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Description of the Company and Basis of Presentation

6 Months Ended

Jun. 30, 2020

Description of the Company and Basis of Presentation

Description of the Company and Basis of Presentation

Note 1 – Description of the Company and Basis of Presentation

Description of the Company

OneSpan Inc. and its wholly owned subsidiaries design, develop, market and support hardware and software security systems that manage and secure access to information assets. OneSpan has operations in Austria, Australia, Belgium, 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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of OneSpan and its subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All significant intercompany accounts and transactions have been eliminated. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020, particularly in light of the novel coronavirus (COVID-19) pandemic and its effects on domestic and global economies. To limit the spread of COVID-19, governments have imposed, and may continue to impose, among other things, travel and business operation restrictions and stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. These disruptions and restrictions could adversely affect our operating results due to, among other things, reduced demand for our services and solutions as a result of our customers having to adjust, reduce or suspend operating activities. During the summer of 2020, we began to experience softened demand for our products and services due to, we believe, global economic uncertainty connected with the continued seriousness of the COVID-19 pandemic.

For additional information, see Part II, Item 1A – Risk Factors of this Form 10-Q for additional information regarding the potential impact of COVID-19 on the Company.

Revision of Previously Issued Financial Statements

We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q related to immaterial errors. The errors relate to certain contracts with customers involving term-based software licenses and related maintenance and support services. The net contract assets that originated from a portion of these contracts in prior periods were not properly accounted for in subsequent periods, which caused overstatements of revenue in prior periods.

We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Reports on Form 10-K for the years ended December 31, 2019 and 2018, or for any quarterly periods included therein or through our most recent Quarterly Report on Form 10-Q.

The following tables present the effects of the aforementioned revisions on our condensed consolidated balance sheet as of December 31, 2019, our unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2019, our unaudited condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2019, our unaudited condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 2019, our unaudited condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2020, and our unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2019 (in thousands).

Condensed Consolidated Balance Sheet


		December 31, 2019
in thousands		As Previously Reported			Adjustments			As Revised
Contract assets		$	7,058		$	(1,818)		$	5,240
Total current assets			211,619			(1,818)			209,801
Contract assets - non-current			3,565			(210)			3,355
Total assets			384,570			(2,028)			382,542

Short-term income taxes payable			7,711			(301)			7,410
Total current liabilities			74,113			(301)			73,812
Long-term deferred revenue			15,259			—			15,259
Long-term income taxes payable			6,958			—			6,958
Total liabilities			120,549			(301)			120,248

Accumulated income			181,167			(1,727)			179,440
Accumulated other comprehensive loss						—
Total stockholders' equity			264,021			(1,727)			262,294
Total liabilities and stockholders' equity			384,570			(2,028)			382,542

Condensed Consolidated Statements of Operations (Unaudited)


		Three Months ended June 30, 2019									Six Months ended June 30, 2019
		As Previously Reported			Adjustments			As Revised			As Previously Reported			Adjustments			As Revised
Revenue
Product and license		$	40,117		$	—		$	40,117		$	71,978		$	(518)		$	71,460
Services and other			16,117			(67)			16,050			31,864			(62)			31,802
Total revenue			56,234			(67)			56,167			103,842			(580)			103,262

Gross Profit			38,354			(67)			38,287			69,923			(580)			69,343

Operating loss			(2,211)			(67)			(2,278)			(7,738)			(580)			(8,318)

Loss before income taxes			(1,691)			(67)			(1,758)			(7,634)			(580)			(8,214)
Provision (benefit) for income taxes			770			(17)			753			499			(146)			353

Net Loss			(2,461)			(50)			(2,511)			(8,133)			(434)			(8,567)

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)


		Three Months ended June 30, 2019									Six Months ended June 30, 2019
		As Previously Reported			Adjustments			As Revised			As Previously Reported			Adjustments			As Revised
Net income (loss)		$	(2,461)		$	(50)		$	(2,511)		$	(8,133)		$	(434)		$	(8,567)
Comprehensive income (loss)			(3,771)			(50)			(3,821)			(8,589)			(434)			(9,023)

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)


	Total Stockholders' Equity
in thousands		As Previously Reported			Adjustments			As Revised
Balance at December 31, 2018		$	252,441		$	(802)		$	251,639
Net income (loss)			(5,671)			(385)			(6,056)
Balance at March 31, 2019			247,958			(1,187)			246,771
Net income (loss)			(2,461)			(50)			(2,511)
Balance at June 30, 2019			244,815			(1,237)			243,578

Balance at December 31, 2019		$	264,021		$	(1,727)		$	262,294
Net income (loss)			98			(94)			4
Balance at March 31, 2020			260,639			(1,821)			258,818

Condensed Consolidated Statements of Cash Flows (Unaudited)


		Six Months ended June 30, 2019
in thousands		As Previously Reported			Adjustments			As Revised
Cash flows from operating activities:
Net loss		$	(8,133)		$	(434)		$	(8,567)
Changes in operating assets and liabilities:
Contract assets			4,123			580			4,703
Income taxes payable			(5,993)			(146)			(6,139)
Deferred revenue			—			—			—
Net cash provided by (used in) operating activities			(22,793)			—			(22,793)

For the three months ended March 31, 2020, the impacts of the adjustments resulted in a decrease of $0.1 million to income before taxes, and a decrease of $0.1 million to net income, compared to the amounts previously reported.

Principles of Consolidation

The consolidated financial statements include the accounts of OneSpan Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Estimates and Assumptions

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

Foreign Currency Translation and Transactions

The financial position and results of the operations of the majority of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S.

Dollars using current exchange rates as of the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations in other income (expense), net. Foreign exchange transaction gains aggregated less than $0.1 million for the three months ended June 30, 2020, and foreign exchange transaction gains aggregated $0.2 million for the three months ended June 30, 2019. For the six months ended June 30, 2020, foreign exchange loss aggregated $0.5 million, and foreign exchange transaction losses aggregated $0.7 million for the six months ended June 30, 2019.

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.