Description of the Company and Basis of Presentation

6 Months Ended

Jun. 30, 2022

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

Transformation Plan

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

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

Basis of Presentation

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

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

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 to correct prior period immaterial errors. The errors relate to certain costs directly

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

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

The following table presents the effects of the aforementioned revisions on our unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2021.

Condensed Consolidated Statement of Operations (Unaudited)

	Three Months Ended June 30, 2021						Six Months Ended June 30, 2021
in thousands	As Previously Reported		Adjustments		As Revised		As Previously Reported		Adjustments		As Revised
Cost of goods sold
Product and license	$	9,589	$	976	$	10,565	$	19,130	$	2,187	$	21,317
Total cost of goods sold		16,470		976		17,446		31,792		2,187		33,979
Gross profit		35,807		(976)		34,831		71,260		(2,187)		69,073
Operating costs
Sales and marketing		15,997		(976)		15,021		34,376		(2,187)		32,189
Total operating costs		44,666		(976)		43,690		89,413		(2,187)		87,226

Principles of Consolidation

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

Estimates and Assumptions

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

Foreign Currency Translation and Transactions

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

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.