Vertex, Inc. - Quarter Report: 2025 March (Form 10-Q)

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(Amounts in thousands, except per share data)

% controlling equity interest in Systax Sistemas Fiscais LTDA (“Systax”), a provider of Brazilian transaction tax content and software. Systax was determined to be a variable interest entity and the accounts were included in the condensed consolidated financial statements. Vertex did not have full decision-making authority over Systax; however, Vertex was the entity that most significantly participated in the variability of the fair value of Systax’s net assets and was considered the entity most closely associated to Systax. As such, Vertex was deemed the primary beneficiary of Systax and consolidated Systax into its condensed consolidated financial statements. On June 5, 2024, Vertex acquired the remaining % equity interest in Systax, resulting in Systax becoming a wholly owned subsidiary of the Company, and is consolidated into the condensed consolidated financial statements.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Unamortized cloud computing implementation costs

Prepaid insurance

Prepaid licenses and support

Prepaid expenses and other current assets

Other assets:

Unamortized cloud computing implementation costs

Other assets

Total other assets

Accrued expenses:

Accrued general expenses

Accrued contract labor and professional fees

Accrued income and other taxes

Accrued expenses

Cloud computing software implementation costs incurred in hosting arrangements are capitalized and included as a component of prepaid expenses and other current assets, or other assets, once available for their intended use. These costs are amortized using the straight-line method over their respective contract service periods, including periods covered by an option to extend, ranging from two to . Amortization expense for capitalized cloud computing implementation costs for the three months ended March 31, 2025 and 2024 were $ and $, respectively, and are included in general and administrative expense in the condensed consolidated statements of comprehensive income (loss).

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Cloud subscriptions

Software subscriptions

Services

Total revenues

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

and $ at March 31, 2025 and December 31, 2024, 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:

Balance, end of period

Increase (decrease)

()

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. Deferred revenue is included net of a related deferred allowance for subscription cancellations (the “deferred allowance”) of $ and $ at March 31, 2025 and December 31, 2024, 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:

)

()

Allowance balance, March 31,

()

Change in allowance

Deferred allowance balance, January 1,

Deferred allowance balance, March 31,

Change in deferred allowance

()

Net amount charged to revenues

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 following table provides information about the balances of and changes to deferred revenue for the following periods:

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Additional amounts deferred

Revenues recognized

()

Ending balance

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 included 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 one to . Amortization of these costs are included in selling and marketing expense in the condensed consolidated statements of comprehensive income (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 impairment losses recorded for the periods presented.

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

Additions

Amortization

()

Ending balance

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

—

ecosio Cash Earn-outs

—

ecosio Stock Earn-outs

—

Fair Value Measurements Using

As of December 31, 2024

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

—

Commercial Paper

—

Corporate Bonds

—

U.S. Treasury Securities

—

ecosio Cash Earn-outs

—

ecosio Stock Earn-outs

—

The Company has investments in high quality, short-term money market instruments, which are issued and payable in U.S. dollars (“Money Market Funds”) and 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.

As of December 31, 2024, the Company had additional investments in bank and corporate issued commercial paper (“Commercial Paper”), corporate bonds (“Corporate Bonds”), and U.S. treasury securities (“U.S. Treasury Securities”). The Company believes that Level 2 designation was appropriate for these securities under Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures, as these securities were fixed income securities, none were exchange-traded, and all were priced by correlation to observed market data. For these securities, the Company obtained fair value measurements from an independent pricing service. The fair value measurements considered observable data that may have included 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. These securities qualified as debt securities per ASC 320, Investments– Debt Securities, and were classified as available-for-sale as they could be liquidated and used for general corporate purposes. These securities were carried at fair value in the investment securities available-for-sale line in the condensed consolidated balance sheets, with the unrealized holding gains and (losses), net of tax, included in other comprehensive (income) loss until realized. During the three months ended March 31, 2025, the Company fully liquidated these securities, which resulted in a realized gain of $, which is included in the interest expense (income), net line of the condensed consolidated statements of comprehensive income (loss).

In connection with the August 2024 ecosio acquisition, the sellers are entitled to annual earn-outs in the form of cash, with an aggregate of up to $ (the “Cash Earn-outs”), and stock, with an aggregate value of up to $ (the “Stock Earn-outs,” and together with the Cash Earn-outs, the “Earn-outs”), assuming maximum payouts. The Earn-outs are based on ecosio’s achievement of certain monthly software revenue targets over a period, measured over an

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

and $, respectively. The fair value of the Cash Earn-out and the Stock Earn-out were measured on the acquisition date using a Monte Carlo simulation in a risk-neutral framework, calibrated to management’s revenue forecasts. Additional information on the Cash Earn-outs and the Stock Earn-outs is presented in the following table:

Year 2 - December 1, 2025 - December 1, 2026

Year 3 - December 1, 2026 - December 1, 2027

Total Cash Earn-outs

Maximum

Fair Value

Stock Earn-outs/ Period (unaudited)

Payout ⁽¹⁾

March 31, 2025

December 31, 2024

Year 1 - December 1, 2024 - December 1, 2025

Year 2 - December 1, 2025 - December 1, 2026

Year 3 - December 1, 2026 - December 1, 2027

Total Stock Earn-outs

⁽¹⁾ Maximum payout based on Vertex's August 6, 2024 opening share price of $, as referenced in the purchase agreement.

Actual payouts are further adjusted depending on ecosio’s software revenue attainment for each of the measurement periods. In the event that actual software revenues exceed 100% of the target, additional payments may be made up to a maximum of % of the annual target. If actual software revenues are below 85% of the target, payouts are made for that measurement period. The Stock Earn-outs are paid in shares of the Company’s Class A common stock.

The Cash Earn-outs and Stock Earn-outs are recorded at fair value in the condensed consolidated balance sheets as follows:

Stock Earn-outs

Total

⁽¹⁾Included in purchase commitment and contingent consideration liabilities, current.

⁽²⁾ Included in purchase commitment and contingent consideration liabilities, net of current portion.

These Earn-outs represent recurring fair value measurements with significant unobservable inputs, which management considers to be Level 3 measurements under the fair value hierarchy. The final payments may be adjusted depending on the actual amount, above or below the target. The Earn-outs will be revalued and adjusted quarterly until the end of the Earn-out period, and any fair value adjustments will be recorded in the other operating expense (income), net line of the condensed consolidated statement of income.

During the three months ended March 31, 2025, the Company recorded fair value adjustments of $ and $() to the Cash Earn-outs and Stock Earn-outs, respectively.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Monte Carlo Simulation

Revenue volatility

Revenue discount rate

Term (in years)

ecosio Contingent Consideration - Stock Earn-outs

Monte Carlo Simulation

Revenue volatility

Revenue discount rate

Term (in years)

December 31, 2024

Liabilities

Fair Value

Valuation Technique

Unobservable Inputs

ecosio Contingent Consideration - Cash Earn-outs

Monte Carlo Simulation

Revenue volatility

Revenue discount rate

Term (in years)

ecosio Contingent Consideration - Stock Earn-outs

Monte Carlo Simulation

Revenue volatility

Revenue discount rate

Term (in years)

In connection with the January 2021 Tellutax LLC (“Tellutax”) acquisition, the sellers were 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 was based on potential earn-out payments determined by periodic revenue achievements over a period. Such estimates represented a recurring fair value measurement with significant unobservable inputs, which management considered 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 was estimated using a Monte Carlo Simulation to compute the expected cash flows from the payments specified in the purchase agreement. Such payments have maximum limit, but if certain targets are not met, there will be payment for the applicable measurement period.

A fair value adjustment of $() was recorded in other operating expense (income), net for the three months ended March 31, 2024. As of March 31, 2025 and December 31, 2024, the Tellutax consideration balance was $.

Changes in the fair value of the Company’s level 3 liabilities during the three months ended March 31, 2025, were as follows:

Fair value adjustments

()

Balance, March 31, 2025

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

and $, respectively. The fair value was determined based on the quoted price of the Notes in an over-the-counter market on the last trading day of the reporting period and has been classified as Level 2 in the fair value hierarchy. For further information on the Notes, refer to Note 7, “Debt”.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Equipment

Computer software purchased

Internal-use software developed:

Cloud-based customer solutions

Internal systems and tools

Furniture and fixtures

In-process internal-use software

Property and equipment

Less accumulated depreciation and amortization

()

Property and equipment, net

Depreciation expense for property and equipment, excluding all internal-use software developed and finance leases, was $ and $ for the three months ended March 31, 2025 and 2024, respectively, and is included in depreciation and amortization in the condensed consolidated statements of comprehensive income (loss).

Finance lease amortization was $ and $ for the three months ended March 31, 2025 and 2024, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of comprehensive income (loss).

Assets under finance leases of $ and $, net of accumulated amortization of $ and $, respectively, at March 31, 2025 and December 31, 2024, respectively, are included in property and equipment in the condensed consolidated balance sheets.

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

Less accumulated depreciation

()

Internal-use software developed, net of accumulated depreciation

In-process internal-use software

Internal-use software developed, net

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Internal systems and tools

Total

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 March 31, 2025 and 2024 was $ and $, respectively, and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive income (loss).

Depreciation expense for internal-use software developed for internal systems and tools for the three months ended March 31, 2025 and 2024 was $ and $, respectively, and is included in depreciation and amortization in the condensed consolidated statements of comprehensive income (loss).

Less accumulated amortization

()

Capitalized software, net of accumulated depreciation

In-process capitalized software

Capitalized software, net

Software development costs capitalized for the three months ended March 31, 2025 and 2024, were $ and $, respectively.

Capitalized software amortization expense, including amortization of acquired technology, was $ and $ for the three months ended March 31, 2025 and 2024, respectively, and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive income (loss).

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Other intangible assets, net

Total

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:

Gross value

Accumulated amortization

()

Carrying value

The following table presents amortization of other intangible assets:

2024

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

(the “Term Loan”); and (ii) a $ revolving facility (the “Line of Credit”). On May 10, 2024, the Company repaid the outstanding Term Loan balance in full.

On November 4, 2024, the Company entered into a Fifth Amendment to the Credit Agreement (the “Fifth Amendment”), which provided for, among other modifications, an increase in the Line of Credit commitment from $ to $ and an extension of the maturity date to November 4, 2029.

The Company had outstanding borrowings under the Credit Agreement at March 31, 2025 or December 31, 2024.

Indenture and Notes

On April 26, 2024, the Company issued $ aggregate principal amount of % Convertible Senior Notes due 2029 (the “Notes”) to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. The Notes bear interest at a rate of % per annum on the principal amount thereof, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2024. The Notes will mature on May 1, 2029, unless earlier repurchased, redeemed or converted in accordance with their terms.

There have been changes to the initial conversion price of the Notes since issuance or during the three months ended March 31, 2025.

The last reported sales price of the Company’s Class A common stock for at least trading days during the consecutive trading days ending on, and including, December 31, 2024, was greater than or equal to % of the conversion price of the Notes on each applicable trading day. Therefore, the Notes were convertible at the option of the holders of the Notes during the first quarter of 2025; however, conversions occurred as of March 31, 2025.

Capped Call Transactions

In connection with the pricing of the Notes on April 23, 2024, the Company entered into privately negotiated capped call transactions (the “Base Capped Call Transactions”) with certain financial institutions (together, the “Option Counterparties”). In connection with the exercise of the option to purchase the additional Notes in full, the Company entered into additional capped call transactions with the Option Counterparties (together with the Base Capped Call Transactions, the “Capped Call Transactions”).

The Company’s indebtedness at March 31, 2025 and December 31, 2024 was as follows:

()

Total debt

()

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

—

Amortization of issuance costs

—

Total interest expense, convertible senior notes

—

shares of Class A common stock related to the exercise of options, net of shares returned to the Company in lieu of payment of the exercise price and taxes due on these exercises. During this period, the Company also issued shares of Class A common stock in connection with the vesting of Restricted Stock Units (“RSUs”), net of shares returned to the Company in lieu of payment of taxes due on the vesting of these RSUs.

During the three months ended March 31, 2024, the Company issued shares of Class A common stock related to the exercise of options, net of shares returned to the Company in lieu of payment of the exercise price and taxes due on these exercises. During this period, the Company issued shares of Class A common stock in connection with the vesting of RSUs, net of shares returned to the Company in lieu of payment of taxes due on the vesting of these RSUs.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Denominator

Total shares used in per share computation

Basic net income per share:

Diluted net income per share:

Numerator

Allocation of net income⁽¹⁾

Total net income used in per diluted computation

Denominator

Number shares used in basic per share computation

Dilutive effect of common stock equivalents

—

Total shares used in per share computation ⁽²⁾

Dilutive net income per share:

⁽¹⁾ Allocation of net income is based on the percentages of shares outstanding.

⁽²⁾For the three months ended March 31, 2025, a total of shares assumed to be converted from the Notes, as well as out-of-the-money options resulted in anti-dilutive impact to EPS and therefore were excluded from the calculation. For the three months ended March 31, 2024, a total of out-of-the-money options resulted in anti-dilutive impact to EPS and therefore were excluded from the calculation.

shares of Class A common stock were available for issuance under the 2020 Plan.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Exercised

()

2020 Plan options outstanding at March 31, 2025

2020 Plan options exercisable at March 31, 2025

The details of options outstanding, vested, and exercisable under the 2020 Plan as of March 31, 2025 are as follows:

to $

*These options have indefinite contractual lives.

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 income (loss) over the period during which the participant is required to perform the requisite services. The vesting period is generally one to . The grant date fair value of options is estimated using the Black-Scholes model.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

options issued under the 2020 Plan during the three months ended March 31, 2025 or 2024.

At March 31, 2025, $ of unrecognized compensation expense associated with options is expected to be recognized over a weighted average period of approximately years.

Restricted Stock Units

The following table summarizes RSU activity for the three months ended March 31, 2025:

Granted

Vested

()

Forfeited

()

Outstanding at March 31, 2025

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 income (loss) over the period during which the participant is required to perform services in exchange for the award, which is generally one to . Vested RSUs are settled by issuing Class A shares or the equivalent value in cash at the Board’s discretion. At March 31, 2025, $ of unrecognized compensation expense for RSUs is expected to be recognized over a weighted average period of approximately years.

Restricted Stock Awards

The following table summarizes RSA activity for the three months ended March 31, 2025:

Outstanding at March 31, 2025

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 income (loss) over the period during which the participant is required to perform services in exchange for the award, which is generally one to . At March 31, 2025, $ of unrecognized compensation expense for RSAs is expected to be recognized over a weighted average period of approximately years.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

period. The annual targets are based on a range of performance targets in which grantees may earn a prorated portion of the base number of awards granted up to %.

The stock-compensation expense associated with the awards will be accounted for as compensation expense over the vesting periods based on the Company’s assessment of the probability of achieving the targets. If the required conditions are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. As of March 31, 2025, the Company determined that it is probable that the performance target for the first annual measurement period would be achieved and has recorded $ in stock-based compensation expense for the three months ended March 31, 2025. compensation expense has been recorded in connection with the second or third annual targets as the Company has not yet deemed it probable that the performance targets will be achieved.

Forfeited

()

Outstanding at March 31, 2025

At March 31, 2025, a maximum of $ of unrecognized compensation expense for PSUs, pending achievement of targets, may be recognized over a weighted average period of approximately years.

Employee Stock Purchase Plan

The ESPP provides eligible employees with rights during each ESPP offering period to purchase shares of the Company’s Class A common stock 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 % 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 included 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 May 31, 2025 aggregated $ as of March 31, 2025. As of March 31, 2025, shares of Class A common stock were available for issuance under the ESPP.

As of March 31, 2025, there was approximately $ of unrecognized ESPP stock-based compensation expense expected to be recognized on a straight-line basis over the remaining term of the six-month offering period ending May 31, 2025.

At March 31, 2025 and 2024, there were ESPP offering periods open that end May 31, 2025 and 2024, respectively. The fair value of ESPP purchase rights for the offering periods is comprised of the value of the % ESPP discount and the value associated with the call or put over the respective ESPP offering period. ESPP offering periods

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Volatility

Expected term (years)

Expected dividend yield

Risk-free interest rate

Volatility is representative of expected stock price volatility over the offering period. The Company’s volatility is applied to current and future offering periods. The expected term represents the term of the ESPP offering period, which is six months. 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 to the offering term.

Stock-Based Compensation

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

RSUs

RSAs

PSUs

—

ESPP

Total stock-based compensation expense

The Company recognized stock-based compensation expense in the condensed consolidated statements of comprehensive income (loss) as follows:

Cost of revenues, services

Research and development

Selling and marketing

General and administrative

Total stock-based compensation expense

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

for legal expenses associated with the case within the other operating expense (income), net line of the condensed consolidated statements of income (loss).

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.

operating segment. Operating segments are defined as components of an enterprise in which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s CODM, the Chief Executive Officer, reviews financial information regularly at the consolidated level. Net income (loss) and adjusted earnings before interest, taxes, depreciation, and amortization (“Adjusted EBITDA”), a non-GAAP measure, are both used as metrics to evaluate performance of the business in deciding whether to reinvest profits into software development, acquisitions or into other areas of the Company. The Company believes that Adjusted EBITDA is a useful supplemental measure to evaluate overall operating performance as it measures business performance by focusing on cash related results and it is an important metric to lenders under the Company’s Credit Agreement. The most directly comparable GAAP measure to Adjusted EBITDA is net income (loss).

The CODM monitors consolidated forecasted versus actual net income (loss) and Adjusted EBITDA results for the purpose of determining the general health of the Company and assessing the performance of the Company as compared to management’s expectations.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Less:

Cost of revenues – software subscriptions

Cost of revenues – services

Research & development

Selling & marketing

General & administrative

Depreciation & amortization

Change in fair value of acquisition contingent earn-outs

()

—

Other segment items ⁽¹⁾

()

Interest (income) expense, net

()

Income tax benefit

()

Net income (GAAP)

Adjustments:

Interest expense (income), net

()

Income tax benefit

()

Depreciation and amortization – property and equipment

Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues

Amortization of acquired intangible assets – selling and marketing expense

Amortization of cloud computing implementation costs – general and administrative

Stock-based compensation expense

Severance expense

Acquisition contingent consideration

—

()

Change in fair value of acquisition contingent earn-outs

()

—

Transaction costs

—

Adjusted EBITDA (Non-GAAP)

⁽¹⁾ Other segment items include professional fees, contracted labor, transaction costs, acquisition related earn-out adjustments and foreign currency exchange gains (losses).

Additionally, the Company considers stock-based compensation expense a significant expense category. For further information, refer to Note 10, “Stock Based Award Plans.”

As the Company operates solely within one segment, total assets, property and equipment, net, and capitalized software, net are reported at the consolidated level on the condensed consolidated balance sheets. The Company’s assets include both current and long-lived assets, and corporate assets. As of March 31, 2025 and December 31, 2024, $ and $, respectively, of the Company’s property and equipment assets were held outside of the U.S.

Depreciation and amortization, property and equipment additions, and capital software additions are reported at the consolidated level on the condensed consolidated statements of cash flows.

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

% and %, respectively, of the Company’s revenues were generated outside of the U.S. of the Company’s customers represented more than 10% of total revenues for the three months ended March 31, 2025 or 2024. For further information including disaggregation of revenues, refer to Note 2, “Revenue Recognition.”

) and $() for the three months ended March 31, 2025 and 2024, respectively. The effective income tax rate was ()% for the three months ended March 31, 2025, compared to % for the three months ended March 31, 2024.

In determining interim provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date income (loss) adjusted for discrete items arising year-to-date. The Company’s effective tax rate differs from the U.S. federal statutory rate of % primarily due to state taxes, foreign taxes, tax benefits on the exercises and vesting of stock awards, tax credits, limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m), fluctuations in valuation allowances on net deferred tax assets established for U.S. and certain foreign jurisdictions, and fluctuations in nondeductible contingent consideration liabilities.

The income tax benefit for the three months ended March 31, 2025 was primarily attributable to tax benefits from stock-based awards exercised or vested during the quarter, tax credits, and fluctuations in nondeductible contingent consideration liabilities, net of limitations on deductions of certain employees’ compensation, fluctuations in valuation allowances on net deferred tax assets established for U.S. and certain foreign jurisdictions, and state taxes. The income tax benefit for the three months ended March 31, 2024 was primarily attributable to tax benefits from stock-based awards exercised or vested during the quarter, net of the impact from limitations on deductions of certain employees’ compensation.

minority investment representing a % ownership interest, as well as an intellectual property sharing and commercial arrangement. Additionally, the Company has designated one member to Kintsugi’s board of directors.

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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 February 27, 2025 (the “2024 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 2024 Annual Report and as may be subsequently updated by our other SEC filings.

Overview

Vertex is a leading global provider of indirect tax solutions. Our mission is to deliver the most trusted tax technology enabling global businesses to transact, comply and grow with confidence. Vertex provides solutions that can be tailored to specific industries for major lines 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 empowers the world’s leading brands to simplify the complexity of continuous compliance. Vertex employs over 1,900 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 faster rate than on-premise software subscription sales, which is a trend that we expect to continue over time. We generated 53% and 47% of software subscription revenue from cloud-based subscriptions during the three months ended March 31, 2025 and 2024, respectively. While our on-premise software subscription revenue comprised 47% and 53% of our software subscription revenue during the three months ended March 31, 2025 and 2024, respectively, it continues to decrease as a percentage of total software subscriptions revenues as cloud-based subscriptions grow.

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 Resource Planning (“ERP”), Customer Relationship Management, procurement, billing, Point of Sale and e-commerce. These partners include

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Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Shopify, Workday and Zuora. We 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 $177.1 million and $156.8 million for the three months ended March 31, 2025 and 2024, respectively. We had net income of $11.1 million and $2.7 million for the three months ended March 31, 2025 and 2024, 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 (including adjustments to the settlement value of deferred purchase commitment liabilities), taxes, depreciation, and amortization, as adjusted to exclude charges for stock-based compensation expense, amortization of cloud computing arrangement implementation costs, severance expense, acquisition contingent consideration, changes in the fair value of acquisition contingent earn-outs, changes in the settlement value of deferred purchase commitment liabilities recorded as interest expense, and transaction costs. Adjusted EBITDA was $37.2 million and $36.7 million for the three months ended March 31, 2025 and 2024, 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.

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.”

Recent Developments

On April 30, 2025, we announced the completion of a strategic investment in Kintsugi AI, Inc. (“Kintsugi”), a San Francisco-based, AI startup focused on automating sales tax compliance for small and mid-size businesses. Terms of the agreement include a $15.0 million minority investment representing a 10% ownership interest, as well as an intellectual property sharing and commercial arrangement. Additionally, the Company has designated one member to Kintsugi’s board of directors. Our investment in Kintsugi is separate from the $10.0 to $12.0 million of investments that we previously announced we would spend in AI technologies during 2025. We plan to leverage Kintsugi’s intellectual property to advance these initiatives.

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 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 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. The updates and support, which are part of the subscription agreement, are

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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 subscriptions are provided for 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.

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 are generally billed annually in advance of the subscription period. Our cloud-based offerings also include related updates and support. 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. 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 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. 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 of approximately 60%. In addition, our managed services offering has continued to experience increased revenues 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 software subscriptions revenue also includes amortization associated with 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 certain 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 software subscriptions revenue in absolute dollars.

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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 in our managed service offerings 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, 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 and marketing 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 and marketing expenses include 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 will occur in advance of experiencing the benefits from such investments and may vary in scope and scale over future periods.

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, amortization of cloud computing arrangement implementation costs, and other internal support and infrastructure costs.

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We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, and integrate current and future acquisitions.

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 tools. Depreciation and amortization will fluctuate in correlation with our ongoing investment in internal infrastructure costs to support our growth.

Change in Fair Value of Acquisition Contingent Earn-Outs

In connection with our acquisition of ecosio GmbH (“ecosio”) in August 2024, the sellers are entitled to three annual earn-outs in the form of cash, with an aggregate value of up to $94.4 million (the “Cash Earn-outs”), and stock, with an aggregate value of up to $35.0 million (the “Stock Earn-outs,” and together with the Cash Earn-outs, the “Earn-outs”), assuming maximum payouts. The Earn-outs are based on ecosio’s achievement of certain monthly software revenue targets over a three-year period, measured over an aggregate of 12 months and paid within 90 days after the relevant measurement period. The change in fair value of acquisition contingent earn-outs consists of fair value adjustments to our Earn-outs, which will be revalued and adjusted quarterly until the end of the Earn-out periods.

Other Operating Expense (Income), net

Other operating expense (income), net consists primarily of transactions costs associated with merger and acquisition activities, periodic 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 Expense (Income), net

Interest expense (income), net reflects the net amount of our interest expense and interest income within the same period.

Interest expense consists primarily of interest incurred related to the Notes (as defined below), Term Loan (as defined below), Credit Agreement (as defined below), and leases. 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, as well as changes in the settlement value of the future payment obligation for the Systax Sistemas Fiscais LTDA (“Systax”) acquisition, which was fully settled on June 5, 2024. Interest income reflects earnings on investments of our cash on hand and our investment securities. 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, foreign, state, and local taxes on our loss or income. In determining our annualized effective income tax rates, net deferred tax assets, valuation allowances, and cash paid for income taxes, we are required to make judgments and estimates about domestic and foreign profitability, the timing and usage of net operating loss and credit 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.

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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 2024 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 condensed consolidated statements of comprehensive income (loss) for the periods indicated.


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change

	(unaudited)
Revenues:
Software subscriptions	$	150,761	$	131,830	$	18,931	14.4	%
Services		26,301		24,951		1,350	5.4	%
Total revenues		177,062		156,781		20,281	12.9	%
Cost of revenues:
Software subscriptions⁽¹⁾		44,245		45,128		(883)	(2.0)	%
Services ⁽¹⁾		19,823		15,861		3,962	25.0	%
Total cost of revenues		64,068		60,989		3,079	5.0	%
Gross profit		112,994		95,792		17,202	18.0	%
Operating expenses:
Research and development⁽¹⁾		20,886		16,845		4,041	24.0	%
Selling and marketing ⁽¹⁾		48,155		40,491		7,664	18.9	%
General and administrative⁽¹⁾		45,028		35,542		9,486	26.7	%
Depreciation and amortization		5,880		5,006		874	17.5	%
Change in fair value of acquisition contingent earn-outs		(14,700)		—		(14,700)	*
Other operating expense (income), net		3,259		(527)		3,786	*
Total operating expenses		108,508		97,357		11,151	11.5	%
Income (loss) from operations		4,486		(1,565)		6,051	(386.6)	%
Other (income) expense:
Interest expense (income), net		(1,539)		286		(1,825)	*
Income (loss) before income taxes		6,025		(1,851)		7,876	(425.5)	%
Income tax benefit		(5,105)		(4,535)		(570)	*
Net income		11,130		2,684		8,446	314.7	%
Other comprehensive (income) loss:
Foreign currency translation adjustments, net of tax		(15,105)		4,011		(19,116)	(476.6)	%
Unrealized loss on investments, net of tax		9		17		(8)	*
Total other comprehensive (income) loss, net of tax		(15,096)		4,028		(19,124)	*
Total comprehensive income (loss)	$	26,226	$	(1,344)	$	27,570	(2,051.3)	%

(1)

Includes stock-based compensation expenses as follows in the table below.

* Percentage change not meaningful.



	For the three months ended March 31,
(Dollars in thousands)	2025		2024

	(unaudited)
Stock-based compensation expense:
Cost of revenues, software subscriptions	$	2,227	$	1,590
Cost of revenues, services		1,696		1,006
Research and development		4,352		3,373
Selling and marketing		5,806		4,222
General and administrative		6,963		6,133
Total stock-based compensation expense	$	21,044	$	16,324

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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 March 31,
	2025		2024

	(unaudited)
Revenues:
Software subscriptions	85.1	%	84.1	%
Services	14.9	%	15.9	%
Total revenues	100.0	%	100.0	%
Cost of revenues:
Software subscriptions	25.0	%	28.8	%
Services	11.2	%	10.1	%
Total cost of revenues	36.2	%	38.9	%
Gross profit	63.8	%	61.1	%
Operating expenses:
Research and development	11.8	%	10.7	%
Selling and marketing	27.2	%	25.8	%
General and administrative	25.4	%	22.7	%
Depreciation and amortization	3.3	%	3.2	%
Change in fair value of acquisition contingent earn-outs	(8.3)	%	—	%
Other operating expense (income), net	1.8	%	(0.3)	%
Total operating expenses	61.2	%	62.1	%
Income (loss) from operations	2.6	%	(1.0)	%
Interest expense (income), net	(0.9)	%	0.2	%
Income (loss) before income taxes	3.5	%	(1.2)	%
Income tax benefit	(2.9)	%	(2.9)	%
Net income	6.4	%	1.7	%
Other comprehensive (income) loss:
Foreign currency translation adjustments, net of tax	(8.5)	%	2.6	%
Unrealized loss on investments, net of tax	—	%	—	%
Total other comprehensive (income) loss, net of tax	(8.5)	%	2.6	%
Total comprehensive income (loss)	14.9	%	(0.9)	%

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Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Revenues


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change

	(unaudited)
Revenues:
Software subscriptions	$	150,761	$	131,830	$	18,931	14.4	%
Services		26,301		24,951		1,350	5.4	%
Total revenues	$	177,062	$	156,781	$	20,281	12.9	%

Revenues increased $20.3 million, or 12.9%, to $177.1 million for the three months ended March 31, 2025 compared to $156.8 million for the same period in 2024. The increase in software subscriptions revenues of $18.9 million, or 14.4%, was primarily driven by increases from our existing customers through cross-selling new products, and to a lesser extent, increases due to expanded use and price increases. Software subscriptions revenues derived from new customers averaged 8.1% and 5.6% of total software subscriptions revenues in the three months ended March 31, 2025 and 2024, respectively.

The $1.4 million increase in services revenues was primarily driven by a $1.7 million increase in recurring services revenues due to returns processing volume increases related to customer business growth and regulatory changes as customers expanded their tax filings into more jurisdictions, as well as an increase in interest received from our funds held for customers. These increases were partially offset by a $0.3 million decrease in service revenues primarily from the impact of our efforts to steer more implementation opportunities to our channel partners, who are an important referral source for new software opportunities.

Cost of Software Subscriptions Revenues


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
Cost of software subscriptions revenues	$	44,245	$	45,128	$	(883)	(2.0)	%

Cost of software subscriptions revenues decreased $0.9 million, or 2.0%, to $44.2 million for the three months ended March 31, 2025 compared to $45.1 million for the same period in 2024. The decrease in cost of software subscriptions revenues was primarily driven by the timing of costs related to supporting period-over-period growth of sales and customers in the prior year period, which was partially offset by ongoing infrastructure investments and support costs to enable the continued expansion of customer transaction volumes for our cloud-based subscription customers.

Cost of Services Revenues


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
Cost of services revenues	$	19,823	$	15,861	$	3,962	25.0	%

Cost of services revenues increased $4.0 million, or 25.0%, to $19.8 million for the three months ended March 31, 2025, compared to $15.9 million for the same period in 2024. The increase in cost of services revenues was primarily due to an increase in costs of service delivery personnel to support revenue growth in software subscription-related services and our managed services offering.

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Research and Development


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
Research and development	$	20,886	$	16,845	$	4,041	24.0	%

Research and development expenses increased $4.0 million, or 24.0%, to $20.9 million for the three months ended March 31, 2025 compared to $16.8 million for the same period in 2024. This increase in research and development expenses was primarily due to an increase in personnel costs related to development work 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 to customer ERP and other software platforms. Additionally, this increase reflects additional research and development investments related to the commercialization of our AI-based Smart Categorization product, other AI-related internal tools and new product initiatives, and other emerging technologies.

Selling and Marketing


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
Selling and marketing	$	48,155	$	40,491	$	7,664	18.9	%

Selling and marketing expenses increased $7.7 million, or 18.9%, to $48.2 million for the three months ended March 31, 2025 compared to $40.5 million for the same period in 2024. This increase was primarily driven by a $4.6 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. Additionally, there was an increase of $3.1 million in advertising and promotional spending related to expanded brand awareness efforts.

General and Administrative


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
General and administrative	$	45,028	$	35,542	$	9,486	26.7	%

General and administrative expenses increased $9.5 million, or 26.7%, to $45.0 million for the three months ended March 31, 2025 compared to $35.5 million for the same period in 2024, primarily driven by planned strategic investments in information technology infrastructure, business process re-engineering and other initiatives to drive future operating leverage, as well as investments in employees, systems and other resources in support of our growth.

Depreciation and Amortization


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
Depreciation and amortization	$	5,880	$	5,006	$	874	17.5	%

Depreciation and amortization increased $0.9 million, or 17.5%, to $5.9 million for the three months ended March 31, 2025 compared to $5.0 million for the same period in 2024. The increase was primarily due to the impact of infrastructure and technology purchases and other capitalized costs to support our growth.

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Change in Fair Value of Acquisition Contingent Earn-outs


	For the three months ended
	March 31,
(Dollars in thousands)		2025		2024	Period-Over-Period Change
Change in fair value of acquisition contingent earn-outs	$	(14,700)	$	—	$	(14,700)	*
* Percentage change not meaningful.

Change in fair value of acquisition contingent earn-outs changed $14.7 million from the prior year due entirely to adjustments to the fair values of our ecosio acquisition contingent Cash Earn-outs and Stock Earn-outs of $1.7 million and $(16.4) million, respectively, recorded during the three months ended March 31, 2025. For further information, refer to Note 3, “Financial Instruments and Fair Value Measurements” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Other Operating Expense (Income), Net


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
Other operating expense (income), net	$	3,259	$	(527)	$	3,786	(718.4)	%

Other operating expense (income), net increased to expense of $3.3 million, net for the three months ended March 31, 2025 compared to income of $0.5 million, net for the same period in 2024. The increase in expense was primarily driven by $2.4 million related to legal costs associated with a pending legal claim and foreign currency transaction losses incurred. For further information regarding the referenced pending legal claim, refer to Note 11, “Commitments and Contingencies” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Interest Expense (Income), Net


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
Interest expense (income), net	$	(1,539)	$	286	$	(1,825)	(638.1)	%

Interest expense (income), net increased to income of $1.5 million for the three months ended March 31, 2025, compared to an expense of $0.3 million for the same period in 2024. This change was mainly due to several factors: a $2.2 million increase in interest income primarily due to increased dollars invested during the period, a reduction of $0.2 million of interest expense related to the valuation of our prior year foreign currency forward contracts due to market fluctuations, and a $0.7 million decrease in interest costs related to the repayment of our term loan in the aggregate amount of $50,000 (the “Term Loan”), which was fully repaid in the second quarter of 2024. These interest income increases were partially offset by $0.6 million in interest expense and a $0.5 million increase in deferred financing costs related to our Notes (as defined below).

Income Tax Benefit


	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024		Period-Over-Period Change
Income tax benefit	$	(5,105)	$	(4,535)	$	(570)	12.6	%

Income tax benefit was ($5.1) million and ($4.5) million for the three months ended March 31, 2025 and 2024, respectively. The change in tax benefit was primarily driven by higher tax benefits on exercises and vesting of stock awards recognized during the three months ended March 31, 2025, as well as tax credits and fluctuations in nondeductible contingent consideration liabilities. These income tax benefit increases were offset by increased limitations on deductions of certain employees’ compensation, fluctuations in valuation allowances on net deferred tax assets established for U.S.

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and certain foreign jurisdictions, income tax expense on income allocated to state jurisdictions, and differences in tax rates on foreign jurisdiction income or loss.

Liquidity and Capital Resources

As of March 31, 2025, we had unrestricted cash and cash equivalents of $270.4 million. Our primary sources of capital include sales of our solutions, proceeds from bank lending facilities, and the offering of existing or future classes of stock.

As of March 31, 2025, we had a credit agreement with a banking syndicate (the “Credit Agreement”) that provides a $300.0 million revolving facility (the “Line of Credit”). There were no outstanding borrowings under the Credit Agreement at March 31, 2025.

On April 26, 2024, we closed a private offering of $345.0 million aggregate principal amount of 0.750% Convertible Senior Notes due in 2029 (the “Notes”). The net proceeds from the offering of the Notes were $333.7 million, after deducting the initial purchasers’ discount and commissions, and other transaction and offering expenses. For additional information on the Notes, refer to our 2024 Annual Report.

We believe that our existing cash resources and our Line of Credit will be sufficient to meet our capital requirements and fund our operations for the next 12 months as well as our longer-term liquidity needs. If an early conversion notice occurs on our Notes, we have the option to pay cash, shares of our Class A common stock, or a combination of both. Also, we expect to have access to additional sources of funds in the capital markets, and we may, from time to time, seek additional capital through a combination of additional debt and/or equity financings. If we were to raise additional funds by issuing equity securities, our stockholders may 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 year ended
	March 31,
(Dollars in thousands)		2025	2024		Year-Over-Year Change
Net cash provided by operating activities	$	14,805	$	24,566	$	(9,761)	(39.7)	%
Net cash used in investing activities		(17,846)		(19,535)		1,689	8.6	%
Net cash used in financing activities		(20,653)		(1,153)		(19,500)	(1,691.2)	%
Effect of foreign exchange rate changes		1,310		(349)		1,659	475.4	%
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(22,384)	$	3,529	$	(25,913)

Operating Activities. Net cash provided by operating activities of $14.8 million for the three months ended March 31, 2025 consisted of net income of $11.1 million and adjustments for non-cash charges of $30.3 million, which were partly offset by cash outflows of $26.7 million related to changes in operating assets and liabilities. The change in operating assets and liabilities was primarily driven by a decrease in accrued and deferred compensation and accrued expenses, and an increase in prepaid expenses and other current assets due to the timing of cash payments during the period. These changes were partially offset by an increase in deferred revenue and a decrease in accounts receivable, primarily due to customer growth and the timing of cash collections during the period.

Net cash provided by operating activities of $24.6 million for the three months ended March 31, 2024 consisted of net income of $2.7 million, adjusted for non-cash charges of $36.8 million, which was partially offset by cash outflows of $14.9 million from changes in operating assets and liabilities. The change in operating assets and liabilities was primarily driven by decreases in accrued and deferred compensation and accrued expenses, and an increase in prepaid expenses and

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other current assets. These movements were primarily due to the timing of cash payments. These changes were partially offset by an increase in deferred revenue and a decrease in accounts receivable, primarily due to customer growth and cash collections during the period.

Investing Activities. Net cash used in investing activities of $17.8 million for the three months ended March 31, 2025 consisted of investments in property and equipment, and capitalized software of $21.4 million and $5.7 million, respectively, related to investments in infrastructure, new products, and enhancements to existing products. Additionally, we invested $2.4 million in available-for-sale investment securities, which was more than offset by proceeds of $11.6 million received during the period for sales and maturities in our investment securities.

Net cash used in investing activities of $19.5 million for the three months ended March 31, 2024 consisted of investments in property and equipment, and capitalized software of $14.4 million and $5.6 million, respectively, related to investments in infrastructure, new products, and enhancements to existing products. Additionally, we invested $4.3 million in available-for-sale investment securities, which was offset by proceeds of $4.8 million received during the period for sales and maturities in our investment securities.

Financing Activities. Net cash used in financing activities of $20.7 million for the three months ended March 31, 2025 consisted of $25.0 million in payments for taxes related to the net share settlement of stock-based awards, which were partially offset by a $3.2 million increase in customer funds obligations, primarily due to timing differences between receipt of funds from customers and taxing jurisdiction withdrawals of these funds, and $1.2 million in proceeds from the exercise of stock options.

Net cash used in financing activities of $1.2 million for the three months ended March 31, 2024 consisted of $17.9 million in payments for taxes related to the net share settlement of stock-based awards, and $0.6 million used for principal debt repayments. These transactions were partially offset by a $15.9 million increase in customer funds obligations, primarily due to timing differences between receipt of funds from customers and taxing jurisdiction withdrawals of these funds, and $1.5 million in proceeds from the exercise of stock options.

Debt. As of March 31, 2025, we had a $300.0 million Line of Credit with no outstanding borrowings in connection with our Credit Agreement. As of March 31, 2025, we had $345.0 million aggregate principal amount of debt outstanding related to our Notes. For additional information on our debt obligations refer to Note 7, “Debt” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Funds Held for Customers and Customer Funds Obligations

We maintain trust accounts with financial institutions, which allow 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 included 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.

Contractual Obligations and Commitments

As of March 31, 2025, we have no outstanding borrowings under our Line of Credit. Our Notes are due in May 2029. We expect to continue to fund debt maturities and interest payments with cash flows generated from operations, existing cash and cash equivalents, or proceeds from additional financing. For additional information on our debt obligations, refer to Note 7, “Debt” 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 contractual obligations and commitments compared to contractual obligations and commitments described in our 2024 Annual Report.

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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.

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 March 31,
(Dollars in millions)	2025		2024		Year-Over-Year Change
Annual Recurring Revenue	$	618.5	$	524.5	$	94.0	17.9	%

ARR increased by $94.0 million, or 17.9%, at March 31, 2025, as compared to March 31, 2024. The increase was primarily driven by $47.6 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases, and $31.7 million in growth of subscriptions of our solutions to new customers. Additionally, $6.6 million was added to ARR due to the inclusion of Systax’s ARR, which was included as a result of the acquisition of the remaining ownership interests of Systax during the second quarter of 2024, and $8.1 million was added to ARR due to the ecosio acquisition during the third quarter of 2024. Excluding the impact of Systax and ecosio, the ARR growth rate would have been 15.1%.

We had 4,888 direct customers and AARPC was approximately $126,534 at March 31, 2025. At March 31, 2024, we had 4,309 direct customers and approximately $121,720 of AARPC. The increase in AARPC was primarily due to expansion of usage by existing customers and adding new customers through organic growth. Additionally, the inclusion of Systax and ecosio added 604 customers to the first quarter of 2025.

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Net Revenue Retention Rate (“NRR”).

We believe that our 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.


	As of March 31,
	2025		2024
Net Revenue Retention Rate	109	%	112	%

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.


	As of March 31,
	2025		2024
Gross Revenue Retention Rate	95	%	95	%

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 (including adjustments to the settlement value of deferred purchase commitment liabilities), taxes, depreciation, and amortization, as adjusted to exclude charges for stock-based compensation expense, amortization of cloud computing arrangement implementation costs, severance expense, acquisition contingent consideration, changes in the fair value of acquisition contingent earn-outs, changes in the settlement value of deferred purchase commitment liabilities recorded as interest expense, and transaction costs. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison,

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our net income was $11.1 million and $2.7 million for the three months ended March 31, 2025 and 2024, respectively, while our net income margin was 6.3% and 1.7% over the same periods, respectively.


	For the three months ended
	March 31,
(Dollars in thousands)	2025			2024

		(unaudited)
Adjusted EBITDA:
Net income	$	11,130		$	2,684
Interest expense (income), net		(1,539)			286
Income tax benefit		(5,105)			(4,535)
Depreciation and amortization – property and equipment		5,880			5,006
Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues		15,855			15,347
Amortization of acquired intangible assets – selling and marketing expense		531			595
Amortization of cloud computing implementation costs – general and administrative		1,006			994
Stock-based compensation expense		21,044			16,324
Severance expense		457			842
Acquisition contingent consideration		—			(800)
Change in fair value of acquisition contingent earn-outs		(14,700)			—
Transaction costs		2,660			—
Adjusted EBITDA	$	37,219		$	36,743

Adjusted EBITDA Margin:
Total revenues	$	177,062		$	156,781
Adjusted EBITDA margin		21.0	%		23.4	%

The increase in Adjusted EBITDA for the three months ended March 31, 2025 of $0.5 million over the comparable period in 2024 was primarily driven by a $19.0 million increase in non-GAAP gross profit, which was partially offset by

increases of $9.0 million in non-GAAP general and administrative expense, $6.1 million in non-GAAP selling and marketing expense, and $3.1 million in non-GAAP research and development expense. Adjusted EBITDA margin decreased to 21.0% for the three months ended March 31, 2025, compared to 23.4% for the comparable period in 2024, primarily due to strategic investments into information technology infrastructure, business and re-engineering processes and other initiatives related to our 2024 acquisitions.

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

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property and equipment and capitalized software. 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 $14.8 million and $24.6 million for the three months ended March 31, 2025 and 2024, respectively, while our operating cash flow margin was 8.4% and 15.7% over the same periods, respectively.


	For the three months ended
	March 31,
(Dollars in thousands)	2025			2024

		(unaudited)
Free Cash Flow:
Cash provided by operating activities	$	14,805		$	24,566
Property and equipment additions		(21,394)			(14,449)
Capitalized software additions		(5,661)			(5,615)
Free cash flow	$	(12,250)		$	4,502

Free Cash Flow Margin:
Total revenues	$	177,062		$	156,781
Free cash flow margin		(6.9)	%		2.9	%

Free cash flow decreased by $16.8 million for the three months ended March 31, 2025, as compared to the same period in 2024. This decrease was primarily driven by a decrease in net cash provided by operating activities of $9.8 million, primarily attributable to the timing of cash payments during the period, as well as $7.0 million in additional investments in property and equipment, and capitalized software related to investments in infrastructure, new products, and enhancements to existing products. Free cash flow margin decreased to (6.9)% for the three months ended March 31, 2025, compared to 2.9% for the same period in 2024.

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 and transaction costs related to acquired technology 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, amortization of cloud computing implementation costs 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, amortization of cloud computing implementation costs in general and administrative expense, severance expense, acquisition contingent consideration, changes in the fair value of acquisition contingent earn-outs, 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 income or loss 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, amortization of cloud computing implementation costs in general and administrative expense, severance expense, acquisition contingent consideration, adjustments to the settlement value of deferred purchase commitment liabilities recorded as interest expense, changes in the fair value of acquisition contingent earn-outs, and transaction costs, included in GAAP net income or loss for the respective periods to determine non-GAAP income or loss before income taxes. Non-GAAP income or loss 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%.

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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.

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


	For the three months ended
	March 31,
	2025			2024

(Dollars in thousands)	(unaudited)
Non-GAAP cost of revenues, software subscriptions	$	26,163		$	28,191
Non-GAAP cost of revenues, services	$	18,127		$	14,855
Non-GAAP gross profit	$	132,772		$	113,735
Non-GAAP gross margin		75.0	%		72.5	%
Non-GAAP research and development expense	$	16,534		$	13,472
Non-GAAP selling and marketing expense	$	41,818		$	35,674
Non-GAAP general and administrative expense	$	36,602		$	27,573
Non-GAAP operating income	$	31,339		$	31,737
Non-GAAP net income	$	24,494		$	23,431


	For the three months ended
	March 31,
(Dollars in thousands)	2025			2024

	(unaudited)
Non-GAAP Cost of Revenues, Software Subscriptions:
Cost of revenues, software subscriptions	$	44,245		$	45,128
Stock-based compensation expense		(2,227)			(1,590)
Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues		(15,855)			(15,347)
Non-GAAP cost of revenues, software subscriptions	$	26,163		$	28,191

Non-GAAP Cost of Revenues, Services:
Cost of revenues, services	$	19,823		$	15,861
Stock-based compensation expense		(1,696)			(1,006)
Non-GAAP cost of revenues, services	$	18,127		$	14,855

Non-GAAP Gross Profit:
Gross profit	$	112,994		$	95,792
Stock-based compensation expense		3,923			2,596
Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues		15,855			15,347
Non-GAAP gross profit	$	132,772		$	113,735

Non-GAAP Gross Margin:
Total revenues	$	177,062		$	156,781
Non-GAAP gross margin		75.0	%		72.5	%

Non-GAAP Research and Development Expense:
Research and development expense	$	20,886		$	16,845
Stock-based compensation expense		(4,352)			(3,373)
Non-GAAP research and development expense	$	16,534		$	13,472

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	For the three months ended
	March 31,
(Dollars in thousands)	2025		2024

	(unaudited)

Non-GAAP Selling and Marketing Expense:
Selling and marketing expense	$	48,155	$	40,491
Stock-based compensation expense		(5,806)		(4,222)
Amortization of acquired intangible assets – selling and marketing expense		(531)		(595)
Non-GAAP selling and marketing expense	$	41,818	$	35,674

Non-GAAP General and Administrative Expense:
General and administrative expense	$	45,028	$	35,542
Stock-based compensation expense		(6,963)		(6,133)
Severance expense		(457)		(842)
Amortization of cloud computing implementation costs – general and administrative		(1,006)		(994)
Non-GAAP general and administrative expense	$	36,602	$	27,573

Non-GAAP Operating Income:
Income (loss) from operations	$	4,486	$	(1,565)
Stock-based compensation expense		21,044		16,324
Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues		15,855		15,347
Amortization of acquired intangible assets – selling and marketing expense		531		595
Amortization of cloud computing implementation costs – general and administrative		1,006		994
Severance expense		457		842
Acquisition contingent consideration		—		(800)
Change in fair value of acquisition contingent earn-outs		(14,700)		—
Transaction costs		2,660		—
Non-GAAP operating income	$	31,339	$	31,737

Non-GAAP Net Income:
Net income	$	11,130	$	2,684
Income tax benefit		(5,105)		(4,535)
Stock-based compensation expense		21,044		16,324
Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues		15,855		15,347
Amortization of acquired intangible assets – selling and marketing expense		531		595
Amortization of cloud computing implementation costs – general and administrative		1,006		994
Severance expense		457		842
Acquisition contingent consideration		—		(800)
Change in fair value of acquisition contingent earn-outs		(14,700)		—
Transaction costs		2,660		—
Non-GAAP income before income taxes		32,878		31,451
Income tax adjustment at statutory rate⁽¹⁾		(8,384)		(8,020)
Non-GAAP net income	$	24,494	$	23,431

⁽¹⁾Non-GAAP income before income taxes is adjusted for income taxes using the respective statutory tax rates for applicable jurisdictions, which for purposes of this determination were assumed to be 25.5%.

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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 revenue recognition and income taxes, which are described in our 2024 Annual Report. There have been no material updates or changes to our critical accounting estimates compared to the critical accounting estimates described in our 2024 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 $270.4 million and $296.1 million as of March 31, 2025 and December 31, 2024, respectively, and investments of $9.2 million as of December 31, 2024. We maintain our cash and cash equivalents in deposit accounts and money market funds with various financial institutions. 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 these investments 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 on our outstanding borrowings. Borrowings under our Credit Agreement 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.

Our Notes have a fixed annual interest rate; therefore, we have no financial or economic interest exposure associated with changes in interest rates. However, the fair value of fixed rate debt instruments fluctuates when interest rates change. Additionally, the fair value of the Notes can be affected when the market price of our common stock fluctuates. We carry the Notes at principal value less unamortized issuance costs on our condensed consolidated balance sheets, and we present fair value for required disclosure purposes only.

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 both the three months ended March 31, 2025 and 2024, approximately 4% 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.

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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 March 31, 2025, 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 interference with our contractual relations and to prohibit the disclosure in any way of our confidential, proprietary and/or trade secret information. We are also seeking monetary damages, including punitive damages and attorney’s fees. As of March 31, 2025, the matter remains before the Court and is proceeding through the discovery process. We believe 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 2024 Annual Report, under the heading “Risk Factors”. There are no material changes to the risk factors discussed in these 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

During the three months ended March 31, 2025, or officer of the Company , modified or a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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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: May 7, 2025	By:	/s/ David DeStefano
		David DeStefano
		President, Chief Executive Officer and Chairperson (principal executive officer)

Date: May 7, 2025	By:	/s/ John Schwab
		John Schwab
		Chief Financial Officer (principal financial officer)

Vertex, Inc. - Quarter Report: 2025 March (Form 10-Q)

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