OneSpan Inc. (OSPN)

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

Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “OneSpan,” “Company,” “we,” “our,” and “us” refer to OneSpan Inc. and its subsidiaries.

This commentary should be read in conjunction with the condensed consolidated financial statements and related notes thereto of OneSpan for the three-month periods ended March 31, 2026 and 2025 as well as our consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31, 2025 (the “Form 10-K”).

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of applicable U.S. securities laws, including statements regarding: our goal of driving profitable, efficient growth in both operating segments, with a particular emphasis on subscription revenue growth; expectations regarding the contributions of, and results from, our acquisitions of Build38 GmbH and Nok Nok Labs, Inc.; expectations about trends in our cost of goods sold, gross margin, and sales and marketing, research and development, and general and administrative expenses; the expected impact of foreign currency rate fluctuations; expectations regarding sources and uses of cash; and our general expectations regarding our operational or financial performance in the future. Forward-looking statements may be identified by words such as "seek", "believe", "plan", "estimate", "anticipate", “expect", "intend", "continue", "outlook", "may", "will", "should", "could", or "might", and other similar expressions. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could materially affect our business and financial results include, but are not limited to: difficulties increasing or maintaining our rate of revenue growth; our ability to attract new customers and retain and expand sales to existing customers; our ability to successfully develop and market new product offerings and product enhancements; changes in customer requirements; the potential effects of technological changes; the loss of one or more large customers; difficulties enhancing and maintaining our brand recognition; competition; lengthy sales cycles; challenges retaining key employees and successfully hiring and training qualified new employees; security breaches or cyber-attacks; real or perceived malfunctions or errors in our products; interruptions or delays in the performance of our products and solutions; reliance on third parties for certain products and data center services; our ability to effectively manage third party partnerships, acquisitions, divestitures, alliances, or joint ventures; economic recession, inflation, tariffs or trade disputes, and political instability; claims that we have infringed the intellectual property rights of others; changing laws, government regulations or policies; pressures on price levels; component shortages; delays and disruption in global transportation and supply chains; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; actions of activist stockholders; and exposure to increased economic and operational uncertainties from operating a global business, as well as other factors described in the “Risk Factors” section of our most recent Annual Report on Form 10-K (filed with the SEC on February 26, 2026). Our filings with the Securities and Exchange Commission and other important information can be found in the Investor Relations section of our website at investors.onespan.com. We do not have any intent, and disclaim any obligation, to update the forward-looking information to reflect events that occur, circumstances that exist or changes in our expectations after the date of this Form 10-Q, except as required by law.

Our website address is included in this Quarterly Report on Form 10-Q as an inactive textual reference only.

Overview

OneSpan helps organizations build secure, seamless, and trusted digital experiences through two solution portfolios: Cybersecurity and Digital Agreements. Our cybersecurity solutions protect identities, secure mobile apps, and safeguard access through advanced high-assurance authentication, threat intelligence, fraud prevention, and robust mobile app protection, defending users, devices, and applications against sophisticated attacks. Our digital agreement solutions streamline agreement workflows with secure e-signatures, identity verification, and smart digital forms, built to enable speed, compliance and exceptional customer experiences. Trusted by leading global enterprises, including more than 60% of the world’s 100 largest banks, OneSpan processes over 100 million digital agreements and billions of secure authentication transactions across more than 120 countries each year.

We offer our products primarily through a subscription licensing model and provide multiple deployment options, including cloud-based and on-premises solutions. Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers.

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We report our financial results under the following two business units, which are our reportable operating segments: Cybersecurity and Digital Agreements.

•Cybersecurity. Cybersecurity, formerly Security Solutions, consists of our broad portfolio of software products, software development kits ("SDKs") and Digipass authenticator devices that are used to build applications designed to defend against attacks on digital transactions across online environments, devices, and applications. The software products and SDKs included in the Cybersecurity segment are delivered through on-premises and cloud-based deployment models and include standards-based authentication technologies such as Fast Identity Online ("FIDO") authentication and passkeys, multi-factor authentication, transaction signing solutions and mobile application security.

•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are cloud-based, include OneSpan Sign e-signature, OneSpan Notary, and Identity Verification.

We seek to drive profitable, efficient growth in both operating segments, with a particular emphasis on subscription revenue growth. Both operating segments were profitable for the three months ended March 31, 2026, and Cybersecurity and Digital Agreements subscription revenue grew 7% and 11%, respectively, as compared to the three months ended March 31, 2025.

Overview of Key Factors Impacting our Results of Operations

As discussed in greater detail below in "Results of Operations", the following factors had a significant impact on our financial results for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025.

Foreign exchange rate impact for the three months ended March 31, 2026. Changes in foreign exchange rates, in particular the weakening of the U.S. Dollar relative to the Euro, favorably impacted both total revenue and Cybersecurity revenue by approximately $2.7 million and $2.5 million, respectively, for the three months ended March 31, 2026 as compared to the equivalent period in 2025. The impact of changes in foreign exchange rates on the Digital Agreements segment for this period was approximately $0.2 million as compared to the equivalent period in 2025.

Recent acquisitions. In June 2025, we acquired Nok Nok Labs, Inc. ("Nok Nok Labs"), a leading provider of passwordless software authentication solutions, and in February 2026, we acquired Build38 GmbH ("Build38"), a leader in next-generation mobile application protection solutions. See Note 6, Business Acquisitions, for additional information about these two transactions (the "Acquisitions").

Components of Operating Results

Revenue

We generate revenue from the sale of our subscriptions, perpetual maintenance and services, and Digipass hardware products. We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments, reflecting the transactional nature of significant parts of our business.

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

•Service and other revenue. Service and other revenue includes solutions that are provided on a cloud-based subscription model, term and perpetual maintenance and support, and 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.

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•Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs, including personnel costs, production costs, freight, and inventory write-off adjustments for discontinued products and services.

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

Gross Profit

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

Operating Expenses

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

Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 50% and 60% 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 during the three months ended March 31, 2026 compared to the comparable prior year period resulted in an increase in operating expenses of $1.0 million.

The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. Long-term incentive plan compensation expense includes both stock-based incentives and an immaterial amount of cash-based incentives. During the three months ended March 31, 2026 and 2025, operating expenses included $1.9 million and $2.8 million, respectively, of expenses related to

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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, Risk Factors 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 Note Regarding Forward Looking Statements” at the beginning of this Form 10-K.

For a comparison of our results of operations for the fiscal years ended December 31, 2024 and 2023, see “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 6, 2024.

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Overview

OneSpan helps organizations build secure, seamless, and trusted digital experiences through two solution portfolios: Cybersecurity and Digital Agreements. Our cybersecurity solutions protect identities, secure mobile apps, and safeguard access through advanced high-assurance authentication, threat intelligence, fraud prevention, and mobile app protection, defending users, devices, and applications against sophisticated attacks. Our digital agreement solutions streamline agreement workflows with secure e-signatures, identity verification, and smart digital forms, built to enable speed, compliance and exceptional customer experiences. Trusted by leading global enterprises, including more than 60% of the world’s 100 largest banks, OneSpan processes over a hundred million digital agreements and billions of secure authentication transactions across more than 120 countries each year.

We offer our products primarily through a subscription licensing model and provide multiple deployment options, including cloud-based and on-premises solutions. Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers.

We report our financial results under the following two business divisions, which are our reportable operating segments: Cybersecurity and Digital Agreements.

•Cybersecurity. Cybersecurity, formerly Security Solutions, consists of our broad portfolio of software products, software development kits ("SDKs") and Digipass authenticator devices that are used to build applications designed to defend against attacks on digital transactions across online environments, devices, and applications. The software products and SDKs included in the Cybersecurity segment are delivered through on-premises and cloud-based deployment models and include standards-based authentication technologies such as Fast Identity Online ("FIDO") authentication and passkeys, multi-factor authentication, transaction signing solutions and mobile application security.

•Digital Agreements. Digital Agreements consists of solutions that enable our clients to secure and automate business processes associated with their digital agreement and customer transaction lifecycles that require consent, non-repudiation and compliance. These solutions, which are cloud-based, include OneSpan Sign e-signature, OneSpan Notary, and OneSpan Identity Verification.

Beginning in mid-2023 and through the third quarter of 2024, our focus was on adjusting our cost structure to enable both business divisions to operate profitably. These cost optimization efforts were a major factor in the overall business returning to operating profitability in the fourth quarter of 2023. The subsequent increase in profitability, combined with high levels of cash generation, enabled us to return approximately $31.6 million to shareholders in 2025 in the form of quarterly dividends and share repurchases. Beginning in the fourth quarter of 2024 and continuing through 2025, we continued to operate profitably while taking a number of important steps to generate future revenue growth:

•In December 2024, we hired a new Chief Technology Officer, Ashish Jain, to lead our research and development efforts.

•In June 2025, we acquired Nok Nok Labs, a provider of passwordless software authentication solutions, which brought S3, a leading FIDO software product, to our product portfolio. This acquisition provides OneSpan's customers with a wider range of flexible, adaptable authentication options. See Note 6, Business Acquisitions, for additional information.

•In June 2025, we entered into the Credit Agreement with MUFG and other lenders party thereto. The Credit Agreement provides for a $100.0 million revolving credit facility with a $10.0 million letter of credit sublimit and a $10.0 million swingline loan sublimit. The proceeds of borrowings under the Credit Agreement may be used for general corporate purposes. We may borrow, repay and reborrow funds under the revolving credit facility until its maturity on June 23, 2030. See Note 12, Debt, for additional information.

•In October 2025, we announced a strategic investment in, and partnership with, ThreatFabric Holding B.V., a Dutch company that provides mobile threat intelligence, malware risk detection, and behavioral analytics, to further enhance the value we offer by providing fraud detection solutions to our customers. See Note 2, Summary of Significant Accounting Policies, for additional information.

•In December 2025, we hired a new Chief Revenue Officer, Shaun Bierweiler, to lead our go-to-market efforts, and to drive growth and customer success.

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•Later in December 2025, we entered into a definitive agreement to acquire Build38, a leader in next-generation mobile application protection solutions, to extend our investment in advanced mobile security technologies. See Note 6, Business Acquisitions, for additional information.

Our efforts to broaden and strengthen our product offerings are driven in part by a secular shift away from physical authentication devices such as our Digipass tokens. Because consumers increasingly interact with their banks through their mobile devices rather than desktop computers, they are more likely to prefer authentication methods that enable secure, convenient access to mobile banking apps without the need for a physical device. In response to this trend, our bank and financial institution customers have increasingly adopted a “mobile first” approach to consumer authentication that prioritizes the mobile user experience over traditional desktop experiences. This approach has resulted in a reduction of Digipass hardware authenticator sales and an increase in sales of software authentication licenses delivered through software applications on mobile devices. Due largely to the mobile first trend, our revenue from Digipass devices declined from 78% of our revenue in 2015 to 20% of our revenue in 2025. Although we plan to continue to invest in our Digipass authenticators, including our newer FIDO2 Digipass devices, as an important component of our broad authentication solution portfolio, we are focused on driving revenue growth in higher–margin software solutions, both through further expansion of our Cybersecurity software solutions and through continued growth in our Digital Agreements division.

Restructuring Plan

In 2021 and 2022, our board of directors approved cost reduction actions designed to advance our operating model, streamline our business, improve efficiency, and enhance our capital resources.

In August 3, 2023, our board of directors approved further cost reduction actions (the "2023 Actions"). In connection with the 2023 Actions, we have incurred restructuring charges, most of which relate to employee transition and severance payments and employee benefits, with a significantly smaller amount of charges relating to vendor contract termination and rationalization actions. We terminated our restructuring plan as of December 31, 2025, as we substantially completed all of the workforce reductions and vendor contract termination and rationalization actions planned as part of the 2023 Actions from 2023 through 2025.

As part of the restructuring plan (including the 2023 Actions), we reduced headcount by eliminating approximately 345 positions. We incurred severance and related benefits costs, recorded in “Restructuring and other related charges” in the consolidated statements of operations for the years ended December 31, 2025, 2024 and 2023.

Recent Developments

On February 26, 2026, our board of directors declared a quarterly cash dividend as part of our recurring quarterly dividend program announced in December 2024. A cash dividend of $0.13 per share, which represents a year-over-year increase of 8.3%, will be paid on March 27, 2026 to shareholders of record as of the close of business on March 13, 2026. The declaration and payment of future dividends is subject to the sole discretion of the board.

Components of Operating Results

Revenue

We generate revenue from the sale of our subscriptions, maintenance and support, professional services, and Digipass hardware products. We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments reflecting the transactional nature of significant parts of our business.

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

•Service and other revenue. Service and other revenue includes solutions that are provided on a cloud-based subscription model, maintenance and support, and professional services.

Cost of Goods Sold

Our total cost of goods sold consists of cost of product and license revenue and cost of service and other revenue. We expect our cost of goods sold to increase in absolute dollars as our business grows, although it may fluctuate as a percentage of total revenue from period to period.

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•Cost of product and license revenue. Cost of product and license revenue primarily consists of direct product and license costs, including personnel costs, production costs, freight, and inventory write-off adjustments for discontinued products and services.

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

Gross Profit

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

Operating Expenses

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

Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 50% and 60% 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, restructuring activities, 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 2025 compared to 2024 resulted in an increase in operating expenses of $1.3 million in 2025.

The comparison of operating expenses can also be impacted significantly by costs related to our share-based and long-term incentive plans. In 2025, 2024, and 2023, operating expenses included $11.3 million, $9.2 million, and $14.6 million, respectively, of expenses related to share-based and long-term incentive plans. Long-term incentive plan compensation expense consists of share-based incentives and an immaterial amount of cash-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. 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 (net of capitalized software costs), bonuses, and long-term incentive compensation. 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, bonuses, legal, consulting and other professional fees, transaction related expenses, and long-term incentive compensation. Our general and administrative expenses may fluctuate as a percentage of total revenue.

•Amortization of intangible assets. Acquired intangible assets are amortized over their respective amortization periods and are periodically evaluated for impairment or changes in estimated useful life.

•Restructuring and other related charges. Restructuring and other related charges consists of employee costs which include severance, retention pay, and related benefits incurred in connection with headcount reductions as part of our restructuring plan, including the 2023 Actions; real estate rationalization costs incurred to optimize our real estate footprint, which include lease contract termination costs, asset impairment charges, and lease right-of-use asset and lease liability write-off gains or losses; product and services optimization costs incurred to advance our operating model, which include write-offs of capitalized software assets no longer in use; write-offs of acquired blockchain technology and related capitalized software due to the discontinuation of incremental development investments in this technology and related commercial efforts; and vendor rationalization costs for contractually committed services that we are no longer utilizing. We terminated our restructuring plan as of December 31, 2025, as we substantially completed all of the workforce reductions and vendor contract termination and rationalization actions planned as part of the 2023 Actions in 2023 through 2025.

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Segment Results

Segment operating income (loss) consists of the revenue generated by a segment, less the direct costs of revenue, sales and marketing, research and development and amortization and any impairment charges that are incurred directly by a segment. Unallocated corporate costs include general and administrative expense and other company-wide costs that are not attributable to a particular segment. Financial results by operating segment are included below under Results of Operations. As of December 31, 2024, we adopted ASU 2023-07, Segment Reporting (Topic 280) to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. See Note 3, Segment Information, for additional information.

Interest Income, Net

Interest income, net, consists of income earned on our cash equivalents, which are invested in short-term instruments at current market rates. Interest expense is primarily related to the amortization of debt issuance costs associated with our credit facilities.

Other Expense, Net

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

Income Taxes

Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). Our IP in our Cybersecurity division is owned by our U.S. subsidiaries. The e-signature IP in our Digital Agreements division is owned by a subsidiary in Canada. These subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to the IP owners on a cost plus basis. In addition, many of our OneSpan entities operate as distributors for all of our OneSpan products. Under this structure, the earnings of our service provider and distributor subsidiaries are relatively constant. These subsidiaries tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings flow to the IP owners.

We record changes in valuation allowance against deferred tax assets that, based on management’s assessment, are considered not to be more likely than not to be realized. The decrease in the valuation allowance in 2025 and 2024 reflects a change in management's assessment of our ability to use existing deferred tax assets, including NOLs and credits and other carryforwards, due to an increase in the operating profit and the intra-entity asset transfer of certain intellectual property ("IP Transfer") discussed in Note 14, Income Taxes.

Management assesses the need for a valuation allowance on a regular basis, weighing all positive and negative evidence to determine whether a deferred tax asset will be fully or partially realized. In evaluating the realizability of deferred tax assets, significant pieces of negative evidence such as 3-year cumulative losses are considered. Management also reviews reversal patterns of temporary differences to determine if the Company would have sufficient taxable income due to the reversal of temporary differences to support the realization of deferred tax assets. Management continues to maintain a valuation allowance against certain deferred tax assets in jurisdictions where assets are not more likely than not to be realized. For all other remaining deferred tax assets, management believes it is still more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

As of December 31, 2025, we adopted ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision usefulness of income tax disclosures. See Note 14, Income Taxes, for additional information.

Impact of Currency Fluctuations

In 2025 and 2024, we generated approximately 79% and 83%, of our revenue and incurred approximately 54% and 59% of our operating expenses outside of the U.S., respectively. As a result, changes in currency exchange rates, especially the Euro exchange rate and the Canadian dollar exchange rate, can have a significant impact on our revenue and operating expenses.

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While the majority of our revenue is generated outside of the U.S., a significant amount of our revenue earned during the year ended December 31, 2025 was denominated in U.S. dollars. In 2025, approximately 57% of our revenue was denominated in U.S. dollars, 40% was denominated in Euros and 3% was denominated in other currencies. In 2024, approximately 55% of our revenue was denominated in U.S. dollars, 41% was denominated in Euros and 4% 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 natural hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may 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 fully balance the exposures of currency exchange rates on revenue and operating expenses.

The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. The functional currency for our subsidiaries in Switzerland, Singapore and Canada is the U.S. dollar. 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 comprehensive loss of $7.4 million in 2025 and a comprehensive gain of $3.3 million in 2024. These amounts are included as a separate component of stockholders’ equity.

Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other expense, net. Foreign exchange transaction losses aggregated $1.6 million and $0.9 million for the years ended December 31, 2025 and 2024, respectively.

Results of Operations

The following table sets forth information about the Company's two operating segments, for the periods indicated, and selected segment and consolidated operating results. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment.

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* Percentage not meaningful

(1) Digital Agreements gross profit includes an intangible asset write-off of $0.8 million and an internal capitalized software write-off of $0.7 million for the year ended December 31, 2024 (see Note 8, Intangible Assets, net and Note 9, Property and Equipment, net).

(2) Cybersecurity other segment items includes general and administrative expense, restructuring and other related charges, and amortization of intangibles for the years ended December 31, 2025 and 2024.

(3) Cybersecurity operating income includes $1.3 million and $0.9 million of total amortization and depreciation expense for the years ended December 31, 2025 and 2024, respectively.

Cybersecurity operating income includes $0.3 million and $2.0 million of restructuring and other related charges for the years ended December 31, 2025 and 2024, respectively.

(4) Digital Agreements other segment items includes general and administrative expense, restructuring and other related charges, and amortization of intangibles for the years ended December 31, 2025 and 2024.

(5) Digital Agreements operating income includes $7.5 million and $6.2 million of total amortization and depreciation for the years ended December 31, 2025 and 2024, respectively.

Digital Agreements operating income includes $1.0 million and $1.7 million of restructuring and other related charges for the years ended December 31, 2025 and 2024, respectively.

Revenue by products and services allocated to the segments for the years ended December 31, 2025 and 2024 is as follows:

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For the year ended December 31, 2025, total revenue was flat compared to the year ended December 31, 2024. Changes in foreign exchange rates as compared to the same period in 2024 favorably impacted total revenue by approximately $3.7 million.

Additional information on our revenue by segment follows.

•Cybersecurity revenue decreased $4.5 million, or approximately 2%, during the year ended December 31, 2025 compared to the year ended December 31, 2024. This decrease was primarily attributable to lower volumes of hardware devices sold due to the mobile-first trend, and to a lesser extent, lower perpetual-based maintenance and professional services revenues due to our transition to term licenses and cloud subscription license models and the sunsetting of our Dealflo solution. The decrease was partially offset by higher term license subscription revenues, primarily from existing customers, increased cloud subscription revenue, and revenue from customers acquired in our acquisition of Nok Nok Labs. Changes in foreign exchange rates compared to the same period in 2024 favorably impacted Cybersecurity revenue by $3.5 million.

•Digital Agreements revenue increased $4.5 million, or approximately 7%, during the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase in Digital Agreements revenue was primarily attributable to higher cloud subscription revenue from existing customer expansions and, to a lesser extent, customers new to OneSpan ("new logos") and overages, partially offset by lower term-based maintenance revenue due to our transition to cloud subscription licenses. Changes in foreign exchange rates as compared to the same period in 2024 favorably impacted Digital Agreements revenue by $0.2 million.

Revenue by Geographic Regions: We classify our sales by customer location in three geographic regions: 1) EMEA, which includes Europe, Middle East and Africa; 2) the Americas, which includes North, Central, and South America; and 3) Asia Pacific (APAC), which also includes Australia and New Zealand. The breakdown of revenue in each of our major geographic areas was as follows:

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For the year ended December 31, 2025, revenue generated in EMEA was $6.0 million, or 5%, lower than the same period in 2024, primarily due to lower hardware volumes attributed to the mobile-first trend and end-of-life products, partially offset by an increase in revenue from mobile application security products.

For the year ended December 31, 2025, revenue generated in the Americas was $8.9 million, or 10%, higher than the same period in 2024, primarily due to an increase in revenue from software authentication products and Digital Agreements revenue.

For the year ended December 31, 2025, revenue generated in APAC was $3.0 million, or 6%, lower than the same period in 2024, primarily attributable to lower hardware volumes and a decrease in revenue from software authentication products, partially offset by an increase in revenue from mobile application security products.

Cost of Goods Sold, Gross Profit and Gross Margin

The following table presents costs of goods sold for our products and services for the years ended December 31, 2025 and 2024:

The cost of product and license revenue decreased $4.6 million or 13% for the year ended December 31, 2025 compared to the year ended December 31, 2024. The decrease in cost of product and license revenue was primarily driven by lower hardware revenue and hardware costs, partially offset by higher third-party license costs.

The cost of services and other revenue decreased $0.2 million or 1% for the year ended December 31, 2025, compared to the year ended December 31, 2024. This was due to the impact of our 2024 write-off of costs associated with our decision to discontinue investment in blockchain technology (see Note 8, Intangible Assets - net) (the "2024 write-off") and lower cloud platform costs in 2025.

Gross profit increased $4.8 million, or 3% for the year ended December 31, 2025 compared to the year ended December 31, 2024. Total gross margin was 74% for the year ended December 31, 2025, compared to 72% for the year ended December 31, 2024. The change was primarily driven by an increase in software revenue and decrease in hardware revenue, and the prior year impact of the 2024 write-off.

The majority of our inventory purchases are denominated in U.S. dollars. Our sales are denominated in various currencies, including the Euro. The impact of changes in currency rates are estimated to have had a unfavorable impact on overall cost of goods sold of less than $0.1 million for the year ended December 31, 2025. Had currency rates in 2025 been equal to rates in the comparable period of 2024, the gross profit margin would have been less than 1 percentage point lower for the year ended December 31, 2025.

Additional information on our gross profit by segment follows.

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•Cybersecurity gross profit decreased $0.6 million for the year ended December 31, 2025 compared to the prior year. Cybersecurity gross margin was 74% and 73% for the years ended December 31, 2025 and 2024, respectively. The increase in the gross margin of 1% was due to an increase in higher-margin hardware revenue, despite lower overall hardware revenue, due to favorable hardware product and customer mix partially offset by slightly lower margins in software revenue, despite higher overall software revenue, primarily due to incremental third party costs.

•Digital Agreements gross profit increased $5.3 million, or approximately 13%, for the year ended December 31, 2025 compared to the prior year. Digital Agreements gross margin for the years ended December 31, 2025 and 2024 was 72% and 68%, respectively. The increase in gross profit and gross margin was driven by higher cloud subscription revenue, lower cloud platform costs, and the prior year impact of the 2024 write-off.

Operating Expenses

For the year ended December 31, 2025, operating expenses increased by $1.1 million, or 1%, compared to the year ended December 31, 2024. Changes in foreign exchange rates unfavorably impacted operating expenses by approximately $1.3 million as compared to the year ended December 31, 2024.

The following table presents the breakout of operating expenses by category as of December 31, 2025 and 2024:

Sales and Marketing Expenses

Sales and marketing expenses increased $2.4 million, or 5%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase was driven primarily by higher employee compensation costs, which included increases in salaries, benefits and commission as a result of headcount additions, including the acquisition of Nok Nok Labs. This increase was partially offset by decreased software licensing costs and lead generation costs due to rationalization efforts.

Average full-time sales and marketing employee headcount for year ended December 31, 2025 was 165, compared to 161 for year ended December 31, 2024.

Research and Development Expenses

Research and development expenses increased $1.7 million, or 5%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase in expense for the period was primarily driven by higher compensation and related benefit costs, including the acquisition of Nok Nok Labs, and lower internal software capitalization costs in 2025 compared to 2024.

Average full-time research and development employee headcount for the year ended December 31, 2025 was 232, compared to 234 for year ended December 31, 2024.

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General and Administrative Expenses

General and administrative expenses decreased $0.3 million, or 1%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. This decrease was largely driven by lower employee compensation costs, which included a decrease in salaries, payroll taxes, and related benefits as a result of lower headcount as well as lower bonus accruals, partially offset by by increased stock-based compensation expense and higher external advisor costs in 2025 compared to the prior year.

Average full-time general and administrative employee headcount for the year ended December 31, 2025 was 87, compared to 100 for the year ended December 31, 2024.

Restructuring and Other Related Charges

Restructuring and other related charges were $1.6 million for the year ended December 31, 2025, compared to $4.4 million for the year ended December 31, 2024, a decrease of $2.8 million or 63%. The year-over-year decrease was largely due to minimal headcount reductions, vendor rationalization and capitalized software write-off costs in 2025 compared to 2024.

Amortization of Intangible Assets

Amortization of intangible assets was $2.5 million and $2.4 million for years ended December 31, 2025 and 2024, respectively. The increase in 2025 as compared to 2024 relates to increased amortization from the intangible assets associated with the acquisition of Nok Nok Labs.

Segment Operating Income

Information on our operating income by segment follows.

•Cybersecurity: For the year ended December 31, 2025, Cybersecurity operating income was $80.0 million, which was $10.1 million, or 11%, lower than the prior year. This decrease was largely due to higher sales and marketing expenses and research and development expenses, including employee compensation and external advisor expenses, partially offset by lower restructuring costs.

•Digital Agreements: Operating income for the year ended December 31, 2025 was $16.0 million, compared to $5.6 million in the prior year. The increase was driven by higher gross profit as discussed in the gross profit section above and lower operating expenses primarily due to lower employee compensation costs.

Interest Income, net

Interest income, net, was $2.0 million for the year ended December 31, 2025, compared to $1.8 million for the year ended December 31, 2024. The increase in interest income was due to higher average excess cash invested in the period compared to the prior year period, partially offset by interest charges related to the Credit Agreement in 2025.

Other Expense, Net

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

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For the year ended December 31, 2025, other expense, net was $1.1 million, compared to $0.1 million for the year ended December 31, 2024. The change was largely driven by increased foreign exchange transaction losses in 2025 compared to foreign exchange transaction losses in 2024, as well as lower income from foreign government subsidies.

Benefit from income taxes

We recorded income tax benefits of $23.5 million and $10.6 million for the years ended December 31, 2025 and 2024, respectively. The income tax benefit recorded for the year ended December 31, 2025 was primarily attributable to the release of valuation allowance for our Canadian entity, offset by income tax provision expense on profits. The income tax benefit recorded for the year ended December 31, 2024 was primarily attributable to a worthless stock deduction for our investment in one of our wholly owned subsidiaries, the release of valuation allowance for our U.S. entity, and the income tax benefit attributable to the IP Transfer, offset by income tax expense attributable to an increase in income before taxes. See Note 14, Income Taxes for additional information.

Loss Carryforwards Available

At December 31, 2025, we have gross deferred tax assets of $51.8 million resulting from U.S. federal, foreign and state NOL carryforwards of $129.9 million and other foreign deductible carryforwards of $144.2 million. At December 31, 2025, we have a valuation allowance of $1.7 million against deferred tax assets related to certain carryforwards. See Note 14, Income Taxes, for additional information.

Key Business Metrics and Non-GAAP Financial Measures

In our quarterly earnings press releases and conference calls, we discuss the below key metrics and financial measures that are not calculated according to generally accepted accounting principles (“GAAP”). These metrics and non-GAAP financial measures help us monitor and evaluate the effectiveness of our operations and evaluate period-to-period comparisons. Management believes that these metrics and non-GAAP financial measures help illustrate underlying trends in our business. We use these metrics and non-GAAP financial measures to establish budgets and operational goals (communicated internally and externally), manage our business and evaluate our performance. We also believe that both management and investors benefit from referring to these metrics and non-GAAP financial measures as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. We believe these metrics and non-GAAP financial measures are useful to investors both because they allow for greater transparency with respect to financial measures used by management in their financial and operational decision-making and also because they are used by investors and the analyst community to help evaluate the health of our business.

Annual Recurring Revenue

We use annual recurring revenue ("ARR") as an approximate measure to monitor the revenue growth of our recurring business. ARR represents the annualized value of the active portion of SaaS, term-based license, and maintenance and support contracts at the end of the reporting period. For term-based license arrangements, the amount included in ARR is consistent with the amount that we invoice the customer annually for the term-based license transaction. A customer with a one-year term-based license contract will be invoiced for the total value of the contract at the beginning of the contractual term, while a customer with a multi-year term-based license contract will be invoiced for each annual period at the beginning of each year of the contract. For contracts that include annual values that increase over time because there are additional deliverables in subsequent periods, we include in ARR only the annualized value of components of the contract that are considered active as of the date of the ARR calculation. We do not include the future committed increases in the contract value as of the date of the ARR calculation.

We consider a contract to be active from when the product or service contractual term commences (the “start date”) until the right to use the product or service ends (the “expiration date”). Even if the contract with the customer is executed before the start date, the contract will not count toward ARR until the customer's right to receive the benefit of the products or services has commenced.

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To the extent that we are negotiating a renewal with a customer within 90 days after the expiration of a recurring contract, we continue to include that revenue in ARR if we are actively in discussions with the customer for a new recurring contract or renewal and the customer has not notified us of an intention not to renew. We exclude from the calculation of ARR renewal contracts that are more than 90 days after their expiration date, even if we are continuing to negotiate a renewal at that time.

ARR is not calculated based on recognized or unearned revenue and there is no direct relationship between revenue recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and the Company’s ARR business metric. We believe ARR is a valuable operating measure to assess the health of our SaaS, term-based license, and maintenance and support contracts because it illustrates our customer recurring contracts as of the measurement date. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates, and does not include revenue from perpetual licenses, purchases of Digipass authenticators, training, professional services or other sources of revenue that are not deemed to be recurring in nature.

ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. Investors should consider our ARR operating measure only in conjunction with our GAAP financial results.

At December 31, 2025, we reported ARR of $186.9 million, which was 11% higher than 2024 ARR of $167.7 million. 2025 ARR included the contribution from our acquisition of Nok Nok Labs, which closed on June 4, 2025. Changes in foreign exchange rates during the year ended December 31, 2025 as compared to the prior year positively impacted ARR by approximately $0.6 million. ARR growth was primarily driven by an increase in subscription contracts and new logos, partially offset by the sunsetting of our on-premises e-signature and Dealflo solutions.

Net Retention Rate

Net Retention Rate ("NRR") is defined as the approximate year-over-year percentage growth in ARR from the same set of customers at the end of the prior year period. It measures the Company’s ability to increase revenue across our existing customer base through expanded use of our platform, offset by customers whose subscription contracts with us are not renewed or renew at a lower amount. The Company’s ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers. NRR is an important way in which we track our performance in this area.

We reported NRR of 104% and 106% at December 31, 2025 and 2024, respectively. The year-over-year change in NRR was primarily due to a decrease in contracts that increased in value and to a lesser extent, an increase in contracts that decreased in value, or contracted, partially offset by a reduction in churned contracts.

Adjusted EBITDA

We define Adjusted EBITDA as net income before interest, taxes, depreciation, amortization, long-term incentive compensation and related payroll tax expense, restructuring and other related charges, and certain non-recurring items, including acquisition related costs, rebranding costs, and non-routine shareholder matters. Adjusted EBITDA is a non-GAAP financial metric. We use Adjusted EBITDA as a simplified measure of performance for use in communicating our performance to investors and analysts and for comparisons to other companies within our industry. As a performance measure, we believe that Adjusted EBITDA presents a view of our operating results that is most closely related to serving our customers. By excluding interest, taxes, depreciation, amortization, long-term incentive compensation and related payroll tax expense, restructuring costs and other related costs, and certain other non-recurring items, we are able to evaluate performance without considering decisions that, in most cases, are not directly related to meeting our customers’ requirements and were either made in prior periods (e.g., depreciation, amortization, long-term incentive compensation and related payroll tax expense, non-routine shareholder matters), deal with the structure or financing of the business (e.g., interest, one-time strategic action costs, restructuring costs, impairment charges) or reflect the application of regulations that are outside of the control of our management team (e.g., taxes). In addition, removing the impact of these items helps us compare our core business performance with that of our competitors.

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Non-GAAP financial metrics such as Adjusted EBITDA are not measures of performance under GAAP and should not be considered in isolation or as alternatives or substitutes for the most directly comparable financial measures calculated in accordance with GAAP, but, rather, should be considered together with our consolidated financial statements, which are prepared in accordance with GAAP and included in Part IV, Item 15, Exhibits and Financial Statement Schedules.

The following table reconciles net income as reported on our consolidated statements of operations to non-GAAP Adjusted EBITDA:

(1) Includes cost of sales depreciation and amortization expense directly related to delivering cloud subscription revenue of $5.6 million and $3.4 million for the years ended December 31, 2025 and 2024, respectively. Costs are recorded in “Services and other cost of goods sold” on the consolidated statements of operations.

(2) Long-term incentive compensation and related payroll tax expense includes share-based compensation and related payroll tax expense, and cash incentive grants awarded to employees located in jurisdictions where we do not issue share-based compensation due to tax, regulatory or similar reasons. The expense associated with these cash incentive grants was immaterial for the years ended December 31, 2025 and 2024, respectively.

Starting January 1, 2025, employer payroll taxes related to employee stock-based award transactions are included in long-term incentive compensation and related payroll tax expense. Prior period amounts have been adjusted to reflect these changes. We are excluding these payroll taxes from Adjusted EBITDA results since they are tied to the timing and size of the vesting of the underlying stock-based awards and the price of our common stock at the time of vesting, which may vary from period to period independent of our operating performance. Employer payroll taxes related to employee stock-based award transactions amounted to $1.0 million and $0.9 million for the years ended December 31, 2025 and 2024, respectively.

(3) Includes write-offs of property and equipment, net, of $0.7 million for the year ended December 31, 2025. Includes write-offs of intangible assets and property and equipment, net, of $0.8 million and $1.0 million, respectively, for the year ended December 31, 2024. Costs are recorded in "Services and other costs of good sold" and "Restructuring and other related charges," respectively, on the consolidated statements of operations.

(4) For the year ended December 31, 2025, other non-recurring items consist of $5.9 million of fees related to non-recurring projects, including transaction costs related to acquisition projects. For the year ended December 31, 2024, other non-recurring items consisted of $4.2 million of fees related to non-recurring projects.

Adjusted EBITDA increased during the year ended December 31, 2025 compared to 2024, primarily due to lower costs of goods sold, partially offset by increased sales and marketing and research and development expenses. Year-over-year changes in foreign exchange rates favorably impacted Adjusted EBITDA by approximately $0.1 million for the year ended December 31, 2025.

Please see further discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for an analysis of the components of net income (loss) in the consolidated statements of operations for the years ended December 31, 2025 and 2024, and additional detail regarding items excluded from Adjusted EBITDA.

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Liquidity and Capital Resources

As of December 31, 2025 and 2024, we had cash and cash equivalents balances of $70.5 million and $83.2 million, respectively. Our cash and cash equivalents balance included money market funds as of December 31, 2025 and money market funds and U.S. treasury bills with maturities at acquisition of less than three months as of December 31, 2024.

We were party to lease agreements that required letters of credit and guarantees to secure the obligations and a cash guarantee with a payroll vendor which totaled $0.2 million at December 31, 2024. Our restricted cash at December 31, 2024 related to letters of credit that were recorded as "Other assets" on the consolidated balance sheet as its requirement was for a period greater than 12 months. This balance is no longer on the consolidated balance sheet as of December 31, 2025 as the restricted cash was replaced by a bank guarantee in conjunction with the Credit Agreement.

As of December 31, 2025, we held $50.3 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $49.5 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.

We expect that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Our cash flows are as follows:

Operating Activities

Cash provided by (used in) operating activities is primarily comprised of net income (loss), as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of allowance for credit losses, amortization of intangible assets, deferred taxes, depreciation of property and equipment, and share-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 and vendor costs. We expect cash outflows from operating activities to be affected by changes in personnel costs and the payments of expenditures.

For the year ended December 31, 2025, $59.5 million of cash was provided by operating activities. This was primarily driven by an increase in operating income for the period as a result of improved gross margins, restructuring and cost savings initiatives partially offset by an increase in deal transaction costs. For the year ended December 31, 2024, $55.7 million of cash was provided by operating activities.

Investing Activities

The changes in cash flows from investing activities primarily relate to timing of purchases of property and equipment, capitalized software activities, and activity in connection with acquisitions and an equity investment. We expect to continue to purchase property and equipment to support the growth of our business as well as to continue to invest in our infrastructure, and we may also make additional acquisitions and equity investments.

For the year ended December 31, 2025 cash of $35.6 million was used in investing activities, compared to cash of $9.3 million used in investing activities during the year ended December 31, 2024. Cash used in investing activities primarily consisted of cash paid for the acquisition of Nok Nok Labs, the equity investment in ThreatFabric and additions to property and equipment.

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Financing Activities

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

For the year ended December 31, 2025, net cash used in financing activities was $38.4 million, which was attributable to dividends paid, cash paid for share repurchases, tax payments for stock issuances, and payment of debt issuance costs.

For the year ended December 31, 2024, net cash used in financing activities was $5.2 million, which consisted primarily of $5.0 million of tax payments for restricted stock issuances and cash paid for the holdback component of our acquisition of substantially all of the assets of the ProvenDB business of Southbank Software Pty Ltd. in February 2023.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations and Commitments

As of December 31, 2025, we have unrecognized purchase obligations of $11.9 million for software agreements related to the administration of our business which range from 1 to 3 years.

As of December 31, 2025, we have operating lease obligations of $8.4 million which will expire in the next 1 to 8 years. The operating lease obligations do not include common area maintenance charges or real estate taxes under our operating leases, for which we are also obligated. These charges are generally not fixed and can fluctuate from year to year.

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.

Revenue Recognition

We record revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. 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.

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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 us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight before 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 on-premises subscription revenue, and services and other, which is inclusive of cloud subscription revenue, maintenance and support, and professional services.

Subscription: Subscription includes cloud and on-premises subscription revenue.

We generate cloud subscription revenues from our Cybersecurity and Digital Agreements cloud service offerings. 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.

Revenue from the sale of on-premises subscription revenue is recorded upon delivery which is 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. We offer term licenses for on-premises subscription revenue ranging from one to five years in length. 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 recognize revenue on a net basis. The fees owed to the third parties are recognized as a component of cost of goods sold when the revenue is recognized.

In addition, we also offer annual or multi-year customer support subscription services, whereby customers can buy different levels of customer support packages for an annual recurring subscription fee.

Maintenance and support: 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 and other revenue: 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 12 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.

Hardware products: 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 invoices and subsequent payments normally correspond with delivery.

Multiple-Element Arrangements

In our typical multiple-element arrangement, the primary deliverables include:

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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 that the customer already owns);

2.Server system software that is installed on the customer’s systems (i.e., software on the server system that verifies the identity of the person being authenticated) or licenses for additional users on the server system software if the server system software had been installed previously; and

3.Post contract support in the form of maintenance on the server system software or support.

Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of any revenue and 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.

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. We evaluate 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 depending on the terms and conditions of the respective customer arrangement. When a hardware client device and licenses to server 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 server 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, based on observable inputs; specifically, the range of prices charged to customers to renew annual maintenance and support 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 approach.

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 valuation allowance, 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.

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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 met when developing the provision for income taxes.

We recognize the tax impact of including certain foreign earnings in U.S. taxable income as a period cost. We have recognized deferred income taxes for local country income and withholding taxes that could be incurred on distributions of non-U.S. earnings because we do not plan to indefinitely reinvest such earnings.

We monitor for changes in tax laws and reflect the impacts of tax law changes in the period of enactment.

Recently Issued Accounting Pronouncements

For information regarding our new accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the notes to consolidated financial statements included in Part IV, Item 15, Exhibits and Financial Statements Schedules.