removed or modified disclosures, and delayed adoption of the additional disclosures until their effective date. We are currently evaluating the effect that the ASU willadopted this standard on January 1, 2020 on a retrospective basis. The adoption of this standard did not have a material impact on our consolidated financial statementsstatements.
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a hosted CCA service. Under ASU 2018-15, customers will apply the same criteria for capitalizing
10
implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures.
We adopted this standard on January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018,January 2020, the FASB issued ASU 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement2020-01, Investments—Equity Securities (Topic 321), which helps entities evaluateInvestments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topics 321, 323 and 815. The new standard addresses accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software licensethe transition into and when an arrangement is solely a hosted CCA service. Under ASU 2018-15, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classificationout of the capitalized implementation costsequity method and related amortization expense,measurement of certain purchased options and requires additional quantitative and qualitative disclosures.forward contracts to acquire investments. The new standard is effective for us on Januarythe Company for annual and interim periods beginning after July 1, 2020. Early2022, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. The Company is permitted, includingevaluating the impact of adoption in any interim period for which financial
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statements have not been issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurredstandard on or after the date this guidance is first applied or retrospectively. We are currently evaluating the effect that the ASU will have on ourits consolidated financial statements and related disclosures.statements.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Note 3 – Business Acquisitions
On May 30, 2018, OneSpan acquired the remaining interest in Dealflo Limited and its subsidiaries (“Dealflo”), increasing our ownership percentage to 100% from 1%. Dealflo, formerly a privately-held company based in the United Kingdom, provides identity verification and end-to-end financial agreement solutions. Upon acquisition, Dealflo became a wholly-owned subsidiary of OneSpan.
Dealflo’s total purchase price consideration was $53.9 million, net of $5.7 million of cash acquired. The total purchase price consideration includes $53.1 million of cash paid to acquire the remaining 99% interest in Dealflo, as well as $0.8 million of fair value of our previous 1% ownership interest.
The acquisition is accounted for as a business combination using the acquisition method of accounting, which requires the net assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Quarterly Report on Form 10-Q, and may be adjusted during the measurement period of up to twelve months from the date of acquisition. Any changes in the estimated fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
As of March 31, 2019, the primary areas that are not yet finalized are the estimations of deferred tax assets and liabilities and income taxes payable as of the acquisition date. We are still in the process of seeking and evaluating information used in the estimation of these fair value estimates as of the acquisition date.
The following table summarizes our preliminary allocation of the purchase price consideration based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (net of cash acquired):
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| Total |
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| (in thousands) |
| Acquired tangible assets |
| $ | 2,037 |
| Acquired intangible assets |
|
| 17,900 |
| Liabilities assumed |
|
| (4,250) |
| Goodwill |
|
| 38,167 |
| Total purchase price consideration |
| $ | 53,854 |
The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value assigned to Dealflo, including expected benefits from synergies resulting from the acquisition, as well as the knowledge and experience of the workforce in place. In accordance with applicable accounting standards, goodwill is not amortized and will be tested for impairment at least annually, or more frequently, if certain indicators are present. Goodwill and intangible assets related to this acquisition are not deductible for foreign tax purposes.
Based on the final results of the acquisition valuation, $17.9 million of the purchase price consideration has been allocated to identifiable intangible assets. The following table summarizes the major classes of intangible assets, as well as the estimated weighted-average amortization periods:
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|
|
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| Estimated Fair Value |
| Weighted Average Amortization Period |
Identifiable Intangible Assets |
| (in thousands) |
| (Years) |
Customer relationships | $ | 11,800 |
| 7 |
Technology |
| 5,900 |
| 4 |
Trademarks |
| 200 |
| 3 |
| $ | 17,900 |
|
|
The results of operations of Dealflo subsequent to the acquisition date have been included in the consolidated statement of operations for the three months ended March 31, 2019. Revenue generated by Dealflo for the three months ended March 31, 2019 was $1.9 million. Dealflo net losses included in the results of operations for the three months ended March 31, 2019 was $1.4 million.
Unaudited Pro Forma Financial Information
The following presents the unaudited pro forma combined results of operations of the Company with Dealflo for the three months ended March 31, 2018, assuming Dealflo was acquired at the beginning of 2017, and after giving effect to certain pro forma adjustments. Pro forma adjustments for the three months ended March 31, 2018 reflect estimated amortization expense for intangible assets purchased of $0.8 million, and the elimination of $0.1 million of revenue related to intercompany transactions.
These unaudited pro forma results are not necessarily indicative of the actual consolidated results of operations had the acquisition actually occurred on January 1, 2017 or of the future results of operations of the consolidated entities (in thousands except per share data):
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| Three months ended March 31, |
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| 2018 | |
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Revenue |
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| $ | 47,493 |
Net loss |
|
|
| (698) |
Basic net loss per share |
|
|
| (0.02) |
Diluted net loss per share |
|
|
| (0.02) |
Shares used in computing basic and diluted net loss per share |
|
|
| 39,910 |
Note 43 – Revenue
We recognize revenue in accordance with ASC 606 “Revenue from Contracts with Customers” (“Topic 606”), as described below.
Term Licenses
The Company considers revenue from arrangements that include term licenses to our software to be functional intellectual property. This requires recognition at the point in time all of the revenue recognition criteria under Topic 606 are met, which for the Company is generally when the customer is provided access to the software and the license term has commenced.
Revenue from 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 returns at the time revenue is recognized. We have established a stand-alone selling price (SSP) for all other performance obligations in the contract. Accordingly, the Company recognizes revenue from these licenses, based on the residual approach due to highly variable pricing, at the beginning of the license period and recognizes the transaction price allocated to the other performance obligations in the contract (typically maintenance and support) over the period in which those performance obligations are satisfied. This is consistent with the method of recognizing revenue for perpetual licenses of intellectual property. Fees paid to third party software providers in term license arrangements are recognized when the term license revenues are recognized.
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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.
Disaggregation of Revenues
The following tables present our revenues disaggregated by major products and services, geographical region and timing of revenue recognition.
Revenue by major products (in thousands)
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| ||
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| Three Months Ended March 31, | Three months ended March 31, | |||||||||
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| 2019 |
| 2018 | 2020 |
| 2019 | |||||
Hardware products |
| $ | 24,290 |
| $ | 17,491 | $ | 19,738 |
| $ | 24,290 | |
Software licenses |
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| 7,571 |
| 16,003 |
| 18,522 |
|
| 7,571 | ||
Subscription |
|
| 5,251 |
| 2,970 |
| 5,829 |
|
| 5,251 | ||
Professional services |
|
| 809 |
| 964 |
| 1,421 |
|
| 809 | ||
Maintenance, support and other |
|
| 9,686 |
|
| 8,004 |
| 10,982 |
|
| 9,686 | |
Total Revenue |
| $ | 47,608 |
| $ | 45,432 | $ | 56,492 |
| $ | 47,608 |
|
Revenue by location of customer for the three months ended March 31, 20192020 and 20182019 (in thousands)
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| EMEA |
| Americas |
| APAC |
| Total |
| ||||
Total Revenue: |
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2019 |
| $ | 25,599 |
| $ | 12,731 |
| $ | 9,278 |
| $ | 47,608 |
|
2018 |
| $ | 18,387 |
| $ | 15,921 |
| $ | 11,124 |
| $ | 45,432 |
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Percent of Total: |
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2019 |
|
| 54 | % |
| 27 | % |
| 19 | % |
| 100 | % |
2018 |
|
| 40 | % |
| 35 | % |
| 25 | % |
| 100 | % |
EMEA | Americas | APAC | Total | ||||||||||
Total Revenue: |
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2020 |
| $ | 33,726 |
| $ | 12,333 |
| $ | 10,433 |
| $ | 56,492 |
|
2019 |
| $ | 25,599 |
| $ | 12,731 |
| $ | 9,278 |
| $ | 47,608 |
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Percent of Total: |
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|
2020 |
|
| 60 | % |
| 22 | % |
| 18 | % |
| 100 | % |
2019 |
|
| 54 | % |
| 27 | % |
| 19 | % |
| 100 | % |
Timing of revenue recognition (in thousands)
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|
|
| Three months ended |
| Three months ended March 31, | ||||||||
|
| March 31, 2019 |
| March 31, 2018 |
| 2020 |
| 2019 | ||||
Products and Licenses transferred at a point in time |
| $ | 31,861 |
| $ | 33,494 |
| $ | 38,260 |
| $ | 31,861 |
Services transferred over time |
|
| 15,747 |
|
| 11,938 |
|
| 18,232 |
|
| 15,747 |
Total Revenue |
| $ | 47,608 |
| $ | 45,432 |
| $ | 56,492 |
| $ | 47,608 |
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Contract balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.
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| March 31, |
| December 31, |
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| March 31, |
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| December 31, | ||
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| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Receivables, inclusive of trade and unbilled |
| $ | 59,084 |
| $ | 59,631 |
| $ | 62,971 |
| $ | 62,405 |
Contract Assets (current and non-current) |
| $ | 8,699 |
| $ | 11,278 |
| $ | 11,181 |
| $ | 10,623 |
Contract Liabilities (Deferred Revenue current and non-current) |
| $ | 43,784 |
| $ | 44,305 |
| $ | 49,382 |
| $ | 45,597 |
Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings. These contract assets are transferred to receivables when the right to billing occurs, which is normally over 3-5 years. The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services. Revenue is recognized for these services over time.
As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. We do not typically include extended payment terms in our contracts with customers.
DuringRevenue recognized during the three months ended March 31, 2020 included $11.9 million that was included on the December 31, 2019 the Company’sbalance sheet in contract asset balances decreased approximately $2.6 million,primarily due to billings exceeding new term contracts during the period.liabilities. Deferred revenue decreasedincreased in the same period due to timing of annual renewals.
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Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.
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in thousands |
| 2019 |
| 2020 |
| 2021 |
| Beyond 2021 |
| Total |
| 2020 |
| 2021 |
| 2022 |
| Beyond 2022 |
| Total | ||||||||||
Future revenue related to current unsatisfied performance obligations |
| $ | 6,615 |
| $ | 6,226 |
| $ | 4,090 |
| $ | 10,251 |
| $ | 27,182 |
| $ | 9,327 |
| $ | 9,164 |
| $ | 7,178 |
| $ | 11,654 |
| $ | 37,323 |
The Company applies practical expedients and does not disclose information about remaining performance obligations (a) that have original expected durations of one year or less, or (b) where revenue is recognized as invoiced.
Costs of obtaining a contract
The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. The Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of benefit based on the transfer of goods or services that we have determined to be up to seven years. The Amortization is reflected in Sales and Marketing in the Statements of Operations. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors, including customer attrition. Commissions are earned upon receipt of payment byinvoicing to the customer and requires the employee to be a current employee.customer. For contracts with multiple year payment terms, as the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. Commissions and amortization expense are included in Sales and Marketing expenses on the consolidated statements of operations.
Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less. These costs are included in Sales and Marketing expense in the consolidated statements of operations.
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The following tables provide information related to the capitalized costs and amortization recognized in the current and prior periods:
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in thousands |
|
| March 31, 2019 |
|
| December 31, 2018 |
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| March 31, 2020 |
|
| December 31, 2019 | ||||
Capitalized costs to obtain contracts, current |
| $ | 459 |
| $ | 413 |
|
| $ | 743 |
| $ | 676 | ||||
Capitalized costs to obtain contracts, non-current |
| $ | 2,307 |
| $ | 2,150 |
|
| $ | 3,465 |
| $ | 3,222 | ||||
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| Three months ended |
|
| Three months ended | |||||||||||
in thousands |
|
| March 31, 2019 |
|
| March 31, 2018 | |||||||||||
Amortization of capitalized costs to obtain contracts |
| $ | 109 |
| $ | 65 | |||||||||||
Impairments of capitalized costs to obtain contracts |
| $ | - |
| $ | - |
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|
|
| Three months ended March 31, |
| |||
in thousands |
|
|
| 2020 |
|
| 2019 |
|
Amortization of capitalized costs to obtain contracts |
|
| $ | 169 |
| $ | 109 |
|
Impairments of capitalized costs to obtain contracts |
|
| $ | - |
| $ | - |
|
13
Note 54 – Inventories, net
Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the FIFO method.
Inventories, net are comprised of the following:
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|
| March 31, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
|
| (in thousands) |
| (in thousands) | ||||||||
Component parts |
| $ | 8,371 |
| $ | 5,445 |
| $ | 6,611 |
| $ | 7,429 |
Work-in-process and finished goods |
|
| 6,870 |
|
| 8,983 |
|
| 11,762 |
|
| 12,390 |
Total |
| $ | 15,241 |
| $ | 14,428 |
| $ | 18,373 |
| $ | 19,819 |
Note 65 – Goodwill
Goodwill activity for the three months ended March 31, 20192020 consisted of the following:
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|
|
in thousands |
|
|
|
|
|
|
Net balance at December 31, 2018 |
| $ | 91,841 | |||
Net balance at December 31, 2019 |
| $ | 94,612 | |||
Net foreign currency translation |
|
| 889 |
|
| (3,056) |
Net balance at March 31, 2019 |
| $ | 92,730 | |||
Net balance at March 31, 2020 |
| $ | 91,556 | |||
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|
|
Certain portions of goodwill are denominated in local currencies and are subject to currency fluctuations. No impairment of goodwill was recorded during the three months ended March 31, 20192020 or March 31, 2018.2019.
20
Note 76 – Intangible Assets
Intangible asset activity for the three months ended March 31, 20192020 is detailed in the following table.
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|
|
| ||||||
in thousands |
| Acquired Technology |
| Customer Relationships |
| Other |
| Total Intangible Assets |
| Acquired Technology |
| Customer Relationships |
| Other |
| Total Intangible Assets | ||||||||
Net balance at December 31, 2018 |
| $ | 8,795 |
| $ | 30,408 |
| $ | 6,259 |
| $ | 45,462 | ||||||||||||
Net balance at December 31, 2019 |
| $ | 5,454 |
| $ | 26,884 |
| $ | 3,871 |
| $ | 36,209 | ||||||||||||
Additions |
|
| — |
|
| — |
|
| 13 |
|
| 13 | ||||||||||||
Net foreign currency translation |
|
| 120 |
|
| 214 |
|
| (12) |
|
| 322 |
|
| (203) |
|
| (607) |
|
| (6) |
|
| (816) |
Amortization expense |
|
| (882) |
|
| (912) |
|
| (554) |
|
| (2,348) |
|
| (860) |
|
| (906) |
|
| (588) |
|
| (2,354) |
Net balance at March 31, 2019 |
| $ | 8,033 |
| $ | 29,710 |
| $ | 5,693 |
| $ | 43,436 | ||||||||||||
Net balance at March 31, 2020 |
| $ | 4,391 |
| $ | 25,371 |
| $ | 3,290 |
| $ | 33,052 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019 balance at cost |
| $ | 42,612 |
| $ | 39,359 |
| $ | 13,705 |
| $ | 95,676 | ||||||||||||
March 31, 2020 balance at cost |
| $ | 41,794 |
| $ | 38,736 |
| $ | 13,701 |
| $ | 94,231 | ||||||||||||
Accumulated amortization |
|
| (34,579) |
|
| (9,649) |
|
| (8,012) |
|
| (52,240) |
|
| (37,403) |
|
| (13,365) |
|
| (10,411) |
|
| (61,179) |
Net balance at March 31, 2019 |
| $ | 8,033 |
| $ | 29,710 |
| $ | 5,693 |
| $ | 43,436 | ||||||||||||
Net balance at March 31, 2020 |
| $ | 4,391 |
| $ | 25,371 |
| $ | 3,290 |
| $ | 33,052 |
Certain intangible assets are denominated in local currencies and are subject to currency fluctuations. No impairment of intangible assets was recorded during the three months ended March 31, 2020 or March 31, 2019.
Note 87 – LeasesProperty and Equipment
As mentioned in Note 2 – SummaryThe major classes of Significant Accounting Policies, the Company adopted ASU 2016-02, property and equipment are as follows:Leases on January 1, 2019, using the modified retrospective approach. The adoption
|
|
|
|
|
|
|
in thousands |
| March 31, 2020 |
| December 31, 2019 | ||
Office equipment and software |
| $ | 13,820 |
| $ | 14,595 |
Leasehold improvements |
|
| 10,229 |
|
| 9,417 |
Furniture and fixtures |
|
| 3,795 |
|
| 3,717 |
Total |
|
| 27,844 |
|
| 27,729 |
14
Accumulated depreciation |
|
| (15,687) |
|
| (16,275) |
Property and equipment, net |
| $ | 12,157 |
| $ | 11,454 |
Depreciation expense was $0.7 million and $8.5$0.5 million in Other accrued expenses and Long-term lease liabilities, respectively, as of January 1, 2019, to capture the cumulative effect of the standard. The difference between the asset and liability is a result of lease incentives, such as tenant improvement allowances, and deferred rent on the balance sheet at transition.
The Company leases certain real estate and automobiles. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the unaudited consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company determines if an arrangement is a lease at inception. All of our leases are operating leases.
Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s leases do not provide an implicit rate of return, the Company uses its imputed collateralized rate based on the information available at the commencement date in determining the present value of lease payments. Operating lease ROU assets are comprised of the lease liability plus prepaid rents and are reduced by lease incentives or deferred rents. The Company has lease agreements with non-lease components which are not bifurcated.
Some of our leases include one or more options to renew, with renewal terms that can extend the lease from one to five years. The exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options to purchase the leased property at fair value. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. Certain of the Company’s lease agreements include payments adjusted periodically for inflation based on the consumer price index. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating lease costs for the three months ended March 31, 2020 and 2019, included $0.9 million attributablerespectively.
Note 8 – Fair Value Measurements
The fair values of cash equivalents, receivables, net, and accounts payable approximate their carrying amounts
due to building rent,their short duration. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing base upon its own market assumptions.
The Company classifies its investments in debt securities as available-for-sale. As described in Note 2- Summary of Significant Accounting Policies, the January 1, 2020 adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, amended our accounting for available-for-sale debt securities. We review available-for-sale det securities for impairments related to losses and $0.3 million attributableother factors each quarter. The unrealized gains and losses on the available-for-sale debt securities were not material as of March 31, 2020 and December 31, 2019.
The estimated fair value of our financial instruments has been determined by using available market information and appropriate valuation methodologies, as defined in ASC 820, Fair Value Measurements. The fair value hierarchy consists of the following three levels:
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or
similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and
market-corroborated inputs which are derived primarily from or corroborated by observable market data.
Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are
unobservable.
The following tables summarize assets that are measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurement at Reporting Date Using | ||||
in thousands |
|
| March 31, 2020 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes |
| $ | 8,337 |
| - | $ | 8,337 |
| - |
Corporate Notes / Bonds |
| $ | 9,167 |
| - | $ | 9,167 |
| - |
Commercial Paper |
| $ | 3,508 |
| - | $ | 3,508 |
| - |
U.S. Treasury Bills |
| $ | 2,390 |
| - | $ | 2,390 |
| - |
U.S. Government Agencies |
| $ | 2,250 |
| - | $ | 2,250 |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurement at Reporting Date Using | ||||
in thousands |
|
| December 31, 2019 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes |
| $ | 9,225 |
| - | $ | 9,225 |
| - |
Corporate Notes / Bonds |
| $ | 8,169 |
| - | $ | 8,169 |
| - |
Commercial Paper |
| $ | 3,482 |
| - | $ | 3,482 |
| - |
15
U.S. Treasury Bills |
| $ | 2,385 |
| - | $ | 2,385 |
| - |
U.S. Government Agencies |
| $ | 2,249 |
| - | $ | 2,249 |
| - |
Note 9 – Allowance for credit losses
As described in Note 2 - Summary of Significant Accounting Policies, the January 1, 2020 adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, amended our accounting policies for the allowance for credit losses.
The changes in the allowance for credit losses during the three months ended March 31, 2020 were as follows:
|
|
|
|
in thousands |
|
| March 31, 2020 |
Balance at December 31, 2019 |
| $ | 2,524 |
Impact of ASU 2016-13 adoption |
|
| 288 |
Balance at January 1, 2020 |
|
| 2,812 |
Provision |
|
| 360 |
Net foreign currency translation |
|
| (7) |
Balance at March 31, 2020 |
| $ | 3,165 |
A higher allowance for credit losses was recorded during the three months ended March 31, 2020 due to automobile rentals. the likely adverse impact the COVID-19 pandemic has had and will have on factors that affect our estimate of future credit losses.
Note 10 – Leases
Operating lease costscost details for the three months ended March 31, 2018 included $0.8 million attributable to building rent,2020 and $0.3 million attributable to automobile rentals.
21
Supplemental unaudited consolidated balance sheet information related to leases is2019 are as follows:
|
|
|
|
|
|
|
|
| March 31, 2019 |
|
| Balance Sheet Classification | |
in thousands |
|
|
|
|
|
|
Leases |
|
|
|
|
|
|
Assets |
|
| 8,768 |
|
| Operating lease right-of-use assets |
Operating lease assets |
| $ | 8,768 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Current |
|
|
|
|
|
|
Operating lease liabilities |
| $ | 3,075 |
|
| Other accrued expenses |
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
Operating lease liabilities |
|
| 7,852 |
|
| Lease liability long term |
Total lease liabilities |
| $ | 10,927 |
|
|
|
|
|
|
|
|
| |
|
| Three months ended | ||||
|
| March 31, | ||||
|
| 2020 |
| 2019 | ||
|
| (in thousands) | ||||
Building rent |
| $ | 691 |
| $ | 864 |
Automobile rentals |
|
| 352 |
|
| 277 |
Total net operating lease costs |
| $ | 1,043 |
| $ | 1,141 |
The At March 31, 2020, the weighted average remaining lease term for our operating leases is 5.87.0 years. The weighted-averageweighted average discount rate for our operating leases is 4.9%5%.
Supplemental unaudited interim consolidatedDuring the three months ended March 31, 2020, there were $1.0 million of operating cash flow information related to leases is as follows:payments for lease liabilities, and $1.9 million of right-of use assets obtained in exchange for new lease liabilities.
|
|
|
|
|
| Three Months Ended | |
|
| March 31, 2019 | |
|
| (in $ thousands) | |
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
Operating cash flows from operating leases |
| $ | 323 |
|
|
|
|
ROU assets obtained in exchange for new operating lease liabilities |
| $ | 387 |
16
Maturities of our operating leases are as follows:
|
|
|
|
|
|
|
|
| As of March 31, 2019 |
| As of March 31, 2020 | ||
|
|
| (in $ thousands) |
|
| (in $ thousands) |
2019 |
| $ | 2,760 | |||
2020 |
|
| 2,450 | |||
2020 (remaining 9 months) |
| $ | 3,241 | |||
2021 |
|
| 1,940 |
|
| 3,048 |
2022 |
|
| 1,526 |
|
| 2,597 |
2023 |
|
| 1,198 |
|
| 2,096 |
2024 |
|
| 1,369 | |||
Later years |
|
| 2,942 |
|
| 6,423 |
Less imputed interest |
|
| (1,889) |
|
| (3,234) |
Total lease obligations |
| $ | 10,927 | |||
Total lease liabilities |
| $ | 15,540 |
22
Disclosures related to periods prior to adoption of ASU 2016-02
Operating lease rent expense was $4.9 million for the year ended December 31, 2018. Future minimum lease payments under non-cancelable rental and lease agreements which had initial or remaining terms in excess of one year are as follows:
|
|
|
|
|
| As of December 31, 2018 | |
|
|
| (in $ thousands) |
2019 |
| $ | 3,817 |
2020 |
|
| 3,081 |
2021 |
|
| 2,671 |
2022 |
|
| 2,244 |
2023 |
|
| 1,941 |
Later years |
|
| 8,870 |
Minimum lease commitments |
| $ | 22,624 |
During the year ended December 31, 2018, we entered into a new lease agreement which will commence during the three months ended September 30, 2019. We estimate that the undiscounted future minimum obligations related to this lease will be approximately $7.4 million. This obligation is disclosed as part of our future minimum lease obligations table above.
Our estimated annual tax rate for 20192020 before discrete items is expected to be approximately 59%96%. Our global effective tax rate is higher than the U.S. statutory tax rate of 21% primarily due to forecasted losses in jurisdictions for which a valuation allowance will be required. Our ultimate tax expense will depend on the mix of earnings in various jurisdictions. Income taxes paid during the three months ended March 31, 20192020 was $4.0$5.7 million.
At December 31, 2018,2019, we had deferred tax assets of $24.6$24.9 million resulting from foreign and state NOL carryforwards of $132.2$16.6 million and other foreign deductible carryforwards of $37.0$8.3 million. At December 31, 2018,2019, we had a valuation allowance of $15.2$17.3 million against deferred tax assets related to certain carryforwards.
Certain of our non-U.S. operations have incurred net operating losses (NOLs), which may become deductible to the extent these operations become profitable. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain non-U.S. operations record a loss, we do not recognize a corresponding tax benefit, thus increasing our effective tax rate. Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in the period.
On March 27, 2020 President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among other provision, the law provides relief to U.S. federal corporate taxpayers through temporary adjustments to net operating loss rules, changes to limitations on interest expense deductibility, the acceleration of available refunds for minimum tax credit carryforwards, and depreciation method changes. We do not expect the provisions of the legislation to have a significant impact on our effective tax rate nor the income tax payable and deferred income tax positions of the Company.
Note 1012 – Long-Term Compensation Plan and Stock Based Compensation (share counts in thousands)
In prior periods,Under the OneSpan Inc. 2019 Omnibus Incentive Plan, we awarded 136 restricted stock units during the three months ended March 31, 2020, subject to time-based vesting. During the same period we awarded restricted stock units some of which are subject to the achievement of future performance criteria and others that are subject to the achievement of market conditions. For the restricted stock units for which performance criteria have been established, the Company has awardedcurrently believes it is probable that 32 unissued shares of time-basedwill be earned. The restricted stock units subject to market conditions allow for up to 64 shares to be earned if the market conditions are fully achieved. The fair value of the unissued 136 restricted stock units was $2.6 million at the date of grant, and is being amortized over the vesting period of one to four years. The fair value of the 96 unissued shares subject to future performance criteria underor market conditions was approximately $1 million at the OneSpan Inc. 2009 Equity Incentive Plan.
The 2009 Equity Incentive Plan terminated on December 19, 2018, and no additional securities remained for issuance. The 2019 Omnibus Incentive Plan was adopted by the Boarddate of Directors on February 1, 2019grant, and is being submitted to stockholders for approval atamortized over the annual shareholder meeting to be held in the second quartervesting period of 2019.three years.
2317
The following table details long-term compensation plan and stock-based compensation expense for the three and months ended March 31, 20192020 and 2018:2019:
|
|
|
|
|
|
|
| ||||||
|
| Three months ended |
|
|
|
|
|
|
| ||||
|
| March 31, |
|
| March 31, | ||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 | ||||
in thousands |
| (in thousands) |
|
| (in thousands) | ||||||||
Restricted stock |
| $ | 552 |
| $ | 800 |
|
| $ | 1,350 |
| $ | 552 |
Long-term compensation plan |
|
| 503 |
|
| 552 |
|
|
| 365 |
|
| 503 |
Total compensation |
| $ | 1,055 |
| $ | 1,352 |
|
| $ | 1,715 |
| $ | 1,055 |
Note 1113 – Earnings per Share (share counts in thousands)
Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of common stock equivalents to the extent they are not anti-dilutive. For the three months ended March 31, 2020, 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, 2019, 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 months ended March 31, 20192020 and 20182019 are as follows:
|
|
|
|
|
|
|
| ||||||
|
| Three months ended |
|
|
|
|
|
|
| ||||
|
| March 31, |
|
| March 31, | ||||||||
in thousands, except per share data |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 | ||||
Net income (loss) |
| $ | (5,671) |
| $ | 1,792 |
|
| $ | 98 |
| $ | (5,671) |
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 40,036 |
|
| 39,910 |
|
|
| 40,127 |
|
| 40,036 |
Incremental shares with dilutive effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards |
|
| — |
|
| 149 |
|
|
| 211 |
|
| — |
Diluted |
|
| 40,036 |
|
| 40,059 |
|
|
| 40,338 |
|
| 40,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.14) |
| $ | 0.04 |
|
| $ | 0.00 |
| $ | (0.14) |
Diluted |
| $ | (0.14) |
| $ | 0.04 |
|
| $ | 0.00 |
| $ | (0.14) |
Note 1214 – Legal Proceedings and Contingencies
We are a party to or have intellectual property subject to litigation and other proceedings that arise in the ordinary course of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our financial results in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the
18
reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a process
24
in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
We include various types of indemnification clauses in our agreements. These indemnifications may include, but are not limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have no liabilities recorded for these clauses as of March 31, 2019.2020.
On March 14, 2017,We are involved in an ongoing dispute with a complaint was filedGerman company, Onespin solutions GmbH, regarding the co-existence of, or alleged infringement with, its trademark in certain jurisdictions for “ONESPIN” and our trademark in certain jurisdictions for “ONESPAN”. Onespin sells integrated circuit integrity verification solutions for use in the United States District Court forsystem on chip software development process flow. We believe that its products and services are sufficiently different from ours. Therefore, among other reasons, we are vigorously defending our intellectual property rights where necessary. In addition, we are the Districtplaintiff in litigation against Onespin in Europe currently. While the outcome of Massachusetts, captioned StrikeForce Technologies, Inc. v. Vasco Data Security International, Inc., et al., claiming the Company infringed on certain patentany particular aspect of this current dispute cannot be predicted with certainty, including timing, we plan to continue to assert our rights of the plaintiff. On May 8, 2017, the Company answered the complaint denying the allegations of patent infringement. The parties then engaged in motion practice and discovery in the case. The plaintiff has also brought suit against various other companies in the cybersecurity industry. In one such suit in the federal district court for the Central District of California, on December 1, 2017, the court granted defendant’s motion to dismiss, finding that the StrikeForce asserted claims are invalid. StrikeForce appealed such decision. In light of such ruling, on December 20, 2017, the court in the Company’s case granted a stay of the proceedings pending the appeal in the related case. On April 16, 2019, the Court dismissed the claims of StrikeForce against us with prejudice. We consider this case to be closed.
prosecute litigation wherever advisable.
From time to time, we have been involved in the litigation and claims incidental to the conduct of our business.business, such as compensation claims from current or former employees in Europe. We expect that to continue. Excluding matters specifically disclosed above, we are not a party to any lawsuit or proceeding that, in management’s opinion, is likely to have a material adverse effect on its business, financial condition or results of operations.
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except headcount, ratios, time periods and percentages)
Unless otherwise noted, references in this Quarterly Report on Form 10‑Q to “OneSpan,” “Company,” “we,” “our,” and “us” refer to OneSpan Inc. and its subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10‑Q, contains forward-looking statements within the meaning of applicable U.S. Securities laws, including statements regarding the potential benefits, performance, and functionality of our products and solutions, including future offerings; our expectations, beliefs, plans, operations and strategies relating to our business and the future of our business; our acquisitions to date and our strategy related to future acquisitions; and our expectations regarding our financial performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate", "anticipate", expect", "intend", and statements that an event or result "may", "will", "should", "could", or "might" occur or be achieved and any other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions which, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could materially affect our business and financial results include, but are not limited to: market acceptance of our products and solutions and competitors’ offerings; the potential effects of technological changes; our ability to effectively identify, purchase and integrate acquisitions; the execution of our transformative strategy on a global scale; the increasing frequency and sophistication of hacking attacks; claims that we have infringed the intellectual property rights of others; changes in customer requirements; price competitive bidding; changing laws, government regulations or policies; pressures on price levels; investments in new products or businesses that may not achieve expected returns; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; exposure to increased economic and operational uncertainties from operating a global business as well as those factors set forth in our Form 10-K (and other forms) filed with the Securities and Exchange Commission. In particular,
19
we direct you to the risk factors contained under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our
25
Form 10-K. In addition, we direct you to our financial statements and the accompanying Notes to Financial Statements contained in this Report. Our SEC filings and other important information can be found on the Investor Relations section of our website at ir.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 Report.
COVID-19 Pandemic Response and Impact
In March 2020, the World Health Organization recognized a novel strain of coronavirus (COVID-19) as a pandemic. In response to the pandemic, the United States and various foreign, state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. The pandemic and the various governments’ response have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate.
Outlook and Financial Results
Through March 31, 2020, we have not experienced a material adverse impact to our business, operations or financial results as a result of the pandemic. The financial services industry response to the pandemic is accelerating the adoption of mobile and cloud technologies and of the technologies needed to protect those channels. Our fraud prevention and process digitization technologies, and ability to deliver on a global basis currently have us well positioned in this environment, and may have contributed to higher revenue during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
However, in the current and future periods, we may experience weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results.
As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets, any negative impact to our results cannot be reasonably estimated, but it could be material. We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. We are able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. See Part II – Item 1A – Risk Factors of this Form 10-Q for additional information regarding the potential impact of COVID-19 on the Company.
Overview
We design, develop and market digital solutions for identity, security, and business productivity that protect and facilitate electronic transactions via mobile and connected devices. We are a global leader in providing anti-fraud and digital transaction management solutions to financial institutions and other businesses. Our solutions secure access to online accounts, data, assets, and applications for global enterprises; provide tools for application developers to easily integrate security functions into their web-based and mobile applications; and facilitate end-to-end financial agreement automation including digital identity verification, customer due diligence, electronic signature, secure storage and document management. Our core technologies, multi-factor authentication, identity verification and transaction signing, strengthen the process of preventing hacking attacks against online and mobile transactions to allow companies to transact business safely with remote customers.
We offer cloud based and on premises solutions using both open standards and proprietary technologies. Some of our proprietary technologies are patented. Our products and services are used for authentication, fraud mitigation, e-signing transactions and documents, and identity management in Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and Business-to-Consumer (“B2C”) environments. Our target market is business processes using electronic interface, particularly the Internet, where there is risk of unauthorized access. Our products can increase security
20
associated with accessing business processes, reduce losses from unauthorized access and reduce the cost of the process by automating activities previously performed manually.
Our Business Model
We offer our products through a product sales and licensing model or through our services platform, which includes our cloud-based service offering.
Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers. Our sales force is able to offer customers a choice of an on-site implementation using our traditional on-premises model or a cloud implementation for some solutions using our services platform.
Industry Growth
We believe there are no reliable measurements of the industry size or growth rates for the segments that we serve. However, we believe the marketmarkets for authentication, anti-fraud,fraud mitigation, agreement automation, and electronic signature solutions will continue to grow driven by new government regulations, growing awareness of the impact of cyber-crime, increasing focus on the digital experience for mobile and online users, and the growth in electronic commerce. The issues driving growth are globalglobal; however, the rate of adoption in each country is a function of local culture, competitive position, economic conditions, and the use of technology.technology may vary significantly.
Economic Conditions
Our revenue may vary significantly with changes in the economic conditions in the countries in which we currently sell products. With our current concentration of revenue in Europe and specifically in the banking and finance vertical market, significant changes in the economic outlook for the European banking market may have a significant effect on our revenue.
The COVID-19 pandemic and the various governments’ response have caused significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate. See Part II, Item 1A – Risk Factors of this Form 10-Q for additional information regarding the potential impact of COVID-19 on the Company.
26
Cybersecurity Risks
Our use of technology is increasing and is critical in three primary areas of our business:
1. | Software and information systems that we use to help us run our business more efficiently and cost effectively; |
2. | The products we have traditionally sold and continue to sell to our customers for integration into their software applications contain technology that incorporates the use of secret numbers and encryption technology; and |
3. | New products and services that we introduced to the market are focused on processing information through our servers or in the cloud. |
We believe that the risks and consequences of potential incidents in each of the above areas are different.
In the case of the information systems we use to help us run our business, we believe that an incident could disrupt our ability to take orders or deliver product to our customers, but such a delay in these activities would not have a material impact on our overall results. To minimize this risk, we actively use various forms of security and monitor the use of our systems regularly to detect potential incidents as soon as possible.
21
In the case of products that we have traditionally sold, we believe that the risk of a potential cyber incident is minimal. We offer our customers the ability to either create the secret numbers themselves or have us create the numbers on their behalf. When asked to create the numbers, we do so in a secure environment with limited physical access and store the numbers on a system that is not connected to any other network, including other OneSpan networks, and similarly, is not connected to the Internet.
In the case of our cloud-based solutions, which involve the processing of customer information, we believe a cyber incident could have a material impact on our business. While our revenue from cloud-based solutions comprises a minority of our revenue today, we believe that these solutions will provide substantial future growth. A cyber incident involving these solutions in the future could substantially impair our ability to grow the business and we could suffer significant monetary and other losses and significant reputational harm.
To minimize the risk, we review our product security and procedures on a regular basis. Our reviews include the processes and software code we are currently using as well as the hosting platforms and procedures that we employ. We mitigate the risk of cyber incidents through a series of reviews, tests, tools and training. Certain insurance coverages may apply to certain cyber incidents. Overall, we expect the cost of securing our networks will increase in future periods, whether through increased staff, systems or insurance coverage.
While we did not experience any cyber incidentincidents in the first three months of 20192020 that had a significant impact on our business, it is possible that we could experience an incident in 20192020 or future years, which could result in unanticipated costs.
Currency Fluctuation
During the three months ended March 31, 2019,2020, approximately 73%87% of our revenue was generated outside of the United States. While the majority of our revenues are generated outside of the United States, the majoritya significant amount of our revenue earned during the three months ended March 31, 20192020 was denominated in U.S. Dollars. We estimate that approximately 65% of our revenue forDuring the three months ended March 31, 20192020, we estimate that approximately 44% of our revenue was denominated in U.S. Dollars.
In addition, during the three months ended March 31, 2019,2020, approximately 70% 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.
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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 incomeloss of $0.9 million and $1.3$4.3 million for the three months ended March 31, 20192020, and other comprehensive income of $0.9 million for the three months ended March 31, 2018, respectively.2019. These amounts are included as a separate component of stockholders’ equity. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. Dollar.
Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net. Foreign exchange transaction losses aggregated $0.5 million and $0.9 million for the three months ended March 31, 2019 compared to gains of $0.2 million for the three months ended2020 and March 31, 2018.2019, respectively.
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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 |
· | Service and other revenue. Service and other revenue includes subscription solutions (which is our definition of software-as-a-service solutions), maintenance and support, and professional services. |
Cost of Goods Sold
Our total cost of goods sold consists of cost of product and license revenue and cost of service and other revenue. We expect our cost of goods sold to increase in absolute dollars as our business grows, although it may fluctuate as a percentage of total revenue from period to period.
· | Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs. |
· | Cost of service and other revenue. Cost of service and other revenue primarily consists of costs related to subscription solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance and support. |
Gross Profit
Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including our average selling price, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.
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Operating Expenses
Our operating expenses are generally based on anticipated revenue levels and fixed over short periods of time. As a result, small variations in revenue may cause significant variations in the period-to-period comparisons of operating income or operating income as a percentage of revenue.
Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 55% and 60%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 20192020 compared to the same period in 20182019 resulted in a decrease in operating expenses of approximately $1.1$0.5 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, 20192020 included $0.5$1.7 million of
23
expenses related to stock-based and long-term incentive plan costs compared to $0.6$1.1 million of stock-based and long-term incentive plan costscost for the three months ended March 31, 2018.2019.
· | Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. We expect sales and marketing expenses to increase in absolute dollars as we continue to invest in sales resources in key focus areas, although our sales and marketing expenses may fluctuate as a percentage of total revenue. |
· | Research and development. Research and development expenses consist primarily of personnel costs and long-term incentive compensation. We expect research and development expenses to increase in absolute dollars as we continue to invest in our future solutions, although our research and development expenses may fluctuate as a percentage of total revenue. |
· | General and administrative. General and administrative expenses consist primarily of personnel costs, legal and other professional fees, and long term incentive compensation. We expect general and administrative expenses to increase in absolute dollars although our general and administrative expenses may fluctuate as a percentage of total revenue. |
· | Amortization and impairment of intangible assets. Acquired intangible assets are amortized over their respective amortization periods, and are periodically evaluated for impairment. |
Interest Income, Net
Interest income, net consists of income earned on our cash equivalents and short term investments. Our cash equivalents and short term investments are invested in short-term instruments at current market rates.
Other Income (Expense), Net
Other income (expense), net primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and development in those countries and other miscellaneous non-operational expenses.
Income Taxes
Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). All our IP in our traditional authentication business is owned by two subsidiaries, one in the U.S. and one in Switzerland.
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These two subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to our U.S. and Swiss subsidiaries on either a percentage of revenue or on a cost plus basis or both. Under this structure, the earnings of our service provider subsidiaries are relatively constant. These service provider companies tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings tend to flow to the U.S. company and Swiss company. In 2019,2020, earnings flowing to the U.S. company are expected to be taxed at a rate of 21% to 25%, while earnings flowing to the Swiss company are expected to be taxed at a rate ranging from 11%16% to 12%17%, including Swiss withholding tax, the earnings could be taxed up to 25%. A Canadian and UK subsidiary currently sellssell and servicesservice global customers directly.
As the majority of our revenues are generated outside of the U.S., our consolidated effective tax rate is strongly influenced by the effective tax rate of our foreign operations. Changes in the effective rate related to foreign operations reflect changes in the geographic mix of earnings and the tax rates in each of the countries in which it is earned. The statutory tax rate for the primary foreign tax jurisdictions ranges from 11% to 35%.
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The geographic mix of earnings of our foreign subsidiaries primarily depends on the level of pretax income of our service provider subsidiaries and the benefit realized in Switzerland through the sales of product. The level of pretax income in our service provider subsidiaries is expected to vary based on:
1. | the staff, programs and services offered on a yearly basis by the various subsidiaries as determined by management, or |
2. | the changes in exchange rates related to the currencies in the service provider subsidiaries, or |
3. | the amount of revenues that the service provider subsidiaries generate. |
For items 1 and 2 above, there is a direct impact in the opposite direction on earnings of the U.S. and Swiss entities. Any change from item 3 is generally expected to result in a larger change in income in the U.S. and Swiss entities in the direction of the change (increased revenues expected to result in increased margins/pretax profits and conversely decreased revenues expected to result in decreased margins/pretax profits).
In addition to the provision of services, the intercompany agreements transfer the majority of the business risk to our U.S. and Swiss subsidiaries. As a result, the contracting subsidiaries’ pretax income is reasonably assured while the pretax income of the U.S. and Swiss subsidiaries varies directly with our overall success in the market.
In November 2015, we acquired OneSpan Canada Inc. (formerly eSignLive), a foreign company with substantial IP and net operating losses and other tax carryforwards. The tax benefit of the carryforwards has been fully reserved as realization has not been deemed more likely than not.
In May 2018, we acquired Dealflo Limited (“Dealflo”), a foreign company with substantial IP and net operating losses. The tax benefit of the loss carryforwards will be reserved to the extent they exceed the deferred tax liabilities recognized upon acquisition as realization has not been deemed more likely than not.
3025
Results of Operations
Revenue
Revenue by Product: We generate revenue from the sale of our hardware products, software licenses, subscriptions, professional services, and maintenance and support. Product and license revenue includes hardware products and software licenses. Service and other revenue includes subscription solutions (which is our definition of software-as-a-service solutions), maintenance and support, and professional services.
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| Three months ended March 31, |
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| Three months ended March 31, |
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| 2019 | 2018 |
| % Change |
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| 2019 |
| $ Change |
| % Change | ||
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Revenue |
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Product and license |
| $ 31,861 |
| $ 33,494 |
| -5% |
| $ 38,260 |
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| $ 31,861 |
| $ 6,399 |
| 20% | |
Services and other |
| 15,747 |
| 11,938 |
| 32% |
| 18,232 |
|
| 15,747 |
| 2,485 |
| 16% | |
Total revenue |
| $ 47,608 |
| $ 45,432 |
| 5% |
| $ 56,492 |
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| $ 47,608 |
| $ 8,884 |
| 19% | |
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% of Total Revenue |
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Product and license |
| 67% |
| 74% |
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| 68% |
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| 67% |
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| |
Services and other |
| 33% |
| 26% |
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| 32% |
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| 33% |
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Total revenue increased $2.2$8.9 million or 5%19%, during the three months ended March 31, 20192020 compared to the three months ended March 31, 2018.
Product2019, primarily driven by an increase in recurring revenue, which is the portion of our revenue subject to future renewal. Recurring revenue, comprised of subscription, term-based software licenses, and licensemaintenance, support and other revenue, decreased by $1.6increased $10.0 million or 5%62% during the three months ended March 31, 20192020, compared to the three months ended March 31, 2018, which was driven by lower sales of software licenses, partially offset by higher hardware revenue.2019.
ServicesProduct and otherlicense revenue increased by $3.8$6.4 million or 32%20% during the three months ended March 31, 20192020 compared to the three months ended March 31, 2018.2019, which was driven by higher software sales of $11.0 million, partially offset by lower hardware sales of $4.6 million. The software sales increase was comprised of an $8.1 million increase in revenue generated from term-based software licenses and a $2.9 million increase in revenue generated from perpetual software licenses.
Services and other revenue increased by $2.5 million, or 16% during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase for the three month period ended March 31, 2020 compared to the same period in 2019 was due todriven primarily by higher maintenance, subscription, and maintenanceprofessional services revenue.
We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments reflecting the transactional nature of significant parts of our business. As a result of the volatility in our business, we believe that the overall strength of our business is best evaluated over a longer term where the impact of transactions in any given period is not as significant as in a quarter-over-quarter comparison.
Revenue by Geographic Regions: We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes sales in North, Central, and
26
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:
31
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Revenue |
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EMEA |
| $ 25,599 |
| $ 18,387 |
| 39% |
| $ 33,726 |
| $ 25,599 |
| $ 8,127 |
| 32% |
Americas |
| 12,731 |
| 15,921 |
| -20% |
| 12,333 |
| 12,731 |
| (398) |
| -3% |
APAC |
| 9,278 |
| 11,124 |
| -17% |
| 10,433 |
| 9,278 |
| 1,155 |
| 12% |
Total revenue |
| $ 47,608 |
| $ 45,432 |
| 5% |
| $ 56,492 |
| $ 47,608 |
| $ 8,884 |
| 19% |
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% of Total Revenue |
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EMEA |
| 54% |
| 40% |
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| 60% |
| 54% |
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Americas |
| 27% |
| 35% |
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| 22% |
| 27% |
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APAC |
| 19% |
| 24% |
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| 18% |
| 19% |
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Revenue generated in EMEA during the three months ended March 31, 20192020 was $25.6$8.1 million, or 39%32% higher than the three months ended March 31, 2018. The increase in revenue is2019, driven by higher hardware revenue.software license sales.
Revenue generated in the Americas during the three months ended March 31, 20192020 was $12.7$0.4 million, or 20%3% lower than the three months ended March 31, 2018,2019, driven by a decrease in perpetual license softwarehardware revenue offset by an increase in maintenance revenue.
Revenue generated in the Asia Pacific region during the three months ended March 31, 20192020 was $9.3$1.2 million, or 17% lower12% higher than the three months ended March 31, 2018. The revenue decrease was2019, driven by lowerhigher software license revenue from software licenses.and maintenance revenue, offset by a decrease in hardware revenue.
Cost of Goods Sold and Gross Margin
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Cost of goods sold |
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Product and license |
| $ 11,316 |
| $ 8,185 |
| $ 3,131 |
| 38% |
| $ 10,738 |
| $ 11,316 |
| $ (578) |
| -5% |
Services and other |
| 4,723 |
| 2,550 |
| 2,173 |
| 85% |
| 5,332 |
| 4,723 |
| 609 |
| 13% |
Total cost of goods sold |
| $ 16,039 |
| $ 10,735 |
| $ 5,304 |
| 49% |
| $ 16,070 |
| $ 16,039 |
| $ 31 |
| 0% |
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Gross profit |
| $ 31,569 |
| $ 34,697 |
| (3,128) |
| -9% |
| $ 40,422 |
| $ 31,569 |
| 8,853 |
| 28% |
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Gross margin |
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Product and license |
| 64% |
| 76% |
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| 72% |
| 64% |
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Services and other |
| 70% |
| 79% |
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| 71% |
| 70% |
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Total gross margin |
| 66% |
| 76% |
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| 72% |
| 66% |
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The cost of product and license revenue increased $3.1decreased $0.6 million or 38% during the three months ended March 31, 20192020 compared to the three months ended March 31, 2018,2019. The decrease in cost of product and license during the period was due to a product mix of higherlower token costs, driven by lower hardware revenuesales as a percentage of total revenue.
The cost of services and other revenue increased by $2.2$0.6 million, or 85%13% during the three months ended March 31, 20192020 compared to the three months ended March 31, 2018, driven primarily by2019. The increase in cost of services and other revenue is reflective of higher cloud servicesubscription revenue, which has increased cloud-based infrastructure costs. Increased software costs from Dealflo contributed to $0.4 million
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Gross profit decreased $3.1increased $8.9 million, or 9%28% during the three months ended March 31, 20192020 compared to the three months ended March 31, 2018.2019. Gross profit margin was 72% for the three months ended March 31, 2020, compared to 66% for the three months ended March 31, 2019,
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compared to 76%2019. The overall increase in profit margins for the three months ended March 31, 2018. The decrease in profit margin for the three months ended March 31, 20192020 was driven by both higher hardware revenueproduct and license margins, as a percentage of total revenuewell as higher services and a decreaseother margins compared to the comparable period in service margins.the prior year.
The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies including the Euro. As the U.S. Dollar strengthened against the Euro for the three months ended March 31, 2019 compared to the same period of 2018, revenue from sales made in Euros decreased, as measured in US Dollars, 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 $1.8$1.1 million for the three months ended March 31, 2019.2020. Had currency rates in 20192020 been equal to rates in 2018,2019, the gross profit margin would have been approximately 3.82 percentage points higher for the three months ended March 31, 2019.2020.
Operating Expenses
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Operating costs |
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Sales and marketing |
| $ | 14,383 |
| $ | 14,277 |
| $ 106 |
| 1% | $ | 14,859 |
| $ | 14,383 |
| $ 476 |
| 3% | |
Research and development |
| 10,495 |
| 5,797 |
| 4,698 |
| 81% |
| 9,994 |
| 10,495 |
| (501) |
| -5% | ||||
General and administrative |
| 9,870 |
| 10,774 |
| (904) |
| -8% |
| 12,268 |
| 9,870 |
| 2,398 |
| 24% | ||||
Amortization of intangible assets |
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| 2,348 |
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| 2,201 |
| 147 |
| 7% |
| 2,354 |
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| 2,348 |
| 6 |
| 0% | |
Total operating costs |
| $ | 37,096 |
| $ | 33,049 |
| $ 4,047 |
| 12% | $ | 39,475 |
| $ | 37,096 |
| $ 2,379 |
| 6% |
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended March 31, 20192020 were $14.4$14.9 million, an increase of $0.1$0.5 million or 1%3%, from the three months ended March 31, 2018. 2019. The increase was driven by higher personnel costs related to a headcount increase, partially offset by lower commissions paid due to a revised commissions structure, and lower marketing spend.
Average full-time sales, marketing, support, and operating employee headcount for the three months ended March 31, 20192020 was 320,326 compared to 317320 for the three months ended March 31, 2018.2019. Headcount was 1%2% higher for the three months ended March 31, 2019,2020, compared to the same period in 2018.2019.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2019,2020, were $10.5$10.0 million, an increasea decrease of $4.7$0.5 million, or 81%5%, from the three months ended March 31, 2018. The increase in expense was driven by higher cloud services costs for our test environment and increased headcount. Additional investment in research and development from Dealflo accounted for $1.7 million of costs during the three months ended March 31, 2019. The decrease in expense for the three month period ended March 31, 2020 was primarily driven by lower cloud computing costs for our test environment.
Average full-time research and development employee headcount for the three months ended March 31, 2019 2020 was 298,311, compared to 209298 for the three months ended March 31, 2018.2019. Average headcount was approximately 42%4% higher for the three months ended March 31, 2019,2020, when compared to the same period in 2018.2019.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 20192020, were $9.9$12.3 million, a decreasean increase of $0.9$2.4 million or 8%24%, from the three months ended March 31, 2018 which2019. The increase in general and administrative expenses for the three months ended March 31, 2020, compared to the same period in 2019 was primarily driven by lower long-term incentive planhigher personnel costs which included additional stock comp due to an increase in eligible participants. The increase in expense was also driven by higher consulting spend, additional expense for subscription software tools
28
implemented throughout 2019, and other lower employee benefits spend.higher bad debt expense driven by the implementation of ASU 2016-13 on January 1, 2020.
Average full-time general and administrative employee headcount for the three months ended March 31, 20192020 was 110,114, compared to 100110 for the three months ended March 31, 2018.2019. Average headcount was approximately 10%4% higher for the three months ended March 31, 2019,2020, when compared to the same period in 2018.
33
2019.
Amortization of Intangible Assets
Amortization of intangible assets for the three months ended March 31, 20192020 was $2.3$2.4 million, an increase of less than $0.1 million or 7% from the comparable period in 2018. The increase in amortization expense was driven by additional expense for intangible assets acquired during the second quarter of 2018 as a result of the Dealflo acquisition, partially offset by decreased amortization expense as a result of writing off certain intangible assets as a result of the rebranding during 2018.2019.
Interest Income, net
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| Three months ended March 31, |
| Change | ||||
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| 2019 | 2018 |
| $ |
| % | |
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Interest income, net |
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| $ 135 |
| $ 393 |
| $ (258) |
| -66% |
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| Three months ended March 31, |
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| 2020 | 2019 |
| $ Change |
| % Change | |
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| (in thousands) |
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Interest income, net |
| $ 207 |
| $ 135 |
| $ 72 |
| 53% |
Interest income, net was $0.1$0.2 million for the three months ended March 31, 2019,2020, as compared to $0.4$0.1 million for the same period in 2018.2019. The decreaseincrease in interest income, net for the three months ended March 31, 2019 compared to the same periodsreflects an increase in 2018 reflects a decrease in our cash equivalents and short term investment balance.
Other Income (Expense),Expense, net
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| Three months ended March 31, |
| Change | ||||
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| 2019 |
| 2018 |
| $ |
| % |
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| (in thousands) |
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Other income (expense), net |
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| $ (551) |
| $ 380 |
| $ (931) |
| NM |
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| Three months ended March 31, |
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| 2020 |
| 2019 |
| $ Change |
| % Change |
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| (in thousands) |
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| ||
Other expense, net |
| $ (338) |
| $ (551) |
| $ 213 |
| -39% |
Other income (expense),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, and other miscellaneous non-operational, non-recurring expenses.
Other income (expense), expense, net for the three months ended March 31, 20192020 was $(0.6)$0.3 million, compared to $0.4$0.6 million for the comparable period of 2018. Higher2019. Lower expense was driven by losses resulting from foreign currency transactions, partially offset by government subsidies.transactions.
Provision (Benefit) for Income Taxes
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| Three months ended March 31, |
| Change | ||||
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| 2019 |
| 2018 |
| $ |
| % |
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| (in thousands) |
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| ||
Provision (benefit) for income taxes |
| $ (272) |
| $ 629 |
| $ (901) |
| NM |
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| Three months ended March 31, |
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| 2020 |
| 2019 |
| $ |
| % Change |
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| (in thousands) |
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| ||
Provision (benefit) for income taxes |
| $ 718 |
| $ (272) |
| $ 990 |
| NM |
The Company recorded an income tax benefitexpense for the three months ended March 31, 20192020 of $0.3$0.7 million, compared to expensea benefit of $0.6$(0.3) million for the three months ended March 31, 2018.2019. The benefit recorded for the three months ended March 31, 2019increase was attributable to the lossincreased profits in the period (See Note 9 – Income Taxes).excluding losses at entities where we cannot record a tax benefit.
29
Liquidity and Capital Resources
At March 31, 2019,2020, we had net cash balances (total cash and cash equivalents) of $69.9$79.6 million and short-term investments of $25.4$25.7 million. Short term investments consist of U.S. treasury bills and notes, government agency notes, corporate notes and bonds, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months.
34
At December 31, 2018,2019, we had net cash balances (total cash and cash equivalents) of $76.7$84.3 million and short-term investments of $22.8$25.5 million.
During the year ended December 31, 2018, we entered into
We are in a new lease agreement that required a letter of credit in the amount of $0.8 million to secure the obligation. The restricted cash related to this letter of credit is recorded in other non-current assets on the Condensed Consolidated Balance Sheet at March 31, 20192020 and December 31, 2018.
2019. Our working capital at March 31, 20192020 was $113.4$139.3 million a decrease of $6.2 million or 5% from $119.6compared to $137.5 million at December 31, 2018. The decrease is driven largely by the operating losses incurred during the quarter.2019.
As of March 31, 2019,2020, we held $67.5$62.4 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $67.3$61.8 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.
We believe that our financial resources are adequate to meet our operating needs over the next twelve months.
Our cash flows are as follows:
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| Three Months ended March 31, |
| Three months ended March 31, | |||||
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| 2019 | 2018 |
| 2020 | 2019 |
| ||
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| (in thousands) |
| (in thousands) | |||||
Cash provided by (used in): |
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Cash used in: |
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| ||||
Operating activities |
| $ (3,737) |
| $ 9,726 |
| $ (2,352) |
| $ (3,737) |
|
Investing activities |
| (2,651) |
| 37,704 |
| (1,671) |
| (2,651) |
|
Financing activities |
| (218) |
| (179) |
| (293) |
| (218) |
|
Effect of foreign exchange rate changes on cash and cash equivalents |
| (195) |
| 572 |
| (342) |
| (195) |
|
Operating Activities
Cash generated by operating activities is primarily comprised of net income, as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of amortization and impairment of intangible assets, depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs. We expect cash outflows from operating activities to be affected by increases in personnel cost as we grow our business.
For the three months ended March 31, 2019,2020, net cash used in operating activities was $3.7$2.4 million, compared to net cash provided byused in operating activities of $9.7$3.7 million during the three months ended March 31, 2018.2019. The decrease is primarily due to lower working capital and a net loss of $5.7 million for the three months ended March 31, 2019, compared todriven by higher net income and the timing of $1.8 million for the three months ended March 31, 2018.cash receipts accrued in deferred revenue.
Investing Activities
The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of investments, purchases of property and equipment, and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the continued growth of our business as well to continue to invest in our infrastructure and activity in connection with acquisitions.
For the three months ended March 31, 2019,2020, net cash used in investing activities was $2.7$1.7 million, compared to net cash provided byused in investing activities of $37.7$2.7 million for the three months ended March 31, 2018.2019. The decrease is largely driven byrelated to the maturitytiming of $40.0 millionthe purchases and maturities of investments during the three months ended March 31, 2018.
our short term investments.
3530
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, 20182019 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 three monthsquarterly period ended March 31, 2019.2020. We believe our most critical accounting policies include revenue recognition, purchase accounting and related fair value measurements and accounting for income taxes.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our market risk during the three months ended March 31, 20192020. For additional information, refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk”, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
Item 4 - Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who, respectively, are our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure (i) the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to the material weakness in our internal control over financial reporting described below and further in our Annual Report on Form 10-K for the year ended December 31, 2018, that our disclosure controls and procedures were not effective as of March 31, 2019.
Changes in Internal Controls
As discussed in Item 9A. of our Annual Report on Form 10-K for the year ended December 31, 2018, Management identified control deficiencies that constituted a material weakness in our internal control over financial reporting as of December 31, 2018.
The Company has implemented additional controls and is in the process of executing a remediation plan. Management expects remediation of the material weakness will be completed in the fiscal year 2019.
Additionally, the Company concluded the implementation of a new global enterprise resource planning (“ERP”) system during the three months ended March 31, 2019. This ERP system has replaced our existing operating and financial systems and is designed to accurately maintain the Company’s financial records, enhance operational functionality, and provide timely information to the Company’s management team related to the operation of the business.
We also implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of ASC 842 to facilitate the adoption on January 1, 2019, as well as our on-going accounting.
Subject to the foregoing, thereThere were no changes in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 20192020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting
36
Inherent Limitations on the Effectiveness of Controls
Our disclosure controlsInternal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and procedures are designedcompliance and is subject to provide reasonable assurancelapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of achieving their objectives. However, our management, including our Chief Executive Officer and Chief Financial Officer, dosuch limitations, there is a risk that material misstatements will not expect that our disclosure controls and proceduresbe prevented or detected on a timely basis by internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that therereporting. However, these inherent limitations are resource constraints, and the benefits of controls must be considered relative to their costs. Becauseknown features of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected. The inherent limitations includefinancial reporting process. Therefore, it is possible to design into the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projectionsprocess safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time,the risk that controls may become inadequate because of changes in conditions, or deterioration inthat the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraudand procedures may occur and may not be detected.deteriorate.
31
We are a party to or have intellectual property subject to litigation and other proceedings that arise in the ordinary course of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our financial results in any particular interim reporting period.
We cannot predict the outcome of legal or other proceedings with certainty, including the legal proceedings which are summarized in “Note 1214 – Legal Proceedings and Contingencies” included in our Notes to Condensed Consolidated Financial Statements, incorporated herein by reference, and “Note 1215 – Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the U.S. Securities and Exchange Commission. Any reasonably possible material loss or range of loss associated with any individual legal proceeding that can be estimated, is provided in Note 1214 to the Condensed Consolidated Financial Statements contained herein.
The following risk factor is provided to update the risk factors previously disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
While we believe the coronavirus could have a negative impact on our financial results in the future, the impact is difficult to assess at this time.
The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. A significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the broader economies, financial markets and overall demand environment for our products.
As a result of the COVID-19 pandemic, we have temporarily closed our offices (including our corporate headquarters) in many countries except where we have been able to accommodate limited essential employees such as for the shipping of our hardware authentication tokens under revised procedures. We implemented certain travel restrictions, remote work arrangements and other measures and while our early experience with this new situation has been satisfactory to date, it has disrupted how we normally operate our business and may in the longer term impact our productivity, innovation and effectiveness such that our results are adversely affected. We have shifted certain of our customer events to virtual-only experiences and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Because we operate in multiple international locations, we expect there to be variability and additional complications from differing conditions and inconsistent guidance from numerous public health agencies.
In our hardware business, we are exposed to specific risks related to manufacturing, supply chain, shipping and distribution- all of which have been impacted by the COVID-19 pandemic. As a result of COVID-19, we experienced some initial delays and increased costs related to fulfilling our hardware orders. Such issues have been primarily resolved however we may be unable to satisfy certain customer orders for our products in the future if orders
3732
substantially increase and/or supply chain problems emerge.
In our software business, we experienced some increased sales for products used in remote employee access and remote banking that we attribute in part to the COVID-19 pandemic. This increase may be temporary, and we are unable to predict whether it will continue or decline. Moreover, the conditions caused by the COVID-19 pandemic can affect the rate of IT spending and could adversely affect our customers’ ability or willingness to attend our events or to purchase our offerings, delay prospective customers’ purchasing decisions, adversely impact our ability to provide on-site sales meetings or professional services to our customers, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of their subscription or term contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance.
If the restrictions on our employees, customers and others in the world increase to limit the spread of COVID-19, the potential effects could be exacerbated, and our results of operations and overall financial performance may be harmed. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases by the Company of its shares of common stock during the first quarter of 2019:2020:
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| of Shares |
| Maximum |
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| Purchased as |
| Number of Shares |
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| Total |
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| Part of Publicly |
| that May Yet Be | |
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| Number of |
| Average |
| Announced |
| Purchased Under | |
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| Shares Purchased |
| Price Paid |
| Plans or |
| the Plans or | |
Period |
| (1) |
| per Share |
| Programs (2) |
| Programs (2) | |
January 1, 2019 through January 31, 2019 |
| 13,785 |
| $ | 12.90 |
| — |
| — |
February 1, 2019 through February 28, 2019 |
| — |
|
| — |
| — |
| — |
March 1, 2019 through March 31, 2019 |
| 1,144 |
| $ | 21.35 |
| — |
| — |
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| Maximum |
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| Purchased as |
| Number of Shares |
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| Total |
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| Part of Publicly |
| that May Yet Be | |
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| Number of |
| Average |
| Announced |
| Purchased Under | |
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| Shares Purchased |
| Price Paid |
| Plans or |
| the Plans or | |
Period |
| (1) |
| per Share |
| Programs (2) |
| Programs (2) | |
January 1, 2020 through January 31, 2020 |
| 11,941 |
| $ | 17.39 |
| — |
| — |
February 1, 2020 through February 29, 2020 |
| 3,969 |
|
| 16.51 |
| — |
| — |
March 1, 2020 through March 31, 2020 |
| 45,290 |
| $ | 17.75 |
| — |
| — |
(1.) | All transactions represent surrender of vested shares in satisfaction of tax withholdings by grantees under the |
(2.) | The Company has no publicly announced plans or programs to repurchase its shares. |
3833
Exhibit 101.INS – XBRL Instance Document
Exhibit 101.SCH – XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB – XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF – XBRL Taxonomy Extension Definition Linkbase Document
*Certain exhibits, schedules and annexes have been omitted pursuant to Item 601(b)(2) of Regulation S-K. OneSpan undertakes to furnish copies of any such omitted items upon request by the Securities and Exchange Commission.
3934
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 May 7, 2019.2020.
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| OneSpan Inc. |
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| /s/ Scott Clements |
| Scott Clements |
| Chief Executive Officer (Principal Executive Officer) |
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| /s/ Mark S. Hoyt |
| Mark S. Hoyt |
| Chief Financial Officer |
| (Principal Financial Officer and Principal Accounting Officer) |
4035