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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2019
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM TO
Commission file number 000‑‑24389
OneSpan Inc.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
36‑‑4169320
(IRS Employer
Identification No.)
121 West Wacker Drive, Suite 2050
Chicago, Illinois 60601
(Address of Principal Executive Offices)(Zip Code)
Registrant’s telephone number, including area code:
312-766-4001
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.001 per share
Name of exchange on which registered
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the act. Yes No X
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 X 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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. [ ]
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 ☐
Smaller reporting company ☐ Emerging growth 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 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 X
As of June 30, 2019, the aggregate market value of voting and non-voting common equity (based upon the last sale price of the common stock as reported on the
NASDAQ Capital Market on June 30, 2019) held by non-affiliates of the registrant was $460,536,053 at $14.17 per share.
As of March 1, 2020, there were 40,271,211 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant’s Notice of Annual Meeting of Stockholders and Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by
reference into Part III of this report.
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PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A.
Controls and Procedures
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
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Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
This Annual Report on Form 10-K contains forward-looking statements within the meaning of applicable U.S. Securities
laws, including statements regarding the potential benefits, performance, and functionality of our products and solutions,
including future offerings; our expectations, beliefs, plans, operations and strategies relating to our business and the future of our
business; our acquisitions to date and our strategy related to future acquisitions; and our expectations regarding our financial
performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate",
"anticipate", expect", "intend", and statements that an event or result "may", "will", "should", "could", or "might" occur or be
achieved and any other similar expressions. These forward-looking statements involve risks and uncertainties, as well as
assumptions which, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those
expressed or implied by such forward-looking statements. Factors that could materially affect our business and financial results
include, but are not limited to: market acceptance of our products and solutions and competitors’ offerings; the potential effects of
technological changes; our ability to effectively identify, purchase and integrate acquisitions; the execution of our transformative
strategy on a global scale; the increasing frequency and sophistication of hacking attacks; claims that we have infringed the
intellectual property rights of others; changes in customer requirements; price competitive bidding; changing laws, government
regulations or policies; pressures on price levels; impairment of goodwill or amortizable intangible assets causing a significant
charge to earnings; exposure to increased economic and operational uncertainties from operating a global business as well as
those factors set forth in this Form 10-K (and other forms) filed with the Securities and Exchange Commission. Our SEC filings
and other important information can be found on 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-K.
Unless otherwise noted, references in this Annual Report on Form 10‑K to “OneSpan”, “Company”, “we”, “our”, and
“us” refer to OneSpan Inc. and its subsidiaries.
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Item 1 – Business
PART I
OneSpan Inc., formerly known as VASCO Data Security International, Inc., was incorporated in the State of Delaware
in 1997. Our principal executive office is located at 121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601; the telephone
number at that address is 312 766 4001. Unless otherwise noted, references in this Annual Report on Form 10-K to “Onespan”,
“Company”, “we”, “our”, and “us” refer to OneSpan Inc. and its subsidiaries. Our website address is www.onespan.com.
Additional information about the Company, including the Company’s annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the Securities and Exchange Commission
(the “SEC”) are available on our website at investors.onespan.com.
Overview
We design, develop and market digital solutions for identity, security, and business productivity that protect and
facilitate electronic transactions via mobile and connected devices. We are a global leader in providing anti-fraud and digital
transaction management solutions to financial institutions and other businesses. We do this by delivering trust in people’s
identities, their devices, and the transactions that they conduct online. We make digital banking accessible, secure, easy, and
valuable. Our solutions secure access to online accounts, data, assets, and applications for global enterprises; provide tools for
application developers to easily integrate security functions into their web-based and mobile applications; and facilitate end-to-
end financial agreement automation including digital identity verification, customer due diligence, electronic signature, and
document management. Our trusted identity platform technologies including Intelligent Adaptive Authentication, Risk Analytics
and Secure Agreement Automation, along with various multi-factor authentication, mobile app security and transaction signing
technologies, enhance the ability of companies to prevent hacking attacks against online and mobile transactionswhile providing
an exceptional experience for remote customers.
We offer cloud based and on-premises solutions using both open standards and proprietary technologies. Some of our
proprietary technologies are patented. Our products and services are used for authentication, fraud mitigation, e-signing
transactions and documents, and identity management in Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and
Business-to-Consumer (“B2C”) environments. Our target market is business processes using an electronic interface, particularly
the internet, where there is risk of account takeover or new account fraud. Our products can enhance customer experience,
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.
Online and mobile application owners and publishers benefit from our expertise in multi-factor authentication, document
signing, transaction signing, application security, remote customer onboarding, and in mitigating hacking attacks. Our convenient
and proven security solutions enable low friction and trusted interactions between businesses, employees, and consumers across a
variety of online and mobile platforms.
Our primary growth strategy is to make digital banking more accessible, secure, easy and valuable. Our key growth
objectives include:
·
Expanding our portfolio of solutions that enable institutions to mitigate fraud, comply with regulations, easily on-
board customers, and adaptively authenticate transactions;
· Automating and securing digital customer journeys with Secure Agreement Automation to remotely verify
identities, mitigate application fraud, and secure account openings and transactions;
·
Increasing sales to existing customers and acquiring new customers;
· Driving increased demand for our products in new applications, new markets, and new territories;
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·
·
Expanding our channel partner ecosystem; and
Strategically acquiring companies that expand our technology portfolio or customer base and increase our recurring
revenue.
Industry Background
Rapid global growth in cloud and mobile banking transactions is driving increased demand for multi-channel security
solutions and enhanced user experiences across the financial services industry. Similarly, increasing remote corporate access of
important resources by employees, business partners and customers is introducing new security risks for participants. Large and
powerful criminal hacking organizations are launching more sophisticated hacking attacks with greater frequency. The criminal
activities of private and state-sponsored hacking organizations have driven an increased need for security solutions and expansion
of regulations requiring improved security measures to protect against hacking attacks and breaches. Several governments
worldwide have issued specific recommendations advocating multi-factor authentication and other security measures to improve
cloud-based and mobile banking security. We believe these global trends will continue and that the market for authentication,
anti-fraud, and e-signature solutions will continue to grow driven by growth in digital banking transactions, digital commerce,
remote corporate access, growing awareness of the impact of cyber-crime, and new government regulations.
Our Background
Our predecessor company, VASCO Corp., entered the data security business in 1991 through the acquisition of a
controlling interest in ThumbScan, Inc., which we renamed as VASCO Data Security, Inc.
In 1996, we expanded our computer security business by acquiring Lintel Security NV/SA, a Belgian corporation, which
included assets associated with the development of security tokens and security technologies for personal computers and
computer networks. Also in 1996, we acquired Digipass NV/SA, a Belgian corporation, which was also a developer of security
tokens and security technologies. In 1997, the acquired entity was renamed VASCO Data Security NV/SA.
In 1997, VASCO Data Security International, Inc. was incorporated and in 1998, we completed a registered exchange
offer with the holders of the outstanding securities of VASCO Corp., becoming a publicly traded company.
In 2006, we opened our international headquarters in Zurich, Switzerland.
In 2013, we acquired Cronto Limited (“Cronto”), a provider of secure visual transaction authentication solutions for
online banking.
In 2014, we acquired Risk IDS, a provider of risk analysis solutions to the banking community.
In 2015, we acquired Silanis Technology Inc., a leading provider of electronic signature (e-signature) and digital
transaction solutions used to electronically sign, send, and manage documents. The solution is sold under the OneSpan Sign
(formerly eSignLive) name and is trusted by many of the largest banks, insurers, and government agencies.
In May 2018, we acquired Dealflo Limited, a leading provider of identity verification and end-to-end financial
automation solutions.
Also in May 2018, VASCO Data Security international, Inc. changed its name to OneSpan Inc. The Company’s name
change reflects a shift in our strategy and solution offerings.
Including our predecessor companies, we have engaged in sixteen acquisitions and two dispositions.
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Our Products and Services
Trusted Identity Platform
The Trusted Identity (TID) platform is a cloud-based platform that brings together OneSpan’s broad portfolio of security
technologies, including Intelligent Adaptive Authentication, Risk Analytics, Secure Agreement Automation, Mobile Security
Suite, multi-factor authentication, biometrics, and orchestration to power solutions that secure users, devices, and transactions
across the digital journey. The innovative approach of this platform delivers on simplicity with orchestration technology that
integrates applications and services requirements via a single interface while constantly protecting sensitive data through an
encrypted client/server secure channel.
Intelligent Adaptive Authentication
Intelligent Adaptive Authentication is a cloud-based solution that enables banks and other financial institutions to secure
users, devices, and transactions while providing an enhanced customer experience. It is powered by the TID platform and
leverages advanced risk analytics, mobile security, multi-factor authentication, biometrics, and other technologies that enable the
real-time analysis and scoring of vast and disparate data across channels. This risk score drives a precise level of authentication
security for each unique transaction which ensures a positive customer experience while safe guarding transactions and sensitive
customer data. This helps institutions reduce fraud and drive growth through higher customer loyalty and increased use of bank
services.
Risk Analytics
Risk Analytics is a comprehensive anti-fraud solution designed to help banks and other financial institutions improve the
speed and accuracy of detecting known and emerging fraud across online and mobile channels. A component of the TID platform,
which includes machine learning technology, the solution analyzes vast amounts of user, device, and transaction data in real time
to provide a comprehensive risk assessment. It enables institutions to take a proactive approach to fraud prevention while
removing major points of friction for end users. Cross-channel, prebuilt rules complement this scoring process and allow fraud
experts to make decisions on alerts or link to automated business processes such as step-up authentication. The solution can be
implemented in combination with Mobile Security Suite to provide integrated trust with minimal impact on the end user
experience. It can be deployed in the cloud or on-premises.
Secure Agreement Automation
Secure Agreement Automation is a cloud-based solution that combines digital identity verification, e-signature, and
workflow automation capabilities to help digitize the mobile and online application process. By leveraging multiple third-party
identity verification services, organizations can drive higher customer adoption and conversion rates via a single vendor, single
SLA, and single API integration through OneSpan. Solution capabilities include: Identity document (e.g., driver’s license,
passport, etc.) capture and real-time authenticity verification, as well as facial comparison (“selfie”) and liveness detection to
establish that the individual presenting the identity document is the same person whose picture appears on the authenticated
identity document. Combined with e-signature capabilities, organizations can quickly present and execute legally enforceable
agreements while improving the digital customer experience.
Secure Agreement Automation enables banks and financial institutions to verify the identity of remote applicants during
the new digital account opening, lending, and financing application processes. The multi-layered identity verification approach
enables automated failover to alternative identity verification providers in the event of a verification failure or provider
unavailability which reduces applicant abandonment rates. Additionally, the solution provides organizations the ability to ensure
the best identity verification processes for their business needs and digital channels to help maximize pass rates, minimize
application fraud, and increase operational efficiencies.
Mobile Security Suite and Mobile Authenticator Studio
Mobile Security Suite is a comprehensive software development kit that allows application developers to natively
integrate security features including geolocation, device identification, jailbreak and root detection, fingerprint
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and face recognition, one-time password delivery via push notification, and electronic signing, among others. Through a
comprehensive library of APIs, application developers can extend and strengthen application security, deliver enhanced
convenience to their application users, and streamline application deployment and lifecycle management processes. Mobile
Security Suite also includes a Runtime Application Self-Protection module, which can detect and mitigate malicious app activity
and potential loss to hacking activities.
Mobile Authenticator Studio is a user-friendly and secure mobile authenticator that operates as a discrete mobile
application. It includes many of the features of the Mobile Security Suite and can easily be tailored to meet the needs of countless
authentication processes. It can be customized and deployed rapidly without extensive technical support ensuring strong security
with compelling value.
OneSpan Sign
OneSpan Sign supports a broad range of e-signature requirements from simple to complex, and from the occasional
agreement to processing tens of thousands of transactions. OneSpan Sign provides multiple deployment options including public
cloud, private cloud, or on-premises without compromising security or functionality. The solution is also available in a Federal
Risk and Authorization Management Program (FedRAMP) SaaS-level compliant cloud, allowing U.S. government agencies to
implement e-signatures in the cloud and meet GSA security requirements.
Customers can configure OneSpan Sign to reinforce their brand for a seamless signing experience. Each step of the e-
signature workflow can be customized, from authentication to distribution and storage. OneSpan Sign also provides
comprehensive and secure electronic evidence for strong legal protection by capturing both document and process-level evidence.
This reduces the time and cost of gathering evidence and demonstrating legal and regulatory compliance. Electronic signature
capabilities can be a critical component of the account opening and onboarding processes, providing a secure and user-friendly
way to execute legally binding agreements.
Hardware Authenticators
We offer a wide variety of hardware authenticators, each of which has its own distinct characteristics to meet the needs
of our customers. All models of the Digipass family of authenticators are designed to work together so customers can switch
devices without changes to their existing infrastructure. Our models range from one-button devices and smart card readers to
devices that include more advanced technologies, such as public key infrastructure (“PKI”) and visual cryptography.
Digipass hardware technology is designed to support authentication and digital signatures for applications running on
traditional PCs, tablets, and mobile phones.
Authentication Server
Authentication Server incorporates a range of strong authentication utilities and solutions designed to allow
organizations to securely authenticate users and transactions. Our solution, once integrated, becomes largely transparent to users,
minimizing rollout and support issues. Authentication Server encompasses multiple authentication technologies (e.g., passwords,
dynamic password technologies, certificates, and biometrics) and allows the use of any combination of those technologies
simultaneously.
Authentication Server enables customers to administer a high level of access control. The solution requires only a few
days to implement in most systems and supports our line of hardware and software authenticators. Once linked to an application,
Authentication Server automatically handles login requests from any authorized user.
Intellectual Property and Proprietary Rights and Licenses
We rely on a combination of patent, copyright, trademark, design, and trade secret laws, as well as employee and third-
party non-disclosure agreements to protect our proprietary rights. In particular, we hold several patents in the U.S. and in other
countries, which cover multiple aspects of our technology. These patents expire between now and more
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than 10 years from now. In addition to the issued patents, we also have several patent applications pending in the U.S., Europe,
and other countries. The majority of our issued and pending patents cover our Digipass product line. We believe these patents to
be valuable property rights and we rely on the strength of our patents and on trade secret law to protect our proprietary
technology. We furthermore have registrations for most of our trademarks in most of the markets where we sell the corresponding
products and services and registrations of the designs of many of our hardware products primarily in the EU and China. To the
extent that we believe our intellectual property rights are being infringed upon, we intend to assert vigorously our intellectual
property rights, including but not limited to, pursuing all available legal remedies.
Research and Development
Our research and development efforts historically have been, and will continue to be, concentrated on solution
enhancement, new technology development, and related new software introductions. We employ a team of full-time engineers
and, from time to time, also engage independent engineering firms to conduct non-strategic product development efforts on our
behalf. For fiscal years ended December 31, 2019, 2018, and 2017, we incurred expenses of $42.5 million, $32.2 million, and
$23.1 million, respectively, for research and development.
Production
Our Digipass security hardware products are manufactured by third party manufacturers pursuant to purchase orders that
we issue. Our hardware Digipass products are made primarily from commercially available electronic components purchased
globally. Our software solutions are produced in-house or developed by third parties and sold under license.
Hardware Digipass products utilize commercially available programmable microprocessors purchased from several
suppliers. The microprocessors are the most important components of our security authenticators that are not commodity items
readily available on the open market. Some microprocessors are single sourced. Orders of microprocessors generally require a
lead-time of 12-16 weeks. We attempt to maintain a sufficient inventory of all parts to handle short-term increases in orders.
Large orders that would significantly deplete our inventory are typically required to be placed with more than twelve
weeks of lead-time, allowing us to make appropriate arrangements with our suppliers. We purchase microprocessors and arrange
for shipment to third parties for assembly and testing in accordance with our design specifications. The majority of our Digipass
products are manufactured by four independent factories in Southern China. Purchases are made on a volume purchase order
basis. We supply product test equipment at the point of assembly. We maintain a local team in China to conduct quality control
and quality assurance procedures. Periodic visits are conducted by our personnel for quality management, assembly process
review, and supplier relations.
Competition
The market for digital solutions for identity, security, and business productivity solutions is very competitive and, like
most technology-driven markets, is subject to rapid change and constantly evolving solutions and services. Our anti-fraud
products are designed to allow authorized users access to a computing environment or application, in some cases using patented
technology, as a replacement for or supplement to a static password. Although certain of our security technologies are patented,
there are other organizations that offer anti-fraud solutions that compete with us for market share. Our main competitors in our
anti-fraud markets are Gemalto, a subsidiary of Thales Group, and RSA Security, a subsidiary of Dell Technologies. There are
many other companies, such as Transmit Security, Symantec, and Early Warning that offer competing services. In addition to
these companies, we face competition from many small authentication solution providers, many of whom offer new technologies
and niche solutions such as biometric or behavioral analysis. We believe that competition in this market is likely to intensify as a
result of increasing demand for security products. Our primary competitors for electronic signature solutions include DocuSign
and Adobe Systems. Both companies are significantly larger than us. In addition to these companies, there are dozens of smaller
and regional providers of electronic signing solutions.
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We believe that the principal competitive factors affecting the market for digital solutions for identity, security, and
business productivity, as well as electronic signatures include the strength and effectiveness of the solution, technical features,
ease of use, quality and reliability, customer service and support, brand recognition, customer base, distribution channels, and the
total cost of ownership of the solution. Although we believe that our products currently compete favorably with respect to such
factors, there can be no assurance that we can maintain our competitive position against current and potential competitors.
Some of our present and potential competitors have significantly greater financial, technical, marketing, purchasing, and
other resources. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and sale of products, or to deliver competitive
products at a lower end-user price. Current and potential competitors have established or may establish cooperative relationships
among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers.
It is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Accordingly, we have
forged, and will continue to forge, our own partnerships to offer a broader range of products and capabilities to the market.
Sales and Marketing
Our solutions are sold worldwide through our direct sales force as well as through distributors, resellers, systems
integrators, and original equipment manufacturers. Our sales staff coordinates sales activity through both our sales channels and
those of our partners making direct sales calls either alone or with the sales personnel of our partners. Our sales staff also provides
product education seminars to sales and technical personnel of resellers and distributors with whom we have working
relationships and to potential end-users of our products.
We offer customers a choice of on-site implementation using our on-premises model or a cloud implementation for
solutions using our services platform.
Part of our expanded selling effort includes approaching our partners to find additional applications for our security
products. In addition, our marketing plan calls for the identification of new business opportunities that may require enhanced
security or areas where we do not currently market our products.
Customers and Markets
We generally focus our sales and marketing efforts in three primary areas. The first is financial institutions where the
majority of our revenue is derived. This segment includes traditional banks, credit unions, and online-only banks. This is our
primary market. We believe there are substantial opportunities for future growth in the financial vertical as our solution portfolio
expands and we deliver additional capabilities targeted specifically at identifying and mitigating online and mobile banking fraud.
We also sell to the enterprise market segment which consists primarily of businesses seeking secure internal and remote network
access. We sell to these businesses mostly through distribution and resellers. Our strategy is to leverage products developed for
the banking market in the enterprise market as the hacking attacks in both markets have many similarities. We also target the
government market segment in select regions around the globe. Our customer base includes a number of government
organizations.
Our top 10 customers contributed 29%, 24%, and 27%, in 2019, 2018, and 2017, respectively, of total worldwide
revenue.
A significant portion of our sales is denominated in foreign currencies and changes in exchange rates impact results of
operations. To mitigate exposure to risks associated with fluctuations in currency exchange rates, we attempt to denominate an
amount of billings in a currency such that it would provide a hedge against operating expenses being incurred in that currency.
For additional information regarding how currency fluctuations can affect our business, please refer to “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about
Market Risk.”
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We also experience seasonality or variation across the year in our markets. These trends can include lower sales during
the summer months, particularly in EMEA, or higher sales during the second half of the fiscal year compared to the first half of
the fiscal year.
Financial Information Relating to Foreign and Domestic Operations
For financial information regarding OneSpan, see our Consolidated Financial Statements and the related Notes, which
are included in this Annual Report on Form 10-K. We have a single operating segment for all our products and operations. See
Note 14 in the Notes to Consolidated Financial Statements for a breakdown of revenue and long-lived assets between the U.S. and
other regions.
Employees
As of December 31, 2019, we had 744 total employees, including 365 located in the Americas, 346 located in EMEA
(Europe, the Middle East and Africa), and 33 located in Asia Pacific. Of the total employees, 321 were involved in sales,
marketing, operations, and customer support, 309 in research and development and 114 in general and administration.
Item 1A - Risk Factors
RISK FACTORS
You should carefully consider the following risk factors, which we consider the most significant, as well as other
information contained in this Annual Report on Form 10-K. In addition, there are a number of less significant and other general
risk factors that could affect our future results. If any of the events described in the risk factors were to occur, our business,
financial condition or operating results could be materially and adversely affected. We have grouped our Risk Factors under
captions that we believe describe various categories of potential risk. For the reader’s convenience, we have not duplicated risk
factors that could be considered to be included in more than one category.
Risks Related to Our Business
A significant portion of our sales are to a limited number of customers. The loss of substantial sales to any one of them
could have an adverse effect on revenues and profits.
We derive a substantial portion of our revenue from a limited number of customers, many of which are financial
institutions. The loss of substantial sales to any one of them could adversely affect our operations and results. In fiscal 2019,
2018, and 2017, our top 10 largest customers contributed 29%, 24%, and 27%, respectively, of total worldwide revenue.
The return of a worldwide recession and/or regional economic downturns may further impact our business.
Our business is subject to economic conditions that may fluctuate in the major markets in which we operate. Factors that
could cause economic conditions to fluctuate include, without limitation, recession, inflation, deflation, interest rates,
unemployment, consumer debt levels, general retail or commercial markets and consumer or business purchasing power or
preferences.
If global economic and financial market conditions remain uncertain and/or weak for an extended period of time, any of
the following factors, among others, could have a material adverse effect on our financial condition and results of operations:
·
slower consumer or business spending may result in reduced demand for our products and services, reduced orders
from customers for our products, order cancellations, lower revenues, increased inventories, and lower gross
margins;
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·
·
·
·
·
·
·
continued volatility in the global markets and fluctuations in exchange rates for foreign currencies and contracts or
purchase orders in foreign currencies could negatively impact our reported financial results and condition;
continued volatility in the prices for commodities and raw materials we use in our products could have a material
adverse effect on our costs, gross margins, and ultimately our profitability;
restructurings, reorganizations, consolidations and other corporate events could affect our customers’ budgets and
buying cycles, particularly in the banking industry;
if our customers experience declining revenues, or experience difficulty obtaining financing in the capital and credit
markets to purchase our products and services, this could result in reduced orders, order cancellations, inability of
customers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable,
reduced cash flows, greater expense associated with collection efforts and increased bad debt expense;
in the event of a contraction of our sales, dated inventory may result in a need for increased obsolescence reserves;
a severe financial difficulty experienced by our customers may cause them to become insolvent or cease business
operations, which could reduce sales, cash collections and revenue streams.
any difficulty or inability on the part of manufacturers of our products or other participants in our supply chain in
obtaining sufficient financing to purchase raw materials or to finance general working capital needs may result in
delays or non-delivery of shipments of our products.
We are unable to predict potential future economic conditions, disruptions in the sovereign debt markets or other
financial markets, regional recessions, or the effect of any such disruption or disruptions on our business and results of operations,
but the consequences may be materially adverse. We believe that our business in the Banking market in Europe would be
impacted most directly by any such disruption and that the consequences may be materially adverse, as approximately 58% of our
consolidated revenues originated in the EMEA region in 2019.
Disruptions in markets or the European Union may affect our liquidity and capital resources.
We believe our financial resources are adequate to meet our operating needs. However, disruptions in the sovereign debt
markets or other financial markets, the Euro Monetary Union or the European Union, could materially adversely affect our
liquidity and capital resources and expose us to additional currency fluctuation risk. Sufficiently adverse effects could cause us to
modify our business plans.
Furthermore, in an adverse economic environment there is a risk that customers may delay their orders until the
economic conditions improve further. If a significant number of orders are delayed for an indefinite period of time, our revenue
and cash receipts may not be sufficient to meet the operating needs of the business. If this is the case, we may need to
significantly reduce our workforce, sell certain of our assets, enter into strategic relationships or business combinations,
discontinue some or all of our operations, or take other similar restructuring actions. While we expect that these actions would
result in a reduction of recurring costs, they also may result in a reduction of recurring revenue and cash receipts. It is also likely
that we would incur substantial non-recurring costs to implement one or more of these restructuring actions.
We could incur substantial accounting related costs if we are unable to maintain an effective system of internal control
over financial reporting.
In response to the material weakness in our internal control over financial reporting disclosed as of December 31, 2018,
we expended significant resources to improve our internal control over financial reporting and the
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effectiveness of our disclosure controls and procedures. We expended significant resources, including accounting related costs
and significant management oversight as we corrected the deficiencies. Management has determined that full remediation of the
prior deficiencies in internal control over financial reporting that led to this material weakness has occurred, disclosed in Item 9A,
and the subsequent investment in the control environment will continue.
We cannot provide absolute assurance that additional material weaknesses, or significant deficiencies, in our internal
controls will not be identified in the future. Failure to maintain effective controls or implement new or improved controls could
result in significant deficiencies or material weaknesses, affect management evaluations and auditor attestations regarding the
effectiveness of our internal controls, failure to meet periodic reporting obligations, and material misstatements in our financial
statements. Material misstatement of our financial statements may result in a restatement, loss of investor and customer
confidence, a decline in the market price of the Company’s common stock, and potential sanctions or investigations by
NASDAQ, the Securities and Exchange Commission or other regulatory authorities. Failure to remedy any material weakness in
the Company’s internal control over financial reporting, or to implement or maintain other effective control systems required of
public companies, could also restrict the Company’s future access to the capital markets.
We have a long operating history, but only modest accumulated profit.
Although we have reported net income (loss) of $8.8 million, $3.8 million, and $(22.4) million for the years ended
December 31, 2019, 2018, and 2017, respectively, our retained earnings were $181.2 million at December 31, 2019. Over our 25
year operating history, we have operated at a loss for many of those years. Depending on the economic environment’s changing
rules and regulations, and our investment strategies, it may be difficult for us to sustain profitability on a GAAP basis. We may
choose to invest for long term value which could decrease or eliminate short term profit.
We derive revenue from a limited number of products.
Approximately half of our revenue is derived from the sale of authentication related hardware products and related
services. We anticipate a substantial portion of future revenue, will be derived from authentication, products and related services.
If the sale of these products and services is impeded for any reason and we have not diversified our offerings into more software,
our business and results of operations would be negatively impacted. Further, we expect our hardware product sales to decline
over the long term in our traditional markets. If the rate of decline is more than expected and the aforementioned diversification
is not enough to offset the decline, our results could be uneven and overall could be negative.
The sales cycle for our products and technology is long, and we may incur substantial expenses for sales that do not occur
when anticipated.
The sales cycle for our products, which is the period of time between the identification of a potential customer and
completion of the sale, is typically lengthy and subject to a number of significant risks over which we have little control. If
revenue falls significantly below anticipated levels, our business would be seriously harmed.
A typical sales cycle in the financial services market is often six months or more. Larger banking transactions may take
up to 18 months or more. Purchasing decisions for our products and services may be subject to delays due to many factors that are
not within our control, such as:
·
·
Time required for a prospective customer to recognize the need for our products;
Significant expense of many security products and systems;
· Customer budgeting process; and
· Customer evaluation, testing and approval process.
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As our operating expenses are based on anticipated revenue levels, a small fluctuation in the timing of sales can cause
our operating results to vary significantly between periods.
We have a great dependence on a limited number of suppliers and the loss of their manufacturing capability could
materially impact our operations.
In the event that the supply of components or finished products is interrupted or relations with any of our principal
vendors is terminated, there could be increased costs and considerable delay in finding suitable replacement sources to
manufacture our hardware products. Our hardware Digipass authentication devices are assembled at facilities located in mainland
China. The importation of these products from China exposes us to the possibility of product supply disruption and increased
costs in the event of changes in the policies of the Chinese government, political unrest or unstable economic conditions in China
or developments in the United States or European Union that are adverse to trade, including enactment of protectionist
legislation. In 2019, a portion of our hardware products became subject to tariffs. If such tariffs increase in amount or scope, our
financial results could be negatively affected.
We order some hardware components, such as processors, in advance of expected use and often produce finished goods
prior to the receipt of executed customer orders. If orders are not received, we could suffer losses related to inventory that
cannot be sold at full value.
In an attempt to minimize the risk of not having an adequate supply of component parts to meet demand and to take
advantage of volume purchasing benefits, especially in situations where we have been notified that key processors will no longer
be manufactured, we sometimes purchase multiple years’ supply of parts based on internal forecasts of demand. In addition, to
meet customers’ demands for accelerated delivery of product, we sometimes produce finished product for existing customers
before we receive the executed order from the customer. Should our forecasts of future demand be inaccurate or if we produce
product that is never ordered, we could incur substantial losses related to the realization of our inventory.
Our success depends on establishing and maintaining strategic relationships with other companies to distribute our
technology and products and, in some cases, for us to incorporate their technology into our products and our products and
services.
Part of our business strategy is to enter into strategic alliances and other cooperative arrangements with other companies
in our industry. We currently are involved in cooperative efforts with respect to the incorporation of our products into products of
others and vice versa, research and development efforts, marketing efforts and reseller arrangements. These relationships are
generally non-exclusive, and some of our strategic partners also have cooperative relationships with certain of our competitors. If
we are unable to enter cooperative arrangements in the future or if we lose any of our current strategic or cooperative
relationships, our business could be harmed. We do not control the time and resources devoted to such activities by parties with
whom we have relationships. In addition, we may not have the resources available to satisfy expectations, which may adversely
affect these relationships. These relationships may not continue, may not be commercially successful, or may require our
expenditure of significant financial, personnel and administrative resources from time to time. Further, certain of our products and
services compete with the products and services of our strategic partners.
We may not be able to maintain effective product distribution channels, which could result in decreased revenue.
We rely on both our direct sales force and an indirect channel distribution strategy for the sale and marketing of our
products. We may be unable to attract distributors, resellers and integrators, as planned, that can market our products effectively
and provide timely and cost-effective customer support and service. There is also a risk that some or all of our distributors,
resellers or integrators may be acquired, may change their business models or may go out of business, any of which could have an
adverse effect on our business. Further, our distributors, integrators and resellers may sell competing products. The loss of
important sales personnel, distributors, integrators or resellers could adversely affect us.
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We depend on our key personnel for the success of our business and the loss of one or more of our key personnel could
have an adverse effect on our ability to manage our business or could be negatively perceived in the capital markets.
Our success and our ability to manage our business depend, in large part, upon the efforts and continued service of our
senior management team. The loss of one or more of our key personnel could have a material adverse effect on our business and
operations. It could be difficult for us to find replacements for our key personnel, as competition for such personnel is often
intense. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our
securities.
If we fail to continue to attract and retain qualified personnel, our business may be harmed.
Our future success depends upon our ability to attract and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is often intense and there can be no assurance that we can attract other highly qualified
personnel in the future. If we cannot retain or are unable to hire such key personnel, our business, financial condition and results
of operations could be significantly adversely affected.
Changes in our effective tax rate may have an adverse effect on our results of operations.
Our future effective tax rates may be adversely affected by a number of factors including the distribution of income
among the various countries in which we operate, changes in the valuation of our deferred tax assets, increases in expenses not
deductible for tax purposes, including the impairment of goodwill in connection with acquisitions, changes in share-based
compensation expense, and changes in tax laws or the interpretation of such tax laws and changes in generally accepted
accounting principles. Any significant increase in our future effective tax rates could adversely impact net income for future
periods; and a reduction in our U.S. tax rate could negatively impact our deferred tax assets which could also adversely impact
our net income.
Our worldwide income tax provisions and other tax accruals may be insufficient if any taxing authorities assume taxing
positions that are contrary to our positions.
Significant judgment is required in determining our provision for income taxes and other taxes such as sales and VAT
taxes. There are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a
consequence of intercompany agreements to purchase intellectual properties, allocate revenue and costs, and other factors, each of
which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although we believe that our
approach to determining the amount of such arrangements is reasonable, we cannot be certain that the final tax authority review
of these matters will not differ materially from what is reflected in our historical income tax provisions and other tax accruals.
Such differences could have a material effect on our income tax provisions or benefits, or other tax accruals, in the period in
which such determination is made, and consequently, on our results of operations for such period.
Changes in global tax laws or in their interpretation or enforcement, could have a material adverse effect on our effective
tax rate, results of operations, cash flows and financial condition.
We could be materially adversely affected by future changes in tax law or policy (or in their interpretation or
enforcement) in the jurisdictions where we operate. These changes could be exacerbated by economic, budget or other challenges
facing these jurisdictions. For example, foreign jurisdictions could impose tax rate changes along with additional corporate tax
provisions that would disallow or tax perceived “base erosion” or profit shifting amongst jurisdictions. In addition, aspects of U.S.
tax reform may lead foreign jurisdictions to respond by enacting additional tax legislation that results in an adverse effect on our
effective tax rate, results of operations, cash flows and financial condition.
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We may acquire or invest in companies, which may disrupt our business and divert management's attention and cause
harm to our financial condition or results. We may be unable to integrate acquired businesses and technologies
successfully or achieve the expected benefits of such acquisitions.
We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in,
complementary businesses, technologies, services, products and other assets in the future. We also may enter into relationships
with other businesses to expand our products and platform, which could involve preferred or exclusive licenses, additional
channels of distribution, discount pricing or investments in other companies.
Our failure to successfully structure or manage any acquisitions could seriously harm our financial condition or
operating results. The expected benefits of any acquisition may not be realized. In connection with our recent acquisitions and any
future purchases, we could face additional financial and operational risks, including:
· Difficulty in assimilating the operations, technology and personnel of acquired companies;
· Disruption in our business because of the allocation of resources to consummate these transactions and the diversion
of management’s attention from our existing business;
· Difficulty in retaining key technical and managerial personnel from acquired companies;
· Dilution of our stockholders, if we issue equity to fund these transactions;
· Reduced liquidity, increased debt and higher amortization expenses;
· Assumption of operating losses, increased expenses and liabilities;
· Our relationships with existing employees, customers and business partners may be weakened or terminated as a
result of these transactions;
· Discovery of unanticipated issues and liabilities;
·
Failure to meet expected returns; and
· Difficulty in maintaining financial reporting and internal control processes needed to be compliant with
requirements applicable to companies subject to SEC reporting.
Reported revenue may fluctuate widely due to the interpretation or application of accounting rules.
Our sales arrangements often include multiple elements, including hardware, services, software, maintenance and
support. In addition, we have sold software related arrangements in multiple forms, including perpetual licenses, term-based
licenses and SaaS subscriptions, each of which may be treated differently under accounting rules. The accounting rules for such
arrangements are complex and subject to change from time to time. The nature of the arrangement can create variations in the
timing of revenue recognition.
Provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and
other losses.
Our agreements with customers, solution partners and channel partners generally include provisions under which we
agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement and, in some
cases, for damages caused by us to property or persons or for other damages. In addition, we make certain representations and
warranties and incur obligations under our contracts in the ordinary course of business, including for items related to data security
and potential data privacy breaches. Not all of our potential losses under our contracts are covered by insurance policies, which
could increase the impact of any such loss should it occur. Large
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indemnity payments or damages resulting from our contractual obligations could harm our business, operating results and
financial condition.
The evolution of our business requires more complex development and go-to-market strategies, which involve significant
risk.
Our increasing focus on developing and marketing a platform of solutions for identity management, authentication, risk
analysis, fraud detection, digital business processes and related areas requires different development and go-to-market strategies
than our historic hardware authentication business. We are developing, buying and licensing technology weighted toward
software solutions and investment in research, development, product management, sales training and senior management. This
transformation strategy is currently in progress and brings with it significant risks related to our choice of solutions and our ability
to execute the strategy successfully. This strategy requires a greater focus on marketing and selling product suites and software
solutions rather than selling hardware products for authentication and transaction signing. Consequently, we are developing, and
must continue to develop, new strategies for marketing and selling our offerings. In addition, marketing and selling new solutions
to enterprises requires significant investment of time and resources in order to train our employees and educate our customers on
the benefits of our new product offerings. These investments can be costly and the additional effort required to educate both
customers and our own sales force can distract from efforts to sell existing products and services.
Complications with the design or implementation of our new enterprise resource planning system could adversely impact
our business and operations, or not allow us to experience the anticipated benefits from our investments in new
technology.
We rely extensively on information systems and technology to manage our business and summarize operating results and
are in the process of a multi-year implementation of a new global enterprise resource planning (“ERP”) system and connected
auxiliary applications. This ERP system has replaced our existing operating and financial systems and is designed to accurately
maintain the Company’s financial records, enhance operational functionality, and provide timely information to the Company’s
management team related to the operation of the business. The ERP system implementation process has required, and will
continue to require, the investment of significant personnel and financial resources. We may not be able to successfully
implement the ERP system without experiencing delays, increased costs and other difficulties. If we have not successfully
designed, and are unable to implement the new ERP system as planned, our financial positions, results of operations, and cash
flows could be negatively impacted. Additionally, if we do not effectively implement the ERP system as planned or the ERP
system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected
or our ability to assess those controls adequately could be delayed.
Risks Related to the Market
We face significant competition and if we lose or fail to gain market share our financial results will suffer.
The market for security products and services is highly competitive. Our competitors include organizations that provide
security products based upon approaches similar to and different from those that we employ. Many of our competitors have
significantly greater financial, marketing, technical and other competitive resources than we do. As a result, our competitors may
be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products.
A decrease of average selling prices for our products and services could adversely affect our business.
The average selling prices for our solution offerings may decline as a result of competitive pricing pressures or a change
in our mix of products, software and services. In addition, competition continues to increase in the market segments in which we
participate and we expect competition to further increase in the future, thereby leading to increased pricing pressures.
Furthermore, we anticipate that the average selling prices and gross profits for our products will decrease over product life cycles.
To maintain or realize our revenue and gross margins, we must continue to develop, or purchase and introduce new products and
services that incorporate new technologies or increased
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functionality. If we experience such pricing pressures or fail to deliver new products and services relevant to our markets, our
revenue and gross margins could decline, which could harm our business, financial condition and results of operations.
We may need additional capital in the future and our failure to obtain capital would interfere with our growth strategy.
Our ability to obtain financing will depend on a number of factors, including market conditions, our operating
performance and investor or creditor interest. These factors may make the timing, amount, terms and conditions of any financing
unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. If adequate funds are
not available or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, defer our
product development activities, or delay the introduction of new products.
We experience variations in quarterly operating results and sales are subject to seasonality, both of which may result in a
volatile stock price.
In the future, as in the past, our quarterly operating results may vary significantly, resulting in a volatile stock price.
Factors affecting our operating results include:
·
·
The level of competition;
The size, timing, cancellation or rescheduling of significant orders;
· New product announcements or introductions by competitors;
·
Technological changes in the market for security products including the adoption of new technologies and
standards;
· Changes in pricing by competitors;
· Our ability to develop, introduce and market new products and product enhancements on a timely basis, if at all;
· Component costs and availability;
· Achievement of significant market share in particular markets followed by declines as buying cycles may be
multiple years apart;
·
The variability of revenue realized from individual customers as their buying patterns can vary significantly from
period to period and is affected by the individual solutions purchased and the structure of the contract;
· Our success in expanding our sales and marketing programs;
· Market acceptance of new products and product enhancements;
· Changes in foreign currency exchange rates; and
· General economic conditions in the countries in which we operate.
We also experience seasonality or variation across the year in our markets. These trends can include the summer months,
particularly in Europe, or the second half of the fiscal year is generally higher than the first half in terms of sales.
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Our stock price may be volatile for reasons other than variations in our quarterly operating results.
The market price of our common stock may fluctuate significantly in response to factors, some of which are beyond our
control, including the following:
· Actual or anticipated fluctuations in our quarterly or annual operating results;
· Differences between actual operating results and results estimated by analysts that follow our stock and provide
estimates of our results to the market;
· Differences between guidance relative to financial results, if given, and actual results;
· Changes in market valuations of other technology companies, and cybersecurity companies in particular;
·
Investor acceptance of our strategies and the perception of our success in executing those strategies;
· Announcements by us or our competitors of significant technical innovations, contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
· Additions or departures of key personnel;
·
·
·
Future sales of common stock;
The inclusion or exclusion of our stock in ETF’s, indices and other benchmarks, and changes made to
methodologies connected therewith;
Trading volume fluctuations; and
· Reactions by investors to uncertainties in the world economy and financial markets.
A small group of persons control a substantial amount of our common stock and could delay or prevent a change of
control.
Our Board of Directors, our officers and their immediate families and related entities beneficially own approximately
19%, with Mr. T. Kendall Hunt beneficially owning approximately 17%, of the outstanding shares of our common stock. As a
director and our largest stockholder, Mr. Hunt may exercise substantial control over our future direction and operations and such
concentration of control may have the effect of discouraging, delaying or preventing a change in control and may also have an
adverse effect on the market price of our common stock.
Additionally, Blackrock, Inc. holds approximately 12% of ownership, Legion Partners Asset Management holds
approximately 5% of ownership, and The Vanguard Group holds approximately 5% of ownership.
Certain provisions of our charter and of Delaware law make a takeover of our Company more difficult.
Our corporate charter and Delaware law contain provisions, such as a class of authorized but unissued preferred stock
which may be issued by our board without stockholder approval that might enable our management to resist a takeover of our
Company. Delaware law also limits business combinations with interested stockholders. These provisions might discourage,
delay or prevent a change in control or a change in our management. These provisions could also discourage proxy contests and
make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could
limit the price that investors might be willing to pay in the future for shares of our common stock.
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Future issuances of blank check preferred stock may reduce voting power of common stock and may have anti-takeover
effects that could prevent a change in control.
Our corporate charter authorizes the issuance of up to 500,000 shares of preferred stock with such designations, rights,
powers and preferences as may be determined from time to time by our Board of Directors, including such dividend, liquidation,
conversion, voting or other rights, powers and preferences as may be determined from time to time by the Board of Directors
without further stockholder approval. The issuance of preferred stock could adversely affect the voting power or other rights of
the holders of common stock. In addition, the authorized shares of preferred stock and common stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a change in control.
Risks Related to Technology and Intellectual Property
Technological changes occur rapidly in our industry and our development of new products is critical to maintain our
revenue.
The introduction by our competitors of products embodying new technologies and the emergence of new industry
standards could render our existing products obsolete and unmarketable. Our future revenue growth and operating profit will
depend in part upon our ability to enhance our current products and develop innovative new solutions to distinguish us from the
competition and to meet customers’ changing needs. Security-related product developments and technology innovations by others
may adversely affect our competitive position and we may not successfully anticipate or adapt to changing technology, industry
standards or customer requirements on a timely basis.
Our business could be negatively impacted by cyber security incidents and other disruptions.
Our use of technology is increasing and is critical in at least three primary areas of our business:
1.
Software and information systems that we use to help us run our business more efficiently and cost effectively,
which are increasingly cloud-based tools;
2. The products we have traditionally sold and continue to sell to our customers contain technology that incorporates
the use of secret numbers and encryption technology; and
3.
Solutions delivered on a software-as-a-service basis, from both public and private cloud models, which may process
and store confidential, personal, health and financial information and which may rely on third parties for some or all
of the solution.
A cyber incident in any of these areas of our business could disrupt our ability to take orders or deliver products or
services to our customers, cause us to suffer significant monetary and other losses and significant reputational harm, or
substantially impair our ability to grow the business. We expect that there will continue to be hacking attempts intended to
capture business information or exploit computing power to impede the performance of our products, to access our customers’
information, or harm our reputation as a company. The processes used by hackers to access or sabotage technology products,
services and networks are evolving in sophistication and increasing in frequency. We could experience a security incident due to
various causes including intentional or unintentional conduct of our employees, vendors, technology partners and others that have
access to or store our information.
In July 2011, we discovered a cyber-incident related to DigiNotar B.V. shortly after we purchased the company. The
hacking incident at DigiNotar B.V. led to the termination of DigiNotar B.V’s registration as a certification service provider and
DigiNotar B.V.’s bankruptcy. Since that time, we have experienced several security incidents, although none have been material.
Even though we have established teams, processes and strategies to protect our corporate and solution assets, we may incur losses
from such events as a result of unanticipated costs associated with data security incidents.
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In addition, because we are in the cyber security industry, we could be targeted by hackers more than other
companies and if a material cyber security breach occurred related to corporate or customer information, the reputational harm
and potential lost future business could be greater than other companies not in our industry. We have taken various measures to
strengthen the security of our products and our systems, to establish information security governance procedures and to train our
employees. However, we are the subject of a large volume of hacking attempts and our defenses might not always be effective. If
a hacking attempt were to be successful and lead to a material data breach, then it could harm our business, financial condition
and results of operations, both in the current period and for a significant future period of time.
We rely upon Amazon Web Services to operate portions of our platform and any disruption of or interference with our
use of Amazon Web Services or other vendors’ material would adversely affect our business, results of operations and
financial condition
We outsource portions of our cloud infrastructure to Amazon Web Services, or AWS. Customers of our products need to
be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that
we access, and we are, therefore, vulnerable to service interruptions at AWS. We have experienced and expect that in the future
we may experience interruptions, delays and outages in service and availability from time to time due to a variety of factors,
including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. Capacity
constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In
addition, if our security, or that of AWS, is compromised, our products or platform are unavailable or our users are unable to use
our products within a reasonable amount of time or at all, then our business, results of operations and financial condition could be
adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a
period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our platform
performance, especially during peak usage times, as our products become more complex and the usage of our products increases.
To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud
infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in
service levels from AWS may adversely affect our ability to meet our customers' requirements.
Any of the above circumstances or events may harm our reputation, possibly move customers to stop using our products,
impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to
financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and
financial condition. These risks are also present with our other cloud service infrastructure vendors beside AWS. In addition, we
also utilize strategic vendors to resell or incorporate third party technology and if these material vendors experienced a data
breach, outage in service or other failure, we could be prevented from meeting our customers’ requirements.
Some of our products contain third-party, open-source software and failure to comply with the terms of the underlying
open-source software licenses could restrict our ability to sell our products or otherwise result in claims against us.
Our products are distributed with software programs licensed to us by third-party authors under open-source licenses,
which may include the GNU General Public License, the GNU Lesser Public License, the BSD License and the Apache License.
Third-party, open-source programs are typically licensed to us for no fee and the underlying license agreements could require us
to make available to users the source code for such programs, as well as the source code for any modifications or derivative works
we create based on these third-party, open-source software programs.
We do not provide end users a copy of the source code to our proprietary software because we believe that the manner in
which our proprietary software is aligned or communicates with the relevant open-source programs does not create a
modification, derivative work or extended version of, or a work based on, that open-source program requiring the distribution of
our proprietary source code.
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Our ability to commercialize our products by incorporating third-party, open-source software may be restricted because,
among other reasons:
·
·
·
·
the terms of open-source license agreements are unclear and subject to varying interpretations, which could result in
unforeseen obligations regarding our proprietary products or claims of infringement;
it may be difficult to determine the developers of open-source software and whether such licensed software infringes
another party’s intellectual property rights;
competitors may have equal access to these open source products, which may help them develop competitive
products; and
open-source software potentially increases customer support costs because licensees can modify the software and
potentially introduce errors, which could also increase the risk of vulnerabilities available to hackers.
We must continue to attract and retain highly skilled technical personnel for our research and development efforts.
The market for highly skilled technical talent is highly competitive. If we fail to attract, train, assimilate and retain
qualified technical personnel for our research and development and product management efforts, we will experience delays or
failures in introductions of new or modified products, and services, failures in adequate analysis of technology or acquisitions in
the market, loss of clients and market share and a reduction in revenue.
We cannot be certain that our research and development activities will be successful.
While management is committed to enhancing our current product offerings and introducing new products, we cannot be
certain our research and development activities will be successful. Furthermore, we may not have sufficient financial resources to
identify and develop new technologies and bring new products to market in a timely and cost effective manner, and we cannot
ensure that any such products will be commercially successful.
Failure to effectively manage our product and service lifecycles could harm our business.
As part of the natural lifecycle of our products and services, we periodically inform customers that products or services
will be reaching their end of life or end of availability and will no longer be supported or receive updates and security
patches. Failure to effectively manage our product and service lifecycles could lead to customer dissatisfaction and contractual
liabilities, which could adversely affect our business and operating results.
SaaS offerings, which involve various risks, constitute an important part of our business.
As we continue to acquire, develop and offer SaaS versions of products, we will need to continue to evolve our
processes to meet a number of regulatory, intellectual property, contractual and service compliance challenges. These challenges
include compliance with licenses for open source and third party software embedded in our SaaS offerings, maintaining
compliance with export control and privacy regulations, including HIPAA and GDPR, protecting our services from external
threats, maintaining continuous service levels and data security expected by our customers, preventing inappropriate use of our
services and adapting our go-to-market efforts. In addition to using our internal resources, we also utilize third party resources to
deliver SaaS offerings, such as third party data hosting vendors. The failure of a third party provider to prevent service
disruptions, data losses or security breaches may require us to issue credits or refunds or indemnify or otherwise be liable to
customers or third parties for damages that may occur. Additionally, if these third-party providers fail to deliver on their
obligations, our reputation could be damaged, our customers could lose confidence in us and our ability to maintain and expand
our SaaS offerings. Finally, our SaaS offerings need to be designed to operate at significant transaction volumes. When combined
with third party software
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and hosting infrastructure, our SaaS offerings may not perform as designed which could lead to service disruptions and associated
damages.
We depend significantly upon our proprietary technology and intellectual property and the loss of or successful challenge
to our proprietary rights could require us to divert management attention and could reduce revenue and increase our
operating costs.
From time to time, we receive claims that we have infringed the intellectual property rights of others, including claims
regarding patents, copyrights, and trademarks. Because of constant technological change in the segments in which we compete,
the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents, it is possible that the number
of these claims may grow. In addition, former employers of our former, current, or future employees may assert claims that such
employees have improperly disclosed to us the confidential or proprietary information of these former employers. Any such
claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not
successful in defending such claims, we could be required to stop selling, delay shipments, redesign our products, pay monetary
amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations with our customers.
Royalty or licensing arrangements we may seek in such circumstances may not be available to us on commercially reasonable
terms or at all. We have made and expect to continue making significant expenditures to establish our intellectual property rights
and to investigate, defend and settle claims related to the use of technology and intellectual property rights as part of our strategy
to manage this risk. In addition, we license and use software from third parties in our business. These third party software licenses
may not continue to be available to us on acceptable terms or at all, and may expose us to additional liability. This liability, or our
inability to use any of this third party software or technology, could result in shipment delays or other disruptions in our business
that could materially and adversely affect our operating results.
We rely principally on trade secrets to protect much of our intellectual property in cases where we do not believe patent
protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although our employees are subject to
confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information.
We may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights.
Failure to obtain or maintain trade secret protection could adversely affect our competitive business position. If we are unable to
prevent third parties from infringing or misappropriating our copyrights, trademarks or other proprietary information, our
competitive position could be adversely affected. In the course of conducting our business, we may inadvertently infringe the
intellectual property rights of others, resulting in claims against us or our customers. Our contracts generally indemnify our
customers for third-party claims for intellectual property infringement by the services and products we provide. In the past, we
have resolved several claims of patent infringement brought against us and a claim brought against a customer related to our
technology. None of these claims were material to our financial results but this may not always be the case. The expense of
defending these claims may adversely affect our financial results and may not be covered by any insurance policies we maintain.
In addition, any such disputes and litigation could divert management attention and harm our reputation in the market.
Our patents may not provide us with competitive advantages.
We hold numerous patents in the United States and in other countries, which cover multiple aspects of our technology. A
substantial part of our patents cover the Digipass product line. Our patents expire between now and more than 10 years from now.
There can be no assurance that we will continue to develop proprietary products or technologies that are patentable, that any
issued patent will provide us with any competitive advantages or will not be challenged by third parties, or that patents of others
will not hinder our competitive advantage. Although certain of our technologies are patented, there are other organizations that
offer products with comparable functionality that employ different technological solutions and compete with us for market share.
We are subject to warranty and product liability risks.
A malfunction of or design defect in our products which results in a breach of a legal obligation or physical harm or
damage from our products could result in tort or warranty claims against us. We seek to reduce the risk of these
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losses by using qualified engineers in the design, manufacturing and testing of our hardware products, proper development and
testing of our software solutions, attempting to negotiate warranty disclaimers and liability limitation clauses in our sales
agreements, and maintaining customary insurance coverage. However, these measures may ultimately prove ineffective in
limiting our liability for damages.
In addition to any monetary liability for the failure of our products, an actual or perceived breach of network or security
at one of our customers or publicly known defect or perceived defect in our products could adversely affect the market’s
perception of us and our products, and could have an adverse effect on our reputation and the demand for our products. Similarly,
an actual or perceived breach of security within our own systems could damage our reputation and have an adverse effect on the
demand for our products.
There is significant government regulation of technology imports and exports and to the extent we cannot meet the
requirements of the regulations we may be prohibited from exporting some of our products, which could negatively
impact our revenue.
Our international sales and operations are subject to risks such as the imposition of government controls, new or changed
export license requirements, restrictions on the export of critical technology, trade restrictions and changes in tariffs. If we are
unable to obtain regulatory approvals on a timely basis our business may be impacted. Certain of our products are subject to
export controls under U.S. law. The list of products and countries for which export approval is required, and the regulatory
policies with respect thereto, may be revised from time to time and our inability to obtain required approvals under these
regulations could materially and adversely affect our ability to make international sales. Violations of export control and
international trade laws could result in penalties, fines, adverse reputational consequences, and other materially adverse
consequences. In the past, we voluntarily disclosed a trade control matter to the U.S. government. Although this matter was
closed during 2018 with no fines, penalties, or finding of wrongdoing, we cannot guarantee that such issues will not arise in the
future. In addition, we cannot predict the future government regulation of aspects of our business and such regulation could be
detrimental to our results.
We employ cryptographic technology in our authentication products that uses complex mathematical formulations.
A portion of our products are based on cryptographic technology. With cryptographic technology, a user is given a key
that is required to encrypt and decode messages. The security afforded by this technology depends on the integrity of a user’s key
and in part on the application of algorithms, which are advanced mathematical factoring equations. These codes may eventually
be broken or become subject to government regulation regarding their use, which would render our technology and products less
effective. The occurrence of any one of the following could result in a decline in demand for our technology and products:
· Any significant advance in techniques for attacking cryptographic systems, including the development of an easy
factoring method or faster, more powerful computers;
·
·
Publicity of the successful decoding of cryptographic messages or the misappropriation of keys; and
Increased government regulation limiting the use, scope or strength of cryptography.
Risks Related to International Operations
We face a number of risks associated with our international operations, any or all of which could result in a disruption in
our business and a decrease in our revenue.
In 2019, approximately 76% of our revenue and approximately 72% of our operating expenses were generated/incurred
outside of the U.S. In 2018, approximately 74% of our revenue and approximately 79% of our operating expenses were
generated/incurred outside of the U.S. In 2017, approximately 72% of our revenue and approximately 76% of our operating
expenses were generated/incurred outside of the U.S. A severe economic decline in any of our major foreign markets could
adversely affect our results of operations and financial condition.
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In addition to exposures to changes in the economic conditions of our major foreign markets, we are subject to a number
of risks any or all of which could result in a disruption in our business and a decrease in our revenue. These include:
·
·
Inconsistent regulations and unexpected changes in regulatory requirements;
Export controls relating to our technology;
· Difficulties and costs of staffing and managing international operations, including maintaining internal controls and
closing or restructuring such operations;
·
Potentially adverse tax consequences;
· Wage and price controls or protection;
· Uncertain protection for intellectual property rights, contractual rights and collecting accounts receivable;
·
Imposition of trade barriers;
· Differing technology standards;
· Uncertain demand for our solutions in individual countries, even if there were past sales;
·
Linguistic and cultural differences;
· A widely distributed workforce;
· Difficulty in providing support and training to customers in certain international locations;
·
·
Economic and political instability; and
Social unrest, health crises, and cultural barriers or changes.
We are subject to foreign currency exchange rate fluctuations and risks, and improper management of that risk could
adversely affect our business, results of operations, and financial conditions.
Because a significant number of our principal customers are located outside the United States, we expect that
international sales will continue to generate a significant portion of our total revenue. We are subject to foreign exchange
fluctuations and risks because the majority of our product costs are denominated in U.S. Dollars, whereas a significant portion of
the sales and expenses of our foreign operating subsidiaries are denominated in various foreign currencies. A decrease in the
value of any of these foreign currencies relative to the U.S. Dollar could adversely affect our revenue and profitability in U.S.
Dollars of our products sold in these markets. We do not currently hold forward exchange contracts to exchange foreign
currencies for U.S. Dollars to offset currency rate fluctuations.
Changes in the European regulatory environment regarding privacy and data protection regulations could have a
material adverse impact on our results of operations.
In Europe, we are subject to the 1995 European Union (“EU”) Directive on Data Protection (“1995 Data Protection
Directive”), which requires EU member states to impose minimum restrictions on the collection and use of personal data that, in
some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in
the United States. We may also face audits or investigations by one or more foreign government agencies relating to our
compliance with these regulations that could result in the imposition of penalties or fines. The EU member state regulations
establish several obligations that organizations must follow with respect to use
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of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not
protect personal data to an adequate level of privacy or security. In addition, certain member states have adopted more stringent
data protection standards. The Company addressed these requirements by certification to the U.S.-EU Safe Harbor Frameworks
prior to such Frameworks being invalidated in October 2015 by the European Court of Justice. The General Data Protection
Regulation (“GDPR”) replaced the 1995 Data Protection Directive effective May 25, 2018, creating significant impacts on how
businesses can collect and process the personal data of EU individuals. We have expended significant resources to comply, but
those methods may be subject to scrutiny by data protection authorities in EU member states. The costs of compliance with, and
other burdens imposed by, such laws, regulations and policies that are applicable to us may limit our use of personal data and
solutions and could have a material adverse impact on our results of operations.
We must comply with governmental regulations setting environmental standards.
Governmental regulations setting environmental standards influence the design, components or operation of our
products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be
introduced with little or no time to bring related products into compliance with these regulations. Our failure to comply with these
regulations may prevent us from selling our products in a certain country. In addition, these regulations may increase our cost of
supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these
cases, we may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected
costs or operational complexities to bring products into compliance. This could have an adverse effect on our revenues, gross
profit margins and results of operations and increase the volatility of our financial results.
We are subject to the Restriction on the Use of Hazardous Substances Directive 2002/95/EC (also known as the “RoHS
Directive”) and the Waste Electrical and Electronic Equipment Directive (also known as the “WEEE Directive”). These directives
restrict the distribution of products containing certain substances, including lead, within applicable geographies and require a
manufacturer or importer to recycle products containing those substances.
These directives affect the worldwide electronics and electronics components industries as a whole. If we or our
customers fail to comply with such laws and regulations, we could incur liabilities and fines and our operations could be
suspended.
The vote by the United Kingdom (UK) to leave the European Union (EU) could adversely affect our financial results.
In June 2016, UK voters approved a referendum to withdraw the UK's membership from the EU, which is commonly
referred to as "Brexit". We have operations in the UK and the EU, and as a result, we face risks associated with the potential
uncertainty and disruptions that may follow Brexit, including with respect to volatility in exchange rates and interest rates and
potential material changes to the regulatory regime applicable to our operations in the UK. Brexit could adversely affect European
or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political
institutions, regulatory agencies and financial markets. Any of these effects of Brexit, and others we cannot anticipate or that may
evolve over time, could adversely affect our business, financial condition, and operating results.
We or our suppliers may be impacted by new regulations related to climate change.
In addition to the European environmental regulations noted above, we or our suppliers may become subject to new laws
enacted with regards to climate change. In the event that new laws are enacted or current laws are modified in countries in which
we or our suppliers operate, our flow of product may be impacted and/or the costs of handling the potential waste associated with
our products may increase dramatically, either of which could result in a significant negative impact on our ability to operate or
operate profitably.
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The effects of regulations relating to conflict minerals may adversely affect our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and
accountability concerning the supply of certain minerals and derivatives (collectively “Conflict Minerals”) which may originate
from the conflict zones of the Democratic Republic of Congo (DRC) and adjoining countries (collectively, “Covered Countries”).
As a result, in August 2012 the SEC established annual disclosure and reporting requirements for companies using Conflict
Minerals in their products, including products manufactured by third parties. Like many electronic devices, our hardware products
contain Conflict Minerals and are subject to the disclosure and reporting requirements. Compliance with these rules also requires
due diligence including country of origin inquiries to determine the sources of Conflict Minerals used in our products.
As required, we filed our annual reports related to products manufactured. We reported that we determined we had no
reason to believe Conflict Minerals used in our products may have originated in Covered Countries.
We may incur continued costs associated with complying with these disclosure requirements. These requirements may
affect pricing, sourcing and availability of Conflict Minerals used to produce our devices. We may be unable to verify the origin
of all Conflict Minerals in our products. We may encounter challenges with customers and stakeholders if we are unable to certify
that our products are conflict free.
U.S. investors may have difficulties in making claims for any breach of their rights as holders of shares because some of
our assets and key employees are not located in the United States.
Several of our key employees are full-time or part-time residents of foreign countries, and a substantial portion of our
assets and those of some of our key employees are located in foreign countries. As a result, it may not be possible for investors to
effect service of process on those persons located in foreign countries, or to enforce judgments against some of our key
employees based upon the securities or other laws of jurisdictions in those foreign countries.
Our business in countries with a history of corruption and transactions with foreign governments increase the risks
associated with our international activities.
We are subject to the U.S. Foreign Corrupt Practices Act (FCPA), and other laws that prohibit improper payments or
offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the
purpose of obtaining or retaining business. We have operations, deal with and make sales to governmental or quasi-governmental
customers in countries known to experience corruption, particularly certain countries in the Middle East, Africa, East Asia and
South and Central America, and further expansion of our international selling efforts may involve additional regions. Our
activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants,
sales agents or channel partners that could be in violation of various laws, including the FCPA and the U.K. Bribery Act, even
though these parties are not always subject to our control. Violations of the FCPA may result in severe criminal or civil sanctions,
including suspension or debarment from U.S. government contracting, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. Violations of the U.K. Bribery Act may result in severe
criminal or civil sanctions and we may be subject to other liabilities that could negatively affect our business operating results and
financial condition.
Item 1B - Unresolved Staff Comments
None.
Item 2 - Properties
Our corporate headquarters is located in Chicago, Illinois. Our international headquarters is in Zurich, Switzerland. Our
European operational headquarters is in Brussels, Belgium, along with our logistics facility. We conduct sales and marketing,
research and development and customer support activities from various locations. Our
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primary global research and development center is in Montreal, Canada. We have additional research and development facilities
in the Netherlands, Cambridge, United Kingdom, Bordeaux, France and Vienna, Austria.
We have sales personnel in our offices near Boston, Massachusetts, Sydney, Australia, Singapore, Tokyo, Japan, Sao
Paulo, Brazil, Dubai, Zurich, Switzerland, Chicago, Illinois, London, United Kingdom, and in several field offices around the
world.
All of our properties are leased.
Item 3 – Legal Proceedings
We are a party to or have intellectual property subject to litigation and other proceedings that arise in the ordinary course
of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary
sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings
described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable
resolution of any matter may have a material effect on our financial results in any particular interim reporting period. Among the
factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible
damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal
counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the
time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over
time as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable
possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the 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 agreements. These indemnifications may include, but are not
limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and
amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement.
We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount
of potential future payments, if any, related to such indemnification provisions. We have no liabilities recorded for these clauses
as of December 31, 2019.
On March 14, 2017, a complaint was filed in the United States District Court for the District of Massachusetts, captioned
StrikeForce Technologies, Inc. v. Vasco Data Security International, Inc., et al., claiming the Company infringed on certain patent
rights of the plaintiff. On May 8, 2017, the Company answered the complaint denying the allegations of patent infringement. The
parties then engaged in motion practice and discovery in the case. The plaintiff has also brought suit against various other
companies in the cybersecurity industry. In one such suit in the federal district court for the Central District of California, on
December 1, 2017, the court granted defendant’s motion to dismiss, finding that the StrikeForce asserted claims are invalid.
StrikeForce appealed such decision. In light of such ruling, on December 20, 2017, the court in the Company’s case granted a stay
of the proceedings pending the appeal in the related case. On April 16, 2019, the Court dismissed the claims of StrikeForce
against us with prejudice. We consider this case to be closed.
From time to time, we have been involved in the litigation incidental to the conduct of our business. Excluding matters
disclosed above, we are not a party to any lawsuit or proceeding that, in management’s opinion, is likely to have a material
adverse effect on its business, financial condition or results of operations.
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Item 4 - Mine Safety Disclosures
Not applicable.
PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock, par value $0.001 per share, trades on the NASDAQ Capital Market under the symbol OSPN. Prior
to June 1, 2018, our common stock traded on the NASDAQ Capital Market under the symbol VDSI.
The following table sets forth the range of high and low daily closing prices of our common stock on the NASDAQ
Capital Market for the past two years.
2019
Fourth quarter
Third quarter
Second quarter
First quarter
2018
Fourth quarter
Third quarter
Second quarter
First quarter
High Low
$ 19.74 $ 14.13
12.95
13.40
12.40
16.68
19.41
21.55
High
Low
$ 19.08 $ 12.21
16.30
12.60
12.05
20.85
23.15
14.95
On March 1, 2020, there were 64 registered holders and approximately 10,878 street name holders of the Company’s
common stock.
We have not paid any dividends on our common stock since incorporation. The declaration and payment of dividends
will be at the sole discretion of the Board of Directors and subject to certain limitations under the General Corporation Law of the
State of Delaware. The timing, amount and form of dividends, if any, will depend, among other things, on the Company’s results
of operations, financial condition, cash requirements, plans for expansion and other factors deemed relevant by the Board of
Directors. The Company intends to retain any future earnings for use in its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
None
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Issuer Purchases of Equity Securities
The following table provides information about purchases by the Company of its shares of common stock during the
three month period ended December 31, 2019:
Total Number
of Shares
Maximum
Period
(1)
per Share Programs (2)
October 1, 2019 through October 31, 2019
November 1, 2019 through November 30, 2019
December 1, 2019 through December 31, 2019
1,513 $ 17.81
—
1,731 $ 19.20
—
—
—
—
the Plans or
Programs (2)
—
—
—
Total
Number of
Average
Shares Purchased Price Paid
Part of Publicly
Purchased as Number of Shares
that May Yet Be
Announced Purchased Under
Plans or
(1) All transactions represent surrender of vested shares in satisfaction of tax withholdings by grantees under the Company’s
Equity Incentive Plans.
(2) The Company has no publicly announced plans or programs to repurchase its shares.
Stock Performance Graph
The Stock Performance Graph below compares the cumulative total return through December 31, 2019, assuming
reinvestment of dividends, by an investor who invested $100.00 on December 31, 2013, in each of (i) our common stock, (ii) the
Russell 2000 index, (iii) the Standard Industrial Code Index 3577 – Computer Peripheral Equipment, NEC and (iv) a comparable
industry (the peer group) index selected by the Company. The peer group for this purpose consists of: American Software, Inc.,
Appian Corporation, Barracuda Networks, Inc., BlackLine, Inc., Callidus Software, Inc., Carbonite, Inc., CPI Card Group, Inc.,
FireEye, Inc., Gigamon, Inc., Imperva, Inc., Mobilelron, Inc., ProofPoint, Inc., PROS Holdings, Inc., Q2 Holdings, Inc., QAD,
Inc., Qualys, Inc., Rapid7, Inc., SecureWorks Corp., Varonis Systems, Inc. The stock price performance shown on the graph
below is not necessarily indicative of future price performance.
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Item 6 - Selected Financial Data (in thousands, except per share data)
2019
Year Ended December 31,
2017*
2016*
2018
2015*
Statements of Operations Data:
Revenue
Operating income
Net income (loss)
Diluted net income (loss) per common share
Balance Sheet Data:
Cash and equivalents
Working capital
Total assets
Long term obligations
Total stockholders equity
Cash dividends declared per common share
$ 254,570 $ 212,280 $ 193,291 $ 192,304 $ 241,443
50,453
42,151
1.06
6,192
(22,399)
(0.56)
15,275
8,789
0.22
9,599
10,514
0.27
24
3,846
0.10
$
84,282 $
76,708 $
78,661 $
49,345 $
137,506
384,570
46,436
264,021
—
119,599
352,826
28,028
252,441
—
161,784
337,622
33,539
237,930
—
139,199
327,270
6,148
253,162
—
78,522
127,675
311,827
11,197
245,156
—
*Prior period amounts are presented under ASC 605 and ASC 985-605.
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except
head count, ratios, time periods and percentages)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to
historical financial information, the following discussion may contain predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties, including those discussed under Item 1A and elsewhere in this Form
10-K. These risks could cause our actual results to differ materially from any future performance suggested below. Please see
“Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” at the
beginning of this Form 10-K.
The Company has excluded discussion of the comparison of the years ended December 31, 2018 and 2017 from this
Form 10-K., which can be found in the annual report on Form 10-K for the period ended December 31, 2018, filed on March 15,
2019.
Overview
We design, develop and market digital solutions for identity, security, and business productivity that protect and
facilitate electronic transactions via mobile and connected devices. We are a global leader in providing anti-fraud and digital
transaction management solutions to financial institutions and other businesses. Our solutions secure access to online accounts,
data, assets, and applications for global enterprises; provide tools for application developers to easily integrate security functions
into their web-based and mobile applications; and facilitate end-to-end financial agreement automation including digital identity
verification, customer due diligence, electronic signature, secure storage, and document management. Our Trusted Identity
platform technologies including Intelligent Adaptive Authentication, Risk Analytics and Secure Agreement Automation, along
with our various multi-factor authentication, mobile app security and transaction signing technologies, enhance the ability of
companies to prevent hacking attacks against online and mobile transactions and to safely transact business with remote
customers.
We offer cloud based and on-premises solutions using both open standards and proprietary technologies. Some of our
proprietary technologies are patented. Our products and services are used for authentication, fraud mitigation, e-signing
transactions and documents, and identity management in Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and
Business-to-Consumer (“B2C”) environments. Our target market is business processes using an electronic
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interface, particularly the internet, where there is risk of account takeover or new account fraud. 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.
Online and mobile application owners and publishers benefit from our expertise in multi-factor authentication, document
signing, transaction signing, application security, and in mitigating hacking attacks. Our convenient and proven security solutions
enable low friction and trusted interactions between businesses, employees, and consumers across a variety of online and mobile
platforms.
Our primary growth strategy is to make digital banking more accessible, secure, easy and valuable. Our key growth
objectives include:
·
Expanding our portfolio of services that enable institutions to mitigate fraud, comply with regulations, easily on-
board customers, and adaptively authenticate transactions;
· Automating and securing digital customer journeys with Secure Agreement Automation to remotely verify
identities, mitigate application fraud and secure account opening and transactions;
·
Increasing sales to existing customers and acquiring new customers;
· Driving increased demand for our products in new applications, new markets, and new territories;
·
·
Expanding our channel partner ecosystem; and
Strategically acquiring companies that expand our technology portfolio or customer base and increase our recurring
revenue.
Our Business Model
We offer our products through a product sales and licensing model or through our services platform, which includes our
cloud-based service offering.
Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems
integrators, and original equipment manufacturers. Our sales force is able to offer customers a choice of an on-site
implementation using our traditional on-premises model or a cloud implementation for some solutions using our services
platform.
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.
Cybersecurity Risks
Our use of technology is increasing and is critical in three primary areas of our business:
1.
Software and information systems that we use to help us run our business more efficiently and cost effectively;
2. The products we have traditionally sold and continue to sell to our customers for integration into their software
applications contain technology that incorporates the use of secret numbers and encryption technology; and
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3. New products and services that we introduced to the market are focused on processing information through our
servers or in the cloud.
We believe that the risks and consequences of potential incidents in each of the above areas are different.
In the case of the information systems we use to help us run our business, we believe that an incident could disrupt our
ability to take orders or deliver product to our customers, but such a delay in these activities would not have a material impact on
our overall results. To minimize this risk, we actively use various forms of security and monitor the use of our systems regularly
to detect potential incidents as soon as possible.
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 incident in 2019, 2018, or 2017 that had a significant impact on our business, it
is possible that we could experience an incident in 2020 or future years, which could result in unanticipated costs.
Currency Fluctuations
In 2019, approximately 76% of our revenue and approximately 72% of our operating expenses were generated/incurred
outside of the U.S. In 2018, approximately 74% of our revenue and approximately 79% of our operating expenses were
generated/incurred outside of the U.S. In 2017, approximately 72% of our revenue and approximately 76% of our operating
expenses were generated/incurred outside of the U.S. While the majority of our revenue is generated outside of the U.S., the
majority of our revenue is billed in U.S. Dollars.
In 2019, approximately 62% of our revenue was denominated in U.S. Dollars, 29% was denominated in Euros and 9%
was denominated in other currencies. In 2018, approximately 61% of our revenue was denominated in U.S. Dollars, 34% was
denominated in Euros and 5% was denominated in other currencies. In 2017, approximately 66% of our revenue was
denominated in U.S. Dollars, 29% was denominated in Euros, and 5% was denominated in other currencies.
In general, to minimize the net impact of currency fluctuations on operating income, we attempt to denominate an
amount of billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency.
We expect that changes in currency rates may also impact our future results if we are unable to match amounts of revenue with
our operating expenses in the same currency. If the amount of our revenue 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.
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The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in
Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. Accordingly, assets and
liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are
translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates
generated a comprehensive gain of $1.5 million in 2019, comprehensive loss of $5.5 million in 2018 and comprehensive income
of $4.0 million in 2017. These amounts are included as a separate component of stockholders’ equity. The functional currency of
our subsidiaries in Singapore, Switzerland, and Canada are measured in U.S. Dollars.
Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations
as other non-operating income/expense. We reported foreign exchange transaction losses of $1.5 million, $0.2 million, and $0.5
million in 2019, 2018, and 2017, respectively.
Components of Operating Results
Revenue
We generate revenue from the sale of our hardware products, software licenses, subscriptions, and services. We believe
comparison of revenues between periods is heavily influenced by the timing of orders and shipments reflecting the transactional
nature of our business.
·
·
Product and license revenue. Product and license revenue includes hardware products and software licenses.
Service and other revenue. Service and other revenue includes software as a service (“SaaS”) solutions,
maintenance and support, and professional services.
Cost of Goods Sold
Our total cost of goods sold consists of cost of product and license revenue and cost of service and other revenue. We
expect our cost of goods sold to increase in absolute dollars as our business grows, although it may fluctuate as a percentage of
total revenue from period to period.
· Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product costs.
· Cost of service and other revenue. Cost of service and other revenue primarily consists of costs related to SaaS
solutions, including personnel and equipment costs, and personnel costs of employees providing professional
services and maintenance and support.
Gross Profit
Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of
factors, including our average selling price, manufacturing costs, the mix of products sold, and the mix of revenue among
products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.
Operating Expenses
Our operating expenses are generally based on anticipated revenue levels and fixed over short periods of time. As a
result, small variations in revenue may cause significant variations in the period-to-period comparisons of operating income or
operating income as a percentage of revenue.
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Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan
expenses generally represent between 55% and 65% of our operating expenses. 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 2019 compared to 2018 resulted in a decrease in operating expenses of approximately $3.1 million in 2019.
The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-
term incentive plans. For full-year 2019, 2018, and 2017, operating expenses included $5.3 million, $6.1 million, and $5.4
million, respectively, related to stock-based and long-term incentive plans. Long-term incentive plan compensation expense
includes both cash and stock-based incentives.
·
·
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses,
trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term
incentive compensation. We expect sales and marketing expenses to increase in absolute dollars as we continue to
invest in sales resources in key focus areas, although our sales and marketing expenses may fluctuate as a
percentage of total revenue.
Research and development. Research and development expenses consist primarily of personnel costs and long-term
incentive compensation. We expect research and development expenses to increase in absolute dollars as we
continue to invest in our future solutions, although our research and development expenses may fluctuate as a
percentage of total revenue.
· General and administrative. General and administrative expenses consist primarily of personnel costs, legal and
other professional fees, and long-term incentive compensation. We expect general and administrative expenses to
increase in absolute dollars although our general and administrative expenses may fluctuate as a percentage of total
revenue.
·
Amortization/impairment of intangible assets. Acquired intangible assets are amortized over their respective
amortization periods.
Interest Income, Net
Interest income consists of income earned on our cash equivalents and short term investments. Our cash equivalents and
short term investments are invested in short-term instruments at current market rates.
Other Income, Net
Other income, net primarily includes exchange gains (losses) on transactions that are denominated in currencies other
than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and
development in those countries and other miscellaneous non-operational expenses.
Income Taxes
Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). All our IP
in our traditional authentication business is owned by two subsidiaries, one in the U.S. and one in Switzerland. These two
subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide
services to our U.S. and Swiss subsidiaries on either a percentage of revenue or on a cost plus basis or both. Under this structure,
the earnings of our service provider subsidiaries are relatively constant. These service provider companies tend to be in
jurisdictions with higher effective tax rates. Fluctuations in earnings tend to flow to the U.S. company and Swiss company. In
2019, earnings flowing to the U.S. company are expected to be taxed at a rate of 21% to 25%, while earnings flowing to the Swiss
company are expected to be taxed at a rate ranging from 10% to 21%. Our Canadian subsidiary currently sells and services global
customers directly, as does a UK subsidiary.
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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 10% to 36%.
The geographic mix of earnings of our foreign subsidiaries primarily depends on the level of pretax income of our
service provider subsidiaries and the benefit realized in Switzerland through the sales of product. The level of pretax income in
our service provider subsidiaries is expected to vary based on:
1.
2.
3.
the staff, programs and services offered on a yearly basis by the various subsidiaries as determined by management,
or
the changes in exchange rates related to the currencies in the service provider subsidiaries, or
the amount of revenues that the service provider subsidiaries generate.
For items 1 and 2 above, there is a direct impact in the opposite direction on earnings of the U.S. and Swiss entities. Any
change from item 3 is generally expected to result in a larger change in income in the U.S. and Swiss entities in the direction of
the change (increased revenues expected to result in increased margins/pretax profits and conversely decreased revenues expected
to result in decreased margins/pretax profits).
In addition to the provision of services, the intercompany agreements transfer the majority of the business risk to our
U.S. and Swiss subsidiaries. As a result, the contracting subsidiaries’ pretax income is reasonably assured while the pretax income
of the U.S. and Swiss subsidiaries varies directly with our overall success in the market.
In 2015, we acquired OneSpan Canada Inc., a foreign company with substantial IP and net operating loss 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, a foreign company with substantial IP and net operating losses. The tax benefit of
the loss carryforwards will be reserved to the extent they exceed deferred tax liabilities as the realization has not been deemed
more likely than not.
Results of Operations
The following tables summarize our consolidated results of operations for the periods presented.
Comparison of the Years Ended December 31, 2019 and 2018
Years ended December 31,
2019
2018
Change
$
%
Revenue
Product and license
Services and other
Total revenue
Revenue by geographic region
EMEA
Americas
APAC
Total revenue
$
$
$
$
184,173
70,397
254,570
147,027
61,577
45,966
254,570
$
$
$
$
32
(in thousands)
152,977
59,303
212,280
103,293
54,979
54,008
212,280
$
$
$
$
31,196
11,094
42,290
43,734
6,598
(8,042)
42,290
20%
19%
20%
42%
12%
-15%
20%
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Total revenue increased $42.3 million or 20%, during the year ended December 31, 2019 compared to the year ended
December 31, 2018. Product and license revenue increased by $31.2 million, or 20% during the year ended December 31, 2019.
The increase in product and license revenue was due to an increase in both hardware and software licenses revenue. Services and
other revenue increased by $11.1 million, or 19% during the year ended December 31, 2019. The increase was due to an increase
in SaaS and maintenance revenue.
Revenue generated in EMEA increased $43.7 million, or 42% during the year ended December 31, 2019. The increase in
revenue was driven by an increase in hardware, software and maintenance revenue.
Revenue generated in the Americas increased $6.6 million, or 12% during the year ended December 31, 2019. The
increase in revenue was driven by higher subscription and maintenance revenue.
Revenue generated in the Asia Pacific region decreased $8.0 million, or 15% during the year ended December 31, 2019.
The decrease in revenue was primarily due to a decrease in software license revenue.
Cost of Goods Sold and Gross Margin
Twelve months ended December 31,
2019
2018
$
% Change
(in thousands)
Cost of goods sold
Product and license
Services and other
Total cost of goods sold
$ 63,393
18,569
$ 81,962
$ 50,706
14,107
$ 64,813
$ 12,687
4,462
$ 17,149
Gross profit
$ 172,608
$ 147,467
25,141
25%
32%
26%
17%
Gross margin
Product and license
Services and other
Total gross margin
66%
74%
68%
67%
76%
69%
The cost of product and license revenue increased $12.7 million, or 25% during the year ended December 31, 2019
compared to the year ended December 31, 2018. The increase in cost of product and license revenue was primarily driven by
higher token volume due to increased hardware sales.
The cost of services and other revenue increased $4.5 million, or 32%, during the year ended December 31, 2019
compared to the year ended December 31, 2018. The increase in cost of services and other revenue was primarily due to increased
services and other revenues and increased SaaS hosting fees.
Gross profit increased $25.1 million, or 17%, during the year ended December 31, 2019 compared to the year ended
December 31, 2018. Gross margin was 68% for the year ended December 31, 2019 and 69% for the year ended December 31,
2018.
The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various
currencies including the Euro. As the U.S. Dollar strengthened against the Euro for the year ended December 31, 2019 compared
to the same period of 2018, revenue from sales made in Euros decreased, as measured in US Dollars, without a corresponding
change in the cost of goods sold. The impact of changes in currency rates are estimated to have decreased revenue by
approximately $7.5 million for the year ended December 31, 2019. Had currency rates in 2019 been equal to rates in 2018, the
gross profit margin would have been approximately 3 percentage points higher for the year ended December 31, 2019.
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Operating Expenses
Operating costs
Sales and marketing
Research and development
General and administrative
Amortization / impairment of intangible assets
$
Total operating costs
$
Twelve months ended December 31,
Change
2019
2018
$
%
(in thousands)
61,503 $
42,463
43,897
9,470
157,333 $
63,805
32,197
41,589
9,852
147,443
$ (2,302)
10,266
2,308
(382)
$ 9,890
-4%
32%
6%
-4%
7%
Sales and Marketing Expenses
Sales and marketing expenses decreased $2.3 million, or 4% during the year ended December 31, 2019 compared to the
year ended December 31, 2018, primarily due to decreased outside marketing spend.
Average full-time sales and marketing employee headcount for year ended December 31, 2019 was 319, compared to
330 for year ended December 31, 2018. Average headcount in 2019 was 3% lower than in 2018.
Research and Development Expenses
Research and development expenses increased $10.3 million, or 32% during the year ended December 31, 2019
compared to the year ended December 31, 2018. The increase in expense was largely driven by an increase in headcount related
to the Dealflo acquisition.
Average full-time research and development employee headcount for year ended December 31, 2019 was 302, compared
to 250 for year ended December 31, 2018. Average headcount in 2019 was 21% higher than in 2018.
General and Administrative Expenses
General and administrative expenses increased $2.3 million, or 6% during the year ended December 31, 2019 compared
to the year ended December 31, 2018. The increase in general and administrative expenses for the year ended December 31, 2019
was driven by higher professional services fees and the prior year reversal of the $0.9 million accrual resulting from a favorable
outcome in our matter with the Office of Foreign Assets Control (“OFAC”).
Average full-time general and administrative employee headcount for year ended December 31, 2019 was 113,
compared to 105 for the year ended December 31, 2018. Average headcount in 2019 was 8% higher than in 2018.
Amortization / Impairment of Intangible Assets
Amortization / impairment of intangible assets for the year ended December 31, 2019 was $9.5 million, compared to
$9.9 million for the year ended December 31, 2018, a decrease of $0.4 million or 4%. The decrease in expense was driven
expense recognized during 2018 for assets that were considered impaired as a result of the rebranding.
Interest Income, net
Interest income, net
Twelve months ended December 31,
2018
2019
(in thousands)
$ 747
% Change
$ 1,265
-41%
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Interest income, net was $0.7 million for the year ended December 31, 2019, compared to $1.3 million for the year
ended December 31, 2018. The decrease in interest income for 2019 compared to 2018 reflects a decrease in the average invested
balance during the period.
Other Income, Net
Other income (expense), net
Twelve months ended December 31,
2018
2019
(in thousands)
$ (527)
% Change
$ 2,264
-123%
Other income (expense) , net primarily includes exchange gains (losses) on transactions that are denominated in
currencies other than our subsidiaries’ functional currencies, and subsidies received from foreign governments in support of our
research and development in those countries.
Other income (expense), net for the year ended December 31, 2019 was $(0.5) million, compared to $2.3 million for the
year ended December 31, 2018. The fluctuation is driven by foreign exchange expense incurred during the year ended December
31, 2019 and lower government subsidies.
Provision (Benefit) for income taxes
Provision (benefit) for income taxes
Twelve months ended December 31,
2019
2018
% Change
(in thousands)
$ 6,706
$ (293)
-2389%
Income tax expense for 2019 was $6.7 million compared to an income tax benefit of $0.3 million in 2018. For the year
ended December 31, 2019 there was a 43% tax expense, compared to an 8% tax benefit in 2018. Taxes increased in 2019
primarily due to the increase in pre-tax income, as well as an accrual related to uncertain tax positions. Taxes in 2018 included a
benefit for an adjustment related to the 2017 deemed repatriation tax as part of Tax Reform.
Our future effective tax rate could be adversely affected by losses generated in jurisdictions where we cannot recognize
a tax benefit, earnings being lower than anticipated in countries that have lower statutory rates and higher than anticipated in
countries that have higher statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws,
regulations, or accounting principles, as well as certain discrete items.
Loss Carryforwards Available
At December 31, 2019, we have gross deferred tax assets of $24.9 million resulting from foreign and state NOL
carryforwards of $16.6 million and other foreign deductible carryforwards of $8.3 million. At December 31, 2019, we have a
valuation allowance of $17.3 million against deferred tax assets related to certain carryforwards. See Note 10 – Income taxes for
more information regarding carryforwards and valuation allowances.
Liquidity and Capital Resources
As of December 31, 2019, we had net cash balances (total cash and cash equivalents) of $84.3 million and short-term
investments of $25.5 million. Short term investments consist of U.S. treasury bills and notes, corporate notes, and high quality
commercial paper with maturities at acquisition of more than three months and less than twelve months. During the year ended
December 31, 2018, we entered into a new lease agreement that required a letter of credit in the amount of $0.8 million to secure
the obligation. The restricted cash related to this letter of credit is recorded in other non-current assets on the Consolidated
Balance Sheet as of December 31, 2019 and December 31, 2018. We had no outstanding debt at December 31, 2019 or
December 31, 2018.
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Our working capital at December 31, 2019 was $137.5 million, an increase of $17.9 million or 15% from $119.6 million
at December 31, 2018. The increase in the combined balance of our cash and short-term investments is primarily driven by higher
net income.
As of December 31, 2019, we held $64.1 million of cash and cash equivalents in subsidiaries outside of the United
States. Of that amount, $63.5 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:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Operating Activities
Twelve months ended December 31,
2019
2018
2017
(in thousands)
$ 18,244
(9,893)
(569)
(208)
$ 1,226
194
(970)
(1,556)
17,627
12,798
(640)
(469)
Cash generated by operating activities is primarily comprised of net income, as adjusted for non-cash items, and changes
in operating assets and liabilities. Non-cash adjustments consist primarily of amortization and impairment of intangible assets,
depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be
affected by increases or decreases in sales and timing of collections. Our primary uses of cash from operating activities have been
for personnel costs. We expect cash outflows from operating activities to be affected by increases in personnel cost as we grow
our business.
For the year ended December 31, 2019, $18.2 million of cash was provided by operating activities. Cash of $1.2 million
and $17.6 million was provided by operating activities for the years ended December 31, 2018 and 2017, respectively.
Investing Activities
The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of
investments, purchases of property and equipment, and activity in connection with acquisitions. We expect to continue to
purchase property and equipment to support the continued growth of our business as well to continue to invest in our
infrastructure and activity in connection with acquisitions.
For the year ended December 31, 2019 cash of $9.9 million was used in investing activities. For the years ended
December 31, 2018 and December 31, 2017, cash of $0.2 million and $12.8 million, respectively, was provided by investing
activities.
Financing Activities
The changes in cash flows from financing activities primarily relate to tax payments for restricted stock issuances.
Cash of $0.6 million, $1.0 million and $0.6 million was used in financing activities during the years ended December 31,
2019, 2018 and 2017, respectively.
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Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Contractual Obligations and Commitments
The following summarizes our contractual obligations and commitments as of December 31, 2019:
Operating lease obligations
Purchase obligations
Taxes payable
Total
1 year
Payments due by period
2-3
years
4-5
years
More than
5 years
$
$
16,547 $
28,547
10,710
55,804 $
3,245 $
21,915
3,752
28,912 $
5,206 $
6,620
2,106
13,932 $
3,092 $
12
4,606
7,710 $
5,004
—
246
5,250
The operating lease obligations above do not include common area maintenance (“CAM”) charges or real estate taxes
under our operating leases, for which the Company is also obligated. These charges are generally not fixed and can fluctuate from
year to year.
Taxes payable primarily represents deemed repatriation tax from 2017. For further information, refer to Note 10 –
Income Taxes.
The Company had $2.9 million, $0.4 million and $0.1 million of unrecognized tax benefits as of December 31, 2019,
December 31, 2018 and December 31, 2017, respectively, which have been set aside in a reserve in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 Income Taxes. We have included $2.7
million in the table above. The remaining amounts are not included in the above table as the timing of payment of such
obligations, if any, is not determinable.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting period.
On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, net
realizable value of inventory and intangible assets. Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. Management believes the following critical accounting
policies affect significant judgments and estimates used in the preparation of its consolidated financial statements.
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Revenue Recognition
Under ASC 605 – For the Year ended December 31, 2017
Prior to January 1, 2018 we recognized revenue in accordance with ASC 985-605, Software – Revenue Recognition,
ASC 985-605-25, Revenue Recognition – Multiple Element Arrangements and Staff Accounting Bulletin 104.
Product and License Revenue includes hardware products and software licenses. Services and Other includes software as
a service (“SaaS”), maintenance and support, and professional services.
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collection of the revenue is probable.
In multiple-element arrangements, some of our products are accounted for under the software provisions of ASC 985-
605 and others under the provisions that relate to the sale of non-software products.
In our typical multiple-element arrangement, the primary deliverables include:
1.
a client component (i.e., an item that is used by the person being authenticated in the form of either a new
standalone hardware device or software that is downloaded onto a device the customer already owns);
2.
host system software that is installed on the customer’s systems (i.e., software on the host system that verifies
the identity of the person being authenticated) or licenses for additional users on the host system software if the host system
software had been installed previously; and
3.
post contract support (PCS) in the form of maintenance on the host system software or support.
Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of
any revenue are incidental to the overall transaction such as initialization of the hardware device, customization of the hardware
device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer’s end-use
customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new
customer.
In multiple-element arrangements that include a hardware client device, we allocate the selling price among all elements,
delivered and undelivered, based on estimated selling price of all of the elements. In multiple-element arrangements that include a
software client device, we continue to account for each element under the current standards of ASC 985-605 related to software.
When software for the client device and host software are delivered elements, we use the Residual Method for determining the
amount of revenue to recognize for token and software licenses if we have vendor-specific objective evidence (“VSOE”) for all of
the undelivered elements. Any discount provided to the customer is applied fully to the delivered elements in such an
arrangement. VSOE for undelivered elements is established using the “bell curve method.” Under this method, we conclude
VSOE exists when a substantial majority of PCS renewals are within a narrow range of pricing. The estimated selling price of
PCS items is based on an established percentage of the user license fee attributable to the specific software. In sales arrangements
where VSOE of fair value has not been established, revenue for all elements is deferred and amortized over the life of the
arrangement.
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For transactions other than multiple-element arrangements, we recognize revenue as follows:
1.
Product and License Revenue: Revenue from the sale of computer security hardware or the license of software
is recorded upon shipment, or upon delivery based on the underlying contract terms. No significant obligations or contingencies
exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized.
2.
SaaS: We generate SaaS revenues from our cloud services offerings. SaaS revenues include fees from
customers for access to the OneSpan Sign (formerly eSignLive) suite of solutions. Our standard customer arrangements generally
do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any
time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of
the contract.
3.
Maintenance and Support Agreements: Maintenance and support agreements generally call for us to provide
software updates and technical support, respectively, to customers. Revenue on maintenance and technical support is deferred and
recognized ratably over the term of the applicable maintenance and support agreement.
4.
Professional Services: We provide professional services to our customers. Revenue from such services is
recognized during the period in which the services are performed.
We recognize revenue from sales to distributors and resellers on the same basis as sales made directly to customers. We
recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collection of the revenue is probable.
For large-volume transactions, we may negotiate a specific price that is based on the number of users of the software
license or quantities of hardware supplied. The per unit prices for large-volume transactions are generally lower than transactions
for smaller quantities and the price differences are commonly referred to as volume-purchase discounts.
All revenue is reported on a net basis, excluding any sales taxes or value added taxes.
Under ASC 606 – For the years ended December 31, 2019 and 2018
On January 1, 2018, we adopted FASB Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts
with Customers”, or “Topic 606” using the modified retrospective method applied to those contracts which were not completed as
of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under FASB ASC Topic
605 “Revenue Recognition ” and FASB ASC Topic 985-605 “ Software-Revenue Recognition ” (“Topic 605”). We recorded a net
increase to opening Accumulated Income of $11.9 million, net of tax, as of January 1, 2018 due to the cumulative impact of
adopting Topic 606, with the impact primarily related to the accounting impacts of our customer contracts that include a term
license to our software, as well as the impact of accounting for costs incurred to obtain our contracts. The net impact to revenue
as a result of applying Topic 606 was an increase of $3.4 million for the year ended December 31, 2018. See Note 4 - Revenue
for further details. We determine revenue recognition through the following steps:
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Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
·
·
· Determination of the transaction price;
·
·
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount
that reflects the consideration we expect to be entitled to in exchange for those products or services, which excludes any sales
incentives and amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on
and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded
from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a
customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
We derive our revenues primarily from Product and License Revenue, which includes hardware products and software
licenses, and Services and Other, which is inclusive of software-as-a-service (which we refer to as “subscription”, or “SaaS”),
maintenance and support, and professional services.
Product Revenue: Revenue from the sale of security hardware is recorded upon shipment, which is the point at which
control of the goods are transferred and the completion of the performance obligations, unless there are specific terms that would
suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard
to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer payments normally correspond
with delivery.
License Revenue: Revenue from the sale of software licensing is recorded upon the latter of when the customer receives
the ability to access the software or when they are legally allowed to use the software. No significant obligations or contingencies
exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers
for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited access to the software,
and term licenses which limit the customer’s access to the software to a specific time period. We offer term licenses ranging from
one to five years in length. Customer payments normally correspond with delivery for perpetual licenses. For term licenses,
payments are either on installment or in advance. In limited circumstances, we integrate third party software solutions into our
software products. We have determined that, consistent with our conclusion under prior revenue recognition rules, generally we
act as the principal with respect to the satisfaction of the related performance obligation and record the corresponding revenue on
a gross basis from these transactions. For transactions in which we do not act as the principal, we would recognize revenue on a
net basis. The fees paid to the third parties are recognized as a component of cost of goods sold when the revenue is recognized.
Subscription Revenue: We generate subscription revenues from our cloud services offerings. Subscription revenues
mostly include fees from customers for access to the OneSpan Sign, TID, and Dealflo solutions. Our standard customer
arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application
service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the
service period of the contract. Customer payments are normally in advance for annual service.
Maintenance, Support and Other: Maintenance and support agreements generally call for us to provide software updates
and technical support, respectively, to customers. Revenue on maintenance and technical support is deferred and recognized
ratably over the term of the maintenance and support agreement. Customer payments are normally in advance for annual service.
Professional Services: We provide professional services to our customers. Revenue from such services is recognized
during the period in which the services are performed. Payments vary, but normally occur on a time and materials basis.
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Significant Judgments
We enter into contracts to deliver a combination of hardware devices, software licenses, subscriptions, maintenance and
support and, in some situations, professional services. The Company evaluates the nature of the goods or services promised in
these arrangements to identify the distinct performance obligations. Determining whether products and services are considered
distinct performance obligations that should be accounted for separately versus together may require significant judgment. When
a hardware client device and licenses to host software are sold in a contract, they are treated as a single performance obligation
because the software license is deemed to be a component of the hardware that is integral to the functionality of the hardware that
is used by our customers for identity authentication. When a software client device is sold in a contract host software, the licenses
are considered a single performance obligation to deliver the authentication solution to the customer. In either of these types of
arrangements, maintenance and support and professional services are typically distinct separate performance obligations from the
hardware or software solutions. Our contracts to deliver subscription services typically do not include multiple performance
obligations; however, in certain limited cases customers may purchase professional services that are distinct performance
obligations.
For contracts that contain multiple performance obligations, the transaction price is allocated to the separate
performance obligations based on their estimated relative standalone selling price. Judgment is required to determine the stand-
alone selling price (“SSP”) of each distinct performance obligation. We determine SSP for maintenance and support and
professional services based on observable inputs; specifically, the range of prices charged to customers to renew annual
maintenance and support contracts and the range of hourly rates we charge our customers in standalone professional services
contracts. In instances where SSP is not directly observable, and when we sell at a highly variable price range, such as for
transactions involving software licenses or subscriptions, we determine the SSP for those performance obligations using the
residual method.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make
payments for goods and services. The allowance is based on a specific review of all significant past-due accounts. If the financial
condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may
be required.
Inventories
We write down inventory where it appears that the carrying cost of the inventory may not be recovered through
subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated
sales volume in the form of sales to new customers as well as sales to previous customers, the expected sales price and the cost of
making the sale when evaluating the valuation of our inventory. If the sales volume or sales price of a specific model declines
significantly, additional write-downs may be required.
Impairment of Long-Lived and Intangible Assets
Definite-lived intangible assets include proprietary technology, customer relationships, and other intangible assets.
Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for
proprietary technology and five to twelve years for customer relationships. Patents are amortized over the life of the patent,
generally 20 years in the U.S. Intangible assets arising from business combinations, such as acquired technology, customer
relationships, and other intangible assets, are originally recorded at fair value. As a result of the Company rebranding, the value
of certain intangible assets were written down during the second quarter of 2018, and impairment charges of $0.5 million were
recorded for the year ended December 31, 2018.
Long-lived assets, including property, plant and equipment, definite-lived intangible assets being amortized and
capitalized software costs, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the long-lived asset group may not be recoverable. An impairment loss shall be recognized if the
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carrying amount of a long-lived asset group exceeds the sum of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by
which the carrying amount of the long-lived asset group exceeds its fair value. Long-lived assets held for sale are reported at the
lower of carrying value or fair value less cost to sell.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business
combination. We assess the impairment of goodwill each November or whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. The Company’s impairment assessment begins with a qualitative assessment to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative
assessment includes comparing the overall financial performance of the reporting units against the planned results used in the last
quantitative goodwill impairment test. Additionally, each reporting unit’s fair value is assessed in light of certain events and
circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity-
and reporting unit specific events. The selection and assessment of qualitative factors used to determine whether it is more likely
than not that the fair value of a reporting unit exceeds the carrying value involves significant judgments and estimates. If it is
determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its
carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the
reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying
value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an
indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s
goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value
of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The residual amount after this
allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under the two-step assessment is
determined using a combination of both income and market-based variation approaches. The inputs and assumptions to valuation
methods used to estimate the fair value of reporting units involves significant judgments.
We operate in one reporting unit and had no goodwill impairment recorded for the years ended December 31, 2019,
2018, and 2017.
Income Taxes
As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The
provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and
impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of
our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, and tax planning opportunities available in each
tax jurisdiction.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences
between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which
those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is
more likely than not that a tax benefit will not be realized. We recognize the effect of a change in tax rates on deferred tax assets
and liabilities and in income in the period that includes the enactment date.
We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax
authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be
realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that do not meet
these recognition and measurement standards. Assumptions, judgments, and the use of estimates are
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required in determining whether the “more likely than not” standard has been meet when developing the provision for income
taxes.
We monitor for changes in tax laws and reflect the impacts of tax law changes in the period of enactment.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASU’s
clarifying certain aspects of ASU 2016-02. The new guidance supersedes the lease guidance under FASB Accounting Standards
Codification (“ASC”) Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a
lessee to recognize on the Balance Sheet a liability to make lease payments and a right-of-use asset representing its right to use
the underlying asset for the lease term for both finance and operating leases. Subsequent guidance issued after February 2016 did
not change the core principle of ASU 2016-02. The Company adopted ASC Topic 842 effective January 1, 2019, using the
modified retrospective method, which did not require the Company to adjust comparative periods. See the Accounting for Leases
section of this note for additional information.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (“ASU 2016-13”). The new guidance provides financial statement users with improved
information about the expected credit losses on trade receivables and other financial instruments held by a reporting entity at each
reporting date. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss
estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. The Company expects to adopt the standard on a modified retrospective basis and is still evaluating the impact of
adopting ASU 2016-13 on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for
Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a
goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the
reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for us beginning
in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after
January 1, 2017. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements
and related disclosures.
Effective January 1, 2018, we adopted ASU 2016-01, Financial Instruments – Overall, which revises the classification
and measurement of investments in equity securities. ASU 2016-01 requires that equity investments, except those accounted for
under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU
2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value
(cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price
changes. Effective January 1, 2018, we elected to record our equity investment that does not have a readily determinable fair
value using the alternative measurement method. Accordingly upon adoption, we recorded a cumulative effect adjustment to
increase opening accumulated income at January 1, 2018 by $0.5 million, net of tax, as required for our equity investments with
no readily determinable fair value to reflect the investment at approximate fair value.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to
Nonemployee share-based payment accounting, which is intended to reduce the cost and complexity of accounting for, and
improve financial reporting for share-based payments to nonemployees for goods and services. The ASU is effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2018. The guidance should be
applied prospectively and early adoption is permitted. We adopted this standard on January 1, 2019 on a prospective basis. The
adoption of this standard did not have a material impact on our consolidated financial statements.
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In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”) which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the
disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective
for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption
permitted for removed or modified disclosures, and delayed adoption of the additional disclosures until their effective date. We
are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General
(Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-
14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14
is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. We are currently evaluating the
effect that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing
Arrangement , which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA)
by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a
hosted CCA service. Under ASU 2018-15, customers will apply the same criteria for capitalizing implementation costs as they
would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and
cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional
quantitative and qualitative disclosures. The new standard is effective for us on January 1, 2020. Early adoption is permitted,
including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the
new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. We
expect to implement the guidance prospectively to all implementation costs incurred after the date of adoption. We are currently
evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, to simplify the
accounting for income taxes. The ASU’s amendments are based on changes that were suggested by stakeholders as part of the
FASB’s effort to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information
provided to financial statement users. The new standard is effective for us on January 1, 2021. We are currently evaluating the
effect that the ASU will have on our consolidated financial statements and related disclosures.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are
adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the issued standards
that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk (In thousands)
Foreign Currency Exchange Risk – In 2019, approximately 76% of our business was conducted outside the United
States, primarily in Europe, Latin America and Asia/Pacific. A significant portion of our business operations is transacted in
foreign currencies. As a result, we have exposure to foreign exchange fluctuations. We are affected by both foreign currency
translation and transaction adjustments. Translation adjustments result from the conversion of the foreign subsidiaries’ balance
sheets and income statements to U.S. Dollars at year-end exchange rates and weighted average exchange rates, respectively.
Translation adjustments resulting from this process are recorded directly into stockholders’ equity. Transaction adjustments result
from currency exchange movements when one of our companies transacts business in a currency that differs from its local
currency. These adjustments are recorded as gains or losses in our statements of operations. Our business transactions are spread
across numerous countries and currencies. This geographic diversity reduces the risk to our operating results. As noted in
Management’s Discussion and Analysis above,
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we attempt to minimize the net impact of currency on operating earnings by denominating an amount of billings in a currency
such that it would provide a hedge against the operating expenses being incurred in that currency.
Interest Rate Risk – We have minimal interest rate risk. We had no debt outstanding at December 31, 2019. Our cash,
cash equivalents, and short term investments are invested in short-term instruments at current market rates. If rates were to
increase or decrease by one percentage point, the Company’s interest income would increase or decrease approximately $0.3
million annually.
Impairment Risk – At December 31, 2019, we had goodwill of $94.6 million and other intangible assets of $36.2 million,
primarily from acquisitions including Dealflo in 2018, eSignLive in 2015, Risk IDS in 2014, Cronto in 2013, and other prior
acquisitions. We assess the recoverability of goodwill at least annually, and the recoverability of other intangible assets whenever
events or circumstances change indicating the carrying value may not be recoverable. As a result of the Company rebranding, the
value of certain intangible assets was written down during the second quarter of 2018, and impairment charges of $0.5 million
were recorded for the year ended December 31, 2018. For the year ended December 31, 2019 and 2017, we did not incur any
impairments.
Item 8 - Financial Statements and Supplementary Data
The information in response to this item is included in our consolidated financial statements, together with the report
thereon of KPMG LLP, appearing on pages F‑1 through F‑42 of this Form 10‑K, and in Item 7 under the heading Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who, respectively,
are our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of December 31, 2019. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure (i) information required to be disclosed by us in our reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and (ii) information required to be disclosed by us in our reports that we
file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive
and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based upon that evaluation, our management have concluded that the Company's disclosure controls and
procedures are effective as of December 31, 2019, to give reasonable assurance that the information required by us in reports filed
under the Exchange Act, is recorded, processed, summarized and reported within the time period specified in the rules and forms
of the SEC, and is accumulated and communicated to management, including our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The management of OneSpan Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial
officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
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procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company; (2) Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the
Company; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Our management, led by our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our
internal control over financial reporting as of December 31, 2019, using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).
Management’s evaluation of our internal control over financial reporting determined that the Company’s internal control over
financial reporting was effective based on those criteria as of December 31, 2019.
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements as of
and for the year ended December 31, 2019 included in this Annual Report on Form 10-K, and has issued its report on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, included on page 48 of this
annual report.
Changes in Internal Control over Financial Reporting
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether
any changes in our internal control over financial reporting that occurred during our last fiscal quarter affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
During the three months ended December 31, 2019, the Company finalized its remediation plan related to the material
weakness that was disclosed in Part II Item 9A Controls and Procedures in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2018. The deficiencies that constituted a material weakness in our internal control over financial reporting as
of December 31, 2018, were as follows:
We did not maintain a sufficient complement of trained, knowledgeable resources (i) to support the adoption of
We did not conduct an effective continuous risk assessment process that was responsive to the adoption of
·
the new revenue accounting standard (ASC Topic 606) and (ii) to execute their responsibilities with respect to internal
control over financial reporting over several financial statement accounts and disclosures.
·
ASC Topic 606 and other changes in the Company’s operating environment.
As a consequence, the Company did not design, implement and operate effective process-level control
·
activities over the majority of the asset, liability, equity, revenue and operating expense accounts reported in the
consolidated financial statements as well as operating cash flows and financial statement disclosures around revenue.
The Company has finalized its remediation plan during the three months ended December 31, 2019, which consisted of
the following measures, and we are satisfied that the material weakness in internal control over financial reporting identified as of
December 31, 2018, has been remediated:
Conducted an expanded training program for our new and existing personnel on internal control over financial
Hired additional accounting personnel with the requisite technical knowledge with respect to revenue
·
recognition and internal control over financial reporting and have used third party resources to ensure we have a
sufficient complement of resources;
·
reporting, accounting for revenue recognition, and other relevant accounting topics;
·
replaced our previous operating and financial systems and is designed to accurately maintain the Company’s financial
records, enhance operational functionality, and provide timely information to the Company’s management team related
to the operation of the business;
Concluded the implementation of a new global enterprise resource planning (“ERP”) system. This ERP system
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Designed, implemented and operated effective process-level controls throughout each of the processes in
Designed and implemented an effective continuous risk assessment processes to monitor changes that could
·
which there were ineffectively designed and implemented controls as of December 31, 2018; and
·
significantly impact our internal control over financial reporting.
Except for the changes in connection with our finalization of the remediation plan discussed above, there have been no
other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that
occurred during the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
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.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OneSpan Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited OneSpan Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated
statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-
year period ended December 31, 2019, and the related notes and financial statement schedule II – Valuation and Qualifying
Accounts (collectively, the consolidated financial statements), and our report dated March 16, 2020 expressed an unqualified
opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting in Item 9A - Controls and Procedures. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
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inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chicago, Illinois
March 16, 2020
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Item 10 - Directors, Executive Officers and Corporate Governance
PART III
All information in response to this Item is incorporated by reference to the “Directors and Executive Officers” and
“Section 16(a) Beneficial Ownership Compliance” sections of OneSpan’s Proxy Statement for the 2019 Annual Meeting of
Stockholders.
Item 11 - Executive Compensation
The information in response to this Item is incorporated by reference to the “Executive Compensation” section of
OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in response to this Item is incorporated by reference to the “Security Ownership of Certain Beneficial
Owners, Directors and Management” section of OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 13 - Certain Relationships and Related Transactions, and Director Independence
The information in response to this Item is incorporated by reference to the “Directors and Executive Officers” and
“Transactions with Related Persons” sections of OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 14 - Principal Accounting Fees and Services
The information in response to this Item is incorporated by reference to the “Report of the Audit Committee” section of
OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 15 - Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Form 10‑K.
PART IV
(1) The following consolidated financial statements and notes thereto, and the related independent auditors’ report,
are included on pages F‑1 through F‑42 of this Form 10‑K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
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Notes to Consolidated Financial Statements
(2) The following consolidated financial statement schedule of the company is included on page F‑43 of this
Form 10‑K:
Schedule II – Valuation and Qualifying Accounts
All other financial statement schedules are omitted because such schedules are not required or the information
required has been presented in the aforementioned consolidated financial statements.
(3) The following exhibits are filed with this Form 10‑K or incorporated by reference as set forth at the end of the
list of exhibits:
Exhibit
Number
2.1
2.2
2.3
2.4
3.1
3.2
4.1
4.2*
4.3*
4.4*
4.5*
Description
Agreement for the Sale and Purchase of the Entire Issued Capital of Cronto Limited dated May 20, 2013.
(Incorporated by reference – Form 8-K filed May 23, 2013.)
Arrangement Agreement, dated October 6, 2015, among VASCO Data Security International, Inc., 685102
N.B. Inc., Silanis Technology Inc., Silanis International Limited, Silanis Canada Inc., and Silanis Agent Inc.
(incorporated by reference – Form 8‑K filed October 13, 2015.)
Stock Purchase Agreement, dated May 30, 2018 between VASCO Digital Automation Limited and shareholders
of Dealflo Limited (incorporated by reference – Form 8-K filed June 1, 2018.)
Share Sale and Purchase Agreement by and among VASCO Data Security International, Inc., A.O.S. Holding
B.V., Filipan Beheer B.V., Mr. Mladen Filipan and Pijnenburg Beheer N.V., dated February 4, 2005
(Incorporated by reference - Form 8‑K filed February 8, 2005.)
Certificate of Incorporation of Registrant, as amended. (incorporated by reference – Form 8-K filed June 1, 2018.)
Bylaws of Registrant, as amended and restated January 3, 2019. (Incorporated by reference - Form 8‑K filed on
January 7, 2019.)
Specimen of Registrant’s Common Stock Certificate. (Incorporated by reference to the Registrant’s Registration
Statement on Form S‑4, as amended (Registration No. 333‑35563), originally filed on September 12, 1997.)
Award Agreement for Restricted Shares under VASCO Data Security International, Inc. 2009 Equity Incentive
Plan made as of October 5, 2015 between VASCO Data Security International, Inc. and Mark Stephen Hoyt.
(Incorporated by reference - Form 8‑K filed October 5, 2015.)
Form of Award Agreement for Restricted Shares under the VASCO Data Security International, Inc. 2009 Equity
Incentive Plan with respect to awards granted January 5, 2017. (Incorporated by reference – Form 10-K filed
March 10, 2017.)
Form of Award Agreement for Performance Shares under VASCO Data Security International, Inc. 2009 Equity
Incentive Plan with respect to awards granted January 5, 2017. (Incorporated by reference – Form 10-K filed
March 10, 2017.)
Form of Award Agreement for Restricted Shares under the VASCO Data Security International, Inc. 2009 Equity
Incentive Plan with respect to awards granted January 4, 2018. (Incorporated by reference – Form 10-K filed
March 8, 2018.)
51
Table of Contents
Exhibit
Number
4.6*
4.7*
4.8*
4.9*
4.10*
Description
Form of Award Agreement for Performance Shares under VASCO Data Security International, Inc. 2009 Equity
Incentive Plan with respect to awards granted January 4, 2018. (Incorporated by reference – Form 10-K filed
March 8, 2018.)
Fiscal Year 2018 Form of Award Agreement for Deferred Stock under the VASCO Data Security
International, Inc. 2009 Equity Incentive Plan. (Incorporated by reference – Form 10-K filed March 8, 2018.)
Form of Award Agreement for Restricted Stock Units under the OneSpan Inc. 2019 Omnibus Incentive Plan.
Form of Award Agreement for Performance-based Restricted Stock Units under the OneSpan Inc. 2019 Omnibus
Incentive Plan.
Form of Award Agreement for Restricted Stock Units for Non-Employee Directors under the OneSpan Inc. 2019
Omnibus Incentive Plan.
4.11*
OneSpan Inc. Cash Award Long-Term Incentive Plan Agreement under the OneSpan Inc. 2019 Omnibus
Incentive Plan.
10.1*
10.2*
VASCO Data Security International, Inc. 2009 Equity Incentive Plan, effective December 19, 2008. (Incorporated
by reference to the Registrant’s Definitive Proxy Statement pursuant to Schedule 14A, filed with the SEC on
April 30, 2009.)
Employment Agreement, effective October 5, 2015, by and between VASCO Data Security International, Inc. and
Mark Stephen Hoyt. (Incorporated by reference – Form 8‑K filed October 5, 2015.)
10.3*
Employment Agreement, dated December 1, 2015, by and between VASCO Data Security International, Inc. and
Scott Clements, and Amendment No. 1 to Employment Agreement effective as of November 15, 2016.
(Incorporated by reference – Form 8‑K filed November 15, 2016)
10.4*
Amendment No. 2 to Employment Agreement effective as of July 28, 2017, by and between VASCO Data
Security International, Inc. (the “Company”), and Scott Clements further amending Employment Agreement
entered into December 1, 2015 and first amended on November 15, 2016. (Incorporated by reference – Form 8‑K
filed July 28, 2017.)
10.5*
OneSpan Inc. 2019 Omnibus Incentive Plan (incorporated by reference from Attachment A to the Registrant’s
Definititve Proxy Statement filed with the Securities and Exchange Commission on April 26, 2019.)
14.1
Amended Corporate Governance Guidelines of the Board of Directors of One Span Inc. and Subsidiaries.
14.2
OneSpan Inc. Code of Conduct and Ethics.
21
23
Subsidiaries of Registrant.
Consent of KPMG LLP.
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 March 16, 2020.
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 March 16, 2020.
32.1
Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated March 16, 2020.
52
Table of Contents
Exhibit
Number
32.2
Description
Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated March 16, 2020.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10‑K.
OneSpan Inc. will furnish any of the above exhibits to stockholders upon written request addressed to the Secretary at
the address given on the cover page of this Form 10‑K. The charge for furnishing copies of the exhibits is $0.25 per page, plus
postage.
53
Table of Contents
OneSpan Inc.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2019, 2018 and
2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Financial Statement Schedule
The following consolidated financial statement schedule is included herein:
Schedule II – Valuation and Qualifying Accounts
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-42
All other financial statement schedules are omitted because they are not applicable or the required information is shown
in the consolidated financial statements or notes thereto.
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OneSpan Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of OneSpan Inc. and subsidiaries (the Company) as of
December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial
statement schedule II –Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 16, 2020 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Changes in Accounting Principles
As discussed in Notes 1 and 4 to the consolidated financial statements, the Company changed its method of accounting for
revenue and certain costs effective January 1, 2018, due to the adoption of Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and as discussed in Notes 1 and 9
to the consolidated financial statements, the Company changed its method of accounting for leases effective January 1, 2019, due
to the adoption of FASB ASC Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1996.
Chicago, Illinois
March 16, 2020
F-2
Table of Contents
OneSpan Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
Current assets
Cash and equivalents
Short term investments
Accounts receivable, net of allowances of $2,524 in 2019 and $1,152 in 2018
Inventories, net
Prepaid expenses
Contract assets
Other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Intangible assets, net of accumulated amortization
Deferred income taxes
Contract assets - non-current
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
Deferred revenue
Accrued wages and payroll taxes
Short-term income taxes payable
Other accrued expenses
Deferred compensation
Total current liabilities
Long-term deferred revenue
Long-term lease liability
Other long-term liabilities
Long-term income taxes payable
Deferred income taxes
Total liabilities
Stockholders' equity
December 31,
2019
2018
$
$
$
$
$
$
84,282
25,511
62,405
19,819
6,198
7,058
6,346
211,619
11,454
10,580
94,612
36,209
7,863
3,565
8,668
384,570
10,835
30,338
15,415
7,711
8,786
1,028
74,113
15,259
11,299
8,297
6,958
4,623
120,549
76,708
22,789
59,631
14,428
4,733
7,962
5,705
191,956
6,250
—
91,841
45,462
5,601
3,316
8,400
352,826
7,202
33,633
13,932
6,905
9,323
1,362
72,357
10,672
—
7,075
7,620
2,661
100,385
Preferred stock: 500 shares authorized, none issued and outstanding at
December 31, 2019 and 2018
Common stock: $.001 par value per share, 75,000 shares authorized; 40,207 and
40,225 issued and outstanding at December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated income
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
—
—
40
96,109
181,167
(13,295)
264,021
384,570
$
40
93,310
172,378
(13,287)
252,441
352,826
$
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
Revenue
Product and license
Services and other
Total revenue
Cost of goods sold
Product and license
Services and other
Total cost of goods sold
Gross profit
Operating costs
Sales and marketing
Research and development
General and administrative
Amortization / impairment of intangible assets
Total operating costs
Operating income
Interest income, net
Other income (expense), net
Income before income taxes
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) per share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
OneSpan Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the years ended December 31,
2018
2019
2017
$
$
184,173
70,397
254,570
$
152,977
59,303
212,280
147,257
46,034
193,291
63,393
18,569
81,962
50,706
14,107
64,813
48,333
10,444
58,777
172,608
147,467
134,514
61,503
42,463
43,897
9,470
157,333
15,275
747
(527)
15,495
6,706
8,789
0.22
0.22
40,050
40,136
$
$
$
63,805
32,197
41,589
9,852
147,443
24
1,265
2,264
3,553
(293)
3,846
0.10
0.10
39,932
40,046
$
$
$
58,994
23,119
37,400
8,809
128,322
6,192
1,431
758
8,381
30,780
(22,399)
(0.56)
(0.56)
39,802
39,802
$
$
$
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
OneSpan Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Other comprehensive income (loss)
Cumulative translation adjustment, net of tax
Pension adjustment, net of tax
Comprehensive income (loss)
For the years ended December 31,
2018
2019
2017
3,846 $ (22,399)
8,789 $
$
1,543
(1,551)
8,781 $
4,029
(5,516)
313
797
(873) $ (18,057)
$
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
OneSpan Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Accumulated
Common Stock
Amount
Additional
Paid-In
Capital
Other
Accumulated Comprehensive Stockholders'
Total
Description
Balance at December 31, 2016
Net income (loss)
Foreign currency translation adjustment, net
of tax
Restricted stock awards
Tax payments for stock issuances
Pension adjustment, net of tax
Balance at December 31, 2017
Cumulative impact of change in accounting
principles, net of tax
Net income (loss)
Foreign currency translation adjustment, net
of tax
Restricted stock awards
Tax payments for stock issuances
Pension adjustment, net of tax
Balance at December 31, 2018
Net income (loss)
Foreign currency translation adjustment, net
of tax
Restricted stock awards
Tax payments for stock issuances
Pension adjustment, net of tax
Balance at December 31, 2019
Shares
40,097
—
—
(11)
—
—
40,086
—
—
—
139
—
—
40,225 $
—
—
—
(18)
—
40,207 $
40
—
—
—
—
—
40
—
—
—
—
—
—
40 $
—
—
—
—
—
40 $
87,481
—
—
3,466
(640)
—
90,307
Income
178,550
(22,399)
Income (Loss)
(12,910)
—
Equity
253,161
(22,399)
—
—
—
—
156,151
4,029
—
—
313
(8,568)
4,029
3,466
(640)
313
237,930
—
—
12,381
3,846
—
—
12,381
3,846
—
3,973
(970)
—
—
—
—
—
93,310 $ 172,378 $
—
8,789
—
3,368
(569)
—
—
—
—
—
96,109 $ 181,167 $
(5,516)
—
—
797
(13,287) $
—
1,543
—
—
(1,551)
(13,295) $
(5,516)
3,973
(970)
797
252,441
8,789
1,543
3,368
(569)
(1,551)
264,021
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
OneSpan Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Twelve months ended December 31,
2018
2019
2017
$
8,789
$
3,846 $
(22,399)
Cash flows from operating activities:
Net income (loss) from operations
Adjustments to reconcile net income (loss) from operations to
net cash provided by (used in) operations:
Depreciation, amortization, and impairment of intangible
assets
Loss (gain) on disposal of assets
Deferred tax expense (benefit)
Stock-based compensation
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories, net
Contract assets
Accounts payable
Income taxes payable
Accrued expenses
Deferred compensation
Deferred revenue
Other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Adjustments to reconcile net income (loss) from operations to
net cash provided by (used in) operations:
Purchase of short term investments
Maturities of short term investments
Purchase of Dealflo, net of cash acquired
Additions to property and equipment
Other
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Tax payments for restricted stock issuances
Net cash used in financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash, cash equivalents, and restricted cash, beginning of period
Cash, cash equivalents, and restricted cash, end of period (1.)
Supplemental cash flow disclosures:
Cash paid for income taxes
$
$
11,545
69
(1,624)
3,368
(3,414)
(5,391)
655
3,628
318
(1,286)
(334)
1,465
456
18,244
(33,839)
31,399
—
(7,453)
—
(9,893)
(569)
(569)
(208)
12,138
(49)
(7,431)
3,973
(11,960)
(2,388)
(3,110)
(1,475)
(2,541)
2,211
(291)
9,538
(1,235)
1,226
(22,820)
80,000
(53,065)
(3,685)
(236)
194
(970)
(970)
(1,556)
7,574
77,555
85,129
$
(1,106)
78,661
77,555 $
10,601
185
13,053
3,466
(8,428)
5,380
—
(1,013)
11,926
2,514
(77)
3,704
(1,285)
17,627
(178,658)
195,000
—
(3,088)
(456)
12,798
(640)
(640)
(469)
29,316
49,345
78,661
7,839
$
10,884 $
6,427
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
(1.) The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to amounts reported
within the consolidated balance sheets as of December 31, 2019 and 2018 and our previously reported consolidated balance
sheet as of December 31, 2017 in our Annual Report on Form 10-K for the year ended December 31, 2018 (in thousands):
December 31, 2019 December 31, 2018 December 31, 2017
Cash and cash equivalents
Restricted cash included in other non-current assets
Cash, cash equivalents and restricted cash
$
$
84,282 $
847
85,129 $
76,708 $
847
77,555 $
78,661
—
78,661
F-8
Table of Contents
OneSpan Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Unless otherwise noted, references in this Annual Report on Form 10‑K to “OneSpan”, “Company”, “we”, “our” and
“us” refer to OneSpan Inc. and its subsidiaries.
Note 1 – Summary of Significant Accounting Policies
Description of the Company
OneSpan Inc. and its wholly owned subsidiaries design, develop, market and support hardware and software security
systems that manage and secure access to information assets. OneSpan has operations in Austria, Australia, Belgium, Brazil,
Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K).,
and the United States (U.S.).
In accordance with ASC 280, Segment Reporting, our operations are reported as a single operating segment. The chief
operating decision maker is the Chief Executive Officer who reviews the statement of operations of the Company on a
consolidated basis, makes decisions and manages the operations of the Company as a single operating segment.
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.
Reclassifications
Certain amounts from prior years have been reclassified to conform to current year presentation.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation and Transactions
The financial position and results of 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. Revenues 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 or (losses) resulting from foreign currency transactions were $1.5 million, $0.2 million, and
$0.5 million in 2019, 2018, and 2017, respectively, and are included in other income (expense), net in the consolidated statements
of operations.
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.
F-9
Table of Contents
Revenue Recognition
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Under ASC 605 – For the Year ended December 31, 2017
Prior to January 1, 2018 we recognized revenue in accordance with ASC 985-605, Software – Revenue Recognition,
ASC 985-605-25, Revenue Recognition – Multiple Element Arrangements and Staff Accounting Bulletin 104.
Product and License Revenue includes hardware products and software licenses. Services and Other includes software as
a service (“SaaS”), maintenance and support, and professional services.
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collection of the revenue is probable.
In multiple-element arrangements, some of our products are accounted for under the software provisions of ASC 985-
605 and others under the provisions that relate to the sale of non-software products.
In our typical multiple-element arrangement, the primary deliverables include:
1.
a client component (i.e., an item that is used by the person being authenticated in the form of either a new
standalone hardware device or software that is downloaded onto a device the customer already owns);
2.
host system software that is installed on the customer’s systems (i.e., software on the host system that verifies
the identity of the person being authenticated) or licenses for additional users on the host system software if the host system
software had been installed previously; and
3.
post contract support (PCS) in the form of maintenance on the host system software or support.
Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of
any revenue are incidental to the overall transaction such as initialization of the hardware device, customization of the hardware
device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer’s end-use
customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new
customer.
In multiple-element arrangements that include a hardware client device, we allocate the selling price among all elements,
delivered and undelivered, based on estimated selling price of all of the elements. In multiple-element arrangements that include a
software client device, we continue to account for each element under the current standards of ASC 985-605 related to software.
When software for the client device and host software are delivered elements, we use the Residual Method for determining the
amount of revenue to recognize for token and software licenses if we have vendor-specific objective evidence (“VSOE”) for all of
the undelivered elements. Any discount provided to the customer is applied fully to the delivered elements in such an
arrangement. VSOE for undelivered elements is established using the “bell curve method.” Under this method, we conclude
VSOE exists when a substantial majority of PCS renewals are within a narrow range of pricing. The estimated selling price of
PCS items is based on an established percentage of the user license fee attributable to the specific software. In sales arrangements
where VSOE of fair value has not been established, revenue for all elements is deferred and amortized over the life of the
arrangement.
For transactions other than multiple-element arrangements, we recognize revenue as follows:
1.
Product and License Revenue: Revenue from the sale of computer security hardware or the license of software
is recorded upon shipment, or upon delivery based on the underlying contract terms. No significant obligations or contingencies
exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized.
F-10
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
2.
SaaS: We generate SaaS revenues from our cloud services offerings. SaaS revenues include fees from
customers for access to the OneSpan Sign (formerly eSignLive) suite of solutions. Our standard customer arrangements generally
do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any
time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of
the contract.
3.
Maintenance and Support Agreements: Maintenance and support agreements generally call for us to provide
software updates and technical support, respectively, to customers. Revenue on maintenance and technical support is deferred and
recognized ratably over the term of the applicable maintenance and support agreement.
4.
Professional Services: We provide professional services to our customers. Revenue from such services is
recognized during the period in which the services are performed.
We recognize revenue from sales to distributors and resellers on the same basis as sales made directly to customers. We
recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collection of the revenue is probable.
For large-volume transactions, we may negotiate a specific price that is based on the number of users of the software
license or quantities of hardware supplied. The per unit prices for large-volume transactions are generally lower than transactions
for smaller quantities and the price differences are commonly referred to as volume-purchase discounts.
All revenue is reported on a net basis, excluding any sales taxes or value added taxes.
Under ASC 606 – For the Years ended December 31, 2019 and December 31, 2018
On January 1, 2018, we adopted FASB Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts
with Customers”, or “Topic 606” using the modified retrospective method applied to those contracts which were not completed as
of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under FASB ASC Topic
605 “Revenue Recognition ” and FASB ASC Topic 985-605 “ Software-Revenue Recognition ” (“Topic 605”). We recorded a net
increase to opening Accumulated Income of $11.9 million, net of tax, as of January 1, 2018 due to the cumulative impact of
adopting Topic 606, with the impact primarily related to the accounting impacts of our customer contracts that include a term
license to our software, as well as the impact of accounting for costs incurred to obtain our contracts. We determine revenue
recognition through the following steps:
·
·
·
·
·
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount
that reflects the consideration we expect to be entitled to in exchange for those products or services, which excludes any sales
incentives and amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on
and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded
from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a
customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
F-11
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
We derive our revenues primarily from Product and License Revenue, which includes hardware products and software
licenses, and Services and Other, which is inclusive of software-as-a-service (which we refer to as “subscription”), maintenance
and support, and professional services.
Product Revenue: Revenue from the sale of security hardware is recorded upon shipment, which is the point at which
control of the goods are transferred and the completion of the performance obligation, unless there are specific terms that would
suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard
to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer payments normally correspond
with delivery.
License Revenue: Revenue from the sale of software licenses is recorded upon the latter of when the customer receives
the ability to access the software or when they are legally allowed to use the software. No significant obligations or contingencies
exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers
for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited access to the software,
and term licenses which limit the customer’s access to the software to a specific time period. The typical term license length is 3
years. Customer payments normally correspond with delivery for perpetual licenses. For term licenses, payments are made either
on installment or upon initial delivery. In limited circumstances, we integrate third party software solutions into our software
products. We have determined that, consistent with our conclusion under prior revenue recognition rules, generally we act as the
principal with respect to the satisfaction of the related performance obligation and record the corresponding revenue on a gross
basis from these transactions. The fees paid to the third parties are recognized as a component of cost of goods sold when the
revenue is recognized.
Subscription Revenue: We generate subscription revenues from our cloud services offerings. Subscription revenues
mostly include fees from customers for access to the OneSpan Sign and Dealflo solutions. Our standard customer arrangements
do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any
time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of
the contract or based on customer usage. Customer payments are normally in advance for an annual subscription period.
Maintenance, Support and Other: Maintenance and support agreements generally call for us to provide software updates
and technical support, respectively, to customers. The annual fee for maintenance and technical support is recognized ratably over
the term of the maintenance and support agreement as this is the period the services are delivered. Customer payments are
normally in advance for annual service.
Professional Services: Professional services revenues are primarily comprised of implementing, automating and
extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized
over time as services are rendered, usually over a period of time that is generally less than a few months. Most projects are
performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee. For time
and material contracts, revenues are generally recognized and invoiced by multiplying the number of hours expended in the
performance of the contract by the contractual hourly rates. For fixed fee contracts, revenues are generally recognized using an
input method based on the ratio of hours expended to total estimated hours to complete the services. Customer payments normally
correspond with delivery.
Significant Judgments
We enter into contracts to deliver a combination of hardware devices, software licenses, subscriptions, maintenance and
support and, in some situations, professional services. The Company evaluates the nature of the goods or services promised in
these arrangements to identify the distinct performance obligations. Determining whether products and services are considered
distinct performance obligations that should be accounted for separately versus together may require significant judgment. When
a hardware client device and licenses to host software are sold in a contract, they are treated as a single performance obligation
because the software license is deemed to be a component of the hardware that is integral to the functionality of the hardware that
is used by our customers for identity
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
authentication. When a software client device is sold in a contract with host software, the licenses are considered a single
performance obligation to deliver the authentication solution to the customer. In either of these types of arrangements,
maintenance and support and professional services are typically distinct separate performance obligations from the hardware and
software solutions. Our contracts to deliver subscription services typically do not include multiple performance obligations;
however, in certain limited cases, customers may purchase professional services that are distinct performance obligations.
For contracts that contain multiple performance obligations, the transaction price is allocated to the separate
performance obligations based on their estimated relative stand-alone selling price (“SSP”). Judgment is required to determine the
SSP of each distinct performance obligation. We determine SSP for maintenance and support and professional services based on
observable inputs; specifically, the range of prices charged to customers to renew annual maintenance and support contracts and
the range of hourly rates we charge our customers in standalone professional services contracts. In instances where SSP is not
directly observable, and when we sell at a highly variable price range, such as for transactions involving software licenses or
subscriptions, we determine the SSP for those performance obligations using the residual method.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are
high-quality short term money market instruments and commercial paper with maturities at acquisition of three months or less.
Cash and cash equivalents are held by a number of U.S. and non-U.S. commercial banks and money market investment funds.
During the year ended December 31, 2018, we entered into a new lease agreement that required a letter of credit in the amount of
$0.8 million to secure the obligation. The restricted cash related to this letter of credit is recorded in other non-current assets on
the Consolidated Balance Sheet as of December 31, 2019 and December 31, 2018.
Short Term Investments
Short term investments consist of U.S. treasury bills and notes, U.S. government agency notes, corporate notes, and high
quality commercial paper with maturities at acquisition of more than three months and less than twelve months. Fair value is
determined using Level 2 inputs as defined by ASC 820, Fair Value Measurements.
Accounts Receivable and Allowance for Doubtful Accounts
The credit worthiness of customers (including distributors and resellers) is reviewed prior to shipment. A reasonable
assurance of collection is a requirement for revenue recognition. Credit limit adjustments for existing customers may result from
the periodic review of outstanding accounts receivable. The Company records trade accounts receivable at invoice values, which
are generally equal to fair value.
We maintain allowances for estimated losses resulting from the inability of our customers to make payments for goods
and services. We analyze accounts receivable balances, customer credit-worthiness, current economic trends and changes in our
customer payment timing when evaluating the adequacy of the allowance for doubtful accounts. The allowance is based on a
specific review of all significant past-due accounts. If the financial condition of our customers deteriorates, resulting in an
impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable
value. Cost is determined using the first-in-first-out (FIFO) method. We write down inventory when it appears that the carrying
cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on
hand, the quantity sold in the past year, the anticipated sales volume in the form of sales to new customers as well as sales to
previous customers, the expected sales price and the cost of making the sale when
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
evaluating the valuation of our inventory. If the sales volume or sales price of a specific model declines significantly, additional
write downs may be required.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets ranging from three to ten years. Leasehold improvements are depreciated over the lesser of the
remaining lease term or 10 years. Additions and improvements are capitalized, while expenditures for maintenance and repairs
are charged to operations as incurred. Gains or losses resulting from sales or retirements are recorded as incurred, at which time
related costs and accumulated depreciation are removed from the accounts.
Equity Method Investment
We apply the equity method of accounting to our investment in Promon AS (Promon), because we exercise significant
influence, but not controlling interest, in the investee. Promon is a technology company headquartered in Norway that specializes
in mobile app security, whose solutions focus largely on Runtime Application Self-Protection (RASP). We exercise significant
influence over Promon as a result of our 17% ownership interest in Promon, our representation on Promon’s Board of Directors,
and the significance to Promon of our business activities with them. We integrate Promon’s RASP technology into our software
solution, which are licensed to our customers. Under the equity method of accounting, the Company’s proportionate share of the
net earnings (losses) of Promon is reported in other income (expense), net in our consolidated Statements of Operations. The
impact of the proportionate share of net earnings (losses) were immaterial for the years ended December 31, 2019, 2018 and 2017
as were the relative size of Promon’s assets and operations in relation to the Company’s. The carrying value of our equity method
investment is reported in other noncurrent assets in the 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 years ended December 31, 2019, 2018 or
2017. The Company recorded $3.5 million in costs of sales in 2019 for license fees owed to Promon for use of their software and
technology. The Company owed Promon $2.2 million as of December 31, 2019, which is included in accounts payable and
accrued liabilities.
Cost of Goods Sold
Included in product and license cost of goods sold are direct product costs. Cost of goods sold related to service revenues
are primarily costs related to subscription solutions, including personnel and equipment costs, and personnel costs of employees
providing professional services and maintenance support.
Research and Development Costs
Costs for research and development, principally the design and development of hardware, and the design and
development of software prior to the determination of technological feasibility, are expensed as incurred on a project-by-project
basis.
Software Development Costs
Software development costs are accounted for in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or
Marketed. Research costs and software development costs, prior to the establishment of technological
feasibility, determined based upon the creation of a working model, are expensed as incurred. Our software
capitalization policy defines technological feasibility as a functioning beta test prototype with confirmed manufacturability (a
working model), within a reasonably predictable range of costs. Additional criteria include receptive customers, or
potential customers, as evidenced by interest expressed in a beta test prototype, at some suggested selling price. Our policy is to
amortize capitalized costs by the greater of (a) the ratio that current gross
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
revenue for a product bears to the total of current and anticipated future gross revenue for that product or (b) the straight-
line method over the remaining estimated economic life of the product, generally two to five years, including the period being
reported on.
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. During 2018, the Company
recognized a $1.2 million government subsidy from a foreign government in support of our advancement authentication
technology, which is included in other income (expense), net on the statement of operations for the year ended December 31,
2018.
Income Taxes
As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The
provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and
impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of
our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, and tax planning opportunities available in each
tax jurisdiction.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences
between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which
those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is
more likely than not that a tax benefit will not be realized. We recognize the effect of a change in tax rates on deferred tax assets
and liabilities and in income in the period that includes the enactment date.
We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax
authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be
realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that do not meet
these recognition and measurement standards. Assumptions, judgments, and the use of estimates are required in determining
whether the “more likely than not” standard has been meet when developing the provision for income taxes.
We monitor for changes in tax laws and reflect the impacts of tax law changes in the period of enactment.
Fair Value of Financial Instruments
At December 31, 2019 and 2018, our financial instruments were cash and equivalents, short term investments, accounts
receivable, accounts payable and accrued liabilities. 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 values of the financial instruments were not materially different from their carrying amounts at December 31, 2019 and
2018. See Note 8 - Fair Value Measurements for additional detail.
Accounting for Leases
All of our leases are operating leases.
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Under ASC 840 – For the Years ended December 31, 2018 and December 31, 2017;
Rent expense on facility leases is charged evenly over the life of the lease, regardless of the timing of actual payments.
We relocated one of our principal executive offices from Oakbrook Terrace, Illinois to Chicago, Illinois during 2018 and
recognized $0.3 million of lease exit costs in general and administrative expense on the statement of operations for the year ended
December 31, 2018.
Under ASC 842 – For the Year ended December 31, 2019:
The Company adopted ASC Topic 842, Leases as of January 1, 2019, using the modified retrospective approach. Prior
period amounts were not adjusted. In addition, the Company elected the following practical expedients:
·
·
The package of practical expedients permitted under the transition guidance within the new standard. The practical
expedient package applies to leases commenced prior to adoption of the new standard and permits companies not to
reassess whether existing or expired contracts contain a lease, the lease classification, and any initial direct costs for
existing leases.
The short-term lease practical expedient, which allowed the Company to exclude short-term leases from recognition
in the consolidated balance sheets;
· We have lease agreements that contain lease and non-lease components. For automobile leases, we account for lease
and non-lease components together. For office leases, we account for these components separately using a relative
standalone selling basis; and
· We apply the portfolio approach to automobile leases with similar characteristics that commence in the same period.
The adoption of this accounting standard resulted in the recording of Operating lease right-of-use (“ROU”) assets and
Operating lease liabilities of $9.2 million and $11.0 million, respectively, as of January 1, 2019. The difference between the asset
and liability is a result of lease incentives, such as tenant improvement allowances, and deferred rent on the balance sheet at
transition. The adoption of ASC Topic 842 had no impact on Retained earnings. See Note 9 – Leases for additional information.
Impairment of Long-Lived and Intangible Assets
Definite-lived intangible assets include proprietary technology, customer relationships, and other intangible assets.
Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for
proprietary technology and five to twelve years for customer relationships. Patents are amortized over the life of the patent,
generally 20 years in the U.S. Intangible assets arising from business combinations, such as acquired technology, customer
relationships, and other intangible assets, are originally recorded at fair value.
Long-lived assets, including property, plant and equipment, operating lease right-of-use assets, definite-lived intangible
assets being amortized and capitalized software costs, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the long-lived asset group may not be recoverable. An impairment loss shall be recognized if
the carrying amount of a long-lived asset group exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount
by which the carrying amount of the long-lived asset group exceeds its fair value. Long-lived assets held for sale are reported at
the lower of carrying value or fair value less cost to sell.
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Goodwill
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business
combination. We assess the impairment of goodwill and intangible assets each November 30 or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The Company’s impairment assessment begins with a
qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
value. The qualitative assessment includes comparing the overall financial performance of the reporting unit against the planned
results used in the last quantitative goodwill impairment test. Additionally, the reporting unit’s fair value is assessed in light of
certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and
other relevant entity- and reporting unit specific events. The selection and assessment of qualitative factors used to determine
whether it is more likely than not that the fair value of the reporting unit is less than the carrying value may involve significant
judgments and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of
the reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the
estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting
unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than
its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of
the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the
reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The
residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under
the two-step assessment is determined using a combination of both income and market-based variation approaches. The inputs
and assumptions to valuation methods used to estimate the fair value of the reporting unit involves significant judgments.
We operate in one reporting unit and had no goodwill impairment recorded for the years ended December 31, 2019,
2018, and 2017.
Stock-Based Compensation
We have stock-based employee compensation plans, described in Note 11 – Long-Term Compensation Plan and Stock
Compensation. ASC 718, Stock Compensation requires us to estimate the fair value of restricted stock granted to employees,
directors and others to record compensation expense equal to the estimated fair value. Compensation expense is recorded on a
straight-line basis over the vesting period for time-based awards and performance awards with cliff vesting provisions and on a
graded basis for performance awards with graded vesting provisions. Forfeitures are recorded as incurred.
Retirement Benefits
We record annual expenses relating to defined benefit pension plans based on calculations which include various
actuarial assumptions, including discount rates, assumed asset rates of return, compensation increases, and turnover rates. We
review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends.
The effects of gains, losses, and prior service costs and credits are amortized over the average service life. The funded status, or
projected benefit obligation less plan assets, for each plan, is reflected in our consolidated financial statements using a December
31 measurement date.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASU’s
clarifying certain aspects of ASU 2016-02. The new guidance supersedes the lease guidance under FASB Accounting Standards
Codification (“ASC”) Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a
lessee to recognize on the Balance Sheet a liability to make lease payments and a right-of-use asset representing its right to use
the underlying asset for the lease term for both finance and operating leases.
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02. The Company adopted ASC
Topic 842 effective January 1, 2019, using the modified retrospective method, which did not require the Company to adjust
comparative periods. See the Accounting for Leases section of this note for additional information.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (“ASU 2016-13”). The new guidance provides financial statement users with improved
information about the expected credit losses on trade receivables and other financial instruments held by a reporting entity at each
reporting date. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss
estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. The Company expects to adopt the standard on a modified retrospective basis and is still evaluating the impact of
adopting ASU 2016-13 on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for
Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a
goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the
reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for us beginning
in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after
January 1, 2017. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements
and related disclosures.
Effective January 1, 2018, we adopted ASU 2016-01, Financial Instruments – Overall, which revises the classification
and measurement of investments in equity securities. ASU 2016-01 requires that equity investments, except those accounted for
under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU
2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value
(cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes.
Effective January 1, 2018, we elected to record our equity investment that does not have a readily determinable fair value using
the alternative measurement method. Accordingly upon adoption, we recorded a cumulative effect adjustment to increase opening
accumulated income at January 1, 2018 by $0.5 million, net of tax, as required for our equity investments with no readily
determinable fair value to reflect the investment at approximate fair value.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to
Nonemployee share-based payment accounting, which is intended to reduce the cost and complexity of accounting for, and
improve financial reporting for share-based payments to nonemployees for goods and services. The ASU is effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2018. The guidance should be
applied prospectively and early adoption is permitted. We adopted this standard on January 1, 2019 on a prospective basis. The
adoption of this standard did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”) which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the
disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective
for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption
permitted for removed or modified disclosures, and delayed adoption of the additional disclosures until their effective date. We
are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General
(Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-
14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14
is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. We
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing
Arrangement , which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA)
by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a
hosted CCA service. Under ASU 2018-15, customers will apply the same criteria for capitalizing implementation costs as they
would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and
cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional
quantitative and qualitative disclosures. The new standard is effective for us on January 1, 2020. Early adoption is permitted,
including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the
new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. We
expect to implement the guidance prospectively to all implementation costs incurred after the date of adoption. We are currently
evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, to simplify the
accounting for income taxes. The ASU’s amendments are based on changes that were suggested by stakeholders as part of the
FASB’s effort to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information
provided to financial statement users. The new standard is effective for us on January 1, 2021. We are currently evaluating the
effect that the ASU will have on our consolidated financial statements and related disclosures.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are
adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the issued standards
that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Note 2 – 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:
December 31,
2019
2018
Component parts
Work-in-process and finished goods
Total
Note 3 – Business Acquisitions
$
(in thousands)
7,429 $
12,390
5,445
8,983
$ 19,819 $ 14,428
On May 30, 2018, OneSpan acquired the remaining interest in Dealflo Limited and its subsidiaries (“Dealflo”),
increasing our ownership percentage to 100% from 1%. Dealflo, formerly a privately-held company based in the United
Kingdom, provides identity verification and end-to-end financial agreement solutions. Upon acquisition, Dealflo became a
wholly-owned subsidiary of OneSpan.
Dealflo’s total purchase price consideration was $53.9 million, net of $5.7 million of cash acquired. The total purchase
price consideration includes $53.1 million of cash paid to acquire the remaining 99% interest in Dealflo, as well as $0.8 million of
fair value of our previous 1% ownership interest. As described in Note 1 – Summary of
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Significant Accounting Policies, upon the adoption of ASU 2016-01 on January 1, 2018 the book value of this ownership interest
was increased by $0.5 million to record the equity investment at $0.8 million within our consolidated financial statements.
This acquisition is accounted for as a business combination using the acquisition method of accounting, which requires
the net assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date.
During the year ended December 31, 2019, we recorded certain measurement period adjustments to amounts previously
reported, comprised primarily of a $1.8 million increase to the deferred tax liability and a $0.6 million increase to other current
assets. The effect of the measurement period adjustments recorded before the measurement period ended during the year ended
December 31, 2019 have been determined as if such adjustments had been accounted for at the acquisition date. The net effect of
the measurement period adjustments increased goodwill by $1.1 million. The measurement period adjustments did not result in
material income statement effects for the year ended December 31, 2019. The measurement period closed on May 30, 2019.
The following table summarizes our final allocation of the purchase price consideration based on the estimated fair
values of the assets acquired and liabilities assumed at the date of acquisition (net of cash acquired):
Acquired tangible assets
Acquired identifiable intangible assets
Liabilities assumed
Goodwill
Total purchase price consideration
Total
(in thousands)
2,700
17,900
(6,041)
39,295
53,854
$
$
The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic
value assigned to Dealflo, including expected benefits from synergies resulting from the acquisition, as well as the knowledge and
experience of the workforce in place. In accordance with applicable accounting standards, goodwill is not amortized and will be
tested for impairment at least annually, or more frequently, if certain indicators are present. Goodwill and intangible assets related
to this acquisition are not deductible for foreign tax purposes.
Based on the final results of the acquisition valuation, $17.9 million of the purchase price consideration has been
allocated to identifiable intangible assets. The following table summarizes the major classes of intangible assets, as well as the
estimated weighted-average amortization periods:
Identifiable Intangible Assets
Customer relationships
Technology
Trademarks
Estimated Fair Value
(in thousands)
Weighted Average
Amortization Period
(Years)
$
$
11,800
5,900
200
17,900
7
4
3
The results of operations of Dealflo subsequent to the acquisition date have been included in the consolidated statement
of operations of the years ended December 31, 2019 and December 31, 2018. The acquisition related costs directly attributable to
the business combination of $1.1 million, including professional fees, and other direct expenses, were expensed as incurred and
included in general and administrative expense in the consolidated statement of operations for the year ended December 31, 2018.
F-20
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Unaudited Pro Forma Financial Information
The following presents the unaudited pro forma combined results of operations of the Company with Dealflo for the
years ended December 31, 2018 and 2017, assuming Dealflo was acquired at the beginning of 2017, and after giving effect to
certain pro forma adjustments. Pro forma adjustments for the year ended December 31, 2018 reflect estimated amortization
expense for intangible assets purchased of $1.3 million, the elimination of $0.2 million of revenue related to intercompany
transactions, and the elimination of $1.1 million of non-recurring acquisition-related costs. Pro forma adjustments for the year
ended December 31, 2017 reflect estimated amortization expense for intangible assets purchased of $3.2 million, the addition of
$1.1 million of non-recurring acquisition-related costs, the elimination of $0.5 million of revenue related to intercompany
transactions, and a $0.6 million reduction of revenue to reflect the estimated fair value adjustment of acquired deferred revenue.
These unaudited pro forma results are not necessarily indicative of the actual consolidated results of operations had the
acquisition actually occurred on January 1, 2017 or of future results of operations of the consolidated entities (in thousands except
per share data):
Revenue
Net loss
Basic net loss per share
Diluted net loss per share
Shares used in computing basic and diluted net loss per share
Note 4 – Revenue
$
2018
2017
(in thousands)
219,847 $
(6,164)
(0.15)
(0.15)
39,932
198,717
(32,990)
(0.83)
(0.83)
39,802
We recognize revenue in accordance with ASC 606 “Revenue from Contracts with Customers” (“Topic 606”), as
described in Note 1 – Summary of Significant Accounting Policies. As described in Note 1, the Company adopted Topic 606 on
January 1, 2018, using the modified retrospective method. The cumulative effect of initially applying Topic 606 was an
adjustment to the opening balance of Accumulated Income of $11.9 million, net of tax, as of January 1, 2018.
Significant Impacts of Adoption
Term Licenses
For revenues generated from arrangements that included term licenses to our software, the Company previously
recognized revenue ratably over the term of the contract when vendor-specific objective evidence (“ VSOE”) did not exist for all
undelivered elements. Under Topic 606, these licenses are considered licenses of functional intellectual property, which requires
recognition at the point in time all of the revenue recognition criteria per Topic 606 are met, which for the Company is generally
when the customer is provided access to the software and the license term has commenced. No significant obligations or
contingencies exist with regard to delivery, customer acceptance or rights of returns at the time revenue is recognized. We have
established a stand-alone selling price (SSP) for all other performance obligations in the contract. Accordingly, the Company now
recognizes revenue from these licenses, based on the residual approach due to highly variable pricing, at the beginning of the
license period and recognizes the transaction price allocated to the other performance obligations in the contract (typically
maintenance and support) over the period in which those performance obligations are satisfied. This is consistent with the method
of recognizing revenue for perpetual licenses of intellectual property. Fees paid to third party software providers in term license
arrangements are recognized when the term license revenues are recognized. For large-volume transactions, we may negotiate a
specific price that is based on the number of users of the software license or quantities of hardware supplied. The per unit prices
for large-volume transactions are generally lower than transactions for smaller quantities and the price differences are commonly
referred to as volume-purchase discounts.
F-21
Table of Contents
Sales Commissions
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. For
commissions earned by sales personnel, the Company previously expensed these amounts when they were earned by the
employees. As a result of adopting Topic 606, the Company now capitalizes commissions associated with new customers and
amortizes the costs over a period in which the Company is expected to benefit, which can be up to seven years. The amortization
is reflected in Sales and Marketing in the statement of operations. For certain contracts, any commission that is subject to a
service period, such as continued employment, is expensed as incurred within Sales and Marketing in the statement of operations.
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 and services (in thousands)
Hardware products
Software licenses
Subscription
Professional services
Maintenance, support and other
Total Revenue
Twelve months ended December 31,
2019
2018
2017*
$
$
127,005 $
57,168
22,250
5,759
42,388
254,570 $
105,560 $
47,417
15,426
5,743
38,134
212,280 $
105,867
41,390
10,296
4,891
30,847
193,291
Revenue by location of customer for the years ended December 31, 2019, 2018, and 2017 (in thousands)
Total Revenue:
2019
2018
2017*
Percent of Total:
2019
2018
2017*
EMEA Americas
APAC
Total
$ 147,027
$ 103,293
92,859
$
$
$
$
61,577
54,979
52,981
$
$
$
45,966
54,008
47,451
$ 254,570
$ 212,280
$ 193,291
58 %
49 %
48 %
24 %
26 %
27 %
18 %
25 %
25 %
100 %
100 %
100 %
*Amounts for the year ended December 31, 2017 are presented under ASC 605 and ASC 985-605.
Timing of revenue recognition (in thousands)
Products and Licenses transferred at a point in time
Services transferred over time
Total Revenue
Year ended December 31,
2019
2018
184,173
70,397
254,570
$
$
152,977
59,303
212,280
$
$
F-22
Table of Contents
Contract balances
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
The following table provides information about receivables, contract assets and contract liabilities from contracts with
customers.
Receivables, inclusive of trade and unbilled
Contract Assets (current and non-current)
Contract Liabilities (Deferred Revenue current and non-current)
$
$
$
December 31,
2019
2018
62,405 $
10,623 $
45,597 $
59,631
11,278
44,305
Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings. These
contract assets are transferred to receivables when the right to billing occurs, which is normally over 3-5 years. The contract
liabilities primarily relate to the advance consideration received from customers for subscription and maintenance
services. Revenue is recognized for these services over time.
As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing
component when we expect, at contract inception, that the period between our transfer of a promised product or service to a
customer and when the customer pays for that product or service will be one year or less. We do not typically include extended
payment terms in our contracts with customers.
Revenue recognized during the twelve months ended December 31, 2019 included $34.7 million that was included on
the December 31, 2018 balance sheet in contract liabilities. Deferred revenue increased in the same period due to timing of annual
renewals.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance
obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.
in thousands
Future revenue related to current
unsatisfied performance obligations
2020
2021
2022
Beyond 2022
Total
$
11,295 $
7,682 $
5,951 $
10,986 $
35,914
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. Under
Topic 606, 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. We determined the period of
benefit by taking into consideration our customer contracts, our technology and other factors, including customer
attrition. Commissions are earned upon invoicing to the customer. For contracts with multiple year payment terms, as the
commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred.
Commissions and amortization expense are included in Sales and Marketing expenses on the consolidated statements of
operations.
F-23
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
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.
The following tables provide information related to the capitalized costs and amortization recognized in the period:
in thousands
Capitalized costs to obtain contracts, current
Capitalized costs to obtain contracts, non-current
in thousands
Amortization of capitalized costs to obtain contracts
Impairments of capitalized costs to obtain contracts
Topic 606 Adoption impacts on Financial Statements
December 31, 2019 December 31, 2018
413
676 $
$
2,150
3,222 $
$
Year ended December 31,
2019
2018
$
$
495 $
- $
283
-
The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements
as of December 31, 2018 and for the year ended December 31, 2018.
Balance Sheet (in thousands)
ASSETS
Current assets
Accounts receivable, net of allowance
Contract asset
Other current assets
Total current assets
Deferred income taxes
Contract asset - non-current
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Deferred revenue
Short-term income taxes payable
Other accrued expenses
Total current liabilities
Deferred revenue - non-current
Deferred income taxes
Total liabilities
Stockholders' equity
Accumulated income
Total stockholders' equity
Total liabilities and stockholders' equity
December 31, 2018
As Reported
Adjustments
Balances without
the adoption of
Topic 606
$
$
$
$
59,631
7,962
5,705
191,956
5,601
3,316
8,400
352,826
33,633
6,905
9,323
72,357
10,672
2,661
100,385
172,378
252,441
352,826
$
$
$
$
(331) $
(7,962)
(703)
(8,996)
587
(3,316)
(289)
(12,014) $
3,019 $
(1,209)
(116)
1,694
3,391
(424)
4,661
(16,675)
(16,675)
(12,014) $
59,300
—
5,002
182,960
6,188
—
8,111
340,812
36,652
5,696
9,207
74,051
14,063
2,237
105,046
155,703
235,766
340,812
F-24
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Statement of Operations (in thousands)
Revenue
Product and license
Services and other
Total revenue
Cost of goods sold
Product and license
Services and other
Total Cost of goods sold
Gross profit
Operating Costs
Sales and marketing
Total operating costs
Operating income (loss)
Income (loss) before taxes
Provision (benefit) for income taxes
Net income (loss)
Basic EPS
Diluted EPS
Year ended December 31, 2018
As Reported
Adjustments
Balances without the
adoption of Topic 606
$
152,977 $
59,303
212,280
2,365 $
(5,772)
(3,407)
50,706
14,107
64,813
605
—
605
155,342
53,531
208,873
51,311
14,107
65,418
147,467
(4,012)
143,455
63,805
147,443
1,108
1,108
64,913
148,551
24
(5,120)
3,553
(5,120)
(293)
(365)
$
$
$
3,846 $
(4,755) $
0.10
0.10
$
$
(5,096)
(1,567)
(658)
(909)
(0.02)
(0.02)
The adoption of Topic 606 did not impact total operating, investing or financing cash flows in the statement of cash
flows.
Note 5 – Goodwill
Goodwill activity for the two years ended December 31, 2019 consisted of the following:
in thousands
Net balance at December 31, 2017
Additions
Net foreign currency translation
Net balance at December 31, 2018
Adjustment to provisional estimate of acquisition date fair values
Net foreign currency translation
Net balance at December 31, 2019
F-25
$
$
$
56,332
38,167
(2,658)
91,841
1,128
1,643
94,612
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Certain portions of goodwill are denominated in local currencies and are subject to currency fluctuations. No impairment
of goodwill was recorded during the years ended December 31, 2019, 2018, or 2017.
Note 6 – Intangible Assets
Intangible asset activity for the two years ended December 31, 2019 is detailed in the following table;
in thousands
Net balance at December 31, 2017
$
Additions-Acquisition
Additions-Other
Impairment
Net foreign currency translation
Amortization expense
Net balance at December 31, 2018
Net foreign currency translation
Amortization expense
Net balance at December 31, 2019
$
Acquired
Technology
Customer Relationships
22,544 $
11,800
—
—
(486)
(3,450)
30,408
118
(3,642)
26,884 $
6,946 $
5,900
109
—
(239)
(3,921)
8,795
120
(3,461)
5,454 $
Other
Total Intangible Assets
37,888
17,900
259
(478)
(733)
(9,374)
45,462
217
(9,470)
36,209
8,398 $
200
150
(478)
(8)
(2,003)
6,259
(21)
(2,367)
3,871 $
December 31, 2019 balance at cost
$
Accumulated amortization
Net balance at December 31, 2019
$
42,647 $
(37,193)
5,454 $
39,505 $
(12,621)
26,884 $
13,710 $
(9,839)
3,871 $
95,862
(59,653)
36,209
Certain intangible assets are denominated in local currencies and are subject to currency fluctuations. Additions -
Acquisitions refers to intangible assets acquired in the acquisition of Dealflo described in Note 3 – Business Acquisitions and
include capitalized technology, trademarks, and customer relationships.
As a result of the Company rebranding, the values of certain intangible assets were written down during the second
quarter of 2018, and impairment charges of $0.5 million were recorded for the twelve months ended December 31, 2018.
Expected amortization of the intangible assets for the years ended:
December 31, 2020
December 31, 2021
December 31, 2022
December 31, 2023
December 31, 2024
Thereafter
Subject to amortization
Trademarks
Total intangible assets
$
$
9,460
5,794
4,663
4,054
4,014
7,603
35,588
621
36,209
Note 7 – Property and Equipment
The major classes of property and equipment are as follows:
in thousands
Office equipment and software
Leasehold improvements
Furniture and fixtures
December 31, 2019 December 31, 2018
11,059
4,784
2,829
14,595
9,417
3,717
F-26
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Total
Accumulated depreciation
Property and equipment, net
27,729
(16,275)
11,454 $
18,672
(12,422)
6,250
$
Depreciation expense was $2.1 million, $2.3 million, and $1.8 million for the years ended December 31, 2019, 2018, and
2017, 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 fair value hierarchy consists of the following three levels:
·
·
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or
similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and
market-corroborated inputs which are derived primarily from or corroborated by observable market data.
Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are
unobservable.
·
The following tables summarize assets that are measured at fair value on a recurring basis as of December 31, 2019 and
December 31, 2018:
in thousands
Assets:
U.S. Treasury Notes
Corporate Notes / Bonds
Commercial Paper
U.S. Treasury Bills
U.S. Government Agencies
in thousands
Assets:
U.S. Treasury Notes
Corporate Notes / Bonds
Commercial Paper
U.S. Treasury Bills
Fair Value Measurement at Reporting Date Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
December 31, 2019
9,225
8,169
3,482
2,385
2,249
-
-
-
-
-
9,225
8,169
3,482
2,385
2,249
-
-
-
-
-
Fair Value Measurement at Reporting Date Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
December 31, 2018
8,920
7,934
2,952
2,983
-
-
-
-
8,920
7,934
2,952
2,983
-
-
-
-
F-27
Table of Contents
Note 9 – Leases
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
As mentioned in Note 1 – Summary of Significant Accounting Policies, the Company adopted ASC Topic 842, Leases
on January 1, 2019, using the modified retrospective approach. The adoption of this accounting standard resulted in the recording
of operating lease right-of-use (“ROU”) assets of $9.2 million in Operating lease right-of use assets, and operating lease liabilities
of $2.5 million and $8.5 million in Other accrued expenses and Long-term lease liabilities, respectively, as of January 1, 2019, to
capture the cumulative effect of the standard. The difference between the asset and liability is a result of lease incentives, such as
tenant improvement allowances, and deferred rent on the balance sheet at transition.
The Company leases certain real estate and automobiles. Leases with an initial term of 12 months or less (“short-term
leases”) are not recorded on the consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-
line basis over the lease term. The Company determines if an arrangement is a lease at inception. All of our leases are operating
leases.
Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of
lease payments over the lease term at commencement date. Because most of the Company’s leases do not provide an implicit rate
of return, the Company uses its imputed collateralized rate based on the information available at the commencement date in
determining the present value of lease payments. Operating lease ROU assets are comprised of the lease liability plus prepaid
rents and are reduced by lease incentives or deferred rents. The Company has lease agreements with non-lease components which
are not bifurcated.
Some of our leases include one or more options to renew, with renewal terms that can extend the lease from one to five
years. The exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options
to purchase the leased property at fair value. For purposes of calculating operating lease liabilities, lease terms are deemed not to
include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. Certain of
the Company’s lease agreements include payments adjusted periodically for inflation based on the consumer price index. The
Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease cost details for the year ended December 31, 2019 are as follows:
Building rent
Automobile rentals
Total net operating lease costs
Year ended December 31,
2019
(in thousands)
$
$
3,397
1,531
4,928
Short term lease costs and variable lease costs recognized during the year ended December 31, 2019 are
immaterial.
Supplemental consolidated balance sheet information related to our operating leases is as follows:
in thousands
Leases
Assets
Operating lease assets
Liabilities
Current
F-28
December 31, 2019
$
10,580
10,580
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Operating lease liabilities
Noncurrent
Operating lease liabilities
Total lease liabilities
$
$
2,636
11,299
13,935
The weighted average remaining lease term for our operating leases is 6.7 years. The weighted-average discount rate for
our operating leases is 5%.
Supplemental consolidated cash flow information related to leases is as follows:
Supplemental cash flow and other information related to leases was as follows:
Operating cash payments from operating leases
ROU assets obtained in exchange for new operating lease liabilities
Maturities of our operating leases are as follows:
2020
2021
2022
2023
2024
Later years
Less imputed interest
Total lease liabilities
Year ended
December 31, 2019
(in $ thousands)
3,731
4,924
As of December 31, 2019
(in $ thousands)
3,245
2,784
2,422
1,909
1,183
5,004
(2,612)
13,935
$
$
$
$
Disclosures related to periods prior to adoption of ASU 2016-02
Operating lease rent expense was $4.9 million for the year ended December 31, 2018 and $3.8 million for the year ended
December 31, 2017. Future minimum lease are as follows:
2019
2020
2021
2022
2023
Later years
Minimum lease commitments
As of December 31, 2018
(in $ thousands)
3,817
3,081
2,671
2,244
1,941
8,870
22,624
$
$
During the year ended December 31, 2018, we entered into a new lease agreement of which a portion commenced
during the three months ended September 30, 2019, and remainder will commence during the three months ended March 31,
2020. We estimated as of January 1, 2019 and December 31, 2019 that the undiscounted future minimum obligations related to
the portion of the lease not yet commenced to be approximately $7.4 million and $2.0
F-29
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
million, respectively. The $7.4 million obligation is disclosed as part of our future minimum lease obligations table above.
Note 10 – Income Taxes
Tax Reform enacted on December 22, 2017 introduced significant changes to U.S. income tax law. Effective in 2018,
Tax Reform reduces the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings
which are referred to as the global intangible low-taxed income tax (“GILTI”). In addition, in 2017 we were subject to a one-time
transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
Due to the timing of the enactment and the complexity involved in applying the provisions of Tax Reform, we made
reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we
collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the IRS,
and other standard-setting bodies, we made adjustments, over the course of the year, to the provisional amounts, including
refinements to deferred taxes. The accounting for the tax effects of Tax Reform was completed as of December 31, 2018.
Tax reform required us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to
U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining
earnings. We recorded a provisional amount for our one-time transitional tax liability and income tax expense of $18.2 million as
of December 31, 2017. During 2018 we recorded a measurement period adjustment of $2.5 million, as a reduction to the
provisional estimates recorded at the end of 2017 due to the release of regulations on the one-time transition tax which reduced
long term taxes payable. After the utilization of existing tax credits, we expect to pay U.S. federal taxes of approximately $10.1
million over eight years related to the repatriation tax.
Due to the change in the statutory tax rate from Tax Reform, we remeasured our deferred taxes as of December 31, 2017
to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a
deferred tax expense of $2.3 million to reflect the reduced U.S. tax rate and other effects of Tax Reform as of December 31, 2017.
During 2018, we recorded an adjustment of $0.5 million as a reduction of the provisional estimate which reduced current taxes
payable.
As a result of Tax Reform, earnings of all foreign subsidiaries have been designated as available for distribution.
Previously, earnings of certain foreign subsidiaries were deemed permanently reinvested. During the fourth quarter of 2017, we
provisionally provided deferred income tax expense of $7.3 million for foreign taxes on distributions from foreign subsidiaries
previously designated as permanently reinvested. No adjustment was made during 2018.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess
of an allowable return on the foreign subsidiary’s tangible assets. The Company could be subjected to incremental U.S. tax on
GILTI income beginning in 2018. FASB Topic 740 allows the company to treat GILTI as either a deferred tax asset or liability or
to account for the impacts in the period in which it is incurred. The Company has elected to account for GILTI tax in the period in
which it is incurred.
Income before income taxes was generated in the following jurisdictions:
For the year ended December 31,
2018
2019
2017
U.S.
Non-U.S.
Total
$
$
3,223 $
12,272
15,495 $
(4,347) $
7,900
3,553 $
(1,877)
10,258
8,381
F-30
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
For the years ended December 31, 2019, 2018, and 2017, domestic income excludes intercompany dividend income of
$6.3 million, $133.3 million, and $0, respectively. The provision (benefit) for income taxes consists of the following:
For the year ended December 31,
2018
2019
2017
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total
$
$
433 $
107
7,790
8,330
(3,792) $
97
10,833
7,138
14,299
141
3,287
17,727
(970)
24
(678)
(1,624)
6,706 $
(333)
15
(7,113)
(7,431)
(293) $
6,043
(200)
7,210
13,053
30,780
Our U.S. federal statutory rate for 2019 and 2018 was 21%. For 2017, our U.S. statutory rate was 35%. The differences
between the income tax provisions computed using the statutory federal income tax rate and the provisions for income taxes
reported in the consolidated statements of operations are as follows:
For the year ended December 31,
2018
2019
2017
Expected tax at statutory rate
Foreign taxes at other rates
US tax on foreign earnings, net of foreign tax credits
Valuation allowances on NOL carryforwards
US tax reform - deemed repatriation
US tax reform - changes in indefinite reinvestment assertion
US tax reform - deferred tax expense from tax rate change
State income taxes, net of federal benefit
Uncertain tax positions
Disallowed expenses and other
$ 3,255 $
(982)
—
2,042
—
—
—
108
1,845
438
Total
$ 6,706 $
747 $
2,933
(3,139)
(1,308)
(226)
—
3,997
2,894
18,472
(2,534)
7,281
—
2,339
(462)
(59)
(79)
—
—
449
(818)
(293) $ 30,780
F-31
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Significant components of our deferred tax assets and liabilities are as follows:
Deferred tax assets:
Stock and long-term compensation plans
Foreign NOL & other carryforwards
US state NOL carryforwards
Deferred revenue
Pension liability
Lease liability
Amortization and depreciation
Accrued expenses and other
Total gross deferred tax assets
Less: Valuation allowance
Net deferred income tax assets
Deferred tax liabilities:
Accruals
Foreign tax on unremitted foreign earnings
Right of use asset
Intangible assets
Deferred tax liabilities
As of December 31,
2018
2019
2,284
2,405 $
23,785
24,240
842
670
627
684
1,078
1,509
—
2,807
770
586
1,138
562
30,524
33,463
(17,255)
(15,170)
16,208 $ 15,354
740 $
549
1,650
2,058
—
2,124
10,215
8,046
12,968 $ 12,414
$
$
$
$
Net deferred tax assets (liabilities)
$
3,240 $
2,940
Deferred tax assets and liabilities are netted by tax jurisdiction.
At December 31, 2019, we had foreign and state net operating loss (NOL) carryforwards and other foreign deductible
carryforwards as shown in the following table:
NOL Carryforward
Canada
United Kingdom
Other foreign
Canada province
U.S. states
Other Carryforwards
Canada
Canada province
Canada (credit)
Carryforward Expiration
$
50,191 2025-2039
4,592
7,039
None
None
50,499 2025-2039
8,961 2020-2030
121,282
17,332
31,463
1,962
50,757
None
None
2036
$
172,039
The net change in the valuation allowance for the years ended December 31, 2019 and December 31, 2018 were
increases of $2.1 million and $2.4 million respectively. Valuation allowances are reviewed on a regular basis and adjustments
made as appropriate. The increase in the valuation allowance in 2019 reflects NOLs and credits for which the realization is not
more likely than not. The change in the valuation allowance also reflects other factors including, but not limited to, changes in our
assessment of our ability to use existing NOLs and other deduction carryforwards, changes
F-32
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
in currency rates, and adjustments to reflect differences between the actual returns filed and the estimates we made at financial
reporting dates. For all other deferred tax assets, the Company believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the deferred tax assets.
Our policy is to record interest and penalties on income taxes as income tax expense. We provided $0.2 million in 2019
and less than $0.1 million during each of the years ended December 31, 2018, and 2017.
ASC 740, Income Taxes sets a “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions.
As of December 31, 2019, 2018, and 2017, we had reserves of $2.9 million, $0.4 million, and $0.1 million, respectively.
Reserve at beginning of year
Increases related to prior year tax positions
Lapse of statute of limitations
Total
As of year ended December 31,
2017
2018
2019
$
427 $
2,500
(4)
$ 2,923 $
107 $
427
(107)
427 $
662
7
(562)
107
We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. We are subject to
examination of our income tax returns by the IRS and other tax authorities. During the second quarter of 2018, the Belgian tax
authorities commenced an audit covering income tax returns filed for the years 2015-2018. During the fourth quarter of 2019, the
scope of the audit expanded to also include income tax returns filed for the years 2013 and 2014. While we believe the positions
we took were supportable under Belgian tax law, in lieu of extending the audit process or pursuing litigation, we negotiated a
settlement with the Belgian tax authorities during the fourth quarter of 2019, and booked an accrual adjustment related to the
settlement. The settlement agreement was signed and payment was made in January 2020.
We believe that an adequate provision has been made for any adjustments that may result from tax examinations.
However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a
manner not consistent with management's expectations, we could be required to adjust our provision for income taxes in the
period such resolution occurs. Included in the balance of unrecognized tax benefits as of December 31, 2019 is $2.1 million, of
tax benefits that, if recognized, would affect the effective tax rate.
We estimate that our unrecognized tax benefits as of December 31, 2019 will decrease by approximately $2.7 million in
the next 12 months.
Our primary tax jurisdictions and the earliest tax year subject to audit are presented in the following table.
Australia
Austria
Belgium
Canada
Netherlands
Singapore
Switzerland
United Kingdom
United States
F-33
2011
2013
2013
2015
2014
2014
2017
2018
2016
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Note 11 – Stock Compensation Plans (sharecounts in thousands)
The Company has a share-based compensation plan, the OneSpan Inc. 2019 Omnibus Incentive Plan (“2019 Plan”),
which was approved by its Shareholders in June 2019 under which the Board of Directors may grant share-based awards
including restricted stock units (RSUs) and performance restricted stock units (PSUs). Awards were previously granted under the
OneSpan Inc. 2009 Equity Incentive Plan (“2009 Plan”), and included Restricted Stock Awards (RSAs) and performance
restricted stock units (PSUs). The 2009 Plan terminated on December 31, 2018, and no additional securities remained for
issuance.
The 2019 Plan may provide performance incentives to employees and non-employee directors, consultants and other key
persons of the Company. The plan is administered by the Compensation Committee as appointed by the Board of Directors and is
intended to be a non-qualified plan.
As of December 31, 2019, the remaining number of shares allowed to be issued under the 2019 Plan was 4.6 million
shares of the company’s common stock, representing 11% of the issued and outstanding shares of the company as of such date.
The following table details long-term compensation plan and stock-based compensation expense for the years ended
December 31, 2019, 2018, and 2017.
For the year ended December 31,
2019
2018
2017
in thousands
Restricted stock
Long-term compensation plan
Total compensation
Time-Based Restricted Stock Awards
$ 3,368 $ 3,973 $ 3,466
1,906
$ 5,323 $ 6,091 $ 5,372
2,118
1,955
Time-based restricted stock awards granted to non-employee directors vest on the first anniversary date of the grant.
Awards granted to certain executive officers vest in equal semi-annual installments over four years. Awards granted to certain
other employees vest ratably over a four-year period with the first one-fourth of the grant vesting one year after the date of the
grant. Shares are subject to forfeiture if the service period requirement is not met. Compensation expense was $0.5 million, $2.0
million, and $2.1 million for 2019, 2018, and 2017, respectively. Tax benefit related to the compensation expense was $0.2
million, $0.5 million, and $0.6 million for 2019, 2018, and 2017, respectively. The following table summarizes the time-based
restricted stock activity for the year ended December 31, 2019.
Weighted- Weighted-
(in thousands)
Outstanding at January 1, 2019
Shares vested
Shares forfeited
Outstanding at December 31, 2019
Shares
241
(116)
(4)
121
average
remaining
term (years)
2.17 $
average
grant date
fair value
15.08
15.20
17.75
14.88
1.71 $
The unamortized future compensation expense for time-based restricted stock awards was $1.2 million at December 31,
2019.
F-34
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Time-Based Restricted Stock Units settled in stock
Upon approval of the 2019 Plan, the Company began granting certain eligible employees RSUs that settle in Company
stock. RSUs granted to non-employee directors vest on the first anniversary date of the grant. Awards granted to certain executive
officers vest in equal semi-annual installments over four years. Awards granted to certain other employees vest ratably over a
four-year period with the first one-fourth of the grant vesting one year after the date of the grant. Shares are subject to forfeiture if
the service period is not met. Compensation expense was $1.0 million for 2019, and the related tax benefit was $0.3 million. The
following table summarizes the time-based restricted stock activity for the year ended December 31, 2019:
Weighted- Weighted-
(in thousands)
Nonvested, January 1, 2019
Shares vested
Shares awarded
Shares forfeited
Nonvested, December 31, 2019
Shares
—
(21)
211
—
190
average
remaining
term (years)
— $
average
grant date
fair value
-
13.69
13.77
-
13.78
2.54 $
The unamortized future compensation expense for time-based restricted stock units was $2.1 million at December 31,
2019.
Performance-Based Restricted Stock Units settled in stock
Performance-based restricted stock units granted to executive officers and certain other employees were subject to
achievement of three year performance criteria established by the Board of Directors. Under certain grants, earned shares related
to three-year targets cliff vest upon fulfillment of the performance criteria and completion of the three-year period. Shares are
subject to forfeiture if the performance criteria and service period are not met.
Compensation expense in 2019, 2018, and 2017 was $1.8 million, $2.0 million, and $1.3 million. Tax benefit related to
the compensation expense was $0.2 million, $0.5 million, and $0.5 million for 2019, 2018, and 2017, respectively.
The following table summarizes activity related to unvested performance restricted stock shares during 2019:
(in thousands)
Unearned, January 1, 2019
Shares vested
Shares awarded
Shares forfeited
Unearned, December 31, 2019
Weighted-
Weighted-
Total
average
average
grant date
remaining
Unvested
Shares term (years) fair value
15.07
27.13
14.12
14.65
14.46
330
(9)
226
(55)
492
1.45 $
1.25 $
Unamortized future compensation expense for performance-based restricted stock was $3.1 million at December 31,
2019.
F-35
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Note 12 – Earnings per Common Share (sharecounts in thousands)
Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect
of unvested common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding
and includes the dilutive effect of unvested common stock equivalents to the extent they are not anti-dilutive. Because the
Company was in a net loss position for the year ended December 31, 2017, diluted net loss per share for this period excludes the
effects of common stock equivalents, which are anti-dilutive.
A reconciliation of the shares included in the basic and fully diluted earnings per share calculations is as follows:
in thousands, except per share data
Net income (loss)
Weighted average common shares outstanding:
Basic
Incremental shares with dilutive effect:
Restricted stock awards
Diluted
Net income (loss) per share:
Basic
Diluted
Note 13 – Employee Benefit Plans
U.S. Plan
For the year ended December 31,
2018
2019
2017
3,846 $ (22,399)
8,789 $
$
40,050
39,932
39,802
86
40,136
114
40,046
—
39,802
$
$
0.22 $
0.22 $
0.10 $
0.10 $
(0.56)
(0.56)
We maintain a defined contribution pension plan for U.S. employees established pursuant to Section 401(k) of the
Internal Revenue Code. The plan allows voluntary employee contributions and discretionary employer contributions. For the
years ended December 31, 2019, 2018, and 2017, we expensed contributions of $0.3 million, $0.3 million, and $0.2 million,
respectively.
Non-U.S. Plans
We are subject to national mandatory pension systems and other compulsory plans, or make contributions to social
pension funds based on local regulations. When our obligation is limited to the payment of the contribution into these plans or
funds, the recognition of such liabilities is not required.
In addition, we have, in some countries, defined benefit plans consisting of final retirement salary and committed
pension payments.
In Switzerland, the pension plan is a cash balance plan where contributions are expressed as a percentage of the
pensionable salary. Contributions to Swiss plans are paid by the employees and the employer. The pension plan guarantees the
amount accrued on the members’ savings accounts, as well as a minimum interest on those savings accounts. The plan assets are
held in guaranteed investment contracts.
We also maintain a pension plan for our Belgian employees, in compliance with Belgian law. Contributions to Belgium
plans are paid by the employees and the employer. Certain features of the plans require them to be categorized as defined benefit
plans under ASC 715 due to Belgian social legislation, which prescribed a minimum annual return of
F-36
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
1.6% on employer contributions and 1.6% for employee contributions. The plan assets are held in guaranteed investment
contracts.
The Company also includes a liability related to obligations to provide retirement benefits to employees who retire from
the Company’s French subsidiary, as required by law. Per French regulations, each employee is entitled to a lump sum payment
upon retirement based on years of service and salary at retirement. Benefit rights vest upon the statutory retirement age of 62. The
obligation recorded represents the present value of amounts the Company expects to pay.
Components of net periodic pension cost included in earnings:
Year ended December 31,
2018
2017
2019
Service cost (gross)
Interest cost
Expected return on plan assets
Amortization of unrecognized actuarial gain
Net periodic pension cost
$
$
1,164 $
234
(242)
(22)
1,134 $
1,281 $
199
(327)
18
1,171 $
1,397
188
(199)
45
1,431
The net unfunded status of the Non-U.S. pension plans is as follows:
As of December 31,
2018
2019
Fair value of plan assets
Projected benefit obligation
Net unfunded benefit obligation
$ 14,159 $ 12,823
(18,173)
(5,350)
(21,759)
(7,600) $
$
Net unfunded benefit obligation is recorded as other long-term liabilities in our consolidated Balance Sheets.
The change in the fair value of plan assets is as follows:
Fair value of plan assets at January 1
Employee contributions
Actual return on plan assets
Benefits (paid), net of transfers
Employer contributions
Foreign exchange adjustment
Fair value of plan assets at December 31
F-37
Year ended December 31,
2019
2018
$
$
12,823 $
485
908
(977)
977
(57)
14,159 $
12,390
506
904
(1,601)
971
(347)
12,823
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
The change in benefit obligations is as follows:
Benefit obligations at January 1
Gross service cost
Interest cost
Employee contributions
Actuarial (gains)/losses
Plan amendment
Benefits (paid), net of transfers
Foreign exchange adjustment
Benefit obligations at December 31
Year ended December 31,
2019
2018
$
$
18,173 $
1,164
234
485
2,763
—
(977)
(83)
21,759 $
18,308
1,281
199
506
(672)
560
(1,601)
(408)
18,173
Our investment policy meets our responsibility under local social legislation and aligns plan assets with liabilities, while
minimizing risk. For the years ended December 31, 2019 and 2018, plan assets are invested in guaranteed investment contracts.
Fair value of guaranteed investment contracts is surrender value. Fair value for the year ended December 31, 2019 was
determined using Level 3 inputs as defined by ASC 820, Fair Value Measurements. Changes in our plan assets are attributable to
benefit payments and contributions as we have not actively traded our assets during the years ended December 31, 2019 and
December 31, 2018.
Other
The accumulated benefit obligation for the plans were $20.3 million and $16.5 million as of December 31, 2019 and
2018, respectively.
The Company expects to pay $1.0 million of contributions over the next twelve months.
The amounts reclassified out of other comprehensive income during the twelve months ended December 31, 2019, 2018,
and 2017 were not material.
Actuarial Assumptions
Certain actuarial assumptions such as the discount rate and the long-term rate of return on plan assets have a significant
effect on the amounts reported for net periodic cost and the benefit obligation. The assumed discount rates reflect the prevailing
market rates of a universe of high-quality, non-callable, corporate bonds currently available that, if the obligation were settled at
the measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. In determining the
long-term return on plan assets, the Company considers long-term rates of return of comparable low risk investments, such as
Euro AA bonds.
The following weighted-average assumptions between all plans were utilized in the pension calculations:
Discount rates
Inflation
Expected return on plan assets
Rate of salary increases
F-38
As of December 31,
2019
2018
(%)
0.15 - 0.70
1.00 - 2.00
1.25 - 2.00
2.00 - 2.80
0.90 - 1.80
1.00 - 2.00
1.30 - 2.00
2.00 - 2.80
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Projected future pension benefits as of December 31, 2019:
2020
2021
2022
2023
2024
Beyond
$
452
549
769
667
568
4,460
Note 14 – Geographic, Customer and Supplier Information
We classify our sales by our customers’ locations in three geographic regions: 1) EMEA, which includes Europe, the
Middle East, and Africa; 2) the Americas, which includes sales in North, Central, Latin and South America and Canada; and 3)
Asia Pacific, which includes Australia and India.
2019
Revenue
Gross profit
Long-lived assets
2018
Revenue
Gross profit
Long-lived assets
2017
Revenue
Gross profit
Long-lived assets
Europe,
Middle East,
Africa (EMEA) Americas
Asia Pacific
Total
$
$
$
147,027 $
99,689
8,085
61,577 $
41,752
13,240
45,966 $ 254,570
172,608
31,167
22,034
709
103,293 $
71,840
7,665
54,979 $
38,204
4,247
54,008 $ 212,280
147,467
37,423
12,067
155
92,859 $
61,506
8,437
52,981 $
41,491
897
47,451 $ 193,291
134,514
31,517
9,401
68
For the years 2019, 2018, and 2017, our top 10 customers contributed 29%, 24% and 27%, respectively, of total
worldwide revenue. The majority of our hardware products are assembled by four independent factories in Southern China.
Note 15 – Commitments and Contingencies
The company leases office space and automobiles under operating lease agreements. See Note 9 – Leases for future
minimum rental payments required under non-cancelable leases.
At December 31, 2019, we have purchase obligations of $28.5 million, including $14.0 million of inventory purchase
obligations which are expected to be consummated in the next 12 months, $12.8 million of committed hosting arrangements
which will be used in the next one to four years, and $1.7 million for other software agreements related to the administration of
our business which range from one to five years.
We are a party to or have intellectual property subject to litigation and other proceedings that arise in the ordinary course
of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary
sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings
described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable
resolution of any matter may have a material effect on our financial results in any
F-39
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal
proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law
and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of
other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our
assessment of these factors may change over time as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable
possibility that a loss may have been incurred, U.S. GAAP requires us to disclose an estimate of the 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 agreements. These indemnifications may include, but are not
limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and
amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement.
We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount
of potential future payments, if any, related to such indemnification provisions. We have no liabilities recorded for these clauses
as of December 31, 2019.
On March 14, 2017, a complaint was filed in the United States District Court for the District of Massachusetts, captioned
StrikeForce Technologies, Inc. v. Vasco Data Security International, Inc., et al., claiming the Company infringed on certain patent
rights of the plaintiff. On May 8, 2017, the Company answered the complaint denying the allegations of patent infringement. The
parties then engaged in motion practice and discovery in the case. The plaintiff has also brought suit against various other
companies in the cybersecurity industry. In one such suit in the federal district court for the Central District of California, on
December 1, 2017, the court granted defendant’s motion to dismiss, finding that the StrikeForce asserted claims are invalid.
StrikeForce appealed such decision. In light of such ruling, on December 20, 2017, the court in the Company’s case granted a stay
of the proceedings pending the appeal in the related case. On April 16, 2019, the Court dismissed the claims of StrikeForce
against us with prejudice. We consider this case to be closed.
From time to time, we have been involved in the litigation incidental to the conduct of our business. Excluding matters
disclosed above, we are not a party to any lawsuit or proceeding that, in management’s opinion, is likely to have a material
adverse effect on its business, financial condition or results of operations.
F-40
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Note 16 – Quarterly Results of Operations (unaudited)
The quarterly results of operations are as follows:
First
Quarter
Second Third
Quarter
Quarter
Fourth
Quarter
2019
2018
Total revenues
Gross profit
Operating costs
Operating income (loss)
Provision (benefit) for income taxes
Net income (loss)
Net income/(loss) per share:
Basic
Diluted
Total revenues
Gross profit
Operating costs
Operating income
Provision (benefit) for income taxes
Net income (loss)
Net income/(loss) per share:
Basic
Diluted
Note 17 – Related Party
$ 47,608 $ 56,234 $ 79,725 $ 71,003
49,629
43,735
5,894
2,343
5,050
38,354
40,565
(2,211)
770
(2,461)
53,056
35,937
17,119
3,864
11,872
31,569
37,096
(5,527)
(272)
(5,671)
$
$
(0.14) $
(0.14) $
(0.06) $
(0.06) $
0.30 $
0.30 $
0.13
0.13
$ 45,432 $ 49,554 $ 52,495 $ 64,799
42,246
38,145
4,101
650
3,964
34,543
37,657
(3,114)
(1,702)
(908)
34,697
33,049
1,648
629
1,792
35,981
38,592
(2,611)
(872)
(1,002)
$
$
0.04 $
0.04 $
(0.03) $
(0.03) $
(0.02) $
(0.02) $
0.10
0.10
In August 2017, Able N.V. (“Able”), a wholly-owned subsidiary,
was sold to an employee of Able for a de minimis amount. The operating results of Able
through the date of sale are included in the consolidated financial statements as of December 31, 2017, and for the year ended
December 31, 2017, and is not significant to our consolidated results. In addition, our 2017 results include a loss
on sale of approximately $0.2 million, recorded in general and administrative expense.
Concurrent with the sale, we provided Able an unsecured line of credit of 1.5 million Euro ($1.8 million at an
exchange rate of $1.18 dollars per Euro). Interest accrued at the rate of 2% per annuum. Beginning in August 2017, Able could
take advances against the line of credit for a period of eighteen months followed by twelve quarterly repayments. The credit line
expired during the year ended December 31, 2019, and no advancements were made. In addition we entered into a transition
services agreement with Able whereby we agreed to provide certain administrative services for a period of three months and Able
agreed to provide office space and consulting services for an agreed upon periodic fee as long as the services are provided.
F-41
Table of Contents
SCHEDULE II
ONESPAN INC.
VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts for trade receivables.
For the year ended December 31,
2019
2018
2017
Foreign
Provision
for Bad
Beginning
Balance Debts
$ 1,152
520
$
535
$
2,215
871
120
Currency Ending
Chargeoffs Translation Balance
— $ 2,524
— $ 1,152
520
2 $
(843)
(239)
(137)
See accompanying independent auditors’ report.
F-42
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 16, 2020.
OneSpan Inc.
/s/ Scott Clements
Scott Clements
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following
persons on behalf of the Registrant in the capacities indicated on March 16, 2020.
Table of Contents
POWER OF ATTORNEY
Each of the undersigned, in his capacity as an officer or director, or both, as the case may be, of OneSpan Inc. does
hereby appoint Scott Clements, and each of them severally, his true and lawful attorneys or attorney to execute in his name, place
and stead, in his capacity as director or officer, or both, as the case may be, this Annual Report on Form 10‑K for the fiscal year
ended December 31, 2019 and any and all amendments thereto and to file the same with all exhibits thereto and other documents
in connection therewith with the Securities and Exchange Commission. Each of said attorneys shall have power to act hereunder
with or without the other attorney and shall have full power and authority to do and perform in the name and on behalf of each of
said directors or officers, or both, as the case may be, every act whatsoever requisite or necessary to be done in the premises, as
fully and to all intents and purposes as to which each of said officers or directors, or both, as the case may be, might or could do
in person, hereby ratifying and confirming all that said attorneys or attorney may lawfully do or cause to be done by virtue hereof.
SIGNATURE
TITLE
/s/ Scott Clements
Scott Clements
/s/ Mark S. Hoyt
Mark S. Hoyt
/s/ John N. Fox, Jr.
John N. Fox, Jr.
/s/ Marc Boroditsky
Marc Boroditsky
/s/ Michael P. Cullinane
Michael P. Cullinane
/s/ Jean K. Holley
Jean K. Holley
/s/ T. Kendall Hunt
T. Kendall Hunt
/s/ Matthew Moog
Matthew Moog
/s/ Marc Zenner
Marc Zenner
President, Chief Executive Officer, and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Exhibit 4.8
AWARD AGREEMENT FOR TIME-BASED RESTRICTED STOCK UNITS
UNDER THE
ONESPAN INC. 2019 OMNIBUS INCENTIVE PLAN
THIS AWARD AGREEMENT FOR RESTRICTED STOCK UNITS (this “Agreement”) is made as of June 12,
2019 (the “Effective Date”), between OneSpan Inc. (the “Company”) and the individual identified on the signature
page and Exhibit A hereto (the “Grantee”).
WHEREAS, the Company maintains the OneSpan Inc. 2019 Omnibus Incentive Plan (as amended, the
“Plan”) for the benefit of its employees, directors, consultants, and other individuals who provide services to the
Company; and
WHEREAS, to compensate the Grantee for his or her service to the Company and to further align the
Grantee’s personal financial interests with those of the Company’s stockholders, the Company wishes to award the
Grantee restricted stock units with respect to shares of Common Stock (as defined below), subject to the restrictions,
terms and conditions contained in the Plan and this Agreement.
NOW, THEREFORE, in consideration of these premises and the agreements set forth herein, the parties,
intending to be legally bound hereby, agree as follows:
1. Grant of Restricted Stock Units. Pursuant to Article III of the Plan, the Company hereby grants to the
Grantee an award of restricted stock units (the “Restricted Stock Units”) with respect to the number of shares of
the Company’s common stock, par value of $0.001 per share (the “Common Stock”), as set forth on Exhibit A
hereto, subject to the terms and conditions set forth in this Agreement and in the Plan. The terms of the Plan are
hereby incorporated into this Agreement by this reference, as though fully set forth herein. Capitalized terms used
but not defined in this Agreement have the meanings set forth in the Plan.
2. Vesting of Restricted Stock Units. The Restricted Stock Units will become vested in accordance with this
Section 2.
(a) Restricted Stock Units will become vested in accordance with the following schedule, provided that
on each vesting date, the Grantee has, from the date hereof, continuously provided services to the Company:
(i) 12.5% of the Restricted Stock Units will vest on the six month anniversary date of the Effective
Date;
(ii) An additional 12.5% of the Restricted Stock Units will vest on the first annual anniversary date of
the Effective Date;
(iii) An additional 12.5% of the Restricted Stock Units will vest on the eighteen month anniversary
date of the Effective Date;
(iv) An additional 12.5% of the Restricted Stock Units will vest on the second annual anniversary date
of the Effective Date;
(v) An additional 12.5% of the Restricted Stock Units will vest on the
2019 RSU – Time Based (LTIP version) June 2019
1
thirty month anniversary date of the Effective Date;
(vi) An additional 12.5% of the Restricted Stock Units will vest on the third annual anniversary date of
the Effective Date;
(vii) An additional 12.5% of the Restricted Stock Units will vest on the forty-second month anniversary
date of the Effective Date; and
(viii) The final 12.5% of the Awarded Shares will vest on the fourth annual anniversary date of the
Effective Date.
(b) If Grantee’s employment with the Company terminates as a result of death or by the Company due to
Disability, the Restricted Stock Units that are unvested as of such termination of employment shall become
immediately vested.
(c) If Grantee’s employment with the Company terminates on or within one year following a Change in
Control for reasons other than (i) resignation without Good Reason or (ii) by the Company for Cause, then
the Restricted Stock Units that are unvested as of such termination of employment shall become immediately
vested.
(d) Except as provided in this Agreement, by the Committee or in any other agreement between the Grantee
and the Company or any of its Subsidiaries, upon cessation of the Grantee’s service with the Company for
any reason or for no reason (and whether such cessation is initiated by the Company, the Grantee or
otherwise): (i) any Restricted Stock Units that have not, prior to such cessation, become vested shall
immediately and automatically, without any action on the part of the Company, be forfeited, and (ii) the
Grantee shall have no further rights with respect to those Restricted Stock Units (or the underlying shares of
Common Stock).
(e) For purposes of this Agreement, service with the Company shall be deemed to include service with any
Subsidiary of the Company for only so long as such entity remains a Subsidiary.
(f) For purposes of this Agreement, “Disability” means a mental or physical impairment of Grantee that is
expected to result in death or that has lasted or is expected to last for a continuous period of 12 months or
more and that causes Grantee to be unable to perform his or her material duties for the Company and to be
engaged in any substantial gainful activity, in each case as determined by the Company’s chief human
resources officer or other person performing that function or, in the case of directors and executive officers,
the Committee, whose determination shall be conclusive and binding. The determination of Disability for
purposes of this Agreement shall not be construed to be an admission of disability for any other purpose.
(g) For purposes of this Agreement, “Good Reason” means:
(i) The assignment to Grantee of any duties inconsistent in any respect with Grantee’s position
(including status, offices, titles and reporting requirements), authority, duties or responsibilities or
any other action by the Company or its affiliates that results in a material diminution in such
position, authority, duties or responsibilities, excluding for this
2
purpose an isolated, insubstantial and inadvertent action not taken in bad faith;
(ii) Any failure by the Company or its affiliates to comply with any provision of any employment
agreement entered into between Grantee and the Company or an affiliate other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith;
(iii) The Company or any of its affiliates requiring Grantee to be based at any office or location other
than the office occupied by Grantee as of the date of this Agreement or a reasonably comparable
office located within a 40-mile radius of such current office; or
(iv) A material adverse change in Grantee’s base salary.
provided, however, that a “Good Reason” termination will have occurred only if (1) Grantee terminates
his or her employment during the one year following the initial existence of a Good Reason event;
(b) Grantee provided notice to Company within 90 days of the initial existence of a Good Reason
condition; and (c) the Company failed to cure the Good Reason event within 30 days of such notice from
Grantee; provided that these notice and cure periods may extend the termination date beyond one year if
the Grantee provides notice within one year following the initial existence of a Good Reason event.
Further, the amount, time and form of payment must be substantially identical to the amount, time and
form of payments made due to an involuntary termination.
(h) For purposes of this Agreement, “Cause” and “Wrongful Act” mean:
(i) Grantee materially breaches Grantee’s obligations under any employment, consulting, or other
agreement between the Grantee and the Company (each, a “Company Agreement”);
(ii) Grantee materially breaches Grantee’s obligations under the Company’s Code of Ethics and
Conduct (or any successor thereto) or an established policy of the Company;
(iii) Grantee engages in conduct prohibited by law (other than minor violations), commits an act of
dishonesty, fraud, or serious or willful misconduct in connection with Grantee’s job duties, or
engages in unethical or immoral conduct that, in the reasonable judgment of the Committee, could
injure the integrity, character or reputation of Company;
(iv) Grantee fails or refuses to perform, or habitually neglects, Grantee’s duties and responsibilities
under any Company Agreement (other than on account of Disability), and continues such failure,
refusal or neglect after having been given written notice by the Company that specifies what duties
Grantee failed to perform and an opportunity to cure of 30 days;
3
(v) Subject to Section 10, use or disclosure by Grantee of confidential information or trade secrets
other than in the furtherance of the Company’s (or its Subsidiaries’) business interests, or other
violation of a fiduciary duty to the Company (including, without limitation, entering into any
transaction or contractual relationship causing diversion of business opportunity from the
Company (other than with the prior written consent of the Board)); or
(vi) Grantee fails to reasonably cooperate with any audit or investigation involving the Company or
its business practices after having been given written notice by the Company that specifies
Grantee’s failure to cooperate and an opportunity to cure of ten days.
3. Delivery of Common Stock Underlying Restricted Stock Units. Within 60 days after the vesting of any
Restricted Stock Units (or such later date as may be required to comply with Section 409A of the Internal Revenue
Code of 1986, as amended (“Section 409A”)), the Company will issue or deliver, subject to the conditions of this
Agreement, the shares of Common Stock in respect of such vested Restricted Stock Units to Grantee. Such issuance
or delivery shall be evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company. The Company shall pay all original issue or transfer taxes and all fees and expenses incident
to such issuance or delivery, except as otherwise provided herein. Prior to the issuance to Grantee of the shares of
Common Stock subject to the Restricted Stock Units, Grantee shall have no direct or secured claim in any specific
assets of the Company or in such shares, and will have the status of a general unsecured creditor of the Company.
4. Adjustments. In the event of any equity restructuring (within the meaning of Financial Accounting
Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation) that causes
the per share value of shares of Common Stock to change, such as a stock dividend, stock split, spinoff, rights
offering or recapitalization through an extraordinary dividend, the terms of this Agreement, including the number
and class of securities subject hereto, shall be appropriately adjusted by the Committee. In the event of any other
change in corporate capitalization, including a merger, consolidation, reorganization, or partial or complete
liquidation of the Company, such equitable adjustments described in the foregoing sentence may be made as
determined to be appropriate and equitable by the Committee (or, if the Company is not the surviving corporation in
any such transaction, the board of directors of the surviving corporation) to prevent dilution or enlargement of rights
of the Grantee. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive.
5. Rights as a Stockholder. The Grantee shall have no rights as a stockholder of the Company with respect to
the shares of Common Stock subject to the Restricted Stock Units (including the right to vote) until the underlying
Common Stock becomes vested pursuant to Section 2 and the Grantee becomes a stockholder of record with respect
to such shares, except that the Grantee shall be entitled to receive dividend equivalents related to the Restricted
Stock Units equal in amount to the dividends declared on the underlying shares of Common Stock. Dividend
equivalent amounts shall accrue and be paid or distributed in cash at the same time the underlying shares of
Common Stock are distributed to Grantee in
4
accordance with Section 3.
6. Tax Consequences.
(a) The Grantee acknowledges that the Company has not advised the Grantee regarding the Grantee’s
income tax liability in connection with the grant or vesting of the Restricted Stock Units, the dividend
equivalents contemplated hereunder or the delivery of the Common Stock underlying the Restricted Stock
Units. The Grantee has reviewed with the Grantee’s own tax advisors the federal, state, local and foreign tax
consequences of this investment and the transactions contemplated by this Agreement. The Grantee is
relying solely on such advisors and not on any statements or representations of the Company or any of its
agents. The Grantee understands that the Grantee (and not the Company) will be responsible for the
Grantee’s own tax liability that may arise as a result of the transactions contemplated by this Agreement.
(b) As a condition precedent to the delivery of the shares of Common Stock upon the vesting of the
Restricted Stock Units, the Grantee shall, upon request by the Company, pay to the Company such amount
as the Company may be required, under all applicable federal, state, local or other laws or regulations, to
withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect
to such shares of Common Stock. If the Grantee shall fail to advance the Required Tax Payments after
request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any
amount then or thereafter payable by the Company to the Grantee.
(c) The Grantee may elect to satisfy his or her obligation to advance the Required Tax Payments by any
of the following means: (i) a cash payment to the Company; (ii) delivery to the Company (either actual
delivery or by attestation procedures established by the Company) of previously owned whole shares of
Common Stock having an aggregate Fair Market Value, determined as of the date on which such
withholding obligation arises (the “Tax Date”), equal to the Required Tax Payments; (iii) authorizing the
Company to withhold whole shares of Common Stock which would otherwise be delivered to the Grantee
having an aggregate Fair Market Value, determined as of the Tax Date, equal to the Required Tax Payments
or (iv) any combination of (i), (ii) and (iii). Shares of Common Stock to be delivered or withheld may not
have a Fair Market Value in excess of the minimum amount of the Required Tax Payments. Any fraction of
a share of Common Stock which would be required to satisfy any such obligation shall be disregarded and
the remaining amount due shall be paid in cash by the Grantee. No certificate representing a share of
Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.
7. Nontransferability of Award. The Grantee may not sell, pledge, assign, encumber, hypothecate, gift,
transfer, bequeath, devise, donate or otherwise dispose of, in any way or manner whatsoever, whether voluntary or
involuntary, any legal or beneficial interest in any of the Restricted Stock Units until the Restricted Stock Units
become vested in accordance with Section 2; provided, however, that the restrictions of this Section 7 shall not
5
apply to any transfer (i) pursuant to applicable laws of descent and distribution or (ii) among Grantee’s family
group; provided that such restrictions will continue to be applicable to the Restricted Stock Units after any such
transfer and the transferees of such Restricted Stock Units have agreed in writing to be bound by the provisions of
this Agreement. Grantee’s "family group" means Grantee’s spouse and descendants (whether natural or adopted)
and any trust solely for the benefit of Grantee and/or Grantee’s spouse and/or descendants during Grantee’s lifetime.
8. Securities Laws. The Company may from time to time impose any conditions on the Restricted Stock Units
or any underlying shares of Common Stock as it deems necessary or advisable to ensure that the Plan satisfies the
conditions of Rule 16b-3 adopted under the Securities and Exchange Act of 1934 and otherwise complies with
applicable rules and laws.
9. Recoupment of Award. Notwithstanding anything in this Agreement to the contrary, if the Company
determines that the Grantee’s Wrongful Act was a significant contributing factor to the Company or a Subsidiary
having to restate all or a portion of its financial statements, all outstanding Restricted Stock Units will immediately
and automatically be forfeited and the Grantee shall promptly repay to the Company any shares of Common Stock,
cash or other property paid in respect of any Restricted Stock Units during the period beginning on the date the
financial statements requiring restatement were originally released to the public or submitted to the Securities and
Exchange Commission (whichever is earlier) and ending on the date the restated financial statements are filed with
the Securities and Exchange Commission.
10. Protected Rights. Grantee understands that nothing contained in this Agreement limits Grantee’s ability to
report possible violations of law or regulation to, or file a charge or complaint with, the Securities and Exchange
Commission, the Equal Employment Opportunity Commission, the National Labor Relations Board, the
Occupational Safety and Health Administration, the Department of Justice, the Congress, any Inspector General, or
any other federal, state or local governmental agency or commission (“Government Agencies”). Grantee further
understands that this Agreement does not limit Grantee’s ability to communicate with any Government Agencies or
otherwise participate in any investigation or proceeding that may be conducted by any Government Agency,
including providing documents or other information, without notice to the Company. Nothing in this Agreement
shall limit Grantee’s ability under applicable United States federal law to (i) disclose in confidence trade secrets to
federal, state, and local government officials, or to an attorney, for the sole purpose of reporting or investigating a
suspected violation of law or (ii) disclose trade secrets in a document filed in a lawsuit or other proceeding, but only
if the filing is made under seal and protected from public disclosure.
11. Compliance with Section 409A. The Restricted Stock Units are intended to be exempt from or comply with
Section 409A, and shall be interpreted and construed accordingly, and each payment hereunder shall be considered
a separate payment. To the extent this Agreement provides for the Restricted Stock Units to become vested and be
settled upon the Grantee’s termination of employment, the applicable shares of Common Stock shall be transferred
to the Grantee or his or her beneficiary upon the Grantee’s “separation from service,” within the meaning of Section
409A. Notwithstanding any other
6
provision in this Agreement, to the extent any payments hereunder constitute nonqualified deferred compensation,
within the meaning of Section 409A, then (a) each such payment which is conditioned upon Grantee’s execution of
a release of claims and which is to be paid or provided during a designated period that begins in one taxable year
and ends in a second taxable year, shall be paid or provided in the later of the two taxable years, and (b) if Grantee
is a specified employee (within the meaning of Section 409A) as of the date of Grantee’s separation from service,
each such payment that is payable upon Grantee’s separation from service and would have been paid prior to the
six-month anniversary of Grantee’s separation from service, shall be delayed until the earlier to occur of (i) the first
day of the seventh month following the Grantee’s separation from service or (ii) the date of Grantee’s death.
12. General Provisions.
(a) This Agreement and the Plan together represent the entire agreement between the parties with
respect to the granting of the Restricted Stock Units and may only be modified or amended in a writing
signed by both parties.
(b) Any notice, demand or request required or permitted to be given by either the Company or the
Grantee pursuant to the terms of this Agreement must be in writing and will be deemed given (i) on the date
and at the time delivered via personal, courier or recognized overnight delivery service, (ii) if sent via
telecopier on the date and at the time telecopied with confirmation of delivery, (iii) if sent via email or other
electronic delivery and receipt is confirmed, on the date and at the time received, or (iv) if mailed, on the date
five days after the date of the mailing (which must be by registered or certified mail). Delivery of a notice by
telecopy (with confirmation) or by email or other electronic delivery (with confirmation or receipt) will be
permitted and will be considered delivery of a notice notwithstanding that it is not an original that is received.
Any notice to Grantee under this Agreement will be made to Grantee at the address (or telecopy number,
email or other electronic address, as the case may be) listed in the Company’s personnel files. If directed to
the Company, any such notice, demand or request will be sent to the Corporate Secretary at the Company’s
principal executive office, or to such other address or person as the Company may hereafter specify in
writing.
(c) The Company may condition delivery of certificates for shares of Common Stock subject to the
Restricted Stock Units (or, if the shares are not certificated, the entry in the stock record books of the
Company of the transfer to the Grantee of the shares of Common Stock) upon the prior receipt from Grantee
of any undertakings which it may determine are required to assure that the certificates are being issued in
compliance with federal and state securities laws.
(d) The Grantee has received a copy of the Plan, has read the Plan and is familiar with its terms, and
hereby accepts the Restricted Stock Units subject to all of the terms and provisions of the Plan, as amended
from time to time. Pursuant to the Plan, the Board and the Committee are authorized to interpret the Plan and
to adopt rules and regulations not inconsistent with the Plan as they deem appropriate. The Grantee hereby
agrees to accept as binding, conclusive and final all decisions
7
or interpretations of the Board or the Committee upon any questions arising under the Plan.
(e) Subject to Section 7, neither this Agreement nor any rights or interest hereunder will be assignable
by the Grantee, the Grantee’s beneficiaries or legal representatives, and any purported assignment in violation
hereof will be null and void.
(f) Either party’s failure to enforce any provision or provisions of this Agreement will not in any way be
construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing
each and every other provision of this Agreement. The rights granted both parties herein are cumulative and
will not constitute a waiver of either party’s right to assert all other legal remedies available to it under the
circumstances.
(g) The grant of Restricted Stock Units hereunder does not confer upon the Grantee any right to continue
in service with the Company.
(h) This Agreement shall be governed by, and enforced in accordance with, the laws of the State of
Delaware, without regard to the application of the principles of conflicts or choice of laws.
(i) This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original, and all of which together shall be deemed to be one and the same instrument. In the event that any
signature to this Agreement is delivered by facsimile transmission or by e- mail delivery of a “.pdf” format
data file or picture format data file, such signature shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force and effect as if such electronic
facsimile signature page were an original thereof. The parties confirm that it is their wish that this Agreement
may be executed by means of electronic signature.
[Signature Page Follows]
8
[SIGNATURE PAGE TO AWARD AGREEMENT FOR RESTRICTED STOCK UNITS]
IN WITNESS WHEREOF, the parties have duly executed this Award Agreement intending it to be
effective as of the first date written above.
ONESPAN INC.
By:
Name: Mark Hoyt
Its:
CFO
GRANTEE
Name: Mary Jean Capodanno
Signature:
9
EXHIBIT A
Grantee
Target $
Grant Date
Mary Jean Capodanno
35,000
06/12/2019
Grant
Date Price
13.69
Target # of Restricted
Stock Units
2,557
10
Exhibit 4.9
AWARD AGREEMENT FOR PERFORMANCE-BASED RESTRICTED STOCK UNITS
UNDER THE
ONESPAN INC. 2019 OMNIBUS INCENTIVE PLAN
THIS AWARD AGREEMENT FOR RESTRICTED STOCK UNITS (this “Agreement”) is made as of
June 12, 2019 (the “Effective Date”), between OneSpan Inc. (the “Company”) and the individual identified on the
signature page and Exhibit A hereto (the “Grantee”).
WHEREAS, the Company maintains the OneSpan Inc. 2019 Omnibus Incentive Plan (as amended, the
“Plan”) for the benefit of its employees, directors, consultants, and other individuals who provide services to the
Company; and
WHEREAS, to compensate the Grantee for his or her service to the Company and to further align the
Grantee’s personal financial interests with those of the Company’s stockholders, the Company wishes to award the
Grantee restricted stock units with respect to shares of Common Stock (as defined below), subject to the restrictions,
terms and conditions contained in the Plan and this Agreement.
NOW, THEREFORE, in consideration of these premises and the agreements set forth herein, the parties,
intending to be legally bound hereby, agree as follows:
1. Grant of Restricted Stock Units. Pursuant to Article IV of the Plan, the Company hereby grants to the
Grantee an award of restricted stock units (the “Restricted Stock Units”) with respect to the number of shares of the
Company’s common stock, par value of $0.001 per share (the “Common Stock”), as set forth on Exhibit A hereto,
subject to the terms and conditions set forth in this Agreement and in the Plan. The terms of the Plan are hereby
incorporated into this Agreement by this reference, as though fully set forth herein. Capitalized terms used but not
defined in this Agreement have the meanings set forth in the Plan.
2. Vesting of Restricted Stock Units. The Restricted Stock Units will become vested in accordance with this
Section 2.
(a) Performance Period. The number of Restricted Stock Units that are earned (the “Earned RSUs”)
shall be determined by the Committee, in its sole and absolute discretion, in accordance with Exhibit A, based
upon the Company’s achievement relative to the applicable Performance Targets (as described on Exhibit A)
for the Restricted Stock Units (the “Three Year RSUs”) during the period commencing on January 1, 2019
and ending on December 31, 2021 (the “Performance Period”). Upon the determination that some number
of the Three Year RSUs are Earned RSUs, all of the Earned RSUs that are Three Year RSUs shall become
vested. For the avoidance of doubt, the Three Year RSUs shall be automatically forfeited in their entirety if
the Performance Target is not achieved at least at the minimum threshold level.
(b) In the event of the occurrence of a Change in Control that is a Company Transaction prior to the
expiration of the Performance Period and there is a termination of employment as described in Section 2(c)
below, any remaining Restricted Stock Units outstanding as of
2019 RSU – Performance Based (LTIP version) June 2019
the date of the Change in Control shall be prorated (based on the ratio of (x) the number of days that have
elapsed in the Performance Period to (y) the total number of days in the Performance Period) at the target
(100%) payout level up to and including the date of such Change in Control (the “Prorated RSUs”) and the
Grantee shall be vested in the Prorated RSUs; provided, however, that if the Company Transaction is a sale
of assets or otherwise does not result in direct receipt of consideration by the holders of Common Stock, the
Grantee shall receive, in exchange for and in lieu of shares of Common Stock in respect of the Prorated
RSUs, a cash payment equal to the product of (1) the value of the deemed per share consideration received by
the Company in the Company Transaction, in each case as determined by the Committee, multiplied by (2)
the number of shares of Common Stock that would have otherwise been delivered in respect of the Prorated
RSUs; provided further, if the Restricted Stock Units constitute “nonqualified deferred compensation” within
the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), then (A)
the Prorated RSUs shall vest but not be settled upon a Change in Control that is a Company Transaction
unless such Change in Control constitutes a “change in control event” within the meaning of Section 409A, to
the extent required to comply with Section 409A, and (B) if the Change in Control is not a “change in control
event” within the meaning of Section 409A, then the Prorated RSUs shall be settled in accordance with the
normal vesting schedule applicable to the Restricted Stock Units under this Agreement or, if earlier, the
Grantee’s death or termination of employment.
(c) In the event of (i) the occurrence of a Change in Control that is a Company Transaction during the
Performance Period and (ii) the Grantee’s termination of employment for reasons other than (A) voluntary
resignation without Good Reason or (B) termination for Cause, during the one-year period following the
Change in Control, the Prorated RSUs shall become vested immediately prior to (and contingent upon) such
termination of employment.
(d) If the Grantee’s service with the Company ceases by reason of the Grantee’s death or termination by
the Company due to Disability prior to the expiration of the Performance Period, 100% of the Restricted
Stock Units based upon the target (100%) payout level shall become vested immediately prior to (and
termination by the Company due to
contingent
Disability. Notwithstanding the foregoing, a Disability shall not qualify if it is the result of (A) a willfully
self-inflicted injury or willfully self-induced sickness; or (B) an injury or disease contracted, suffered, or
incurred while participating in a criminal offense. The determination of Disability for purposes of this
Agreement shall not be construed to be an admission of disability for any other purpose.
the occurrence of
such death or
on)
(e) Except as provided in this Agreement, by the Committee or in any other agreement between the
Grantee and the Company or any of its Subsidiaries, upon cessation of the Grantee’s service with the
Company for any reason or for no reason (and whether such cessation is initiated by the Company, the
Grantee or otherwise): (i) any Restricted Stock Units that have not, prior to such cessation, become vested
shall immediately and automatically, without any action on the part of the Company, be forfeited, and (ii) the
Grantee shall have no further rights with respect to those Restricted Stock Units (or the underlying shares of
Common Stock).
2
(f) For purposes of this Agreement, service with the Company shall be deemed to include service with
any Subsidiary of the Company for only so long as such entity remains a Subsidiary.
(g) For purposes of this Agreement, “Cause” and “Wrongful Act” mean:
(i) Grantee materially breaches Grantee’s obligations under any employment, consulting, or other
agreement between the Grantee and the Company (each, a “Company Agreement”);
(ii) Grantee materially breaches Grantee’s obligations under the Company’s Code of Ethics and
Conduct (or any successor thereto) or an established policy of the Company;
(iii) Grantee engages in conduct prohibited by law (other than minor violations), commits an act of
dishonesty, fraud, or serious or willful misconduct in connection with Grantee’s job duties, or engages
in unethical or immoral conduct that, in the reasonable judgment of the Committee, could injure the
integrity, character or reputation of Company;
(iv) Grantee fails or refuses to perform, or habitually neglects, Grantee’s duties and
responsibilities under any Company Agreement (other than on account of Disability), and continues
such failure, refusal or neglect after having been given written notice by the Company that specifies
what duties Grantee failed to perform and an opportunity to cure of 30 days;
(v) Subject to Section 10, use or disclosure by Grantee of confidential information or trade secrets
other than in the furtherance of the Company’s (or its Subsidiaries’) business interests, or other
violation of a fiduciary duty to the Company (including, without limitation, entering into any
transaction or contractual relationship causing diversion of business opportunity from the Company
(other than with the prior written consent of the Board)); or
(vi) Grantee fails to reasonably cooperate with any audit or investigation involving the Company
or its business practices after having been given written notice by the Company that specifies
Grantee’s failure to cooperate and an opportunity to cure of ten days.
(h) For purposes of this Agreement, “Disability” means a mental or physical impairment of Grantee that
is expected to result in death or that has lasted or is expected to last for a continuous period of
12 months or more and that causes Grantee to be unable to perform his or her material duties for the
Company and to be engaged in any substantial gainful activity, in each case as determined by the
Company’s chief human resources officer or other person performing that function or, in the case of
directors and executive officers, the Committee, whose determination shall be conclusive and binding.
3
(i) For purposes of this Agreement, “Good Reason” means:
(i) The assignment to Grantee of any duties inconsistent in any respect with Grantee’s position
(including status, offices, titles and reporting requirements), authority, duties or responsibilities or any
other action by the Company or its affiliates that results in a material diminution in such position,
authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith;
(ii) Any failure by the Company or its affiliates to comply with any provision of any employment
agreement entered into between Grantee and the Company or an affiliate other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith;
(iii) The Company or any of its affiliates requiring Grantee to be based at any office or location
other than the office occupied by Grantee as of the date of this Agreement or a reasonably comparable
office located within a 40-mile radius of such current office; or
(iv) A material adverse change in Grantee’s base salary.
provided, however, that a “Good Reason” termination will have occurred only if (1) Grantee
terminates his or her employment during the one year following the initial existence of a Good Reason
event; (b) Grantee provided notice to Company within 90 days of the initial existence of a Good
Reason condition; and (c) the Company failed to cure the Good Reason event within 30 days of such
notice from Grantee; provided that these notice and cure periods may extend the termination date
beyond one year if the Grantee provides notice within one year following the initial existence of a
Good Reason event. Further, the amount, time and form of payment must be substantially identical to
the amount, time and form of payments made due to an involuntary termination.
3. Delivery of Common Stock Underlying Restricted Stock Units. Within 60 days after the vesting of any
Restricted Stock Units (or such later date as may be required to comply with Section 409A, the Company will issue
or deliver, subject to the conditions of this Agreement, the vested shares of Common Stock in respect of such
Restricted Stock Units to Grantee. Such issuance or delivery shall be evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company. The Company shall pay all original
issue or transfer taxes and all fees and expenses incident to such issuance or delivery, except as otherwise provided
herein. Prior to the issuance to Grantee of the shares of Common Stock subject to the Restricted Stock Units,
Grantee shall have no direct or secured claim in any specific assets of the Company or in such shares, and will have
the status of a general unsecured creditor of the Company.
4. Adjustments. In the event of any equity restructuring (within the meaning of Financial Accounting Standards
Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation) that causes the per share
value of shares of Common Stock to change, such
4
as a stock dividend, stock split, spinoff, rights offering or recapitalization through an extraordinary dividend, the
terms of this Agreement, including the number and class of securities subject hereto, shall be appropriately adjusted
by the Committee. In the event of any other change in corporate capitalization, including a merger, consolidation,
reorganization, or partial or complete liquidation of the Company, such equitable adjustments described in the
foregoing sentence may be made as determined to be appropriate and equitable by the Committee (or, if the
Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation)
to prevent dilution or enlargement of rights of the Grantee. The decision of the Committee regarding any such
adjustment shall be final, binding and conclusive.
5. Rights as a Stockholder. The Grantee shall have no rights as a stockholder of the Company with respect to
the shares of Common Stock subject to the Restricted Stock Units (including the right to vote) until the underlying
Common Stock becomes vested pursuant to Section 2 and the Grantee becomes a stockholder of record with respect
to such shares, except that the Grantee shall be entitled to receive dividend equivalents related to the Restricted Stock
Units equal in amount to the dividends declared on the underlying shares of Common Stock that become vested
pursuant to this Agreement. Dividend equivalent amounts shall be paid or distributed in cash at the same time the
underlying shares of Common Stock are distributed to Grantee in accordance with Section 3.
6. Tax Consequences.
(a) The Grantee acknowledges that the Company has not advised the Grantee regarding the Grantee’s
income tax liability in connection with the grant or vesting of the Restricted Stock Units, the dividend
equivalents contemplated hereunder or the delivery of the Common Stock underlying the Restricted Stock
Units. The Grantee has reviewed with the Grantee’s own tax advisors the federal, state, local and foreign tax
consequences of this investment and the transactions contemplated by this Agreement. The Grantee is relying
solely on such advisors and not on any statements or representations of the Company or any of its agents. The
Grantee understands that the Grantee (and not the Company) will be responsible for the Grantee’s own tax
liability that may arise as a result of the transactions contemplated by this Agreement.
(b) As a condition precedent to the delivery of the shares of Common Stock upon the vesting of the
Restricted Stock Units, the Grantee shall, upon request by the Company, pay to the Company such amount as
the Company may be required, under all applicable federal, state, local or other laws or regulations, to
withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to
such shares of Common Stock. If the Grantee shall fail to advance the Required Tax Payments after request
by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount
then or thereafter payable by the Company to the Grantee.
(c) The Grantee may elect to satisfy his or her obligation to advance the Required Tax Payments by any
of the following means: (i) a cash payment to the Company; (ii) delivery to the Company (either actual
delivery or by attestation procedures established by the Company) of previously owned whole shares of
Common Stock having an aggregate Fair Market Value, determined as of the date on which such withholding
obligation arises (the “Tax Date”), equal to the Required Tax Payments; (iii) authorizing the Company to
withhold whole shares of Common Stock which would otherwise be delivered to the
5
Grantee having an aggregate Fair Market Value, determined as of the Tax Date, equal to the Required Tax
Payments or (iv) any combination of (i), (ii) and (iii). Shares of Common Stock to be delivered or withheld
may not have a Fair Market Value in excess of the minimum amount of the Required Tax Payments. Any
fraction of a share of Common Stock which would be required to satisfy any such obligation shall be
disregarded and the remaining amount due shall be paid in cash by the Grantee. No certificate representing a
share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.
7. Nontransferability of Award. The Grantee may not sell, pledge, assign, encumber, hypothecate, gift,
transfer, bequeath, devise, donate or otherwise dispose of, in any way or manner whatsoever, whether voluntary or
involuntary, any legal or beneficial interest in any of the Restricted Stock Units until the Restricted Stock Units
become vested in accordance with Section 2; provided, however, that the restrictions of this Section 7 shall not
apply to any transfer (i) pursuant to applicable laws of descent and distribution or (ii) among Grantee’s family group;
provided that such restrictions will continue to be applicable to the Restricted Stock Units after any such transfer and
the transferees of such Restricted Stock Units have agreed in writing to be bound by the provisions of this
Agreement. Grantee’s "family group" means Grantee’s spouse and descendants (whether natural or adopted) and
any trust solely for the benefit of Grantee and/or Grantee’s spouse and/or descendants during Grantee’s lifetime.
8. Securities Laws. The Company may from time to time impose any conditions on the Restricted Stock Units
or any underlying shares of Common Stock as it deems necessary or advisable to ensure that the Plan satisfies the
conditions of Rule 16b-3 adopted under the Securities and Exchange Act of 1934 and otherwise complies with
applicable rules and laws.
9. Recoupment of Award. Notwithstanding anything in this Agreement to the contrary, if the Company
determines that the Grantee’s Wrongful Act was a significant contributing factor to the Company or a Subsidiary
having to restate all or a portion of its financial statements, all outstanding Restricted Stock Units will immediately
and automatically be forfeited and the Grantee shall promptly repay to the Company any shares of Common Stock,
cash or other property paid in respect of any Restricted Stock Units during the period beginning on the date the
financial statements requiring restatement were originally released to the public or submitted to the Securities and
Exchange Commission (whichever is earlier) and ending on the date the restated financial statements are filed with
the Securities and Exchange Commission.
10. Protected Rights. Grantee understands that nothing contained in this Agreement limits Grantee’s ability to
report possible violations of law or regulation to, or file a charge or complaint with, the Securities and Exchange
Commission, the Equal Employment Opportunity Commission, the National Labor Relations Board, the
Occupational Safety and Health Administration, the Department of Justice, the Congress, any Inspector General, or
any other federal, state or local governmental agency or commission (“Government Agencies”). Grantee further
understands that this Agreement does not limit Grantee’s ability to communicate with any Government Agencies or
otherwise participate in any investigation or proceeding that may be conducted by any Government Agency,
including providing documents or other information, without notice to the Company. Nothing in this Agreement shall
limit Grantee’s ability under applicable United States federal law to (i) disclose in confidence trade secrets to federal,
state, and local government
6
officials, or to an attorney, for the sole purpose of reporting or investigating a suspected violation of law or
(ii) disclose trade secrets in a document filed in a lawsuit or other proceeding, but only if the filing is made under seal
and protected from public disclosure.
11. Compliance with Section 409A. The Restricted Stock Units are intended to be exempt from or comply with
Section 409A, and shall be interpreted and construed accordingly, and each payment hereunder shall be considered a
separate payment. To the extent this Agreement provides for the Restricted Stock Units to become vested and be
settled upon the Grantee’s termination of employment, the applicable shares of Common Stock shall be transferred to
the Grantee or his or her beneficiary upon the Grantee’s “separation from service,” within the meaning of Section
409A. Notwithstanding any other provision in this Agreement, to the extent any payments hereunder constitute
nonqualified deferred compensation, within the meaning of Section 409A, then (a) each such payment which is
conditioned upon Grantee’s execution of a release of claims and which is to be paid or provided during a designated
period that begins in one taxable year and ends in a second taxable year, shall be paid or provided in the later of the
two taxable years, and (b) if Grantee is a specified employee (within the meaning of Section 409A) as of the date of
Grantee’s separation from service, each such payment that is payable upon Grantee’s separation from service and
would have been paid prior to the six-month anniversary of Grantee’s separation from service, shall be delayed until
the earlier to occur of (i) the first day of the seventh month following the Grantee’s separation from service or (ii) the
date of Grantee’s death.
12. General Provisions
(a) This Agreement and the Plan together represent the entire agreement between the parties with respect
to the granting of the Restricted Stock Units and may only be modified or amended in a writing signed by
both parties.
(b) Any notice, demand or request required or permitted to be given by either the Company or the
Grantee pursuant to the terms of this Agreement must be in writing and will be deemed given (i) on the date
and at the time delivered via personal, courier or recognized overnight delivery service, (ii) if sent via
telecopier on the date and at the time telecopied with confirmation of delivery, (iii) if sent via email or other
electronic delivery and receipt is confirmed, on the date and at the time received, or (iv) if mailed, on the
date five days after the date of the mailing (which must be by registered or certified mail). Delivery of a
notice by telecopy (with confirmation) or by email or other electronic delivery (with confirmation or receipt)
will be permitted and will be considered delivery of a notice notwithstanding that it is not an original that is
received. Any notice to Grantee under this Agreement will be made to Grantee at the address (or telecopy
number, email or other electronic address, as the case may be) listed in the Company’s personnel files. If
directed to the Company, any such notice, demand or request will be sent to the Corporate Secretary at the
Company’s principal executive office, or such other address or person as the Company may hereafter specify
in writing.
(c) The Company may condition delivery of certificates for shares of Common Stock subject to the
Restricted Stock Units (or, if the shares are not certificated, the entry in the stock record books of the
Company of the transfer to the Grantee of the shares of Common Stock) upon the prior receipt from Grantee
of any undertakings which it may determine are
7
required to assure that the certificates are being issued in compliance with federal and state securities laws.
(d) The Grantee has received a copy of the Plan, has read the Plan and is familiar with its terms, and
hereby accepts the Restricted Stock Units subject to all of the terms and provisions of the Plan, as amended
from time to time. Pursuant to the Plan, the Board and the Committee are authorized to interpret the Plan and
to adopt rules and regulations not inconsistent with the Plan as they deem appropriate. The Grantee hereby
agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or the
Committee upon any questions arising under the Plan.
(e) Subject to Section 7, neither this Agreement nor any rights or interest hereunder will be assignable by
the Grantee, the Grantee’s beneficiaries or legal representatives, and any purported assignment in violation
hereof will be null and void.
(f) Either party’s failure to enforce any provision or provisions of this Agreement will not in any way be
construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing
each and every other provision of this Agreement. The rights granted both parties herein are cumulative and
will not constitute a waiver of either party’s right to assert all other legal remedies available to it under the
circumstances.
(g) The grant of Restricted Stock Units hereunder does not confer upon the Grantee any right to continue
in service with the Company.
(h) This Agreement shall be governed by, and enforced in accordance with, the laws of the State of
Delaware, without regard to the application of the principles of conflicts or choice of laws.
(i) This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original, and all of which together shall be deemed to be one and the same instrument. In the event that any
signature to this Agreement is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format
data file or picture format data file, such signature shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force and effect as if such electronic
facsimile signature page were an original thereof. The parties confirm that it is their wish that this Agreement
may be executed by means of electronic signature.
[Signature Page Follows]
8
[SIGNATURE PAGE TO AWARD AGREEMENT FOR PERFORMANCE-BASED RESTRICTED STOCK UNITS]
IN WITNESS WHEREOF, the parties have duly executed this Award Agreement intending it to be
effective as of the first date written above.
ONESPAN INC.
By:
Name: Mark Hoyt
Its:
CFO
GRANTEE
Name: Mary Jean Capodanno
Signature:
9
GRANTEE SPECIFIC INFORMATION:
Exhibit A
Grantee
Target $
Grant Date
Mary Jean Capodanno
15,000
06/12/2019
Grant
Date Price
13.69
Target # of Restricted
Stock Units
1,096
Performance Targets
The number of Earned RSUs, if any, will be dependent on the Company’s achievement of the Performance Targets
as defined below:
The “Performance Target” for the Three Year RSUs is comprised of the following metrics and weightings:
Metric
Hardware Revenue
Non-Hardware Revenue
Weighting
50%
50%
Awarded RSUs
548
548
Hardware Revenue consists of aggregate hardware revenue for calendar years 2019, 2020, and 2021.
Non-Hardware Revenue consists of aggregate non-hardware revenue for calendar years 2019, 2020 and 2021,
adjusted for change in non-hardware deferred revenue during the three-year period.
Metrics follow the Company’s published financial statements and earnings disclosures. Revenue from acquisitions
shall be determined by the Company in accordance with U.S. Generally Accepted Accounting Principles.
The Performance Target metrics shall be subject to a minimum threshold, a maximum achievement and linear
interpolation between various performance levels as follows:
2019 – 2021 Hardware Actual
Performance (millions)
Earned Restricted Stock Units as
a percentage of Awarded RSUs
Earned RSU’s
Minimum threshold $244
Target $271
Maximum $298 or higher
2019 – 2021 Non-Hardware Actual
Performance (millions)
Earned RSUs as a percentage of
Awarded RSUs
Minimum threshold $464
Target $515
Maximum $567 or higher
10
50%
100%
150%
50%
100%
150%
Earned RSUs
274
548
822
274
548
822
Exhibit 4.10
MASTER 2019 DIRECTOR GRANT
AWARD AGREEMENT FOR RESTRICTED STOCK UNITS
FOR NON-EMPLOYEE DIRECTORS UNDER THE
ONESPAN INC.
2019 OMNIBUS INCENTIVE PLAN
THIS AWARD AGREEMENT FOR RESTRICTED STOCK UNITS (this “Agreement”) is made as of February 1, 2019 (the “Effective
Date”), between OneSpan Inc. (the “Company”) and the undersigned director of the Company (the “Grantee”).
WHEREAS, the Company maintains the OneSpan Inc. 2019 Omnibus Incentive Plan (the “Plan”) for the benefit of its employees,
directors, consultants, and other individuals who provide services to the Company; and
WHEREAS, the Plan permits the issuance of restricted stock units with respect to shares of Common Stock (as defined below),
subject to certain terms, conditions and restrictions; and
WHEREAS, to compensate the Grantee for his or her service as a director of the Company, the Company wishes to award the
Grantee restricted stock units with respect to shares of Common Stock, subject to the restrictions and on the terms and conditions contained in
the Plan and this Agreement.
NOW, THEREFORE, in consideration of these premises and the agreements set forth herein, the parties, intending to be legally
bound hereby, agree as follows:
1. Grant of Restricted Stock Units. Pursuant to Article III of the Plan, the Company hereby grants to the Grantee an award of
restricted stock units (the “Restricted Stock Units”) with respect to the number of shares of the Company’s common stock, par value of $.001
per share (the “Common Stock”), that is specified on the signature page hereto, subject to the terms and conditions set forth herein and in the
Plan and subject further to adjustment as provided in Section 5.7 of the Plan; provided, however, the grant of Restricted Stock Units
contemplated herein shall be subject to the approval of the Plan by the Company’s stockholders at the Company’s 2019 Annual Meeting of
Stockholders and if the Plan shall not be approved at such meeting, the Restricted Stock Units shall be forfeited for no consideration without
any action on the part of the Company or the Grantee. The terms of the Plan are hereby incorporated into this Agreement by this reference, as
though fully set forth herein. Capitalized terms used but not defined herein will have the same meaning as defined in the Plan.
2. Vesting of Restricted Stock Units. The Restricted Stock Units are subject to forfeiture until they become non-forfeitable in
accordance with this Section 2.
(a) Vesting. The Restricted Stock Units will vest and become non-forfeitable on the one-year anniversary of the
Effective Date (the “Vesting Date”), provided that the Grantee has, from the date hereof, continuously served as a director of the Company
through the Vesting Date.
(b) All Outstanding Restricted Stock Units Forfeited Upon Cessation of Service. Subject to the remainder of this
Section 2, upon cessation of Grantee’s service as a director of the Company for any reason or for no reason (and whether such cessation is
initiated by the Company, the Grantee or otherwise):
-1-
MASTER 2019 DIRECTOR GRANT
automatically, without any action on the part of the Company, be forfeited; and
(i) any Restricted Stock Units that have not vested prior to the effective date of such cessation will immediately and
(ii) the Grantee will have no further rights with respect to those Restricted Stock Units.
(c) Acceleration on Death or Disability. If the Grantee ceases to be a director of the Company by reason of the
Grantee's death or disability, all outstanding Restricted Stock Units shall become immediately vested. The term “disability” means a medically
determinable mental or physical impairment that, in the opinion of the Board, causes the Grantee to be unable to perform Grantee’s duties as a
director of the Company.
(d) Acceleration upon a Change in Control. Upon a Change in Control of the Company, all outstanding Restricted
Stock Units shall become immediately vested.
(e) Acceleration upon Retirement. If the Grantee ceases to be a director of the Company by reason of the Grantee’s
Retirement (as defined below), all outstanding Restricted Stock Units shall become immediately vested. The term “Retirement” for this
Agreement shall have both of the following meanings (and only one of which need be satisfied): (i) the termination of the Grantee’s service as
a director of the Company occurring on or after the date that the Grantee reaches age 65, or (ii) regardless of the director’s age, with respect to
any director who has served as a director for at least ten consecutive years, the termination of the Grantee’s service as a director of the
Company upon expiration of the Grantee’s term of service following Grantee’s declination to stand for nomination for a new annual term as
director.
3. Rights as a Stockholder. The Grantee shall have no rights as a stockholder of the Company with respect to the shares of
Common Stock subject to the Restricted Stock Units (including the right to vote) until the underlying Common Stock becomes vested pursuant
to Section 2 and the Grantee becomes a stockholder of record with respect to such shares, except that the Grantee shall be entitled to receive
dividend equivalents related to the Restricted Stock Units equal in amount to the dividends declared on the underlying shares of Common
Stock. Dividend equivalent amounts shall accrue and be paid or distributed in cash at the same time the underlying shares of Common Stock
are distributed to Grantee in accordance with Section 4.
4. Delivery of Common Stock Underlying Restricted Stock Units. The Company shall deliver vested shares of Common Stock
(and the related dividend equivalents in accordance with Section 3) with respect to the Restricted Stock Units to the Grantee within ten
business days upon the earliest to occur of: (i) the Grantee’s cessation of service as a director of the Company; and (ii) a Change in Control (as
defined in the Plan), but only if such Change in Control also constitutes a “change in control event” of the Company within the meaning of
Section 409A of the Code.
5. Restrictions on Transfer. The Grantee may not sell, transfer, assign, pledge or otherwise encumber or dispose of the
Restricted Stock Units subject to this Agreement until such time as the shares of Common Stock underlying the Restricted Stock Units are
issued to the Grantee in accordance with Section 4. The Grantee may designate beneficiaries to receive
-2-
MASTER 2019 DIRECTOR GRANT
the shares of Common Stock underlying the Restricted Stock Units subject to this Agreement if the Grantee dies before delivery of the shares
of Common Stock by so indicating on a form supplied by the Company. If the Grantee fails to designate a beneficiary, such Common Stock
will be delivered to the Grantee’s estate.
6. Tax Consequences. The Grantee acknowledges that the Company has not advised
the Grantee regarding the Grantee’s income tax liability in connection with the grant or vesting
of the Restricted Stock Units, the dividend equivalents contemplated hereunder or the delivery of the Common Stock underlying the Restricted
Stock Units. The Grantee has reviewed with the Grantee’s own tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Grantee is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents. The Grantee understands that the Grantee (and not the Company) shall be responsible for
the Grantee’s own tax liability that may arise as a result of the transactions contemplated by this Agreement.
7. Securities Laws. The Company may from time to time impose any conditions on the Restricted Stock Units or the shares of
Common Stock underlying the Restricted Stock Units as it deems necessary or advisable to ensure that the Plan satisfies the conditions of Rule
16b-3 or other applicable laws.
8. General Provisions.
(a) This Agreement and the Plan together represent the entire agreement between the parties with respect to the
Restricted Stock Units and may only be modified or amended in a writing signed by both parties.
(b) Any notice, demand or request required or permitted to be given by either the Company or the Grantee pursuant to
the terms of this Agreement shall be in writing and shall be deemed given on the date and at the time delivered via personal, courier or
recognized overnight delivery service or, if sent via telecopier, on the date and at the time telecopied with confirmation of delivery or, if
mailed, on the date five days after the date of the mailing (which shall be by regular, registered or certified mail). Delivery of a notice by
telecopy (with confirmation) shall be permitted and shall be considered delivery of a notice notwithstanding that it is not an original that is
received. Any notice to Grantee under this Agreement shall be made to Grantee at the address listed in the Company’s personnel files. If
directed to the Company, any such notice, demand or request shall be sent to the Company’s principal executive office, c/o the Company’s
Secretary, or to such other address or person as the Company may hereafter specify in writing.
(c) The Company may condition delivery of certificates for the shares of Common Stock underlying the Restricted
Stock Units upon the prior receipt from Grantee of any undertakings which it may determine are required to assure that the certificates are
being issued in compliance with federal and state securities laws.
(d) The Grantee has received a copy of the Plan, has read the Plan and is familiar with its terms, and hereby accepts
the Restricted Stock Units subject to all of the terms and provisions of the Plan, as amended from time to time. Pursuant to the Plan, the Board
and the Committee are authorized to interpret the Plan and to adopt rules and regulations not inconsistent with the Plan as they deem
appropriate. The Grantee hereby agrees to accept as
-3-
MASTER 2019 DIRECTOR GRANT
binding, conclusive and final all decisions or interpretations of the Board and the Committee upon any questions arising under the Plan.
(e) The award of Restricted Stock Units granted hereunder is intended to comply with the requirements of Section
409A of the Code (“Section 409A”) and shall be construed and interpreted in a manner that is consistent with the requirements for avoiding
additional taxes or penalties under Section 409A of the Code.
(f) Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided
under this Agreement comply with Section 409A of the Code and in no event shall the Company be liable for all or any portion of any taxes,
penalties, interest or other expenses that may be incurred by the Grantee on account of non-compliance with Section 409A of the Code.
(g) Neither this Agreement nor any rights or interest hereunder shall be assignable by the Grantee, Grantee’s
beneficiaries or legal representatives, and any purported assignment in violation hereof shall be null and void.
(h) Either party’s failure to enforce any provision or provisions of this Agreement shall not in any way be construed as
a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this
Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party’s right to assert all other
legal remedies available to it under the circumstances.
(i) The grant of Restricted Stock Units hereunder will not confer upon the Grantee any right to continue in service with
the Company or any of its Subsidiaries.
(j) This Agreement shall be governed by, and enforced in accordance with, the laws of the State of Delaware, without
regard to the application of the principles of conflicts or choice of laws.
(k) This Agreement may be executed, including execution by facsimile signature, in one or more counterparts, each of
which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. The parties confirm that it is
their wish that this Agreement may be executed by means of electronic signature.
[Signature Page Follows]
-4-
SIGNATURE PAGE TO
AWARD AGREEMENT FOR RESTRICTED STOCK UNITS
MASTER 2019 DIRECTOR GRANT
IN WITNESS WHEREOF, the parties have duly executed this Award Agreement intending it to be effective as of the first date
written above.
ONESPAN INC.
By:
Its:
CFO
GRANTEE
Name:
Signature:
GRANT VALUE: $105,000
SHARE PRICE: $14.74
SHARES SUBJECT TO AWARD: 7,124
-5-
Exhibit 4.11
CASH AWARD LONG-TERM INCENTIVE PLAN AGREEMENT
Version [ ]% Performance / [ ]% Time-Based
THIS AWARD AGREEMENT (this “Agreement”) is made as of January 1, 2019 (the “Grant Date”),
between OneSpan Inc. (the “Grantor”) and [ ] (the “Grantee”).
WHEREAS, the Grantor seeks to motivate and incentivize the Grantee to contribute to the future success of
OneSpan Inc. (the "Company") and all of the entities that are directly or indirectly controlled by, in control of or
under the common control with the Company (each a "Related Company"); and
WHEREAS, as a means for motivating and incentivizing the Grantee, the Grantor wishes to provide the
Grantee with an opportunity to receive future cash payments, the amount of which is based upon the Grantee's
continued service.
NOW, THEREFORE, in consideration of these premises and the agreements set forth herein, the parties,
intending to be legally bound hereby, agree as follows:
1. Definitions. Whenever the following terms are used in this Agreement, they shall have the meaning
specified below unless the context clearly indicates otherwise.
(a) "Administrator" means the Company's Chief Financial Officer.
(b) Change in Control," unless otherwise defined for purposes of an Award in a written employment,
services or other agreement between the Grantee and the Employer, the Company or a Related
Company, means the occurrence of any of the following events:
(i). An acquisition by any individual, entity or group, within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act, (a “Person”) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of more than 50% of either (1) the then outstanding
shares of Common Stock of the Company (the “Outstanding Common Stock”) or (2) the
combined voting power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the “Outstanding Voting Securities”); excluding,
however, the following: (A) any acquisition directly from the Company, other than an
acquisition by virtue of the exercise, exchange or conversion of any Convertible Securities
unless such securities were themselves acquired directly from the Company, (B) any acquisition
by the Company; (C) any acquisition by T. Kendall Hunt or any of his affiliates, or (D) any
acquisition by any Person pursuant to a transaction which complies with clauses (1) and (2) of
the exception contained in the definition of “Company Transaction;” or
(ii). A Company Transaction; or
(iii). The approval by the stockholders of the Company of a complete liquidation or dissolution of the
Company (other than to an entity pursuant to a transaction which would comply with clauses (1)
and (2) of the exception contained in the definition of “Company Transaction”), assuming for
this purpose that such transaction would be a Company Transaction.
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For purposes of the definition of “Change of Control” and “Company Transaction”, a series of
transactions undertaken with a common purpose shall be treated as a single transaction that begins at
the consummation of the first transaction in the series and ends at the consummation of the last
transaction in the series.
(c) "Company Transaction" means the consummation of:
(i). a reorganization, merger or consolidation of the Company; or
(ii). the sale or other disposition of all or substantially all of the assets of the Company and its direct
and indirect subsidiaries taken as a whole to a Person or Persons who are not “related persons”
as defined in U.S. Treasury Regulation § 1.409A-3(i)(5)(vii)(B);
except in each case a transaction pursuant to which:
1. all or substantially all of the individuals and entities who are the beneficial owners,
respectively, of the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such transaction will beneficially own, directly or indirectly, 50% or
more of, respectively, the outstanding shares of common stock, and the combined voting
power of the outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the entity resulting from such transaction (including,
without limitation, an entity which as a result of such transaction owns the Company or
all or substantially all of the Company’s assets, either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership, immediately prior
to such transaction, of the Outstanding Common Stock and Outstanding Voting
Securities, as the case may be; and
2. individuals who were members of the Board immediately prior to the approval by the
stockholders of the Company of such transaction will constitute at least a majority of the
members of the board of directors of the entity resulting from such transaction.
(d) “Disability” means, except as otherwise required under local law, a mental or physical impairment of
the Grantee that is expected to result in death or that has lasted or is expected to last for a continuous
period of 12 months or more and that causes the Grantee to be unable to perform his or her material
duties for the Employer and to be engaged in any substantial gainful activity, in each case as
determined by the Company in its sole discretion, whose determination shall be conclusive and
binding. Notwithstanding the foregoing, the Grantee will not be deemed to have sustained a
Disability if it is the result of (A) a willfully self-inflicted injury or willfully self-induced sickness; or
(B) an injury or disease contracted, suffered, or incurred while participating in a criminal offense.
(e) "Employer" means the Related Company that employs the Grantee.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time.
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(g) "Good Reason" means: (a) the assignment to the Grantee of any duties inconsistent in any respect
with the Grantee’s position (including status, offices, titles and reporting requirements), authority,
duties or responsibilities or any other action by the Employer, the Company or a Related Company
that results in a material diminution in such position, authority, duties or responsibilities, excluding for
this purpose an isolated, insubstantial and inadvertent action not taken in bad faith; (b) any failure by
the Employer, the Company or a Related Company to comply with any provision of any employment
agreement covering the Grantee other than an isolated, insubstantial and inadvertent failure not
occurring in bad faith; (c) the Employer, the Company or a Related Company requiring the Grantee to
be based at any office or location other than the office occupied by the Grantee as of the date of the
Award or a reasonably comparable office located within a 40-mile radius of such current office; or (d)
a material adverse change in the Grantee's base salary. A Good Reason termination will have
occurred only if (a) the Grantee terminates his or her employment during the one year following the
initial existence of a Good Reason event; (b) the Grantee provided notice to the Employer within 90
days of the initial existence of a Good Reason condition; and (c) the Employer failed to cure the Good
Reason event within 30 days of such notice from the Grantee. Any good faith determination
regarding the occurrence of "Good Reason" made by the Administrator shall be binding and
conclusive upon all parties.
(h) “Performance Period” means the period commencing on January 1, 2019 and ending on December
31, 2021.
(i) "Recoupment Period" means the period beginning on the date the financial statements requiring
restatement were originally released to the public or submitted to the Securities and Exchange
Commission (whichever is earlier) and ending on the date the restated financial statements are filed
with the Securities and Exchange Commission.
2. Cash Bonus Opportunity. The Company hereby grants to the Grantee the opportunity to receive future cash
payments (the "Award"), subject to the terms and conditions set forth in this Agreement. The target amount
of the Award in USD is detailed in Addendum B (“Target Amount”).
3. Vesting of Award. Subject to Section 7, the Award is subject to forfeiture and not earned until it becomes
vested in accordance with this Section 3.
(a) Performance Period: The portion of the Target Amount that is determined and thereafter subject to
any vesting shall be determined by the Administrator, in its sole and absolute discretion, in accordance
with Addendum B, based upon the Company’s achievement relative to the Performance Target during
the Performance Period (“Determined Amount”). Upon determination of Determined Amount and
subject to Section 7, the Determined Amount as detailed in Addendum B shall become vested after the
three-year performance period and finalization of the audited financial statements, provided that on
the payment date, the Grantee has, from the Grant Date, continuously provided services to the
Employer, the Company or any other Related Company.
(b) Time Vesting Period. Subject to Section 7, the Target Amount subject to time-based vesting shall be
subject to vesting, in accordance with the following schedule (the "Time Vesting Period"), provided
that on each payment date, the
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Grantee has, from the Grant Date, continuously provided services to the Employer, the Company or
any other Related Company:
Vesting Percentage of
Time-Based Amount
Date
March 2020
March 2021
March 2022
March 2023
Any portion of the Determined Amount that has not vested pursuant to this Section 3 will be automatically
forfeited.
(c) In the event of the occurrence of a Change in Control prior to the expiration of the Performance
Period, the value of the Target Amount outstanding as of the date of the Change in Control shall be
prorated (based on the ratio of (x) the number of days that have elapsed in the Performance Period to
(y) the total number of days in the Performance Period) and compared to actual performance up to and
including the date of such Change in Control (the “Prorated Award”) and the Grantee shall become
vested in the Prorated Award immediately prior to (and contingent on) the Change in Control if the
prorated performance targets have been met as determined by the Administrator.
(d) In the event of (i) the occurrence of a Change in Control during the Time Vesting Period and (ii) the
Grantee’s termination of continuous service with the Employer, the Company or any Related
Company for reasons other than (A) resignation without Good Reason, or (B) Cause, during the one
year period following the Change in Control, 100% of the Target Amount that is subject to the Time
Vesting Period will become vested immediately prior to (and contingent upon) such termination.
(e) In the event of the termination of the Grantee's continuous service with the Employer, the Company
or any Related Company, by reason of the Grantee’s death or Disability prior to the expiration of the
Time Period, 100% of the Target Amount based upon the target (100%) Time level will become
vested immediately prior to (and contingent on) the occurrence of such death or Disability. If the
Grantee’s continuous service with the Employer, the Company or any Related Company ceases by
reason of the Grantee’s death or Disability during the Time Vesting Period, 100% of the Target
Amount that is subject to the Time Vesting Period will become vested immediately prior to (and
contingent upon) the occurrence of such death or Disability.
(f) Except as provided in Sections 3(c), 3(d) and 3(e), in the event of the termination of the Grantee's
continuous service with the Employer, the Company or any Related Company for any other reason:
(i) any portion of the Award that has not, prior to such cessation, become vested will immediately and
automatically, without any action on the part of the Grantor, be forfeited, and (ii) the Grantee shall
have no further rights with respect to the Award.
(g) For purposes of this Agreement, “Cause” and “Wrongful Act” mean:
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(i). Grantee materially breaches Grantee’s obligations under any employment, consulting, or
other agreement between the Grantee and the Employer, the Company or any Related
Company (each, a “Company Agreement”);
(ii). Grantee materially breaches Grantee’s obligations under the Company’s Code of Ethics and
Conduct (or any successor thereto) or an established policy of the Company;
(iii). Grantee engages in conduct prohibited by law (other than minor violations), commits an act
of dishonesty, fraud, or serious or willful misconduct in connection with Grantee’s job
duties, or engages in unethical or immoral conduct that, in the reasonable judgment of the
Administrator, could injure the integrity, character or reputation of the Employer, the
Company or any Related Company;
(iv). Grantee fails or refuses to perform, or habitually neglects, Grantee’s duties and
responsibilities under any Company Agreement (other than on account of Disability), and
continues such failure, refusal or neglect after having been given written notice that
specifies what duties Grantee failed to perform and an opportunity to cure of 10 days;
(v). Use or disclosure by Grantee of confidential information or trade secrets of the Employer,
the Company or any Related Company, other than in the furtherance of the Employer's, the
Company's or any Related Company's business interests, or other violation of a fiduciary
duty to the Employer, the Company or any Related Company (including, without limitation,
entering into any transaction or contractual relationship causing diversion of business
opportunity from the Employer, the Company or any Related Company); or
(vi). Grantee fails to reasonably cooperate with any audit or investigation involving the
Employer, the Company or any Related Company or its business practices after having been
given written notice that specifies Grantee’s failure to cooperate and an opportunity to cure
of 10 days.
(h) For purposes of this Agreement, the termination date of the Grantee's service with the Employer, the
Company or any Related Company shall mean the earliest of (i) the date on which notice of
termination is provided to the Grantee, (ii) the last day of the Grantee's active service with the
Employer, the Company or any Related Company, or (iii) the last day on which the Grantee is an
employee of the Employer, the Company or any Related Company, as determined in each case
without including any required advance notice period and irrespective of the status of the termination
under local labor or employment laws.
(i) If the Grantee is a resident of or employed in a country that is a member of the European Union, the
grant of the Award and this Agreement are intended to comply with the age discrimination provisions
of the EU Equal Treatment Framework Directive, as implemented into local law (the “Age
Discrimination Rules”). To the extent that a court or tribunal of competent jurisdiction determines
that any provision of this Agreement or the Award are invalid or
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unenforceable, in whole or in part, under the Age Discrimination Rules, the Administrator, in its sole
discretion, shall have the power and authority to revise or strike such provision to the minimum extent
necessary to render it valid and enforceable to the full extent permitted under local law.
4. Payment of Award. As soon as administratively practicable following each vesting date (target month:
March), the Grantor shall make a cash payment in local currency, less any applicable tax withholding and/or
any other required withholdings pursuant to Section 5 of this Agreement, to the Grantee equal to the vested
percentage of the time-based Target Amount portion. For purposes of the foregoing, the amount of the cash
payment in local currency shall be determined using the applicable currency conversion rate on the date of
payment or up to 10 days prior, as determined by the Administrator (or its delegate) in its sole discretion.
5. Withholding of Tax-Related Items. Regardless of any action the Grantor may take with respect to any or
all income tax, social insurance, housing fund, payroll tax, payment on account or other tax-related
withholding (“Tax-Related Items”), the Grantee acknowledges that the ultimate liability for all Tax-Related
Items legally due by the Grantee is and remains the Grantee's responsibility, and that the Grantor (i) makes no
representations or undertakings regarding the treatment of any Tax-Related Items in connection with any
aspect of the Award, including the grant of the Award, the vesting of the Award, and any cash payments
made in settlement of the Award; and (ii) does not commit to structure the terms of the grant or any aspect of
the Award to reduce or eliminate the Grantee's liability for Tax-Related Items. Prior to the delivery of any
cash payment in settlement of the Award, if any taxing jurisdiction requires withholding of Tax-Related
Items, the Grantor shall withhold any amount necessary to pay the Tax-Related Items from the gross amount
of the cash payment in settlement of the Award.
6. Restrictions on Unvested Award. Except for the forfeiture of the Award, as described in Section 3, the
Grantee may not sell, pledge, assign, encumber, hypothecate, gift, transfer, bequeath, devise, donate or
otherwise dispose of, in any way or manner whatsoever, whether voluntary or involuntary, any legal or
beneficial interest in any portion of the Award until the Award becomes vested in accordance with Section 3.
7. Recoupment of Cash Payments. Notwithstanding anything in this Agreement to the contrary and to the
extent permitted under applicable law, if the Administrator determines that the Grantee’s Wrongful Act was a
significant contributing factor to the Employer, the Company or any Related Company having to restate all or
a portion of its financial statements, any outstanding portion of the Award will immediately and automatically
be forfeited and the Grantee shall promptly repay to the Grantor any cash or other property previously paid in
respect of the Award during the Recoupment Period.
8. No Right to Continued Service. To the extent the Award is granted to the Grantee by an entity other than
the Employer, the Grantor's grant of the Award shall not be deemed to create an employment relationship
with the Grantee. Further, the granting of the Award evidenced hereby and this Agreement shall impose no
obligation on the Employer to continue the employment of the Grantee and shall not lessen or affect any right
that the Employer may have to terminate the employment of such Grantee.
9. Discretionary Nature of Agreement; No Vested Rights. The Grantee acknowledges and agrees that the
Agreement is discretionary in nature and may be amended, cancelled, or terminated by the Grantor, in its sole
discretion, at any time. The grant of
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the Award under this Agreement is a one-time benefit and does not create any contractual or other right to
receive a grant of an Award or any other award under this Agreement or other benefits in lieu thereof in the
future. Future grants, if any, will be at the sole discretion of the Grantor. Any amendment, modification or
termination of the Agreement shall not constitute a change or impairment of the terms and conditions of the
Grantee’s employment with the Employer.
10. Extraordinary Nature of Award. The value of the Award is an extraordinary item of compensation outside
the scope of the Grantee’s employment (and the Grantee’s employment agreement, if any), and is not part of
normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of
service payments, bonuses, long-service awards, pension, or retirement benefits or similar payments.
11. Repatriation and Legal/Tax Compliance Requirements. The Grantee agrees, as a condition to the grant of
the Award, to repatriate all cash acquired pursuant to the Award in accordance with local foreign exchange
rules and regulations in the Grantee’s country of residence (and country of employment, if different). In
addition, the Grantee agrees to take any and all actions, and consents to any and all actions taken by the
Employer, the Company or any Related Company as may be required to allow the Employer, the Company or
any Related Company to comply with local laws, rules and regulations in the Grantee’s country of residence
(and country of employment, if different). Finally, the Grantee agrees to take any and all actions that may be
required to comply with the Grantee’s personal legal and tax obligations under local laws, rules and
regulations in the Grantee’s country of residence (and country of employment, if different).
12. Consent to Collection, Processing and Transfer of Personal Data. Pursuant to applicable personal data
protection laws, the Grantor hereby notifies the Grantee of the following in relation to the Grantee’s personal
data and the collection, processing and transfer of such data in relation to the Grantor’s grant of the
Award. The collection, processing and transfer of the Grantee’s personal data are necessary for the Grantor’s
administration of the Grantee's Award. As such, the Grantee voluntarily acknowledges and consents (where
required under applicable law) to the collection, use, processing and transfer of personal data as described
herein. The Grantor holds certain personal information about the Grantee, including the Grantee’s name,
home address and telephone number, date of birth, social security number or other employee identification
number, salary, nationality, and job title for the purpose of managing and administering the Grantee's Award
(“Data”). The Data may be provided by the Grantee or collected, where lawful, from third parties, and the
Grantor will process the Data for the exclusive purpose of implementing, administering and managing the
Grantee’s Award. The Data processing will take place through electronic and non-electronic means
according to logics and procedures strictly correlated to the purposes for which Data are collected and with
confidentiality and security provisions as set forth by applicable laws and regulations in the Grantee’s country
of residence (and country of employment, if different). Data processing operations will be performed
minimizing the use of personal and identification data when such operations are unnecessary for the
processing purposes sought. Data will be accessible within the Grantor’s organization only by those persons
requiring access for purposes of the implementation and administration of the Grantee's Award. The Grantor
will transfer Data internally as necessary for the purpose of the implementation and administration of the
Grantee’s Award, and the Grantor may further transfer Data to any third parties assisting the Company in the
implementation and administration of the Grantee's Award. These recipients may be located in the European
Economic Area, or elsewhere throughout the
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world, such as the United States. The Grantee hereby authorizes (where required under applicable law) these
recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for purposes of
implementing and administering the Grantee's Award. The Grantee may, at any time, exercise the Grantee’s
rights provided under applicable personal data protection laws, which may include the right to (a) obtain
confirmation as to the existence of the Data, (b) verify the content, origin and accuracy of the Data, (c)
request the integration, update, amendment, deletion, or blockage (for breach of applicable laws) of the Data,
and (d) to oppose, for legal reasons, the collection, processing or transfer of the Data which is not necessary
or required for the implementation and administration of the Grantee's Award. The Grantee may seek to
exercise these rights by contacting the Grantee’s local HR manager or the Grantor’s Human Resources
Department.
13. Electronic Delivery. The Grantor may, in its sole discretion, decide to deliver any documents related to the
Award granted to the Grantee under this Agreement by electronic means. The Grantee hereby consents to
receive such documents by electronic delivery and agrees to participate in this Agreement through an on-line
or electronic system established and maintained by the Company or a third party designated by the Grantor.
14. English Language. The Grantee acknowledges and agrees that it is the Grantee’s express intent that the
Agreement and all other documents, notices and legal proceedings entered into, given or instituted pursuant to
the Award, be drawn up in English. If the Grantee has received the Agreement or any other documents
related to the Award translated into a language other than English, and if the meaning of the translated
version is different than the English version, the English version shall control.
15. Addendum. Notwithstanding any provision of this Agreement to the contrary, the Award shall be subject to
any special terms and conditions for the Grantee’s country of residence (and country of employment, if
different) as are forth in the applicable Addendum A to this Agreement (the “Addendum”). Further, if the
Grantee transfers residency and/or employment to another country reflected in an Addendum to the
Agreement, the special terms and conditions for such country will apply to the Grantee to the extent the
Grantor determines, in its sole discretion, that the application of such terms and conditions is necessary or
advisable in order to comply with local law or to facilitate the operation and administration of the Award (or
the Grantor may establish alternative terms and conditions as may be necessary or advisable to accommodate
the Grantee’s transfer). Any applicable Addendum shall constitute part of this Agreement.
16. Additional Requirements. The Grantor reserves the right to impose other requirements on the Award, to the
extent the Company determines in its sole discretion, that such other requirements are necessary or advisable
in order to comply with local law or to facilitate the operation and administration of the Award. Such
requirements may include (but are not limited to) requiring the Grantee to sign any additional agreements or
undertakings that may be necessary to accomplish the foregoing.
17. Headings. The headings preceding the text of the sections in this Agreement hereof are inserted solely for
convenience of reference, and shall not constitute a part of the terms and conditions of this Agreement, nor
shall they affect its meaning, construction or effect.
18. Severability. The provisions of this Agreement are severable and if any one or more provisions are
determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall
nevertheless be binding and enforceable.
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19. Governing Law. The Award made and actions taken under this Agreement shall be governed by and
construed in accordance with the laws of Delaware without taking into account its conflict of law provisions.
20. General Provisions
(a) This Agreement represents the entire agreement between the parties with respect to the Award and
may only be modified or amended in a writing signed by both parties. Notwithstanding the foregoing,
this Agreement may be modified or amended without the consent of the Grantee, should the Grantor
determine in its sole discretion that a modification or amendment is advisable and necessary to
accomplish the purposes of this Agreement.
(b) Any notice, demand or request required or permitted to be given by either the Grantor or the Grantee
pursuant to the terms of this Agreement must be in writing and will be deemed given (i) on the date
and at the time delivered via personal, courier or recognized overnight delivery service, (ii) if sent via
telecopier on the date and at the time telecopied with confirmation of delivery, (iii) if sent via email or
other electronic delivery and receipt is confirmed, on the date and at the time received, or (iv) if
mailed, on the date five days after the date of the mailing (which must be by registered or certified
mail). Delivery of a notice by telecopy (with confirmation) or by email or other electronic delivery
(with confirmation or receipt) will be permitted and will be considered delivery of a notice
notwithstanding that it is not an original that is received. Any notice to Grantee under this Agreement
will be made to Grantee at the address (or telecopy number, email or other electronic address, as the
case may be) listed in the Company’s personnel files. If directed to the Grantor, any such notice,
demand or request will be sent to the Administrator at the Company’s principal executive office, or to
such other address or person as the Grantor may hereafter specify in writing. Any notice to the
Grantee will be sent to the Grantee's last known address, with a copy to the other party not sending the
notice.
(c) The Grantee has received a copy of this Agreement, has read this Agreement and is familiar with its
terms, and hereby accepts the Award subject to all of the terms and provisions of this
Agreement. Pursuant to this Agreement, the Administrator is authorized to interpret this Agreement
and to adopt rules and regulations not inconsistent with this Agreement as the Administrator deems
appropriate. The Grantee hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions arising under this Agreement.
(d) Neither this Agreement nor any rights or interest hereunder will be assignable by the Grantee, the
Grantee’s beneficiaries or legal representatives, and any purported assignment in violation hereof will
be null and void.
(e) Either party’s failure to enforce any provision or provisions of this Agreement will not in any way be
construed as a waiver of any such provision or provisions, nor prevent that party thereafter from
enforcing each and every other provision of this Agreement. The rights granted both parties herein are
cumulative and will not constitute a waiver of either party’s right to assert all other legal remedies
available to it under the circumstances.
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(f) This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original, and all of which together shall be deemed to be one and the same instrument. In the event
that any signature to this Agreement is delivered by facsimile transmission, e-signature technology or
by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is executed) with the same force
and effect as if such facsimile, digital or “.pdf” signature page were an original thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement intending it to be effective as of
the first date written above.
OneSpan Inc.
By: Mark S. Hoyt
Its: Chief Financial Officer
Grantee:
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ONESPAN INC.
ADDENDUM A TO
LONG-TERM INCENTIVE PLAN AGREEMENT
In addition to the terms of the Cash Award Long-Term Incentive Plan Agreement (the “Agreement”), the Award is
subject to the following additional terms and conditions as set forth in this addendum to the extent the Grantee
resides and/or is employed in one of the countries addressed herein (the “Addendum”). All defined terms as
contained in this Addendum shall have the same meaning as set forth in the Agreement. To the extent the Grantee
transfers residency and/or employment to another country, the additional terms and conditions as set forth in the
addendum for such country (if any) shall also apply to the Award to the extent the Grantor determines, in its sole
discretion, that the application of such addendum is necessary or advisable in order to comply with local laws, rules
and regulations, or to facilitate the operation and administration of the Award (or the Grantor may establish
additional terms and conditions as may be necessary or advisable to accommodate the Grantee's transfer).
Belgium / France / Canada
1. English Language. The Grantee acknowledges and agrees that it is the Grantee’s express intent that
the Agreement and all other documents, notices and legal proceedings entered into, given or instituted
pursuant to the Award, be drawn up in English. If the Grantee has received the Agreement or any
other documents related to the Award translated into a language other than English, and if the
meaning of the translated version is different than the English version, the English version shall
control.
2. Tax. As per Section 5 of the Agreement, Grantee acknowledges that the ultimate liability for all Tax-
Related Items legally due by the Grantee is and remains the Grantee's responsibility, and that the
Grantor (i) makes no representations or undertakings regarding the treatment of any Tax-Related
Items in connection with any aspect of the Award, including the grant of the Award, the vesting of the
Award, and any cash payments made in settlement of the Award; and (ii) does not commit to structure
the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee's liability for Tax-
Related Items.
BY SIGNING BELOW, THE GRANTEE ACKNOWLEDGES, UNDERSTANDS AND AGREES TO THE
PROVISIONS OF THE AGREEMENT AND ADDENDUM A AND B.
Signature
Date
11/13
ONESPAN, INC.
ADDENDUM B TO
LONG-TERM INCENTIVE PLAN AGREEMENT
Target Amount: [ ] USD.
The three-year Performance Target shall be the combined revenues of [ ] and [ ] for the Performance
Period. Revenues shall be measured in accordance with U.S. Generally Accepted Accounting Principles as reported
in the Company’s audited financial statements.
The portion of the Target Amount that is time-based (and subject to further vesting in accordance with Section 3 of
the Agreement) shall be determined by the Time-Based percentage as set out below and the portions that are
performance-based are based on achievement of the Performance Targets (three-year cliff vesting) below and the
assigned percentages below. The Performance Based portion of the Target Amount will not be earned if actual
performance is less than the minimum Performance Target (90%).
The maximum Performance Based portion is 150% of Performance Based Target Amount.
2019 – 2021 Performance and Time Based Criteria:
Long-Term Incentive Plan
2019-2021
HW Revenue
(c)
2019-2021
Non-HW Rev
(c, d)
Time
Based
(4 years)
(in millions)
Percent of Target Amount Payout
Performance and Time Based
2019-2021 Performance Target Amounts
$271.0
$515.0
Payout Curve (with interpolation between achievement levels):
2019-2021 HW Revenue (c)
2019-2021 Non-HW Rev (c, d)
Target
flr/clng
Less than floor
$244
$271
$298
REVENUE
Non-HW
Non-HW growth
HW
HW growth
Total revenue
Total Growth
90%
110%
Plan
2019
$ 136
27%
$ 98
-7%
$ 234
10%
% of Target
Payout
0%
50%
100%
150%
Target
flr/clng
Less than floor
$464.0
$515.0
$567.0
90%
110%
% of
Target
Payout
0%
50%
100%
150%
Long-Term
2020
2021
$ 169
25%
$ 91
-7%
$ 260
11%
$ 210
24%
$ 82
-10%
$ 292
12%
19-21 Tot
$515
$271
$786
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Example LTIP Award - $25,000 50/50 (performance goal met at 100%):
Time-Based
(50%)
$12,500
2019
Payout
$0
2020
Payout
$3,125
2021
Payout
$3,125
2022
Payout
$3,125
2023
Payout
$3,135
Performance-Based
(50%)
$12,500
Total Annual
Payouts
$0
$0
$0
$0
$12,500
$0
$3,125
$3,125
$15,625
$3,125
13/13
Exhibit 14.1
ONESPAN INC.
CORPORATE GOVERNANCE GUIDELINES
as amended on January 21, 2019
The Board of Directors (“Board”) of OneSpan Inc. (the “Company”) has developed the following Corporate Governance Guidelines (the
“Guidelines”) to assist the Board in the exercise of its oversight responsibilities and to serve the best interests of the Company and its
stockholders. The Guidelines should be interpreted in the context of all applicable laws and the Company’s Certificate of Incorporation, By-
laws, and the charter documents of the Board and Board committees.
The Guidelines are to provide guidance for corporation direction and control. Their structure specifies the distribution of rights and
responsibilities among different participants: the Board, management, stockholders and other stakeholders of the Company. Broadly stated,
the Guidelines will assist the Board in representing the Company’s stockholders by meeting two key objectives: first, being faithful to the
Board’s oversight responsibilities; and second, advising and counseling on important strategic operating and financial decisions.
The purpose of the Guidelines is to serve as a flexible framework within which the Company may conduct its business and not as a set of
legally binding obligations. The Guidelines are subject to modification from time to time by the Board as it considers appropriate in the best
interests of the Company or as required by applicable laws and regulations.
1. ROLE OF THE BOARD OF DIRECTORS
· The Board is legally responsible for the oversight of the management of the Company’s business and its affairs in order to protect and
enhance the assets of the Company in the interest of all stockholders. The Board approves the strategic goals of the business, the
objectives and policies within which it is managed, and then evaluates management performance.
· The Board is responsible for hiring the Chief Executive Officer and for planning for the succession of the Chief Executive Officer.
· The Board supervises management of the business through the Company’s Chief Executive Officer, who is charged with the day-to-
day management of the Company, and with the development and implementation of its business strategy.
· Directors should be committed to the Company, as evidenced by regular Board and committee attendance, preparation for and active
participation in meetings, and attention to the interests of the stockholders. Each director is also encouraged and expected to attend the
Company’s annual meeting of stockholders.
· Each director shall discharge all duties as a director, including duties as a member of a Board committee, in good faith, with the care an
ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director reasonably
believes to be in the best interests of the corporation, and otherwise in compliance with applicable law and rules.
2. BOARD COMPOSITION; INDEPENDENCE
· The Board of Directors should consist of a cross-section of qualified individuals with education and experience appropriate to guide the
Company in meeting its legal, financial, and operational objectives. Generally, a director shall be of the highest moral integrity, shall
have had significant managerial experience, either as a current or
121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601 USA . OneSpan.com
Revised January 21, 2019
former senior executive of a publicly traded or privately held company, or similar business experience or training.
· The Board of Directors shall choose from among the directors a Chairman of the Board. In the absence of an independent director
holding the position of Chairman, the Board of Directors shall appoint a Lead Independent Director.
· The Corporate Governance and Nominating Committee is responsible for reviewing with the Board, on an annual basis, the requisite
skills and characteristics of Board candidates, as well as the composition of the Board as a whole. This assessment will include
director independence, as well as consideration of diversity, character and judgment, skills and experience in the context of the needs
of the Board. More specifically, the Corporate Governance and Nominating Committee will evaluate each of the members of the
Board and consider each member’s experience, qualifications, attributes and skills that make such member’s continued service on the
Board appropriate. The Corporate Governance and Nominating Committee will make recommendations to the full Board concerning
all nominees for Board membership, including the re-election of existing Board members and nominees to fill Board vacancies. Final
approval of director nominees will be determined by the full Board. Each independent director is expected to promptly disclose to the
Board any existing or proposed relationships or transactions that could impact his or her independence.
· The Company’s By-laws provide that the Board shall consist of at least 4, but no more than 20, directors. A majority of the Board
shall consist of directors who the Board has determined have no material relationship with the Company and who qualify as
“independent” directors under the listing standards of The NASDAQ Stock Market LLC (“NASDAQ”) and the Securities and
Exchange Commission (“SEC”). The Board will review annually the relationships that each director has with the Company (either
directly, or as a partner, stockholder or officer of an organization that has a relationship with the Company), and only those directors
who the Board affirmatively determines have no material relationship with the Company will be considered independent. The
Company will disclose these determinations with respect to independence in its annual filings with the SEC.
· If a director changes his or her primary business or professional activities or relationships, that director shall promptly communicate
the change(s) to the Board for its consideration. The Board will then determine if that director should resign his/her position on the
Board. A director shall promptly notify the Chairman and the Secretary in the event of any change or anticipated change in his or her
affiliations, activities or professional or personal circumstances that (i) may create a conflict or potential conflict of interest, (ii) may
trigger any Company reporting obligation, (iii) may result in the director engaging in significant political activity (such as participating
in a visible leadership position in a political campaign, running for office or accepting an elected or appointed political office), (iv) has
the potential to cause embarrassment, negative publicity or reputational harm to the Company or the director or (v) could result in a
possible inconsistency with the Company’s policies or values. The Corporate Governance and Nominating Committee shall then
determine if that director should resign his/her position on the Board. All directors must comply with the applicable provisions of the
“A Company Free of Conflicts of Interest” section of the Company’s Code of Conduct and Ethics. Each director is expected to
promptly disclose to the Board any existing or proposed relationships or transactions that involve or could create a conflict of interest.
If a significant conflict of interest involving a director cannot be resolved, the director should promptly tender a resignation to the
Board. The Corporate Governance and Nominating Committee shall then review the appropriateness of that director’s continued
service on the Board in light of the conflict and make a recommendation to the Board as to whether the resignation should be accepted.
· No individual can continue to serve as a director or officer if he or she has violated the general anti-fraud provisions of the securities
laws.
121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601 USA . OneSpan.com
· All directors are elected for 1-year terms at the annual meeting of stockholders and serve until their successors are elected and
qualified, or their earlier death, removal or resignation.
· Without the express approval of the Board, no management director may serve on the board of directors (or equivalent governing
body) of another non-affiliated public entity, and no non-management director shall serve on the board of directors (or equivalent
governing body) of more than 5 public companies, without specific Board approval.
· The Chairman shall regularly solicit from the members of the Board recommendations as to matters to be brought before the Board and
shall ensure that such matters receive appropriate consideration.
· The Board of Directors does not believe it should limit the number of terms an individual may serve as a director or that a fixed
retirement age for directors is appropriate. Directors who have served on the Board of Directors for an extended time period are often
able to provide valuable contributions and insight into the Company’s operations based on their experience with, and understanding of,
the Company’s business, history and objectives.
3. BOARD COMMITTEES
· The Board, by a vote of a majority of the whole Board, may establish and seek the advice of, and delegate responsibilities to,
committees of the Board, and those committees from time to time at their discretion may engage external advisors.
· The Board has established the following standing committees, each of which should meet as specified in its respective charter to
review the matters with which it is charged, and to otherwise carry out its duties:
Audit
Compensation
Corporate Governance and Nominating
· The Audit Committee shall be composed of at least three directors who the Board has determined have no material relationship with
the Company and who qualify as “independent” and “financially literate” directors under the NASDAQ rules and who satisfy the
additional eligibility requirements for audit committee membership set forth in SEC Rule 10A-3 promulgated under the Securities
Exchange Act of 1934. No director may serve on the Audit Committee unless he or she is independent.
· The Compensation Committee shall be composed of at least three directors who the Board has determined to be “independent”
directors, as defined under the NASDAQ rules and applicable requirements of the SEC. No director may serve on the Compensation
Committee unless he or she is independent. No director shall serve on the Compensation Committee if he or she is an executive officer
of a company on whose Board or equivalent governing body a member of the Company’s management serves. The Compensation
Committee will review and approve corporate goals and objectives relevant to the compensation of the Company’s named executive
officers, evaluate the officers’ performance in light of those goals and objectives and set the compensation level based on that
evaluation.
· The Corporate Governance and Nominating Committee shall be composed of at least three directors who the Board has determined to
be “independent” directors, as defined under the NASDAQ rules. No director may serve on the Corporate Governance and Nominating
Committee unless he or she is independent. The Corporate Governance and Nominating Committee will recommend individuals to be
nominated to the Board and will review each committee’s charter annually with the applicable committee to be sure that the charter
remains relevant and complies with applicable laws and rules.
121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601 USA . OneSpan.com
4. MEETINGS
· The Board will hold at least 4 regular meetings each fiscal year at regularly scheduled intervals.
· Each regular Board meeting shall include an executive session without management or any non-independent directors present. The
independent Chairman, Lead Independent Director, or an independent director chosen by the directors present shall lead the executive
sessions.
· A meeting agenda and background material should be provided to directors prior to each meeting so that all Board members have an
opportunity for advance review of the relevant materials, and senior management will be readily accessible to directors at all Board
and committee meetings.
5. BOARD ACCESS TO EMPLOYEES; INTERACTION WITH THIRD PARTIES
· Directors have access to Company employees to ensure that directors can ask all questions and glean all information necessary to fulfill
their duties. Directors shall notify the Chief Executive Officer in advance of contacting any employee and shall use judgment to
ensure that any such contact is not unduly disruptive to the business of the Company. In addition, as necessary and appropriate, the
Board and its committees have access to the Company’s outside auditors and advisors.
· In performing its functions, the Board and each of its committees is entitled to rely on the advice, reports and opinions of management,
counsel, accountants, auditors and other expert advisers. The Board and each of its committees shall have the authority to retain and
approve the fees and retention terms of its outside advisors.
· It is the policy of the Board that the Company’s Chief Executive Officer, the Chief Financial Officer and Director of Investor Relations
act as the spokespersons for the Company, although management may, from time to time, request individual directors to meet or
otherwise communicate with various constituencies that are involved with the Company. Individual directors will only speak with
stockholders and the media about the Company if authorized by the full Board and in accordance with the policies of the Company.
· It is the policy of the Board that stockholders shall have reasonable access to directors at annual meetings of stockholders and an
opportunity to communicate directly with directors on appropriate matters. The Board will generally respond, or cause the Company
to respond, in writing to bona fide communications from stockholders addressed to one or more members of the Board. Directors shall
notify the full Board of any oral or written communications received from stockholders and describe or send copies of such
correspondence to the full Board. Stockholders and other interested parties are invited to communicate with the Board or any of its
committees or directors by writing to the Board or any such committee or director at OneSpan Inc., 121 West Wacker Drive, Suite
2050, Chicago, Illinois 60601.
· In order to facilitate open discussions, the Board believes maintaining confidentiality of information and deliberations is
imperative. Each director has a fiduciary obligation to maintain the confidentiality of information received in connection with his or
her service as a director or committee member.
6. BOARD AND SENIOR EXECUTIVE COMPENSATION AND RESTRICTIONS
· Employee directors shall not receive any additional compensation for their service as directors.
· A director’s annual retainer shall be paid in part in equity equal in value to at least 50% of such director’s aggregate annual retainer
(excluding amounts payable for Committee Chair or membership) until the director
121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601 USA . OneSpan.com
holds stock valued at no less than three times the annual retainer for directors (excluding amounts payable for Committee Chair or
membership). Once a director holds stock valued at three times the annual retainer, such ownership should be maintained through the
director’s term of service. In the event that the annual retainer fee is increased, directors will have three years to meet the new
ownership guidelines. The Board will evaluate whether exceptions should be made for any director on whom these guidelines would
impose a financial hardship. To determine stock ownership levels, a calculation will be made as of January 31 of each year based on
the then-current director aggregate annual retainer (excluding amounts payable for Committee Chair or membership), and for this
purpose, (a) the value of a share of Company common stock shall be deemed to be the greater of the closing price on such January 31
(or if such January 31 is not a trading day, the last trading day immediately preceding such January 31 ) or the closing price of a share
of Company common stock on the date on which the director acquired such share; (b) each share of unvested time-vested restricted
stock shall count as one share of Company common stock; and (c) each share of unvested restricted stock subject to performance or
other conditions other than time vesting shall not count for the purpose of determining stock ownership levels.
· The Compensation Committee of the Board is responsible for evaluating and recommending non-employee director compensation to
the full Board, and compensation for non-employee directors should be competitive and should encourage increased ownership of
Company common stock through payment of a portion of that compensation in equity.
· The Company shall not, directly or indirectly, including through or by any subsidiary, extend or maintain credit, or arrange for the
extension of credit in the form of a personal loan, to or for any director or executive officer.
· The Company’s named executive officers will forfeit certain bonuses and profits if the Company is required to restate its financial
statements because of material non-compliance with any financial reporting requirements resulting from misconduct. Each named
executive officer (including former named executive officers) will be required to reimburse any bonus and/or any equity-based
incentive compensation he or she received and any profits he or she realized from the sale of the Company’s securities during the 12
months following the initial filing of the financial statements containing or embodying the non-compliance.
7. BOARD ORIENTATION AND CONTINUING EDUCATION
· The Company shall provide new directors with a suitable orientation program to familiarize them with the Company’s operating
businesses and to introduce senior management and primary outside advisors and auditors.
· The Board believes that continuing education is essential to valuable Board participation and decision making. In addition, portions of
certain Board meetings will be devoted to educational topics at which senior management and outside subject matter experts present
information regarding matters such as the Company’s industry, business operations, strategies, objectives, risks, opportunities,
competitors and important legal and regulatory issues. The Company encourages directors to periodically pursue or obtain appropriate
programs, sessions or materials and the Company will reimburse directors for reasonable expenses in accordance with Company
policy.
121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601 USA . OneSpan.com
Exhibit 14.2
1. Introduction
OneSpan Inc.
Code of Conduct and Ethics
The Board of Directors of OneSpan Inc. (together with its subsidiaries, the "Company") has
adopted this Code of Conduct and Ethics (the "Code") in order to:
(a) promote honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest;
(b) promote full, fair, accurate, timely and understandable disclosure in reports and
documents that the Company files with, or submits to, the Securities and Exchange Commission
(the "SEC") and in other public communications made by the Company;
(c) promote compliance with applicable governmental laws, rules and regulations;
(d) promote compliance with Company’s contractual obligations;
(e) promote the protection of Company assets, including corporate opportunities and
confidential information;
(f) promote fair dealing practices;
(g) promote fair and lawful processing of personal information;
(h) deter wrongdoing; and
(i) ensure accountability for adherence to the Code.
All directors, officers, employees and contractors are required to be familiar with the Code, take any
related mandatory training made available, accept and comply with its provisions and report any
suspected violations as described below in Section 18, Reporting and Enforcement.
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Revised December 14, 2017
2. Compliance
2.1 Employees, officers and directors should comply, in both letter and spirit, with all applicable
laws, rules and regulations in the cities, states and countries in which the Company operates.
2.2 Although not all employees, officers and directors are expected to know the details of all
applicable laws, rules and regulations, it is important to know enough to determine when to seek advice
from appropriate personnel. Questions about compliance should be addressed to the Company’s Legal
Department at Legal@vasco.com.
3. Honest and Ethical Conduct
3.1 The Company's policy is to promote high standards of integrity by conducting its affairs
honestly and ethically.
3.2 Each director, officer and employee must act with integrity and observe the highest ethical
standards of business conduct in his or her dealings with the Company's customers, suppliers, partners,
service providers, competitors, employees and anyone else with whom he or she has contact in the
course of performing his or her job.
4. Preventing Harassment and Discrimination
OneSpan strives to maintain a work environment, which is free from discrimination and harassment,
whether based on race, color, religion, gender, gender identity or expression, sexual orientation, national
origin, genetics, disability, age, or any other factors that are unrelated to OneSpan’s legitimate business
interests. OneSpan will not tolerate sexual advances, actions or comments, racial or religious slurs or
jokes, or any other comments or conduct that, in the judgment of OneSpan management, creates,
encourages or permits an offensive or intimidating work environment.
5. Health, Safety and the Environment
5.1 Maintaining a safe and sustainable environment both inside and outside the workplace is
vital to the health and well-being of us all.
5.2 OneSpan provides a safe and drug-free working environment for its employees and to meet
or exceed the standards of all applicable laws and regulations governing workplace safety, health and the
environment. Misusing controlled substances or being under the influence of illegal drugs or alcohol is
prohibited while performing work-related duties.
5.3 All directors, officers and employees should report any unsafe working conditions or
workplace accidents to the local Human Resource Manager or the Chief Compliance Officer. Any acts or
threats of violence towards another person or abuse of company property should be reported
immediately to your local Human Resources Manager.
5.4 OneSpan has a responsibility to operate in an environmentally sound manner, uphold ethical
and social standards in its supply chain, and make a positive difference in the communities
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where its employees live and work. OneSpan strives to increase the energy efficiency of its operations,
reduce waste, and protect the environment.
6. A Company free of Conflicts of Interest
6.1 A conflict of interest occurs when an individual's private interest (or the interest of a member
of his or her family interferes, or reasonably appears to interfere, with the interests of the Company as a
whole. A conflict of interest can arise when an employee, officer or director (or a member of his or her
family) takes actions or has interests that may make it difficult to perform his or her work for the Company
objectively and effectively. Conflicts of interest also arise when an employee, officer or director (or a
member of his or her family) receives improper personal benefits because of his or her position in the
Company. In addition, no director, officer or employee may compete with the Company during its
employment.
6.2 Loans by the Company to, or guarantees by the Company of obligations of, employees or
their family members are of special concern and could constitute improper personal benefits to the
recipients of such loans or guarantees, depending on the facts and circumstances must be disclosed and
approved by the Chief Compliance Officer. Loans by the Company to, or guarantees by the Company of
obligations of, any director or officer or their family members are expressly prohibited.
6.3 Whether or not a conflict of interest exists or will exist can be unclear. Conflicts of interest (or
reasonably potential ones) should be avoided unless specifically authorized as described in Section 6.4.
6.4 Persons other than directors and officers who have questions about a potential conflict of
interest or who become aware of an actual or potential conflict should report the matter with their Local
Human Resource Manager or the Chief Compliance Officer. The Local Human Resource Manager must
report the matter to the Chief Compliance Officer with a written description of the activity and seeking the
Chief Compliance Officer's determination. If the Local Human Resource Manager is himself involved in
the potential or actual conflict, the matter should instead be discussed directly with the Chief Compliance
Officer.
6.5 Directors and officers must seek determinations and prior authorizations or approvals of
potential conflicts of interest from Chief Compliance Officer or the Chairperson of the Board’s
Governance Committee.
7. Business Courtesy
7.1 The giving and receiving of gifts and entertainment is often part of building business
relationships and corporate goodwill. However, a conflict of interest may arise if gifts or entertainment
either influence business decisions or create the appearance of doing so. Therefore, it is important to
carefully consider actual or apparent conflict of interest issues before offering or accepting gifts and
entertainment. In certain situations, the exchange of limited, non-cash business courtesies may be
appropriate, where permitted by applicable law.
121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601 USA OneSpan.com Revsied December 14, 2017
7.2 Employees, officers and directors must exercise the utmost care when giving or receiving
business-related gifts. Accepting or offering gifts of moderate value is permitted in situations where it is
legal and in accordance with local business practices. Similarly, and to the extent permitted under
applicable law, you may offer or accept meals and entertainment of reasonable value in connection with
business discussions. However, any type of business courtesy, gift or gratuity is unacceptable if it could
compromise your business judgment or improperly influence customers, suppliers, business partners or
government officials.
7.3 Keep in mind that certain business courtesies, such as cash, checks, gift certificates and
offers to pay non-business related travel and/or accommodations, are never acceptable. If you have any
doubt about whether a particular gift is appropriate, consult Legal@vasco.com or the Chief Compliance
Officer.
8. Protection and Proper Use of Company Assets
8.1 All directors, officers and employees should protect the Company's assets and ensure their
efficient use. This includes both tangible and intangible assets. The Company and its employees must
protect the confidentiality, integrity and availability of all forms of information used by, entrusted to and
maintained by the Company on behalf of employees, investors, business partners, and customers.
8.2 All Company assets should be used only for legitimate business purposes, though incidental
and reasonable personal use is permitted. Any information created, saved, sent or received using
Company information systems may however be subject to technical monitoring that the Company
performs for information security reasons. Any suspected incident of fraud or theft of Company assets
should be reported for investigation immediately.
8.3 OneSpan’s Information Security department has created policies and standards that will
help each director, officer and employee secure its environment by understanding information security
issues and acting responsibly. Each director, officer and employee must follow OneSpan’s Information
Security Policies required for the protection of OneSpan’s information and systems.
8.4 The obligation to protect Company assets includes the Company's proprietary information.
Proprietary information includes intellectual property such as trade secrets, patents, trademarks and
copyrights, as well as business and marketing plans, engineering and manufacturing ideas, designs,
databases, records, OneSpan name and any non-public financial data or reports. Unauthorized use or
distribution of this information is prohibited and could also be illegal and result in civil or criminal
penalties.
8.5 From time to time OneSpan may also receive requests for money, Company assets or other
Company resources to benefit a particular charity or civic group. These should be referred the
appropriate supervisor within the business unit. The request should be discussed and approved by the
Chief Compliance Officer. The Company does not make any political contributions to any political
candidates, parties or campaigns.
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9. Confidentiality
9.1 OneSpan processes confidential information in a manner to ensure appropriate security and
protect against unauthorized or unlawful processing. Confidential information includes all non-public
information (regardless of its source), e.g. personal information, intellectual property, patent information
or trade secret that might be of use to the Company's competitors or harmful to the employees, the
Company or its customers, suppliers or partners if disclosed. Similarly, directors, officers and employees
must maintain the confidentiality of information entrusted to them by the Company or by its customers,
suppliers or partners, except when disclosure is expressly authorized or is required or permitted by law.
9.2 OneSpan respects the privacy of all its employees, business partners and customers.
Directors, officers and employees must handle personal information responsibly and in compliance with
all applicable privacy laws. Employees, officers and directors must exercise special care when handling
personal information.
10. Fair Dealing
Each director, officer and employee must deal fairly with the Company's customers, suppliers,
partners, service providers, competitors, employees and anyone else with whom he or she has contact in
the course of performing his or her job. No director, officer or employee may take unfair advantage of
anyone through manipulation, concealment, abuse or privileged information, misrepresentation of facts or
any other unfair dealing practice.
11. Company Records
11.1 All directors, officers and employees should to make sure that all Company information is
recorded and reported accurately and promptly. This includes, but is not limited to, information
concerning the Company’s employees, research and development activities, strategic plans, travel and
expense claims, and general operations.
11.2 OneSpan expects any regular document disposal must cease immediately if you are aware
of or have reason to believe that the documents or materials are, or are likely to become, relevant to a
business dispute, litigation matter or government inquiry (including all records that are subject to a legal
hold or legal collection notice) or as requested by the Company. If you have any questions about the
Company’s records retention, contact the Legal Department.
12. Disclosure
12.1 The Company's periodic reports and other documents filed with the SEC, including all
financial statements and other financial information, must comply with applicable federal securities laws
and SEC rules.
12.2 Each director, officer and employee who contributes in any way to the preparation or
verification of the Company's financial statements and other financial information must ensure that the
Company's books, records and accounts are accurately maintained. Each director, officer
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and employee must cooperate fully with the Company's accounting and internal audit departments, as
well as the Company's independent public accountants and counsel.
12.3 Each director, officer and employee who is involved in the Company's disclosure process
must:
· be familiar with and comply with the Company's disclosure controls and procedures and its
internal control over financial reporting; and
·
take all necessary steps to ensure that all filings with the SEC and all other public
communications about the financial and business condition of the Company provide full, fair,
accurate, timely and understandable disclosure.
13. Anti-Bribery and Anti-Corruption
13.1 OneSpan acts openly, honest, and direct. No employees, officer or director shall offer, give
or accept money or anything of value from third parties, including customers and partners, to improperly
obtain or retain business, secure an improper advantage, or otherwise influence them to act improperly.
This applies to engagements with third parties from both commercial and public sectors.
13.2 OneSpan is committed to comply with the U.S. Foreign Corrupt Practices Act, the UK
Bribery Act and as well as other applicable national, local or international anti-bribery standards.
OneSpan strictly prohibits offering bribes to a government official for the purpose of attempting to
influence, obtain or retain business or for any other improper purpose.
13.3 Paying bribes in connection with purely private sector transactions is prohibited as well.
Corrupt activities of any kind have no place at OneSpan.
14. Corporate Opportunities
All directors, officers and employees owe a duty to the Company to advance its interests when the
opportunity arises. Directors, officers and employees are prohibited from taking for themselves personally
(or for the benefit of friends or family members) opportunities that are discovered through the use of
Company assets, property, information or position. Directors, officers and employees may not use
Company assets, property, information or position for personal gain (including gain of friends or family
members).
15. Insider Trading
Everyone at OneSpan is prohibited from providing inside information—about the Company or its
suppliers, customers, or other third parties—to others. Insider trading, insider dealing, and stock tipping
are criminal offenses in most countries where OneSpan does business. Employees shall follow the
Company’s Insider Trading Policy. If you have any questions regarding this type of information, contact
Legal Department for advice.
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16. Anti-Competition Conduct
OneSpan succeeds by competing vigorously and fairly in the marketplace in compliance with
applicable antitrust, competition, and other laws and regulations designed to promote fair competition,
free trade, and encourage ethical and legal behavior among competitors.
17. Trade Compliance
As a U.S. company, OneSpan’s hardware and software products, services, and technology (i.e.,
technical data for the design, development, production or use of those products and source code) are
subject to both U.S. and non-U.S. export laws and regulations. Before OneSpan products, services and
technology can be exported, re-exported, or delivered anywhere, OneSpan must validate that it has the
authorization to export under U.S. export regulations, European Union financial sanctions and the EU
Dual-Use Export Control Regulations and any applicable trade compliance laws and regulations.
18. Reporting and Enforcement
18.1 Reporting and Investigation of Violations.
(a) Actions prohibited by this Code involving board directors or executive officers must be
reported to the Board’s Governance Committee by the Chief Compliance Officer.
(b) Actions prohibited by this Code involving anyone other than a board director or
executive officer must be reported to the Local Human Resource Manager, Chief Compliance
Officer or to file a report via the internet, go to the Company’s report hotline.
(c) After receiving a report of an alleged prohibited action, the Board’s Governance
Committee, Local Human Resource Manager or the Chief Compliance Officer must promptly take
all appropriate actions necessary to investigate.
(d) All directors, officers and employees are expected to cooperate in any internal
investigation of misconduct.
18.2 Enforcement.
(a) The Company must ensure prompt and consistent action against violations of this
Code.
(b) If, after investigating a report of an alleged prohibited action by a director or executive
officer, the Board’s Governance Committee determines that a violation of this Code has occurred,
the Board’s Governance Committee will report such determination to the Board of Directors.
(c) If, after investigating a report of an alleged prohibited action by any other person,
Local Human Resource Manager or the Chief Compliance Officer determines that a
121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601 USA OneSpan.com Revsied December 14, 2017
violation of this Code has occurred, Local Human Resource Manager will report such determination
to the Chief Compliance Officer.
(d) Upon receipt of a determination that there has been a violation of this Code, the
Board of Directors or the Chief Compliance Officer will take such preventative or disciplinary action
as it deems appropriate, including, but not limited to, reassignment, demotion, dismissal and, in the
event of criminal conduct or other serious violations of the law, notification of appropriate
governmental authorities.
18.3 Waivers.
(a) Each of the Board of Directors (in the case of a violation by a director or executive
officer) and the Chief Compliance Officer (in the case of a violation by any other person) may, in its
discretion, waive any violation of this Code.
(b) Any waiver for a director or an executive officer shall be disclosed as required by SEC
and NASDAQ rules.
18.4 Prohibition on Retaliation.
The Company does not tolerate acts of retaliation against any director, officer or employee
who makes a good faith report of known or suspected acts of misconduct or other violations of this Code.
19. Monitoring Compliance and Disciplinary Action
19.1 The Company’s management, under the supervision of its Board or its Audit Committee,
shall take reasonable steps from time to time to (i) monitor compliance with this Code, and (ii) when
appropriate, impose and enforce appropriate disciplinary measures for violations of this Code.
19.2 Disciplinary measures for violations of this Code may include, but are not limited to,
counseling, oral or written reprimands, warnings, termination of employment or service.
19.3 The Company’s management shall periodically report to the Board or the Audit Committee,
as applicable, on these compliance efforts including, without limitation, periodic reporting of alleged
violations of this Code and the actions taken with respect to any such violation.
121 West Wacker Drive, Suite 2050, Chicago, Illinois 60601 USA OneSpan.com Revsied December 14, 2017
Subsidiaries of OneSpan Inc.
OneSpan Australia Pty Ltd
OneSpan Pty Ltd
OneSpan Austria GmbH
OneSpan Europe NV
OneSpan NV
OneSpan Seguranca de Dados Brasil Ltda
Dealflo Technology Inc.
OneSpan Canada Inc.
OneSpan Software (Beijing) Co. Ltd.
OneSpan Software (Beijing) Co. Ltd. (Shanghai
Branch)
OneSpan France SAS
VASCO Data Security (India) Private Limited
OneSpan Japan Kabushiki Kaisha
Alfa & Ariss BV
Diginotar Notariaat B.V.
OneSpan Netherlands B.V.
OneSpan Asia Pacific Pte Ltd
OneSpan International GmbH
OneSpan Solutions GmbH
OneSpan Middle East FZE
Risk IDS Limited
OneSpan Solutions UK Limited
OneSpan Technology Limited
VASCO Digital Automation Limited
OneSpan Solutions Limited
OneSpan Inc.
OneSpan North America Inc.
Australia
Australia
Australia
Belgium
Belgium
Brazil
New Brunswick, Canada
New Brunswick, Canada
China
China
France
India
Japan
Netherlands
Netherlands
Netherlands
Singapore
Switzerland
Switzerland
Dubai, United Arab Emirates
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
State of Delaware
State of Delaware
Exhibit 21
Exhibit 23
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Board of Directors
OneSpan Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-234406) on Form S-3 and (Nos.
333-62829, 333-161158 and 333-232207) on Form S-8 of OneSpan Inc. of our reports dated March 16, 2020, with
respect to the consolidated balance sheets of OneSpan Inc. as of December 31, 2019 and 2018, the related
consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule
II – Valuation and Qualifying Accounts (collectively, the consolidated financial statements) and the effectiveness of
internal control over financial reporting as of December 31, 2019, which reports appear in the December 31, 2019
annual report on Form 10-K of OneSpan Inc. Our report dated March 16, 2020, on the consolidated financial
statements refers to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 606, Revenue from Contracts with Customers, effective January 1, 2018, and the adoption of FASB ASC
Topic 842, Leases, effective January 1, 2019.
Chicago, Illinois
March 16, 2020
/s/ KPMG LLP
Exhibit 31.1
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Scott Clements, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of OneSpan Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared; and
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles; and
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered
by the report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting.
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Dated: March 16, 2020
/s/ Scott Clements
Scott Clements
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Mark S. Hoyt, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of OneSpan Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared; and
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles; and
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by
the report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting.
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 16, 2020
/s/ Mark S. Hoyt
Mark S. Hoyt
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the filing with the Securities and Exchange Commission of the Annual Report of OneSpan Inc. (the company)
on Form 10-K for the period ended December 31, 2019 (the Report), I, Scott Clements, President and Chief Executive Officer of
the company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to the best of my knowledge:
i.
ii.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the company.
8
/s/ Scott Clements
Scott Clements
President and Chief Executive Officer
March 16, 2020
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the filing with the Securities and Exchange Commission of the Annual Report of OneSpan Inc. (the company)
on Form 10-K for the period ended December 31, 2019 (the Report), I, Mark S. Hoyt, Chief Financial Officer of the company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
i.
ii.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the company.
/s/ Mark S. Hoyt
Mark S. Hoyt
Chief Financial Officer
March 16, 2020