Vertex, Inc. - Quarter Report: 2022 June (Form 10-Q)

As of June 30,

Net Revenue Retention Rate

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39413

VERTEX, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware				23-2081753
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

2301 Renaissance Blvd King of Prussia, Pennsylvania				19406
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code: (800) 355-3500

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Class A Common Stock, Par Value $0.001 Per Share	VERX	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 5, 2022, the registrant had 48,432,472 shares of Class A common stock, $0.001 par value per share, and 101,307,000 shares of Class B common stock, $0.001 par value per share, outstanding.

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TABLE OF CONTENTS

		Page
	Part I - Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited)	9
	Notes to Condensed Consolidated Financial Statements (unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	56
	Part II - Other Information	57
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	58
	Signatures	59

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations and regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management, are forward-looking statements and should be evaluated as such. These statements often include words such as “anticipate,” “believe,” “expect,” “suggests,” “plans,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” and other similar expressions or the negatives of those terms. We base these forward-looking statements on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances at such time. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of future performance or results. The forward-looking statements are subject to and involve risks, uncertainties and assumptions, and you should not place undue reliance on these forward-looking statements. Although we believe that these forward-looking statements are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. Important factors that may materially affect such forward-looking statements include, but are not limited to:

●

the potential effects on our business of the coronavirus disease 2019 (“COVID-19”) pandemic;

●

our ability to attract new customers on a cost-effective basis and the extent to which existing customers renew and upgrade their subscriptions;

●

our ability to sustain and expand revenues, maintain profitability, and to effectively manage our anticipated growth;

●

the timing of our introduction of new solutions or updates to existing solutions;

●

our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services or content;

●

our ability to maintain and expand our strategic relationships with third parties;

●

risks related to our expanding international operations;

●

our ability to deliver our solutions to customers without disruption or delay;

●

our exposure to liability from errors, delays, fraud or system failures, which may not be covered by insurance;

●

risks related to our determinations of customers’ transaction tax and tax payments;

●

risks related to changes in tax laws and regulations or their interpretation or enforcement;

●

our ability to manage cybersecurity and data privacy risks;

●

risks related to failures in information technology, infrastructure and third-party service providers;

●

our ability to effectively protect, maintain and enhance our brand;

●

global economic weakness and uncertainties, and disruption in the capital and credit markets;

●

business disruptions related to natural disasters, epidemic outbreaks, terrorist acts, political events or other events outside of our control;

●

our ability to comply with anti-corruption, anti-bribery and similar laws;

●

changes in interest rates, security ratings and market perceptions of the industry in which we operate, or our ability to obtain capital on commercially reasonable terms or at all;

●

any statements of belief and any statements of assumptions underlying any of the foregoing; and

●

other factors beyond our control.

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The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in our Annual Report on Form 10-K for the year ended December 31, 2021, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 and in other sections of this Quarterly Report on Form 10-Q, including under Part II, Item 1A, Risk Factors. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for us to identify all such risk factors, nor can we assess the impact of all such risk factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on our forward-looking statements, and you should not rely on forward-looking statements as predictions of future events. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this report. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Vertex, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of June 30, 2022 and December 31, 2021

(Amounts in thousands, except per share data)


	June 30,		December 31,
	2022		2021
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	85,554	$	73,333
Funds held for customers		19,935		24,873
Accounts receivable, net of allowance of $8,719 and $9,151, respectively		88,961		76,929
Prepaid expenses and other current assets		22,956		20,536
Investment securities available for sale, current (amortized cost of $6,940 at June 30, 2022)		6,943		—
Total current assets		224,349		195,671
Property and equipment, net of accumulated depreciation		106,526		98,390
Capitalized software, net of accumulated amortization		38,362		33,442
Goodwill and other intangible assets		255,556		272,702
Deferred commissions		12,168		12,555
Deferred income tax asset		31,190		35,298
Operating lease right-of-use assets		19,007		20,249
Other assets		2,592		1,900
Total assets	$	689,750	$	670,207

Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	1,563	$	—
Accounts payable		17,710		13,000
Accrued expenses		23,931		22,966
Tax sharing agreement distributions payable		—		536
Customer funds obligations		18,890		23,461
Accrued salaries and benefits		16,223		16,671
Accrued variable compensation		13,480		26,462
Deferred compensation, current		1,844		4,202
Deferred revenue, current		243,815		237,344
Current portion of operating lease liabilities		4,306		3,933
Current portion of finance lease liabilities		2,368		284
Deferred purchase consideration, current		19,955		19,805
Purchase commitment and contingent consideration liabilities, current		4,791		468
Total current liabilities		368,876		369,132
Deferred compensation, net of current portion		129		1,963
Deferred revenue, net of current portion		11,259		11,666
Debt, net of current portion		47,939		—
Operating lease liabilities, net of current portion		22,371		24,320
Finance lease liabilities, net of current portion		39		68
Deferred purchase consideration, net of current portion		9,586		19,419
Purchase commitment and contingent consideration liabilities, net of current portion		7,488		10,829
Deferred other liabilities		1,428		2,726
Total liabilities		469,115		440,123
Commitments and contingencies (Note 13)

Stockholders' equity:
Preferred shares, $0.001 par value, 30,000 shares authorized; no shares issued and outstanding		—		—
Class A voting common stock, $0.001 par value, 300,000 shares authorized; 48,316 and 42,286 shares issued and outstanding, respectively		48		42
Class B voting common stock, $0.001 par value, 150,000 shares authorized; 101,307 and 106,807 shares issued and outstanding, respectively		101		107
Additional paid in capital		232,850		222,621
Retained earnings		18,957		24,811
Accumulated other comprehensive loss		(31,321)		(17,497)
Total stockholders' equity		220,635		230,084
Total liabilities and stockholders' equity	$	689,750	$	670,207

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the three and six months ended June 30, 2022 and 2021

(Amounts in thousands, except per share data)


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021

	(unaudited)				(unaudited)
Revenues:
Software subscriptions	$	101,088	$	89,604	$	198,219	$	172,884
Services		18,188		15,334		36,041		30,290
Total revenues		119,276		104,938		234,260		203,174
Cost of revenues:
Software subscriptions		36,209		26,829		69,122		52,419
Services		11,920		10,550		23,873		21,893
Total cost of revenues		48,129		37,379		92,995		74,312
Gross profit		71,147		67,559		141,265		128,862
Operating expenses:
Research and development		10,310		11,926		19,943		23,385
Selling and marketing		31,979		24,865		59,431		45,015
General and administrative		30,084		24,865		58,841		49,717
Depreciation and amortization		3,224		2,878		6,184		5,705
Other operating (income) expense, net		(154)		4,483		694		4,354
Total operating expenses		75,443		69,017		145,093		128,176
(Loss) income from operations		(4,296)		(1,458)		(3,828)		686
Interest expense (income), net		724		(385)		718		150
(Loss) income before income taxes		(5,020)		(1,073)		(4,546)		536
Income tax expense (benefit)		500		(1,881)		1,308		(2,560)
Net (loss) income		(5,520)		808		(5,854)		3,096
Other comprehensive loss, net of tax		11,775		3,359		13,824		4,336
Total comprehensive loss	$	(17,295)	$	(2,551)	$	(19,678)	$	(1,240)

Net (loss) income attributable to Class A stockholders, basic	$	(1,598)	$	190	$	(1,679)	$	644
Net (loss) income per Class A share, basic	$	(0.04)	$	0.01	$	(0.04)	$	0.02
Weighted average Class A common stock, basic		43,286		34,726		42,818		30,592
Net (loss) income attributable to Class A stockholders, diluted	$	(1,598)	$	229	$	(1,679)	$	811
Net (loss) income per Class A share, diluted	$	(0.04)	$	0.01	$	(0.04)	$	0.02
Weighted average Class A common stock, diluted		43,286		44,711		42,818		41,357
Net (loss) income attributable to Class B stockholders, basic	$	(3,922)	$	618	$	(4,175)	$	2,452
Net (loss) income per Class B share, basic	$	(0.04)	$	0.01	$	(0.04)	$	0.02
Weighted average Class B common stock, basic		106,203		112,804		106,505		116,460
Net (loss) income attributable to Class B stockholders, diluted	$	(3,922)	$	579	$	(4,175)	$	2,285
Net (loss) income per Class B share, diluted	$	(0.04)	$	0.01	$	(0.04)	$	0.02
Weighted average Class B common stock, diluted		106,203		112,804		106,505		116,460

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the three and six months ended June 30, 2022 (unaudited)

(Amounts in thousands)


											Accumulated
	Outstanding	Class A		Outstanding	Class B		Additional				Other		Total
	Class A	Common		Class B	Common		Paid In		Retained		Comprehensive		Stockholders'
	Shares	Stock		Shares	Stock		Capital		Earnings		(Loss) Income		Equity
Balance, January 1, 2022	42,286	$	42	106,807	$	107	$	222,621	$	24,811	$	(17,497)	$	230,084
Exercise of stock options, net	272		—	—		—		278		—		—		278
Shares issued upon vesting of Restricted Stock Units, net	3		—	—		—		(15)		—		—		(15)
Stock-based compensation expense	—		—	—		—		4,867		—		—		4,867
Foreign currency translation adjustments and revaluations, net of tax	—		—	—		—		—		—		(2,049)		(2,049)
Net loss	—		—	—		—		—		(334)		—		(334)
Balance, March 31, 2022	42,561		42	106,807		107		227,751		24,477		(19,546)		232,831
Exercise of stock options, net	93		—	—		—		(34)		—		—		(34)
Shares issued upon vesting of Restricted Stock Awards, net	59		—	—		—		—		—		—		—
Stock-based compensation expense	—		—	—		—		4,166		—		—		4,166
Shares issued in connection with ESPP	103		—	—		—		967		—		—		967
Class B shares exchanged for Class A shares	5,500		6	(5,500)		(6)		—		—		—		—
Foreign currency translation adjustments and revaluations, net of tax	—		—	—		—		—		—		(11,777)		(11,777)
Unrealized gain from available for sale investments, net of tax	—		—	—		—		—		—		2		2
Net loss	—		—	—		—		—		(5,520)		—		(5,520)
Balance, June 30, 2022	48,316	$	48	101,307	$	101	$	232,850	$	18,957	$	(31,321)	$	220,635

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the three and six months ended June 30, 2021 (unaudited)

(Amounts in thousands)


											Accumulated
	Outstanding	Class A		Outstanding	Class B		Additional				Other		Total
	Class A	Common		Class B	Common		Paid In		Retained		Comprehensive		Stockholders'
	Shares	Stock		Shares	Stock		Capital		Earnings		Loss		Equity
Balance, January 1, 2021	26,327	$	26	120,117	$	120	$	206,541	$	25,782	$	(3,127)	$	229,342
ASC 842 transition adjustment	—		—	—		—		—		508		—		508
Exercise of stock options, net	640		1	—		—		(6,998)		—		—		(6,997)
Shares issued upon vesting of Restricted Stock Units, net	5		—	—		—		(34)		—		—		(34)
Stock-based compensation expense	—		—	—		—		6,302		—		—		6,302
Foreign currency translation adjustments and revaluations, net of tax	—		—	—		—		—		—		(977)		(977)
Net income	—		—	—		—		—		2,288		—		2,288
Balance, March 31, 2021	26,972		27	120,117		120		205,811		28,578		(4,104)		230,432
Exercise of stock options, net	462		1	—		—		(3,293)		—		—		(3,292)
Shares issued upon vesting of Restricted Stock Awards, net	234		—	—		—		—		—		—		—
Shares issued in connection with ESPP	60		—	—		—		6,101		—		—		6,101
Stock-based compensation expense	—		—	—		—		1,010		—		—		1,010
Class B shares exchanged for Class A shares	12,100		12	(12,100)		(12)		—		—		—		—
Foreign currency translation adjustments and revaluations, net of tax	—		—	—		—		—		—		(3,359)		(3,359)
Net income	—		—	—		—		—		808		—		808
Balance, June 30, 2021	39,828	$	40	108,017	$	108	$	209,629	$	29,386	$	(7,463)	$	231,700

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2022 and 2021

(Amounts in thousands)


	Six Months Ended June 30,
	2022		2021

	(unaudited)
Cash flows from operating activities:
Net (loss) income	$	(5,854)	$	3,096
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		30,535		17,697
Provision for subscription cancellations and non-renewals, net of deferred allowance		(611)		994
Amortization of deferred financing costs		118		106
Change in fair value of contingent consideration liability		700		—
Write-off of deferred financing costs		370		—
Stock-based compensation expense		9,127		12,828
Deferred income tax benefit		(88)		(2,812)
Non-cash operating lease costs		1,534		1,867
Other		552		66
Changes in operating assets and liabilities:
Accounts receivable		(10,900)		10,993
Prepaid expenses and other current assets		(3,124)		(3,396)
Deferred commissions		387		198
Accounts payable		4,732		2,515
Accrued expenses		685		(5,707)
Accrued and deferred compensation		(17,550)		(8,301)
Deferred revenue		6,288		(1,220)
Operating lease liabilities		(1,868)		(2,532)
Other		(457)		73
Net cash provided by operating activities		14,576		26,465
Cash flows from investing activities:
Acquisition of business, net of cash acquired		(474)		(193,591)
Property and equipment additions		(27,827)		(15,888)
Capitalized software additions		(5,926)		(5,125)
Purchase of investment securities, available for sale		(6,943)		—
Net cash used in investing activities		(41,170)		(214,604)
Cash flows from financing activities:
Net increase (decrease) in customer funds obligations		(4,571)		22,227
Proceeds from term loan		50,000		—
Principal payments on long-term debt		(313)		—
Payments for deferred financing costs		(983)		—
Proceeds from purchases of stock under ESPP		967		1,010
Payments for taxes related to net share settlement of stock-based awards		(489)		(10,715)
Proceeds from exercise of stock options		718		391
Distributions under Tax Sharing Agreement		(536)		(2,700)
Payments for purchase commitment liabilities		(255)		(788)
Payments of finance lease liabilities		(49)		(685)
Payments for deferred purchase commitments		(10,000)		—
Net cash provided by financing activities		34,489		8,740
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(612)		(221)
Net increase (decrease) in cash, cash equivalents and restricted cash		7,283		(179,620)
Cash, cash equivalents and restricted cash, beginning of period		98,206		312,273
Cash, cash equivalents and restricted cash, end of period	$	105,489	$	132,653
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets, end of period:
Cash and cash equivalents	$	85,554	$	101,593
Restricted cash—funds held for customers		19,935		31,060
Total cash, cash equivalents and restricted cash, end of period	$	105,489	$	132,653

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(Amounts in thousands, except per share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Vertex, Inc. (“Vertex”) and its consolidated subsidiaries and variable interest entities (“VIE”) (collectively, the “Company”) operate as solutions providers of state, local and value added tax calculation, compliance and analytics, offering software products which are sold through software license and software as a service (“cloud”) subscriptions. The Company also provides implementation and training services in connection with its software license and cloud subscriptions, transaction tax returns outsourcing, and other tax-related services. The Company sells to customers located throughout the United States of America (“U.S.”) and internationally.

Basis of Consolidation

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and include the accounts of the Company. All intercompany transactions have been eliminated in consolidation.

The Company has a 65% equity interest in Systax Sistemas Fiscais LTDA (“Systax”), a provider of Brazilian transaction tax content and software. Systax is considered a VIE given that the equity investors, as a group, lack the characteristics of a controlling financial interest. Vertex includes Systax in the condensed consolidated financial statements as Vertex is the primary beneficiary of the equity interests in Systax and participates significantly in the variability in the fair value of Systax’s net assets.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and include the accounts of the Company. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) filed with the SEC on March 16, 2022. The condensed consolidated balance sheet as of December 31, 2021 has been derived from audited financial statements included in the 2021 Annual Report. The accompanying interim condensed consolidated balance sheet as of June 30, 2022, the interim condensed consolidated statements of comprehensive loss, changes in stockholders’ equity for the three and six months ended June 30, 2022 and 2021, and interim condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the annual audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the condensed consolidated financial statements. The operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results expected for the full year ending December 31, 2022.

Segments

The Company operates its business as one operating segment. For the three and six months ended June 30, 2022, approximately 10% and 8%, respectively, of the Company’s revenues were generated from customers located outside the U.S. For the three and six months ended June 30, 2021, revenues generated from customers located outside the U.S. were approximately 7% and 6%, respectively. As of June 30, 2022 and December 31, 2021, $791 and $699, respectively, of the Company’s property and equipment assets were held outside the U.S.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date. A three-level fair value hierarchy (the “Fair Value Hierarchy”) prioritizes the inputs used to measure fair value. The Fair Value Hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. Classification in the Fair Value Hierarchy is based on the lowest of the following levels that is significant to the measurement:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs are quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3: Inputs are unobservable inputs based on the Company’s assumptions and valuation techniques used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The Company’s assessment of the significance of an input to a fair value measurement requires judgment, which may affect the determination of fair value and the measurement’s classification within the Fair Value Hierarchy.

Use of Estimates

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses during the reporting period. Significant estimates used in preparing these condensed consolidated financial statements include: (i) the estimated allowance for subscription cancellations, (ii) expected credit losses associated with the allowance for doubtful accounts; (iii) allowance for credit losses on available for sale securities; (iv) the reserve for self-insurance, (v) assumptions related to achievement of technological feasibility for software developed for sale, (vi) product life cycles, (vii) estimated useful lives and potential impairment of long-lived assets and intangible assets, (viii) potential impairment of goodwill, (ix) determination of the fair value of tangible and intangible assets acquired, liabilities assumed and consideration transferred in acquisitions, (x) amortization period of material rights and deferred commissions (xi) Black-Scholes-Merton option pricing model (“Black-Scholes model”) input assumptions used to determine the fair value of stock-based compensation awards, (xii) measurement of future purchase commitment, contingent consideration liabilities and deferred purchase consideration liabilities associated with acquisitions, and (xiii) the potential outcome of future tax consequences of events that have been recognized in the condensed consolidated financial statements or tax returns. Actual results may differ from these estimates.

Software Development Costs

Internal-Use Software

The Company follows Accounting Standard Codification (“ASC”) 350-40, Goodwill and Other, Internal-Use Software, to account for development costs incurred for the costs of computer software developed or obtained for internal use. ASC 350-40 requires such costs to be capitalized once certain criteria are met. Internal-use software is included in internal-use software developed in property and equipment in the condensed consolidated balance sheets once available for its intended use and is depreciated over periods between 3 to 5 years. Depreciation expense for internal-use software utilized for cloud-based customer solutions and for software for internal systems and tools is included in cost of revenues, software subscriptions and depreciation and amortization expense, respectively, in the condensed consolidated statements of comprehensive loss.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Software Developed for Sale

The costs incurred for the development of computer software to be sold, leased, or otherwise marketed are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed, when technological feasibility has been established. Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on a product-by-product basis using the straight-line method over periods between three to five years and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive loss. Capitalized software costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies at least annually at December 31, and whenever events or circumstances make it more likely than not that impairment may have occurred.

Business Combinations

Upon acquisition of a company, the Company determines if the transaction is a business combination, which is accounted for using the acquisition method of accounting. Under the acquisition method, once control is obtained of a business, the assets acquired, liabilities assumed, consideration transferred and amounts attributed to noncontrolling interests, are recorded at fair value. The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired, liabilities assumed, consideration transferred, and amounts attributed to noncontrolling interests at the acquisition date. One of the most significant estimates relates to the determination of the fair value of these amounts. The determination of the fair values is based on estimates and judgments made by management. The Company’s estimates of fair value are based upon assumptions it believes to be reasonable, but which are inherently uncertain and unpredictable. Measurement period adjustments to these values as of the acquisition date are reflected at the time identified, up through the conclusion of the measurement period, which is the time at which all information for determination of the values of assets acquired, liabilities assumed, consideration transferred and noncontrolling interests is received, and is not to exceed one year from the acquisition date (the “Measurement Period”). Thus the Company may record adjustments to the fair value of these tangible and intangible assets acquired, liabilities assumed, consideration transferred and noncontrolling interests, with the corresponding offset to goodwill during this Measurement Period. Additionally, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluate these estimates and assumptions periodically and record any adjustments to preliminary estimates to goodwill, provided the Company is within the Measurement Period, with any adjustments to amortization of new or previously recorded identifiable intangibles being recorded to the condensed consolidated statements of comprehensive loss in the period in which they arise. In addition, if outside of the Measurement Period, any subsequent adjustments to the acquisition date fair values are reflected in the condensed consolidated statements of comprehensive loss in the period in which they arise.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. The Company evaluates goodwill for impairment annually at October 1^st, and whenever events or circumstances make it more likely than not that impairment may have occurred.

Deferred Financing Costs

The Company capitalizes costs related to obtaining, renewing or extending loan agreements and amortizes these costs on a straight-line basis, which approximates the effective interest method, over the life of the loan. Deferred financing costs related to term loans outstanding are reflected as a reduction of current portion of long-term debt and long-term debt net of current portion in the condensed consolidated balance sheets. Deferred financing costs related to undrawn debt are reflected in other assets in the condensed consolidated balance sheets.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Stock-Based Compensation

The Company has stock awards issued under the 2020 Incentive Award Plan (the “2020 Plan”) and the 2020 Employee Stock Purchase Plan (the “ESPP”). The awards are subject to, and the Company applies, the guidance set forth in ASC 718, Compensation—Stock Compensation, for the award of equity-based instruments. The provisions of ASC 718 require a company to measure the fair value of stock-based compensation as of the grant date of the award. Stock-based compensation expense reflects the cost of employee services received in exchange for the awards. The Company has elected to recognize award forfeitures as they occur.

Revenue Recognition

Revenue from contracts with customers

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct, and accounted for as separate performance obligations. Revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of goods and services

Licenses for on-premise software subscriptions provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates and product support (collectively, the “updates and support”). The updates and support, which are part of the subscription agreement, are essential to the continued utility of the software; therefore, the Company has determined the software and the related updates and support to be a single performance obligation. Accordingly, when on-premise software is licensed, the revenue associated with this combined performance obligation is recognized ratably over the license term as these performance obligations are satisfied over the duration of the license term. Revenue recognition begins on the later of the beginning of the subscription period or the date the software is made available to the customer to download. Prior to January 1, 2022, certain on-premise software subscription prices in the initial subscription year were higher than standard renewal prices. The excess initial year price over the renewal price (“new sale premium”) is a material right that provides customers with the right to this reduced renewal price. The Company recognizes revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years. Effective January 1, 2022, the Company changed the pricing structure for on-premise software so the initial year price and renewal prices were consistent, thus removing the material right for transactions after this date. The material right for applicable transactions prior to this pricing change will continue to be recognized over the estimated period of benefit to the customer.

Cloud-based subscriptions allow customers to use Company-hosted software over the contract period without taking possession of the software. The cloud-based offerings also include related updates and support. Cloud-based contracts consistently provide a benefit to the customer during the subscription period; thus, the associated revenue is recognized ratably over the related subscription period. Revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based solutions.

Revenue from deliverable-based services is recognized as services are delivered. Revenue from fixed fee services is recognized as services are performed using the percentage of completion input method.

The Company has elected the “right to invoice” practical expedient for revenue related to services that are billed on an hourly basis, which enables revenue to be recognized as the services are performed.

The Company has determined that the methods applied to measuring its progress toward complete satisfaction of performance obligations recognized over time are a faithful depiction of the transfer of control of software subscriptions and services to customers.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Significant judgments

Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Identification of the amortization periods of material rights and contract costs requires significant judgement by management.

Payment terms

Payment terms and conditions vary by contract, although the Company’s terms generally include a requirement of payment within 30-days. In instances where the timing of revenue recognition differs from the timing of payment, the Company has determined that its contracts do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, not to receive financing from customers or to provide customers with financing.

Cost of revenues

Cost of revenues, software subscriptions includes the direct cost to maintain, host and distribute software products, the direct cost to provide customer support, the direct cost to maintain tax content and depreciation and amortization of costs of capitalized software, acquired intangibles, and internal-use software utilized for cloud-based subscriptions. Cost of revenues, services includes the direct costs of implementation, training, transaction tax returns outsourcing and other tax-related services.

Reimbursable costs

Reimbursable costs passed through and invoiced to customers of the Company are recorded as services revenues with the associated expenses recorded as cost of revenues, services in the condensed consolidated statements of comprehensive loss.

Income Taxes

Vertex accounts for income taxes using the asset and liability method. The Company recognizes deferred tax assets and liabilities for future tax consequences of events that have been previously recognized in the Company’s condensed consolidated financial statements and tax returns. The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The effects of future changes in tax laws or rates are not anticipated. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process whereby: (i) management determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (ii) for those tax positions that meet the more likely than not recognition threshold, management recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company records interest related to underpayment of income taxes as interest expense and penalties as other operating expenses in the condensed consolidated statements of comprehensive loss.

The impact as a result of the application of ASC 740 is reflected in the condensed consolidated financial statements. The Company assesses its income tax positions and records tax benefits or expense based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. Variations in the actual outcome of these future tax consequences could materially impact the condensed consolidated financial statements. The Company’s effective income tax rate is based on estimated income for the year, the estimated composition of the income/losses in different jurisdictions, and discrete adjustments in the applicable quarterly periods. Potential discrete adjustments generally include tax charges or benefits related to stock-based compensation and changes in tax legislation, among other items.

The Company’s effective income tax rate was (10%) and 175% for the three months ended June 30, 2022, and 2021, respectively. For the three months ended June 30, 2022, the effective income tax rate was lower than the U.S. federal statutory rate primarily due to foreign losses benefited at lower rates, shortfall in tax benefits related to stock-based

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

compensation, and limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m) (“Section 162(m)”), when compared to losses before income taxes for the three months ended June 30, 2022. For the three months ended June 30, 2021, the effective income tax rate was higher than the U.S. federal statutory rate primarily due to excess tax benefits related to stock-based compensation, offset by limitations on deductions of certain employees’ compensation under Section 162(m), when compared to income before income taxes for the three months ended June 30, 2021.

The Company’s effective income tax rate was (29%) and (478%) for the six months ended June 30, 2022, and 2021, respectively. For the six months ended June 30, 2022, the effective income tax rate was lower than the U.S. federal statutory rate primarily due to foreign losses benefited at lower rates, shortfall in tax benefits related to stock-based compensation, and limitations on deductions of certain employees’ compensation under Section 162(m), when compared to losses before income taxes for the six months ended June 30, 2022. For the six months ended June 30, 2021, the effective income tax rate was lower than the U.S. federal statutory rate primarily due to excess tax benefits related to stock-based compensation, offset by limitations on deductions of certain employees’ compensation under Section 162(m), when compared to income before income taxes for the six months ended June 30, 2021.

The Tax Cuts and Jobs Act of 2017 generally requires taxpayers to capitalize research and experimental expenditures effective for tax years beginning after December 31, 2021, and amortize the capitalized costs over a period of five or 15 years depending on where the research is conducted. The latest versions of the proposed Build Back Better Act delay the effective date on which these expenditures are required to be capitalized. However, it is unclear if this act will pass in its current form or if any other legislation might be enacted to defer or repeal the effective date of capitalization. If the capitalization requirement is not deferred or repealed, the Company expects the capitalization of research and experimental expenditures to increase its current U.S. federal and state income tax expense.

Supplemental Balance Sheet Disclosures

Supplemental balance sheet disclosures are as follows for the respective periods:


	As of June 30,		As of December 31,
	2022		2021
	(unaudited)
Prepaid expenses and other current assets:
Prepaid expenses	$	8,802	$	8,903
Prepaid insurance		756		3,348
Prepaid licenses and support		13,398		8,285
Prepaid expenses and other current assets	$	22,956	$	20,536

Accrued expenses:
Accrued general expenses	$	15,805	$	10,771
Accrued contract labor and professional fees		5,728		9,688
Accrued income and other taxes		2,398		2,507
Accrued expenses	$	23,931	$	22,966

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Supplemental Cash Flow Disclosures

Supplemental cash flow disclosures are as follows for the respective periods:


	For the Six months ended June 30,
	2022		2021

	(unaudited)
Cash paid for:
Interest	$	577	$	119
Income taxes, net of refunds	$	1,922	$	966
Operating cash flows from operating leases	$	1,826	$	2,701

Non-cash investing and financing activities:
Purchase commitment and contingent consideration liabilities	$	700	$	12,736
Leased assets obtained in exchange for new finance lease liabilities	$	2,078	$	173

Recently Issued Accounting Pronouncements

As an “emerging growth company,” the Jumpstart Our Business Startups Act allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to delay adoption of certain new or revised accounting standards. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

Deferred Revenue

In October 2021, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (“ASU 2021-08”). ASU 2021-08 provides specific guidance on how to recognize and measure contract assets and contract liabilities related to revenue contracts with customers acquired in a business combination. This will align the accounting for these acquired contracts to the accounting for revenue contracts originated by the acquirer and will provide more comparable information to investors and other financial statement users seeking to better understand the financial impact of these acquisitions. ASU 2021-08 will be effective for public entities with fiscal years beginning after December 15, 2022, and for all other entities with fiscal years beginning after December 15, 2023, with early adoption permitted. ASU 2021-08 will be applied prospectively to business combinations occurring on or after the applicable effective date. The Company is currently evaluating the impact this guidance will have on the Company’s condensed consolidated financial statements.

Risks and Uncertainties

In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) to be a pandemic. The COVID-19 pandemic is continuing to have widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. To protect the health and well-being of Company employees and customers, substantial modifications were made to employee travel policies, and our offices were closed, and remained closed through June 30, 2022, with employees directed to work from home. The Company has begun to participate in and/or hold conferences and other marketing events in person and virtual based on the event, beginning in 2022. The COVID-19 pandemic has impacted, and may continue to impact, Company operations, including employees, customers and partners, and there is substantial uncertainty regarding the nature and degree of its continued effects over time.

The Company did not experience any significant reductions in sales, revenues or collections through June 30, 2022 as a result of COVID-19. The Company believes it has ample liquidity and capital resources to continue to meet its operating needs and to service debt and other financial obligations.

The extent to which the COVID-19 pandemic impacts the business going forward will depend on numerous evolving factors that cannot reliably be predicted, including the ongoing duration and scope of the pandemic; governmental,

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

business, and individuals’ actions in response to the pandemic; and the impact on economic activity, including the possibility of recession, inflation or financial market instability. These factors may adversely impact consumer, business and government spending on technology as well as customers’ ability to pay for Company products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including estimated allowance for subscription cancellations, product life cycles and estimated lives of long-lived assets.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on previously reported comprehensive income or loss.

2. REVENUE RECOGNITION

See Note 1, “Summary of Significant Accounting Policies”, for a description of the Company’s revenue recognition accounting policy.

Disaggregation of revenue

The table reflects revenue by major source for the following periods:


	Three months ended June 30,				Six months ended June 30,
		2022	2021			2022	2021

	(unaudited)				(unaudited)
Software subscriptions:
Software licenses	$	60,872	$	57,525	$	119,731	$	113,875
Cloud subscriptions		40,216		32,079		78,488		59,009
Software subscriptions		101,088		89,604		198,219		172,884
Services		18,188		15,334		36,041		30,290
Total revenues	$	119,276	$	104,938	$	234,260	$	203,174

Contract balances

Timing of revenue recognition may differ from the timing of invoicing customers. A receivable is recorded in the condensed consolidated balance sheets when customers are billed related to revenue to be collected and recognized for subscription agreements as there is an unconditional right to invoice and receive payment in the future related to these subscriptions. A receivable and related revenue may also be recorded in advance of billings to the extent services have been performed and the Company has a right under the contract to bill and collect for such performance. Subscription-based customers are generally invoiced annually at the beginning of each annual subscription period. Accounts receivable is presented net of an allowance for potentially uncollectible accounts and estimated cancellations of software license and cloud-based subscriptions (the “allowance”) $8,719 and $9,151 at June 30, 2022 and December 31, 2021, respectively. The allowance for potentially uncollectible accounts represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations.

The beginning and ending balances of accounts receivable, net of allowance, are as follows:


	For the six months ended June 30, 2022		For the year ended December 31, 2021
	(unaudited)
Balance, beginning of period	$	76,929	$	77,159
Balance, end of period		88,961		76,929
Increase (decrease), net	$	12,032	$	(230)

A contract liability is recorded as deferred revenue on the condensed consolidated balance sheets when customers are billed in advance of performance obligations being satisfied, and revenue is recognized after invoicing ratably over the subscription period or over the amortization period of material rights. Deferred revenue is reflected net of a related deferred

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

allowance for subscription cancellations (the “deferred allowance”) of $6,700 and $6,537 at June 30, 2022 and December 31, 2021, respectively. The deferred allowance represents the portion of the allowance for subscription cancellations associated with deferred revenue.

The beginning and ending balances of and changes to the allowance and the deferred allowance are as follows:


	For the three months ended June 30,
	2022				2021
	Balance			Net Change	Balance			Net Change

	(unaudited)
Allowance balance, April 1,	$	(8,450)			$	(8,059)
Allowance balance, June 30,		(8,719)				(9,399)
Change in allowance			$	269			$	1,340
Deferred allowance balance, April 1,		6,098				5,515
Deferred allowance balance, June 30,		6,700				6,267
Change in deferred allowance				(602)				(752)
Net amount charged to revenues			$	(333)			$	588

	For the six months ended June 30,
	2022				2021
	Balance			Net Change	Balance			Net Change

	(unaudited)
Allowance balance, January 1,	$	(9,151)			$	(8,592)
Allowance balance, June 30,		(8,719)				(9,399)
Change in allowance			$	(432)			$	807
Deferred allowance balance, January 1,		6,537				6,432
Deferred allowance balance, June 30,		6,700				6,267
Change in deferred allowance				(163)				165
Net amount charged to revenues			$	(595)			$	972

The portion of deferred revenue expected to be recognized in revenue beyond one year is included in deferred revenue, net of current portion in the condensed consolidated balance sheets. The tables provide information about the balances of and changes to deferred revenue for the following periods:


	As of June 30,		As of December 31,
	2022		2021
	(unaudited)
Balances:
Deferred revenue, current	$	243,815	$	237,344
Deferred revenue, non-current		11,259		11,666
Total deferred revenue	$	255,074	$	249,010


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021

	(unaudited)				(unaudited)
Changes to deferred revenue:
Beginning balance	$	245,715	$	218,133	$	249,010	$	222,262
Additional amounts deferred		128,635		109,417		240,324		203,524
Revenues recognized		(119,276)		(104,938)		(234,260)		(203,174)
Ending balance	$	255,074	$	222,612	$	255,074	$	222,612

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Contract costs

Deferred sales commissions earned by the Company’s sales force and certain sales incentive programs and vendor referral agreements are considered incremental and recoverable costs of obtaining a contract with a customer. An asset is recognized for these incremental contract costs and reflected as deferred commissions in the condensed consolidated balance sheets. These contract costs are amortized on a straight-line basis over a period consistent with the transfer of the associated product and services to the customer, which is generally three years. Amortization of these costs are included in selling and marketing expense in the condensed consolidated statements of comprehensive loss. The Company periodically reviews these contract assets to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these assets. There were no impairment losses recorded for the periods presented.

The changes to contract cost balances as of and for the following periods are:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021

	(unaudited)				(unaudited)
Deferred commissions:
Beginning balance	$	11,679	$	11,693	$	12,555	$	11,743
Additions		2,931		2,135		4,656		4,193
Amortization		(2,442)		(2,283)		(5,043)		(4,391)
Ending balance	$	12,168	$	11,545	$	12,168	$	11,545

3. BUSINESS COMBINATIONS

LCR-Dixon

On September 22, 2021, the Company executed a stock purchase agreement with LCR-Dixon Corporation (“LCR-Dixon”), a provider of SAP technologies and tax intelligence solutions. LCR-Dixon’s solutions were specifically developed to improve functionality and performance for SAP indirect tax processes and are integrated with the Company’s tax determination software. The LCR-Dixon acquisition was accounted for as a business combination. The transaction costs associated with the acquisition were not significant.

The purchase price was $99,062 consisting of (i) $59,720 of cash paid at closing, partially offset by $1,899 of LCR-Dixon cash received in the acquisition, resulting in net cash consideration at closing of $57,821, (ii) $474 cash paid related to the final determination of LCR-Dixon’s cash and net working capital as of the acquisition date (the “Post-closing Adjustment”) paid in January 2022, (iii) non-interest bearing deferred payments aggregating $40,000 to be paid in four equal installments of $10,000 every six-months beginning March 2022 and ending September 2023, net of a discount of $976 (the “deferred purchase consideration”) and (iv) other adjustments associated with income tax amounts that exceed the estimated amount calculated at closing of $156. Cash paid was funded from available cash on hand. The discount recorded as a reduction of the deferred purchase consideration will be recorded as interest expense over the payment period using the effective interest method. The deferred purchase consideration, net of discount, is included in current liabilities and long-term liabilities in the condensed consolidated balance sheets at (i) $19,955 and $9,586, respectively, at June 30, 2022, and (ii) $19,805 and $19,419, respectively, at December 31, 2021.

The following table summarizes the purchase price for LCR-Dixon:


	As of Acquisition Date
Cash consideration	$	60,038
Fair value of deferred purchase consideration		39,024
Total	$	99,062

The purchase price was allocated to the net assets acquired based on management’s determination of their estimated fair values using available information as of the acquisition date. The excess of purchase consideration over the net assets acquired is recorded as goodwill, which primarily reflects the existence of intangible assets not recognized under U.S. GAAP such as the value of expected future synergies, the value of the assembled workforce and other market factors. The

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Company expects that goodwill associated with the LCR-Dixon acquisition will not be deductible for tax purposes. The fair values of these amounts on the acquisition date, which are reflected in the table below, have been finalized during the three months ended June 30,2022 and include Measurement Period adjustments resulting in an increase to capitalized software of $7,700, an increase to other intangibles of $6,500 and various other adjustments resulting in a net reduction to goodwill of $11,178. Any subsequent adjustments to these values will be recorded in the consolidated statements of comprehensive loss in the period in which the adjustment is identified.

The Company and LCR-Dixon had a pre-existing relationship in the form of a royalty agreement at the acquisition date. The Company owed LCR-Dixon royalties in connection with licenses sold by the Company to end users when collected by the Company from end users (the “Royalty Agreement”). The Royalty Agreement terminated upon consummation of the acquisition and the Company wrote-off $252 of royalties payable to LCR-Dixon with an offset to goodwill. The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed as recorded in the Company’s condensed consolidated balance sheet as of the acquisition date:


	As of Acquisition Date
Cash and cash equivalents	$	1,899
Accounts receivable		1,586
Prepaid expenses and other current assets		150
Property and equipment		4
Capitalized software		7,700
Goodwill		86,639
Other intangibles		6,500
Accounts payable		(19)
Accrued expenses		(202)
Accrued compensation		(1,746)
Deferred income tax liability		(3,630)
Deferred revenue		(71)
Total	$	98,810

The fair value, valuation methodologies, estimated useful lives, and significant assumptions of the identifiable intangibles acquired in the LCR-Dixon acquisition are summarized in the table below:

September 22, 2021

LCR-Dixon Identifiable Intangibles

Balance Sheet Location

Fair Value

Valuation Methodology

Estimated Useful Life

Discount Rate

Trade name

Goodwill and other intangible assets (Note 8)

200

Relief from royalty method - income approach

6 months

20.0

Customer relationships

Goodwill and other intangible assets (Note 8)

6,300

Excess earnings method - income approach

3 years

20.0

Developed technology

Property and equipment, net (Note 6)

7,700

Relief from royalty method - income approach

3 years

20.0

4. INVESTMENTS

Vertex created an investment securities portfolio in June 2022 using excess cash to generate investment income that will be used for general corporate purposes. Our investment securities portfolio consists of the following: Money Market Mutual Funds (“Money Market Funds”) invested in U.S. Treasury Securities, Bank and Corporate issued Commercial Paper (“Commercial Paper”), Corporate Bonds, and U.S. Treasury Securities. The Money Market Funds and a portion of the Commercial Paper are considered cash and cash equivalents due to their short maturity dates. There were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

The Money Market Funds qualify as equity securities per ASC 321, Investments - Equity Securities. No net gains or losses were recognized on sales of equity securities during the quarter or year to date and no unrealized gains or losses were recognized on equity securities held as of June 30, 2022 or as of December 31, 2021, respectively.

The Commercial Paper, Corporate Bonds, and U.S. Treasury Securities qualify as debt securities per ASC 320, Investments - Debt Securities, and have been classified as available-for-sale as they may be liquidated and used for general corporate purposes. None of the Company’s debt securities are classified as trading or held to maturity. As of June 30, 2022, the Company's debt securities portfolio had unaccreted discounts of $333 and no remaining unamortized premiums.

The table below presents the amortized cost, gross unrealized gains and losses, allowance for credit losses, and fair value aggregated by major security type as of June 30, 2022. Accrued interest receivable of $16 as of June 30, 2022, is not included in the table.


	As of June 30, 2022
Investment securities available-for-sale: (unaudited)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Allowance For Credit Losses		Fair Value
Commercial paper	$	11,107	$	—	$	—	$	—	$	11,107
Corporate bonds		200		—		—		—		200
U.S. Treasury securities		3,570		3		—		—		3,573
Total investment securities available for sale	$	14,877	$	3	$	—	$	—	$	14,880

Investment Securities in a Gross Unrealized Loss Position

The table below provides the gross unrealized losses and fair value of securities available-for-sale aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2022. The amounts include securities available-for-sale without an allowance for credit losses. As of June 30, 2022, the Company’s available-for-sale investment securities consisted of 53 securities, one of which was in an immaterial unrealized loss position. As a result, there is no allowance for credit losses recorded for available-for-sale debt securities as of June 30, 2022.


	As of June 30, 2022
	Less than 12 Months				12 Months or Longer				Total
Investment securities available-for-sale without an allowance for credit losses: (unaudited)	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Commercial paper	$	—	$	—	$	—	$	—	$	—	$	—
Corporate bonds		200		—		—		—		200		—
U.S. Treasury securities		—		—		—		—		—		—
Total investment securities available for sale	$	200	$	—	$	—	$	—	$	200	$	—

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Maturities of Investment Securities

The table below summarizes, as of June 30, 2022, the fair value of investment securities by major security type and contractual maturity as well as the total fair value, and amortized cost of investment securities by contractual maturity. Because borrowers may have the right to call or prepay certain obligations, the expected maturities of securities are likely to differ from the scheduled contractual maturities presented below.


	As of June 30, 2022
	Due in 1 Year or Less		Due > 1 Year through 5 Years		Due > 5 Years through 10 Years		Due > 10 Years		Total
Fair value of investment securities available-for-sale: (unaudited)
Commercial paper	$	11,107	$	—	$	—	$	—	$	11,107
Corporate bonds		200		—		—		—		200
U.S. Treasury securities		1,796		1,777		—		—		3,573
Total investment securities available for sale	$	13,103	$	1,777	$	—	$	—	$	14,880
Amortized cost of investment securities available for sale	$	13,103	$	1,774	$	—	$	—	$	14,877

Net Securities Gains or Losses and Securities Pledged

During the three months ended June 30, 2022, the Company had no sales of debt securities categorized as available for sale, resulting in no realized gains or losses, and no securities were pledged.

5. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the Company’s Fair Value Hierarchy for its financial assets and liabilities measured at fair value on a recurring basis:


	Fair Value Measurements Using
As of June 30, 2022 (unaudited)	Fair Value		Prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Money market funds	$	46,304	$	46,304	$	—	$	—
Commercial paper		11,107		—		11,107		—
Corporate bonds		200		—		200		—
U.S. Treasury securities		3,573		—		3,573		—
Tellutax contingent consideration		(3,200)		—		—		(3,200)
Foreign currency forward contracts		368		—		368		—

	Fair Value Measurements Using
As of December 31, 2021	Fair Value		Prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Money market funds	$	3,201	$	3,201	$	—	$	—
Tellutax contingent consideration		(2,500)		—		—		(2,500)
Foreign currency forward contracts		(62)		—		(62)		—

The Company has investments in money market funds, which are included in cash and cash equivalents on the condensed consolidated balance sheets. Fair value inputs for these investments are considered Level 1 measurements within the Fair Value Hierarchy since Money Market Fund fair values are known and observable through daily published floating net asset values. Securities classified as available-for-sale are reported at fair value using Level 2 inputs. For the

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Commercial Paper, Corporate Bonds and U.S. Treasury securities, the Company believes that Level 2 designation is appropriate under ASC 820-10, as these securities are fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.

In connection with the January 2021 Tellutax LLC (“Tellutax”) acquisition, the sellers are entitled to contingent consideration if sales targets are met during a period of time following the acquisition (the “Tellutax Contingent Consideration”).

The Tellutax Contingent Consideration is based on three potential earn-out payments determined by periodic revenue achievements over a thirty-month period. Such estimate represents a recurring fair value measurement with significant unobservable inputs, which management considers to be Level 3 measurements under the Fair Value Hierarchy. The significant assumptions used in these calculations included forecasted results and the estimated likelihood for each performance scenario. The fair value of Tellutax Contingent Consideration is estimated using a Monte Carlo Simulation to compute the expected cash flows from earn-out payments specified in the purchase agreement. Earn-out payments have no maximum limit, but if certain targets are not met, there will be no earn-out payment for the applicable measurement period.

A fair value adjustment of $0 and $700 was recorded in other operating expense (income), net for the three and six months ended June 30, 2022, respectively. At June 30, 2022, the Tellutax Contingent Consideration of $800 and $2,400 is included in purchase commitment and contingent consideration liabilities, current, and purchase commitment and contingent consideration liabilities, net of current portion, respectively, in the condensed consolidated balance sheets. At December 31, 2021, the Tellutax Contingent Consideration of $2,500 is included in purchase commitment and contingent consideration liabilities, net of current portion in the condensed consolidated balance sheets.

Tellutax Contingent Consideration fair value as of June 30, 2022 and December 31, 2021 and unobservable inputs used for the Monte Carlo Simulation valuation were as follows:


	June 30, 2022
Liability	Fair Value		Valuation Technique	Unobservable Inputs
Tellutax Contingent Consideration	$	(3,200)	Monte Carlo Simulation	Revenue volatility	75.0	%
				Revenue discount rate	20.9	%
				Term (in years)	2.6

	December 31, 2021
Liability	Fair Value		Valuation Technique	Unobservable Inputs
Tellutax Contingent Consideration	$	(2,500)	Monte Carlo Simulation	Revenue volatility	95.0	%
				Revenue discount rate	20.0	%
				Term (in years)	3.6

Changes in the fair value of Tellutax Contingent Consideration during the six months ended June 30, 2022 were as follows:


	Tellutax
	Contingent
	Consideration

Balance, January 1, 2022	$	(2,500)
Fair value adjustments		(700)
Balance, June 30, 2022	$	(3,200)

Assets and Liabilities for Which Fair Value is Only Disclosed

The carrying amounts of cash and cash equivalents and funds held for customers were the same as their respective fair values and are considered Level 1 measurements.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

The carrying amounts for accounts receivable, accounts payable, and accrued expenses approximate their relative fair values due to their short-term nature and are considered Level 2 measurements.

Non-recurring Fair Value Measurements

The LCR-Dixon acquisition on September 22, 2021, the acquisition of EVAT and its wholly owned subsidiaries (collectively, “Taxamo”) on May 12, 2021, the Tellutax acquisition on January 25, 2021, and the Systax acquisition on January 10, 2020, were accounted for as business combinations and the total purchase price for each acquisition was allocated to the net assets acquired and liabilities assumed based on their estimated fair values.

Deferred purchase consideration associated with the LCR-Dixon acquisition was $29,541 and $39,224 at June 30, 2022 and December 31, 2021, respectively. See Note 3, “Business Combinations”, for additional information on such amounts.

The Company has a contractual commitment to acquire the remaining equity interest from the original Systax Quotaholders incrementally between 2021 through 2024. Future purchase commitment payments for these incremental acquisition amounts are based on a multiple of Systax revenue and earnings before interest, depreciation, amortization and income taxes (“EBITDA”) performance at the end of 2020, 2022 and 2023, whereby the Company will have full ownership after the final transaction in 2024. Management determined these future purchase commitments to be a forward contract, resulting in the Company being required to estimate and record an estimated future purchase commitment amount (the “Purchase Commitment Liability”) in connection with recording the initial purchase. The fair value of the Purchase Commitment Liability at the acquisition date was finalized to be $12,592. This amount will fluctuate as a result of changes in foreign currency exchange rates and is reflected in purchase commitment and contingent consideration liabilities in the condensed consolidated balance sheets, with such changes in exchange rates being reflected in other comprehensive loss or income in the condensed consolidated statements of comprehensive loss. Adjustments to the settlement date value that arise as a result of remeasurement at future balance sheet dates will be recorded as interest expense related to financing costs in the condensed consolidated statements of comprehensive loss in the period the change is identified. No such adjustments have been recorded through June 30, 2022.

The Purchase Commitment Liability included in purchase commitment and contingent consideration liabilities, current and purchase commitment and contingent liabilities, net of current portion in the condensed consolidated balance sheets at June 30, 2022 was $3,816 and $5,088, respectively. The remaining Purchase Commitment Liability is included in purchase commitment and contingent consideration liabilities, net of current portion in the condensed consolidated balance sheets at December 31, 2021 was $8,329.

The carrying amounts of both the LCR-Dixon deferred purchase consideration and the Systax Purchase Commitment Liability amounts discussed above approximated their respective fair values at such dates and are considered Level 3 non-recurring fair value measurements.

Derivative Instruments

The Company may periodically enter into derivative contracts to reduce our exposure to foreign currency exchange rates. Historically, the Company has not designated derivative contracts as hedges. Such derivative contracts are typically designed to manage specific risks according to our strategies, which may change from time to time.

The Company entered into a series of foreign currency forward contracts to reduce our exposure to adverse fluctuations in the Brazilian Real associated with a portion of the Systax Purchase Commitment Liability. Such forward contracts, have not been designated as a hedge, do not qualify for hedge accounting and are not material to our condensed consolidated financial statements. These forward contacts are remeasured at fair value on a recurring basis and are included in other assets in our condensed consolidated balance sheets with changes in their estimated fair value recognized as interest expense in our condensed consolidated statements of comprehensive loss. Our fair value determinations are based on foreign currency exchange rates in active markets, which are considered to be Level 2 measurements within the Fair Value Hierarchy.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

6. PROPERTY AND EQUIPMENT

The major components of property and equipment are as follows:


	As of June 30,		As of December 31,
	2022		2021
	(unaudited)
Leasehold improvements	$	20,926	$	20,956
Equipment		40,322		41,937
Computer software purchased		11,855		11,792
Internal-use software developed:
Cloud-based customer solutions		126,827		114,872
Internal systems and tools		32,789		32,408
Furniture and fixtures		7,665		7,675
In-process internal-use software		27,895		16,965
		268,279		246,605
Less accumulated depreciation and amortization		(161,753)		(148,215)
Property and equipment, net	$	106,526	$	98,390

Depreciation expense for property and equipment, excluding all internal-use software developed and finance leases, was $1,671 and $1,902 for the three months ended June 30, 2022 and 2021, respectively, $3,389 and $3,808 for the six months ended June 30, 2022 and 2021 and is reflected in depreciation and amortization in the condensed consolidated statements of comprehensive loss.

Finance lease amortization was $535 and $770 for the three and six months ended June 30, 2022, respectively, and depreciation expense for assets held under capital leases was $240 and $464 for the three and six months ended June 30, 2021, respectively. Finance lease amortization and depreciation expense for assets held under capital leases are included in depreciation and amortization expense in the condensed consolidated statements of comprehensive loss. Assets under finance leases of $3,611 and $1,533, net of accumulated amortization of $1,702 and $931, respectively, at June 30, 2022 and December 31, 2021, respectively, are included in property and equipment in the condensed consolidated balance sheets.

The major components of internal-use software are as follows:


	As of June 30,		As of December 31,
	2022		2021
	(unaudited)
Internal-use software developed	$	159,616	$	147,280
Less accumulated depreciation		(101,668)		(87,281)
Internal-use software developed, net of accumulated depreciation		57,948		59,999
In-process internal-use software		27,895		16,965
Internal-use software developed, net	$	85,843	$	76,964

Amounts included in property and equipment additions related to capitalized internal-use software on the condensed consolidated statements of cash flows are as follows:


	For the six months ended June 30,
	2022		2021

	(unaudited)
Cloud-based customer solutions	$	14,406	$	8,232
Internal systems and tools		11,849		6,253
Total	$	26,255	$	14,485

In-process internal-use software developed is not depreciated until it is available for its intended use. Depreciation expense for internal-use software developed for cloud-based customer solutions for the three months ended June 30, 2022

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

and 2021 was $6,927 and $2,669, respectively, $13,258 and $5,345, for the six months ended June 30, 2022 and 2021, respectively, and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive loss.

Depreciation expense for internal-use software developed for internal systems and tools for the three months ended June 30, 2022 and 2021 was $1,018 and $736, respectively, and $2,025 and $1,433 for the six months ended June 30, 2022 and 2021, and is included in depreciation and amortization in the condensed consolidated statements of comprehensive loss.

7. CAPITALIZED SOFTWARE

Capitalized software includes acquired software and direct labor and related expenses for software developed for sale for new products and enhancements to existing products.

The major components of capitalized software are as follows:


	As of June 30,		As of December 31,
	2022		2021
	(unaudited)
Capitalized software	$	89,175	$	72,512
Less accumulated amortization		(53,885)		(45,179)
Capitalized software, net of accumulated depreciation		35,290		27,333
In-process capitalized software		3,072		6,109
Capitalized software, net	$	38,362	$	33,442

Software development costs capitalized for the three months ended June 30, 2022 and 2021, excluding acquisitions, were $3,014 and $2,904, respectively, and $5,926 and $5,125 for the six months ended June 30, 2022 and 2021, respectively. During the three months ended June 30, 2022, developed technology with an acquisition date fair value of $7,700 acquired in the LCR-Dixon acquisition was recorded to capitalized software.

Capitalized software amortization expense, including amortization of acquired technology, was $5,405 and $3,182 for the three months ended June 30, 2022 and 2021, respectively, and $8,706 and $6,350 for the six months ended June 30, 2022 and 2021, respectively, and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive loss. Amortization expense associated with the acquired LCR-Dixon developed technology from the acquisition date through June 30, 2022 was $1,925 and is included in the capitalized software amortization expense for the three and six months ended June 30, 2022. Included in this amount is $642 and $642 of expense that would have been recorded during the year ended December 31, 2021 and the three months ended March 31, 2022, respectively, had the fair value of acquired LCR-Dixon developed technology been available on the acquisition date.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets are as follows for the periods presented:


	As of June 30,		As of December 31,
	2022		2021
	(unaudited)
Goodwill	$	248,723	$	270,041
Other intangible assets, net		6,833		2,661
Total	$	255,556	$	272,702

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

The changes in the carrying amount of goodwill are as follows for the periods presented:


	As of June 30,
	2022		2021

	(unaudited)
Balance, January 1	$	270,041	$	16,329
Acquisitions		—		206,280
Measurement period adjustments		(10,329)		—
Foreign currency translation adjustments		(10,989)		(4,425)
Balance, June 30, gross		248,723		218,184
Accumulated impairment losses		—		—
Balance, June 30, net	$	248,723	$	218,184

The Company has recognized various amortizable other intangible assets in connection with acquisitions related to customer relationships, technology, and tradenames. The following tables provide additional information for other intangible assets, which are individually not material to the condensed consolidated financial statements, for the periods presented:


	As of June 30,		As of December 31,
	2022		2021
	(unaudited)
Weighted average amortization period (years)		3.5		4.2

Gross value	$	10,677	$	4,110
Accumulated amortization		(3,844)		(1,449)
Carrying value	$	6,833	$	2,661

The following table presents amortization of other intangible assets:


For the three months ended June 30,	Cost of Revenues, Software Subscriptions		Selling and Marketing Expense		Total Expense
2022	$	54	$	2,019	$	2,073
2021		66		86		152

For the six months ended June 30,	Cost of Revenues, Software Subscriptions		Selling and Marketing Expense		Total Expense
2022	$	119	$	2,268	$	2,387
2021		127		170		297

Amortization expense associated with the other intangible assets recognized from the LCR-Dixon acquisition from the acquisition date through June 30, 2022 was $1,775 for the three and six months ended June 30, 2022 and is included in the other intangible assets amortization expense in the above schedule. Included in this amount is $625 and $625 of expense that would have been recorded during the year ended December 31, 2021 and the three months ended March 31, 2022, respectively, had the fair value of the acquired LCR-Dixon other intangibles been available on the acquisition date.

9.DEBT

Credit Agreement

On March 8, 2022, the Company entered into the Second Amendment to Credit Agreement (the “Second Amendment”), with a banking syndicate, which amended the previous credit agreement entered into in March 2020 (the “Previous Credit Agreement”), providing for, among other modifications, (i) a new term loan in the aggregate amount of $50,000 (the “Term Loan”); (ii) an extension of the maturity date of the revolving facility from March 2025 to March 2027; (iii) an increase in the revolving credit commitment from $100,000 (the “Previous Line of Credit”) to $200,000 (the “Amended Line of Credit”); (iv) the Company’s option to select an applicable interest rate at either the bank base rate plus an applicable margin (the “New Base Rate Option”) or Secured Overnight Financing Rate (“SOFR”) plus an applicable margin (the “SOFR Option”); (v) modifications to the financial covenant performance levels which determine

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

applicable margins; and (vi) modifications to certain covenants and events of default. Net proceeds from the Term Loan shall be used to fund ongoing working capital, capital expenditures, permitted distributions, permitted acquisitions and general corporate purposes of the Company and its subsidiaries.

The Company paid $993 in financing costs in connection with the Second Amendment, which will be amortized over the term of the loan. The Company wrote off $370 in deferred financing fees pertaining to the Previous Credit Agreement associated with a bank exiting the Second Amendment. The remaining balance of deferred financing costs pertaining to the remaining bank associated with the Previous Credit Agreement of $277 will be amortized over the term of the Second Amendment. The portion of the deferred financing costs associated with the Amended Line of Credit and the Term Loan are reflected in other assets and as a reduction of the Term Loan, respectively, in the condensed consolidated balance sheet at June 30, 2022.

The Second Amendment is collateralized by certain assets of the Company and contains financial and operating covenants. The Company was in compliance with these covenants at June 30, 2022.

Term Loan

The Term Loan requires quarterly principal payments over five years, with a balloon payment due on March 8, 2027. The interest rate on the Term Loan was 2.63% at June 30, 2022 as the Company selected the SOFR Option. Term Loan outstanding amounts are reported in the current portion of long-term debt and long-term debt, net of current portion, in the condensed consolidated balance sheets.

Amended Line of Credit

The Amended Line of Credit expires in March 2027. The Company is required to pay a quarterly fee on the difference between the $200,000 allowed maximum borrowings and the unpaid principal balance outstanding under the line at the applicable rate. At June 30, 2022, the New Base Rate Option and SOFR Option applicable to Amended Line of Credit borrowings were 4.75% and 2.63%, respectively. There were no outstanding borrowings under the Amended Line of Credit at June 30, 2022 or the Previous Line of Credit at December 31, 2021, respectively.

10.STOCKHOLDERS’ EQUITY

Common Stock

During the three and six months ended and June 30, 2022, the Company issued 93 and 365 shares of Class A common stock (“Class A”), respectively, related to the exercise of options, net of 23 and 70 shares, respectively, returned to the Company in lieu of payment of the exercise price and taxes due on these exercises.

During the three and six months ended June 30, 2022, the Company issued 0 and 3 shares of Class A common stock, respectively, in connection with the vesting of Restricted Stock Units (“RSUs”), net of 0 and 1 share, respectively, returned to the Company in lieu of payment of taxes due on the vesting of these RSUs.

During the three and six months ended June 30, 2022, the Company issued 59 shares of Class A common stock in connection with the vesting of Restricted Stock Awards (“RSAs”).

During the three and six months ended June 30, 2022, a stockholder exchanged 5,500 shares of Class B common stock for an equivalent number of shares of Class A common stock.

During the three and six months ended and June 30, 2021, the Company issued 462 and 1,102 shares of Class A common stock (“Class A”), respectively, related to the exercise of options, net of 219 and 575 shares, respectively, returned to the Company in lieu of payment of the exercise price and taxes due on these exercises.

During the three and six months ended June 30, 2021, the Company issued 0 and 5 shares of Class A, respectively, in connection with the vesting of RSUs, net of 0 and 1 shares, respectively, returned to the Company in lieu of payment of taxes due on the vesting of these RSUs.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

During the three and six months ended June 30, 2021, the Company issued 234 shares of Class A common stock in connection with the vesting of RSAs.

Tax Sharing Agreement Payments

In connection with termination of the Company’s S-Corporation status effective July 27, 2020, the Company entered into a Tax Sharing Agreement with the former S-Corporation shareholders. All obligations of the Company under the Tax Sharing Agreement are satisfied by adjustments of additional paid in capital.

During the three and six months ended June 30, 2022, the Company distributed $0 and $536 to the former S-Corporation shareholders under the Tax Sharing Agreement to settle the Company’s obligation for income taxes related to the allocation of taxable income to the S-Corporation short tax period ended July 26, 2020.

During the three and six months ended June 30, 2021, the Company distributed $2,700 to the former S-Corporation shareholders under the Tax Sharing Agreement to settle the Company’s obligation for income taxes related to the allocation of taxable income to the S-Corporation short tax period ended July 26, 2020.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

11. EARNINGS PER SHARE

The tables below illustrate the calculation of basic and diluted net (loss) income per common share for the Class A common and Class B common for the periods reflected below.


	For the three months ended June 30,						For the six months ended June 30,
Class A common stock:	2022			2021			2022			2021

	(unaudited)						(unaudited)
Numerator, basic:
Net (loss) income attributable to all stockholders	$	(5,520)		$	808		$	(5,854)		$	3,096
Class A stock as a percentage of total shares outstanding, basic		28.96	%		23.54	%		28.67	%		20.80	%
Net (loss) income attributable to Class A stockholders, basic	$	(1,598)		$	190		$	(1,679)		$	644

Numerator, diluted:
Net (loss) income attributable to all stockholders	$	(5,520)		$	808		$	(5,854)		$	3,096
Class A stock as a percentage of total shares outstanding, diluted		28.96	%		28.37	%		28.67	%		26.20	%
Net (loss) income attributable to Class A stockholders, diluted	$	(1,598)		$	229		$	(1,679)		$	811

Denominator, basic and diluted:
Weighted average Class A common stock, basic		43,286			34,726			42,818			30,592
Dilutive effect of common stock equivalents⁽¹⁾⁽²⁾		—			9,985			—			10,765
Weighted average Class A common stock, diluted		43,286			44,711			42,818			41,357

Net (loss) income per Class A share, basic	$	(0.04)		$	0.01		$	(0.04)		$	0.02
Net (loss) income per Class A share, diluted	$	(0.04)		$	0.01		$	(0.04)		$	0.02

(1)

For the three months ended June 30, 2022, the following weighted-average outstanding shares of common stock equivalents by award type were excluded from the computation of diluted net loss per share attributable to Class A stockholders as the impact of including them would have been anti-dilutive: 9,024 options (including 763 out-of-the-money options), 306 RSAs, 2,417 RSUs and 49 shares under the ESPP. For the three months ended June 30, 2021, 251 out-of-the-money options were excluded from the computation of diluted net income per share attributable to Class A stockholders as the impact of including them would have been anti-dilutive.

(2)

For the six months ended June 30, 2022, the following weighted-average outstanding shares of common stock equivalents by award type were excluded from the computation of diluted net income per share attributable to Class A stockholders as the impact of including them would have been anti-dilutive: 9,226 options (including 765 out-of-the-money options), 316 RSAs, 1,984 RSUs and 45 shares under the ESPP. For the six months ended June 30, 2021, 167 out-of-the-money options were excluded from the computation of diluted net income per share attributable to Class A stockholders as the impact of including them would have been anti-dilutive.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)


	For the three months ended June 30,						For the six months ended June 30,
Class B common stock:	2022			2021			2022			2021

	(unaudited)						(unaudited)
Numerator, basic:
Net (loss) income attributable to all stockholders	$	(5,520)		$	808		$	(5,854)		$	3,096
Class B stock as a percentage of total shares outstanding, basic		71.04	%		76.46	%		71.33	%		79.20	%
Net (loss) income attributable to Class B stockholders, basic	$	(3,922)		$	618		$	(4,175)		$	2,452

Numerator, diluted:
Net (loss) income attributable to all stockholders	$	(5,520)		$	808		$	(5,854)		$	3,096
Class B stock as a percentage of total shares outstanding, diluted		71.04	%		71.63	%		71.33	%		73.80	%
Net (loss) income attributable to Class B stockholders, diluted	$	(3,922)		$	579		$	(4,175)		$	2,285

Denominator, basic and diluted:
Weighted average Class B common stock, basic		106,203			112,804			106,505			116,460
Dilutive effect of common stock equivalents		—			—			—			—
Weighted average Class B common stock, diluted		106,203			112,804			106,505			116,460

Net (loss) income per Class B share, basic	$	(0.04)		$	0.01		$	(0.04)		$	0.02
Net (loss) income per Class B share, diluted	$	(0.04)		$	0.01		$	(0.04)		$	0.02

12. STOCK-BASED AWARD PLANS

The 2020 Plan provides the ability to grant cash and equity-based incentive awards to eligible employees, directors and service providers in order to attract, retain and motivate those that make important contributions to the Company. The Company issued stock options, RSAs, and RSUs under the 2020 Plan. As of June 30, 2022, 10,757 shares of Class A common were available for issuance under the 2020 Plan.

Options

The following table summarizes activity for options outstanding under the 2020 Plan for the six months ended June 30, 2022:


				Weighted
			Weighted	Average
			Average	Remaining	Aggregate
			Exercise	Contractual	Intrinsic
2020 Plan Option Activity	Units		Price	Life (Years)	Value

	(unaudited)
Outstanding at January 1, 2022	9,500	$	4.20	5.2	$	110,843
Forfeited	(98)		5.20
Exercised	(435)		2.73
2020 Plan options outstanding at June 30, 2022	8,967		4.26	4.7		63,356
2020 Plan options excercisable at June 30, 2022	6,512		2.77	3.7		55,730

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

The detail of options outstanding, vested and exercisable under the 2020 Plan as of June 30, 2022 is as follows:



	Options Outstanding		Options Vested and Exercisable
		Weighted		Weighted
		Average		Average
Exercise Prices	Units	Life (Years)	Units	Life (Years)

	(unaudited)
$0.15 to $0.71	1,770	—	1,770	—
$2.15	390	2.6	390	2.6
$2.50	2,186	4.0	2,186	4.0
$2.67	419	4.7	419	4.7
$3.17	1,166	5.8	416	5.8
$3.73	1,590	7.3	813	7.4
$4.70	683	7.6	341	7.6
$18.47	213	9.4	—	—
$18.96	235	9.1	105	9.1
$19.00	69	9.2	—	—
$32.16	246	8.6	72	8.5
	8,967		6,512

The Board of Directors (“the Board”) intends all options granted to be exercisable at a price per share not less than the per share fair market value of the Company’s Class A common stock underlying the options on the date of grant. Compensation expense for option awards are measured based on the grant date fair value of the awards and recognized in the condensed consolidated statements of comprehensive loss over the period during which the participant is required to perform the requisite services. The vesting period is generally one to four years. The grant date fair value of options is estimated using the Black-Scholes model.

There were no options issued under the 2020 Plan during the three or six months ended June 30, 2022. The Company issued 12 options and 263 options under the 2020 Plan during the three months and six months ended June 30, 2021, respectively. The assumptions used in the Black-Scholes model to determine the value of the options issued during these periods are as follows:


	Option Valuation Period
	Q2 2021
Fair market value of common stock	$	17.66
Volatility		36.8	%
Expected term (years)		6.0
Expected dividend yield		—	%
Risk-free interest rate		0.4	%

The fair market value of common stock reflects the market closing price on NASDAQ on the respective option grant date. As of the valuation date, the Company lacked sufficient historical data on the volatility of its stock price. Selected volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term. The expected term represents the term the options are expected to be exercised over, which differs from the term of the option grants which is ten years. The Company does not expect to pay dividends. The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the option grants.

At June 30, 2022, $13,927 of unrecognized compensation expense associated with options is expected to be recognized over a weighted average period of approximately 2.4 years.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Restricted Stock Units

The following table summarizes RSU activity for the six months ended June 30, 2022:



		Weighted
		Average
		Grant Date Fair
	Units	Value Per Share
Outstanding at January 1, 2022	530	$	26.49
Granted	1,980		13.57
Vested	(4)		34.64
Forfeited	(100)		16.05
Outstanding at June 30, 2022	2,406	$	16.28

Stock-based compensation cost for RSUs is measured based on the fair value of the Company’s underlying common stock on the date of grant and is recognized on a straight-line basis in the condensed consolidated statements of comprehensive loss over the period during which the participant is required to perform services in exchange for the award, which is generally one to four years. Vested RSUs are settled by issuing Class A shares or the equivalent value in cash at the Board’s discretion. At June 30, 2022, $32,362 of unrecognized compensation cost for RSUs is expected to be recognized over a weighted average period of approximately 3.3 years.

In connection with the Taxamo acquisition, certain continuing employees of Taxamo received RSUs with service and performance conditions (“PSUs”). At June 30, 2022, there are 895 shares of our Class A common stock with an aggregate grant date fair value of $15,803 that will be accounted for as post-acquisition compensation expense over the vesting period if targets are achieved. The performance-based condition will be satisfied upon meeting certain performance targets for the year ended 2023. As of June 30, 2022, it is not probable that these targets will be met, thus no compensation expense has been recorded to date related to these PSUs.

Restricted Stock Awards

The following table summarizes RSA activity for the six months ended June 30, 2022:



		Weighted
		Average
		Grant Date Fair
	Units	Value Per Share
Outstanding at January 1, 2022	326	$	18.76
Granted	106		9.92
Vested	(59)		17.66
Forfeited	(8)		19.00
Outstanding at June 30, 2022	365	$	16.36

Stock-based compensation cost for RSAs is measured based on the fair value of the Company’s underlying common stock on the date of grant and is recognized on a straight-line basis in the condensed consolidated statements of comprehensive loss over the period during which the participants are required to perform services in exchange for the award, which is generally one to four years. At June 30, 2022, $3,601 of unrecognized compensation cost for RSAs is expected to be recognized over a weighted average period of approximately 1.4 years.

Employee Stock Purchase Plan

The ESPP provides eligible employees with rights during each six-month ESPP offering period to purchase shares of the Company’s Class A common through payroll deductions of up to a specified percentage of their eligible compensation. The purchase price of the shares, in the absence of a contrary designation, is 85% of the lower of the fair value of the Class A common stock on the first or last day of the ESPP offering period. Amounts withheld from participants are reflected in accrued salaries and benefits in the condensed consolidated balance sheets until such shares are purchased. Amounts withheld from participants for the offering period ending November 30, 2022 aggregated $153 as of June 30, 2022. As of June 30, 2022, 3,666 shares of Class A common stock were available for issuance under the ESPP.

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

As of June 30, 2022 there was approximately $248 of unrecognized ESPP stock-based compensation cost expected to be recognized on a straight-line basis over the remaining term of the six-month offering period ending November 30, 2022.

At June 30, 2022 and 2021, there were two ESPP offering periods open that end November 30, 2022 and 2021, respectively. The fair value of ESPP purchase rights for the offering periods is comprised of the value of the 15% ESPP discount and the value associated with the call or put over the respective ESPP offering period. The value of the call or put was estimated using the Black-Scholes model with the following assumptions:


	Offering Period Ending
	11/30/2022			11/30/2021
Fair market value of common stock	$	11.16		$	19.89
Volatility		35.4	%		35.1	%
Expected term (years)		0.5			0.5
Expected dividend yield		-	%		-	%
Risk-free interest rate		1.6	%		0.1	%

Selected volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term. The expected term represents the term of the six month ESPP offering period. The Company does not expect to pay dividends. The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the award at the date nearest the offering term.

Stock-Based Compensation

The Company recognized total stock-based compensation cost related to incentive awards, net of forfeitures, as follows:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021

	(unaudited)				(unaudited)
Stock-based compensation expense:
Stock options	$	1,133	$	3,913	$	3,414	$	7,681
RSUs		2,343		793		4,121		1,229
RSAs		574		1,446		1,309		3,655
ESPP		144		133		283		263
Total stock-based compensation expense	$	4,194	$	6,285	$	9,127	$	12,828

The Company recognized stock-based compensation cost in the condensed consolidated statements of comprehensive loss as follows:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021

	(unaudited)				(unaudited)
Stock-based compensation expense:
Cost of revenues, software subscriptions	$	479	$	572	$	925	$	1,132
Cost of revenues, services		275		622		681		1,216
Research and development		498		571		612		1,132
Selling and marketing		1,401		1,433		2,973		2,720
General and administrative		1,541		3,087		3,936		6,628
Total stock-based compensation expense	$	4,194	$	6,285	$	9,127	$	12,828

13. LEGAL PROCEEDINGS

The Company may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business. The Company is not aware of any such legal proceedings or claims that management believes will have a material adverse effect on its business, financial condition, or operating results.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2022 (the “2021 Annual Report”). In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled “Special Note Regarding Forward-Looking Statements” above, and in Part I, Item 1A of the 2021 Annual Report and as may be subsequently updated by our other SEC filings.

Overview

Vertex is a leading global provider of indirect tax software and solutions. Our mission is to deliver the most trusted tax technology enabling global businesses to transact, comply and grow with confidence. Vertex provides cloud-based and on-premise solutions that can be tailored to specific industries for every major line of indirect tax, including sales and consumer use, value added and payroll. Headquartered in North America, and with offices in South America and Europe, Vertex employs over 1,300 professionals and serves companies across the globe.

We derive the majority of our revenue from software subscriptions. These subscriptions include use of our software and ongoing monthly content updates. Our software is offered on a subscription basis to our customers, regardless of their deployment preferences. On-premise subscriptions are typically sold through one-year contracts and cloud-based subscriptions are typically sold through one- to three-year contracts. We bill the majority of our customers annually in advance of the subscription period.

Our customers include a majority of the Fortune 500, as well as a majority of the top 10 companies by revenue in multiple industries such as retail, technology and manufacturing, in addition to leading marketplaces. As our customers expand geographically and pursue omnichannel business models, their tax determination and compliance requirements increase and become more complex, providing sustainable organic growth opportunities for our business. Our flexible, tiered transaction-based pricing model also results in our customers growing their spend with us as they grow and continue to use our solutions. We principally price our solutions based on a customer’s revenue base, in addition to a number of other factors.

We employ a hybrid deployment model to align to our customers’ technology preferences for their core financial management software across on-premise, cloud deployments or any combination of these models. Over time, we expect both existing and newly acquired customers to continue to shift towards cloud deployment models. Cloud-based subscription sales to new customers have grown at a significantly faster rate than on-premise software subscription sales, which is a trend that we expect to continue over time. We generated 40% and 36% of software subscription revenue from cloud-based subscriptions during the three months ended June 30, 2022 and 2021, respectively, and 40% and 34% for the six months ended June 30, 2022 and 2021, respectively. While our on-premise software subscription revenue comprised 60% and 64% of our software subscription revenues during the three months ended June 30, 2022 and 2021, respectively, and 60% and 66% for the six months ended June 30, 2022 and 2021,respectively, it continues to decrease as a percentage of total software subscriptions revenues as cloud-based subscriptions accelerate.

We license our solutions primarily through our direct sales force, which focuses on selling to qualified leads provided by our marketing efforts, and through our network of referral partners. We also utilize indirect sales to a lesser extent to efficiently grow and scale our enterprise and mid-market revenues.

Our partner ecosystem is a differentiating, competitive strength in both our software development and our sales and marketing activities. We integrate with key technology partners that span Enterprise Resoure Planning (“ERP”), Customer Relationship Management (“CRM”), procurement, billing, Point of Sale (“POS”) and e-commerce. These partners include Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Workday and Zuora. We

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also collaborate with numerous accounting firms who have built implementation practices around our software to serve their customer base.

We believe that global commerce and the compliance environment provides durable and accelerating growth opportunities for our business. We generated revenue of $119.3 million and $104.9 million for the three months ended June 30, 2022 and 2021, respectively. We had a net loss of $(5.5) million and net income of $0.8 million for the three months ended June 30, 2022 and 2021, respectively. We had a net loss of $(5.9) million and a net income of $3.1 million for the six months ended June 30, 2022 and 2021, respectively. These amounts are presented in accordance with United States (“ U.S.”) generally accepted accounting principles (“GAAP”).

We define Adjusted EBITDA as net loss or income before interest, taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, stock-based compensation expense, severance expense, acquisition contingent consideration and transaction costs. Adjusted EBITDA was $17.8 million and $19.3 million for the three months ended June 30, 2022 and 2021, respectively. Adjusted EBITDA was $36.9 million and $37.4 million for the six months ended June 30, 2022 and 2021, respectively. Adjusted EBITDA is a non-GAAP financial measure. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Use and Reconciliation of Non-GAAP Financial Measures” for further discussion of key business metrics and non-GAAP financial measures and their comparison to GAAP financial measures.

Recent Developments

Impact of COVID-19

During the six months ended June 30, 2022, the COVID-19 pandemic had minimal impact on our revenues and results of operations, as we continue to derive the significant majority of our revenues from our existing software subscriptions. As we principally price our solutions based on our customers’ revenues within certain revenue bands, elongated declines in our existing customers’ revenues may impact our ability to grow our existing customer revenues. We did not experience an abnormal number of non-renewals in 2021 or for the six months ended June 30, 2022, nor any material declines in revenues associated with declines in our customers’ revenues, and we currently expect our existing customer base to remain largely stable, as it did through the recession in 2008 and 2009. However, significant increases in non-renewals or concessions to renewal customers would have a material impact on our revenues and cash flows. We expect that the uncertainty caused by the COVID-19 pandemic could impact our billings to new customers as the pandemic continues to generate economic uncertainty. In addition, it may also negatively impact our efforts to maintain or expand revenues from our existing customers as they continue to evaluate certain long-term projects and budget constraints. However, we do not anticipate that overall demand for our software and solutions, our ability to deliver such software and solutions, or our growth strategies will be materially impacted by the COVID-19 pandemic, as companies continue to rely on us for their indirect tax solutions.

We continue to expect that we will be able to collect amounts due under subscription contracts from customers experiencing issues as a result of the COVID-19 pandemic, and we have not recorded additional credit losses associated with the allowance for doubtful accounts in connection with any delays. Given that customers cannot forgo our monthly content updates, which are necessary to remain compliant with the most current regulations, we believe customers will continue to pay our renewal invoices in a timely, even if slightly elongated, manner. We believe that we currently have ample liquidity and capital resources to continue to meet our operating needs, and our ability to continue to service our debt or other financial obligations is not currently impaired. For a further description of our liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Components of Our Results of Operations

Revenue

We generate revenue from software subscriptions and services.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. We enter into contracts that include

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various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers that are subsequently remitted to governmental authorities.

Software Subscriptions

Licenses for on-premise software subscriptions, which are generally one year, provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates and product support (collectively, the “updates and support”). The updates and support, which are part of the subscription agreement, are essential to the continued utility of the software; therefore, we have determined the software and the related updates and support to be a single performance obligation. Accordingly, when on-premise software is licensed, the revenue associated with this combined performance obligation is recognized ratably over the license term as these performance obligations are satisfied over the duration of the license term. Revenue recognition begins on the later of the beginning of the subscription period or the date the software is made available to the customer to download. Prior to January 1, 2022, certain on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price is a material right that provides customers with the right to this reduced renewal price. We recognize revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years. Effective January 1, 2022, we changed the pricing structure for on-premise software so the initial year price and renewal prices were consistent, thus removing the material right for transactions after this date. The material right for applicable transactions prior to this pricing change will continue to be recognized over the estimated period of benefit to the customer.

Our cloud-based subscriptions allow customers to use Vertex-hosted software over the contract period without taking possession of the software. The contracts are generally for one to three years and billed annually in advance of the subscription period. Our cloud-based offerings also include related updates and support. All services within the cloud-based contracts consistently provide a benefit to the customer during the subscription period, thus the associated revenue is recognized ratably over the subscription period. Revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based solutions.

Revenue is impacted by the timing of sales and our customers’ growth or contractions resulting in their need to expand or contract their subscription usage, the purchase of new solutions or the non-renewal of existing solutions. In addition, revenue will fluctuate with the cessation of extended product support fees charged for older versions of our software subscription solutions when they are retired and these fees are no longer charged. Contracts for on-premise licenses permit cancellations at the end of the license term, which is generally one year. Legacy cloud-based subscription contracts for multi-year periods previously provided customers the right to terminate their contract for services prior to the end of the subscription period at a significant penalty. This penalty requires the payment of a percentage of the remaining months of the then current contract term. Current cloud-based contracts do not contain such termination rights. Terminations of cloud-based subscriptions prior to the end of the subscription term have occurred infrequently and the impact has been immaterial. The allowance for subscription and non-renewal cancellations reflects an estimate of the amount of such cancellations and non-renewals based on past experience, current information and forward-looking economic considerations.

Services Revenue

We generate services revenue primarily in support of our customers’ needs associated with our software and to enable them to realize the full benefit of our solutions. These software subscription-related services include configuration, data migration and implementation, and premium support and training. In addition, we generate services revenue through our managed services offering which allows customers to outsource all or a portion of their indirect tax operations to us. These services include indirect tax return preparation, filing and tax payment and notice management. We generally bill for services on a per-transaction or time and materials basis, and we recognize revenue from deliverable-based professional services as services are performed.

Fluctuations in services revenue are directly correlated to fluctuations in our subscription revenues with respect to implementation and training services as we have historically experienced an attachment rate to subscription sales for these services in excess of 60%. In addition, our managed services offering has continued to experience increased revenues

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associated with returns processing volume increases attributable to regulatory changes, as customers expanded their tax filings into more jurisdictions.

Cost of Revenue

Software Subscriptions

Cost of software subscriptions revenue consists of costs related to providing and supporting our software subscriptions and includes personnel and related expenses, including salaries, benefits, bonuses and stock-based compensation. In addition, cost of revenue includes direct costs associated with information technology, such as data center and software hosting costs, and tax content maintenance. Cost of revenue also includes amortization associated with direct labor and related expenses for capitalized internal-use software for cloud-based subscription solutions and software developed for sale for new products and enhancements to existing products, and costs associated with the amortization of acquired intangible assets. We plan to continue to significantly expand our infrastructure and personnel to support our future growth and increases in transaction volumes of our cloud-based solutions, including through acquisitions. We expect growth in our business will result in an increase in cost of revenue in absolute dollars.

Services

Cost of services revenue consists of direct costs of software subscription-related services and our managed services offering. These costs include personnel and related expenses, including salaries, benefits, bonuses, stock-based compensation and the cost of third-party contractors and other direct expenses. We plan to continue to expand our infrastructure and personnel as necessary to support our future growth and related increases in our service revenue. We expect growth in our business will result in an increase in the cost of services revenue in absolute dollars.

Research and Development

Research and development expenses consist primarily of personnel and related expenses for our research and development activities, including salaries, benefits, bonuses and stock-based compensation, and the cost of third-party developers and other contractors. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred.

We devote substantial resources to developing new products and enhancing existing products, conducting quality assurance testing, improving our core technology, and integrating acquired technology with our products. We believe continued investments in research and development are critical to attain our strategic objectives and expect research and development costs to increase in absolute dollars. These investments include enhancing our solution offerings to address changing customer needs to support their growth, as well as implementing changes required to keep pace with our partners’ technology to ensure the continued ability of our solutions to work together and deliver value to our customers. The market for our solutions is characterized by rapid technological change, frequent new product and service introductions and enhancements, changing customer demands and evolving industry standards. As a result, although we are making significant research and development expenditures, which may be incurred and certain of which may be capitalized, there is no guarantee these solutions will be accepted by the market. This could result in increased costs or an impairment of capitalized development costs with no resulting future revenue benefit.

Selling and Marketing Expenses

Selling expenses consist primarily of personnel and related expenses in support of sales and marketing efforts. These costs include salaries, benefits, bonuses and stock-based compensation. In addition, selling expense includes costs related to advertising and promotion efforts, branding costs, partner-based commissions, costs associated with our annual customer conferences and amortization of certain acquired intangible assets. We intend to continue to invest in our sales and marketing capabilities in the future to continue to increase our brand awareness and expect these costs to increase on an absolute dollar basis as we grow our business and continue to expand our market and partner ecosystem penetration. Sales and marketing expense in absolute dollars and as a percentage of total revenue may fluctuate from period-to-period based on total revenue levels and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods. Easing up of the travel restrictions due to COVID-19 are resulting in increases in travel and external marketing event expenses, which were significantly lower in 2021. These costs will

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increase as travel and conference restrictions continue to be lifted, which has begun to occur in 2022, although it is uncertain whether they will return to historical levels experienced pre-COVID-19.

General and Administrative

General and administrative expenses consist primarily of personnel and related expenses for administrative, finance, information technology, legal, risk management, facilities and human resources staffing, including salaries, benefits, bonuses, severance, stock-based compensation, professional fees, insurance premiums, facility costs and other internal support costs.

We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, integrate future acquisitions, invest in our systems and tools to support improvements in future operating leverage, and incur additional costs associated with being a publicly listed company. As a public company, we expect to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, SEC compliance and internal control compliance, including the design, implementation and testing of increasingly formalized systems of internal control over financial reporting.

Depreciation and Amortization

Depreciation and amortization expense consists of the allocation of purchased and developed asset costs over the future periods benefitted by the use of these assets. These assets include leasehold improvements for our facilities, computers and equipment needed to support our customers and our internal infrastructure and capitalized internal-use software associated with our internal infrastructure and tools. Depreciation and amortization will fluctuate in correlation with our ongoing investment in internal infrastructure costs to support our growth.

Other Operating Expense (Income), net

Other operating expense (income), net consists primarily of transactions costs associated with merger and acquisition activities, quarterly remeasurement of contingent consideration associated with completed acquisitions, realized gains and losses on foreign currency changes and other operating gains and losses. These amounts will fluctuate as a result of ongoing merger and acquisition activities and for changes in foreign currency rates.

Interest (Income) Expense, net

Interest (income) expense, net reflects the amount of our interest expense that exceeds interest income over the same period.

Interest expense consists primarily of interest payments and other financing costs on our bank credit facility. Interest expense includes amortization of deferred financing fees over the term of the credit facility or write-downs of such costs upon redemption of debt. Interest expense will vary as a result of fluctuations in the level of debt outstanding as well as interest rates on such debt. In addition, interest expense will include adjustments to the fair value of contracts that may be entered into to hedge risks associated with currency fluctuations for cash receipts or cash payments denominated in currencies other than U.S. dollars and which do not qualify for hedge accounting. In addition, changes in the settlement value of the future payment obligation for the Systax Sistemas Fiscais LTDA (“Systax”) acquisition and amortization of the discount on deferred purchase consideration associated with the LCR-Dixon Corporation (“LCR-Dixon”) acquisition will be recorded as interest expense.

Interest income reflects earnings on investments of our cash on hand, our investment securities, and on our funds held for customers related to our managed outsourcing services. Interest income will vary as a result of fluctuations in the future level of funds available for investment and the rate of return available in the market on such funds.

Income Tax Expense (Benefit)

Income tax expense (benefit) consists primarily of federal, state, and local taxes on our income or loss. In determining our annualized effective income tax rates, net deferred tax assets and valuation allowances, and cash paid for income taxes, management is required to make judgments and estimates about domestic and foreign profitability, the timing and usage

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of net operating loss carryforwards, applicable tax rates, and transfer pricing methodologies. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could materially differ from our projections.

The Tax Cuts and Jobs Act of 2017 generally requires taxpayers to capitalize research and experimental expenditures effective for tax years beginning after December 31, 2021, and amortize the capitalized costs over a period of five or 15 years depending on where the research is conducted. The latest versions of the proposed Build Back Better Act delay the effective date on which these expenditures are required to be capitalized. However, it is unclear if this act will pass in its current form or if any other legislation might be enacted to defer or repeal the effective date of capitalization. If the capitalization requirement is not deferred or repealed, we expect the capitalization of research and experimental expenditures to increase our current U.S. federal and state income tax expense.

Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and our consolidated financial statements and the notes thereto included in our 2021 Annual Report. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. The following table sets forth our consolidated statements of comprehensive loss for the periods indicated.


	For the three months ended								For the six months ended
	June 30,								June 30,
(Dollars in thousands)	2022		2021		Period-Over-Period Change				2022		2021		Period-Over-Period Change

	(unaudited)								(unaudited)
Revenues:
Software subscriptions	$	101,088	$	89,604	$	11,484	12.8	%	$	198,219	$	172,884	$	25,335	14.7	%
Services		18,188		15,334		2,854	18.6	%		36,041		30,290		5,751	19.0	%
Total revenues		119,276		104,938		14,338	13.7	%		234,260		203,174		31,086	15.3	%
Cost of revenues:
Software subscriptions⁽¹⁾		36,209		26,829		9,380	35.0	%		69,122		52,419		16,703	31.9	%
Services⁽¹⁾		11,920		10,550		1,370	13.0	%		23,873		21,893		1,980	9.0	%
Total cost of revenues		48,129		37,379		10,750	28.8	%		92,995		74,312		18,683	25.1	%
Gross profit		71,147		67,559		3,588	5.3	%		141,265		128,862		12,403	9.6	%
Operating expenses:
Research and development⁽¹⁾		10,310		11,926		(1,616)	(13.6)	%		19,943		23,385		(3,442)	(14.7)	%
Selling and marketing⁽¹⁾		31,979		24,865		7,114	28.6	%		59,431		45,015		14,416	32.0	%
General and administrative⁽¹⁾		30,084		24,865		5,219	21.0	%		58,841		49,717		9,124	18.4	%
Depreciation and amortization		3,224		2,878		346	12.0	%		6,184		5,705		479	8.4	%
Other operating (income) expense, net		(154)		4,483		(4,637)	(103.4)	%		694		4,354		(3,660)	(84.1)	%
Total operating expenses		75,443		69,017		6,426	9.3	%		145,093		128,176		16,917	13.2	%
(Loss) income from operations		(4,296)		(1,458)		(2,838)	194.7	%		(3,828)		686		(4,514)	(658.0)	%
Interest expense (income), net		724		(385)		1,109	(288.1)	%		718		150		568	378.7	%
(Loss) income before income taxes		(5,020)		(1,073)		(3,947)	367.8	%		(4,546)		536		(5,082)	(948.1)	%
Income tax expense (benefit)		500		(1,881)		2,381	(126.6)	%		1,308		(2,560)		3,868	(151.1)	%
Net (loss) income		(5,520)		808		(6,328)	(783.2)	%		(5,854)		3,096		(8,950)	(289.1)	%
Other comprehensive loss, net of tax		11,775		3,359		8,416	250.6	%		13,824		4,336		9,488	218.8	%
Total comprehensive loss	$	(17,295)	$	(2,551)	$	(14,744)	578.0	%	$	(19,678)	$	(1,240)	$	(18,438)	1,486.9	%

(1)

Includes stock-based compensation expenses as shown on the following table.

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	For the three months ended				For the six months ended
	June 30,				June 30,
(Dollars in thousands)	2022		2021		2022		2021

	(unaudited)				(unaudited)
Stock-based compensation expense:
Cost of revenues, software subscriptions	$	479	$	572	$	925	$	1,132
Cost of revenues, services		275		622		681		1,216
Research and development		498		571		612		1,132
Selling and marketing		1,401		1,433		2,973		2,720
General and administrative		1,541		3,087		3,936		6,628
Total stock-based compensation expense	$	4,194	$	6,285	$	9,127	$	12,828

The following table sets forth our results of operations as a percentage of our total revenues for the periods presented.


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021

	(unaudited)				(unaudited)
Revenues:
Software subscriptions	84.8	%	85.4	%	84.6	%	85.1	%
Services	15.2	%	14.6	%	15.4	%	14.9	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Revenues:
Software subscriptions	30.4	%	25.6	%	29.5	%	25.8	%
Services	10.0	%	10.1	%	10.2	%	10.8	%
Total cost of revenues	40.4	%	35.7	%	39.7	%	36.6	%
Gross profit	59.6	%	64.3	%	60.3	%	63.4	%
Operating expenses:
Research and development	8.6	%	11.4	%	8.5	%	11.5	%
Selling and marketing	26.8	%	23.7	%	25.4	%	22.2	%
General and administrative	25.2	%	23.7	%	25.1	%	24.5	%
Depreciation and amortization	2.7	%	2.7	%	2.6	%	2.8	%
Other operating (income) expense, net	(0.1)	%	4.3	%	0.3	%	2.1	%
Total operating expenses	63.2	%	65.8	%	61.9	%	63.1	%
(Loss) income from operations	(3.6)	%	(1.4)	%	(1.6)	%	0.3	%
Interest expense (income), net	0.6	%	(0.4)	%	0.3	%	0.1	%
(Loss) income before income taxes	(4.2)	%	(1.0)	%	(1.9)	%	0.2	%
Income tax expense (benefit)	0.4	%	(1.8)	%	0.6	%	(1.3)	%
Net (loss) income	(4.6)	%	0.8	%	(2.5)	%	1.5	%
Other comprehensive loss, net of tax	9.9	%	3.2	%	5.9	%	2.1	%
Total comprehensive loss	(14.5)	%	(2.4)	%	(8.4)	%	(0.6)	%

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Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Revenues


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
Revenues:
Software subscriptions	$	101,088	$	89,604	$	11,484	12.8	%
Services		18,188		15,334		2,854	18.6	%
Total revenues	$	119,276	$	104,938	$	14,338	13.7	%

Revenues increased $14.3 million, or 13.7%, to $119.3 million for the three months ended June 30, 2022 compared to $104.9 million for the three months ended June 30, 2021. The increase in software subscriptions revenues of $11.5 million, or 12.8%, was primarily driven by increases from our existing customers. Software subscriptions revenues derived from new customers averaged 8.9% and 7.0% of total software subscriptions revenues in 2022 and 2021, respectively.

The $2.9 million increase in services revenues was primarily driven by an increase of $1.8 million in software subscription related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and existing customers upgrading to newer versions of our solutions. In addition, our managed services offering experienced a $1.1 million increase in recurring services revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.

Cost of Software Subscriptions Revenues


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
Cost of software subscription revenues	$	36,209	$	26,829	$	9,380	35.0	%

Cost of software subscriptions revenues increased $9.4 million, or 35.0%, to $36.2 million for the three months ended June 30, 2022 compared to $26.8 million for the three months ended June 30, 2021. This included a $3.0 million increase in costs of personnel supporting period over period growth of sales and customers and ongoing infrastructure investments and support costs to enable the continued expansion of customer transaction volumes for our cloud-based subscription customers. In addition, this included an increase in depreciation and amortization of $6.4 million associated with our ongoing investments in internal-use software for cloud-based subscription solutions, software developed for sale for new products and enhancements to existing products, and acquired intangible assets. As a percentage of software subscriptions revenues, the cost of software subscriptions revenues increased to 35.8% in 2022 compared to 29.9% for the same period in 2021.

Cost of Services Revenues


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
Cost of services revenues	$	11,920	$	10,550	$	1,370	13.0	%

Cost of services revenues increased $1.4 million, or 13.0%, to $11.9 million for the three months ended June 30, 2022 compared to $10.6 million for the three months ended June 30, 2021. This increase was primarily driven by an increase in costs of service delivery personnel to support revenue growth in software subscription-related services and our managed services offering. As a percentage of services revenues, cost of services revenues decreased to 65.5% in 2022 compared to 68.8% for the same period in 2021.

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Research and Development


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
Research and development	$	10,310	$	11,926	$	(1,616)	(13.6)	%

Research and development expenses decreased $1.6 million, or 13.6%, to $10.3 million for the three months ended June 30, 2022 compared to $11.9 million for the three months ended June 30, 2021. The $1.6 million decrease in research and development expenses is primarily due to an increase in development work capitalized associated with new solutions to address end-to-end data analysis and compliance needs of our customers, and continued expansion of connectors and application program interfaces (“APIs”) to customer ERP and other software platforms. As a percentage of total revenues, research and development expenses decreased to 8.6% in 2022 compared to 11.4% for the same period in 2021. Research and development expense excludes those costs that have been capitalized for solutions that have met our capitalization policy.

Selling and Marketing


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
Selling and marketing	$	31,979	$	24,865	$	7,114	28.6	%

Selling and marketing expenses increased $7.1 million, or 28.6%, to $32.0 million for the three months ended June 30, 2022 compared to $24.9 million for the same period in 2021. This increase was primarily driven by a $3.0 million increase in payroll and related expenses associated with the growth in period over period subscription sales and services revenues and expansion of our partner and channel management programs. In addition, there was an increase of $2.2 million in advertising and promotional spending and expanded brand awareness efforts. Lastly, there was an increase of $1.9 million in amortization of acquired intangible assets associated with prior acquisitions. As a percentage of total revenues, selling and marketing expenses increased to 26.8% in 2022 compared to 23.7% for the same period in 2021.

General and Administrative


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
General and administrative	$	30,084	$	24,865	$	5,219	21.0	%

General and administrative expenses increased $5.2 million, or 21.0%, to $30.1 million for the three months ended June 30, 2022 compared to $24.9 million for the same period in 2021. General and administrative expenses increased $6.7 million primarily due to planned strategic investments in information technology infrastructure, business process reengineering and other initiatives to drive future operating leverage, as well as investments in employees, systems and resources in support of our growth and public company reporting and compliance activities. This increase is offset by a decline in stock-based compensation of $1.5 million for the three months ended June 30, 2022 over the same period in 2021. As a percentage of total revenues, general and administrative expenses increased to 25.2% in 2022 compared to 23.7% for the same period in 2021.

Other Operating (Income) Expense, Net


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
Other operating (income) expense, net	$	(154)	$	4,483	$	(4,637)	(103.4)	%

Other operating (income) expense, net, decreased $4.6 million, or 103.4%, to $0.2 million of income for the three months ended June 30, 2022 compared to $4.5 million of expense for the same period in 2021. This decrease was primarily due to $4.5 million in transaction costs associated with the Taxamo acquisition for the three months ended June 30, 2021.

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As a percentage of total revenues, other operating expense (income), net decreased to (0.1)% in 2022 compared to 4.3% in 2021.

Interest Expense (Income), Net


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
Interest expense (income), net	$	724	$	(385)	$	1,109	(288.1)	%

Interest expense (income) changed by $1.1 million, or 288.1%, to expense of $0.7 million for the three months ended June 30, 2022, from income of $0.4 million for the same period in 2021. Interest expense related to bank debt and the discount recorded related to the LCR-Dixon deferred purchase consideration increased $0.3 million and $0.1 million, respectively, during the three months ended June 30, 2022. In addition, interest expense increased $0.8 million due to a decrease in the valuation of our foreign currency forward contracts related to the Systax future purchase commitment liability.

Income Tax Expense (Benefit)


	Three months ended
	June 30,
(Dollars in thousands)	2022		2021		Period-over-Period change
Income tax expense (benefit)	$	500	$	(1,881)	$	2,381	(126.6)	%

Income tax expense (benefit) changed by $2.4 million, or 126.6%, to a $0.5 million expense for the three months ended June 30, 2022 compared to a $1.9 million benefit for the same period in 2021. This increase in expense was primarily driven by decreases in tax benefits on exercises and vestings of stock awards partially offset by the unfavorable impact of limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m) (“Section 162(m)”).

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Revenues


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Revenues:
Software subscriptions	$	198,219	$	172,884	$	25,335	14.7	%
Services		36,041		30,290		5,751	19.0	%
Total revenues	$	234,260	$	203,174	$	31,086	15.3	%

Revenues increased $31.1 million, or 15.3%, to $234.3 million for the six months ended June 30, 2022 compared to $203.2 million for the six months ended June 30, 2021. The increase in software subscriptions revenues of $25.3 million, or 14.7%, was primarily driven by increases from our existing customers. Software subscriptions revenues derived from new customers averaged 8.2% of total software subscriptions revenues in both 2022 and 2021.

The $5.8 million increase in services revenues was primarily driven by an increase of $3.7 million in software subscription-related services associated with the growth in subscription revenues, which includes new customers implementing our solutions, existing customers upgrading to newer versions of our solutions, our premium support services and due to acquisitions. In addition, our managed services offering experienced a $2.1 million increase in recurring services revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.

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Cost of Software Subscriptions Revenues


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Cost of software subscriptions revenues	$	69,122	$	52,419	$	16,703	31.9	%

Cost of software subscriptions revenues increased $16.7 million, or 31.9%, to $69.1 million for the six months ended June 30, 2022 compared to $52.4 million for the six months ended June 30, 2021. This included a $6.5 million increase in costs of personnel supporting period-over-period growth of sales and customers and ongoing infrastructure investments and support costs to enable the continued expansion of customer transaction volumes for our cloud-based subscription customers. In addition, this included an increase in depreciation and amortization of $10.2 million associated with our ongoing investments in internal-use software for cloud-based subscription solutions, software developed for sale for new products and enhancements to existing products, and acquired intangible assets. As a percentage of software subscriptions revenues, the cost of software subscriptions revenues increased to 34.9% in 2022 compared to 30.3% for the same period in 2021.

Cost of Services Revenues


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Cost of services revenues	$	23,873	$	21,893	$	1,980	9.0	%

Cost of services revenues increased $2.0 million, or 9.0%, to $23.9 million for the six months ended June 30, 2022 compared to $21.9 million for the six months ended June 30, 2021. This increase was primarily driven by an increase in costs of service delivery personnel to support revenue growth in software subscription-related services and our managed services offering. As a percentage of services revenues, cost of services revenues decreased to 66.2% in 2022 compared to 72.3% for the same period in 2021.

Research and Development


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Research and development	$	19,943	$	23,385	$	(3,442)	(14.7)	%

Research and development expenses decreased $3.4 million, or 14.7%, to $19.9 million for the six months ended June 30, 2022 compared to $23.4 million for the six months ended June 30, 2021. The $3.4 million decrease in research and development expenses is primarily due to an increase in development work capitalized associated with new solutions to address end-to-end data analysis and compliance needs of our customers and continued expansion of connectors and APIs to customer ERP and other software platforms. As a percentage of total revenues, research and development expenses decreased to 8.5% in 2022 compared to 11.5% for the same period in 2021. Research and development expense excludes those costs that have been capitalized for solutions that have met our capitalization policy.

Selling and Marketing


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Selling and marketing	$	59,431	$	45,015	$	14,416	32.0	%

Selling and marketing expenses increased $14.4 million, or 32.0%, to $59.4 million for the six months ended June 30, 2022 compared to $45.0 million for the same period in 2021. This increase was primarily driven by a $8.7 million increase in payroll and related expenses associated with the growth in period-over-period subscription sales and services revenues and expansion of our partner and channel management programs. In addition, there was an increase of $3.6 million in advertising and promotional spending and expanded brand awareness efforts as well as an increase of $2.1 million associated with amortization of acquired intangible assets associated with prior acquisitions. As a percentage of total

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revenues, selling and marketing expenses increased to 25.4% for the three months ended June 30, 2022 compared to 22.2% for the same period in 2021.

General and Administrative


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
General and administrative	$	58,841	$	49,717	$	9,124	18.4	%

General and administrative expenses increased $9.1 million, or 18.4%, to $58.8 million for the six months ended June 30, 2022 compared to $49.7 million for the same period in 2021. General and administrative expenses increased $11.8 million primarily driven by planned strategic investments in information technology infrastructure, business process reengineering and other initiatives to drive future operating leverage, as well as investments in employees, systems and resources in support of our growth, and public company reporting and compliance activities. This increase is offset by a decline in stock-based compensation of $2.7 million for the six months ended June 30, 2022 over the same period in 2021. As a percentage of total revenues, general and administrative expenses increased to 25.1% in 2022 compared to 24.5% for the same period in 2021.

Other Operating Expense, Net


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Other operating expense, net	$	694	$	4,354	$	(3,660)	(84.1)	%

Other operating expense, net, decreased $3.7 million, or 84.1%, to $0.7 million for the six months ended June 30, 2022 compared to $4.4 million for the same period in 2021. This decrease was primarily due to $4.5 million in transaction costs associated with the Taxamo acquisition in 2021, offset by a $0.7 million increase in acquisition contingent consideration liability in 2022. As a percentage of total revenues, other operating expense, net decreased to 0.3% in 2022 compared to 2.1% in 2021.

Interest Expense, Net


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Interest expense, net	$	718	$	150	$	568	378.7	%

Interest expense, net increased $0.6 million, or 378.7%, for the six months ended June 30, 2022 to $0.7 million from $0.2 million for the comparable period in 2021. Interest expense related to bank debt and the discount recorded associated with the LCR-Dixon deferred purchase consideration increased $0.3 million and $0.3 million, respectively. Interest expense during the period also included $0.4 million in increased deferred financing costs associated with the Second Amendment to the Credit Agreement (the “Second Amendment”) which was consummated during 2022.

Income Tax Expense (Benefit)


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Income tax expense (benefit)	$	1,308	$	(2,560)	$	3,868	(151.1)	%

Income tax expense (benefit) increased to expense of $1.3 million from a benefit of $2.6 million, resulting in a change of 151.1%, for the six months ended June 30, 2022 compared to the same period in 2021. This expense increase was primarily driven by decreases in tax benefits on exercises and vestings of stock awards partially offset by the unfavorable impact of limitations on deductions of certain employees’ compensation under Section 162(m).

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Liquidity and Capital Resources

As of June 30, 2022, we had unrestricted cash and cash equivalents of $85.6 million and retained earnings of $19.0 million. In addition, we had $6.9 million in investment securities with a maturity date exceeding three months as of June 30, 2022 not included in unrestricted cash and cash equivalents. Our primary sources of capital to date have been from sales of our solutions, proceeds from bank lending facilities and the initial public offering of our Class A common stock in July 2020 (the “Offering”). On March 8, 2022, we entered into the Second Amendment which increased our existing $100.0 million credit facility to a $250.0 million facility consisting of a $50.0 million term loan (the “Term Loan”) and a $200.0 million line of credit (the “Line of Credit”). The proceeds from the Term Loan will be used for working capital, capital expenditures, permitted acquisitions and general corporate purposes. We have no outstanding borrowings under the Line of Credit at June 30, 2022.

We believe that our existing cash resources and our bank line of credit will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. However, if these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms unacceptable to us.

The following table presents a summary of our cash flows for the periods indicated:


	For the six months ended
	June 30,
(Dollars in thousands)	2022		2021		Year-Over-Year Change
Net cash provided by operating activities	$	14,576	$	26,465	$	(11,889)	(44.9)	%
Net cash used in investing activities		(41,170)		(214,604)		173,434	(80.8)	%
Net cash provided by financing activities		34,489		8,740		25,749	294.6	%
Effect of foreign exchange rate changes		(612)		(221)		(391)	176.9	%
Net increase (decrease) in cash, cash equivalents and restricted cash	$	7,283	$	(179,620)	$	186,903	(104.1)	%

Operating Activities. Net cash provided by operating activities was $14.6 million for the six months ended June 30, 2022 compared to net cash provided by operating activities of $26.5 million for the same period in 2021, a decrease of $11.9 million. The decrease in cash provided by operating activities in 2022 was driven primarily by the net decrease in changes in operating assets and liabilities of $15.1 million period over period.

Investing Activities. Net cash used in investing activities was $41.2 million for the six months ended June 30, 2022 compared to $214.6 million for the same period in 2021, a decrease in use of funds for investing activities of $173.4 million. This decrease was primarily due to a net decrease in cash paid for acquisitions of $193.1 million. During the six months ended June 30, 2021, we acquired Taxamo for approximately $187.5 million in cash, net of $2.6 million of Taxamo’s cash received in the acquisition, and Tellutax, LLC (“Tellutax”) for cash paid of $6.1 million. Investments in property and equipment for the six months ended June 30. 2022 increased $11.9 million over 2021 due to increased investments in commercial cloud-based customer solutions and internal infrastructure systems and tools. During the six months ended June 30, 2022, we also purchased $6.9 million of investment securities.

Financing Activities. Net cash provided by financing activities was $34.5 million for the six months ended June 30, 2022 compared to $8.7 million for the same period in 2021, an increase in cash of $25.7 million. Net cash provided by financing activities was primarily driven by cash received in connection with borrowings under the Term Loan of $50.0 million associated with the Second Amendment, offset by $10.0 million in payments for acquisition purchase commitment liabilities. Net cash provided by financing activities of $8.7 million for the six months ended June 30, 2021 was primarily driven by the increase in customer funds obligations of $22.2 million due primarily to timing differences between receipt of funds from customers and taxing jurisdiction withdrawls of these funds, partially offset by $10.7 million in payments

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for taxes in connection with the exercise of stock options whereby the award holders returned shares to us to satisfy their tax obligations.

Debt. As of June 30, 2022, we had a $200.0 million Line of Credit with no outstanding borrowings and a $50.0 million Term Loan in connection with the Second Amendment. Interest on outstanding borrowings accrue at a base rate plus an applicable margin (4.75% as of June 30, 2022) or the Secured Overnight Financing Rate (“SOFR”) plus an applicable margin (2.63% as of June 30, 2022). We have $49.5 million in bank debt outstanding at June 30, 2022 associated with the Term Loan.

Funds Held for Customers and Customer Funds Obligations

We maintain trust accounts with financial institutions, which allows our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held for customers represent cash and cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Funds held for customers are not commingled with our operating funds.

Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on our consolidated balance sheets as the obligations are expected to be settled within one year. Cash flows related to changes in customer funds obligations liability are presented as cash flows from financing activities.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments

Other than the borrowings under the Second Amendment in June 30, 2022, there have been no material updates or changes to our contractual obligations and commitments compared to contractual obligations and commitments described in our 2021 Annual Report.

Key Business Metrics

We regularly review the metrics identified below to evaluate growth trends, measure our performance, formulate financial projections and make strategic decisions.

Annual Recurring Revenue (“ARR”) and Average Annual Revenue Per Customer (“AARPC”).

We derive the vast majority of our revenue from recurring software subscriptions. We believe ARR provides us with visibility to our projected software subscription revenue in order to evaluate the health of our business. Because we recognize subscription revenue ratably, we believe investors can use ARR to measure our expansion of existing customer revenues, new customer activity, and as an indicator of future software subscription revenues. ARR is based on monthly recurring revenue (“MRR”) from software subscriptions for the most recent month at period end, multiplied by twelve. MRR is calculated by dividing the software subscription price, inclusive of discounts, by the number of subscription covered months. MRR only includes customers with MRR at the end of the last month of the measurement period.

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AARPC represents average annual revenue per customer and is calculated by dividing ARR by the number of software subscription customers at the end of the respective period.



	As of June 30,
(Dollars in millions)	2022		2021		Year-Over-Year Change
Annual Recurring Revenue	$	398.1	$	336.2	$	61.9	18.4	%

ARR increased by $61.9 million, or 18.4%, at June 30, 2022, as compared to June 30, 2021. The increase was primarily driven by $34.6 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases, and $27.3 million in growth of subscriptions of our tax solutions to new customers.

The number of customers and AARPC increased to 4,242 customers and approximately $93,850, respectively, at June 30, 2022, from 4,175 and approximately $80,500, respectively, at June 30, 2021. The increase in customers and AARPC was primarily due to expansion of usage by existing customers and adding new customers through organic growth.

Net Revenue Retention Rate.

We believe that our Net Revenue Retention Rate (“NRR”) provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it demonstrates to investors our ability to expand existing customer revenues, which is one of our key growth strategies. Our NRR refers to the ARR expansion during the 12 months of a reporting period for all customers who were part of our customer base at the beginning of the reporting period. Our NRR calculation takes into account any revenue lost from departing customers or those who have downgraded or reduced usage, as well as any revenue expansion from migrations, new licenses for additional products or contractual and usage-based price changes.

The 400 basis point increase in NRR to 110% at June 30, 2022 from 106% for the same period in 2021 was primarily attributable to an increase in sales growth to existing customers as compared to the prior year.

Gross Revenue Retention Rate (“GRR”)

We believe our GRR provides insight into and demonstrates to investors our ability to retain revenues from our existing customers. Our GRR refers to how much of our MRR we retain each month after reduction for the effects of revenues lost from departing customers or those who have downgraded or reduced usage. GRR does not take into account revenue expansion from migrations, new licenses for additional products or contractual and usage-based price changes. GRR does not include revenue reductions resulting from cancellations of customer subscriptions that are replaced by new subscriptions associated with customer migrations to a newer version of the related software solution.

Adjusted EBITDA and Adjusted EBITDA Margin.

We believe that Adjusted EBITDA is a measure widely used by securities analysts and investors to evaluate the financial performance of our company and other companies. We believe that Adjusted EBITDA and Adjusted EBITDA margin are useful as supplemental measures to evaluate our overall operating performance as they measure business performance focusing on cash related charges and because they are important metrics to lenders under our credit agreement. We define Adjusted EBITDA as net loss or income before interest, taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, stock-based compensation expense, severance expense, acquisition contingent consideration and transaction costs. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison, our net (loss) income was $(5.5) million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively, while our net (loss) income margin was (4.6)% and 0.8% over the same periods, respectively. Additionally, our net (loss) income was $(5.9) million and $3.1 million for the six

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months ended June 30, 2022 and 2021, respectively, while our net (loss) income margin was (2.5)% and 1.5% over the same periods, respectively.


	For the three months ended						For the six months ended
	June 30,						June 30,
(Dollars in thousands)	2022			2021			2022			2021
Adjusted EBITDA:
Net (loss) income	$	(5,520)		$	808		$	(5,854)		$	3,096
Interest expense (income), net		724			(385)			718			150
Income tax expense (benefit)		500			(1,881)			1,308			(2,560)
Depreciation and amortization - property and equipment		3,224			2,878			6,184			5,705
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues		12,386			5,917			22,083			11,822
Amortization of acquired intangible assets - selling and marketing expense		2,019			86			2,268			170
Stock-based compensation expense		4,194			6,285			9,127			12,828
Severance expense		258			957			381			1,488
Acquisition contingent consideration		—			—			700			—
Transaction costs		—			4,522			7			4,672
Adjusted EBITDA	$	17,785		$	19,187		$	36,922		$	37,371

Adjusted EBITDA Margin:
Total revenues	$	119,276		$	104,938		$	234,260		$	203,174
Adjusted EBITDA margin		14.9	%		18.3	%		15.8	%		18.4	%

The decrease in Adjusted EBITDA for the three months ended June 30, 2022 of $1.4 million over the comparable period in 2021 was primarily driven by an increase in non-GAAP gross profit, offset by an increase in operating expenses including additional sales and marketing and general and administrative expenses. Adjusted EBITDA margin decreased to 14.9% for the three months ended June 30, 2022 compared to 18.3% for the comparable period in 2021 primarily due to increased investments in 2022 in sales and marketing to drive future revenue growth opportunities and infrastructure modernization investments to support future productivity improvements and scale.

The decrease in Adjusted EBITDA for the six months ended June 30, 2022 of $0.4 million over the comparable period in 2021 was primarily driven by an increase in non-GAAP in gross profit, offset by an increase in operating expenses including additional sales and marketing and research and development investments. Adjusted EBITDA margin declined to 15.8% for the six months ended June 30, 2022 compared to 18.4% for the comparable period in 2021 primarily due to increased investments in 2022 in sales and marketing to drive future revenue growth opportunities and infrastructure modernization investments to support future productivity improvements and scale.

Free Cash Flow and Free Cash Flow Margin.

We use free cash flow as a critical measure in the evaluation of liquidity in conjunction with related GAAP amounts. We also use this measure when considering available cash, including for decision making purposes related to dividends and discretionary investments. We consider free cash flow to be an important measure for investors because it measures the amount of cash we generate from our operations after our capital expenditures and capitalization of software development costs. In addition, we base certain of our forward-looking estimates and budgets on free cash flow and free cash flow margin. We define free cash flow as the total of net cash provided by operating activities less purchases of property and equipment and capitalized software.

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We define free cash flow margin as free cash flow divided by total revenues for the same period. Our net cash provided by operating activities was $12.0 million and $29.4 million for the three months ended June 30, 2022 and 2021, respectively, while our operating cash flow margin was 10.0% and 28.0% over the same periods, respectively. Our net cash provided by operating activities was $14.6 million and $26.5 million for the six months ended June 30, 2022 and 2021, respectively, while our operating cash flow margin was 6.2% and 13.0% over the same periods, respectively.


	For the three months ended						For the six months ended
	June 30,						June 30,
(Dollars in thousands)	2022			2021			2022			2021
Free Cash Flow:
Cash provided by operating activities	$	11,981		$	29,430		$	14,576		$	26,465
Property and equipment additions		(13,954)			(9,693)			(27,827)			(15,888)
Capitalized software additions		(3,014)			(2,904)			(5,926)			(5,125)
Free cash flow	$	(4,987)		$	16,833		$	(19,177)		$	5,452

Free Cash Flow Margin:
Total revenues	$	119,276		$	104,938		$	234,260		$	203,174
Free cash flow margin		(4.2)	%		16.0	%		(8.2)	%		2.7	%

Free cash flow decreased by $21.8 million for the three months ended June 30, 2022, as compared to the same period in 2021. This decrease was primarily driven by a decrease in cash provided by operating activities of $17.4 million, combined with increased investments of $4.4 million in commercial and internal use software for our cloud-based solutions included in property and equipment and on-premise customer solutions included in capitalized software additions. Free cash flow margin decreased to (4.2)% for the three months ended June 30, 2022, compared to 16.0% for the same period in 2021.

Free cash flow decreased by $24.6 million for the six months ended June 30, 2022 as compared to the same period in 2021. This decrease was primarily driven by a decrease in net cash provided by operating activities of $11.9 million, combined with an increase of $12.7 million in investments in property and equipment additions to support our internal infrastructure investments. Free cash flow margin decreased to (8.2)% for the six months ended June 30, 2022, compared to 2.7% for the same period in 2021.

Use and Reconciliation of Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we have calculated Adjusted EBITDA, Adjusted EBITDA margin, free cash flow, free cash flow margin, non-GAAP cost of revenues, non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP selling and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income, and non-GAAP net income, which are each non-GAAP financial measures. We have provided tabular reconciliations of each of these non-GAAP financial measures to its most directly comparable GAAP financial measure.

We use these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance. We use non-GAAP financial measures of free cash flow and free cash flow margin to evaluate liquidity. Our non-GAAP financial measures are presented as supplemental disclosure as we believe they provide useful information to investors and others in understanding and evaluating our results, prospects, and liquidity period-over-period without the impact of certain items that do not directly correlate to our operating performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as comparing our financial results to those of other companies. Our definitions of these non-GAAP financial measures may differ from similarly titled measures presented by other companies, and therefore, comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, the financial information prepared in accordance with GAAP financial measures, and should be read in conjunction with the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

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Additional Non-GAAP Financial Measures

In addition to Adjusted EBITDA, Adjusted EBITDA margin, free cash flow, and free cash flow margin calculated and discussed in “Key Business Metrics,” the following additional non-GAAP financial measures are calculated and presented further below:

●

Non-GAAP cost of revenues, software subscriptions is determined by adding back to GAAP cost of revenues, software subscriptions, the stock-based compensation expense, and depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues for the respective periods.

●

Non-GAAP cost of revenues, services is determined by adding back to GAAP cost of revenues, services, the stock-based compensation expense included in cost of revenues, services for the respective periods.

●

Non-GAAP gross profit is determined by adding back to GAAP gross profit the stock-based compensation expense, and depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues for the respective periods.

●

Non-GAAP gross margin is determined by dividing non-GAAP gross profit by total revenues for the respective periods.

●

Non-GAAP research and development expense is determined by adding back to GAAP research and development expense the stock-based compensation expense included in research and development expense for the respective periods.

●

Non-GAAP selling and marketing expense is determined by adding back to GAAP selling and marketing expense the stock-based compensation expense and the amortization of acquired intangible assets included in selling and marketing expense for the respective periods.

●

Non-GAAP general and administrative expense is determined by adding back to GAAP general and administrative expense the stock-based compensation expense and severance expense included in general and administrative expense for the respective periods.

●

Non-GAAP operating income is determined by adding back to GAAP loss or income from operations the stock-based compensation expense, depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues, amortization of acquired intangible assets included in selling and marketing expense, severance expense, acquisition contingent consideration, and transaction costs included in GAAP loss or income from operations for the respective periods.

●

Non-GAAP net income is determined by adding back to GAAP net loss or income the income tax benefit or expense, stock-based compensation expense, depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues, amortization of acquired intangible assets included in selling and marketing expense, severance expense, acquisition contingent consideration and transaction costs included in GAAP net loss or income for the respective periods to determine non-GAAP loss or income before income taxes. Non-GAAP income before income taxes is then adjusted for income taxes calculated using the respective statutory tax rates for applicable jurisdictions, which for purposes of this determination were assumed to be 25.5%.

We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view these non-GAAP financial measures in conjunction with the related GAAP financial measures.

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The following schedules reflect our additional non-GAAP financial measures and reconcile our additional non-GAAP financial measures to the related GAAP financial measures.


	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2022			2021			2022			2021
Non-GAAP cost of revenues, software subscriptions	$	23,344		$	20,340		$	46,114		$	39,465
Non-GAAP cost of revenues, services	$	11,645		$	9,928		$	23,192		$	20,677
Non-GAAP gross profit	$	84,287		$	74,670		$	164,954		$	143,032
Non-GAAP gross margin		70.7	%		71.2	%		70.4	%		70.4	%
Non-GAAP research and development expense	$	9,812		$	11,355		$	19,331		$	22,253
Non-GAAP selling and marketing expense	$	28,559		$	23,346		$	54,190		$	42,125
Non-GAAP general and administrative expense	$	28,285		$	20,821		$	54,524		$	41,601
Non-GAAP operating income	$	14,561		$	16,309		$	30,738		$	31,666
Non-GAAP net income	$	10,309		$	12,437		$	22,365		$	23,479

	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2022			2021			2022			2021
Non-GAAP Cost of Revenues, Software Subscriptions:
Cost of revenues, software subscriptions	$	36,209		$	26,829		$	69,122		$	52,419
Stock-based compensation expense		(479)			(572)			(925)		$	(1,132)
Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues		(12,386)			(5,917)			(22,083)			(11,822)
Non-GAAP cost of revenues, software subscriptions	$	23,344		$	20,340		$	46,114		$	39,465

Non-GAAP Cost of Revenues, Services:
Cost of revenues, services	$	11,920		$	10,550		$	23,873		$	21,893
Stock-based compensation expense		(275)			(622)			(681)			(1,216)
Non-GAAP cost of revenues, services	$	11,645		$	9,928		$	23,192		$	20,677

Non-GAAP Gross Profit:
Gross profit	$	71,147		$	67,559		$	141,265		$	128,862
Stock-based compensation expense		754			1,194			1,606			2,348
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues		12,386			5,917			22,083			11,822
Non-GAAP gross profit	$	84,287		$	74,670		$	164,954		$	143,032

Non-GAAP Gross Margin:
Total revenues	$	119,276		$	104,938		$	234,260		$	203,174
Non-GAAP gross margin		70.7	%		71.2	%		70.4	%		70.4	%

Non-GAAP Research and Development Expense:
Research and development expense	$	10,310		$	11,926		$	19,943		$	23,385
Stock-based compensation expense		(498)			(571)			(612)			(1,132)
Non-GAAP research and development expense	$	9,812		$	11,355		$	19,331		$	22,253

Non-GAAP Selling and Marketing Expense:
Selling and marketing expense	$	31,979		$	24,865		$	59,431		$	45,015
Stock-based compensation expense		(1,401)			(1,433)			(2,973)			(2,720)
Amortization of acquired intangible assets – selling and marketing expense		(2,019)			(86)			(2,268)			(170)
Non-GAAP selling and marketing expense	$	28,559		$	23,346		$	54,190		$	42,125

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	Three months ended				Six months ended
	June 30,				June 30,
(Dollars in thousands)	2022		2021		2022		2021
Non-GAAP General and Administrative Expense (1):
General and administrative expense	$	30,084	$	24,865	$	58,841	$	49,717
Stock-based compensation expense		(1,541)		(3,087)		(3,936)		(6,628)
Severance expense		(258)		(957)		(381)		(1,488)
Non-GAAP general and administrative expense	$	28,285	$	20,821	$	54,524	$	41,601
(1) The six month period ended June 30, 2021 includes $150 of transaction costs previously presented as a component of general and administrative expenses that was reclassified to other operating expense, net, in the condensed consolidated statement of comprehensive loss.

Non-GAAP Operating Income:
(Loss) income from operations	$	(4,296)	$	(1,458)	$	(3,828)	$	686
Stock-based compensation expense		4,194		6,285		9,127		12,828
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues		12,386		5,917		22,083		11,822
Amortization of acquired intangible assets – selling and marketing expense		2,019		86		2,268		170
Severance expense		258		957		381		1,488
Acquisition contingent consideration		—		—		700		—
Transaction costs		—		4,522		7		4,672
Non-GAAP operating income	$	14,561	$	16,309	$	30,738	$	31,666

Non-GAAP Net Income:
Net (loss) income	$	(5,520)	$	808	$	(5,854)	$	3,096
Income tax expense (benefit)		500		(1,881)		1,308		(2,560)
Stock-based compensation expense		4,194		6,285		9,127		12,828
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues		12,386		5,917		22,083		11,822
Amortization of acquired intangible assets – selling and marketing expense		2,019		86		2,268		170
Severance expense		258		957		381		1,488
Acquisition contingent consideration		—		—		700		—
Transaction costs		—		4,522		7		4,672
Non-GAAP income before income taxes		13,837		16,694		30,020		31,516
Income tax adjustment at statutory rate		(3,528)		(4,257)		(7,655)		(8,037)
Non-GAAP net income	$	10,309	$	12,437	$	22,365	$	23,479

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Critical Accounting Estimates

The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include software development costs, business combinations, goodwill, accounting for stock-based compensation, revenue recognition, and income taxes, which are described in Note 1, “Summary of Significant Accounting Policies” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

There have been no material updates or changes to our critical accounting estimates compared to the critical accounting estimates described in our 2021 Annual Report.

Recent Accounting Pronouncements

For further information on recent accounting pronouncements, refer to Note 1, “Summary of Significant Accounting Policies” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We had unrestricted cash and cash equivalents of $85.6 million and had $49.5 million in outstanding bank debt related to Term Loans as of June 30, 2022.

We maintain our cash and cash equivalents in deposit accounts, money market funds with various financial institutions, and in short duration fixed income securities. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Increases or declines in interest rates would be expected to augment or reduce future interest income by an insignificant amount.

We are exposed to risk related to changes in interest rates. Borrowings under the Second Amendment bear interest at rates that are variable. Increases in the bank prime or SOFR rates would increase the interest rate on any future outstanding borrowings. Any debt we incur in the future may also bear interest at variable rates. For each 100 basis point increase in the bank prime or SOFR rates, this would result in a projected increase in interest expense of $0.5 million annually.

Foreign Currency Exchange Risk

Our revenues and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the Canadian Dollar, Euro, British Pound, Swedish Krona and Brazilian Real. Decreases in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenues and other operating results as expressed in U.S. dollars. For the six months ended June 30, 2022 and 2021, approximately 4% and 2%, respectively, of our revenues were denominated in currencies other than U.S. dollars.

We have experienced and will continue to experience fluctuations in our net loss or income as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We have historically recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operations and our risk grows. The acquisition of the controlling interest in Systax in January 2020 and the future purchase commitment liabilities associated with this acquisition are expected to increase our exposure to fluctuations of the Brazilian Real over time. At June 30, 2022, outstanding foreign currency forward contracts hedge approximately 50% of our exposure to adverse fluctuations in the Brazilian Real associated with these future purchase commitment liabilities.

Inflation

Historically, we do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset

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such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Based on the evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II---OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On January 25, 2022, we filed a complaint (subsequently amended on February 9, 2022) against Avalara, Inc. (“Avalara”) in the United States District Court for the Eastern District of Pennsylvania. The complaint alleges claims of unfair competition, intentional interference with contractual relations, and trade secret misappropriation against Avalara. We are seeking a permanent injunction to prevent Avalara from further interfering in our contractual relations and to prohibit them from using or disclosing in any way our confidential, proprietary, and/or trade secret information. We are also seeking monetary damages, including punitive damages, and attorneys’ fees. On February 7, 2022, Avalara filed a motion to dismiss the complaint for lack of personal jurisdiction. Avalara withdrew that motion on February 17, 2022, and filed a renewed motion to dismiss the amended complaint for lack of personal matter jurisdiction on March 2, 2022. Vertex’s opposition to the motion to dismiss was filed on March 23, 2022. On March 30, 2022, Avalara filed a motion for leave to file a reply brief in support of its motion to dismiss, and on April 6, 2022, Vertex filed a motion for leave to file a sur-reply brief. We believe that the allegations in the complaint, once proven, are sufficient to prevail in this matter. However, the eventual outcome of the case is subject to a number of uncertainties, and therefore we cannot offer any assurance as to the ultimate impact of this case on our business and operations.

In addition to the foregoing matter, from time to time, we may be involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition.

ITEM 1A. RISK FACTORS

This document incorporates by reference various risk factors discussed in the Company’s 2021 Annual Report, under the heading “Risk Factors,” and the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2022, under the heading “Risk Factors.” There are no material changes to the risk factors discussed in theses filings. You should carefully consider these risks, together with management’s discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. If any of the events contemplated should occur, our business, results of operations, financial condition and cash flows could suffer significantly.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS


Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith	Furnished Herewith
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002						X
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002						X
101.INS	Inline XBRL Instance Document					X
101.SCH	Inline XBRL Taxonomy Extension Schema Document					X
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document					X
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Vertex, Inc.

Date: August 9, 2022	By:	/s/ David DeStefano
		David DeStefano
		President, Chief Executive Officer and Chairperson (principal executive officer)

Date: August 9, 2022	By:	/s/ John Schwab
		John Schwab
		Chief Financial Officer (principal financial officer)