UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, ~~2021~~2022

☐	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)

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 Code)

(312) 766-4001

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

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.


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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

There were ~~40,210,558~~39,595,180 shares of Common Stock, $.001 par value per share, outstanding at ~~August 1, 2021.~~July 29, 2022.

Table of Contents

OneSpan Inc.

Form 10-Q

For the Quarter Ended June 30, ~~2021~~2022

Table of Contents



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (Unaudited) as of June 30, ~~2021 (Unaudited)~~2022 and December 31, ~~2020~~2021	3

	Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	5

	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	6

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2022

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3134

Item 4.	Controls and Procedures	3134

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3235

Item 1A.	Risk Factors	32

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	3435

Item 6.	Exhibits	3536

SIGNATURES		3638

Table of Contents

OneSpan Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)


	June 30,		December 31,		June 30,		December 31,
	2021		2020		2022		2021
ASSETS
Current assets
Cash and equivalents	$	66,530	$	88,394	$	77,583	$	63,380
Short term investments		42,726		26,859		20,226		35,108
Accounts receivable, net of allowances of $3,147 in 2021 and $4,135 in 2020		45,762		57,537
Accounts receivable, net of allowances of $2,051 in 2022 and $1,419 in 2021						39,863		56,612
Inventories, net		9,498		13,093		9,997		10,345
Prepaid expenses		7,823		7,837		7,117		7,594
Contract assets		5,243		7,202		5,147		4,694
Other current assets		9,860		6,256		10,586		9,356
Total current assets		187,442		207,178		170,519		187,089
Property and equipment, net		11,468		11,835		10,130		10,757
Operating lease right-of-use assets		10,035		11,356		8,138		9,197
Goodwill		97,842		97,552		90,421		96,174
Intangible assets, net of accumulated amortization		24,227		27,196		18,117		21,270
Deferred income taxes		8,942		7,030		3,515		3,786
Contract assets - non-current		1,634		1,877		522		195
Other assets		12,738		11,179		10,547		13,803
Total assets	$	354,328	$	375,203	$	311,909	$	342,271
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	6,918	$	5,684	$	9,119	$	8,204
Deferred revenue		43,058		43,417		48,342		54,617
Accrued wages and payroll taxes		15,146		13,649		13,425		16,607
Short-term income taxes payable		997		2,618		1,434		1,103
Other accrued expenses		10,190		8,334		6,612		7,668
Deferred compensation		571		1,602		113		877
Total current liabilities		76,880		75,304		79,045		89,076
Long-term deferred revenue		10,676		11,730		7,030		9,125
Long-term lease liabilities		11,154		12,399		9,193		10,180
Other long-term liabilities		10,195		10,423		7,277		7,770
Long-term income taxes payable		5,042		6,095		3,080		5,054
Deferred income taxes		1,736		1,912		1,942		1,286
Total liabilities		115,683		117,863		107,567		122,491
Stockholders' equity
Preferred stock: 500 shares authorized, none issued and outstanding at June 30, 2021 and December 31, 2020		—		—
Common stock: $.001 par value per share, 75,000 shares authorized; 40,171 and 40,103 shares issued; 40,171 and 40,103 shares outstanding at June 30, 2021 and December 31, 2020, respectively		40		40
Preferred stock: 500 shares authorized, none issued and outstanding at June 30, 2022 and December 31, 2021						—		—
Common stock: $.001 par value per share, 75,000 shares authorized; 40,635 and 40,593 shares issued; 39,597 and 40,001 shares outstanding at June 30, 2022 and December 31, 2021, respectively						40		40
Additional paid-in capital		99,223		98,819		102,140		100,250
Treasury stock, at cost, 361 and 250 shares outstanding at June 30, 2021 and December 31, 2020, respectively		(7,938)		(5,030)
Treasury stock, at cost, 1,038 and 592 shares outstanding at June 30, 2022 and December 31, 2021, respectively						(18,222)		(12,501)
Retained earnings		157,917		173,731		139,037		143,173
Accumulated other comprehensive loss		(10,597)		(10,220)		(18,653)		(11,182)
Total stockholders' equity		238,645		257,340		204,342		219,780
Total liabilities and stockholders' equity	$	354,328	$	375,203	$	311,909	$	342,271

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

OneSpan Inc.

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

(unaudited)


	Three months ended				Six months ended				Three months ended				Six months ended
	June 30,				June 30,				June 30,				June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Revenue
Product and license	$	28,378	$	35,384	$	56,823	$	73,644	$	28,731	$	28,378	$	58,216	$	56,823
Services and other		23,899		19,570		46,229		37,680		24,059		23,899		47,021		46,229
Total revenue		52,277		54,954		103,052		111,324		52,790		52,277		105,237		103,052

Cost of goods sold
Product and license		9,589		12,576		19,130		23,314		10,947		10,565		20,026		21,317
Services and other		6,881		5,649		12,662		10,981		6,337		6,881		13,027		12,662
Total cost of goods sold		16,470		18,225		31,792		34,295		17,284		17,446		33,053		33,979

Gross profit		35,807		36,729		71,260		77,029		35,506		34,831		72,184		69,073

Operating costs
Sales and marketing		15,997		14,694		34,376		29,553		16,381		15,021		32,276		32,189
Research and development		12,096		10,541		24,340		20,535		12,876		12,096		26,625		24,340
General and administrative		15,039		10,846		27,590		23,114		13,270		15,039		28,165		27,590
Amortization of intangible assets		1,534		2,335		3,107		4,689		1,217		1,534		2,599		3,107
Total operating costs		44,666		38,416		89,413		77,891		43,744		43,690		89,665		87,226

Operating loss		(8,859)		(1,687)		(18,153)		(862)		(8,238)		(8,859)		(17,481)		(18,153)

Interest income, net		2		126		6		333		35		2		18		6
Other income, net		1,029		509		667		171
Other income (expense), net										(675)		1,029		14,972		667

Loss before income taxes		(7,828)		(1,052)		(17,480)		(358)		(8,878)		(7,828)		(2,491)		(17,480)
Provision (benefit) for income taxes		(1,143)		973		(1,644)		1,663		472		(1,143)		1,645		(1,644)

Net loss	$	(6,685)	$	(2,025)	$	(15,836)	$	(2,021)	$	(9,350)	$	(6,685)	$	(4,136)	$	(15,836)

Net loss per share
Basic	$	(0.17)	$	(0.05)	$	(0.40)	$	(0.05)	$	(0.23)	$	(0.17)	$	(0.10)	$	(0.40)
Diluted	$	(0.17)	$	(0.05)	$	(0.40)	$	(0.05)	$	(0.23)	$	(0.17)	$	(0.10)	$	(0.40)

Weighted average common shares outstanding
Basic		39,694		40,028		39,692		40,059		40,157		39,694		39,870		39,692
Diluted		39,694		40,028		39,692		40,059		40,157		39,694		39,870		39,692

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)


	Three months ended June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Net loss	$	(6,685)	$	(2,025)	$	(15,836)	$	(2,021)	$	(9,350)	$	(6,685)	$	(4,136)	$	(15,836)
Other comprehensive loss
Cumulative translation adjustment, net of tax		549		446		(370)		(3,832)		(5,315)		549		(7,335)		(370)
Unrealized gains (losses) on available-for-sale securities		8		—		(7)		—
Pension adjustment, net of tax		—		(6)		—		(12)		(22)		8		(47)		(7)
Unrealized losses on available-for-sale securities										(10)		—		(89)		—
Comprehensive loss	$	(6,128)	$	(1,585)	$	(16,213)	$	(5,865)	$	(14,697)	$	(6,128)	$	(11,607)	$	(16,213)

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

For the three and six months ended June 30, ~~2021:~~2022:

Accumulated



Additional

Other

Total

Common Stock

Treasury - Common Stock

Paid-In

Retained

Comprehensive

Stockholders'
Description

Shares

Amount

Shares

Amount

Capital

Earnings

Income (Loss)

Equity
Balance at December 31, 2020

40,103

$
40

250

(5,030)

$
98,819

$
173,731

$
(10,220)

$
257,340
Net income (loss)

—

—

—

—

—

(9,151)

—

(9,151)
Foreign currency translation adjustment, net of tax

—

—

—

—

—

22

(919)

(897)
Restricted stock awards

248

—

—

—

1,342

—

—

1,342
Tax payments for stock issuances

(86)

—

—

—

(2,139)

—

—

(2,139)
Unrealized gain (loss) on available-for-sale securities

—

—

—

—

—

—

(15)

(15)
Balance at March 31, 2021

40,265

$
40

250

$
(5,030)

$
98,022

$
164,602

$
(11,154)

$
246,480
Net income (loss)

—

—

—

—

—

(6,685)

—

(6,685)
Foreign currency translation adjustment, net of tax

—

—

—

—

—

—

549

549
Restricted stock awards

24

—

—

—

1,292

—

—

1,292
Tax payments for stock issuances

(7)

—

—

—

(91)

—

—

(91)
Share repurchase

(111)

—

111

(2,908)

—

—

(2,908)
Unrealized gain (loss) on available-for-sale securities

—

—

—

—

—

—

8

8
Balance at June 30, 2021

40,171

$
40

361

$
(7,938)

$
99,223

$
157,917

$
(10,597)

$
238,645

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

Accumulated



Additional

Other

Total

Common Stock

Treasury - Common Stock

Paid-In

Retained

Comprehensive

Stockholders'
Description

Shares

Amount

Shares

Amount

Capital

Earnings

Income (Loss)

Equity
Balance at December 31, 2019

40,207

40

—

—

$
96,109

$
179,440

$
(13,295)

$
262,294
Cumulative effect of change related to adoption of ASU 2016-13, net of tax

—

—

—

—

—

(254)

0

(254)
Net income

—

—

—

—

—

4

—

4
Foreign currency translation adjustment , net

—

—

—

—

—

—

(4,278)

(4,278)
Restricted stock awards

168

—

—

—

1,350

—

—

1,350
Tax payments for stock issuances

(61)

—

—

—

(293)

—

—

(293)
Pension adjustment, net of tax

—

—

—

—

—

—

(6)

(6)
Balance at March 31, 2020

40,314

$
40

—

—

$
97,166

$
179,190

$
(17,579)

$
258,817
Net loss

—

—

—

—

—

(2,025)

—

(2,025)
Foreign currency translation adjustment, net

—

—

—

—

—

—

446

446
Restricted stock awards

19

—

—

—

860

—

—

860
Tax payments for stock issuances

(4)

—

—

—

(886)

—

—

(886)
Pension adjustment, net of tax

—

—

—

—

—

—

(6)

(6)
Balance at June 30, 2020

40,329

40

—

—

97,140

177,165

(17,139)

257,206


											Accumulated
							Additional				Other		Total
	Common Stock			Treasury - Common Stock			Paid-In		Retained		Comprehensive		Stockholders'
Description	Shares	Amount		Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balance at December 31, 2021	40,001	$	40	592		(12,501)	$	100,250	$	143,173	$	(11,182)	$	219,780
Net income (loss)	—		—	—		—		—		5,214		—		5,214
Foreign currency translation adjustment, net of tax	—		—	—		—		—		—		(2,020)		(2,020)
Restricted stock awards	34		—	—		—		1,360		—		—		1,360
Tax payments for stock issuances	(14)		—	—		—		(635)		—		—		(635)
Unrealized gain (loss) on available-for-sale securities	—		—	—		—		—		—		(79)		(79)
Pension adjustment, net of tax	—		—	—		—		—		—		(25)		(25)
Balance at March 31, 2022	40,021	$	40	592	$	(12,501)	$	100,975	$	148,387	$	(13,306)	$	223,595
Net income (loss)	—		—	—		—		—		(9,350)		—		(9,350)
Foreign currency translation adjustment, net of tax	—		—	—		—		—		—		(5,315)		(5,315)
Restricted stock awards	28		—	—		—		1,253		—		—		1,253
Tax payments for stock issuances	(6)		—	—		—		(88)		—		—		(88)
Share repurchase	(446)		—	446		(5,721)		—		—		—		(5,721)
Unrealized gain (loss) on available-for-sale securities	—		—	—		—		—		—		(10)		(10)
Pension adjustment, net of tax	—		—	—		—		—		—		(22)		(22)
Balance at June 30, 2022	39,597	$	40	1,038	$	(18,222)	$	102,140	$	139,037	$	(18,653)	$	204,342

For the three and six months ended June 30, 2021:


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

Table of Contents

OneSpan Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Six months ended June 30,


2021

2020
Cash flows from operating activities:




Net loss from operations

$
(15,836)

$
(2,021)
Adjustments to reconcile net loss from operations to net cash provided by (used in) operations:


Depreciation and amortization of intangible assets

4,582

6,097
Loss on disposal of assets

19

53
Deferred tax benefit

(2,194)

(319)
Stock-based compensation

2,634

2,210
Changes in operating assets and liabilities:

Accounts receivable, net

11,021

7,528
Inventories, net

3,585

3,376
Contract assets

1,974

(2,026)
Accounts payable

1,280

(5,025)
Income taxes payable

(2,652)

(5,870)
Accrued expenses

3,660

(791)
Deferred compensation

(1,031)

13
Deferred revenue

(931)

2,990
Other assets and liabilities

(4,927)

(1,834)
Net cash provided by operating activities

1,184

4,381

Cash flows from investing activities:




Purchase of short term investments

(32,253)

(14,645)
Maturities of short term investments

16,100

13,340
Additions to property and equipment

(1,208)

(2,167)
Other

(17)

(48)
Net cash used in investing activities

(17,378)

(3,520)

Cash flows from financing activities:




Repurchase of common stock

(2,908)

—
Tax payments for restricted stock issuances

(2,230)

(1,179)
Net cash used in financing activities

(5,138)

(1,179)

Effect of exchange rate changes on cash

(511)

20

Net decrease in cash

(21,843)

(298)
Cash, cash equivalents, and restricted cash, beginning of period

89,241

85,129
Cash, cash equivalents, and restricted cash, end of period (1.)

$
67,398

$
84,831


	Six months ended June 30,
	2022		2021
Cash flows from operating activities:
Net loss from operations	$	(4,136)	$	(15,836)
Adjustments to reconcile net loss from operations to net cash provided by (used in) operations:
Depreciation and amortization of intangible assets		4,043		4,582
Loss on disposal of assets		1		19
Gain on sale of equity-method investment		(14,810)		—
Deferred tax benefit		729		(2,194)
Stock-based compensation		2,613		2,634
Changes in operating assets and liabilities:
Accounts receivable		14,798		12,009
Allowance for doubtful accounts		631		(988)
Inventories, net		(465)		3,585
Contract assets		(1,033)		1,974
Accounts payable		1,202		1,280
Income taxes payable		(1,608)		(2,652)
Accrued expenses		(3,454)		3,660
Deferred compensation		(764)		(1,031)
Deferred revenue		(7,160)		(931)
Other assets and liabilities		(1,871)		(4,927)
Net cash provided by (used in) operating activities		(11,284)		1,184

Cash flows from investing activities:

Purchase of short term investments		(15,812)		(32,253)
Maturities of short term investments		30,550		16,100
Additions to property and equipment		(1,039)		(1,208)
Additions to intangible assets		(13)		(17)
Sale of equity-method investment		18,874		—
Net cash provided by (used in) investing activities		32,560		(17,378)

Cash flows from financing activities:
Repurchase of common stock		(5,721)		(2,908)
Tax payments for restricted stock issuances		(722)		(2,230)
Net cash used in financing activities		(6,443)		(5,138)

Effect of exchange rate changes on cash		(631)		(511)

Net increase (decrease) in cash		14,202		(21,843)
Cash, cash equivalents, and restricted cash, beginning of period		64,228		89,241
Cash, cash equivalents, and restricted cash, end of period (1)	$	78,430	$	67,398

~~(1.)~~

(1)

End of period cash, cash equivalents, and restricted cash includes ~~$0.9~~$0.8 million and ~~$0.8~~$0.9 million of restricted cash at June 30, ~~2021~~2022 and June 30, ~~2020,~~2021, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

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OneSpan Inc.

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, and market solutions that enable secure, compliant, and ~~support hardware~~easy digital customer agreements and ~~software~~transaction experiences. We are a global leader in providing high-assurance identity and authentication security ~~systems~~as well as simplified e-signature workflows. Our solutions enable trust that ~~manage~~ensures the integrity of the people and artifacts associated with digital agreements and transactions across banking, financial services, healthcare, and professional services. Our solution portfolio includes a broad set of offerings across several categories, including identity verification, authentication, transaction signing, mobile security, electronic signature, and secure ~~access to information assets.~~video collaboration for virtual interactions and transactions. OneSpan has operations in Austria, Australia, Belgium, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K), and the United States (U.S.).

Transformation Plan

In ~~accordance~~May 2022, we announced a three-year strategic transformation plan that we believe will enable us to build on our strong solution portfolio and market position, enhance our enterprise go-to-market strategy, accelerate revenue growth, and drive efficiencies to support margin expansion and increased profitability. In conjunction with ~~ASC 280,~~the strategic transformation plan and to enable a more efficient capital deployment model, effective with the quarter ended June 30, 2022, we will begin reporting under the following two lines of business, which will be our reportable operating segments: Digital Agreements and Security Solutions. We plan to manage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flow given its modest growth profile. See Note 16 – Segment ~~Reporting,~~Information for additional detail.

While 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.~~

results will not be impacted, we have recasted our segment information during 2022 for comparable presentation.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of OneSpan Inc. 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, ~~2020.~~2021.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All intercompany accounts and transactions have been eliminated. Operating results for the ~~three and~~ six months ended June 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2021, particularly~~2022.

Revision of Previously Issued Financial Statements

We have revised amounts reported in ~~light~~previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q to correct prior period immaterial errors. The errors relate to certain costs directly

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related to the production and distribution of hardware products. The costs were not properly categorized in prior periods, which led to an understatement of product and license cost of goods sold and an overstatement of sales and marketing expense. There was no impact to previously reported revenue or net income.

We evaluated the aggregate effects of the ~~novel coronavirus (COVID-19) pandemic~~errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and ~~its effects~~No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Reports on ~~domestic~~Form 10-K for the years ended December 31, 2021 and ~~global economies.~~2020, or for any quarterly periods included therein or through our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021.

~~We continue to actively address~~The following table presents the effects of the COVID-19 pandemic and its impact globally. Beginning in the Summer of 2020 through the present, we have experienced lengthened sales cycles and reduced demand for some of our security solutions due to economic uncertainty connected to the COVID-19 pandemic. While we hope that the negative consequencesaforementioned revisions on our ~~business associated with~~unaudited condensed consolidated statements of operations for the ~~COVID-19 pandemic will subside, we cannot predict the impact with certainty.~~three and six months ended June 30, 2021.

Condensed Consolidated Statement of Operations (Unaudited)


	Three Months Ended June 30, 2021						Six Months Ended June 30, 2021
in thousands	As Previously Reported		Adjustments		As Revised		As Previously Reported		Adjustments		As Revised
Cost of goods sold
Product and license	$	9,589	$	976	$	10,565	$	19,130	$	2,187	$	21,317
Total cost of goods sold		16,470		976		17,446		31,792		2,187		33,979

Gross profit		35,807		(976)		34,831		71,260		(2,187)		69,073

Operating costs
Sales and marketing		15,997		(976)		15,021		34,376		(2,187)		32,189
Total operating costs		44,666		(976)		43,690		89,413		(2,187)		87,226

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. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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Foreign Currency Translation and Transactions

The financial position and results of the operations of the majority of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other income (expense), net. Foreign exchange transaction losses aggregated $0.9 and $1.3 million for the three and six months ended June 30, 2022, respectively. Foreign exchange transaction gains aggregated $0.6 million and foreign transaction losses aggregated less than $0.1 million for the three and six months ended June 30, 2021, respectively. ~~Foreign exchange transaction gains aggregated less than $0.1 million and foreign transaction losses aggregated $0.5 million for the three and six months ended June 30, 2020, respectively.~~

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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

There have been no changes to the significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, filed with the SEC on February ~~25, 2021~~22, 2022 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

Software Capitalization and Depreciation

As part of our transformation plan announced in May 2022, we began investing in the Digital Agreements operating segment for accelerated growth. In conjunction with expanded research and development to grow the Digital Agreements product offerings, we began capitalizing certain costs incurred in connection with obtaining or developing internal use software during the three months ended June 30, 2022. These costs include payroll and payroll-related costs for employees who are directly associated with the internal-use software projects, external direct costs of materials and services and interest costs while developing the software. Capitalized software costs are included in property and equipment, net and are amortized using the straight-line method over the estimated life of three years. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during the preliminary project and post-implementation stages, as well as software maintenance and training costs, are expensed in the period in which they are incurred. The Company capitalized $0.2 million of internal-use software for the three and six months ended June 30, 2022.

Cash, Cash Equivalents and Restricted Cash

We are inparty to lease agreements that require letters of credit to secure ~~the~~our obligations. The restricted cash related to these letters of credit is recorded in other non-current assets on the ~~Condensed Consolidated Balance Sheet~~condensed consolidated balance sheet in the amounts of ~~$0.9~~$0.8 million and $0.8 million at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Sale of Equity Method Investment

~~We apply the~~On January 31, 2022, we sold our equity ~~method of accounting to our investment~~interest in Promon AS (Promon) for $18.9 million and recorded the gain on sale of $14.8 million in other income (expense), ~~because we exercise significant influence, but not controlling interest, in~~net on the ~~investee.~~condensed consolidated statement of operations for the six months ended June 30, 2022. Promon is a technology company headquartered in Norway that specializes in mobile app security, whose solutions focus largely on Runtime Application Self-Protection (RASP).

Prior to January 31, 2022, we held a 17% interest in Promon. We ~~exercise~~applied the equity method of accounting to our investment in Promon because we exercised significant influence ~~over Promon as~~on, but did not hold a ~~result of our 17% ownership~~controlling 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 mobile security offerings, which are then licensed to our customers.~~investee. Under the equity method of accounting, the Company’s proportionate share of the net earnings (losses) of Promon is reported in other income (expense), net in our condensed consolidated ~~Statements~~statements of ~~Operations.~~operations. The impact of the proportionate share of net earnings (losses) were immaterial for the ~~three and~~ six months ended June 30, ~~2021~~2022 and ~~2020~~2021, as were the relative size of Promon’s assets and operations in relation to the Company’s. ~~The carrying value of~~

We intend to continue to purchase and integrate Promon’s RASP technology into our equity method investment is reported in other noncurrent assets in the condensed consolidated Balance Sheets and is reported originally at cost and adjusted each period for the Company’s share of the investee’s earnings (losses) and dividends paid, if any. The Company also assesses the investment for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may not be recoverable. The Company did not record any impairment charges during the six month periods ended June 30, 2021 and 2020. The Company recorded $0.5 million and $0.1 million in cost of sales during the three months ended June 30, 2021 and June 30, 2020, respectively, for license fees owed to Promon for use of theircustomer software and technology, and recorded $2.0 million and $1.4 million for the six months ended June 30, 2021 and 2020, respectively. The Company owed Promon $1.2 million as of June 30, 2021, which is included in accounts payable and accrued liabilities.solutions.

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Recently Issued Accounting Pronouncements

~~In December 2019, the FASB issued ASU 2019-12,~~ ~~Simplification for Accounting for Income Taxes~~, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2020-12 was effective beginning January 1, 2021. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

~~In March 2020, the FASB issued ASU 2020-04,~~ ~~Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and can be applied through December 31, 2022. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

From time to time, new accounting pronouncements are issued by the ~~FASB~~Financial Accounting Standards Board (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 – Revenue~~

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

~~Disaggregation of Revenues~~

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

~~Revenue by major products (in thousands)~~

Three months ended June 30,

Six months ended June 30,


2021

2020

2021

2020

Hardware products

$
19,451

$
24,188

$
37,119

$
43,926
Software licenses

8,927

11,196

19,704

29,718
Subscription

9,824

6,133

18,229

11,840
Professional services

1,041

1,326

2,443

2,747
Maintenance, support, and other

13,034

12,111

25,557

23,093
Total Revenue

$
52,277

$
54,954

$
103,052

$
111,324

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Note 3 – Revenue

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

Disaggregation of Revenues

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

Revenue by major products (in thousands)


		Three Months Ended			Six Months Ended
		June 30, 2022	June 30, 2021		June 30, 2022		June 30, 2021

Subscription (1)	$	19,829	$	15,746	$	43,098	$	32,128
Maintenance and support		12,178		13,034		24,124		25,557
Professional services and other (2)		2,000		4,046		3,881		8,248
Hardware products		18,783		19,451		34,134		37,119
Total Revenue	$	52,790	$	52,277	$	105,237	$	103,052

(1)	Subscription includes cloud and on-premises subscription revenue, previously referred to as “subscription” and “term-based software licenses”, respectively.

(2)	Professional services & other includes perpetual software licenses revenue which was less than 2% of total revenue for both the three and six months ended June 30, 2022, and less than 6% of total revenue for both the three and six months ended June 30, 2021.

Revenue by location of customer for the three months ended June 30, ~~2021~~2022 and ~~2020~~2021 (in thousands)


	EMEA			Americas			APAC			Total			EMEA			Americas			APAC			Total
Total Revenue:
2022													$	23,521		$	19,329		$	9,940		$	52,790
2021	$	24,830		$	17,011		$	10,436		$	52,277		$	24,830		$	17,011		$	10,436		$	52,277
2020	$	28,336		$	13,932		$	12,686		$	54,954

Percent of Total:
2022														44	%		37	%		19	%		100	%
2021		47	%		33	%		20	%		100	%		47	%		33	%		20	%		100	%
2020		52	%		25	%		23	%		100	%

Revenue by location of customer for the six months ended June 30, ~~2021~~2022 and ~~2020~~2021 (in thousands)


	EMEA			Americas			APAC			Total			EMEA			Americas			APAC			Total
Total Revenue:
2022													$	48,397		$	36,578		$	20,262		$	105,237
2021	$	51,819		$	33,539		$	17,694		$	103,052		$	51,819		$	33,539		$	17,694		$	103,052
2020	$	61,940		$	26,265		$	23,119		$	111,324

Percent of Total:
2022														46	%		35	%		19	%		100	%
2021		50	%		33	%		17	%		100	%		50	%		33	%		17	%		100	%
2020		56	%		24	%		20	%		100	%

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Timing of revenue recognition (in thousands)


	Three months ended June 30,				Six months ended June 30,				Three Months ended June 30,				Six Months ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Products and Licenses transferred at a point in time	$	28,378	$	35,384	$	56,823	$	73,644	$	28,731	$	28,378	$	58,216	$	56,823
Services transferred over time		23,899		19,570		46,229		37,680		24,059		23,899		47,021		46,229
Total Revenue	$	52,277	$	54,954	$	103,052	$	111,324	$	52,790	$	52,277	$	105,237	$	103,052

Contract balances (in thousands)

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


		June 30,		December 31,		June 30,		December 31,
	2021		2020
in thousands					2022		2021
Receivables, inclusive of trade and unbilled	$	45,762	$	57,537	$	39,863	$	56,612
Contract Assets (current and non-current)	$	6,877	$	9,079	$	5,669	$	4,889
Contract Liabilities (Deferred Revenue current and non-current)	$	53,734	$	55,147	$	55,372	$	63,742

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~~bill occurs, which is normally over 3-5 ~~years.~~years. The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services. Revenue is recognized for these services over time.

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

Revenue recognized during the six months ended June 30, ~~2021~~2022 included ~~$11.6~~$31.7 million that was included on the December 31, ~~2020~~2021 balance sheet in contract liabilities. Deferred revenue increased 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.


in thousands	2021		2022		2023		Beyond 2023		Total		2022		2023		2024		Beyond 2024		Total
Future revenue related to current unsatisfied performance obligations	$	14,877	$	19,855	$	12,057	$	7,043	$	53,832	$	20,118	$	22,932	$	12,706	$	7,745	$	63,501

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~~.years. The ~~Amortization~~amortization is reflected in Sales and Marketing in the ~~Statements~~condensed consolidated statements of ~~Operations.~~operations. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors, including customer attrition. Commissions are earned upon invoicing to the customer. For contracts with multiple year payment

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terms, asbecause 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~~expense in the condensed consolidated statements of operations.

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

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



in thousands		June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Capitalized costs to obtain contracts, current	$	1,622	$	1,222	$	2,495	$	2,134
Capitalized costs to obtain contracts, non-current	$	6,706	$	5,464	$	9,497	$	8,675


		Three months ended June 30,				Six months ended June 30,
in thousands		2022		2021		2022		2021
Amortization of capitalized costs to obtain contracts	$	555	$	361	$	1,090	$	671
Impairments of capitalized costs to obtain contracts	$	-	$	-	$	-	$	-

Three months ended June 30,

Six months ended June 30,
in thousands

2021

2020

2021

2020
Amortization of capitalized costs to obtain contracts

$
361

$
264

$
671

$
433
Impairments of capitalized costs to obtain contracts

$
-

$
-

$
-

$
-

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Note 4 – 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:


	June 30,		December 31,		June 30,		December 31,
	2021		2020		2022		2021

	(in thousands)				(in thousands)
Component parts	$	4,815	$	5,439	$	4,189	$	3,841
Work-in-process and finished goods		4,683		7,654		5,808		6,504
Total	$	9,498	$	13,093	$	9,997	$	10,345

Note 5 – Goodwill

Goodwill activity for the ~~three and~~ six months ended June 30, ~~2021~~2022 consisted of the ~~following:~~following.


		Digital Agreements		Security Solutions		Total
in thousands
Net balance at December 31, 2021	$	—	$	—	$	96,174
Goodwill reallocation (1)		20,966		75,208		—
Net foreign currency translation		(1,254)		(4,499)		(5,753)
Net balance at June 30, 2022	$	19,712	$	70,709	$	90,421

in thousands

Net balance at December 31, 2020

$
97,552
Net foreign currency translation

290
Net balance at June 30, 2021

$
97,842

Goodwill reallocation: As a result of the transformation plan and new reportable operating segments (see Note 1 – Description of the Company), we reallocated the goodwill balances of each reporting unit and respective reportable operating segments. Additionally, we performed a goodwill impairment test on the goodwill balances of each of the reporting units of our reportable operating segments as of May 17, 2022 by comparing the fair value of each reporting unit to its carrying value, including the reallocated goodwill. We concluded that there was 0 indication of goodwill impairment for any of the reporting units as of May 17, 2022.

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NaN impairment of goodwill was recorded during the six months ended June 30, ~~2021~~2022 or June 30, ~~2020.~~2021.

Note 6 – Intangible Assets

Intangible asset activity for the ~~three and~~ six months ended June 30, ~~2021~~2022 is detailed in the following table.



in thousands	Acquired Technology		Customer Relationships		Other		Total Intangible Assets		Acquired Technology		Customer Relationships		Other		Total Intangible Assets
Net balance at December 31, 2020	$	2,277	$	23,200	$	1,719	$	27,196
Net balance at December 31, 2021									$	753	$	19,161	$	1,356	$	21,270
Additions		2		—		14		16		9		—		5		14
Disposals		—		—		(21)		(21)
Net foreign currency translation		31		106		6		143		(22)		(537)		(9)		(568)
Amortization expense		(778)		(2,004)		(325)		(3,107)		(615)		(1,948)		(36)		(2,599)
Net balance at June 30, 2021	$	1,532	$	21,302	$	1,393	$	24,227
Net balance at June 30, 2022									$	125	$	16,676	$	1,316	$	18,117

June 30, 2021 balance at cost	$	43,436	$	40,121	$	13,559	$	97,116
June 30, 2022 balance at cost									$	41,997	$	38,520	$	13,507	$	94,024
Accumulated amortization		(41,904)		(18,819)		(12,166)		(72,889)		(41,872)		(21,844)		(12,191)		(75,907)
Net balance at June 30, 2021	$	1,532	$	21,302	$	1,393	$	24,227
Net balance at June 30, 2022									$	125	$	16,676	$	1,316	$	18,117

Certain intangible assets are denominated in functional currencies besides the U.S. dollar and are subject to currency fluctuations. NaN impairment of intangible assets was recorded during the ~~three~~six months ended June 30, ~~2021~~2022 or June 30, ~~2020.~~2021.

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Note 7 – Property and Equipment

The major classes of property and equipment are as follows:


in thousands	June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Office equipment and software	$	14,259	$	13,540	$	14,728	$	14,327
Leasehold improvements		10,433		10,593		10,058		10,296
Furniture and fixtures		3,909		3,827		4,187		4,223
Capitalized software						198		—
Total		28,601		27,960		29,171		28,846
Accumulated depreciation		(17,133)		(16,125)		(19,041)		(18,089)
Property and equipment, net	$	11,468	$	11,835	$	10,130	$	10,757

Depreciation expense was $0.7 million and $1.4 million for the three and six months ended June 30, 2022 respectively, compared to $0.7 million and $1.5 million for the three and six months ended June 30, 2021, ~~respectively, compared to $0.7 million and $1.4 million for the three and six months ended June 30, 2020.~~respectively.

Note 8 – Fair Value Measurements

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

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

The Company classifies its investments in debt securities as available-for-sale. In accordance with ASU 2016-13, Measurement of Credit Losses on Financial Instruments, we review available-for-sale debt securities for impairments related to losses and other factors each quarter. Unrealized gains and losses are recorded to other comprehensive income. The unrealized gains and losses on the available-for-sale debt securities were not material as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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

●

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

●

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

●

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

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The following tables summarize assets that are measured at fair value on a recurring basis as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


			Fair Value Measurement at Reporting Date Using						Fair Value Measurement at Reporting Date Using
in thousands		June 30, 2021	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)		June 30, 2022	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury Notes	$	2,422	-	$	2,422	-	$	3,996	-	$	3,996	-
Corporate Notes / Bonds	$	12,252	-	$	12,252	-	$	3,808	-	$	3,808	-
Commercial Paper	$	8,097	-	$	8,097	-	$	5,468	-	$	5,468	-
U.S. Treasury Bills	$	3,789	-	$	3,789	-	$	6,955	-	$	6,955	-
U.S. Government Agencies	$	16,166	-	$	16,166	-


			Fair Value Measurement at Reporting Date Using				��		Fair Value Measurement at Reporting Date Using
in thousands		December 31, 2020	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)		December 31, 2021	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury Notes	$	4,951	-	$	4,951	-	$	4,038	-	$	4,038	-
Corporate Notes / Bonds	$	8,780	-	$	8,780	-	$	9,585	-	$	9,585	-
Commercial Paper	$	4,098	-	$	4,098	-	$	8,996	-	$	8,996	-
U.S. Treasury Bills	$	5,292	-	$	5,292	-	$	9,990	-	$	9,990	-
U.S. Government Agencies	$	3,738	-	$	3,738	-	$	2,499	-	$	2,499	-

Note 9 – Allowance for credit losses

The changes in the allowance for credit losses during the six months ended June 30, ~~2021~~2022 were as follows:


in thousands
Balance at December 31, 2020	$	4,135
Balance at December 31, 2021			$	1,419
Provision		660		678
Write-offs		(1,645)		(25)
Net foreign currency translation		(3)		(21)
Balance at June 30, 2021	$	3,147
Balance at June 30, 2022			$	2,051

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Note 10 – Leases

Operating lease cost details for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021 are as follows:


	Three months ended				Six months ended					Three months ended				Six months ended
	June 30,				June 30,					June 30,				June 30,
	2021		2020		2021		2020		2022		2021		2022		2021

	(in thousands)				(in thousands)					(in thousands)				(in thousands)
Building rent	$	677	$	765	$	1,247	$	1,456	$	521	$	677	$	1,096	$	1,247
Automobile rentals		411		359		744		711		361		411		581		744
Total net operating lease costs	$	1,088	$	1,124	$	1,991	$	2,167	$	882	$	1,088	$	1,677	$	1,991

At June 30, ~~2021,~~2022, the weighted average remaining lease term for our operating leases is ~~6.6~~6.2 years. The weighted average discount rate for our operating leases is 5%.

During the six months ended June 30, ~~2021,~~2022, there were ~~$1.9~~$1.7 million of operating cash payments for lease liabilities, and $0$0.4 million of right-of use assets obtained in exchange for new lease liabilities.

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Maturities of our operating leases are as follows:


	As of June 30, 2021		As of June 30, 2022
		(in $ thousands)		(in thousands)
2021	$	1,682
2022		3,156	$	1,351
2023		2,551		2,537
2024		1,738		1,840
2025		1,603		1,737
2026				1,679
Later years		5,972		4,326
Less imputed interest		(2,847)		(2,152)
Total lease liabilities	$	13,855	$	11,318

Note 11 – Income Taxes

~~Given our expected projected loss (before tax) for the year, our~~Our estimated annual effective tax rate for ~~2021~~2022 before discrete items and excluding entities with a valuation allowance is expected to be approximately 7%24%. Our global effective tax rate is ~~lower~~higher than the U.S. statutory tax rate of 21% primarily due to ~~losses in jurisdictions for which a valuation allowance is required and therefore no benefit is received, along with~~ nondeductible expenses. Our ultimate tax expense will depend on the mix of earnings in various jurisdictions. Income taxes of ~~$1.5~~$1.7 million and ~~$6.5~~$2.0 million were paid during the three and six months ended June 30, ~~2021,~~2022, respectively.

~~At December 31, 2020, we had~~Management assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of ~~$30.0 million resulting from foreign and state NOL carryforwards~~negative evidence such as 3-year cumulative losses are considered. Management also reviews reversal patterns of ~~$119.5 million and other foreign deductible carryforwards~~temporary differences to determine if the Company would have sufficient taxable income due to the reversal of ~~$64.7 million. At December 31, 2020, we had a valuation allowance~~temporary differences to support the realization of ~~$19.9~~ ~~million against~~ deferred tax ~~assets related to certain carryforwards.~~

assets.

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

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At December 31, 2021, we had deferred tax assets of $43.7 million resulting from US, foreign and state NOL carryforwards of $148.6 million and other foreign deductible carryforwards of $97.5 million. At December 31, 2021, we had a valuation allowance of $31.3 million against deferred tax assets related to certain carryforwards.

Note 12 – Long-Term Compensation Plan and Stock Based Compensation (share counts in thousands)

Under the OneSpan Inc. 2019 Omnibus Incentive Plan, we award restricted stock units subject to time-based vesting, restricted stock units which are subject to the achievement of future performance criteria and restricted stock units that are subject to the achievement of market conditions. Other long-term incentive plan compensation expense includes cash incentives.

We awarded ~~226~~1,209 restricted stock units during the six months ended June 30, ~~2021,~~2022, subject to time-based vesting. The fair value of the unissued time-based restricted stock unit grants was ~~$5.9~~$18.2 million at the dates of grant and the grants are being amortized over the vesting periods of one to four years.

We awarded restricted stock ~~unit grants~~units subject to the achievement of service and future performance criteria during the six months ended June 30, ~~2021, subject to the achievement of market and service conditions,~~2022, which allow for up to 53138 shares to be earned if the ~~market conditions~~performance criteria are ~~fully achieved.~~achieved at the target level. The fair value of these awards was ~~$2.2~~$1.7 million at the dates of grant and the awards are being amortized over the vesting period of three years. The Company currently believes that ~~45 of these shares are expected to be earned.~~

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We awarded restricted stock units subject to the achievement of service and future performance criteria during the six months ended June 30, 2021, which allow for up to 186 shares to be earned if the performance criteria are fully achieved. The fair value of these awards was $4.5 million at the dates of grant and the awards are being amortized over the vesting period of three years. The Company currently believes that 169all of these shares are expected to be earned.

During the three and six month periods ended June 30, 2022, stock-based compensation and other long-term incentive plan compensation accruals were reversed for certain employees who were severed from the Company. The reversal of the accrued long-term incentive plan compensation for the severed employees largely offset the expense for the periods. The following table details stock-based compensation expense and other long-term ~~compensation~~incentive plan ~~and stock-based~~ compensation expense for the ~~three and~~ six months ended June 30, ~~2021~~2022 and ~~2020:~~2021:


	Three months ended				Six months ended
	June 30,				June 30,				June 30,				June 30,
	2021		2020		2021		2020		2022		2021		2022		2021

in thousands	(in thousands)				(in thousands)
									(in thousands)				(in thousands)
Stock-based compensation	$	1,292	$	860	$	2,634	$	2,210	$	1,253	$	1,292	$	2,613	$	2,634
Other long-term incentive plan compensation		275		305		474		670		24		275		(112)		474
Total compensation	$	1,567	$	1,165	$	3,108	$	2,880	$	1,277	$	1,567	$	2,501	$	3,108

Note 13 – 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. Because the Company iswas in a net loss position for the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020,~~2021, diluted net loss per share for these periods excludes the effects of common stock equivalents, which are anti-dilutive.

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The details of the earnings per share calculations for the three ~~and six~~ months ended June 30, ~~2021~~2022 and ~~2020~~2021 are as follows:


	Three months ended				Six months ended				Three months ended				Six months ended
	June 30,				June 30,				June 30,				June 30,
in thousands, except per share data	2021		2020		2021		2020
									2022		2021		2022		2021

									(in thousands, except per share data)				(in thousands, except per share data)
Net loss	$	(6,685)	$	(2,025)	$	(15,836)	$	(2,021)	$	(9,350)	$	(6,685)	$	(4,136)	$	(15,836)
Weighted average common shares outstanding:
Basic		39,694		40,028		39,692		40,059		40,157		39,694		39,870		39,692
Incremental shares with dilutive effect:
Restricted stock awards		—		—		—		—		—		—		—		—
Diluted		39,694		40,028		39,692		40,059		40,157		39,694		39,870		39,692

Net loss per share:
Basic	$	(0.17)	$	(0.05)	$	(0.40)	$	(0.05)	$	(0.23)	$	(0.17)	$	(0.10)	$	(0.40)
Diluted	$	(0.17)	$	(0.05)	$	(0.40)	$	(0.05)	$	(0.23)	$	(0.17)	$	(0.10)	$	(0.40)

Note 14 – 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~~punitive 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.

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

We include various types of indemnification clauses in our customer agreements. ~~These indemnifications~~Our obligations under these indemnification clauses may include, but are not limited to, covering costs for infringement claims related to our intellectual property, direct damages and consequential damages. The type and amount of such ~~indemnifications~~indemnification clauses vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have 0 liabilities recorded for these clauses as of June 30, ~~2021.~~2022.

A complaint was filed on August 20, 2020 against OneSpan and certain of its officers, asserting claims for purported violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and SEC Rule 10b-5 promulgated thereunder, based on certain alleged material misstatements and omissions. The case is captioned Almendariz v. OneSpan Inc., et al., No. 1:20-cv-04906 (N.D. Ill.) (the “Securities Class Action”). Specifically, the plaintiff in the Securities Class Action alleges, among other things, that certain statements about OneSpan’s business were misleading because of defendants’ failure to disclose that OneSpan purportedly had inadequate internal procedures and controls over financial reporting and related disclosures; and OneSpan purportedly downplayed the negative impacts of immaterial errors in its financial statements. On April 28, 2021, the Securities Class Action was dismissed by the court without prejudice.

A complaint, related in subject matter to the Securities Class Action, was filed on October 23, 2020 against certain of OneSpan’s officers and directors, and names OneSpan as a nominal defendant. The case is captioned Klein v. Boroditzky, et al., No. 1:20-cv-06310 (N.D. Ill.) (the “Derivative Action” and, collectively with the Securities Class Action, the “Litigation”). The plaintiff asserts claims for breach of fiduciary duty, abuse of control and corporate waste, as well as a claim for contribution under Sections 10(b) and 21D of the Exchange Act, based on the same alleged wrongdoing pled in the Securities Class Action. On February 16, 2021, on the parties’ agreed motion, the court stayed the action pending a decision on the then-anticipated motion to dismiss in the Securities Class Action. On June 28, 2021 the Klein case was dismissed by the court without prejudice.

On April 2, 2021, a different purported shareholder of the Company, represented by one of the same law firms representing plaintiff in the Klein case, filed second derivative suit in the Northern District of Illinois arising out of the same events that led to the filing of the Securities Class Action. The case is captioned Herrera v. Boroditsky, et al., 1:21-cv-01789 (N.D. Ill.). The factual allegations are substantially similar to those in Klein, except that the complaint does not contain express allegations regarding the pendency of the Securities Class Action and only one cause of action, for breach of fiduciary duty, is asserted. On June 28, 2021 the Herrera case was dismissed by the court without prejudice.

From time to time, we have been involved in litigation, claims and ~~claims~~other proceedings incidental to the conduct of our business, such as compensation claims from current or former employees ~~in Europe.~~or commercial disputes with vendors. We ~~expect that to continue. Excluding matters specifically disclosed above, we~~ are not currently a party to any lawsuit, claim or proceeding that, in management’s opinion, is likely to have a material adverse effect on ~~its~~our business, financial condition or results of operations.

~~Note 15 – Subsequent Events~~

~~As previously disclosed, pursuant to that certain Cooperation Agreement by and among OneSpan Inc. (the “~~~~Company~~~~” or “~~~~OneSpan~~~~”), on the one hand, and Legion Partners Asset Management, LLC, John N. Fox, Jr. will resign from the Company’s Board of Directors (the “~~~~Board~~~~”) on or prior to September 30, 2021. On July 29, 2021, Mr. Fox~~

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~~notified~~Note 15 – Restructuring Plan

In December 2021, the Board ~~that he will resign from~~approved a restructuring plan (“Plan”) designed to advance the Company’s operating model, streamline its business, and enhance its capital resources. As part of the first phase of the Plan, we reduced headcount by eliminating positions in certain areas of the Company. The first phase began and was substantially completed during the three months ended March 31, 2022.

In May 2022, the Board ~~effective August 4, 2021. Mr. Fox did not advise~~approved additional actions related to the Plan through the year ending December 31, 2025. This second phase of the Plan consists solely of headcount-related actions and is designed to continue to advance the Company’s operating model, streamline its business, and enhance its capital resources.

In connection with the Plan, the Company incurred severance, retention pay, and related benefits costs. These costs are recorded in the sales and marketing, research and development, and general and administrative expense line items in the condensed consolidated statements of ~~any disagreement with~~operations for the ~~Company on any matter relating to its operations, policies or practices.~~three and six months ended June 30, 2022, as follows:

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


		Three months ended		Six months ended
		June 30,		June 30,
		2022		2022

		(in thousands)
Operating costs
	Sales and marketing	$	1,453	$	2,348
	Research and development		917		2,570
	General and administrative		318		430
	Total restructuring related expenses	$	2,688	$	5,348

There are $3.1 million of restructuring related expenses recorded in Accrued Wages and Payroll Expenses on the Company’s condensed consolidated balance sheet at June 30, 2022.

Note 16 – Segment Information

In May 2022, we announced a three-year strategic transformation plan that we believe will enable us to build on our strong solution portfolio and market position, enhance our enterprise go-to-market strategy, accelerate revenue growth, and drive efficiencies to support margin expansion and increased profitability. In conjunction with the strategic transformation plan and to enable a more efficient capital deployment model, effective with the quarter ended June 30, 2022, we will begin reporting under the following two lines of business, which will be our reportable operating segments: Digital Agreements and Security Solutions. We expect to manage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flow given its more modest growth profile.

Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM), in deciding how to allocate resources and in assessing performance. Our chief operating decision maker, who is our chief executive officer, manages the business under 2 operating segments, which are our reportable segments: Digital Agreements and Security Solutions.

●

Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are largely cloud-based, include our e-signature solution and our Virtual Room solution. As our transformation plan progresses, we expect to include other cloud-based security modules associated with the secure transaction lifecycle of identity verification, authentication, virtual interaction, e-transactions and e-vaulting (storage) in the Digital Agreements segment. This segment also includes costs attributable to our transaction cloud platform.

~~On August 4,~~Table of Contents

●

Security Solutions. Security Solutions consist of our broad portfolio of software products and/or software development kits (SDKs) that are used to build applications designed to defend against attacks on digital transactions across online environments, devices and applications. These solutions, which are largely on-premises software products, include identity verification, multi-factor authentication and transaction signing, such as mobile application security, mobile software tokens, and Digipass tokens that are not cloud connected devices.

Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue, sales and marketing, and research and development expenses that are incurred directly by a segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment.

The tables below set forth information about our operating segments for the three and six months ended June 30, 2022 and 2021, along with the ~~Company announced~~items necessary to reconcile the appointment of Steven R. Worth as Interim President and Chief Executive Officer, effective August 2, 2021. Mr. Worth has served as OneSpan’s General Counsel, Chief Compliance Officer and Corporate Secretary since 2016 and has served as OneSpan’s Interim Chief Financial Officer and Treasurer since June 9, 2021. Following his appointment as Interim President and Chief Executive Officer, he continuessegment information to ~~serve~~the totals reported in the ~~roles of General Counsel, Chief Compliance Officer and Corporate Secretary and has executive responsibility for~~ ~~information security, legal, compliance and intellectual property matters. At this time, any compensation adjustments in connection with Mr. Worth’s appointment have not been determined.~~accompanying consolidated financial statements.

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


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2021		2022		2021
Digital Agreements
Revenue	$	10,454	$	9,527	$	23,755	$	19,591
Gross profit	$	7,647	$	6,626	$	17,933	$	14,080
Gross margin		73%		70%		75%		72%
Operating income (loss)	$	101	$	(795)	$	1,789	$	(731)

Security Solutions
Revenue	$	42,336	$	42,750	$	81,482	$	83,461
Gross profit	$	27,859	$	28,205	$	54,251	$	54,993
Gross margin		66%		66%		67%		66%
Operating income	$	8,631	$	10,035	$	17,118	$	16,599

Total Company:
Revenue	$	52,790	$	52,277	$	105,237	$	103,052
Gross profit	$	35,506	$	34,831	$	72,184	$	69,073
Gross margin		67%		67%		69%		67%

Statements of Operations reconciliation:
Segment operating income	$	8,732	$	9,240	$	18,907	$	15,868
Operating expenses not allocated at the segment level:
Corporate operating expenses	$	15,753	$	16,573	$	33,789	$	30,922
Amortization		1,217		1,526		2,599		3,099
Operating loss	$	(8,238)	$	(8,859)	$	(17,481)	$	(18,153)
Interest income, net		35		2		18		6
Other income (expense), net		(675)		1,029		14,972		667
Loss before income taxes	$	(8,878)	$	(7,828)	$	(2,491)	$	(17,480)

1920

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The following tables illustrate the disaggregation of revenues by products and services, including a reconciliation of the disaggregated revenues to revenues from our two operating segments for the three and six months ended June 30, 2022 and 2021.


		Three Months Ended
		June 30, 2022				June 30, 2021
		Digital Agreements		Security Solutions		Digital Agreements		Security Solutions

Subscription	$	8,736	$	11,093	$	7,780	$	7,966
Maintenance and support		1,408		10,770		1,512		11,522
Professional services and other		310		1,690		235		3,811
Hardware products		-		18,783		-		19,451
Total Revenue	$	10,454	$	42,336	$	9,527	$	42,750


		Six Months Ended
		June 30, 2022				June 30, 2021
		Digital Agreements		Security Solutions		Digital Agreements		Security Solutions

Subscription	$	20,407	$	22,691	$	15,939	$	16,189
Maintenance and support		2,760		21,364		2,889		22,668
Professional services and other		588		3,293		718		7,530
Hardware products		-		34,134		45		37,074
Total Revenue	$	23,755	$	81,482	$	19,591	$	83,461

We allocate Goodwill by reporting unit, in accordance with ASC 350. Refer to Note 5 – Goodwill for additional information. All other assets and liabilities are unallocated, as the CODM does not evaluate these items at the segment level when addressing segment performance or allocating resources.

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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 outcomes we expect from our strategic transformation plan; our plans for managing our Digital Agreements and Security Solutions segments; 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; product enhancements and introductions; future sales and marketing expenditures; plans to expand our ~~strategic plans regarding our portfolio, including acquisitions and dispositions;~~salesforce; foreign currency exchange rate impacts; and our general 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", "continue", "outlook", "may", "will", "should", "could", or "might", and other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions that, 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: our ability to execute our strategic transformation plan; our ability to hire and train sales and other employees necessary to implement our strategic transformation plan; market acceptance of our products and ~~solutions and competitors’ offerings;~~solutions; investments in new products or businesses that may not achieve expected returns; competition; changes in customer requirements; the potential effects of technological changes; economic recession, inflation, and political instability; the impact of the COVID-19 pandemic and actions taken to contain it; our ability to effectively manage acquisitions, divestitures, alliances, joint ventures and other portfolio actions; the ~~execution of our transformative strategy on a global scale; the~~ increasing frequency and sophistication of ~~hacking attacks;~~cyber-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~~component shortages; delays and disruption in ~~new~~global transportation and supply chains; reliance on third parties for certain products ~~or businesses that may not achieve expected returns;~~and data center services; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; actions of activist stockholders; and exposure to increased economic and operational uncertainties from operating a global business, as well as those factors described in the “Risk Factors” section of our Annual Report on Form 10-K. Our filings with the Securities and Exchange Commission (the “SEC”) and other important information can be found in the Investor Relations section of our website at investors.onespan.com. We do not have any intent, and disclaim any obligation, to update the forward-looking information to reflect events that occur, circumstances that exist or changes in our expectations after the date of this Form 10-Q, except as required by law.

~~Outlook and Financial Results~~

We continue to actively address the effects of the COVID-19 pandemic and its impact globally. Beginning in the Summer of 2020 and continuing through the present, we have experienced lengthened sales cycles and reduced demand for some of our security solutions due to economic uncertainty connected to the COVID-19 pandemic. The most significant impact of the pandemic on our business has been a drop in demand for our hardware authentication products and delays in the implementation of certain software solutions.

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

We believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on the global economy and our business results. See Part 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~~OneSpan designs, develops, and ~~market~~markets solutions that enable secure, compliant, and easy digital ~~solutions for identity, security,~~customer agreements and ~~business productivity that protect and facilitate electronic transactions via mobile and connected devices.~~transaction experiences. We are a global leader in providing ~~anti-fraud~~high-assurance identity and

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~~digital transaction management solutions to financial institutions and other businesses.~~ authentication security as well as simplified e-signature workflows. Our solutions ~~secure access to online accounts, data, assets,~~enable trust that ensures the integrity of the people and ~~applications for global enterprises; provide tools for application developers to easily integrate security functions into their web-based~~artifacts associated with digital agreements and ~~mobile applications;~~transactions across banking, financial services, healthcare, and ~~facilitate end-to-end financial agreement automation~~professional services. Our solution portfolio includes a broad set of offerings across several categories, including ~~digital~~ identity verification, ~~customer due diligence,~~authentication, transaction signing, mobile security, electronic signature, and secure ~~storage~~video collaboration for virtual interactions 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.

transactions.

We offer ~~cloud based~~our solutions through cloud-based and, ~~on premises~~in select cases, 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 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 primarily through a ~~product sales and~~subscription licensing model, ~~or through our services platform, which includes~~including our cloud-based service ~~offering.~~

offerings. 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 the markets for authentication, 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 global; however, the rate of adoption in each country is a function of local culture, competitive position, economic conditions, and the use of technology may vary significantly.

~~Economic Conditions~~

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

~~Cybersecurity Risks~~

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

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

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

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~~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.

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

~~Currency Fluctuation~~

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

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

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

The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet

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~~date. Revenues~~Business Transformation

We are currently in the midst of a business transition and ~~expenses~~transformation. Our total revenue decreased on a year-over-year basis in 2020, and 2021, and we experienced negative operating income and net losses in both of those years. During 2021 and early 2022, our previous CEO, CFO, and several other senior executives left the company. In late November 2021, our current CEO, Matthew Moynahan, joined us and has been building a new executive team over the course of 2022 to effect the transformation.

●

We expect to manage Digital Agreements for accelerated growth and market share gains and Security Solutions for cash flow given its more modest growth profile. Across both segments, we are ~~translated~~building on our strong foundation in both e-signature and cybersecurity by enhancing product features, developing new and next-generation solutions, and building out a new transaction cloud platform, which we expect will allow us to efficiently deliver security and e-signature solutions to our customers across their entire digital agreement lifecycle. We also plan to enhance our go-to-market strategy by prioritizing growth at ~~average~~large enterprise accounts, expanding our direct sales force, and accessing new routes to market through alliances and partnerships.

Our transformation plan involves numerous risks and uncertainties. Please see Item IA, Risk Factors.

Foreign Exchange Rate Impact

We generate approximately 85% of our revenue and have substantial operations outside of the United States, and therefore changes in foreign currency exchange rates ~~prevailing during the period. Translation adjustments arising from differences~~can have a significant impact on our revenue and operating expenses. We estimate that changes in exchange rates, ~~generated other comprehensive gain of $0.5 million~~especially for the Euro, negatively impacted our revenue for the three months ~~ended June 30, 2021~~ and ~~other comprehensive loss of $0.4 million for the~~ six months ended June 30, ~~2021. Translation adjustments arising from differences in exchange rates generated other comprehensive gain of $0.4~~2022 by approximately $3.2 million and $4.8 million, respectively, as compared to the applicable prior year periods. These changes also benefitted our operating expenses for the three months ~~ended June 30, 2020~~ and ~~other comprehensive loss of $3.8 million for the~~ six months ended June 30, ~~2020. These amounts~~2022 by an estimated $2.0 and $3.1 million, respectively, as compared to the applicable prior year periods. Most of this exchange rate impact was in our Security Solutions segment. Based on current exchange rates, we expect to see continued but more moderate exchange rate impact in future periods.

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Restructuring Plan

In December 2021, our Board approved a restructuring plan designed to advance our operating model, streamline our business, and enhance our capital resources. The first phase of this restructuring plan began and was substantially completed during the three months ended March 31, 2022.

In May 2022, our Board approved additional actions related to the restructuring plan through the year ending December 31, 2025. The additional actions consist solely of headcount-related reductions designed to continue to advance the same objectives as the first phase of the plan.

As part of the restructuring plan, we reduced headcount by eliminating positions in certain areas of the Company. We incurred severance and related benefits costs, which are ~~included as a separate component of stockholders’ equity. The functional currency for our subsidiaries~~recorded in ~~Switzerland, Singapore~~the sales and ~~Canada is~~marketing, research and development, and general and administrative expense line items in the ~~U.S. Dollar.~~

~~Gains and losses resulting from foreign currency transactions are included in the~~condensed consolidated statements of operations ~~in other income (expense), net. Foreign exchange transaction gains aggregated $0.6 million~~ for the three ~~months ended June 30, 2021, compared to less than $0.1 million of gains aggregated for the three months ended June 30, 2020. During the~~and six months ended June 30, ~~2021, foreign exchange transaction losses aggregated less than $0.1 million compared to losses aggregated of $0.5 million during the six months ended June 30, 2020.~~2022. See Note 15 – Restructuring Plan for additional detail.

Components of Operating Results

Revenue

We generate revenue from the sale of ~~our hardware products, software licenses,~~on-premises and cloud subscriptions, maintenance and support, professional services, and ~~professional services. We believe comparison of revenues between periods~~our hardware products. Our revenue is heavily influenced by the timing of orders and shipments, ~~reflecting~~which may affect the ~~transactional nature of significant parts~~comparability of our ~~business.~~period-to-period results, particularly over shorter timeframes.

●

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

●

Service and other revenue. Service and other revenue includes solutions that are provided on a cloud-based subscription ~~solutions (which is our definition of software-as-a-service solutions),~~model, 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.~~costs, including personnel costs, production costs, and freight.

●

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

Gross Profit

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

Operating Expenses

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

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

Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates in the first six months of 2021 compared to the same period in 2020 resulted in an increase in operating expenses of approximately $2.8 million.

The comparison of operating expenses can ~~also~~ be impacted significantly by costs related to our stock-based and long-term incentive plans. Operating expenses for the three and six months ended June 30, ~~2021~~2022 included ~~$1.6~~$1.3 million and ~~$3.1~~$2.5 million, respectively of expenses related to stock-based and long-term incentive plan costs compared to ~~$1.2~~$1.6 million and ~~$2.9~~$3.1 million of stock-based and long-term incentive plan cost for the three and six months ended June 30, ~~2020,~~2021, respectively. Stock-based compensation expense during the six months ended June 30, 2022 was favorably impacted by the forfeiture of unvested awards by certain severed sales management and executive management during the periods, offset by new grants.

●

Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. We expect sales and marketing expenses to increase in absolute dollars as we ~~continue~~expand our salesforce and marketing activities to ~~invest in sales resources in key focus areas,~~support our strategic transformation plan, 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~~costs to increase in absolute dollars as we continue to ~~invest in~~enhance and expand our ~~future solutions, although~~product offerings and cloud platform. However, our research and development expenses may fluctuate as a percentage of total ~~revenue.~~revenue including due to expected growth of our team and capitalization of certain costs related to the expansion of our cloud product portfolio.

●

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 to support the anticipated growth of our business, although our general and administrative expenses may fluctuate as a percentage of total revenue.

●

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

Segment Results

Segment operating income consists of the revenue generated by a segment, less the direct costs of revenue, sales and marketing, and research and development expenses that are incurred directly by a segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. Financial results by operating segment are included below under Results of Operations.

Interest Income, Net

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

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.

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Income Taxes

Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). ~~All~~The majority of our IP in our ~~traditional authentication~~Security Solutions business is owned by two subsidiaries, one in the U.S. and one in Switzerland. These two subsidiaries have entered into agreements with most of the other 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 ~~2021,~~2022, earnings flowing to the U.S. company are expected to be taxed at a rate of

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

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 ~~12%~~11% to 35%.

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:

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

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

the amount of ~~revenues~~revenue 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.~~business results.

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 existing loss carryforwards at the time of acquisition was not recorded as ~~the Company~~we determined they were not more likely than not to be realized.

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

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Results of Operations

In conjunction with our strategic transformation plan, effective with the quarter ended June 30, 2022, we began reporting under the following two lines of business which will be our reportable operating segments: Digital Agreements and Security Solutions.

The following table sets forth, for the periods indicated, selected segment and consolidated operating results.


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2021		2022		2021
Digital Agreements
Revenue	$	10,454	$	9,527	$	23,755	$	19,591
Gross profit	$	7,647	$	6,626	$	17,933	$	14,080
Gross margin		73%		70%		75%		72%
Operating income (loss)	$	101	$	(795)	$	1,789	$	(731)

Security Solutions
Revenue	$	42,336	$	42,750	$	81,482	$	83,461
Gross profit	$	27,859	$	28,205	$	54,251	$	54,993
Gross margin		66%		66%		67%		66%
Operating income	$	8,631	$	10,035	$	17,118	$	16,599

Total Company:
Revenue	$	52,790	$	52,277	$	105,237	$	103,052
Gross profit	$	35,506	$	34,831	$	72,184	$	69,073
Gross margin		67%		67%		69%		67%

Statements of Operations reconciliation:
Segment operating income	$	8,732	$	9,240	$	18,907	$	15,868
Operating expenses not allocated at the segment level:
Corporate operating expenses	$	15,753	$	16,573	$	33,789	$	30,922
Amortization		1,217		1,526		2,599		3,099
Operating loss	$	(8,238)	$	(8,859)	$	(17,481)	$	(18,153)

Revenue

~~Revenue by Product:~~ We generate revenue from the sale of our ~~hardware products, software licenses,~~ subscriptions, maintenance and support, professional services, and ~~maintenance~~hardware products. Subscription includes cloud and ~~support. Product~~on-premises subscription revenue, previously referred to as “subscription” and ~~license revenue includes hardware~~“term-based software licenses”, respectively.

Revenue by products and ~~software licenses. Service~~services allocated to the segments for the three and ~~other revenue includes subscription solutions (which~~six months ended June 30, 2022 and 2021 is ~~our definition of software-as-a-service solutions), maintenance and support, and professional services.~~as follows:


		Three Months Ended
		June 30, 2022				June 30, 2021
		Digital Agreements		Security Solutions		Digital Agreements		Security Solutions

Subscription (1)	$	8,736	$	11,093	$	7,780	$	7,966
Maintenance and support		1,408		10,770		1,512		11,522
Professional services and other (2)		310		1,690		235		3,811
Hardware products		-		18,783		-		19,451
Total Revenue	$	10,454	$	42,336	$	9,527	$	42,750

Three months ended June 30,

Six months ended June 30,


2021

2020

2021

2020

(in thousands)
Hardware products

$
19,451

$
24,188

$
37,119

$
43,926
Software licenses

8,927

11,196

19,704

29,718
Subscription

9,824

6,133

18,229

11,840
Professional services

1,041

1,326

2,443

2,747
Maintenance, support, and other

13,034

12,111

25,557

23,093
Total Revenue

$
52,277

$
54,954

$
103,052

$
111,324

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		Six Months Ended
		June 30, 2022				June 30, 2021
		Digital Agreements		Security Solutions		Digital Agreements		Security Solutions

Subscription (1)	$	20,407	$	22,691	$	15,939	$	16,189
Maintenance and support		2,760		21,364		2,889		22,668
Professional services and other (2)		588		3,293		718		7,530
Hardware products		-		34,134		45		37,074
Total Revenue	$	23,755	$	81,482	$	19,591	$	83,461

(1)

Subscription includes cloud and on-premises subscription revenue, previously referred to as “subscription” and “term-based software licenses”, respectively.

(2)

Professional services & other includes perpetual software licenses revenue which was less than 2% of total revenue for both the three and six months ended June 30, 2022, and less than 6% of total revenue for both the three and six months ended June 30, 2021.

Total revenue ~~decreased $2.7~~increased $0.5 million or 5%1%, during the three months ended June 30, ~~2021~~2022 compared to the three months ended June 30, 2020, driven primarily by a $4.7 million decrease in hardware revenue, offset by an increase in recurring revenue, which is the portion of our revenue subject to future renewal. Recurring revenue, comprised of subscription, term-based software licenses, and maintenance, support and other revenue, increased $5.5 million or 24% during the three months ended June 30, 2021, compared to the three months ended June 30, 2020. Total revenue decreased $8.3 million or 7%, during2021. For the six months ended June 30, ~~2021~~2022, total revenue increased by $2.2 million, or 2% compared to the six months ended June 30, ~~2020,~~2021. This increase in total revenue was driven ~~primarily~~ by ~~decreases~~an $11.0 million increase in ~~hardware and perpetual software license~~subscription revenue, ~~partially~~ offset by ~~an increase in recurring revenue. Recurring~~lower non-recurring revenue, ~~increased $8.6~~which consisted of $4.4 million ~~or 17% during the six months ended June 30, 2021, compared to the six months ended June 30, 2020.~~

Product and license revenue decreased by $7.0 million or 20% during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. For the six months ended June 30, 2020, product and license revenue decreased $16.8 million or 23% compared to the six months ended June 30, 2020. The decrease in both periods is due to lower ~~hardware and software license sales.~~

~~Services and other revenue increased by $4.3 million, or 22% during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. For the six months ended June 30, 2021,~~professional services and other revenue, ~~increased $8.5~~$3.0 million ~~or 23% compared to the six months ended June 30, 2020. The increase for both the three~~lower hardware revenue, and ~~six month periods ended June 30, 2021 compared to the same periods in 2020 was driven by higher~~$1.4 million lower maintenance and ~~subscription~~support revenue.

Additional information on our revenue by segment follows.

●

Digital Agreements revenue increased $0.9 million, or 10%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. For the six months ended June 30, 2022, Digital Agreements revenue increased $4.2 million, or 21%, compared to the same period in the prior year. Year-over-year growth in Digital Agreements for the three and six months ended June 30, 2022 was affected by a higher proportion of cloud subscription revenue relative to on-premises revenue for both periods. More restrained customer purchasing behavior as compared to the height of the COVID-19 pandemic was also a factor.

●

Security Solutions revenue decreased $0.4 million, or approximately 1%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. For the six months ended June 30, 2022, Security Solutions revenue decreased $2.0 million, or 2%, compared to the same period in the prior year. The decrease for both periods is due to decreases in revenue generated by professional services and other, maintenance and support, and hardware products. The decreases were offset by an increase in on-premises subscription revenue driven by higher demand. Security Solutions revenue was impacted by foreign exchange rate changes, electronic component shortages and shipping delays during the three and six months ended June 30, 2022, which may also affect revenue generated during the second half of the year.

~~We believe comparison of revenues between periods~~Our revenue 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.

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

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


	Three months ended June 30,		Six months ended June 30,		Three months ended June 30,		Six months ended June 30,
	2021	2020	2021	2020	2022	2021	2022	2021

	(in thousands)		(in thousands)		(in thousands)		(in thousands)
Revenue
EMEA	$ 24,830	$ 28,336	$ 51,819	$ 61,940	$ 23,521	$ 24,830	$ 48,397	$ 51,819
Americas	17,011	13,932	33,539	26,265	19,329	17,011	36,578	33,539
APAC	10,436	12,686	17,694	23,119	9,940	10,436	20,262	17,694
Total revenue	$ 52,277	$ 54,954	$ 103,052	$ 111,324	$ 52,790	$ 52,277	$ 105,237	$ 103,052

% of Total Revenue
EMEA	47%	52%	50%	56%	44%	47%	46%	50%
Americas	33%	25%	33%	24%	37%	33%	35%	33%
APAC	20%	23%	17%	21%	19%	20%	19%	17%

Revenue generated in EMEA during the three months ended June 30, ~~2021~~2022 was ~~$3.5~~$1.3 million, or ~~12%~~5% lower than the three months ended June 30, ~~2020,~~2021, driven primarily by lower hardware sales. For the six months ended June 30, ~~2021,~~2022, revenue generated in EMEA was ~~$10.1~~$3.4 million or ~~16%~~7% lower than the same period in ~~2020,~~2021, driven by lower ~~software license revenue and lower~~ hardware revenue.

Revenue generated in the Americas during the three months ended June 30, ~~2021~~2022 was ~~$3.1~~$2.3 million, or ~~22%~~14% higher than the three months ended June 30, ~~2020, driven primarily by increases in software license revenue and subscription revenue.~~2021. For the six months ended June 30, ~~2021,~~2022, revenue generated in the Americas was ~~$7.3~~$3.0 million or ~~28%~~9% higher than the same period in ~~2020,~~2021. Increases in revenue for both periods was primarily driven ~~largely~~ by higher cloud and on-premises subscription revenue.

Revenue generated in the Asia Pacific region during the three months ended June 30, ~~2021~~2022 was ~~$2.3~~$0.5 million, or ~~18%~~5% lower than the three months ended June 30, ~~2020,~~2021, driven by lower ~~revenue from software licenses and hardware.~~cloud subscription revenue. For the six months ended June 30, ~~2021,~~2022, revenue generated in the Asia Pacific region was ~~$5.4~~$2.6 million or ~~23% lower~~15% higher than the same period in ~~2020,~~2021, driven by ~~lower software, maintenance,~~higher on-premise and ~~hardware~~cloud subscription revenue.

Cost of Goods Sold and Gross Margin


	Three months ended June 30,		Six months ended June 30,		Three months ended June 30,		Six months ended June 30,
	2021	2020	2021	2020	2022	2021	2022	2021

	(in thousands)		(in thousands)		(in thousands)		(in thousands)
Cost of goods sold
Product and license	$ 9,589	$ 12,576	$ 19,130	$ 23,314	$ 10,947	$ 10,565	$ 20,026	$ 21,317
Services and other	6,881	5,649	12,662	10,981	6,337	6,881	13,027	12,662
Total cost of goods sold	$ 16,470	$ 18,225	$ 31,792	$ 34,295	$ 17,284	$ 17,446	$ 33,053	$ 33,979

Gross profit	$ 35,807	$ 36,729	$ 71,260	$ 77,029	$ 35,506	$ 34,831	$ 72,184	$ 69,073

Gross margin
Product and license	66%	64%	66%	68%	62%	63%	66%	62%
Services and other	71%	71%	73%	71%	74%	71%	72%	73%
Total gross margin	68%	67%	69%	69%	67%	67%	69%	67%

The cost of product and license revenue ~~decreased $3.0~~increased by $0.4 million or ~~24%~~4% during the three months ended June 30, ~~2021~~2022 compared to the three months ended June 30, ~~2020.~~2021, driven primarily by higher on-premises subscription

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revenue. During the six months ended June 30, ~~2021,~~2022, the cost of product and license revenue decreased ~~$4.2~~$1.3 million or ~~18%~~6% compared to the six months ended June 30, ~~2020. The decrease in cost of product and license during both periods was~~2021 due to lower token costs, which were driven by lower hardware sales as a percentage of total ~~revenue.~~

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revenue

The cost of services and other revenue ~~increased~~decreased by ~~$1.2~~$0.5 million, or ~~22%~~8% during the three months ended June 30, ~~2021~~2022 compared to the three months ended June 30, ~~2020.~~2021, driven by lower maintenance and professional services revenue. For the six months ended June 30, ~~2021,~~2022, the cost of services and other revenue increased by ~~$1.7~~$0.4 million, or ~~15%~~3% compared to the six months ended June 30, ~~2020.~~2021. The increase ~~in cost of services and other revenue for both periods is reflective of~~reflects higher cloud subscription ~~revenue, which has increased cloud-based infrastructure costs.~~revenue.

Gross profit ~~decreased $0.9~~increased $0.7 million, or 3%2% during the three months ended June 30, ~~2021~~2022 compared to the three months ended June 30, ~~2020.~~2021. During the six months ended June 30, ~~2021~~2022 gross profit ~~decreased~~increased by ~~$5.8~~$3.1 million, or 7%5% compared to the six months ended June 30, ~~2020.~~2021. Gross profit margin was ~~68% and 69% for the three and six months ended June 30, 2021, respectively, compared to~~ 67% and 69% for the three and six months ended June 30, ~~2020,~~2022, respectively, compared to 67% and 67% for the three and six months ended June 30, 2021, respectively. The increase in profit margins for the ~~three~~six months ended June 30, ~~2021~~2022 was due to stronger product and license margin driven by ~~stronger margins for~~ product mix and ~~license.~~improved cost management.

The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies, including the Euro. The impact of changes in currency rates are estimated to have ~~increased~~decreased revenue by approximately ~~$2.4~~$3.2 million and ~~$4.6~~$4.8 million for the three and six months ended June 30, ~~2021,~~2022, respectively. Had currency rates in 2021 been equal to rates in ~~2020,~~2021, the gross profit margin would have been approximately 6 and 5 percentage ~~point lower~~points higher for ~~both~~ the three and six months ended June 30, 2022, respectively.

Additional information on our gross profit by segment follows.

●

Digital Agreements gross profit increased $1.0 million or 15% during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. For the six months ended June 30, 2022, Digital Agreements gross profit increased $3.9 million or 27% compared to the same period in the prior year. The increase in gross profit is driven by stronger margins, primarily due to lower outside services costs for operating our cloud platform. Digital Agreements gross margins for the three and six months ended June 30, 2022 were 73% and 75%, respectively, compared to 70% and 72% for the three and six months ended June 30, 2021.

●

Security Solutions gross profit decreased $0.3 million or approximately 1% during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. For the six months ended June 30, 2022, Security Solutions gross profit decreased $0.7 million or 1% compared to the same period in the prior year. Security Solutions gross margins for the three and six months ended June 30, 2022 were 66% and 67%, respectively, compared to 66% and 66% for the three and six months ended June 30, 2021, respectively.

Operating Expenses


	Three months ended June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021

	(in thousands)				(in thousands)				(in thousands)				(in thousands)
Operating costs
Sales and marketing	$	15,997	$	14,694	$	34,376	$	29,553	$	16,381	$	15,021	$	32,276	$	32,189
Research and development		12,096		10,541		24,340		20,535		12,876		12,096		26,625		24,340
General and administrative		15,039		10,846		27,590		23,114		13,270		15,039		28,165		27,590
Amortization of intangible assets		1,534		2,335		3,107		4,689		1,217		1,534		2,599		3,107
Total operating costs	$	44,666	$	38,416	$	89,413	$	77,891	$	43,744	$	43,690	$	89,665	$	87,226

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Sales and Marketing Expenses

Sales and marketing expenses for the three months ended June 30, ~~2021~~2022 were ~~$16.0~~$16.4 million, an increase of $1.3 million or 9%, from the three months ended June 30, ~~2020.~~2021, driven primarily by severance costs incurred as part of our restructuring plan. Sales and marketing expenses for the six months ended June 30, ~~2021~~2022 were ~~$34.4~~$32.3 million, an increase of ~~$4.8~~less than $0.1 million or ~~16%~~approximately 0% from the same period in ~~2020. The increase in expense for the three and six months ended June 30, 2021 compared to the same periods in 2020 was driven by higher headcount and an increase in the average cost per employee.~~2021.

Average full-time sales, marketing, support, and operating employee headcount for the three and six months ended June 30, ~~2021~~2022 was 343 and 351, respectively, compared to 379 and 374 ~~respectively, compared to 342 and 335 for the three and six months ended June 30, 2020, respectively. Headcount was 11% and 12% higher~~ for the three and six months ended June 30, 2021, respectively. Average headcount was 9% and 6% lower for the three and six months ended June 30, 2022, respectively, compared to the same periods in ~~2020.~~2021.

In future periods, we expect sales and marketing spend to increase as we enhance our enterprise go-to-market strategy. We are focused on new logo growth through building brand awareness, as well as expanding offerings to our existing customers. We expect to expand our sales force and add new distribution channels.

Research and Development Expenses

Research and development expenses for the three months ended June 30, ~~2021,~~2022, were ~~$12.1~~$12.9 million, an increase of ~~$1.6~~$0.8 million, or ~~15%~~6%, from the three months ended June 30, ~~2020.~~2021. Research and development expenses for the six months ended June 30, ~~2021,~~2022, were ~~$24.3~~$26.6 million, an increase of ~~$3.8~~$2.3 million, or ~~19%~~9%, from the six months ended June 30, ~~2020.~~2021. The increase in both periods was driven ~~primarily~~ by ~~higher personnel~~severance costs ~~due to higher headcount, partially offset by lower travel costs.~~

~~Table~~incurred as part of ~~Contents~~our restructuring plan.

Average full-time research and development employee headcount for the three and six months ended June 30, ~~2021~~2022 was 349 and 357, compared to 352 and 355 ~~compared to 320 and 316 for the three and six months ended June 30, 2020, respectively.. Average headcount was approximately 12% higher~~ for the three and six months ended June 30, 2021, respectively. Average headcount was approximately 1% lower for the three and six months ended June 30, 2022, respectively, when compared to the same ~~period~~periods in ~~2020.~~2021.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, ~~2021,~~2022, were ~~$15.0~~$13.3 million, ~~an increase~~a decrease of ~~$4.2~~$1.8 million, or ~~39%~~12%, from the three months ended June 30, ~~2020.~~2021. This decrease was driven primarily by one-time outside service and settlement costs related to the proxy contest that took place in 2021, partially offset by higher personnel costs in 2022. General and administrative expenses for the six months ended June 30, ~~2021,~~2022 were ~~$27.6~~$28.2 million, an increase of ~~$4.5~~$0.6 million, or ~~19%~~2%, from the six months ended June 30, ~~2020. The~~2021. This increase ~~in general and administrative expenses for the three and six months ended June 30, 2021, compared to the same periods in 2020~~ was driven by ~~higher personnel cost~~non-recurring outside service costs related to our strategic action plan and ~~higher outside professional services spend,~~severance costs related to our restructuring plan, partially offset by ~~lower travel costs.~~one-time outside service and settlement costs related to the proxy contest that took place in 2021.

Average full-time general and administrative employee headcount for the three and six months ended June 30, ~~2021~~2022 was 138 and 138, respectively, compared to 134 and 134 ~~respectively, compared to 120 and 118~~ for the three and six months ended June 30, ~~2020,~~2021, respectively. Average headcount was approximately ~~11% and 13%~~3% higher for the three and six months ended June 30, ~~2021, respectively,~~2022, when compared to the same periods in ~~2020.~~2021.

Amortization of Intangible Assets

Amortization of intangible assets for the three ~~and~~months ended June 30, 2022 was $1.2 million, compared to $1.5 million for the three months ended June 30, 2021. Amortization expense for the six months ended June 30, ~~2021~~2022 was ~~$1.5~~$2.6 million ~~and~~compared to $3.1 million ~~respectively, compared to $2.3 million and $4.7 million~~ for the ~~three and~~ six months ended June 30, ~~2020, respectively. For~~2021. The expense decrease for both periods ~~there was a decrease of 34% from the comparable periods in 2020. The decrease~~ was driven by certain assets acquired in the Silanis acquisition becoming fully amortized.

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Segment Operating Income (Loss)

Information on our operating income (loss) by segment follows.

●

Digital Agreements operating income (loss) for the three months ended June 30, 2022 was $0.1 million, compared to $(0.8) million for the comparable period in the prior year. Operating income (loss) for the six months ended June 30, 2022 was $1.8 million, compared to $(0.7) million for the comparable period in the prior year. Operating income increases for both periods reflect our strategic transformation plan to accelerate growth in this operating segment.

●

Security Solutions operating income for the three months ended June 30, 2022, was $8.6 million which was a year-over-year decrease of $1.4 million or 14% from the three months ended June 30, 2021, driven primarily by a decline in perpetual software license revenue. For the six months ended June 30, 2022 Security Solutions operating income was $17.1 million, which was $0.5 million or 3% higher than the comparable period of the prior year. Modest year-over-year operating income growth reflects our strategic transformation plan to manage this operating segment for cash flow.

Interest ~~Income,~~income, net

Three months ended June 30,

Six months ended June 30,

Three months ended June 30,

Six months ended June 30,

2021

2020

2021

2020

2022

2021

2022

2021

(in thousands)

Interest income, net

$ 2

$ 126

$ 6

$ 333

$ 35

$ 2

$ 18

$ 6

Interest income, net was less than $0.1 million for both the three months ended June 30, 2022 and 2021 or the six months ended June 30, 2022 and 2021, ~~as compared to~~interest income, net was less than $0.1 million and $0.3 million for the same periods in 2020. The decrease in interest income, net for both the three and six months ended June 30, 2021 compared to the same periods in 2020 reflects a decrease in our cash equivalents and short term investment balance and lower interest rates.

million.

Other income, net

Three months ended June 30,

Six months ended June 30,

Three months ended June 30,

Six months ended June 30,

2021

2020

2021

2020

2022

2021

2022

2021

(in thousands)

Other income, net

$ 1,029

$ 509

$ 667

$ 171

Other income (expense), net

($ 675)

$ 1,029

$ 14,972

$ 667

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

Other income (expense), net for the three ~~and~~months ended June 30, 2022 was $(0.7) million, compared to $1.0 million for the comparable period of 2021, driven primarily by currency fluctuations. For the six months ended June 30, ~~2021~~2022, other income (expense), net was ~~$1.0~~$15.0 million, ~~and $0.7 million, respectively,~~ compared to ~~$0.5 million and $0.2~~$0.7 million for the ~~comparable periods of 2020. Higher income~~six months ended June 30, 2021. The fluctuation was primarily driven by ~~gains resulting from foreign currency translation.~~$14.8 million gain on sale of our investment in Promon AS.

Provision for Income Taxes


	Three months ended June 30,		Six months ended June 30,
	2022	2021	2022	2021

	(in thousands)		(in thousands)
Provision (benefit) for income taxes	$ 472	($ 1,143)	$ 1,645	($ 1,644)

We recorded income tax expense for the three months ended June 30, 2022 of $0.5 million, compared to income tax benefit of $1.1 million for the three months ended June 30, 2021. The expense recorded during three months ended June 30, 2022 was primarily attributable to earnings at subsidiaries without a valuation allowance. We recorded income tax expense for the six months ended June 30, 2022 of $1.6 million compared to income tax benefit of $1.6

2932

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~~Provision for Income Taxes~~

Three months ended June 30,

Six months ended June 30,

2021

2020

2021

2020

(in thousands)

(in thousands)
Provision (benefit) for income taxes

($ 1,143)

$ 973

($ 1,644)

$ 1,663

The Company recorded income tax benefit for the three months ended June 30, 2021 of $1.1 million, compared to income tax expense of $1.0 million for the three months ended June 30, 2020. The Company recorded income tax benefit for the six months ended June 30, 2021 of $1.6 million, compared to income tax expense of $1.7 million for the six months ended June 30, ~~2020.~~2021. The ~~benefit~~expense recorded for the ~~three and~~ six months ended June 30, ~~2021~~2022 was primarily attributable to the gain recognized on the sale of our investment in Promon AS and income taxes on earnings at subsidiaries without a ~~net loss in the period excluding losses at entities where we cannot record a tax benefit, as well as tax benefit for certain stock compensation deductions.~~

valuation allowance.

Liquidity and Capital Resources

At June 30, ~~2021,~~2022, we had ~~net~~ cash balances (total cash and cash equivalents) of ~~$66.5~~$77.6 million and short-term investments of ~~$42.7~~$20.2 million. Short term investments consist of U.S. treasury ~~bills~~notes and ~~notes, government agency notes,~~bills, corporate notes and bonds, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months.

At December 31, ~~2020,~~2021, we had ~~net~~ cash balances of ~~$88.4~~$63.4 million and short-term investments of ~~$26.9~~$35.1 million.

We are inparty to lease agreements that require letters of credit to secure the obligations. The restricted cash related to these letters of credit is recorded in other non-current assets on the ~~Condensed Consolidated Balance Sheet~~condensed consolidated balance sheet in the amounts of ~~$0.9~~$0.8 million and $0.8 million at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Our working capital at June 30, ~~2021~~2022 was ~~$110.6~~$91.5 million compared to ~~$131.9~~$98.0 million at December 31, ~~2020.~~

2021.

As of June 30, ~~2021,~~2022, we held ~~$55.1~~$54.4 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, ~~$54.1~~$53.3 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:


	Six months ended June 30,		Six months ended June 30,
	2021	2020	2022	2021
	(in thousands)		(in thousands)
Cash provided by (used in):
Operating activities	$ 1,184	$ 4,381	($ 11,284)	$ 1,184
Investing activities	(17,378)	(3,520)	32,560	(17,378)
Financing activities	(5,138)	(1,179)	(6,443)	(5,138)
Effect of foreign exchange rate changes on cash and cash equivalents	(511)	20	(631)	(511)

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 of intangible assets, depreciation of property and equipment, deferred tax benefit, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs. ~~We expect cash outflows from operating activities to be affected by increases in personnel cost as we grow our business.~~

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For the six months ended June 30, ~~2021,~~2022, net cash ~~provided by~~used in operating activities was ~~$1.2~~$11.3 million, compared to net cash provided by operating activities of ~~$4.4~~$1.2 million during the six months ended June 30, ~~2020. The fluctuation is~~2021. This was primarily driven by ~~a more significant net loss, partially offset by a lower accounts receivable balance, lower contract assets, and higher accrued expenses.~~the sale of our equity method investment in Promon AS.

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.~~infrastructure.

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For the six months ended June 30, ~~2021,~~2022, net cash ~~used in~~provided by investing activities was ~~$17.4~~$32.6 million, compared to net cash used in investing activities of ~~$3.5~~$17.4 million for the six months ended June 30, ~~2020. The fluctuation is related to~~2021. Cash provided by investing activities during the six months ended June 30, 2022 was driven by the $18.9 million sale of our investment in Promon AS. Cash used in investing activities during the six months ended June 30, 2021 was driven by the timing of the purchases and maturities of our short term investments, as well as ~~a higher short term investment balance.~~

property and equipment purchases.

Financing Activities

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

For the six months ended June 30, ~~2021,~~2022, net cash used in financing activities was ~~$5.1~~$6.4 million, compared to net cash used in financing activities of ~~$1.2~~$5.1 million for the six months ended June 30, ~~2020.~~2021. The increase is ~~primarily due to~~driven by a higher volume of share repurchases during the first six months ~~ended June 30, 2021,~~of 2022 compared to ~~the comparable period in 2020.~~

2021, partially offset by lower tax payments for restricted stock issuances.

Critical Accounting ~~Policy~~Policies

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, ~~2020~~2021 and Note 2 – Summary of Significant Accounting Policies to our Interim Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, ~~2021.~~2022. We believe our most critical accounting policies include revenue recognition, ~~purchase accounting and related fair value measurements~~credit losses, 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 June 30, ~~2021~~2022. 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, ~~2020.~~2021.

Item 4 - Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures

Our management, with the participation of ~~our~~the Company’s Chief Executive Officer and Chief Financial Officer, ~~who, respectively, are our principal executive officer and principal financial officer, conducted an evaluation of~~has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in ~~Rule~~Rules 13a-15(e) and ~~Rule~~ 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of ~~the end~~June 30, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~the period covered by this Quarterly Report on Form 10-Q. Disclosure~~June 30, 2022, our disclosure controls and procedures ~~include, without limitation, controls~~were effective in recording, processing, summarizing and ~~procedures designed to ensure (i) the~~reporting, on a timely basis, information required to be disclosed by us in ~~our~~the 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)~~such information ~~required to be disclosed by us in our reports that we file or submit under the Exchange Act~~ is accumulated and communicated to ~~our~~ management ~~including our principal executive~~

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~~and principal financial officers, or persons performing similar functions,~~ as appropriate to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Chief Executive Officer and interim Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Controls

There ~~were~~have been no changes in ~~our~~the Company’s 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 June 30, 2021, that have~~ materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

~~Inherent Limitations on~~ during the ~~Effectiveness~~quarter ended June 30, 2022.

Table of ~~Controls~~Contents

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

PART II. OTHER INFORMATION

Item 1 - Legal Proceedings

WeFrom time to time, we are a party to ~~or have intellectual property subject to~~ litigation, claims and other proceedings that arise in the ordinary course of our ~~business. These types of matters could result~~business, such as compensation claims from current or former employees or commercial disputes with vendors. We are not currently a party to any lawsuit, claim or proceeding that, in ~~fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability~~management’s opinion, is ~~remote that the outcome of each of these matters, including the legal proceedings described below, will~~likely to have a material adverse effect on our business, financial condition or results of operations. However, the ~~corporation as a whole, notwithstanding that the unfavorable resolution~~results of ~~any matter may have a material effect on our financial results in any particular interim reporting period.~~

Wesuch legal proceedings or claims cannot ~~predict~~be predicted with certainty, and regardless of the outcome, can have an adverse impact on us because of ~~legal or~~defense and settlement costs, diversion of management resources and other proceedings with certainty, including the legal proceedings which are summarized in “Note 14 – Legal Proceedings and Contingencies” included in our Notes to Condensed Consolidated Financial Statements, incorporated herein by reference, and “Note 15 – Commitments and Contingencies” in our ~~Annual Report on Form 10-K for the year ended December 31, 2020~~ filed with the U.S. Securities and Exchange Commission. Any reasonably possible material loss or range of loss associated with any individual legal proceeding that can be estimated, is provided in Note 14 to the Condensed Consolidated Financial Statements contained herein.factors.

Item 1A – Risk Factors

~~The following risk factor is provided~~There were no material changes to ~~update~~ the risk factors ~~previously~~ disclosed ~~under the heading “Risk Factors”~~ in ~~the Company’s~~Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021, filed with the SEC on February 22, 2022, except as set forth below.

~~While~~Our strategic transformation plan involves numerous risks, and may not achieve the results we ~~believe the coronavirus has had, and could continue to have, a negative impact on our financial results, the impact is difficult to assess at this time.~~expect.

~~The effects~~In May 2022, we announced a three-year strategic transformation plan. Although we believe that this plan will enable to us accelerate revenue growth and increase profitability, we may not be successful in executing the plan on our expected timeframe, or the plan may not achieve the results we expect, for a number of reasons, including 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.following:

●

The assumptions we used in developing the plan, including assumptions regarding customer acquisition, customer retention, market needs, and the impact of our marketing initiatives, may prove incorrect;

●

We may experience challenges or delays in growing our salesforce to support our growth plans or in training and incentivizing our salespeople to execute our new go-to-market approach;

●

We may have difficulties in hiring and retaining employees in general due to the challenging hiring environment;

●

It may be more difficult, time consuming, or expensive than we anticipate to build a robust sales pipeline, increase our brand awareness, or enhance our product distribution channels;

●

We may encounter difficulties and delays in platform- and product-related initiatives to support our growth, including the buildout of our new transaction cloud platform, due to staffing and other resource constraints;

●

Ongoing component shortages and shipping delays affecting our Digipass devices could negatively impact revenue and cash flow for our Security Solutions segment, which we are relying upon to help fund growth in our Digital Agreements segment; and

●

Economic recession, inflation, political instability or conflict, and changes in foreign exchange rates may negatively affect our financial and operating results.

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

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

In our software business, we experienced some increased sales for products used in remote employee access and electronic signature in 2020 that we attribute in part to the COVID-19 pandemic. This increase may have been temporary, and we are unable to predict whether it will continue or decline. Moreover, the conditions caused by the COVID-19 pandemic can affect the rate of IT spending, the decision to start new IT projects, the timing of existing projects and the priority our customers place on various projects. While these factors may be positive for some of our software solutions such as electronic signature, these factors may be negative for our other software solutions. The COVID-19 pandemic could adversely affect our customers’ ability or willingness to attend our events or to purchase our offerings, delay prospective customers’ purchasing decisions, adversely impact our ability to provide on-site sales meetings or professional services to our customers, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of their contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance. During the Summer of 2020, we began to experience some of the aforementioned scenarios, and this continued through the present, due in part to, we believe, global economic uncertainty connected with the continued seriousness of the COVID-19 pandemic. While we hope that the negative consequences on our business associated with the COVID-19 pandemic will subside, we cannot predict the impact with certainty.

If the restrictions on our employees, customers and others in the world continue or increase in order to limit the spread of COVID-19, the potential effects could continue and could be exacerbated, and our results of operations 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, new strains and transmission rate of the virus, the extent and effectiveness of containment actions and vaccines, and the impact of these

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~~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 ~~second~~first quarter of ~~2021:~~2022:

Total Number

of Shares

Maximum

of Shares

Maximum

Purchased as

Dollar Value of Shares

Purchased as

Dollar Value of Shares

Total

Part of Publicly

that May Yet Be

Total

Part of Publicly

that May Yet Be

Number of

Average

Announced

Purchased Under

Number of

Average

Announced

Purchased Under

Shares Purchased

Price Paid

Plans or

the Plans or

Shares Purchased

Price Paid

Plans or

the Plans or

Period

per Share

Programs (1)

(1)

per Share

Programs (1)

April 1, 2021 through April 30, 2021

—

44,969,863

May 1, 2021 through May 31, 2021

—

44,969,863

June 1, 2021 through June 30, 2021

111,000

26.17

111,000

42,062,363

April 1, 2022 through April 30, 2022

—

37,498,973

May 1, 2022 through May 31, 2022

169,545

12.35

169,545

47,900,542

June 1, 2022 through June 30, 2022

276,516

13.07

276,516

44,278,939

(1.)

On ~~June 10, 2020,~~May 12, 2022, the Board of Directors ~~authorized a share~~terminated the stock repurchase program ~~(“program”), pursuant to~~adopted on June 10, 2020 and adopted a new stock repurchase program under which the Company ~~can~~is authorized to repurchase up to ~~$50.0~~$50 million of our issued and outstanding shares of common stock. Share purchases under the program will take place in open market transactions or in privately negotiated transactions and may be made from time to time depending on market conditions, share price, trading volume, and other factors. The timing of the repurchases and the amount of stock repurchased in each transaction is subject to ~~OneSpan’s~~our sole discretion and will depend upon market and business conditions, applicable legal and credit requirements and other corporate considerations. The authorization is effective until ~~June 10, 2022~~May 11, 2024 unless the total amount has been used or authorization has been cancelled.

~~(2.)~~

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

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Item 6 - Exhibits

Exhibit 3.1 – Certificate of Incorporation of the Registrant, as amended

Exhibit 10.1 – 2022 Management Incentive Plan*

Exhibit 31.1 – Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August ~~4, 2021.~~2, 2022.

Exhibit 31.2 – Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August ~~4, 2021.~~2, 2022.

Exhibit 32.1 – Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August ~~4, 2021.~~2, 2022.

Exhibit 32.2 – Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August ~~4, 2021.~~2, 2022.

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

Exhibit 101.SCH – Inline XBRL Taxonomy Extension Schema Document

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

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

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

Exhibit 101.DEF – Inline XBRL Taxonomy Extension Definition Linkbase Document

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 4, ~~2021.~~2022.


	OneSpan Inc.


	/s/ ~~Steven R. Worth~~Matthew P. Moynahan
	~~Steven R. Worth~~Matthew P. Moynahan
	Chief Executive Officer (Principal Executive Officer)

	/s/ Jan Kees van Gaalen
	Jan Kees van Gaalen
	Interim Chief ~~Executive~~Financial Officer
	(Principal ~~Executive~~Financial Officer)

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

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