# OneSpan Inc. (OSPN) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OneSpan Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1044777/000162828025008750/ospn-20241231.htm
Accession: 0001628280-25-008750
Filing date: 2025-02-27
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/OSPN/
All MD&A years: /company/OSPN/mda/
Previous year: /company/OSPN/mda/fy2023/ (FY 2023)
Next year: /company/OSPN/mda/fy2025/ (FY 2025)

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, 2023 and 2022, 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.

Overview

OneSpan delivers cutting-edge solutions in two key areas: advanced secure authentication and digital agreements. Our secure authentication solutions protect devices, users, and applications with robust multi-factor and passwordless authentication and other fraud prevention technologies. Our digital agreements solutions combine identity verification, electronic signatures, and digital workflows to streamline agreements, enhance compliance, and accelerate business processes. We empower organizations to automate and secure both customer-facing and revenue-generating processes, supporting a wide range of use cases—from simple transactions to complex workflows requiring elevated security. Trusted by global blue-chip enterprises, including more than 60% of the world’s 100 largest banks, OneSpan processes millions of digital agreements and billions of secure authentication transactions in more than 100 countries annually.

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.

Business Segments

We report our financial results under the following two lines of business, which are our reportable operating segments: Security Solutions and Digital Agreements.

•Security Solutions. 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 Security Solutions segment are on-premises and, to a lesser extent, cloud software products, and include multi-factor authentication and transaction signing solutions, such as mobile application security and mobile software tokens.

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

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Business Developments

During 2022 and the first half of 2023, OneSpan was operating under a three-year strategic plan that focused on driving revenue growth in Digital Agreements. However, in mid-2023, we determined that we were unlikely to achieve the revenue growth levels set forth in that strategic plan within the contemplated three-year timeframe due to a number of factors, including increasing maturity and competitiveness in the market for e-signature solutions, limited awareness of our brand among buyers of e-signature tools, and higher pricing aggressiveness from competitors.

In response to these challenges, we modified our strategy to focus more heavily on improving profitability across the business. To this end, in August 2023, our Board approved the 2023 Actions (discussed below) to achieve higher levels of profitability while maintaining the Company's long-term growth potential. .

We now seek to drive profitable, efficient growth in both operating segments, with a particular emphasis on subscription revenue growth. Digital Agreements became profitable for the first time in the third quarter of 2024 and both operating segments were profitable for the full year 2024. Security Solutions and Digital Agreements subscription revenue grew 33% and 28% year-over-year in 2024, respectively.

Security Solutions total revenue decreased 1% in 2024, largely due to a reduction in hardware revenues driven by certain customers adopting a “mobile-first” approach, which prioritizes the mobile user experience over traditional desktop and hardware experiences, particularly for consumer banking. 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. As organizations embrace the convenience and accessibility of mobile technology, we expect to increase our focus on high-margin software solutions while continuing to invest in our hardware authentication solutions in order to meet diverse customer needs.

Digital Agreements total revenue increased 20% in 2024 and we substantially completed transitioning the segment to a SaaS revenue model.

Restructuring Plan

In December 2021, our Board approved a restructuring plan designed to advance our operating model, streamline our business, improve efficiency, and enhance our capital resources. The first phase of this restructuring plan began and was substantially completed during the three months ended March 31, 2022. In May 2022, our Board approved additional actions related to the restructuring plan through the year ending December 31, 2025. The additional actions consisted primarily of headcount-related reductions designed to continue to advance the same objectives as the first phase of the plan.

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 and expect to continue to incur 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 currently expect that we will incur restructuring charges of approximately $0.5 million to $1.0 million related to the 2023 Actions in periods after 2024, substantially all of which relate to employee transition and severance payments.

We plan to incrementally take actions under the restructuring plan until December 31, 2025, when the plan terminates. We completed substantially all of the workforce reductions planned as part of the 2023 Actions in 2023 and 2024. The vendor contract component of the 2023 Actions is planned for completion by the end of 2025.

As part of the restructuring plan (including the 2023 Actions), we reduced headcount by eliminating approximately 330 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, 2024, 2023 and 2022.

Recent Developments

On December 16, 2024, the Board of Directors declared a quarterly cash dividend as part of the initiation of a recurring quarterly dividend program. The initial quarterly cash dividend of $0.12 per share was paid on February 14, 2025 to shareholders of record as of the close of business on January 31, 2025. The declaration and payment of future dividends is subject to the sole discretion of the Board of Directors.

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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.

•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 2024 compared to 2023 resulted in a decrease in operating expenses of less than $0.1 million in 2024.

The comparison of operating expenses can also be impacted significantly by costs related to our share-based and long-term incentive plans. In 2024, 2023, and 2022, operating expenses included $9.2 million, $14.6 million, and $8.8 million, respectively, of expenses related to share-based and long-term incentive plans. For the year ended December 31, 2024, stock-based compensation declined as compared to the year ended December 31, 2023, which was largely due to the departure of our former CEO and forfeitures recorded upon his termination, timing of annual grants, and a lower level of employee equity awards granted in 2024 compared to 2023. However, this decline was partially offset by the awards granted to our current CEO when he accepted his permanent role of President and CEO in 2024. Long-term incentive plan compensation expense consists of share-based incentives and an immaterial amount of cash-based incentives.

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•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 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, legal, consulting and other professional fees, and long-term incentive compensation. Our general and administrative expenses may fluctuate as a percentage of total revenue.

•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 plan to incrementally incur additional restructuring costs through December 31, 2025, when the restructuring plan terminates and the 2023 Actions are completed.

•Impairment of intangible assets. Impairment of intangible assets are incurred when we determine that the carrying value of an asset exceeds its fair value. We test annually, or when triggering events arise. During the year ended December 31, 2022, we performed an impairment review of the customer relationships intangible assets obtained in our 2018 acquisition of Dealflo Limited (“Dealflo”). The impairment review was triggered by our July 2022 notification to customers regarding our intent to gradually sunset our Dealflo solution in the months leading up to December 31, 2023. The results of the impairment review indicated that the carrying value of the Dealflo customer relationships exceeded the fair value, and we recorded a $3.8 million impairment charge on the entire remaining value of the asset during the year ended December 31, 2022. This was recorded in "restructuring and other related charges" on the consolidated statements of operations.

•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.

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 and short-term investments. Our cash equivalents and short-term investments are invested in short-term instruments at current market rates.

Other Income (Expense), Net

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

Income Taxes

Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). Our IP in our Security Solutions business is owned by a U.S. operating subsidiary. The e-signature IP in our Digital

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Agreements business 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 2024 reflects a change in management's assessment of the ability to use existing deferred tax assets, including NOLs, due to an increase in the operating profit and intra-entity asset transfer of certain intellectual property ("IP Transfer") discussed in Note 13, Income Taxes. The increase in the valuation allowance in 2023 reflects Net Operating Losses (“NOLs”), other deduction carryforwards, and credits for which the realization is not more likely than not. The change in valuation allowance in 2024 also reflects other factors including, but not limited to, changes in management’s assessment of the ability to use existing deferred tax assets, including NOLs and other deduction carryforwards.

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.

Impact of Currency Fluctuations

In 2024 and 2023, we generated approximately 83% of our revenue for both years and incurred approximately 59% and 58% 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.

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, 2024 was denominated in U.S. dollars. 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 2023, approximately 53% of our revenue was denominated in U.S. dollars, 43% 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 balance fully the exposures of currency exchange rates on revenue and operating expenses.

The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. 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 $3.3 million in 2024 and a comprehensive gain of $3.7 million in 2023. 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 income (expense). Foreign exchange transaction losses aggregated $0.9 million and $1.1 million for the years ended December 31, 2024 and 2023, respectively.

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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.

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31, 2024"],["(In thousands)","Security Solutions","","Digital Agreements","","Corporate and Other","","Total"],["Revenue","$","182,187","","$","60,992","","$","\u2014","","$","243,179"],["Cost of goods sold","49,319","","19,281","","3","","68,603"],["Gross profit (1)","132,868","","41,711","","(3)","","174,576"],["Gross margin","73%","","68%","","*","","72%"],["Sales and marketing","24,684","","15,658","","4,204","","44,546"],["Research and development","16,132","","16,117","","174","","32,423"],["Other segment items (2)(4)","1,990","","4,321","","46,491","","52,802"],["Operating income (loss) (3)(5)","90,062","","5,615","","(50,872)","","44,805"],["Interest income, net","","","","","","","1,807"],["Other income (expense), net","","","","","","","(125)"],["Income (loss) before income taxes","","","","","","","$","46,487"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31, 2023"],["(In thousands)","Security Solutions","","Digital Agreements","","Corporate and Other","","Total"],["Revenue","$","184,181","","$","50,925","","$","\u2014","","$","235,106"],["Cost of goods sold","64,207","","13,183","","1","","77,391"],["Gross profit","119,974","","37,742","","(1)","","157,715"],["Gross margin","65%","","74%","","*","","67%"],["Sales and marketing","35,356","","31,566","","3,313","","70,235"],["Research and development","18,894","","18,687","","839","","38,420"],["Other segment items (2)(4)","5,534","","6,014","","66,383","","77,931"],["Operating (loss) income (3)(5)","60,190","","(18,525)","","(70,536)","","(28,871)"],["Interest income, net","","","","","","","2,090"],["Other income (expense), net","","","","","","","(532)"],["Income (loss) before income taxes","","","","","","","$","(27,313)"]]
[[/GREPCENT_TABLE]]

* 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) Security Solutions other segment items includes general and administrative expense, restructuring and other related charges, and amortization of intangibles for the years ended December 31, 2024 and 2023.

(3) Security Solutions operating income includes $0.9 million and $0 of total amortization and depreciation expense for the years ended December 31, 2024 and 2023, respectively.

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Security Solutions operating income includes $2.0 million and $5.5 million of restructuring and other related charges for the years ended December 31, 2024 and 2023, 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, 2024 and 2023.

(5) Digital Agreements operating income includes $6.2 million and $3.7 million of total amortization and depreciation for the years ended December 31, 2024 and 2023, respectively.

Digital Agreements operating income includes $1.7 million and $3.7 million of restructuring and other related charges for the years ended December 31, 2024 and 2023, respectively.

Revenue

Revenue by products and services allocated to the segments for the years ended December 31, 2024 and 2023 is as follows:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2024","","2023"],["(In thousands)","Security Solutions","","Digital Agreements","","Security Solutions","","Digital Agreements"],["Subscription","$","80,555","","","$","58,848","","","$","60,550","","","$","45,886"],["Maintenance and support","38,342","","","1,736","","","42,240","","","4,143"],["Professional services and other (1)","4,439","","","408","","","5,425","","","896"],["Hardware products","58,851","","","\u2014","","","75,966","","","\u2014"],["Total Revenue","$","182,187","","","$","60,992","","","$","184,181","","","$","50,925"]]
[[/GREPCENT_TABLE]]

(1) Professional services and other includes perpetual software licenses revenue, which was immaterial for the year ended December 31, 2024 and approximately 1% of total revenue for the year ended December 31, 2023.

For the year ended December 31, 2024, total revenue increased by $8.1 million, or 3%, compared to the year ended December 31, 2023. Changes in foreign exchange rates as compared to the same period in 2023 negatively impacted total revenue by approximately $0.1 million.

Additional information on our revenue by segment follows.

•Security Solutions revenue decreased $2.0 million, or approximately 1%, during the year ended December 31, 2024 compared to the year ended December 31, 2023. This decrease was driven primarily by lower volumes of hardware devices sold, lower perpetual software license and perpetual-based maintenance revenues as we focus on transitioning to on-premises and cloud subscription license models, and the sunsetting of our Dealflo solution. The decrease was largely offset by higher on-premises subscription revenue from existing customer expansion, including an increase in multi-year contracts, for which we recognize most of the revenue early in the contract term. Changes in foreign exchange rates compared to the same period in 2023 negatively impacted Security Solutions revenue by $0.1 million.

•Digital Agreements revenue increased $10.1 million, or approximately 20%, during the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in Digital Agreements revenue was driven by higher cloud subscription revenue from existing customer expansion and new customers (which we sometimes refer to as "new logos"), partially offset by lower maintenance revenue related to the sunsetting of our on-premises e-signature product. Changes in foreign exchange rates as compared to the same period in 2023 favorably impacted Digital Agreements revenue by less than $0.1 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 sales in North, Central, and South America; and 3) Asia Pacific (APAC), which also includes Australia, New Zealand, and India. The breakdown of revenue in each of our major geographic areas was as follows:

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[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(In thousands, except percentages)","2024","","2023","","$ Change","","% Change"],["Revenue"],["EMEA","$","108,555","","","$","111,568","","","$","(3,013)","","","(3)","%"],["Americas","86,803","","","80,057","","","6,746","","","8","%"],["APAC","47,821","","","43,481","","","4,340","","","10","%"],["Total revenue","$","243,179","","","$","235,106","","","$","8,073","","","3","%"],["% of Total Revenue"],["EMEA","44","%","","47","%"],["Americas","36","%","","34","%"],["APAC","20","%","","19","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2024, revenue generated in EMEA was $3.0 million or 3% lower than the same period in 2023, primarily driven by a decrease in hardware revenue due to lower volumes sold and the impact of sunsetting our Dealflo solution, largely offset by an increase in software authentication revenue from customer expansions.

For the year ended December 31, 2024, revenue generated in the Americas was $6.7 million or 8% higher than the same period in 2023, primarily driven by an increase in e-signature revenue from customer expansion and new logos and an increase in software authentication revenue from customer expansion, partially offset by a decrease in hardware revenue due to lower volumes sold.

For the year ended December 31, 2024, revenue generated in APAC was $4.3 million or 10% higher than the same period in 2023, primarily driven by an increase in software authentication revenue from customer expansions, partially offset by a decrease in hardware revenue due to lower volumes sold.

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, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(In thousands, except percentages)","2024","","2023","","$ Change","","% Change"],["Cost of goods sold"],["Product and license","$","36,732","","","$","48,676","","","$","(11,944)","","","(25)","%"],["Services and other","31,871","","","28,715","","","3,156","","","11","%"],["Total cost of goods sold","$","68,603","","","$","77,391","","","$","(8,788)","","","(11)","%"],["Gross profit","$","174,576","","","$","157,715","","","$","16,861","","","11","%"],["Gross margin"],["Product and license","72","%","","63","%"],["Services and other","71","%","","72","%"],["Total gross margin","72","%","","67","%"]]
[[/GREPCENT_TABLE]]

The cost of product and license revenue decreased $11.9 million or 25% for the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease in cost of product and license revenue was primarily driven by lower hardware revenues.

The cost of services and other revenue increased $3.2 million or 11% for the year ended December 31, 2024, compared to the year ended December 31, 2023. This increase was largely due to higher cloud platform costs related to

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higher volume usage and the write-off of acquired technology and capitalized internally developed software costs due to our decision to discontinue our investment in blockchain technology in 2024.

Gross profit increased $16.9 million, or 11% for the year ended December 31, 2024 compared to the year ended December 31, 2023. Total gross margin was 72% for the year ended December 31, 2024, compared to 67% for the year ended December 31, 2023. The increase in total gross profit was driven by higher software versus hardware revenue mix and the changes in cost of revenue discussed above.

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 approximately $0.8 million for the year ended December 31, 2024. Had currency rates in 2024 been equal to rates in the comparable period of 2023, the gross profit margin would have been less than 1 percentage point higher for the year ended December 31, 2024.

Additional information on our gross profit by segment follows.

•Security Solutions gross profit increased $12.9 million, or approximately 11%, for the year ended December 31, 2024 compared to the prior year. The increase in gross profit was primarily driven by an increase in subscription revenue. Security Solutions gross margin was 73% and 65% for the years ended December 31, 2024 and 2023, respectively. The increase in gross margin is primarily the result of increased subscription revenue which is a higher margin product, combined with a decline in hardware revenue, which has lower margins.

•Digital Agreements gross profit increased $4.0 million, or approximately 11%, for the year ended December 31, 2024 compared to the prior year. The increase in gross profit was driven by higher overall revenue, partially offset by higher cloud platform costs and higher depreciation of capitalized software costs. Digital Agreements gross margin for the years ended December 31, 2024 and 2023 was 68% and 74%, respectively. The decrease in gross margin is primarily the result of an increase in depreciation of capitalized software costs and the write-off in 2024 of the previously capitalized software costs discussed above.

Operating Expenses

For the year ended December 31, 2024, operating expenses decreased by $56.8 million, or 30%, compared to the year ended December 31, 2023. Changes in foreign exchange rates favorably impacted operating expenses by approximately less than $0.1 million as compared to the year ended December 31, 2023.

The following table presents the breakout of operating expenses by category as of December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(In thousands, except percentages)","2024","","2023","","$ Change","","% Change"],["Operating costs"],["Sales and marketing","$","44,546","","","$","70,235","","","$","(25,689)","","","(37)","%"],["Research and development","32,423","","","38,420","","","(5,997)","","","(16)","%"],["General and administrative","46,007","","","58,267","","","(12,260)","","","(21)","%"],["Restructuring and other related charges","4,444","","","17,311","","","(12,867)","","","(74)","%"],["Amortization of intangible assets","2,351","","","2,353","","","(2)","","","\u2014","%"],["Total operating costs","$","129,771","","","$","186,586","","","$","(56,815)","","","(30)","%"]]
[[/GREPCENT_TABLE]]

Sales and Marketing Expenses

Sales and marketing expenses decreased $25.7 million, or 37%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease was primarily driven by lower employee compensation costs which included decreases in commissions, salaries, and benefits as a result of headcount reductions, decreased consulting and marketing costs, and lower travel and entertainment expenses.

Average full-time sales and marketing employee headcount for year ended December 31, 2024 was 161, compared to 339 for year ended December 31, 2023. Average headcount in 2024 was 53% lower than in 2023 due to the restructuring activities discussed elsewhere in this Item 7.

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Research and Development Expenses

Research and development expenses decreased $6.0 million, or 16%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease was primarily driven by lower compensation costs, which included a decrease in salaries, payroll taxes, and related benefits as a result of lower headcount and lower consulting expenses, partially offset by increased bonus expense accruals.

Average full-time research and development employee headcount for the year ended December 31, 2024 was 234, compared to 305 for year ended December 31, 2023. Average headcount in 2024 was 23% lower than in 2023 due to the restructuring activities discussed elsewhere in this Item 7.

General and Administrative Expenses

General and administrative expenses decreased $12.3 million, or 21%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. This decrease in expense was largely due to lower employee compensation costs, which included a decrease in salaries, severance, payroll taxes, and related benefits as a result of lower headcount. Additionally, stock-based compensation expense was lower year-over-year due to lower headcount, including the termination of our former CEO, and lower annual equity awards granted to employees. These decreases were offset by higher bonus accruals and other non-recurring expenses.

Average full-time general and administrative employee headcount for the year ended December 31, 2024 was 100, compared to 139 for the year ended December 31, 2023. Average headcount in 2024 was 28% lower than in 2023 due to the restructuring activities discussed elsewhere in this Item 7.

Restructuring and Other Related Charges

Restructuring and other related charges were $4.4 million for the year ended December 31, 2024, compared to $17.3 million for the year ended December 31, 2023, a decrease of $12.9 million or 74%. The year-over-year decrease was due to higher restructuring costs in 2023, including more significant headcount reductions and the termination of the Brussels and Chicago leases, partially offset by an increase in capitalized software costs and acquired technology write-offs in 2024.

Amortization of Intangible Assets

Amortization of intangible assets was $2.4 million for both years ended December 31, 2024 and 2023.

Segment Operating Income (Loss)

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

•Security Solutions: For the year ended December 31, 2024, Security Solutions operating income was $90.1 million, which was $29.9 million, or 50%, higher than the prior year. This increase was driven by higher gross profit (discussed above), a result of favorable product and revenue mix, and lower sales and marketing expenses, research and development expenses, and restructuring expenses all largely due to lower employee costs due to lower headcount.

•Digital Agreements: Operating income for the year ended December 31, 2024 was $5.6 million, compared to an operating loss of $18.5 million for the prior year. The increase in operating income was primarily driven by higher revenue, lower sales and marketing expenses and research and development expenses, including lower employee compensation costs, marketing expenses, travel and entertainment costs, and lower restructuring expenses, partially offset by the write-off of our acquired blockchain technology and related capitalized software in 2024.

Interest Income, net

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[[/GREPCENT_TABLE]]

42

Interest income, net, was $1.8 million for the year ended December 31, 2024, compared to $2.1 million for the year ended December 31, 2023. The decrease in interest income is due to lower average excess cash invested and a lower average rate yield in the period compared to the prior year.

Other Income (Expense), Net

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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

For the year ended December 31, 2024, other income (expense), net was $(0.1) million, compared to $(0.5) million for the year ended December 31, 2023. The fluctuation was primarily driven by a decrease in subsidies received from foreign governments, offset by lower transaction losses due to the favorable US dollar rate against other functional currencies and lower loss on disposal of assets.

(Benefit) provision for income taxes

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

We recorded an income tax benefit of $10.6 million and income tax expense of $2.5 million for the years ended December 31, 2024 and 2023, respectively. The income tax benefit recorded for the year ended December 31, 2024 was primarily attributable to the worthless stock deduction, release of valuation allowance, income tax benefit attributable to the IP Transfer, offset by income tax expense attributable to an increase in income before taxes.

Loss Carryforwards Available

At December 31, 2024, we have gross deferred tax assets of $56.8 million resulting from U.S. federal, foreign and state NOL carryforwards of $183.7 million and other foreign deductible carryforwards of $130.3 million. At December 31, 2024, we have a valuation allowance of $37.2 million against deferred tax assets related to certain carryforwards (see Note 13, Income Taxes.

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

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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.

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, 2024, we reported ARR of $167.7 million, which was 8% higher than 2023 ARR of $154.6 million. Changes in foreign exchange rates during the year ended December 31, 2024 as compared to the prior year negatively impacted ARR by approximately $0.1 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 106% and 110% at December 31, 2024 and 2023, respectively. Year-over-year, NRR was primarily impacted by the same factors that affected ARR, as discussed above.

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, amortization, long-term incentive compensation, restructuring and other related charges, and certain non-recurring items, including acquisition related costs, rebranding costs, and non-routine shareholder matters. 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, restructuring 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, non-routine shareholder

44

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.

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:

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[[/GREPCENT_TABLE]]

(1) Includes cost of sales depreciation and amortization expense directly related to delivering cloud subscription revenue of $3.4 million and $1.5 million for the years ended December 31, 2024 and 2023, respectively. Costs are recorded in “Services and other cost of goods sold” on the consolidated statements of operations.

(2) Long-term incentive compensation includes share-based compensation 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 immaterial expense associated with these cash incentive grants was $0.2 million and $0.3 million for the years ended December 31, 2024 and 2023, respectively.

(3) 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 and $0 for the year ended December 31, 2023. Costs are recorded in "Services and other costs of good sold" and "Restructuring and other related charges," respectively, on the consolidated statements of operations. Also, includes restructuring and other related charges of $0.1 million for the year ended December 31, 2024 and $0 for the year ended December 31, 2023. These charges are recorded in "Services and other costs of good sold" on the consolidated statements of operations.

(4) For the year ended December 31, 2024, other non-recurring items consist of $4.2 million of fees related to non-recurring projects. For the year ended December 31, 2023, other non-recurring items consist of $1.6 million of fees related to non-recurring projects and our acquisition of substantially all of the assets of the ProvenDB business of Southbank Software Pty Ltd., and $1.4 million of fees related to non-recurring items, primarily severance payable to our former chief executive officer.

Adjusted EBITDA increased during the year ended December 31, 2024 compared to 2023, primarily due to higher revenue and gross profit dollars as well as lower operating expenses as a result of restructuring activities described elsewhere in Item 7. Year-over-year changes in foreign exchange rates favorably impacted Adjusted EBITDA by approximately $0.6 million for the year ended December 31, 2024.

Please see further discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for an analysis of what comprises net income (loss) in the consolidated statements of operations for the years ended December 31, 2024 and 2023, and additional detail around items excluded from Adjusted EBITDA.

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Liquidity and Capital Resources

As of December 31, 2024 and 2023, we had cash and cash equivalents balances of $83.2 million and $43.0 million, respectively. Our cash and cash equivalents balance includes money market funds and U.S. treasury bills with maturities at acquisition of less than three months.

We are party to lease agreements that require letters of credit and guarantees to secure the obligations and a cash guarantee with a payroll vendor which totaled $0.2 million and $0.5 million at December 31, 2024 and 2023, respectively. The restricted cash related to the letters of credit and guarantees is recorded in "Restricted cash" on the consolidated balance sheets.

As of December 31, 2024, we held $63.6 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $63.3 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:

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[[/GREPCENT_TABLE]]

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, 2024, $55.7 million of cash was provided by operating activities. This was primarily driven by a significant increase in net income for the period as a result of the restructuring and cost savings initiatives. For the year ended December 31, 2023, $10.7 million of cash was used in operating activities.

Our working capital at December 31, 2024 was $64.8 million, a increase of $33.3 million, or 106%, from $31.5 million at December 31, 2023. The increase was due to a significantly higher cash balance, partially offset by lower accounts receivable, and lower accounts payable, accrued wages and payroll taxes, and deferred revenue.

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. 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 activity in connection with acquisitions.

For the year ended December 31, 2024 cash of $9.3 million was used in investing activities, compared to cash of $12.0 million used in investing activities during the year ended December 31, 2023. The cash used for the year ended December 31, 2024 was primarily attributable to additions to capitalized software activities.

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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 and tax payments for restricted stock issuances.

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..

For the year ended December 31, 2023, net cash used in financing activities was $32.1 million, which consisted of $29.2 million of common stock repurchases, both in open market repurchases and pursuant to the Tender Offer discussed in 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, and $2.9 million of tax payments for restricted stock issuances.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Contractual Obligations and Commitments

We have unrecognized purchase obligations of $5.0 million for software agreements related to the administration of our business which range from 1 to 3 years.

We have operating lease obligations of $9.3 million which will expire in the next 1 to 9 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.

We have taxes payable of $0.5 million due within 1 year, which primarily represent deemed repatriation tax from 2017. We had $0 of unrecognized tax benefits as of both December 31, 2024 and 2023.

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.

47

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 Security Solutions 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. Professional services and other revenue includes perpetual licenses revenue, which was immaterial for the year ended December 31, 2024 and approximately 1% of total revenue for the year ended December 31, 2023. Perpetual licenses grant the customer unlimited access to the software.

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.

48

The Company also enters into separate service agreements with certain hardware customers to perform distribution services. In these situations, revenue is recognized prior to physical delivery of a good (i.e. “bill-and-hold arrangements). The Company evaluates bill-and-hold arrangements, and records revenue accordingly when the following criteria are met:

•The reason for the bill-and-hold arrangement is substantive;

•The product is identified separately as belonging to the customer;

•The product currently is ready for physical transfer to the customer; and

•OneSpan does not have the ability to use the product or to direct it to another customer.

Multiple-Element Arrangements

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

1.A client component (i.e. an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a device 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 ("PCS") 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. The Company evaluates the nature of the goods or services promised in these arrangements to identify the distinct performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment 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 and professional services based on observable inputs; specifically, the range of prices charged to customers to renew annual maintenance and support contracts and the range of hourly rates we charge our customers in standalone professional services contracts. In instances where SSP is not directly observable, and when we sell at a highly variable price range, such as for transactions involving software licenses or subscriptions, we determine the SSP for those performance obligations using the residual approach.

49

Credit Losses

In accordance with Accounting Standards Update ("ASU") No. 2016-13, the Company evaluates its allowance based on expected losses rather than incurred losses, which is known as the current expected credit loss ("CECL") model. The allowance is determined using the loss rate approach and is measured on a collective (pool) basis when similar risk characteristics exist. Where financial instruments do not share risk characteristics, they are evaluated on an individual basis. The allowance is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Income Taxes

As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, and tax planning opportunities available in each tax jurisdiction.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of a change in tax rates on deferred tax assets and liabilities and in income in the period that includes the enactment date.

We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments, and the use of estimates are required in determining whether the “more-likely-than-not” standard has been 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.