UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September~~June 30, ~~2020~~2021


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

For the transition period from to

Commission File Number: ~~333-239644~~001-39413

VERTEX, INC.

(Exact Name of Registrant as Specified in its Charter)


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

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

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

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


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

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

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

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


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

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

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

As of ~~November 10, 2020,~~August 9, 2021, the registrant had ~~25,687,503~~39,963,083 shares of Class A common stock, $0.001 par value per share, and ~~120,417,000~~108,017,000 shares of Class B common stock, $0.001 par value per share, outstanding.

Table of Contents

TABLE OF CONTENTS

9
		Page
	Part I - Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, ~~2019 and September 30,~~ 2020 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2021 and 2020 (unaudited)	6
	Condensed Consolidated Statements of Changes in Equity (Deficit) for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2019~~2021 and 2020 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2021 and 2020 (unaudited)	9
	Notes to Condensed Consolidated Financial Statements (unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4538
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6760
Item 4.	Controls and Procedures	6861
	Part II - Other Information	7061
Item 1.	Legal Proceedings	7061
Item 1A.	Risk Factors	7061
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7062
Item 3.	Defaults Upon Senior Securities	7062
Item 4.	Mine Safety Disclosures	7062
Item 5.	Other Information	7062
Item 6.	Exhibits	7163
	Signatures	7264

Table of Contents

~~Cautionary Note Regarding Forward-Looking Statements~~SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of ~~Section 27A of~~ the Private Securities Litigation Reform Act of ~~1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), that involve substantial risks and uncertainties.~~1995. All statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations and regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management, are forward-looking statements and should be evaluated as such. These statements often include words such as “anticipate,” “believe,” “expect,” “suggests,” ~~“plan,~~“plans,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” ~~“forecast”~~“forecast,” and other similar expressions or the negatives of those terms. We base these forward-looking statements on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances at such time. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of future performance or results. The forward-looking statements are subject to and involve risks, uncertainties and assumptions, and you should not place undue reliance on these forward-looking statements. Although we believe that these forward-looking statements are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. Important factors that may materially affect such forward-looking statements include, but are not limited to:

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

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

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

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

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

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

●risks related to our expanding international operations;

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

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

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

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

●our ability to manage cybersecurity and data privacy risks;

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

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

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

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

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

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

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

●other factors beyond our ~~control; and~~control.

Table of Contents

●~~other~~

The risks included here are not exhaustive, and additional factors ~~discussed~~could adversely affect our business and financial performance, including factors and risks included in our Annual Report on Form 10-K for the year ended December 31, 2020 and in other sections of this Quarterly Report on Form 10-Q, including ~~the sections titled “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and~~ under Part II, Item ~~1A. “Risk~~1A, Risk Factors.”

~~You~~ Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for us to identify all such risk factors, nor can we assess the impact of all such risk factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on our forward-looking statements, and you should not rely on forward-looking statements as predictions of future events. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this report. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. ~~Financial Statements.~~FINANCIAL STATEMENTS

Vertex, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of June 30, 2021 and December 31, ~~2019 and September 30,~~ 2020 ~~(unaudited)~~

~~(Amounts in thousands)~~

September 30,

December 31,

2020

2019


(unaudited)


Assets




Current assets:




Cash and cash equivalents

$
270,271

$
75,903
Funds held for customers

8,745

7,592
Accounts receivable, net of allowance of $7,567 (unaudited), and $7,515, respectively

66,789

70,367
Advances to stockholders

2

283
Prepaid expenses and other current assets

16,001

11,412
Total current assets

361,808

165,557
Property and equipment, net of accumulated depreciation

55,935

54,727
Capitalized software, net of accumulated amortization

32,619

32,075
Goodwill

18,667

—
Deferred commissions

10,372

11,196
Deferred income tax asset

32,440

219
Deposits and other assets

3,093

849
Total assets

$
514,934

$
264,623

Liabilities and Equity




Current liabilities:




Current portion of long-term debt

$
1,179

$
50,804
Accounts payable

11,828

10,729
Accrued expenses

15,014

13,308
Distributions payable

—

13,183
Customer funds obligations

8,711

7,553
Accrued salaries and benefits

20,276

15,195
Accrued variable compensation

16,154

22,237
Deferred compensation, current

3,220

8,935
Deferred revenue

185,445

191,745
Deferred rent and other

908

840
Future acquisition commitment, current

780

—
Total current liabilities

263,515

334,529
Deferred compensation, net of current portion

2,156

18,530
Deferred revenue, net of current portion

12,095

14,046
Long-term debt, net of current portion

329

682
Future acquisition commitment, net of current portion

9,485

—
Deferred other liabilities

8,793

9,268
Total liabilities

296,373

377,055
Commitments and contingencies (Note 11)




Options for redeemable shares

—

17,344
Stockholders' equity (deficit):




Preferred shares, $0.001 par value, 30,000 and 0 shares authorized, respectively; 0 and 0 shares issued and outstanding, respectively

—

—
Class A voting common stock, $0.001 par value, 0 and 600 shares authorized, respectively; 0 and 300 shares issued, respectively; 0 and 147 shares outstanding, respectively

—

—
Class B non-voting common stock, $0.001 par value, 0 and 299,400 shares authorized, respectively; 0 and 162,297 shares issued, respectively; 0 and 120,270 shares outstanding, respectively

—

54
Class A voting common stock, $0.001 par value, 300,000 and 0 shares authorized, respectively; 25,688 and 0 shares issued and outstanding, respectively

26

—
Class B voting common stock, $0.001 par value, 150,000 and 0 shares authorized, respectively; 120,417 and 0 shares issued and outstanding, respectively

120

—
Additional paid in capital

200,722

—
Retained earnings (accumulated deficit)

21,696

(90,701)
Accumulated other comprehensive loss

(4,003)

(491)
Treasury stock

—

(38,638)
Total stockholders' equity (deficit)

218,561

(129,776)
Total liabilities and equity

$
514,934

$
264,623

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

~~-5-~~

~~Table of Contents~~

~~Vertex, Inc.~~

~~Condensed Consolidated Statements of Comprehensive Income (Loss)~~

~~For the three and nine months ended September 30, 2019 and 2020 (unaudited)~~

(Amounts in thousands, except per share data)

Three months ended

Nine months ended

September 30,

September 30,

2020

2019

2020

2019

(unaudited)

(unaudited)
Revenues:












Software subscriptions

$
79,778

$
71,041

$
232,844

$
202,692
Services

14,827

11,398

42,277

32,736
Total revenues

94,605

82,439

275,121

235,428
Cost of revenues:








Software subscriptions

29,161

18,647

79,846

56,490
Services

18,807

8,786

49,329

23,616
Total cost of revenues

47,968

27,433

129,175

80,106
Gross profit

46,637

55,006

145,946

155,322
Operating expenses:








Research and development

16,501

7,271

43,197

22,049
Selling and marketing

29,423

15,830

78,300

49,164
General and administrative

48,043

17,263

123,437

49,358
Depreciation and amortization

2,735

2,311

8,109

6,528
Other operating (income) expense, net

(60)

4

154

472
Total operating expenses

96,642

42,679

253,197

127,571
Income (loss) from operations

(50,005)

12,327

(107,251)

27,751
Other (income) expense:








Interest income

(79)

(251)

(535)

(775)
Interest expense

1,875

503

3,959

1,579
Total other expense, net

1,796

252

3,424

804
Income (loss) before income taxes

(51,801)

12,075

(110,675)

26,947
Income tax (benefit) expense

(30,773)

175

(31,508)

600
Net (loss) income

(21,028)

11,900

(79,167)

26,347
Other comprehensive loss from foreign currency translation adjustments and revaluations, net of tax

238

174

3,512

176
Total comprehensive income (loss)

$
(21,266)

$
11,726

$
(82,679)

$
26,171
Net (loss) income attributable to Class A stockholders, basic

$
(2,751)

$
22

$
(2,427)

$
21
Net (loss) income per Class A share, basic

$
(0.15)

$
0.10

$
(0.40)

$
0.16
Weighted average Class A common stock, basic

18,124

225

6,129

134
Net (loss) income attributable to Class A stockholders, diluted

$
(2,751)

$
373

$
(2,427)

$
826
Net (loss) income per Class A share, diluted

$
(0.15)

$
0.10

$
(0.40)

$
0.21
Weighted average common Class A stock, diluted

18,124

3,893

6,129

3,898
Net (loss) income attributable to Class B stockholders, basic

$
(18,277)

$
11,878

$
(76,740)

$
26,326
Net (loss) income per Class B share, basic

$
(0.15)

$
0.10

$
(0.64)

$
0.22
Weighted average common Class B stock, basic

120,417

120,417

120,417

120,417
Net (loss) income attributable to Class B stockholders, diluted

$
(18,277)

$
11,527

$
(76,740)

$
25,521
Net (loss) income per Class B share, diluted

$
(0.15)

$
0.10

$
(0.64)
��
$
0.21
Weighted average common Class B stock, diluted

120,417

120,417

120,417

120,417
Loss before income taxes

$
(51,801)

$
(110,675)

Pro forma provision for income tax benefit

(13,106)

(28,001)

Pro forma net loss

$
(38,695)

$
(82,674)

Pro forma net loss attributable to Class A stockholders

$
(5,062)

$
(4,004)

Weighted average Class A common stock, basic and diluted

18,124

6,129

Pro forma net loss per Class A share, basic and diluted

$
(0.28)

$
(0.65)

Pro forma net loss attributable to Class B stockholders

$
(33,633)

$
(78,670)

Weighted average Class B common stock, basic and diluted

120,417

120,417

Pro forma net loss per Class B share, basic and diluted

$
(0.28)

$
(0.65)


	June 30, 2021		December 31, 2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	101,593	$	303,051
Funds held for customers		31,060		9,222
Accounts receivable, net of allowance of $9,399, and $8,592, respectively		73,130		77,159
Prepaid expenses and other current assets		17,593		13,259
Total current assets		223,376		402,691
Property and equipment, net of accumulated depreciation		61,611		56,557
Capitalized software, net of accumulated amortization		34,364		31,989
Goodwill and other intangible assets		220,818		18,711
Deferred commissions		11,545		11,743
Deferred income tax asset		32,573		29,974
Operating lease right-of-use assets		22,156		—
Other assets		3,086		3,263
Total assets	$	609,529	$	554,928

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	11,694	$	8,876
Accrued expenses		19,974		19,176
Distributions payable		—		2,700
Customer funds obligations		31,462		9,235
Accrued salaries and benefits		22,994		17,326
Accrued and deferred compensation, current		15,648		24,429
Deferred revenue		210,587		207,560
Current portion of long-term debt		—		882
Current portion of operating lease liabilities		3,641		—
Current portion of finance lease liabilities		271		—
Deferred rent and other		—		939
Purchase commitment and contingent consideration liabilities, current		10,458		845
Total current liabilities		326,729		291,968
Deferred compensation, net of current portion		4,244		5,010
Deferred revenue, net of current portion		12,025		14,702
Debt, net of current portion		—		225
Operating lease liabilities, net of current portion		26,726		—
Finance lease liabilities, net of current portion		334		—
Purchase commitment and contingent consideration liabilities, net of current portion		11,610		8,905
Deferred other liabilities		17		8,632
Total liabilities		381,685		329,442
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred shares, $0.001 par value, 30,000 shares authorized; 0 shares issued and outstanding		—		—
Class A common stock, $0.001 par value, 300,000 shares authorized; 39,828 and 26,327 shares issued and outstanding, respectively		40		26
Class B common stock, $0.001 par value, 150,000 shares authorized; 108,017 and 120,117 shares issued and outstanding, respectively		108		120
Additional paid in capital		209,629		206,541
Retained earnings		25,530		21,926
Accumulated other comprehensive loss		(7,463)		(3,127)
Total stockholders' equity		227,844		225,486
Total liabilities and stockholders' equity	$	609,529	$	554,928

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

-5-

Table of Contents

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the three and six months ended June 30, 2021 and 2020

(Amounts in thousands, except per share data)


	Three months ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020

	(unaudited)				(unaudited)
Revenues:
Software subscriptions	$	89,604	$	77,306	$	172,884	$	153,066
Services		15,334		13,965		30,290		27,450
Total revenues		104,938		91,271		203,174		180,516
Cost of revenues:
Software subscriptions		26,829		26,001		52,419		50,685
Services		10,550		15,744		21,893		30,522
Total cost of revenues		37,379		41,745		74,312		81,207
Gross profit		67,559		49,526		128,862		99,309
Operating expenses:
Research and development		11,926		13,617		23,385		26,696
Selling and marketing		24,865		24,544		45,015		48,877
General and administrative		24,865		37,758		49,717		75,394
Depreciation and amortization		2,878		2,505		5,705		5,374
Other operating expense, net		4,483		103		4,354		214
Total operating expenses		69,017		78,527		128,176		156,555
Income (loss) from operations		(1,458)		(29,001)		686		(57,246)
Interest (income) expense, net		(385)		1,059		150		1,628
Income (loss) before income taxes		(1,073)		(30,060)		536		(58,874)
Income tax benefit		(1,881)		(985)		(2,560)		(735)
Net income (loss)		808		(29,075)		3,096		(58,139)
Other comprehensive loss from foreign currency translation adjustments and revaluations, net of tax		3,359		276		4,336		3,274
Total comprehensive loss	$	(2,551)	$	(29,351)	$	(1,240)	$	(61,413)

Net income (loss) attributable to Class A stockholders	$	190	$	(32)	$	644	$	(16)
Net income (loss) per Class A share, basic	$	0.01	$	(0.24)	$	0.02	$	(0.24)
Weighted average Class A common stock, basic		34,726		132		30,592		66
Net income (loss) attributable to Class A stockholders, diluted	$	229	$	(32)	$	811	$	(16)
Net income (loss) per Class A share, diluted	$	0.01	$	(0.24)	$	0.02	$	(0.24)
Weighted average Class A common stock, diluted		44,711		132		41,357		66

Net income (loss) attributable to Class B stockholders	$	618	$	(29,043)	$	2,452	$	(58,123)
Net income (loss) per Class B share, basic	$	0.01	$	(0.24)	$	0.02	$	(0.48)
Weighted average Class B common stock, basic		112,804		120,417		116,460		120,417
Net income (loss) attributable to Class B stockholders, diluted	$	579	$	(29,043)	$	2,285	$	(58,123)
Net income (loss) per Class B share, diluted	$	0.01	$	(0.24)	$	0.02	$	(0.48)
Weighted average Class B common stock, diluted		112,804		120,417		116,460		120,417

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

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Table of Contents

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity (Deficit)

For the ~~nine~~three and six months ended ~~September~~June 30, ~~2019~~2021 (unaudited)

(Amounts in thousands)


	Before Recapitalization						After Recapitalization										Accumulated
	Outstanding	Class A		Outstanding	Class B		Outstanding	Class A		Outstanding	Class B		Additional				Other		Treasury			Total		Options for
	Class A	Common		Class B	Common		Class A	Common		Class B	Common		Paid-in		Retained		Comprehensive		Shares	Treasury		Stockholders'		Redeemable
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Earnings		Loss		Issued	Stock		Equity		Shares
Balance, January 1, 2021	—	$	—	—	$	—	26,327	$	26	120,117	$	120	$	206,541	$	21,926	$	(3,127)	—	$	—	$	225,486	$	—
ASC 842 transition adjustment	—		—	—		—	—		—	—		—		—		508		—	—		—		508		—
Exercise of stock options, net	—		—	—		—	640		1	—		—		(6,998)		—		—	—		—		(6,997)		—
Shares issued upon vesting of Restricted Stock Units, net	—		—	—		—	5		—	—		—		(34)		—		—	—		—		(34)		—
Stock-based compensation expense	—		—	—		—	—		—	—		—		6,302		—		—	—		—		6,302		—
Foreign currency translation adjustments and revaluations, net of tax	—		—	—		—	—		—	—		—		—		—		(977)	—		—		(977)		—
Net income	—		—	—		—	—		—	—		—		—		2,288		—	—		—		2,288		—
Balance, March 31, 2021	—		—	—		—	26,972		27	120,117		120		205,811		24,722		(4,104)	—		—		226,576		—
Exercise of stock options, net	—		—	—		—	462		1	—		—		(3,293)		—		—	—		—		(3,292)		—
Shares issued upon vesting of Restricted Stock Awards	—		—	—		—	234		—	—		—		—		—		—	—		—		—		—
Stock-based compensation expense	—		—	—		—	—		—	—		—		6,101		—		—	—		—		6,101		—
Shares issued under ESPP	—		—	—		—	60		—	—		—		1,010		—		—	—		—		1,010		—
Class B shares exchanged for Class A shares	—		—	—		—	12,100		12	(12,100)		(12)		—		—		—	—		—		—		—
Foreign currency translation adjustments and revaluations, net of tax	—		—	—		—	—		—	—		—		—		—		(3,359)	—		—		(3,359)		—
Net income	—		—	—		—	—		—	—		—		—		808		—	—		—		808		—
Balance, June 30, 2021	—	$	—	—	$	—	39,828	$	40	108,017	$	108	$	209,629	$	25,530	$	(7,463)	—	$	—	$	227,844	$	—

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

-7-

Table of Contents

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity (Deficit) ~~(Continued)~~

For the ~~nine~~three and six months ended ~~September~~June 30, 2020 (unaudited)

(Amounts in thousands)

Before Recapitalization

After Recapitalization

Retained

Accumulated

Total

Outstanding

Class A

Outstanding

Class B

Outstanding

Class A

Outstanding

Class B

Additional

Earnings

Other

Treasury



Stockholders'

Options for

Class A

Common

Class B

Common

Class A

Common

Class B

Common

Paid-in

(Accumulated

Comprehensive

Shares

Treasury

Equity

Redeemable


Shares

Stock

Shares

Stock

Shares

Stock

Shares

Stock

Capital

Deficit)

Loss

Issued

Stock

(Deficit)

Shares
Balance, January 1, 2020

147

$
—

120,270

$
54

—

$
—

—

$
—

$
—

$
(90,701)

$
(491)

41,910

$
(38,638)

$
(129,776)

$
17,344
Remeasurement of options for redeemable shares

—

—

—

—

—

—

—

—

—

(15,242)

—

—

—

(15,242)

15,242
Distributions declared

—

—

—

—

—

—

—

—

—

(4,010)

—

—

—

(4,010)

—
Foreign currency translation adjustments and revaluations

—

—

—

—

—

—

—

—

—

—

(2,998)

—

—

��
(2,998)

—
Net loss

—

—

—

—

—

—

—

—

—

(29,064)

—

—

—

(29,064)

—
Balance, March 31, 2020

147

—

120,270

54

—

—

—

—

—

(139,017)

(3,489)

41,910

(38,638)

(181,090)

32,586
Remeasurement of options for redeemable shares

—

—

—

—

—

—

—

—

—

(14,637)

—

—

—

(14,637)

14,637
Exercise of stock options, net

—

—

173

—

—

—

—

—

—

53

—

—

—

53

—
Distributions declared

—

—

—

—

—

—

—

—

—

(123,185)

—

—

—

(123,185)

—
Foreign currency translation adjustments and revaluations

—

—

—

—

—

—

—

—

—

—

(276)

—

—

(276)

—
Net loss

—

—

—

—

—

—

—

—

—

(29,075)

—

—

—

(29,075)

—
Balance, June 30, 2020

147

—

120,443

54

—

—

—

—

—

(305,861)

(3,765)

41,910

(38,638)

(348,210)

47,223
Distributions declared

—

—

—

—

—

—

—

—

—

(5,706)

—

—

—

(5,706)

—
Reclassification of accumulated S Corporation earnings

—

—

—

—

—

—

—

—

(354,291)

354,291

—

—

—

—

—
Remeasurement of options for redeemable shares

—

—

—

—

—

—

—

—

(21,954)

—

—

—

—

(21,954)

21,954
Reclassification of options for redeemable shares

—

—

—

—

—

—

—

—

69,177

—

—

—

—

69,177

(69,177)
Recapitalization prior to Offering

(147)

—

(120,443)

(54)

173

—

120,417

120

(38,704)

—

—

(41,910)

38,638

—

—
Reclassification of SAR liability to equity in connection with Offering

—

—

—

—

—

—

—

—

143,519

—

—

—

—

143,519

—
Auto-exercised options in connection with Offering

—

—

—

—

564

1

—

—

(13,809)

—

—

—

—

(13,808)

—
Shares issued in connection with Offering, net of Offering costs

—

—

—

—

23,812

24

—

—

416,778

—

—

—

—

416,802

—
Exercise of stock options in connection with the Offering

—

—

—

—

510

—

—

—

(7,023)

—

—

—

—

(7,023)

—
Vested restricted stock issued in connection with Offering

—

—

—

—

19

—

—

—

361

—

—

—

—

361

—
Exercise of stock options, net

—

—

—

—

610

1

—

—

1,007

—

—

—

—

1,008

—
Stock-based compensation expense

—

—

—

—

—

—

—

—

5,661

—

—

—

—

5,661

—
Foreign currency translation adjustments and revaluations

—

—

—

—

—

—

—

—

—

—

(238)

—

—

(238)

—
Net loss

—

—

—

—

—

—

—

—

—

(21,028)

—

—

—

(21,028)

—
Balance, September 30, 2020

—

$
—

—

$
—

25,688

$
26

120,417

$
120

$
200,722

$
21,696

$
(4,003)

—

$
—

$
218,561

$
—


	Before Recapitalization						After Recapitalization										Accumulated
	Outstanding	Class A		Outstanding	Class B		Outstanding	Class A		Outstanding	Class B		Additional				Other		Treasury			Total		Options for
	Class A	Common		Class B	Common		Class A	Common		Class B	Common		Paid In		Accumulated		Comprehensive		Shares	Treasury		Stockholders'		Redeemable
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Deficit		Loss		Issued	Stock		Deficit		Shares
Balance, January 1, 2020	147	$	—	120,270	$	54	—	$	—	—	$	—	$	—	$	(90,701)	$	(491)	41,910	$	(38,638)	$	(129,776)	$	17,344
Remeasurement of options for redeemable shares	—		—	—		—	—		—	—		—		—		(15,242)		—	—		—		(15,242)		15,242
Distributions declared	—		—	—		—	—		—	—		—		—		(4,010)		—	—		—		(4,010)		—
Foreign currency translation adjustments and revaluations, net of tax	—		—	—		—	—		—	—		—		—		—		(2,998)	—		—		(2,998)		—
Net loss	—		—	—		—	—		—	—		—		—		(29,064)		—	—		—		(29,064)		—
Balance, March 31, 2020	147		—	120,270		54	—		—	—		—		—		(139,017)		(3,489)	41,910		(38,638)		(181,090)		32,586
Remeasurement of options for redeemable shares	—		—	—		—	—		—	—		—		—		(14,637)		—	—		—		(14,637)		14,637
Exercise of stock options, net	—		—	173		—	—		—	—		—		—		53		—	—		—		53		—
Distributions declared	—		—	—		—	—		—	—		—		—		(123,185)		—	—		—		(123,185)		—
Foreign currency translation adjustments and revaluations, net of tax	—		—	—		—	—		—	—		—		—		—		(276)	—		—		(276)		—
Net loss	—		—	—		—	—		—	—		—		—		(29,075)		—	—		—		(29,075)		—
Balance, June 30, 2020	147	$	—	120,443	$	54	—	$	—	—	$	—	$	—	$	(305,861)	$	(3,765)	41,910	$	(38,638)		(348,210)	$	47,223

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

-8-

Table of Contents

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2021 and 2020 ~~(unaudited)~~

(Amounts in thousands)

Nine Months Ended

September 30,


2020

2019

(unaudited)
Cash flows from operating activities:




Net (loss) income

$
(79,167)

$
26,347
Adjustments to reconcile net (loss) income to net cash provided by operating activities:




Depreciation and amortization

23,586

18,152
Provision for subscription cancellations and non-renewals

52

(27)
Amortization of deferred financing costs

356

199
Write-off of deferred financing costs

1,351

—
Stock-based compensation expense

140,890

3,930
Deferred income taxes

(32,004)

—
Redemption of Converted SARs

(22,889)

—
Other

86

51
Changes in operating assets and liabilities:




Accounts receivable

4,143

3,010
Advances to stockholders

281

115
Prepaid expenses and other current assets

(4,613)

(1,379)
Deferred commissions

824

(253)
Accounts payable

1,193

128
Accrued expenses

1,382

(1,767)
Accrued and deferred compensation

(5,399)

(4,197)
Deferred revenue

(8,251)

1,053
Other

(1,777)

437
Net cash provided by operating activities

20,044

45,799
Cash flows from investing activities:




Acquisition of business, net of cash acquired

(12,318)

—
Property and equipment additions

(14,982)

(13,315)
Capitalized software additions

(9,246)

(12,345)
Net cash used in investing activities

(36,546)

(25,660)
Cash flows from financing activities:




Net increase in customer funds obligations

1,158

1,223
Proceeds from line of credit

12,500

—
Principal payments on line of credit

(12,500)

—
Proceeds from long-term debt

175,000

—
Principal payments on long-term debt

(226,029)

(4,339)
Payments for deferred financing costs, net

(2,436)

—
Proceeds from issuance of shares in connection with Offering

423,024

—
Payments for offering costs

(6,222)

—
Payments for taxes on exercised options

(11,999)

(184)
Proceeds from exercise of stock options

6,023

68
Distributions to stockholders

(146,084)

(22,252)
Net cash provided by (used in) financing activities

212,435

(25,484)
Effect of exchange rate changes on cash, cash equivalents and restricted cash

(412)

(176)
Net increase (decrease) in cash, cash equivalents and restricted cash

195,521

(5,521)
Cash, cash equivalents and restricted cash, beginning of period

83,495

59,174
Cash, cash equivalents and restricted cash, end of period

$
279,016

$
53,653
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets, end of period:




Cash and cash equivalents

$
270,271

$
49,094
Restricted cash—funds held for customers

8,745

4,559
Total cash, cash equivalents and restricted cash, end of period

$
279,016

$
53,653


	Six Months Ended
	June 30,
	2021		2020

	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	3,096	$	(58,139)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		17,697		15,416
Provision for subscription cancellations and non-renewals, net of deferred allowance		994		154
Amortization of deferred financing costs		106		428
Stock-based compensation expense		12,828		76,596
Deferred income tax benefit		(2,812)		(1,057)
Non-cash operating lease costs		1,867		—
Other		66		14
Changes in operating assets and liabilities:
Accounts receivable		10,993		7,093
Advances to stockholders		(2)		53
Prepaid expenses and other current assets		(3,396)		(1,717)
Deferred commissions		198		807
Accounts payable		2,515		2,911
Accrued expenses		(5,707)		(1,481)
Accrued and deferred compensation		(8,301)		(10,804)
Deferred revenue		(1,220)		(7,353)
Operating lease liabilities		(2,532)		—
Other		75		(2,165)
Net cash provided by operating activities		26,465		20,756
Cash flows from investing activities:
Acquisition of business, net of cash acquired		(193,591)		(12,318)
Property and equipment additions		(15,888)		(10,565)
Capitalized software additions		(5,125)		(7,264)
Net cash used in investing activities		(214,604)		(30,147)
Cash flows from financing activities:
Net increase in customer funds obligations		22,227		2,622
Proceeds from line of credit		—		12,500
Principal payments on line of credit		—		(12,500)
Proceeds from long-term debt		—		175,000
Principal payments on long-term debt		—		(51,009)
Payments for deferred financing costs, net		—		(2,904)
Proceeds from purchases of stock under ESPP		1,010		—
Payments for taxes related to net share settlement of stock-based awards		(10,715)		—
Proceeds from exercise of stock options		391		52
Distributions to stockholders		—		(140,378)
Distributions under Tax Sharing Agreement		(2,700)		—
Payments for purchase commitment liability		(788)		—
Payments on finance lease liabilities		(685)		—
Net cash provided by (used in) financing activities		8,740		(16,617)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(221)		(204)
Net decrease in cash, cash equivalents and restricted cash		(179,620)		(26,212)
Cash, cash equivalents and restricted cash, beginning of period		312,273		83,495
Cash, cash equivalents and restricted cash, end of period	$	132,653	$	57,283
Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets, end of period:
Cash and cash equivalents	$	101,593	$	47,295
Restricted cash—funds held for customers		31,060		9,988
Total cash, cash equivalents and restricted cash, end of period	$	132,653	$	57,283

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

-9-

Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(Amounts in thousands, except per share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

~~Effective~~Basis of Consolidation

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

On May 12, 2021, the Company acquired 95% of the outstanding equity of EVAT Solutions Limited (“EVAT”) and its subsidiaries, doing business as Taxamo (collectively “Taxamo”), a cloud-based provider of tax and payment automation for global eCommerce and marketplaces. As the Company has a controlling interest in Taxamo, its accounts have been included in the condensed consolidated financial statements from the acquisition date.

On January 7, 2020, the Company acquired a 60% controlling interest in Systax Sistemas Fiscais LTDA (“Systax”), a provider of Brazilian transaction tax content and software. Systax is considered a Variable Interest Entity (“VIE”) and its accounts have been included in the condensed consolidated financial statements from the acquisition date. Systax was determined to be a VIE as ~~the Company~~Vertex is the primary beneficiary of the equity interests in Systax and participates significantly in the variability in the fair value of Systax’s net assets. Although the Company does not have full decision-making authority as it is shared with the minority interest owners, as the minority interest owners are considered related parties, the Company is considered the most closely associated party to Systax and is required to consolidate. Systax’s assets may only be used to settle its own obligations and this will continue until such time as the Company owns 100% of the VIE. As of September 30, 2020, the net assets of Systax were $20,556 (unaudited). The Company is at risk to the extent of its current 60% ownership of Systax, which risk will increase over time in proportion to increases in percentage ownership as the Company exercises its future share purchase commitment through 2024. See Note 2.

~~Registration of Company Stock and Initial Public Offering~~

On July 28, 2020, the Company filed its amended and restated certificate of incorporation with the Delaware Secretary of State to: (i) effect a three-for-one forward stock split (the “Stock Split”); (ii) establish a new capital structure for the Company (the “New Capital Structure”); and (iii) effect a share exchange (the “Share Exchange”) (collectively, the “Recapitalization”). The Stock Split resulted in each one share owned by a stockholder being exchanged for three shares of common stock, and the number of shares of the Company’s common stock issued and outstanding was increased proportionately based on the Stock Split. After the Stock Split, the Share Exchange occurred, resulting in stockholders of record exchanging their existing Class A and Class B common stock (“former Class A” and “former Class B”, respectively) for newly created shares of Class A and Class B common stock (“Class A” and “Class B”, respectively) issued in connection with the New Capital Structure. The effect of the Stock Split and the Share Exchange are recognized retrospectively in the Consolidated Financial Statements.

The Company’s Registration Statement on Form S-1 (the “S-1”) with the Securities and Exchange Commission (“SEC”) was declared effective on July 28, 2020, resulting in the Class A shares being registered and available for trading on the NASDAQ exchange (the “Offering”).

The Company received $423,024 in proceeds from the sale of 23,812 shares of Class A at a public offering price of $19.00 per share on July 28, 2020, net of underwriting fees, and used a portion of the proceeds to pay off $175,000 in outstanding debt. The net proceeds remaining after payment of Offering costs will be used for working capital and other corporate purposes as described in the S-1.

~~-10-~~

~~Table of Contents~~

Unaudited Interim Financial Information

The accompanying ~~unaudited condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements, and the~~ unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the ~~SEC~~Securities and Exchange Commission (the “SEC”) for interim financial information and include the accounts of the Company. ~~All intercompany transactions have been eliminated in consolidation.~~ Certain information and disclosures normally included in consolidated financial statements prepared in accordance with ~~accounting principles generally accepted in the~~ U.S. ~~(“GAAP”)~~GAAP have been condensed or omitted. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, ~~2019~~2020, included in the Company’s ~~final S-1 dated July 28,~~Annual Report on Form 10-K for the year ended December 31, 2020 ~~and~~(the “2020 Annual Report”) filed with the SEC ~~pursuant to Rule 424(b)(4) under~~on March 15, 2021. The interim condensed consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements included in the ~~Securities Act of 1933, as amended, (the “Securities Act”), on July 30,~~ 2020 ~~(the “Prospectus”).~~Annual Report. The accompanying interim condensed consolidated balance sheet as of ~~September~~June 30, ~~2020, the interim condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019, and~~2021, the interim condensed consolidated statements of comprehensive loss and changes in equity (deficit) for the three and six months ended June 30, 2021 and 2020, and interim condensed consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the annual audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the condensed consolidated financial statements. The operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020 and 2019~~2021 are not necessarily indicative of the results expected for the full year ~~periods~~ ending December 31, ~~2020 and 2019, respectively.~~2021.

-10-

Table of Contents

Segments

The Company operates its business as ~~one~~1 operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”), the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s CODM allocates resources and assesses performance based upon discrete financial information at the consolidated level. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 approximately 7% and ~~2019, approximately 3%~~6%, respectively, of the Company’s revenues were generated outside the U.S. ~~in each respective period. As of December 31, 2019, none of~~For the ~~Company’s long-lived assets were held~~three and six months ended June 30, 2020, revenues generated outside of the U.S. ~~As of September 30, 2020, 18%, or $18,870, of the Company’s long-lived assets~~ were ~~held outside of the U.S. (unaudited) and consists primarily of goodwill of $18,667 (unaudited) at September 30, 2020 related to the acquisition of the controlling interest~~approximately 3% in ~~Systax, which is located in Brazil. See Note 2.~~each respective period.

Fair Value Measurement

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

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

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

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

~~-11-~~

~~Table of Contents~~

The Company’s assessment of the significance of an input to ~~the~~a fair value measurement requires judgment, which may affect the ~~valuation~~determination of fair value ~~assets~~ and ~~liabilities and their placement within~~ the ~~fair value hierarchy levels.~~

The Company has investments in money market accounts, which are included in cash and cash equivalents on the consolidated balance sheets. Fair value inputs for these investments are considered Level 1 measurementsmeasurement’s classification within the Fair Value Hierarchy since money market account fair values are known and observable through daily published floating net asset values. The fair value of the Company’s investments in money market accounts were $159,851 and $38,520 at September 30, 2020 and December 31, 2019, respectively.Hierarchy.

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, funds held for customers, accounts receivable, accounts payable, accrued expenses and debt approximate their related fair values.

Use of Estimates

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

~~Cash and Cash Equivalents~~

The Company considers all highly liquid investments purchased with an initial maturity date of three months or less to be cash equivalents. Funds held as investments in money market funds are included within cash and cash equivalents.

~~Funds Held for Customers~~

Funds held for customers in the consolidated balance sheets represents customer funds advanced for transaction tax returns outsourcing. Funds held for customers are restricted for the sole purpose of remitting such funds to satisfy obligations on behalf of such customers and are deposited at FDIC-insured institutions. Customer funds obligations are included in current liabilities in the consolidated balance sheets, as the obligations are expected to be settled within one year.

~~Property and Equipment~~

Property and equipment are stated at cost or fair value when acquired in a business combination and presented net of accumulated depreciation. Normal maintenance and repairs are charged to expense, while major renewals and betterments are capitalized. Assets under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets and are depreciated over the shorter of the asset’s useful life or lease term.

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~~Depreciation and amortization are computed straight-line over the estimated useful lives of the assets, as follows:~~


~~Leasehold improvements~~		~~1 - 12 years~~
~~Internal-use software developed~~		~~3 - 5 years~~
~~Computer software~~		~~3 - 7 years~~
~~Equipment~~		~~3 - 10 years~~
~~Automobiles~~		~~5 years~~
~~Furniture and fixtures~~		~~7 - 10 years~~

Software Development Costs

Internal-Use Software

The Company follows Accounting Standard Codification (“ASC”) 350-40, Goodwill and Other, Internal-Use Software, to account for development costs incurred for the costs of computer software developed or obtained for internal use. ASC 350-40 requires such costs to be capitalized once certain criteria are met. Capitalized internal-use software costs are primarily comprised of direct labor, related expenses and initial software licenses. ASC 350-40 includes specific guidance on costs not to be capitalized, such as overhead, general and administrative and training costs. Internal-use software includes software utilized for cloud-based solutions as well as software for internal systems and tools. Costs are capitalized once the project is defined, funding is committed and it is confirmed the software will be used for its intended purpose. Capitalization of these costs concludes once the project is substantially complete and the software is ready for its intended purpose. Post-configuration training and maintenance costs are expensed as incurred. Internal-use software is included in internal-use software developed in property and equipment in the condensed consolidated balance sheets once available for its intended use and is depreciated over periods between 3 to 5 years. Depreciation expense for internal-use software utilized for cloud-based solutions and for software for internal systems and tools is included in cost of revenues, software subscriptions and depreciation and amortization expense, respectively, in the condensed consolidated statements of comprehensive ~~income (loss).~~loss.

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Software Developed for Sale

The costs incurred for the development of computer software to be sold, leased, or otherwise marketed are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed, when technological feasibility has been established. Technological feasibility generally occurs when all planning, design, coding and testing activities are completed that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements. The establishment of technological feasibility is an ongoing assessment of judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in technology. Capitalized software includes direct labor and related expenses for software development for new products and enhancements to existing products and acquired software.

Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on a product-by-product basis using the straight-line method over periods between 3 to 5 ~~years. Unamortized capitalized~~years and is included in cost of revenues, software ~~development costs determined to be~~subscriptions in ~~excess~~the condensed consolidated statements of ~~the net realizable value of the product are expensed immediately.~~

comprehensive loss. Capitalized software costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies at least annually at December 31, and whenever events or circumstances make it more likely than not that impairment may have occurred. In event of an impairment, unamortized capitalized software costs are compared to the net realizable value of the related product and the carrying value of the related assets are written down to the net realizable value to the extent the unamortized capitalized costs exceed such value. The net realizable value

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is the estimated future gross revenues from the related product reduced by the estimated future costs of completing and disposing of such product, including the costs of providing related maintenance and customer support.

~~Assessment of Long-Lived Assets~~

The Company reviews the carrying value of long-lived assets, including internal-use software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Whenever such events or circumstances are present, an impairment loss equal to the excess of the asset carrying value over its fair value, if any, is recorded.

Business Combinations

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

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. The Company evaluates goodwill for impairment annually at ~~December 31~~October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred. The Company has determined that its business comprises one reporting unit. The Company has the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, in which case a quantitative impairment test is not required.

Stock-Based Compensation

The ~~quantitative goodwill impairment test is performed by comparing~~Company’s Registration Statement on Form S-1 with the ~~fair value of~~SEC was declared effective on July 28, 2020, resulting in the ~~reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired. An impairment loss is recognized~~Class A shares being registered and available for any excess of the carrying amount of the reporting unit’s goodwill over the fair value up to the amount of goodwill allocated to the reporting unit. Income tax effects from any tax-deductible goodwilltrading on the ~~carrying amount of the reporting unit are considered when measuring the goodwill impairment loss, if applicable.~~

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~~Deferred Financing Costs~~

The Company capitalizes costs related to obtaining, renewing or extending loan agreements and amortizes these costs on a straight-line basis, which approximates the interest method, over the life of the loan. Deferred financing costs related to outstanding borrowings under bank debt are reflected as a reduction of current portion of long-term debt and long-term debt, net of current portion. Deferred financing costs related to undrawn debt are reflected in deposits and other assets in the consolidated balance sheets in accordance with ASC 835-30, ~~Interest—Imputation of Interest~~NASDAQ exchange (the “Offering”).

~~Accounting for Stock-Based Compensation~~

On the effective date of the Offering, the Company adopted the 2020 Incentive Award Plan (the “2020 Plan”) and the 2020 Employee Stock Purchase Plan (the “ESPP”), which ~~provides~~provide for the award of stock appreciation rights (“SARs”), stock options (“options”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and participation in the ESPP (collectively, the "awards")~~, which~~.

The awards are subject to, and the Company applies, the guidance set forth in ASC 718, Compensation—Stock Compensation, ("ASC 718") for the award of equity-based instruments.

The provisions of ASC 718 require a company to measure the fair value of stock-based compensation as of the grant date of the award. Stock-based compensation expense reflects the cost of employee services received in exchange for the awards.

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SARs are accounted for as liabilities under ASC 718 and, as such, the Company recognizes stock-based compensation expense by remeasuring the value of the SARs at the end of each reporting period and accruing the portion of the requisite service rendered at that date. Prior to July 2, 2020, the date management determined the Company was considered to have become a public entity, the Company measured SARs ~~based on~~at their intrinsic ~~value which reflected the difference between the fair value of the Company’s former Class B common stock less the grant~~value. After such date, fair value of the underlying shares as this was the value the SAR participant could derive from exercise of the SAR award. Prior to the Offering, the fair value of the Company’s common stock was determined periodically by the Board with the assistance of management and a third-party valuation firm. Upon becoming a public entity, and up to the effective date of the Offering, management remeasured outstanding SARs using the fair value-based method under ASC 718. See Note 9 for discussion of the impact of the resulting change in accounting policy. Outstanding SARs are included in deferred compensation, current and deferred compensation, net of current portion in the consolidated balance sheets.

Stock-based compensation expense for ~~new~~stock options issued under the 2020 Plan after the Offering is measured based on the grant date fair value of the award and is estimated using the Black-Scholes model. Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the award.

Stock-based compensation expense for RSAs and RSUs is based on the ~~the~~ fair value of the Company’s underlying common stock on the date of grant. Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the award. Stock-based compensation expense for awards subject to performance-based measurement criteria is recognized when achievement of performance targets is deemed probable.

The ESPP permits participants to purchase Class A common stock through payroll deductions, up to a specified percentage of their eligible compensation or a lump sum contribution amount for the initial offering ~~period (July 28 to November 30, 2020), subject to the plan’s maximum purchase provisions during the specified offering periods.~~period. The plan is a compensatory plan as it allows participants to purchase stock at a 15% discount from the lower of the fair value of the Class A common on the first or last day of the ESPP offering period (the “ESPP ~~discount”~~Discount”)~~. The~~.The ESPP is accounted for as an ~~equity-classified~~equity classified award. Stock-based compensation expense for the ESPP is measured based on the fair value of the ESPP award at the start of the offering period. The fair value is comprised of the value of the ESPP ~~discount~~Discount and the value associated with the variability in the Class A common stock price during the offering period (the ~~“Call”~~“Call/Put”), which is estimated using the Black-Scholes model. Compensation cost is recognized on a straight-line basis over the respective offering period.

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The Company has elected to recognize award forfeitures as they occur.

~~Operating Leases and Deferred Rent~~

Rent expense for operating leases is recognized on a straight-line basis over the period of the related lease. For lease agreements that include future specific rent increases, rent concessions and/or tenant improvement allowances, the difference between the rent payments and the straight-line rent expense is included in deferred rent liability in the consolidated balance sheets.

~~Self-insurance~~

The Company is self-insured for the majority of its health insurance costs, including medical claims subject to certain stop-loss provisions. Management periodically reviews the adequacy of the Company’s stop-loss insurance coverage. The Company records an estimate of claims incurred but not reported, based on management’s judgment and historical experience. Self-insurance accruals are $1,473 and $2,068 at December 31, 2019 and September 30, 2020 (unaudited), respectively, and are reflected in accrued salaries and benefits in the consolidated balance sheets. Material differences may result in the amount and timing of insurance expense if actual experience differs significantly from management’s estimates.

Revenue Recognition

Revenue from contracts with customers

The Company recognizes revenue in accordance with ~~Accounting Standards Update (“ASU”) 2014-09,~~ASC 606, Revenue from Contracts with Customers~~, (“ASC 606”)~~. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct, and accounted for as separate performance obligations. Revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of goods and services

Licenses for on-premise software subscriptions provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates (collectively “updates”) and product support. The updates and support, which are part of the subscription agreement, are essential to the continued utility of the software; therefore, the Company has determined the software and the related updates and support to be a single performance obligation. Accordingly, when on-premise software is licensed, the revenue associated with this combined performance obligation is recognized ratably over the license term as these 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. The Company’s on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price (“new sale premium”) is a material right that provides customers with the right to this reduced renewal price. The Company recognizes revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years.

Cloud-based subscriptions allow customers to use Company-hosted software over the contract period without taking possession of the software. The cloud-based offerings also include related updates and support. Cloud-based contracts consistently provide a benefit to the customer during the subscription ~~period,~~period; thus, the associated revenue is recognized

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ratably over the related subscription period. Revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based solutions.

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

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

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

Significant Judgments

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

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~~Disaggregation of revenue~~

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

For the three months ended

For the nine months ended

September 30,

September 30,



2020

2019


2020

2019

(unaudited)

(unaudited)
Sources of revenue:








Software subscriptions

$
79,778

$
71,041

$
232,844

$
202,692
Services

14,827

11,398

42,277

32,736
Total revenue

$
94,605

$
82,439

$
275,121

$
235,428

~~Contract balances~~

Timing of revenue recognition may differ from the timing of invoicing customers. A receivable is recorded in the consolidated balance sheets when customers are billed related to revenue to be collected and recognized for subscription agreements as there is an unconditional right to invoice and receive payment in the future related to these subscriptions. A receivable and related revenue may also be recorded in advance of billings to the extent services have been performed and the Company has a right under the contract to bill and collect for such performance. Subscription-based customers are generally invoiced annually at the beginning of each annual subscription period. Accounts receivable is presented net of an allowance for potentially uncollectible accounts and estimated cancellations of software license and cloud-based subscriptions (the “allowance”) of $7,515 and $7,567 at December 31, 2019 and September 30, 2020 (unaudited), respectively. The allowance is based on management’s assessment of uncollectible accounts on a specific identification basis, with the estimate of potential cancellations being determined based on management’s review of historical cancellation rates.

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

For the year ended

For the nine months ended

December 31,

September 30,


2019

2020

(unaudited)
Balance, beginning of period

$
62,235

$
70,367
Balance, end of period

70,367

66,789
Increase (decrease), net

$
8,132

$
(3,578)

A contract liability is recorded as deferred revenue on the consolidated balance sheets when customers are billed in advance of performance obligations being satisfied, and revenue is recognized ratably over the subscription period or over the amortization period of material rights. Deferred revenue is reflected net of a related deferred allowance for subscription cancellations (the “deferred allowance”) of $5,614 and $5,170 at December 31, 2019 and September 30, 2020 (unaudited), respectively. The deferred allowance represents the portion of the allowance for subscription cancellations associated with deferred revenue.

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

For the three months ended

September 30, 2020

(unaudited)


Balance

Net Change
Allowance balance, July 1

$
(7,669)


Allowance balance, September 30

(7,567)


Change in allowance

$
(102)
Deferred allowance balance, July 1

5,335

Deferred allowance balance, September 30

5,170


Change in deferred allowance

165
Net amount charged to revenue

$
63

For the three months ended

September 30, 2019

(unaudited)


Balance


Net Change
Allowance balance. July 1

$
(4,845)


Allowance balance, September 30

(5,500)


Change in allowance

$
655
Deferred allowance balance, July 1

3,720


Deferred allowance balance, September 30

4,198


Change in deferred allowance

(478)
Net amount charged to revenue

$
177

For the nine months ended

September 30, 2020

(unaudited)


Balance


Net Change
Allowance balance. January 1

$
(7,515)


Allowance balance, September 30

(7,567)


Change in allowance

$
52
Deferred allowance balance, January 1

5,614


Deferred allowance balance, September 30

5,170


Change in deferred allowance

444
Net amount charged to revenue

$
496

For the nine months ended

September 30, 2019

(unaudited)


Balance


Net Change
Allowance balance. January 1

$
(5,527)


Allowance balance, September 30

(5,500)


Change in allowance

$
(27)
Deferred allowance balance, January 1

4,858


Deferred allowance balance, September 30

4,198


Change in deferred allowance

660
Net amount charged to revenue

$
633

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

As of December 31,

As of September 30,

2019

2020




(unaudited)
Deferred revenue, current

$
191,745

$
185,445
Deferred revenue, non-current

14,046

12,095
Total

$
205,791

$
197,540

For the three months ended

For the nine months ended

September 30,

September 30,

2020

2019

2020

2019

(unaudited)
Changes to deferred revenue:












Beginning balance

$
198,437

$
179,351

$
205,791

$
178,703
Additional amounts deferred

93,708

82,844

266,870

236,481
Revenue recognized

(94,605)

(82,439)

(275,121)

(235,428)
Ending balance

$
197,540

$
179,756

$
197,540

$
179,756

~~Contract costs~~

Deferred sales commissions earned by the Company’s sales force and certain sales incentive programs and vendor referral agreements are considered incremental and recoverable costs of obtaining a contract with a customer. An asset is recognized for these incremental contract costs and reflected as deferred commissions in the consolidated balance sheets. These contract costs are amortized on a straight-line basis over a period consistent with the transfer of the associated product and services to the customer, which is generally three years. Amortization of these costs are included in selling and marketing expense in the 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 no impairment losses recorded for the periods presented.

~~The table provides information about the changes to contract cost balances as of and for the following periods:~~

For the three months ended

For the nine months ended

September 30,

September 30,

2020

2019

2020

2019

(unaudited)
Deferred commissions:












Beginning balance

$
10,390

$
8,760

$
11,196

$
8,830
Additions

1,876

1,884

4,570

4,950
Amortization

(1,894)

(1,560)

(5,394)

(4,696)
Ending balance

$
10,372

$
9,084

$
10,372

$
9,084

Payment terms

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

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Cost of Revenues

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

Reimbursable Costs

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

~~Research and Development~~

Research and development costs consist primarily of personnel and related expenses for research and development activities including salaries, benefits and other compensation. Research and development costs are expensed as incurred in accordance with ASC 730, ~~Research and Development,~~ ~~and are included in the consolidated statements of comprehensive income (loss).~~

~~Foreign Currency~~

The Company transacts business in various foreign currencies. Management has concluded that the local country’s currency is the functional currency of its foreign operations. Consequently, operating activities outside the U.S. are translated into U.S. Dollars using average exchange rates, while assets and liabilities of operations outside the U.S. are translated into U.S. Dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are included in stockholders’ (equity) deficit as a component of accumulated other comprehensive loss in the consolidated balance sheets. Related periodic movements in exchange rates are included in other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).

Income Taxes

On July 27, 2020, the Company’s ~~S-corporation~~S-Corporation election (the “S ~~election”~~Election”) was terminated by the Company’s stockholders in connection with the Offering. As a result, Vertex ~~will now be taxed~~became taxable at the corporate level as a ~~C-corporation~~C-Corporation for U.S federal and state income tax purposes. In connection with the S ~~election~~Election termination, the the Company entered into an agreement with the ~~S-corporation~~S-Corporation stockholders pursuant to which the Company has indemnified them for unpaid income tax liabilities and may be required to make future payments in material amounts to them attributable to incremental income taxes resulting from an adjustment to ~~S-corporation~~S-Corporation related taxable income ~~that arises after the effective date of the S election termination~~ (the “Tax Sharing Agreement”). In addition, the Tax Sharing Agreement indemnifies the ~~S-corporation~~S-Corporation stockholders for any interest, penalties, losses, costs or expenses arising out of any claim under the agreement. Correspondingly, the ~~S-corporation~~S-Corporation stockholders have indemnified the Company with respect to unpaid tax liabilities (including interest and penalties) ~~to the extent that such unpaid tax liabilities are~~ attributable to a decrease in ~~S-corporation~~S-Corporation stockholders’ taxable income ~~for any period~~ and a corresponding increase in our taxable income as a C-Corporation for any period.

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Prior to July 27, 2020, as Vertex was taxed as an ~~S-corporation~~S-Corporation for U.S. federal and certain states income tax purposes, ~~and for most states,~~ net income or loss was allocated to ~~the stockholders~~ and ~~was~~ included on ~~their individual~~the income tax ~~returns.~~returns of the S-Corporation stockholders. Historically, the Company distributed amounts to the S-Corporation stockholders to satisfy their tax liabilities resulting from allocated net income or loss. ~~In certain states,~~ Vertex was taxed at the corporate ~~level.~~level in those states where the S-Corporation status was not recognized or where the state imposed a tax on an S-Corporation. Accordingly, the income tax provision or benefit was based on taxable income allocated to these states. In certain foreign jurisdictions, Vertex subsidiaries were taxed at

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the corporate ~~level. Similar to states,~~level, and the income tax provision or benefit iswas based on taxable income sourced to these foreign jurisdictions.

~~Certain foreign subsidiaries in which we own~~

Supplemental Cash Flow Disclosures

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


	For the six months ended
	June 30,
	2021		2020

	(unaudited)
Cash paid for interest	$	119	$	1,360
Cash paid for income taxes, net of refunds	$	966	$	490
Operating cash flows from operating leases	$	2,701	$	—

Non-cash investing and financing activities:
Purchase commitment and contingent consideration liabilities	$	12,736	$	14,344
Remeasurement of options for redeemable shares	$	—	$	29,879
Leased assets obtained in exchange for new finance lease liabilities	$	173	$	—

Recently Issued Accounting Pronouncements

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

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases. This standard amends several of aspects of lease accounting, including requiring lessees to recognize operating leases with a initial term greater than ~~50%~~one year on their balance sheet as a right-of-use asset, and a corresponding lease liability, measured at the present value of the ~~equity by measure of vote or value are treated as controlled foreign companies (“CFCs”)~~future minimum lease payments. The standard is effective for U.S. federal income tax purposes and most states under the IRS foreign tax regulations. The income and loss from these entities is reported on the Company’s U.S. federal and some state income tax returns when the foreign earnings are repatriated or deemed to be repatriated to the U.S. In conjunction with the termination of the S election, certain direct and indirect wholly-owned foreign subsidiaries that were previously treated as disregardedpublic entities for ~~U.S. federal income tax purposes~~fiscal years and ~~most states under the Internal Revenue Service (“IRS”) “check-the-box” regulations, “unchecked-the-box” to become regarded~~interim periods beginning after December 15, 2018. The standard is effective for all other entities for fiscal years beginning after December 15, 2021, and as a result, became CFCs. Prior to these elections, the income and loss from these entities was reported on the Company’s U.S. federal and most state income tax returns in addition to being reported on a foreign jurisdiction tax return regardless of whether or not the earnings were repatriated.interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted.

The Company ~~records deferred income taxes~~adopted ASU No. 2016-02 on January 1, 2021 using the ~~liability method.~~modified retrospective transition method, which did not require the Company to adjust comparative periods. The ~~Company recognizes deferred tax~~Company’s lease assets and lease liabilities ~~for~~are recognized on the lease commencement date in an amount that represents the present value of future ~~tax consequences of events that have been previously recognized in the~~lease payments. The Company’s ~~consolidated financial statements and tax returns. The measurement of deferred tax assets and liabilities~~incremental borrowing rate, which is based on ~~provisions~~information available at the adoption date for existing leases and the commencement date for leases commencing after the adoption date, is used to determine the present value of lease payments.

The Company elected the "package of three" practical expedients permitted under the transition guidance, which allows (i) a carry forward of the ~~enacted tax law. The effects~~historical lease classification conclusions, (ii) management to assess whether a contract is or contains a lease, and (iii) the retention of ~~future changes in tax laws or rates are not anticipated. A valuation allowance is~~initial direct costs for any leases that exist prior to adoption of the new standard.

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As a result of the adoption of ASC 842 on January 1, 2021, the Company recorded ~~when it is more likely than not that some or all~~both operating lease right-of-use assets of $24,004 and operating lease liabilities of $32,562. An adjustment to retained earnings of $508, net of the deferred tax ~~assets will not be realized.~~ impact, was also recorded. The adoption of ASC 842 had an immaterial impact on the condensed consolidated statement of comprehensive loss for the three and six months ended June 30, 2021, and the condensed consolidated cash flow statement for the six months ended June 30, 2021. The adoption of this standard also resulted in a change in the naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases within property and equipment, with corresponding short-term and long-term debt liabilities being presented as “Current portion of finance lease liabilities” and “Finance lease liabilities, net of current portion,” respectively. See Note 7 for further information.

The Company ~~records uncertain tax positions~~does not recognize leases with an initial term less than one year (“short-term leases”) on its condensed consolidated balance sheets, and recognizes such lease payments in ~~accordance~~the condensed consolidated statements of comprehensive loss on a straight-line basis over the lease term. Leases with ~~ASC 740,~~ an option to extend the related lease term or terminate early are reflected in the lease term when it is reasonably certain that the Company will exercise such options.

Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”) which replaces the existing incurred loss impairment model with an expected credit loss model and requires financial assets, including trade receivables, to be measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, for business entities that are public and meet the definition of an SEC filer (excluding smaller reporting companies), and after December 15, 2022 for all other entities. The Company adopted this standard effective January 1, 2021, and this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

~~Income Taxes~~Measurement of Credit Losses on Financial Instruments, on(“ASU 2016-13”) which replaces the ~~basis of a two-step process whereby: (i) management determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position,~~existing incurred loss impairment model with an expected credit loss model and ~~(ii) for those tax positions that meet the more likely than not recognition threshold, management recognizes the largest amount of tax benefit that is greater than 50 percent likely~~requires financial assets, including trade receivables, to be realized upon ultimate settlement with the related tax authority. The impact as a result of the application of ASC 740 is reflected in the consolidated financial statements. The Company assesses its income tax positions and records tax benefits or expense based upon management’s evaluation of the facts, circumstances, and information availablemeasured at amortized cost to be presented at the ~~reporting date.~~

The Company recorded a $32,440 deferred tax asset during the three months ended September 30, 2020 as a result of the conversion from an S-corporation to a C-corporation. The deferred tax asset is primarily due to future stock-based compensation deductions for tax purposes resulting from SARs that were previously issued by the Company, converted to options and immediately exercised upon the effective date of the Offering. The exercise of these options is projected to result in a net operating loss for the C-corporation short tax year beginning July 27, 2020 and ending December 31, 2020, for which it is more likely than not the Company will realize this benefit within the next several tax years. Based on Management’s evaluation of the positive and negative evidence, it is more likely than not that the Company will realize these benefits on future U.S. tax returns.

~~Total Comprehensive Income (Loss)~~

Total comprehensive income (loss) consists of net (loss) income and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. GAAP are recorded as elements of stockholders’ equity (deficit) but are excluded from net income. Other comprehensive income (loss) is comprised solely of foreign currency translation adjustments and revaluations.

~~Earnings Per Share (“EPS”)~~

The Company has two classes of common stock outstanding and thus calculates EPS following the two-class method. This method allocates earnings for the respective periods between the two classes of common stock in proportion to the weighted average shares outstanding for each class of common stock as a percentage of total weighted average shares of both classes of common stock outstanding. Neither the Class A nor Class B common stock has any liquidity or dividend preferences and are both consideredamount expected to be ~~participating securities. Basic and diluted net (loss) income per share attributable~~

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to common stockholders is calculated using the treasury stock method. The basic net (loss) income per share attributable to Class A common stockholders includes RSAs, RSUs and ESPP shares once vesting or purchase contingencies are resolved and the related shares are deemed to be outstanding. The diluted net (loss) income per share attributable to Class A common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase shares of Class A common stock, RSAs and RSUs, and ESPP shares for which the Company has received payments for are considered common stock equivalents.

~~In accordance with ASC 260,~~ ~~Earnings Per Share~~, the historical EPS was retrospectively restated similar to the treatment of a stock split to reflect the Share Exchange for all periods presented prior to the Offering as management concluded that there was no economic value attributable to the exchange of shares in connection with the Recapitalization. Class A common stock issued in connection with the Offering are reflected in the weighted average share calculation from their issuance date.

~~Unaudited Pro Forma Income Taxes~~

Effective July 27, 2020, the Company converted to and will be taxed as a C-corporation for U.S. income tax purposes. Accordingly, a pro forma income tax provision has been disclosed as if the Company was a taxable corporation for the three and nine months ended September 30, 2020. The Company has computed pro forma entity level income tax expense using an estimated effective tax rate of approximately 25% for these periods, inclusive of all applicable U.S. federal, state, local and foreign income taxes.

~~Unaudited Pro Forma Earnings Per Share~~

The Company has presented pro forma earnings per share for the three and nine months ended September 30, 2020 to reflect the pro forma adjustment to income taxes resulting from the conversion to a C-corporation effective July 27, 2020.

For the three months ended

For the nine months ended

September 30,

September 30,

Class A common stock:

2020

2020

(unaudited)

Numerator:





Pro forma net loss attributable to all stockholders

$
(38,695)

$
(82,674)

Class A stock as a percentage of total shares outstanding

13.08
%

4.84
%
Pro forma net loss attributable to Class A stockholders

$
(5,062)

$
(4,004)

Denominator:





Weighted average Class A common stock, basic and diluted

18,124

6,129

Pro forma net loss per Class A share, basic and diluted

$
(0.28)

$
(0.65)

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For the three months ended

For the nine months ended

September 30,

September 30,

Class B common stock:

2020

2020

(unaudited)

Numerator:





Pro forma net loss attributable to all stockholders

$
(38,695)

$
(82,674)

Class B stock as a percentage of total shares outstanding

86.92
%

95.16
%
Pro forma net loss attributable to Class B stockholders

$
(33,633)

$
(78,670)

Denominator:





Weighted average Class B common stock outstanding, basic and diluted

120,417

120,417

Pro forma net loss per Class B share, basic and diluted

$
(0.28)

$
(0.65)

~~Supplemental Cash Flow Disclosures~~

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

For the nine months ended

September 30,


2020

2019

(unaudited)
Cash paid for:




Interest

$
1,912

$
1,388
Income taxes

$
522

$
526
Non-cash investing and financing activities:




Acquisition purchase commitment liability at acquisition date

$
14,344

$
—
Equipment acquired through capital leases

$
826

$
1,904
Remeasurement of options for redeemable shares

$
51,833

$
762
Conversions of SAR's in connection with the Offering

$
128,870

$
—
Exchange of Amended Options in connection with the Offering

$
69,177

$
—

~~Recently Issued Accounting Pronouncements~~

~~In February 2016, the FASB issued~~collected. ASU ~~No. 2016-02,~~ ~~Leases~~. This standard amends several of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset, and a corresponding lease liability, measured at the present value of the future minimum lease payments. The standard2016-13 is effective for ~~public entities for fiscal years~~annual periods, and interim periods within those years, beginning after December 15, ~~2018,~~2019, for business entities that are public and meet the definition of an SEC filer (excluding smaller reporting companies), and after December 15, ~~2020~~2022 for all other ~~companies, with early adoption permitted.~~entities. The Company ~~intends to adopt~~adopted this standard effective January 1, 2021, ~~using the modified retrospective transition method~~ and therefore will not restate comparative periods. The Company expects to elect the "package of three" practical expedients permitted under the transition guidance, which allows (i) a carry forward of the historical lease classification conclusions, (ii) management’s assessment on whether a contract is or contains a lease, and (iii) the initial direct costs for any leases that exist prior to

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~~adoption of the new standard. The Company is currently evaluating the impact~~ this guidance will have on the Company’s consolidated financial statements. While the Company has not yet quantified the impact, resulting adjustments are expected to materially increase total assets and total liabilities relative to such amounts reported prior to adoption, butdid not have a material impact on the Company’s condensed consolidated ~~statements of comprehensive income (loss) or consolidated statements of cash flows.~~financial statements.

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments—Credit Losses (Topic 326)~~: Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”) which replaces the existing incurred loss impairment model with an expected credit loss model and requires financial assets, including trade receivables, to be measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, for business entities that are public and meet the definition of an SEC filer (excluding smaller reporting companies), and after December 15, 2022 for all other entities. The Company ~~has elected to delay adoption of~~adopted this standard effective January 1, 2021, and this guidance ~~until January 1, 2021. The implementation of ASU 2016-13 is~~did not ~~expected to~~ have a material impact on the Company’s condensed consolidated financial ~~position.~~statements.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment~~Income Taxes, (“ASU 2017-04”) to eliminate step two of the goodwill impairment test requiring a hypothetical purchase price allocation. Goodwill impairment, if any, is determined by comparing the reporting unit’s fair value to its carrying value. An impairment loss is recognized in an amount equal to the excess of the reporting unit’s carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, for business entities that are public and meet the definition of an SEC filer (excluding smaller reporting companies), and after December 15, 2022 for all other entities. The Company has adopted this guidance effective as of January 1, 2020.

In December 2019, the FASB issued ASU ~~Update~~ No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, (“ASU 2019-12”) which simplifies the accounting for income taxes. The guidance in ASU 2019-12 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2020, for business entities that are public, and after December 15, 2021, including interim periods within those annual periods, for all other entities, with early adoption permitted. The Company ~~will adopt~~adopted this standard effective January 1, 2021, and this guidance ~~on January 1, 2021. The Company is currently evaluating the~~did not have a material impact ~~this guidance will have~~ on the Company’s condensed consolidated financial statements.

Risks and Uncertainties

~~In December 2019, a novel strain of coronavirus (“COVID-19”) appeared.~~ In March 2020, the World Health Organization declared the outbreak of ~~COVID-19~~coronavirus disease 2019 (“COVID-19”) to be a pandemic. The COVID-19 pandemic is ~~having~~continuing to have widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. To protect the health and well-being of Company employees and customers, substantial modifications were made to employee travel policies, and our offices were closed, and remained closed through June 30, 2021, with employees ~~advised~~directed to work from ~~home, and~~home. In addition, conferences and other marketing events were cancelled or shifted to ~~virtual-only.~~virtual-only, and the Company continued to participate virtually through June 30, 2021. The COVID-19 pandemic has impacted, and may continue to impact, Company operations, including employees, customers and partners, and there is substantial uncertainty inregarding the nature and degree of its continued effects over time.

The Company did not experience any significant reductions in sales, revenues or collections through ~~September~~June 30, ~~2020~~2021 as a result of COVID-19. The uncertainty caused by the COVID-19 pandemic could, however, impact Company billings to new customers for the remainder of ~~2020,~~2021, and may also negatively impact Company efforts to expand revenues from existing customers as they continue to evaluate certain long-term projects and budget constraints. In addition to the potential impact on sales, the Company may see delays in collections ~~over~~during 2021 as customers adjust their operating protocols to accommodate implementation of new criteria to protect the ~~coming months.~~health and well-being of their employees and customers. However, these delays are not expected to materially impact the business, and thus the Company has not recorded an additional credit losses associated with the allowance for doubtful

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accounts in connection with any delays. The

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Company believes it has ample liquidity and capital resources to continue to meet its operating needs and to service debt and other financial obligations.

The extent to which the COVID-19 pandemic impacts the business going forward will depend on numerous evolving factors that cannot reliably be predicted, including the duration and scope of the pandemic; governmental, business, and individuals’ actions in response to the pandemic; and the impact on economic activity, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business and government spending on technology as well as customers’ ability to pay for Company products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including estimated allowance for subscription cancellations, product life cycles and estimated lives of long-lived assets.

Reclassifications

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

2. ~~ACQUISITION~~REVENUE RECOGNITION

See Note 1 for a description of the Company’s revenue recognition accounting policy.

Disaggregation of revenue

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


	Three months ended				Six months ended
	June 30,				June 30,
		2021	2020			2021	2020

	(unaudited)				(unaudited)
Software subscriptions:
Software licenses	$	57,525	$	57,194	$	113,875	$	113,919
Cloud subscriptions		32,079		20,112		59,009		39,147
Software subscriptions		89,604		77,306		172,884		153,066
Services		15,334		13,965		30,290		27,450
Total revenues	$	104,938	$	91,271	$	203,174	$	180,516

Contract balances

Timing of revenue recognition may differ from the timing of invoicing customers. A receivable is recorded in the condensed consolidated balance sheets when customers are billed related to revenue to be collected and recognized for subscription agreements as there is an unconditional right to invoice and receive payment in the future related to these subscriptions. A receivable and related revenue may also be recorded in advance of billings to the extent services have been performed and the Company has a right under the contract to bill and collect for such performance. Subscription-based customers are generally invoiced annually at the beginning of each annual subscription period. Accounts receivable is presented net of an allowance for potentially uncollectible accounts and estimated cancellations of software license and cloud-based subscriptions (the “allowance”) of $9,399 and $8,592 at June 30, 2021 and December 31, 2020, respectively.

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The allowance represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations.

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


	For the six months ended		For the year ended
	June 30, 2021		December 31, 2020
	(unaudited)
Balance, beginning of period	$	77,159	$	70,367
Balance, end of period		73,130		77,159
(Decrease) increase, net	$	(4,029)	$	6,792

A contract liability is recorded as deferred revenue on the condensed consolidated balance sheets when customers are billed in advance of performance obligations being satisfied, and revenue is recognized after invoicing ratably over the subscription period or over the amortization period of material rights. Deferred revenue is reflected net of a related deferred allowance for subscription cancellations (the “deferred allowance”) of $6,267 and $6,432 at June 30, 2021 and December 31, 2020, respectively. The deferred allowance represents the portion of the allowance for subscription cancellations associated with deferred revenue.

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


	For the three months ended June 30,
	2021				2020
	Balance			Net Change	Balance			Net Change
Allowance balance, April 1	$	(8,059)			$	(7,476)
Allowance balance, June 30		(9,399)				(7,669)
Change in allowance			$	1,340			$	193
Deferred allowance balance, April 1		5,515				5,118
Deferred allowance balance, June 30		6,267				5,335
Change in deferred allowance				(752)				(217)
Net amount charged to revenues			$	588			$	(24)


	For the six months ended June 30,
	2021				2020
	Balance			Net Change	Balance			Net Change
Allowance balance, January 1	$	(8,592)			$	(7,515)
Allowance balance, June 30		(9,399)				(7,669)
Change in allowance			$	807			$	154
Deferred allowance balance, January 1		6,432				5,614
Deferred allowance balance, June 30		6,267				5,335
Change in deferred allowance				165				279
Net amount charged to revenues			$	972			$	433

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.

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The tables provide information about the balances of and changes to deferred revenue for the following periods:


	As of June 30,		As of December 31,
	2021		2020
	(unaudited)
Balances:
Deferred revenue, current	$	210,587	$	207,560
Deferred revenue, non-current		12,025		14,702
Total deferred revenue	$	222,612	$	222,262


	For the three months ended				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020

	(unaudited)				(unaudited)
Changes to deferred revenue:
Beginning balance	$	218,133	$	201,484	$	222,262	$	205,791
Additional amounts deferred		109,417		88,224		203,524		173,162
Revenues recognized		(104,938)		(91,271)		(203,174)		(180,516)
Ending balance	$	222,612	$	198,437	$	222,612	$	198,437

Contract costs

Deferred sales commissions earned by the Company’s sales force and certain sales incentive programs and vendor referral agreements are considered incremental and recoverable costs of obtaining a contract with a customer. An asset is recognized for these incremental contract costs and reflected as deferred commissions in the condensed consolidated balance sheets. These contract costs are amortized on a straight-line basis over a period consistent with the transfer of the associated product and services to the customer, which is generally three years. Amortization of these costs are included in selling and marketing expense in the condensed consolidated statements of comprehensive loss. The Company periodically reviews these contract assets to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these assets. There were 0 impairment losses recorded for the periods presented.

The table provides information about the changes to contract cost balances as of and for the following periods:


	For the three months ended				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020

Deferred commissions:	(unaudited)				(unaudited)
Beginning balance	$	11,693	$	10,563	$	11,743	$	11,196
Additions		2,135		1,630		4,193		2,694
Amortization		(2,283)		(1,803)		(4,391)		(3,500)
Ending balance	$	11,545	$	10,390	$	11,545	$	10,390

3. BUSINESS COMBINATIONS

Taxamo

On May 12, 2021, the Company acquired 95% of the outstanding equity of EVAT and its wholly owned subsidiaries (collectively “Taxamo”), a cloud-based provider of tax and payment automation for global eCommerce and marketplaces. This acquisition supports the Company’s growth strategies across eCommerce platforms and marketplaces in Europe and North America.

The preliminary purchase price for the Taxamo acquisition was $200,689 as of the acquisition date, consisting of (i) $190,153 of cash paid at closing, partially offset by $2,662 of Taxamo’s cash received in the acquisition resulting in net cash consideration at closing of $187,491, (ii) an acquisition holdback with an estimated fair value upon acquisition of $502, and (iii) an option to purchase from and an option for the remaining shareholder to sell, the remaining 5% of the outstanding equity of EVAT (the “Option”) at a fixed amount between August and December 2021 for an estimated fair value of $10,034. The Company recorded the estimated fair value of the Option payment amount in purchase commitment and contingent consideration liabilities, current on the condensed consolidated balance sheets. Cash consideration was funded by the Company from available cash on hand.

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The following table summarizes the preliminary purchase price for Taxamo:


	May 12, 2021
	(unaudited)
Cash paid to Taxamo sellers at closing	$	190,153
Fair value of acquisition holdbacks		502
Fair value of purchase commitment liability		10,034
Total	$	200,689

The Company’s accounting for the Taxamo acquisition is preliminary. The purchase price is subject to purchase price adjustments related to the final determination of Taxamo’s cash, net working capital, and taxes as of May 12, 2021. The Taxamo acquisition was accounted for as a business combination. The total preliminary purchase price was allocated to the net assets acquired based on management’s determination of their estimated fair values using available information as of the acquisition date. The excess of purchase consideration over the net assets acquired is recorded as goodwill, which primarily reflects the value of acquired technology, and the existence of intangible assets not recognized under U.S. GAAP such as the value of the assembled workforce and other market factors. The Company expects that goodwill associated with the Taxamo acquisition will not be deductible for tax purposes. The preliminary values recorded, which are reflected in the table below, will be adjusted during the Measurement Period as more detailed analyses are performed and further information becomes available regarding the fair values of these amounts on the acquisition date. The Company does not have a preliminary estimate of identifiable intangible assets as of June 30, 2021. A third-party expert has been engaged to assist in the valuation of identifiable intangible assets as part of the acquisition. Any subsequent adjustments to the preliminary values not associated with determination of their fair values on the acquisition date will be recorded in the condensed consolidated statements of comprehensive loss in the period in which the change is identified. Taxamo’s business and product offerings are being integrated into the Company's one operating segment.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed as recorded in the Company’s condensed consolidated balance sheet as of the acquisition date:


	May 12, 2021
	(unaudited)
Cash and cash equivalents	$	2,441
Funds held for customers		221
Accounts receivable		7,783
Prepaid expenses and other current assets		908
Property and equipment		46
Goodwill		201,580
Accounts payable		(304)
Accrued expenses		(6,615)
Accrued compensation		(3,939)
Deferred other income		(1,432)
Total	$	200,689

The transaction costs associated with the acquisition were $4,522 and were recorded in other operating expense, net for the three and six months ended June 30, 2021.

The Company has included the financial results of Taxamo in the condensed consolidated statement of comprehensive loss from the date of acquisition. As the Taxamo acquisition did not have a material impact on the Company’s reported revenue or net income for the three and six months ended June 30, 2021, pro forma financial information has not been presented.

Tellutax

On January 25, 2021, the Company executed an Asset Purchase Agreement with Tellutax LLC, a Portland, Oregon-based edge computing technology startup (“Tellutax”), to acquire substantially all of Tellutax’s assets (the “Tellutax Acquisition”). Cash consideration paid for the acquisition was $6,100, funded through cash on hand, and serves to

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strengthen the Company’s technology roadmap and hybrid cloud strategy enabling it to better serve customers in an increasingly hyper-connected environment. The Tellutax Acquisition entitles the sellers to contingent consideration if sales targets are met during a period of time following the acquisition.

The Tellutax Acquisition was accounted for as a business combination. The total purchase price was allocated to the net assets acquired based on management’s determination of their estimated fair values using available information as of the acquisition date. The excess of purchase consideration over the net assets acquired is recorded as goodwill, which primarily reflects the value of expected future synergies, the existence of intangible assets not recognized under U.S. GAAP such as the value of the assembled workforce and other market factors. The Company expects that goodwill associated with the Tellutax Acquisition will be deductible for tax purposes. The fair values of these amounts on the acquisition date, which are reflected in the table below, have been finalized. Any subsequent adjustments to these values will be recorded in the condensed consolidated statements of comprehensive loss in the period in which the change is identified.

The purchase price for the Tellutax Acquisition includes cash paid at closing plus an estimated fair value of contingent consideration of $2,200 (the “Tellutax Contingent Consideration”) as of January 25, 2021. The following table presents the allocation of the purchase price recorded in the condensed consolidated balance sheet as of the acquisition date:


	January 25, 2021
	(unaudited)
Capitalized Software - Developed technology	$	3,600
Goodwill		4,700
Total	$	8,300

The Company has included the financial results of Tellutax in the condensed consolidated statement of comprehensive loss from the date of acquisition. As the Tellutax Acquisition did not have a material impact on the Company’s reported revenue or net income for the three and six months ended June 30, 2021, pro forma financial information has not been presented.

The fair value of developed technology was valued using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. The significant assumptions used in the developed technology valuation included forecasted results and discount rate.

The fair value of Tellutax Contingent Consideration is estimated using a Monte Carlo Simulation to compute the expected cash flows from earn-out payments specified in the purchase agreement. The Tellutax Contingent Consideration is based on 3 potential earn-out payments determined by periodic revenue achievements over a thirty-month period. Earn-out payments have 0 maximum limit, but if certain targets are not met, there will be 0 earn-out payment for the applicable measurement period. The estimated fair value of the Tellutax Contingent Consideration recorded as of the acquisition date was $2,200, see Note 4 for information on recurring fair value adjustments after the acquisition date.

Systax

On January 7, 2020, the Company acquired a 60% controlling interest in Systax, a provider of Brazilian transaction tax content and software. Cash consideration for the purchase was ~~$12,374 and was funded through borrowings under the revolving line of credit (the “Line of Credit”).~~$12,374. This acquisition ~~provides~~provided the Company with full access to a sizeable database of Brazilian tax content that is critical to supporting its global multi-national customers’ business expansion into Brazil.

The Company has a contractual purchase commitment to acquire the remaining 40% equity interest from the original Systax Quotaholders incrementally between 2021 through 2024. Future purchase commitment payments for these incremental acquisition amounts are based on a multiple of Systax revenue and earnings before interest, depreciation, amortization and income taxes (“EBITDA”) performance at the end of 2020, 2022 and 2023, whereby the Company will have full ownership after the final ~~payment~~transaction in 2024. Management ~~has~~ determined these future purchase commitments to be a forward contract, resulting in the Company being required to estimate and record an estimated future purchase commitment amount (the “Purchase Commitment Liability”) in connection with recording the initial purchase. The fair value of the Purchase Commitment Liability ~~is estimated to be $14,344~~ at the acquisition date ~~based on information available at that time.~~was finalized to be $12,592. This amount will fluctuate

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as a result of changes in foreign currency ~~translation adjustments~~exchange rates and is reflected in ~~future acquisition~~purchase commitment and contingent consideration liabilities in the condensed consolidated balance ~~sheet~~sheets, with such changes in exchange rates being reflected in other comprehensive income or loss in the condensed consolidated statements of comprehensive loss. The Purchase Commitment Liability was $9,750 at ~~September 30, 2020. Any adjustments to~~December 31, 2020 reflecting the ~~acquisition date fair value~~impacts of ~~this commitment will be adjusted to goodwill during the Measurement Period.~~such fluctuations in foreign currency exchange rates. Adjustments to the settlement date value that arise as a result of remeasurement ~~after the acquisition date~~at future balance sheet dates will be recorded as interest expense related to financing costs in the consolidated statements of comprehensive income ~~(loss)~~or loss in the period the change is identified. NaN such adjustments have been recorded through June 30, 2021.

The Company acquired an additional 5% equity interest of Systax through a Purchase Commitment Liability payment of $788 during the three and six months ended June 30, 2021, increasing the Company’s equity interest in Systax to 65% and reducing the remaining Purchase Commitment Liability to $9,334 at June 30, 2021.

4. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company has investments in money market accounts, which are included in cash and cash equivalents on the condensed consolidated balance sheets. Fair value inputs for these investments are considered Level 1 measurements within the Fair Value Hierarchy since money market account fair values are known and observable through daily published floating net asset values.

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


	Fair Value Measurements Using
As of June 30, 2021	Fair Value		Prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Money market funds	$	17,201	$	17,201	$	-	$	-
Tellutax Contingent Consideration	$	(2,276)	$	-	$	-	$	(2,276)

	Fair Value Measurements Using
As of December 31, 2020	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	$	265,270	$	265,270	$	-	$	-

Tellutax Contingent Consideration

As discussed in Note 3, the Tellutax Contingent Consideration is based on 3 potential earn-out payments determined by periodic revenue achievements over a thirty-month period. Such estimate represents a recurring fair value measurement with significant unobservable inputs, which management considers to be Level 3 measurements under the Fair Value Hierarchy. The significant assumptions used in these calculations included forecasted results and the estimated likelihood for each performance scenario.

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The estimated fair value of the Tellutax Contingent Consideration was determined using a Monte Carlo Simulation valuation as of the acquisition date of January 25, 2021. Management performed a present value analysis as of June 30, 2021 using the outputs of the Monte Carlo Simulation as of the acquisition date, the term of 4.3 years as of the acquisition date was reduced to 3.9 years as of June 30, 2021 to reflect the passage of time, resulting in a $(76) fair value adjustment increasing the carrying value of the Tellutax Contingent Consideration liability at June 30, 2021 which was recorded in other operating expense, net for the three and six months ended June 30, 2021. Management used this approach as there were no significant changes identified in forecasted results or the estimated likelihood for each performance scenario since the acquisition date which could result in significant changes to potential earn-out payments.

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


		June 30, 2021	January 25, 2021
Liability		Fair Value		Fair Value	Valuation Technique	Unobservable Inputs
Tellutax Contingent Consideration	$	(2,276)	$	(2,200)	Monte Carlo Simulation	Revenue volatility	95.0	%
						Revenue discount rate	20.3	%
						Term (in years)	4.3

Changes in the fair value of Level 3 Tellutax Contingent Consideration during the six months ended June 30, 2021 were as follows:


	Tellutax Contingent Consideration
Balance, January 1, 2021	$	—
Acquisition of Tellutax		(2,200)
Fair value adjustments		(76)
Foreign currency translation adjustments		—
Balance, June 30, 2021	$	(2,276)

Assets and Liabilities for Which Fair Value is Only Disclosed

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

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

Non-recurring Fair Value Measurements

The Taxamo Acquisition on May 12, 2021 and the Tellutax Acquisition on January 25, 2021, were accounted for as a business ~~combination~~combinations and the total ~~preliminary~~ purchase price for each acquisiton was allocated to the net ~~tangible~~ assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the excess being recorded as goodwill. The net tangible assets acquired and liabilities assumed were valued at their respective carrying amounts as of the acquisition date pending the receipt of additional information during the Measurement Period. The contractual value of accounts receivable was $867 at acquisition date. The excess of the purchase consideration over the net tangible assets is recorded as goodwill and primarily reflects the value of the tax content database, the customer list, the assembled workforce and expected future synergies. Goodwill is deductible for tax purposes. The preliminary values recorded will be adjusted during the Measurement Period as more detailed analyses are performed and further information becomes available regarding the fair values of these amounts as of the acquisition date. Any such adjustments may be material. Subsequent adjustments to these values not associated with determination of their fair values on the acquisition date would be recorded in the consolidated statements of comprehensive income (loss) in the period the change is identified.values. See Note 3.

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~~The following table presents the preliminary purchase price allocation recorded in the Company’s consolidated balance sheet as of the acquisition date (unaudited):~~

Initial Purchase
Net Assets and Assumed Liabilities

Price Allocation

(unaudited)
Cash and cash equivalents

$
56
Accounts receivable

867
Property and equipment

48
Other assets

18
Goodwill

26,124
Accounts payable and accrued expenses

(228)
Accrued compensation

(162)
Other liabilities

(5)
Total consideration at acquisition date

$
26,718

The Company has included the financial results of Systax in the consolidated statement of comprehensive income (loss) from the date of acquisition in accordance with ASC 810 due to the Company having a controlling financial interest in Systax. Systax revenue and net loss for the three months ended September 30, 2020 (unaudited) reflected in the consolidated statement of comprehensive income (loss), after elimination of intercompany activity, were $915 and $(242), respectively. Systax revenue and net loss for the nine months ended September 30, 2020 (unaudited) reflected in the consolidated statement of comprehensive income (loss), after elimination of intercompany activity, were $3,002 and $(523), respectively. As the Systax acquisition did not have a material impact on the Company’s reported revenue or net loss for the three and nine months ended September 30, 2020, pro forma financial information has not been presented. The transaction costs associated with the acquisition were approximately $504 and were recorded in general and administrative expense in the year ending December 31, 2019.

3.5. PROPERTY AND EQUIPMENT

The major components of property and equipment are as follows:


	As of December 31,		As of September 30,		As of June 30,		As of December 31,
	2019		2020		2021		2020
			(unaudited)		(unaudited)
Leasehold improvements	$	20,887	$	20,890	$	21,017	$	20,907
Equipment		40,598		41,918		41,485		41,410
Computer software acquired		11,232		11,391
Internal-use software developed
Cloud-based services		51,442		59,518
Computer software purchased						11,684		11,620
Internal-use software developed:
Cloud-based customer solutions						67,037		65,423
Internal systems and tools		23,957		25,083		28,889		25,349
Furniture and fixtures		7,451		7,670		7,679		7,674
Automobiles		27		58
In-process internal-use software		809		4,164		12,636		3,304
		156,403		170,692		190,427		175,687
Less accumulated depreciation		(101,676)		(114,757)		(128,816)		(119,130)
Property and equipment, net	$	54,727	$	55,935	$	61,611	$	56,557

Depreciation expense for property and equipment, excluding all internal-use software developed and ~~capital~~finance leases, was ~~$1,970~~$1,902 and ~~$1,707~~$1,773 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019 (unaudited),~~2020, respectively, and ~~$5,918~~$3,808 and ~~$4,495~~$3,948 for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019 (unaudited), respectively.~~respectively Depreciation for property and equipment,

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excluding ~~cloud-based~~ internal-use software developed for cloud-based customer solutions, is reflected in depreciation and amortization in the condensed consolidated statements of comprehensive ~~income (loss).~~loss.

~~Assets~~Finance lease amortization was $240 and $464 for the three and six months ended June 30, 2021, respectively, and depreciation expense for assets held under capital leases was $167 and $335 for the three and six months ended June 30, 2020, respectively. Finance lease amortization and depreciation expense for assets held under capital leases are included in depreciation and amortization expense in the condensed consolidated statements of ~~$1,455 and $1,769,~~comprehensive loss. Assets under finance leases of $1,070, net of accumulated ~~depreciation~~amortization of ~~$627 and $1,140,~~$464, at ~~December 31, 2019 and September~~June 30, ~~2020 (unaudited), respectively,~~2021 are included in property and equipment in the condensed consolidated balance sheets. ~~Depreciation expense for assets held~~Assets under capital leases ~~was $178 and $168 for the three months ended September 30,~~of $1,360, net of accumulated depreciation of $1,370, at December 31, 2020, ~~and 2019 (unaudited), respectively, and $513 and $397 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively. Depreciation expense for assets held under capital leases is~~are included in ~~depreciation~~property and ~~amortization expense~~equipment in the condensed consolidated ~~statements of comprehensive income (loss).~~balance sheets.

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


	As of December 31,		As of September 30,		As of June 30,		As of December 31,
	2019		2020		2021		2020
			(unaudited)		(unaudited)
Internal-use software developed	$	75,399	$	84,601	$	95,926	$	90,772
Less accumulated depreciation		(53,852)		(62,028)		(71,868)		(65,090)
		21,547		22,573		24,058		25,682
In-process internal-use software		809		4,164		12,636		3,304
Internal-use software developed, net	$	22,356	$	26,737	$	36,694	$	28,986

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


	For the nine months ended September 30,				For the six months ended June 30,		For the six months ended December 31,
	2020		2019		2021		2020

	(unaudited)				(unaudited)		(unaudited)
Cloud-based solutions	$	12,574	$	7,041
Cloud-based customer solutions					$	8,232	$	7,731
Internal systems and tools		1,463		2,971		6,253		939
Total	$	14,037	$	10,012	$	14,485	$	8,670

In-process internal-use software developed is not depreciated until it is available for its intended use. Depreciation expense for internal-use software ~~used~~developed for cloud-based customer solutions for the three months ended ~~September~~June 30, 2021 and 2020, was $2,669 and ~~2019 (unaudited) was $2,183 and $1,899,~~$2,453, respectively, and ~~$6,647~~was $5,345 and ~~$6,118~~$4,464 for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, respectively, and ~~2019 (unaudited), respectively. Depreciation expense for internal-use software used for cloud-based solutions~~ is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive ~~income (loss).~~loss.

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Depreciation expense for internal-use software ~~utilized~~developed for internal systems and tools for the three months ended ~~September~~June 30, 2021 and 2020, was $736 and ~~2019 (unaudited) was $587 and $436,~~$565, respectively, and ~~$1,678~~was $1,433 and ~~$1,636~~$1,091 for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, respectively, and ~~2019 (unaudited), respectively. Depreciation expense for internal-use software utilized for internal systems and tools~~ is included in depreciation and amortization in the condensed consolidated statements of comprehensive ~~income (loss).~~loss.

Research and development costs associated with internal-use software were $3,119 and $2,778 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $7,119 and $8,639 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively.

4.6. CAPITALIZED SOFTWARE

Capitalized software includes acquired software and direct labor and related expenses for software developed for sale for new products and enhancements to existing products. ~~Software development costs capitalized for the three months~~

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~~ended September 30, 2020 and 2019 (unaudited) were $2,591 and $4,244, respectively, and $9,246 and $12,345 for the nine months ended September 30, 2020 and 2019 (audited), respectively.~~

The major components of capitalized software are as follows:


	As of December 31,		As of September 30,		As of June 30,		As of December 31,
	2019		2020		2021		2020
			(unaudited)		(unaudited)
Capitalized software	$	47,862	$	60,557	$	65,980	$	63,071
Less accumulated amortization		20,281		28,983		(38,567)		(32,217)
		27,581		31,574		27,413		30,854
In-process capitalized software		4,494		1,045		6,951		1,135
Capitalized software, net	$	32,075	$	32,619	$	34,364	$	31,989

Software development costs capitalized for the three months ended June 30, 2021 and 2020 were $2,904 and $3,558, respectively, and were $8,725 and $7,264 for the six months ended June 30, 2021 and 2020, respectively. During the six months ended June 30, 2021, an acquisition date value of $3,600 for developed technology the Company acquired in the Tellutax business combination was recorded and is reflected in in-process capitalized software as the Company undertakes necessary enhancements to integrate it with the Company’s existing software architecture.

Capitalized software amortization expense for the three months ended ~~September~~June 30, 2021 and 2020 was $3,182 and ~~2019 was $3,124 and $1,788,~~$3,022, respectively, and ~~$8,702~~was $6,350 and ~~$5,506~~$5,578 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive ~~income (loss).~~loss.

7. LEASES

5.The Company leases office space, IT equipment and office equipment. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets and lease expense is recognized over the term of these leases on a straight-line basis. The Company’s leases have remaining terms of up to 8 years.

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The following table sets forth the Company’s lease assets and liabilities and their balance sheet location as follows:



		As of June 30,
	Balance Sheet Location	2021
Lease assets:		(unaudited)
Operating lease right-of-use assets	Operating lease right-of-use assets	$	22,156
Finance lease assets	Property and equipment, net (Note 5)		1,070
Total lease assets		$	23,226

Lease liabilities:
Current:
Operating lease liabilities	Current portion of operating lease liabilities	$	3,641
Finance lease liabilities	Current portion of finance lease liabilities		271
Total current lease liabilities			3,912
Non-current:
Operating lease liabilities	Operating lease liabilities, net of current portion		26,726
Finance lease liabilities	Finance lease liabilities, net of current portion		334
Total non-current lease liabilities			27,060
Total lease liabilities		$	30,972

The major components of lease cost are as follows:


	For the three months ended June 30,		For the six months ended June 30,
	2021		2021
	(unaudited)		(unaudited)
Operating lease cost	$	1,181	$	2,350

Finance lease cost:
Amortization of lease assets		240		463
Interest on lease liabilities		3		10
Total lease cost	$	1,424	$	2,823

The weighted-average term and discount rate for leases are as follows:


	As of June 30,
	2021
	(unaudited)
Weighted-average remaining lease term (years):
Operating leases		7.0
Finance leases		1.5

Weighted-average discount rate:
Operating leases		2.3	%
Finance leases		2.3	%

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Lease liability maturities for the next five years and thereafter are as follows as of June 30, 2021:


	Operating Leases		Finance Leases

	(unaudited)
Remainder of 2021 (six months remaining)	$	2,810	$	269
2022		4,542		289
2023		4,460		60
2024		4,464		10
2025		4,382		—
Thereafter		12,531		—
Total lease payments		33,189		628
Less: Imputed interest		(2,822)		(23)
Present value of lease liabilities	$	30,367	$	605

Lease liability maturities for the next five years and thereafter under the previous lease accounting standard are as follows:


	As of December 31, 2020
		Operating Leases		Capital Leases
2021		$	5,442	$	915
2022			4,518		230
2023			4,459		—
2024			4,464		—
2025			4,382		—
Thereafter			12,531		—
Total Lease Payments		$	35,796		1,145
Less amount representing interest					(38)
Present value of minimum lease payments					1,107
Less current portion					(882)
Capital lease obligations, net of current portion				$	225

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets are as follows:


	As of June 30,		As of December 31,
	2021		2020
	(unaudited)
Goodwill	$	218,184	$	16,329
Other intangible assets, net		2,167		2,382
	$	220,818	$	18,711

The changes in the carrying amount of goodwill for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 are as follows:


Balance, January 1, 2021	$	16,329
Acquisition of Taxamo		201,580
Acquisition of Tellutax		4,700
Foreign currency translation adjustments		(4,425)
Balance, June 30, 2021, gross		218,184
Accumulated impairment losses		—
Balance, June 30, 2021, net	$	218,184

2020

(unaudited)
Balance, January 1

$
—
Acquisition of Systax, January

26,124
Foreign currency translation adjustment for the three months ended March 30

(5,893)
Foreign currency translation adjustment for the three months ended June 30

(876)
Foreign currency translation adjustment for the three months ended September 30

(688)
Balance, September 30

$
18,667

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The Company has recognized various amortizable other intangible assets in connection with acquisitions, including 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:


	As of June 30,		As of December 31,
	2021		2020
	(unaudited)
Other intangible assets
Weighted average amortization period (years)		5.5		5.5

Gross value	$	2,952	$	2,825
Accumulated amortization		(785)		(443)
Carrying value	$	2,167	$	2,382


	For the three months ended June 30, 2021
	Cost of Revenues, Software Subscriptions		Selling and Marketing Expense
Amortization of acquired intangible assets	$	66	$	86	152

	For the six months ended June 30, 2021
	Cost of Revenues, Software Subscriptions		Selling and Marketing Expense
Amortization of acquired intangible assets	$	127	$	170	297

6. 9.DEBT

~~New~~ Credit Agreement ~~(unaudited)~~

On March 31, 2020, the Company entered into a ~~new~~ credit agreement with a bank, which was subsequently amended on April 3, 2020 to permit another bank to be a party to the agreement, consisting of a $175,000 term loan (the ~~“New Term~~“Term Loan”) and a $100,000 committed line of credit (the ~~“New Line~~“Line of Credit”) (collectively, the ~~“New Credit~~“Credit Agreement”). Net proceeds from the New Term Loan after payment of financing fees of $2,904 and repayment of aggregate amounts outstanding at March 31, 2020 under the previous credit agreement term loan and line of credit of $61,656, were used to fund a portion of the $123,185 distribution made to the stockholders on May 29, 2020.

A portion of the Offering proceeds was used to repay the $175,000 ~~New~~ Term Loan in full on July 31, 2020. The Company received a refund of $468 of financing fees as a result of repayment of the New Term Loan within 90 days of execution of the New Credit Agreement, which was recorded as a reduction of deferred financing costs associated with the New Term Loan. The Company wrote off the remaining balance of deferred financing costs associated with the New Term Loan of $1,174, which was recorded as interest expense in the consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

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The ~~New~~ Line of Credit matures in March 2025 and had no0 outstanding borrowings at ~~closing~~June 30, 2021 or ~~at September 30,~~December 31, 2020. The Company has the option to select an applicable interest rate at either the bank base rate plus an applicable margin (the ~~“New Base~~“Base Rate Option”) or the LIBOR plus an applicable margin (the ~~“New LIBOR~~“LIBOR Option”). The applicable margins are determined by certain financial covenant performance as defined in the ~~New~~ Credit Agreement. At ~~September~~June 30, ~~2020,~~2021, the ~~New~~ Base Rate Option and ~~New~~ LIBOR Option applicable to Line of Credit borrowings were ~~3.75%~~3.25% and ~~2.50%~~2.00%, respectively.

The ~~New~~ Credit Agreement is collateralized by certain assets of the Company and contains financial and operating covenants. The Company was in compliance with these covenants at ~~September~~June 30, ~~2020.~~2021.

~~Credit Agreement~~

~~At December 31, 2019,~~10.STOCKHOLDERS’ EQUITY

Recapitalization

On July 28, 2020, the Company ~~had~~filed its amended and restated certificate of incorporation with the Delaware Secretary of State to: (i) effect a ~~credit agreement~~three-for-one forward stock split (the ~~“Credit Agreement”~~“Stock Split”); (ii) establish a new capital structure for the Company (the “New Capital Structure”); and (iii) effect a share exchange (the “Share Exchange”) ~~consisting of a term loan (the “Term Loan”) with an outstanding principal balance of $50,375 and a $40,000 committed Line of Credit with no outstanding borrowings. The Company had~~(collectively, the option to select an applicable interest rate at either the bank base rate plus an applicable margin (the "Base Rate Option") or the London Interbank Offered Rate (“LIBOR”) plus an applicable margin (the “LIBOR Option”“Recapitalization”). The ~~applicable margins were determined by certain financial covenant performance as defined in the Credit Agreement. At December 31, 2019, the Base Rate Option and LIBOR Option~~Stock Split resulted in ~~rates~~each one share owned by a stockholder being exchanged for three shares of 4.75% and 2.69%, respectively. The Credit Agreement was collateralized by certain assets of the Company and contained financial and operating covenants, which included limitations on the amount of dividends payable in a given period. The Company was in compliance with these covenants at December 31, 2019.

The Term Loan required quarterly principal payments over five years, with a balloon payment in November 2020. The interest rate on the Term Loan was 2.69% at December 31, 2019 as the Company selected the LIBOR Option. Term Loan outstanding amounts are reported in current portion of long-term debt and long-term debt, net of current portion, in the consolidated balance sheets. As a result of the Term Loan becoming due in November 2020, the balance outstanding of $50,375 was included in current portion of long-term debt on the consolidated balance sheet at December 31, 2019.

~~The Line of Credit was due to expire on November 1, 2020. The Company was required to pay a quarterly fee on the difference between the $40,000 maximum borrowings allowed under the Line of Credit~~common stock, and the ~~unpaid principal balance outstanding under the line at an applicable rate. The applicable rate, determined by certain financial covenant performance as defined in the Credit Agreement, was 0.20%.~~

~~Unamortized deferred financing costs~~number of $221 at December 31, 2019 are included as a reduction in current portion of long-term debt in the consolidated balance sheets. Amortization expense of deferred financing costs on the Term Loan was $44 for the nine months ended September 30, 2020. The Company wrote off the remaining unamortized deferred financing costs associated with the Term Loan of $177, which was recorded as interest expense in the consolidated statement of comprehensive income for the three and nine months ended September 30, 2020.

~~Capital Leases~~

Capital lease obligations were $1,333 and $1,509 at December 31, 2019 and September 30, 2020 (unaudited), respectively, and are included in current portion of long-term debt and long-term debt, net of current portion in the consolidated balance sheets.

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7~~. STOCKHOLDERS’ EQUITY (DEFICIT)~~

~~Termination of S-Corporation status~~

~~In connection with termination~~shares of the Company’s ~~S-corporation status effective July 27, 2020,~~common stock issued and outstanding was increased proportionately based on the ~~Company had an accumulated deficit~~Stock Split. After the Stock Split, the Share Exchange occurred, resulting in stockholders of ~~$354,291 pertaining to the S-corporation shareholders which was reclassified to additional paid~~record exchanging their existing Class A and Class B common stock (“former Class A” and “former Class B,” respectively) for newly created shares of Class A and Class B common stock (“Class A” and “Class B,” respectively) issued in ~~capital upon such termination.~~

~~Common Stock~~-28-

In Table of Contents

connection with the ~~Recapitalization,~~New Capital Structure. The effect of the ~~Company: (i) effected the three-for-one~~ Stock Split ~~which is reflected~~and Share Exchange are recognized retrospectively in the condensed consolidated financial ~~statements; (ii) established~~statements.

In connection with the New Capital ~~Structure;~~Structure, Treasury Stock was retired and ~~(iii) effected~~amounts associated with the ~~Share Exchange.~~Treasury Stock were reclassified to additional paid in capital. Thus, at June 30, 2021 and December 31, 2020, there was 0 Treasury Stock.

~~Prior~~Common Stock

During the three months ended March 31, 2021 and June 30, 2021, the Company issued 640 and 462 shares of Class A, respectively, related to the ~~Share Exchange,~~exercise of stock options, net of 356 and 219 shares, respectively, returned to the Company in lieu of payment of the exercise price and taxes due on these exercises.

During the three months ended March 31, 2021 the Company issued 5 shares of Class A in connection with the vesting of RSUs, net of 1 share returned to the Company in lieu of payment of taxes due on the vesting of these RSUs. During the three months ended June 30, 2021, 234 shares of Class A were issued in connection with the vesting of RSAs. No Class A shares were issued during the three months ended March 31, 2021 and June 30, 2021 in connection with the vesting of RSAs and RSUs, respectively.

During the three months ended June 30, 2021, a stockholder exchanged 12,100 shares of Class B for an equivalent number of shares of Class A.

At June 30, 2020, the Company had 147 shares of former Class A common stock and 120,443 shares of former Class B common stock outstanding. ~~Members~~At June 30, 2020, members of a family (the “Family”) owned ~~99.9% of~~ all 147 outstanding shares of ~~both former classes of common stock, which was comprised of 100% of the~~ former Class A common stock and 120,270 shares of the former Class B common stock. The remaining 173 shares of former Class B common stock outstanding were owned by non-Family ~~members.~~members in connection with the exercise of stock options in April 2020 for cash of $53. There were no0 dividend or liquidation preference differences between the former Class A and former Class B shares. There were common stock equivalents outstanding at June 30, 2020 held by non-Family members that entitled such holders to receive an equivalent number of former Class B shares upon exercise.

In connection with establishing the New Capital Structure in July 2020, the ~~shareholders~~stockholders authorized 450,000 shares of common stock, par value $0.001 per share, and 30,000 shares of preferred stock, par value $0.001 per share. ~~Common~~In connection with the New Capital Structure, common stock is divided into two classes, Class A with one vote per share, and Class B with ten votes per share. The rights of the holders of Class A and Class B are identical, except with respect to voting and conversion rights. Upon transfer of Class B shares to a non-Family member, such shares will automatically convert to an equivalent number of Class A shares with the respective voting rights attributable to such new shares. Authorized Class A and Class B shares are 300,000 and 150,000 shares, respectively. There are no0 dividend or liquidation preference differences between Class A and Class B.

In connection with the Share Exchange in July 2020, the Family members exchanged each share of former Class A and former Class B for the equivalent number of Class B shares established as part of the New Capital Structure. In addition, the non-Family members exchanged their former Class B shares for an equivalent number of Class A shares established as part of the New Capital Structure. NoNaN funds were exchanged in connection with the Share Exchange, and the aggregate number of shares outstanding both immediately prior to and after the Share Exchange remained the same at 120,590. In addition, common stock equivalents, all of which were held by non-Family members and which were previously exercisable into former Class B shares, became exercisable into Class A shares established as part of the New Capital Structure.

~~In April 2020, Vertex issued 173 shares of former Class B common stock in connection with the exercise of stock options by option holders~~ Historical earnings per share information for cash of $53. These shares were exchanged for Class A common stock in connection with the Recapitalization on July 28, 2020. Also on July 28, 2020, the Company sold 23,812 shares of Class A in connection withall periods presented prior to the Offering for $423,024, net of underwriting fees. Offering costs paid from these proceeds aggregated $6,222 and are reflected as a reduction of additional paid in capital in stockholders’ equity. In addition, the company issued 510 shares of Class A in connection with the exercise of stock options by option holders, net of 381 shares returnedwas retrospectively restated similar to the ~~Company in lieu~~treatment of ~~payment~~a stock split to reflect the Share Exchange as management concluded that there was no economic value attributable to such exchange of the exercise price and taxes due on these exercises. In connection with the Offering, the Company also issued an aggregate 564 shares of Class A related to the conversion of SARs into options and the immediate exercise of these options into shares, net of 860 shares returned to the Company in lieu of payment of the exercise price and taxes due on these exercises. The Company also issued 610 Class A shares in connection with the ~~exercise~~Recapitalization. See Note 11.

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Table of ~~outstanding options~~Contents

Distributions

The board of directors (the “Board”) declared and 19paid aggregate distributions pro rata to stockholders of the former Class A ~~shares in connection with RSAs granted at the Offering, which vested immediately.~~

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~~In April 2019, Vertex issued 225 shares of former~~and Class B common stock ~~in connection with the exercise~~ of ~~stock options by option holders for cash of $68, net of 51 shares that were immediately returned to Vertex upon exercise in lieu of payment of income taxes payable by the option holders.~~

At December 31, 2019 the Company repurchased shares (“Treasury Stock”) aggregating 41,910 which are carried at cost and included in Treasury Stock in the consolidated balance sheet. Such amount is comprised of 41,757 shares of former Class B common stock and 153 shares of former Class A common stock. In connection with the Recapitalization, the Treasury Stock was retired and amounts associated with the Treasury Stock were reclassified to additional paid in capital. At September 30, 2020, there was no Treasury Stock outstanding.

~~The Board declared distributions of $4,010~~$123,185 ($~~0.03~~1.02 per share) and ~~$123,185~~$4,010 ($~~1.02~~0.03 per share) during the three months ended ~~March 31 and~~ June 30, 2020 ~~respectively,~~ and ~~$5,706 ($0.05 per share) through July 25,~~March 31, 2020, ~~pro rata to stockholders of former Class A and former Class B common stock. No distributions were declared subsequent to the~~respectively.

Tax Sharing Agreement Payments

In connection with termination of the ~~S election.~~Company’s S-Corporation status effective July 27, 2020, the Company entered into a Tax Sharing Agreement with the former S-Corporation shareholders. See Note 1. The Tax Sharing Agreement, as amended on June 30, 2021, requires the Company to finalize the S-Corporation income tax returns for the short period ended July 26, 2020 no later than August 15, 2021 (previously June 30, 2021 prior to the amendment). The Company is required to settle any remaining liability for taxes to the former S-Corporation shareholders within 15 days thereafter under the amended Tax Sharing Agreement. All obligations of the Company under the Tax Sharing Agreement are satisfied by adjustments of additional paid in capital.

~~The Board declared distributions of $5,255 ($0.04 per share) and $6,105 ($0.05 per share) during~~During the three months ended ~~March 31 and~~ June 30, ~~2019, respectively, pro rata~~2021, the Company distributed $2,700 to ~~stockholders~~the former S-Corporation shareholders under the Tax Sharing Agreement in connection with preliminary estimates of ~~former Class A and former Class B common stock. No distributions were declared during~~obligations for income taxes related to the ~~three months~~allocation of taxable income to the S-Corporation short tax period ended ~~September 30, 2019.~~July 26, 2020.

-30-

8.Table of Contents

11. EARNINGS PER SHARE

The table below illustrates the calculation of basic and diluted net income (loss) ~~income~~ per common share for the Class A common and Class B common for the periods reflected below. The weighted average shares outstanding have been retrospectively restated to reflect the Share Exchange for all periods prior to the Offering, resulting in the Class A shares

~~-32-~~

~~Table of Contents~~

representing ~~non-Family owned~~non-Family-owned shares and Class B representing Family-owned shares for all periods presented. See Note 710 for further information on the Share Exchange.


	For the three months ended						For the six months ended
	June 30,						June 30,
Class A common stock:	2021			2020			2021			2020

	(unaudited)						(unaudited)
Numerator, basic:
Net income (loss) attributable to all stockholders	$	808		$	(29,075)		$	3,096		$	(58,139)
Class A common stock as a percentage of total shares outstanding, basic¹		23.54	%		0.11	%		13.08	%		0.03	%
Net income (loss) attributable to Class A stockholders, basic¹	$	190		$	(32)		$	644		$	(16)

Numerator, diluted:
Net income (loss) attributable to all stockholders	$	808		$	(29,075)		$	3,096		$	(58,139)
Class A common stock as a percentage of total shares outstanding, diluted¹		28.37	%		0.11	%		26.20	%		0.03	%
Net income (loss) attributable to Class A stockholders, diluted¹	$	229		$	(32)		$	811		$	(16)

Denominator, basic and diluted:
Weighted average Class A common stock, basic¹		34,726			132			30,592			66
Dilutive effect of common stock equivalents²		9,985			—			10,765			—
Weighted average Class A common stock, diluted¹		44,711			132			41,357			66

Net income (loss) per Class A share, basic¹	$	0.01		$	(0.24)		$	0.02		$	(0.24)

Net income (loss) per Class A share, diluted¹	$	0.01		$	(0.24)		$	0.02		$	(0.24)

For the three months ended

For the nine months ended

September 30,

September 30,

Class A common stock:

2020

2019

2020

2019

(unaudited)

Numerator, basic:









Net (loss) income attributable to all stockholders

$
(21,028)

$
11,900

$
(79,167)

$
26,347

Class A stock as a percentage of total shares outstanding, basic

13.08
%

0.19
%

3.07
%

0.08
%
Net (loss) income attributable to Class A stockholders, basic

$
(2,751)

$
22

$
(2,427)

$
21

Numerator, diluted:









Net (loss) income attributable to all stockholders

$
(21,028)

$
11,900

$
(79,167)

$
26,347

Class A stock as a percentage of total shares outstanding, diluted

13.08
%

3.13
%

3.07
%

3.14
%
Net (loss) income attributable to Class A stockholders, diluted

$
(2,751)

$
373

$
(2,427)

$
826

Denominator, basic and diluted:









Weighted average Class A common stock, basic

18,124

225

6,129

134

Dilutive effect of common stock equivalents

—

3,668

—

3,764

Weighted average Class A common stock, diluted

18,124

3,893

6,129

3,898

Net (loss) income per Class A share, basic

$
(0.15)

$
0.10

$
(0.40)

$
0.16

Net (loss) income per Class A share, diluted

$
(0.15)

$
0.10

$
(0.40)

$
0.21

~~-33-~~

~~Table~~¹ The net income (loss) attributable to Class A stockholders, basic and diluted, and the weighted average Class A common stock basic and diluted, as of ~~Contents~~

For the three months ended

For the nine months ended

September 30,

September 30,

Class B common stock:

2020

2019

2020

2019

(unaudited)

Numerator, basic:









Net (loss) income attributable to all stockholders

$
(21,028)

$
11,900

$
(79,167)

$
26,347

Class B stock as a percentage of total shares outstanding, basic

86.92
%

99.81
%

96.93
%

99.92
%
Net (loss) income attributable to Class B stockholders, basic

$
(18,277)

$
11,878

$
(76,740)

$
26,326

Numerator, diluted:









Net (loss) income attributable to all stockholders

$
(21,028)

$
11,900

$
(79,167)

$
26,347

Class B stock as a percentage of total shares outstanding, diluted

86.92
%

96.87
%

96.93
%

96.86
%
Net (loss) income attributable to Class B stockholders, diluted

$
(18,277)

$
11,527

$
(76,740)

$
25,521

Denominator, basic and diluted:









Weighted average Class B common stock, basic

120,417

120,417

120,417

120,417

Dilutive effect of common stock equivalents

—

—

—

—

Weighted average Class B common stock, diluted

120,417

120,417

120,417

120,417

Net (loss) income per Class B share, basic

$
(0.15)

$
0.10

$
(0.64)

$
0.22

Net (loss) income per Class B share, diluted

$
(0.15)

$
0.10

$
(0.64)

$
0.21

9~~. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS~~

~~401(k) Plan~~

~~The Company maintains~~and for the three and six months ended June 30, 2020 were retrospectively restated to effect the Share Exchange. This resulted in a ~~401(k) plan that covers eligible employees subject~~reduction in the loss per Class A share, basic and diluted, for the six months ended June 30, 2020 from $(0.48) per share to ~~certain age and length~~$(0.24) per share as a result of ~~service requirements. The Company matches up to 3% of eligible compensation~~there being no Class A shares outstanding during the ~~period in which an eligible participant contributes~~three months ended March 31, 2020 after effecting the Share Exchange.

² The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net income (loss) per share attributable to Class A stockholders because the ~~plan. Matching contributions were $913~~impact of including them would have been anti-dilutive: 251 and ~~$818~~3,653 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019 (unaudited),~~2020, respectively, and ~~$3,003~~168 and ~~$2,747~~3,693 for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019 (unaudited),~~ respectively. In addition, a discretionary profit-sharing contribution of 3% of eligible compensation for eligible employees was approved and aggregated $3,363 for the year ended December 31, 2019 and is reflected in accrued salaries and benefits in the consolidated balance sheet. Accrued salaries and benefits includes $981 and $2,923 for the three and nine months ended September 30, 2020 (unaudited), respectively, for an estimated discretionary profit-sharing contribution for 2020.

~~Long-Term Rewards Plan~~

The Company has a long-term rewards (“LTR”) plan for certain key employees which provides for compensation related to growth in certain financial measures over a three-year period (the “Reward Performance Period’), subject to achieving an annual minimum net income target (the “Net Income Target”) during each year of the Reward Performance Period. Each year, eligible LTR plan participants receive an individual target award opportunity (“Award Opportunity”) for a new three-year Reward Performance Period (i.e. target award grant made in 2018 is for years 2018 through 2020). For Reward Performance Periods prior to 2018, compensation earned for growth in the financial measures over each Reward Performance Period is paid in cash in the year following the end of the respective Reward Performance Period,

~~-34-~~-31-

Table of Contents

assuming the Net Income Target was achieved for each year of the respective Reward Performance Period. Starting in 2018, the Net Income Target is only required to be achieved in the final year of the Reward Performance Period. Estimated compensation is recorded during each year of a Reward Performance Period (“accrued LTR Award Opportunities”).


	For the three months ended						For the six months ended
	June 30,						June 30,
Class B common stock:	2021			2020			2021			2020

	(unaudited)						(unaudited)
Numerator, basic:
Net income (loss) attributable to all stockholders	$	808		$	(29,075)		$	3,096		$	(58,139)
Class B common stock as a percentage of total shares outstanding, basic¹		76.46	%		99.89	%		79.20	%		99.97	%
Net income (loss) attributable to Class B stockholders, basic¹	$	618		$	(29,043)		$	2,452		$	(58,123)

Numerator, diluted:
Net income (loss) attributable to all stockholders	$	808		$	(29,075)		$	3,096		$	(58,139)
Class B common stock as a percentage of total shares outstanding, diluted¹		71.63	%		99.89	%		73.80	%		99.97	%
Net income (loss) attributable to Class B stockholders, diluted¹	$	579		$	(29,043)		$	2,285		$	(58,123)

Denominator, basic and diluted:
Weighted average Class B common stock, basic¹		112,804			120,417			116,460			120,417
Dilutive effect of common stock equivalents¹		—			—			—			—
Weighted average Class B common stock, diluted¹		112,804			120,417			116,460			120,417

Net income (loss) per Class B share, basic¹	$	0.01		$	(0.24)		$	0.02		$	(0.48)

Net income (loss) per Class B share, diluted¹	$	0.01		$	(0.24)		$	0.02		$	(0.48)

The net income (loss) attributable to Class B stockholders, basic and diluted, and the weighted average Class B common stock basic and diluted, as of and for the three and six months ended June 30, 2020 were retrospectively restated to effect the Share Exchange. As there were no changes to the total number of shares outstanding as a result of the Share Exchange, there was no change to net loss per Class B share, basic or diluted from previously disclosed results for the three and six months ended June 30, 2020.

Compensation expense included $732 and $817 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $2,329 and $1,802 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively, for open Reward Performance Periods. Amounts paid to participants in 2020 for the Reward Performance Period starting in 2017 of $2,717 is reflected in deferred compensation, current in the consolidated balance sheet as of December 31, 2019. Amounts estimated to be paid in 2021 for performance through September 30, 2020 for the Reward Performance Period starting in 2018 of $2,096 (unaudited) is reflected in deferred compensation, current in the consolidated balance sheet as of September 30, 2020. The remaining balances of accrued LTR Award Opportunities for open Reward Performance Periods of $1,812 and $1,965 at December 31, 2019 and September 30, 2020 (unaudited) are reflected in deferred compensation, net of current portion, in the consolidated balance sheets.

~~Stock-Based Award Plans~~

12. STOCK-BASED AWARD PLANS

On the effective date of the Offering, the Company adopted the 2020 Plan and the ESPP.

The 2020 Plan provides the ability to grant cash and equity-based incentive awards to eligible employees, directors and service providers in order to attract, retain and motivate those that make important contributions to the Company. The 2020 Plan provides for the award of stock options, RSAs, RSUs, SARs and other cash compensation. ~~The Company granted 694 RSAs and 10 RSUs on the effective date of the Offering.~~

The ESPP provides eligible employees with rights during each six-month ESPP offering period to purchase shares of the Company’s Class A common at the ESPP ~~discount~~Discount through payroll deductions, ~~or through lump sum payments during~~except for the initial offering period (July 28 to November 30, 2020). whereby the participants were permitted to make lump sum contributions to the ESPP for such period. Amounts withheld or received from participants are reflected in accrued salaries and benefits in the condensed consolidated balance ~~sheet~~sheets until such shares are purchased. ~~Lump sum payments~~Amounts withheld from ~~ESPP~~ participants for the ~~initial~~ offering period ~~will be due prior to the end~~ending November 30, 2021 aggregated $152 as of ~~the offering period, and none were received by September~~June 30, ~~2020.~~

~~Stock-based award plan events and related activity are described further below.~~2021.

Prior to the adoption of the 2020 Plan, the Company had a SAR plan for the purpose of providing incentives to key members of management and consultants to contribute to the growth and financial success of the Company. As a result of the Offering, SAR participants were offered the option to either redeem their SARs upon the occurrence of the Offering or amend their SARs pursuant to which, upon effectiveness of the 2020 Plan, such SARs would become options to purchase shares of Class A common stock under the 2020 Plan (the “SAR Exchange Offer”). All SAR participants eligible to receive the SAR Exchange Offer accepted and had their outstanding SARs ~~which aggregated 12,038,~~ converted to stock options with equivalent terms under the 2020 Plan at the Offering effective date (the “Converted SARs”). of July 28, 2020. This was considered a modification of these SAR awards ~~as described further below.~~which was recorded in the respective quarter this occurred. The SAR plan was subsequently retired (“Retired SAR Plan”) and any ~~future~~ SARs issued after such date will be granted under the 2020 Plan. ~~This activity is described further below.~~

-32-

Table of Contents

Prior to the adoption of the 2020 Plan, the Company had options outstanding to purchase ~~3,676~~ shares of former Class B common stock. Upon the effectiveness of the Offering these options were amended and exchanged for options to purchase an equivalent number of Class A shares at the same exercise price and vesting, subject to many of the terms of the 2020 Plan. These options remain subject to expiration in connection with a Triggering Event under the terms of the original option agreements (the “Amended Options”). ~~This activity is described further below.~~Any options issued subsequent to this exchange will be granted under the 2020 Plan.

~~-35-~~

~~Table of Contents~~

~~The following table reflects the exchanges and new issuances of stock-based awards in connection with the Offering:~~

Units outstanding
July 27, 2020

Units (exchanged) issued in connection with Offering

Units outstanding
July 28, 2020
(prior to exercises)

(unaudited)
SARs
12,086

(12,038)

48
Amended Options
3,676

(3,676)

—
2020 Plan options
—

15,714

15,714
RSA's
—

694

694
RSU's
—

10

10

~~Compensation expense and additional information pertaining to stock-based awards is described further below.~~

2020 Plan

~~An aggregate~~As of ~~16,500~~June 30, 2021, 854 shares of ~~our~~ Class A common ~~stock was initially~~were available for issuance under the 2020 Plan. The number of shares initially available for issuance will be increased annually on January 1 of each calendar year beginning in 2021 and ending in and including 2030, equal to the lesser of (i) 4% of the shares of Class A and Class B common stock outstanding on the final day of the immediately preceding calendar year and (ii) a smaller number of shares as determined by the Board. No more than 3,000 shares of Class A common may be issued under the 2020 Plan upon the exercise of incentive stock options. Shares available under the 2020 Plan may consist of authorized but unissued shares, shares purchased on the open market, or treasury shares. If an award under the 2020 Plan expires, lapses or is terminated, exchanged for cash, surrendered, repurchased, or canceled without having been fully exercised or forfeited, any unused shares subject to the award will again be available for new grants under the 2020 Plan. Awards granted under the 2020 Plan in substitution for any options or other stock or stock-based awards granted by an entity before the entity’s merger or consolidation with or acquisition by the Company of the entity’s property or stock will not reduce the shares available for grant under the 2020 Plan, but will count against the maximum number of shares that may be issued upon the exercise of incentive stock options.

Awards issued under the 2020 Plan vest based on service criteria established by the Board. The ~~company~~Company has elected to account for forfeitures as they occur rather than estimate forfeitures at date of grant.

~~Amended and~~ Retired SAR Plan

The Retired SAR Plan enabled the Company to grant awards (“SAR Awards”) as a fixed number of shares of former Class B common stock (“SAR Units”). SAR Units outstanding aggregated 12,276 at December 31, 2019. SAR Units were issued at the equivalent of the fair value of the equivalent number of shares of the Company’s former Class B common stock on the grant date (“Base Value”), as determined by the Board with assistance from management and an independent third-party valuation provider, and compensation recorded based upon the appreciation of the SAR Units in excess of the Base Value over the requisite service period. SAR Awards were exercisable upon 50% vesting or upon the occurrence of a triggering event.

Prior to the SAR Exchange Offer being made, vested SAR Units were redeemable upon the occurrence of a triggering event which included: (i) expiration of the term of the SAR; (ii) a change of control of the Company whereby stockholders holding at least 50% of the voting stock of the company sell their shares; (iii) a merger of the Company with an unrelated third-party; (iv) an initial public offering; and (v) death, disability or retirement of a SAR participant.

~~-36-~~

~~Table of Contents~~

SAR participants were limited to exercising no more than 25% of their vested SAR Units in any given year. SAR Awards generally vested 50% and 100% after two years and five years, respectively, from the grant date, or as determined by the Board. Maximum contractual terms ranged from ten years to term of employment of the participant. SAR Awards were settled in cash only, not through the issuance of shares. SAR Award exercises were limited each year to the proportion of the vested SAR Units to the total units outstanding multiplied by adjusted net cash from operating activities (the “Liquidity Pool”), which was defined as cash from operating activities less cash paid for property and equipment and capitalized software for a given period.

The SAR Exchange Offer resulted in eligible SAR participants amending their SARs pursuant to which, upon effectiveness of the Company’s 2020 Plan, such SARs were exchanged for options under the 2020 Plan. Effective July 13, 2020, the SAR Exchange Offer period ended and all SAR participants eligible to receive the offer accepted and had their outstanding SARs converted to stock options with equivalent terms under the 2020 Plan on the effective date of the plan upon the Offering. This was considered a modification of these SAR Awards.

Converted SARs with either no expiration date or that expired during calendar year 2020 were converted to options and automatically exercised into shares (the “Auto Exercise New Options”) on the effective date of the Offering. Shares issued in connection with the Auto Exercise New Options were net of the number of shares of common stock necessary to satisfy the aggregate exercise price and the tax withholding obligation of such options of $13,835. The Auto Exercise New Option participants also had the ability to require the Company to repurchase all or a portion of these on the Offering effective date for cash based on the Offering price of $19, which aggregated $9,054 (unaudited). The aggregate of these amounts of $22,889 is reflected as a reduction of cash provided by operating activities as these payment requirements arose when the original SARs were liability-classified prior to their conversion and exercise.

Management continued to record changes in the intrinsic value of the SARs in 2020 up to July 2, 2020, the date on which management determined the Company was considered to have become a public entity. Management recorded the change in accounting policy of $2,422 in accordance with ASC 718 during the three months ended SeptemberAt June 30, 2020, which included $1,299 of vested Converted SARs that was recognized as compensation expense during this period, with the remaining $1,122 of unvested Converted SARs being recognized as compensation expense over the remaining service period of one to five years through 2025. The additional incremental increase in fair value of the Converted SARs after July 2, 2020 and up to the time of the exchange on the Offering effective date resulting from the modification was recorded as compensation expense. The fair value of the Converted SARs, estimated using the Black-Scholes model, was $197,708 (unaudited), of which $153,366 (unaudited) is vested. Management recorded additional compensation expense of $57,079 (unaudited) for vested Converted SARs from July 1 to the Offering effective date, which included the $1,299 impact of the change in accounting of vested Converted SARs. The remaining $44,342 (unaudited) of unvested Converted SAR liability, which includes the $1,122 of unvested Converted SARs in connection with the change in accounting policy on July 2, 2020, will be recognized as compensation expense over the remaining service period of one to five years through 2025. Upon modification, the Converted SARs are no longer being recorded as a liability under ASC 718 and the accumulated liability balance, net of amounts for paymentof taxwithholding and redemption, was reclassified to stockholders’ equity. No incremental compensation expense arose in connection with the SAR modification.

~~The assumptions used in the Black-Scholes model to determine the fair value of the Converted SARs on the modification date are as follows:~~

Fair market value of common stock
$
19.00
Volatility

36.7%
Expected term (years)

6.5
Expected dividend yield

-
Risk-free interest rate

0.4%

~~-37-~~

~~Table of Contents~~

The Company lacks sufficient historical data on the volatility of its stock price. Selected volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term. The expected term represents the term of the Converted SARs, which ranges from within one year to ten years. The Company does not expect to pay dividends after the Offering. 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 SAR grants.

~~Prior to the Offering,~~ the fair value of the common stock underlying the SAR Awards was determined by the Board with assistance from management and an independent third-party valuation firm. The determination of value used the market and income approaches, with an adjustment for marketability discount pertinent to private company entities in arriving at the per share fair value (the “valuation methodology”). Under the market approach, the guideline public company method is used, which estimates the fair value of the Company based on market prices of stock of guideline public companies. The income approach involves projecting the future benefits of owning an asset and estimating the present value of those future benefits by discounting them based upon the time value of money and the investment risks associated with ownership. At the end of 2019, due to the consideration by the Board of pursuing the Offering, the valuation methodology began to consider the impact of such an event on the value of the Company’s common stock underlying the awards. As the Company approached the Offering effective date, this resulted in increases in the value of the SAR Awards which resulted in corresponding increases to compensation expense ~~for the three and nine months ended September 30,~~during 2020 which exceeded historical results.

~~The below table represents SAR activity for the following periods:~~Amended Options

Units

Range of


Vested

Nonvested

Total

grant values

(unaudited)
Balance, January 1, 2019

5,889

4,782

10,671

$
0.92–$3.17
Granted

297

2,112

2,409

$
3.73
Exercised

(609)

—

(609)

$
1.31–$2.50
Forfeited

—

(195)

(195)

$
2.13–$2.50
Vested

630

(630)

—


Balance, December 31, 2019

6,207

6,069

12,276

$
0.92–$3.73
Granted

21

681

702

$
4.70
Exercised

(829)

—

(829)

$
1.31–$2.50
Forfeited

—

(63)

(63)

$
2.50
Vested

1,410

(1,410)

—


Converted

(6,761)

(5,277)

(12,038)

$
0.92–$4.70
Balance September 30, 2020

48

—

48

$
2.50

Prior to ~~July 2, 2020,~~ the weighted average grant date intrinsic value of the SARs on grant date was zero as the Company’s Board granted all awards at a price per share not less than the per share fair value of the Company’s former Class B common stock underlying such awards on the date of grant.

Accrued SAR Awards of $5,790 and $1,051 at December 31, 2019 and September 30, 2020 (unaudited), respectively, representing SAR Units scheduled for redemption and 25% of the vested SAR Units eligible for exercise within 12-months of the balance sheet date are reflected in deferred compensation, current in the consolidated balance sheets. The remaining balance of accrued SAR Awards of $16,506 at December 31, 2019 is reflected as deferred compensation, net of current portion, in the consolidated balance sheet. We had approximately $3,900 of total unrecognized compensation expense for unvested SAR Awards at December 31, 2019 which we expect to recognize over the respective service periods of one to five years.

~~-38-~~

~~Table of Contents~~

At the Offering effective date, the total unrecognized compensation for unvested SAR Awards of $44,342 was reclassified to additional paid in capital as these awards were reclassified to equity-based awards on this date subject to the terms of the 2020 Plan. This amount will be recognized as compensation expense under the 2020 Plan over the respective service periods of one to five years.

~~Amended Options~~

On July 20, 2020, the Amended Options resulted from the Board amending the outstanding options to provide for their exchange for options to purchase an equivalent number of Class A shares available under the 2020 Plan ~~at the same exercise price, vesting and term~~. ~~The~~ amendment of the options was deemed a modification. No incremental compensation was recorded in connection with this modification as it was determined that the value of the Amended Options was the same both before and after the modification. The Amended Options remain exercisable upon: (i) the option holder no longer serving as an employee of the Company or a member of the Board; (ii) the Grantee’s death or disability; (iii) the occurrence of a Partial Triggering Event (as defined below); or (iv) the occurrence of a Triggering Event (as defined below). Prior to being amended, the option agreements provided employee option holders with the ability to exercise a portion of their options between April 15 and April 30 of each year based upon the fair value of the Class B common stock as of December 31 of the prior calendar year, provided that certain Company performance is achieved. Upon amendment, the options are instead now subject to restrictions on trading during certain periods (“blackout dates”). Option holders are permitted to satisfy tax withholding obligations incurred in connection with the ~~exercise by exchanging exercised options~~Offering in ~~lieu of payment of income taxes paid by the Company on their behalf.~~

In the event of the sale of at least 50% of the Company’s stock or all the assets of the Company (“Triggering Event”) in a single or multiple transactions, the option holders have the right to exercise their options and sell their related shares in connection with the transactions. Unexercised options expire after a Triggering Event. In the event of a sale of at least 25% of the Company’s assets to an unrelated third-party in a single or multiple transactions (“Partial Triggering Event”), the option holders have the right to exercise a portion of their options pro rata based on the sales price and sell their related shares in connection with the transaction. Unexercised options remaining after a Partial Triggering Event remain outstanding. In addition, in the event stockholders owning at least 51% of the outstanding stock of the Company (the “selling stockholders”) sell a portion of their stock to an unrelated third-party, the option holders have the right to exercise and sell an amount of options in the same proportion as the selling stockholders (a “tag-along right”). The option holders may also be required to exercise all their outstanding options and sell all related shares in the event the selling stockholders sell at least 51% of their ownership to an unrelated third-party (a “drag-along right”).

~~Prior to the amendment,~~July 2020, the options permitted holders to put their exercised shares back to the Company, thus the options were classified as temporary equity and included in “Options for Redeemable Shares” on the condensed consolidated ~~balance sheets.~~statements of changes in equity (deficit) at June 30, 2020 and March 31, 2020. The Company recorded ~~increases~~an increase in the value of Options for Redeemable Shares of ~~$21,954~~$14,637 and ~~$579~~$29,879 during the three and six months ended June 30, 2020, respectively, pertaining to the 3,676 options outstanding at June 30, 2020. As all options outstanding were fully vested, 0 related compensation expense was recorded for the ~~three~~six months ended ~~September~~June 30, ~~2020 and 2019 (unaudited), respectively, and $69,177 and $762 for~~2020.

In connection with the ~~nine months ended September 20, 2020 and 2019 (unaudited), respectively. The~~amendment, the option holders’ ability to put the exercised Amended Option shares to the Company in order to attain liquidity was exchanged for the right by the holders to exercise these options and sell the related shares on the NASDAQ exchange. As a result of ~~this~~the put right no longer being applicable, the options were no longer considered temporary equity and were reclassified to stockholders’ equity inat the ~~amount~~time of ~~$69,177 during~~ the ~~three months ended September 30, 2020.~~

exchange.

~~-39-~~-33-

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~~The following table summarizes activity for the Amended Options from January 1, 2019:~~

Weighted

Weighted

average

Aggregate

average

remaining

intrinsic

exercise

contractual

value
Amended Option Activity

Units

price

life (years)

(in thousands)

(unaudited)
Outstanding at January 1, 2019

4,125

$
0.20

*

$
14,581
Exercised

(276)

$
0.25

$
957
Outstanding at December 31, 2019

3,849

$
0.19

*

$
17,344
Exercised through June 30

(173)

$
0.30

$
759
Amendment and exchange of options

(3,676)

$
0.19

*

$
69,177
Outstanding at September 30, 2020

—

*Options have indefinite contractual lives

Options under 2020 Plan

~~The Company issued no options under the 2020 Plan through September 30, 2020 other than those associated with the Converted SARs and the Amended Options previously discussed.~~ The following table summarizes activity for options outstanding under the 2020 Plan:


				Weighted						Weighted
			Weighted	average	Aggregate				Weighted	Average
			average	remaining	intrinsic				Average	Remaining	Aggregate
			exercise	contractual	value				Exercise	Contractual	Intrinsic
2020 Plan Option Activity	Units		price	life (years)	(in thousands)		Units		Price	Life (Years)	Value

Outstanding at January 1, 2021							11,876	$	2.44
Granted							263	$	31.51
Forfeited							(281)	$	3.50
Exercised							(1,677)	$	2.14		$	35,882
2020 Plan options outstanding at June 30, 2021							10,181	$	3.21	5.11	$	190,675
2020 Plan options exercisable at June 30, 2021							5,895	$	1.77	3.36	$	118,920
	(unaudited)
Outstanding at January 1, 2020	—		—
Issued in connection with Converted SARs	12,038	$	2.18
Issued in connection with Amended Options	3,676	$	0.19	*
Exercised	(3,402)	$	1.11		$	63,295
2020 Plan options outstanding as of September 30, 2020	12,312	$	2.45	7.47	$	253,006
2020 Plan options exercisable as of September 30, 2020	7,224	$	1.76	7.14	$	153,414
*Amended Options have indefinite contractual lives

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The detail of options outstanding, vested and exercisable under the 2020 Plan as of ~~September~~June 30, ~~2020~~2021 is as follows:

Options outstanding

Options vested and exercisable




Weighted



Weighted

average

average
Exercise Prices

Units

life (years)

Units

life (years)

(unaudited)
$0.15 to $0.71

2,552

9.4

2,552

9.4
$2.15

1,295

4.4

1,295

4.4
$2.50

2,816

5.7

1,808

5.6
$2.67

901

6.4

430

6.4
$3.17

1,674

7.5

861

7.5
$3.73

2,392

9.0

278

8.9
$4.70

682

9.4

—

—

12,312

7,224


	Options Outstanding		Options Vested and Exercisable
		Weighted		Weighted
		Average		Average
Exercise Prices	Units	Life (Years)	Units	Life (Years)
$0.15 to $0.71	2,234	*	2,234	—
$2.15	548	3.61	548	3.61
$2.50	2,431	4.99	1,801	4.86
$2.67	650	5.68	273	5.69
$3.17	1,415	6.78	665	6.76
$3.73	1,957	8.31	371	8.01
$4.70	683	8.61	—	—
$17.66	12	9.87	—	—
$32.16	251	9.67	3	9.67
	10,181		5,895

*Amended Options have indefinite contractual lives

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 new option awards issued subsequent to the Offering to participants under the 2020 Plan are measured based on the grant date fair value of the awards and recognized in the condensed consolidated statements of ~~operations~~comprehensive loss over the period during which the participant is required to perform the requisite services. The vesting period is generally one to four years. The grant date fair value of options is estimated using the Black-Scholes model. ~~No new~~

There were 0 options ~~were granted subsequent to~~issued or outstanding under the ~~Offering through September~~2020 Plan for the three months ended June 30, 2020. ~~Unrecognized~~The Company issued 251 options and 12 options under the 2020 Plan during the three months ended March 31 and June 30, 2021, respectively. The assumptions used in the Black-Scholes model to determine the value of the options issued during these periods are as follows:


	Option Valuation Period
		Q1 2021			Q2 2021
Fair market value of common stock	$	32.16		$	17.66
Volatility		36.8	%		36.8	%
Expected term (years)		6.0			6.0
Expected dividend yield		—	%		—	%
Risk-free interest rate		0.4	%		0.4	%

The fair market value of common stock reflects the market closing price on NASDAQ on the respective option grant date. As of the valuation dates, the Company lacked sufficient historical data on the volatility of its stock price. Selected

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volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term. The expected term represents the term the options are expected to be exercised over, which differs from the term of the option grants which is ten years. The Company does not expect to pay dividends. The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the option grants.

During the three and six months ended June 30, 2021, the Company recognized aggregate stock-based compensation expense for options and Converted SARs that were exchanged for options under the 2020 Plan of $3,913 and $7,681, respectively, net of forfeitures related to these awards. At June 30, 2021, $25,025 of unrecognized compensation expense associated with ~~the~~options and Converted SARs ~~was $40,434 at September 30, 2020 (unaudited), which will~~is expected to be recognized over ~~the respective remaining service periods~~a weighted average period of ~~one to five~~approximately 3.0 years.

Restricted Stock Units

~~The Company issued RSUs to eligible participants during the quarter ended September 30, 2020.~~ The following table summarizes RSU activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020:~~

Weighted

average

grant date fair

Units

value per share

(Unaudited)
Outstanding at January 1, 2020

—

$
—
Granted

88

22.36
Outstanding at September 30, 2020

88

$
22.36

2021:


		Weighted
		Average
		Grant Date Fair
	Units	Value Per Share
Outstanding at January 1, 2021	101	$	23.80
Granted	352		30.73
Vested	(7)		34.78
Forfeited	(15)		28.86
Outstanding at June 30, 2021	431	$	29.50

There were 0 RSUs issued or outstanding for the six months ended June 30, 2020. 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 ~~aggregated $1,958. This cost will be~~is recognized on a straight-line basis in the condensed consolidated statements of ~~operations~~comprehensive loss over the period during which the participant is required to perform services in exchange for the award, which is generally one to four years. Vested RSUs are settled by issuing Class A shares or the equivalent value in cash at the Board’s discretion. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the Company ~~recorded~~recognized stock-based compensation expense for RSUs of ~~$18~~$793 and $1,229, respectively, net of forfeitures related to these awards. At ~~September~~June 30, ~~2020, $1,940~~2021, $11,108 of unrecognized compensation cost for RSUs is expected to be recognized over a weighted average period of approximately ~~4.0~~3.6 years.

~~-41-~~

~~Table~~In connection with the Taxamo acquisition, certain continuing employees of ~~Contents~~Taxamo received RSUs with service and performance conditions covering up to 1,230 shares of our Class A common stock (“PSUs”) with an aggregate grant date fair value of $21,729 that will be accounted for as post-acquisition compensation expense over the vesting period. The performance-based condition will be satisfied upon meeting certain performance targets for the year ended 2023. As of June 30, 2021, it is not probable that these targets will be met, thus 0 compensation expense has been recorded to date related to these PSUs.

Restricted Stock Awards

~~The Company issued RSAs to eligible participants during the quarter ended September 30, 2020.~~ The following table summarizes RSA activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020:~~2021:


		Weighted			Weighted
		average			Average
		grant date fair			Grant Date Fair
	Units	value per share		Units	Value Per Share

	(unaudited)
Outstanding at January 1, 2020	—	$	—
Outstanding at January 1, 2021				670	$	19.00
Granted	694		19.00	59		17.66
Vested	(21)		19.00	(234)		19.00
Forfeited	(1)		19.00	(18)		19.00
Outstanding at September 30, 2020	672	$	19.00
Outstanding at June 30, 2021				477	$	18.90

There were 0 RSAs issued or outstanding for the six months ended June 30, 2020. 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 ~~aggregated $13,190 during the three months ended September 30, 2020. This cost will be~~ is

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recognized on a straight-line basis in the condensed consolidated statements of ~~operations~~comprehensive loss over the period during which the participants are required to perform services in exchange for the award, which is generally one to four years. Vested RSAs are settled by issuing Class A shares upon vesting. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the Company ~~recorded~~recognized stock-based compensation expense for RSAs of ~~$2,014,~~$1,446 and $3,655, respectively, net of forfeitures related to these awards. At ~~September~~June 30, ~~2020, $11,158~~2021, $5,903 of unrecognized compensation cost for RSAs is expected to be recognized over a weighted average period of approximately 2.2 years.

Employee Stock Purchase Plan

The ESPP permits participants to purchase Class A common stock through payroll deductions of up to a specified percentage of their eligible ~~compensation, provided that participants will be permitted to make lump sum contributions to the ESPP during the initial offering period (July 28 to November 30, 2020).~~compensation. The maximum number of shares that may be purchased by a participant during any offering period is determined by the plan ~~adminstrator~~administrator in advance of each offering period.

On the first trading day of each offering period, each participant will automatically be granted an option to purchase shares of Class A common. The option will expire at the end of the applicable offering period and will be exercised at that time to the extent of the payroll deductions accumulated or contributions made during such offering period. The purchase price of the shares, in the absence of a contrary designation, is ~~85%~~15% of the lower of the fair value of the Class A common on the first or last day of the ESPP offering period. Participants may voluntarily end their participation in the plan at any time during a specified period prior to the end of the applicable offering period and will be paid their accrued payroll deductions and related contributions, if applicable, that have not yet been used to purchase shares of Class A common. If a participant withdraws from the plan during an offering period, the participant cannot rejoin until the next offering period. Participation ends automatically upon a ~~participant's~~participant’s termination of employment.

A total of 1,000 shares of Class A common were initially reserved for issuance under the ESPP. The number of shares available for issuance under the ESPP will be increased annually on January 1 of each calendar year beginning in 2021 and ending in and including 2030, by an amount equal to the lesser of (i) 1% of the shares of Class A and Class B common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is

~~-42-~~

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determined by the Board, provided that no more than 16,000 shares of Class A common stock may be issued. The ESPP is administered by a committee of the Board.

~~During the three and nine months ended September 30, 2020, the~~

The Company recorded stock-based compensation expense of ~~$121~~$133 and $263 for the three and six months ended June 30, 2021, respectively, related to the ~~ESPP initial offering period. No shares of~~ESPP. Class A common stock ~~were~~ purchased under the ESPP ~~as no amounts were withheld through payroll or contributed by participants through this date.~~for the six-month offering period ended May 31, 2021 aggregated 60 shares. As of ~~September~~June 30, ~~2020,~~2021, there was approximately ~~$116~~$227 of unrecognized ESPP stock-based compensation cost ~~related to the ESPP’s initial offering period~~ that is expected to be recognized on a straight-line basis over the remaining term of the six-month offering period that ~~ends on November 30, 2020.~~started June 1, 2021.

~~For the periods presented, the~~

The fair value of ESPP purchase rights is comprised of the value of the 15% ESPP ~~discount~~Discount and the value associated with the ~~the Call~~Call/Put over the respective ESPP offering period. The value of the ~~Call~~Call/Put for the previous offering period (December 1, 2020 – May 31, 2021) and the current offering period (June 1, 2021 – November 30, 2021) was estimated using the Black-Scholes model with the following assumptions:

For the three months ended

For the nine months ended

September 30,

September 30,


2020

2019

2020

2019
Fair market value of common stock

$
19.00

n/a

$
19.00

$
n/a
Volatility

35%

n/a

35%

n/a
Expected term (years)

0.33

n/a

0.33

n/a
Expected dividend yield

-

n/a

-

n/a
Risk-free interest rate

0.11%

n/a

0.11%

n/a


	Previous			Current
	Offering Period			Offering Period
Fair market value of common stock	$	25.83		$	19.89
Volatility		35.10	%		35.10	%
Expected term (years)		0.50			0.50
Expected dividend yield		—	%		—	%
Risk-free interest rate		0.12	%		0.12	%

The Company lacks sufficient historical data on the volatility of its stock price. Selected volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term. The expected term represents the term of the ESPP offering period, which is generally six ~~months except for the initial offering period which is from July 28 to November 30, 2020.~~months. The Company does not expect to pay ~~dividends after the Offering.~~dividends. The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the award at the date nearest the offering term.

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Stock-Based Compensation

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

For the three months ended

For the nine months ended

September 30,

September 30,


2020

2019

2020

2019

(unaudited)
Stock-based compensation cost:








SARs

$
62,141

$
1,310

$
138,737

$
3,930
Stock options

-

-

-

-
RSUs

18

-

18

-
RSAs

2,014

-

2,014

-
ESPP

121

-

121

-
Total stock-based compensation cost

$
64,294

$
1,310

$
140,890

$
3,930


	For the three months ended				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020
Stock-based compensation expense:
SARs and Converted SARs	$	3,520	$	41,676	$	6,911	$	76,596
Stock options		393		—		770		—
RSUs		793		—		1,229		—
RSAs		1,446		—		3,655		—
ESPP		133		—		263		—
Total stock-based compensation expense	$	6,285	$	41,676	$	12,828	$	76,596

~~-43-~~

~~Table of Contents~~

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


	For the three months ended				For the nine months ended				For the three months ended				For the six months ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020

	(unaudited)
Stock-based compensation expense:
Cost of revenues, software subscriptions	$	6,342	$	131	$	14,002	$	393	$	572	$	4,168	$	1,132	$	7,660
Cost of revenues, services		9,230		197		20,719		591		622		6,251		1,216		11,489
Research and development		6,340		131		14,000		393		571		4,168		1,132		7,660
Selling and marketing		12,821		261		28,140		784		1,433		8,335		2,720		15,319
General and administrative		29,561		590		64,029		1,769		3,087		18,754		6,628		34,468
Total stock-based compensation	$	64,294	$	1,310	$	140,890	$	3,930
Total stock-based compensation expense									$	6,285	$	41,676	$	12,828	$	76,596

~~10. �� RELATED PARTIES~~

The Company advanced amounts to certain stockholders of the Company of $283 and $2 at December 31, 2019 and September 30, 2020 (unaudited), respectively. The 2019 amounts are short-term in nature and repaid within three months. The amounts in 2020 are related to settlement of S-Corporation tax obligations as permitted under the Tax Sharing Agreement. These amounts are included in advances to stockholders in the consolidated balance sheets.

~~11. COMMITMENTS AND CONTINGENCIES~~

The Company leases office space under operating leases that expire at various dates through September 2028. Rent expense under all property operating leases was $1,736 and $1,628 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $5,187 and $4,720 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively. These amounts are reflected in general and administrative expense in the consolidated statements of comprehensive income (loss).

13. LEGAL PROCEEDINGS

The Company may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm ~~our~~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 ~~our~~its business, financial condition, or operating results.

~~-44-~~-37-

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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. 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 ~~“Risk Factors” in Part II, Item 1A.~~“Special Note Regarding Forward-Looking Statements” above.

Overview

Vertex ~~delivers comprehensive~~is a leading global provider of indirect tax ~~solutions that enable~~software and solutions. Our mission is to deliver the most trusted tax technology enabling global businesses to transact, comply and grow with confidence. ~~Companies with complex tax operations rely on~~ Vertex provides cloud-based and on-premise solutions that can be tailored to ~~automate their end-to-end~~specific industries for every major line of indirect tax, ~~processes. Indirect tax is the largest corporate tax category, encompassing~~including sales ~~tax, sellers use tax,~~and consumer use, ~~tax and~~ value added ~~tax (“VAT”), among others. Indirect tax accounts for more than $3.5 trillion of annual tax revenue, which is 2.5 times~~and payroll. Headquartered in North America, and with offices in South America and Europe, Vertex employs over 1,200 professionals and serves companies across the amount of corporate income taxes, according to the 2019 OECD Tax Database. Our software, content and services address the increasing complexities of global commerce and compliance by reducing friction, enhancing transparency and enabling greater confidence in meeting indirect tax obligations. As a result, our software is ubiquitous within our customers’ business systems, touching nearly every line item of every transaction that an enterprise can conduct.globe.

We have pioneered tax technology for over 40 years. We first began electronic delivery of tax rules in the early 1980s, and we first sold transaction tax processing software in 1982. Today, our software enables tax determination, compliance and reporting, tax data management and document management with powerful pre-built integrations to core business applications used by most companies, particularly those applications that have a significant impact on global commerce. Our software is fueled by over 300 million data-driven effective tax rules and supports indirect tax compliance in more than 19,000 jurisdictions worldwide. In order to maintain the quality of our content, our team includes many global tax and regulatory experts from industry and the public sector, who deliver monthly updates to our tax content, which are then incorporated directly into our software. Our solutions can be deployed on-premise, in the cloud, or both, with implementation services available to enable optimal customer outcomes and satisfy their unique business requirements.

We have accumulated industry-specific tax knowledge for over four decades, and our customers leverage our in-depth content through their use of our software. This allows our customers to comply with the dynamic regulatory landscape in real time and mitigates our customers’ risk exposure. As our customers expand their global footprint and business models, we are actively supporting their expansion by continuously strengthening our content offering and allowing for additional jurisdiction-specific tax compliance.

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 almost all of our customers annually in advance of the subscription period.

~~We have over 4,000~~Our customers ~~including the~~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. At September 30, 2020, we had over 4,000 customers and our Annual Recurring Revenue (“ARR”) per customer was over $75,000, while at September 30, 2019, we had over 4,000 customers and our ARR per customer was over $65,000. 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 ~~is aligned~~also results in our customers growing their spend with us as they grow and continue to use our ~~customers’ objectives by adjusting with their growth over time.~~solutions. We principally price our solutions based on a customer’s revenue base, in addition to a number of other factors.

~~-45-~~

~~Table of Contents~~

We employ a hybrid deployment model to align to our customers’ technology preferences for their core financial management software across ~~on premise,~~on-premise, cloud deployments or any combination of these models. Over time, we expect both existing and newly acquired customers to continue to shift towards cloud deployment models. Cloud-based subscription sales to new customers have grown at a significantly faster rate than ~~on premise~~on-premise software subscription sales, which is a trend that we expect to continue over time. We generated ~~28.7%~~36% and ~~21.0%~~26% of software subscription revenue from

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Table of Contents

cloud-based subscriptions during the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~26.6%~~34% and ~~18.7%~~26% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. While our on-premise software subscription revenue ~~comprises 73.4%~~comprised 64% and 74% of our ~~2020~~ software subscription ~~revenue, we anticipate that~~revenues during the three months ended June 30, 2021 and 2020, respectively, and 66% and 74% for the six months ended June 30, 2021 and 2020, respectively, it ~~will~~continues to decrease as a percentage of total software ~~subscription revenue~~subscriptions revenues as cloud-based subscriptions accelerate.

We ~~sell~~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 ERP, CRM, procurement, billing, POS and ~~eCommerce.~~e-commerce. These partners include Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, 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 ~~$82.4~~$104.9 million and ~~$94.6~~$91.3 million for the three months ended ~~September~~June 30, ~~2019~~2021 and 2020, respectively. We generated revenue of ~~$235.4~~$203.2 million and ~~$275.1~~$180.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2021 and 2020, respectively. We had a net income of ~~$11.9~~$0.8 million and a net loss of ~~$21.0~~$(29.1) million for the three months ended ~~September~~June 30, ~~2019~~2021 and 2020, respectively. We had a net income of ~~$26.3~~$3.1 million and a net loss of ~~$79.2~~$(58.1) million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2021 and 2020, respectively. Net income is presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”).

We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, stock-based compensation expense, severance expense and transaction costs. Adjusted EBITDA was $19.2 million and $21.5 million for the three months ended June 30, 2021 and 2020, respectively. Adjusted EBITDA was ~~$19.6~~$37.4 million and ~~$22.5~~$36.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2021 and 2020, respectively. Adjusted EBITDA was $50.8 million and $59.3 million for the nine months ended September 30, 2019 and 2020, respectively. Additionally, we generated net cash provided by operating activities of $45.8 million and $20.0 million in the nine months ended September 30, 2019 and 2020, respectively. Our free cash flow was $3.7 million and $15.8 million in the three months ended September 30, 2019 and 2020, respectively. Our free cash flow was $20.1 million and $18.7 million in the nine months ended September 30, 2019 and 2020, respectively. Adjusted EBITDA and free cash flow areis a non-GAAP financial ~~measures.~~measure. Refer to “~~Use~~“Key Business Metrics” and “Use and Reconciliation of Non-GAAP Financial ~~Measures~~”Measures” for further discussion of key business metrics and non-GAAP financial measures and their comparison to GAAP financial measures.

Recent ~~Developments—~~Developments

~~Initial Public Offering~~Taxamo Acquisition

On ~~July 31, 2020, we completed our initial public offering~~May 12, 2021, the Company acquired 95% of the outstanding equity of EVAT Solutions Limited (“~~IPO”~~EVAT”) and its wholly owned subsidiaries (collectively “Taxamo”), a cloud-based provider of tax and payment automation for global eCommerce and marketplaces. This acquisition supports the Company’s growth strategies across eCommerce platforms and marketplaces in ~~which we sold 23,812,216 shares~~Europe and North America. The preliminary purchase price for the Taxamo acquisition was $200.7 million as of ~~our Class A common stock,~~the acquisition date, consisting of (i) $190.2 million of cash paid at closing, (ii) an acquisition holdback of $0.5 million, and ~~certain selling stockholders sold~~(iii) an ~~additional 510,284 shares~~option to purchase from and an option for the remaining shareholder to sell the remaining 5% of ~~Class A common stock,~~the outstanding equity of EVAT at a ~~public offering price of $19.00 per share. We received proceeds of approximately $423.0 million, after deducting underwriting discounts~~fixed amount between August and ~~commissions, from sales of our shares in the IPO. We did not receive any of the proceeds from the sale of shares by the selling stockholders.~~December 2021 for $10.0 million.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic is having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes and closure of non-essential businesses. To protect the health and well-being of our employees and customers, we have made substantial modifications to employee travel policies, closed our offices as employees are advised to work from home and cancelled or shifted our conferences and other marketing events to virtual-

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only. The COVID-19 pandemic has impacted and may continue to impact our business operations, including our employees, customers and partners, and there is substantial uncertainty in the nature and degree of its continued effects over time.

During 2020 and for the ~~first half of 2020,~~six months ended June 30, 2021, the COVID-19 pandemic had minimal impact on our ~~revenue or~~revenues and results of operations, as we continue to derive the significant majority of our ~~revenue~~revenues from our existing software subscriptions. As we principally price our solutions based on our customers’ revenues within certain revenue bands, elongated declines in our existing customers’ revenues may impact our ability to grow our existing customer revenues. We did not experience an abnormal number of non-renewals in 2020 or for the ~~first half of 2020,~~six months ended June 30, 2021, nor any material declines in ~~revenue~~revenues associated with declines in our customers’ revenues, and we currently expect our existing customer base to remain largely stable, as it did through the recession in 2008 and 2009. However, significant ~~decreases~~increases in non-renewals or concessions to renewal customers would have a material impact on our revenues and cash

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flows. ~~We did see a decline in new software subscription billings at~~During 2020 and through the ~~end of the first quarter of 2020. It is important to note that our sales metrics are assessed quarterly, and given the size and complexity of our sales process~~six months ended June 30, 2021, we often see variances from month to month due to legal or procurement processes. In the case of the first quarter of 2020 we achieved our new software billings targets as several deals were completed earlier in the quarter.

~~For the third quarter of 2020, new software billings exceeded our original third quarter of 2020 forecasts. We~~ have seen some delays in signing deals due to prospects ~~shifting~~ongoing adjustments to working remotely for extended periods of time, and some due to economic uncertainty. We expect that the uncertainty caused by the COVID-19 pandemic could ~~continue to~~ impact our billings to new customers ~~for~~beyond 2020 and the ~~remainder of 2020, and~~six months ended June 30, 2021 as the pandemic continues to generate economic uncertainty. In addition, it may also negatively impact our efforts to maintain or expand revenues from our existing customers as they continue to evaluate certain long-term projects and budget constraints. However, we do not anticipate that overall demand for our software and solutions, our ability to deliver such software and solutions, or our growth strategies will be materially impacted by the COVID-19 pandemic, as companies continue to rely on us for their indirect tax solutions.

~~In addition to the impacts on our sales, our~~Our cash collections ~~from existing customers~~for 2020 were ~~lower than expected at the end of the first quarter of 2020. During the second and third quarters of 2020,~~consistent with our ~~collections exceeded our expectation~~expectations as some of the procedural disruptions that customers experienced as they shifted to remote work early in ~~March had stabilized.~~the year stabilized by the end of 2020. We believe that we may see delays in collections ~~over~~in 2021 as the ~~coming months.~~recent resurgence of COVID-19 continues to generate economic uncertainty. However, we do not believe that these delays will materially impact our business; we continue to expect that we will be able to collect amounts due under subscription contracts from ~~customer~~customers experiencing issues as a result of the COVID-19 pandemic, and we have not recorded an additional credit losses associated with the allowance for doubtful accounts in connection with any delays. Given that customers cannot forgo our monthly content updates, which are necessary to remain compliant with the most current regulations, we believe customers will continue to pay our renewal invoices in a timely, even if slightly elongated, manner. We believe that we currently have ample liquidity and capital resources to continue to meet our operating needs, and our ability to continue to service our debt or other financial obligations is not currently impaired. For a further description of our liquidity, ~~including the New Credit Agreement entered into on March 31, 2020,~~ see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors wethat cannot reliably ~~predict,~~be predicted, including the duration and scope of the pandemic; governmental, business, and individuals’ actions in response to the pandemic; and the impact on economic activity, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business and government spending on technology as well as customers’ ability to pay for our products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including estimated allowance for subscription cancellations, product life cycles, estimated useful lives and ~~estimated lives~~potential impairment of long-lived ~~assets.~~

~~Key Business Metrics~~

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

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~~Annual Recurring Revenue.~~

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.

September 30

(In millions)

2020

2019

Period-over-Period change

Annual Recurring Revenue

$
306.5

$
265.6

$
40.9

15.4
%

ARR increased by $40.9 million or 15.4% for the twelve month period ended September 30, 2020, as compared to the same period in 2019. The increase was primarily driven by $20.0 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases and $20.9 million of on premise and cloud-based subscription sales of our tax solutions to new customers.

~~Net Revenue Retention Rate.~~

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

September 30


2020

2019

Net Revenue Retention Rate

108
%
109
%

~~The NRR declined from 109% at September 30, 2019 to 108% at September 30, 2020 due primarily to a reduction in new sales to existing customers.~~

~~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 New Credit Agreement. We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, share-based compensation expense, severance charges and offering transaction costs. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison, our net (loss) income was $(21.0) million and $11.9 million for the three months ended September 30, 2020 and 2019, respectively, while our net income margin was (22.2)% and 14.4% over the same periods, respectively. Additionally, our net (loss) income was $(79.2) million and $26.3 million for the nine months ended

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~~September 30, 2020 and 2019, respectively, while our net income margin was (28.8)% and 11.2% over the same periods, respectively.~~

For the three months ended

For the nine months ended

September 30

September 30

(dollars in thousands)

2020

2019

2020

2019

Adjusted EBITDA:

Net (loss) income

$
(21,028)

$
11,900

$
(79,167)

$
26,347

Interest, net

1,796

252

3,424

804

Income tax (benefit) expense

(30,773)

175

(31,508)

600

Depreciation and amortization – cost of subscription revenues

5,307

3,687

15,349

11,624

Amortization of acquired intangibles - selling and marketing expense

128

—

128

—

Depreciation and amortization

2,735

2,311

8,109

6,528

Stock-based compensation

64,294

1,310

140,890

3,930

Severance charges

72

1

2,114

948

Adjusted EBITDA

$
22,531

$
19,636

$
59,339

$
50,781

Adjusted EBITDA Margin:









Total revenues

$
94,605

$
82,439

$
275,121

$
235,428

Adjusted EBITDA margin

23.8
%

23.8
%

21.6
%

21.6
%

The increase in Adjusted EBITDA for the three months ended September 30, 2020 of $2.9 million over the comparable period in 2019 is primarily driven by an increase in gross profit, offset by an increase in operating expenses including additional sales and marketing and research and development investments. Adjusted EBITDA margin remained consistent at 23.8% for the three months ended September 30, 2020 over the comparable period in 2019.

The increase in Adjusted EBITDA for the nine months ended September 30, 2020 of $8.6 million over the comparable period in 2019 is primarily driven by an increase in gross profit, offset by an increase in operating expenses including additional sales and marketing and research and development investments. Adjusted EBITDA margin remained consistent at 21.6% for the nine months ended September 30, 2020 over the comparable period in 2019.

~~Free Cash Flow and Free Cash Flow Margin.~~

Our management uses 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, adjusted for the redemption of stock appreciation rights (“SARs”) in 2020 in connection with the Offering reflected as a reduction of cash provided by operating activities, less purchases of 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 $20.0 million and $45.8 million for the nine months ended September 30, 2020 and 2019, respectively, while our operating cash flow margin was 7% and 19% over the same periods, respectively. Net cash used in investing activities was $36.5 million and $25.7 million for the nine months ended September 30, 2020 and 2019, respectively. Net cash provided

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~~by (used in) financing activities was $212.4 million and $(25.5) million for the nine months ended September 30, 2020 and September 30, 2019, respectively.~~

Nine months ended

September 30

(dollars in thousands)

2020

2019

Free cash flow:

Cash provided by operating activities

$
20,044

$
45,799

Redemption of Converted SARs

22,889

—

Property and equipment additions

(14,982)

(13,315)

Capitalized software additions

(9,246)

(12,345)

Free cash flow

$
18,705

$
20,139

Free cash flow margin:

Total revenues

$
275,121

$
235,428

Free cash flow margin

6.8
%

8.6
%

Free cash flow decreased by $1.4 million for the nine months ended September 30, 2020 as compared to the same period in 2019, driven primarily by a decrease in cash from operating activities of $25.8 million due to a $22.9 million payment for redemption of converted SARs in connection with the IPO, a reduction in cash provided by changes in operating assets and liabilities of $9.4 million, partially offset by an increase in non-cash operating activity resulting from increases in depreciation and amortization of $5.4 million and the write-off of deferred financing fees of $1.4 million. The $22.9 million payment for redemption of converted SARs pertain to SARs converted to stock options and immediately redeemed for cash upon the IPO. The reduction in operatingintangible assets, and ~~liabilities~~potential impairment of $9.4 million was primarily due to a reduction in deferred revenue of $9.3 million. Deferred revenue decreased due to a $5.6 million decrease in nonrecurring extended product support fees billed in the first half of 2019 related to older versions of software subscription solutions retired during 2019. The balance of the deferred revenue reduction of $3.7 million is due primarily to modifications to billing frequencies requested by customers, primarily to align all the annual subscription billings for their subscription licenses to the same period. Such billing frequency modification results in a short-term reduction in deferred revenue, but no impact to revenue. The increase in depreciation and amortization of $5.4 million was due to increased development costs related to the release of O Series 9.0 and internal automation projects. The write-off of deferred financing fees of $1.4 million was a result of the redemption of debt during the nine months ended September 30, 2020.goodwill.

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, which are generally one year, provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates and product support. The updates and support, which are part of the subscription agreement, are essential to the continued utility of the software; therefore, we have determined the software and the related updates and support to be a single performance obligation. Accordingly, when on-premise software is licensed, the revenue associated with this combined performance obligation is recognized ratably over the license term as these 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.

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Our on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price is a material right that provides customers with the right to this reduced renewal price. We recognize revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years.

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. All services within the cloud-based contracts consistently provide a benefit to the customer during the subscription period, thus the associated revenue is recognized ratably over the subscription period. Revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based solutions.

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

Services Revenue

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

Fluctuations in services revenue are directly correlated to fluctuations in our subscription revenues with respect to implementation and training services as we have historically experienced an attachment rate to subscription sales for these services in excess of 60%. ~~Our~~However, demand for services in 2020 exceeded historical levels as certain customers migrated to a newer version of the software which is not expected to be a significant driver of our services revenues growth in 2021. In addition, our managed services offering has ~~recently experienced~~continued to experience increased ~~revenue~~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 revenue also includes amortization associated with direct labor and related expenses for capitalized internal-use software for cloud-based subscription solutions and software developed ~~software~~for sale for new products and enhancements to existing products, and ~~cloud-based subscription solutions.~~costs associated with the amortization of acquired intangible assets. We plan to continue to significantly expand our infrastructure and personnel to support our future growth

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and increases in transaction volumes of our cloud-based solutions, including through acquisitions. We expect growth in our business will result in an increase in cost of revenue in absolute dollars.

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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 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, but may decrease as a percentage of revenues as we scale our operations.

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. For the nine months ended September 30, 2020 and 2019, $9.2 million and $12.3 million of software development costs were capitalized, respectively. Capitalized software development costs consist primarily of employee-related and third-party labor costs.

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

Selling and Marketing Expenses

Selling expenses consist primarily of personnel and related expenses in support of sales and marketing efforts. These costs include salaries, benefits, bonuses and stock-based compensation. In addition, selling expense includes costs related to advertising and promotion efforts, branding costs, partner-based commissions, costs associated with our annual customer conferences and amortization of certain acquired ~~intangibles.~~intangible assets. We intend to continue to invest in our sales and marketing capabilities in the future to continue to increase our brand awareness and expect these costs to increase on an absolute dollar basis as we grow our business and continue to expand our market and partner ecosystem penetration. Sales and marketing expense in absolute dollars and as a percentage of total revenue may fluctuate from period-to-period based on total revenue levels and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods. In addition, travel restrictions due to COVID-19 continue to result in reductions in travel and external marketing events. These costs are expected to increase once travel and conference restrictions are lifted, although it is uncertain whether they will return to historical levels experienced pre-COVID-19.

General and Administrative

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

We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, integrate future acquisitions and incur additional costs associated with becoming a

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publicly listed company. As a public company, we expect to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, SEC compliance and internal control ~~compliance.~~

~~-52-~~

~~Table~~compliance, including the design, implementation and testing of ~~Contents~~increasingly formalized systems of internal control over financial reporting.

Depreciation and Amortization

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

~~Interest Income~~Other Operating Expense, net

~~Interest income reflects earnings~~Other operating expense, net consists primarily of transactions costs associated with merger and acquisition activities, quarterly remeasurement of contingent consideration associated with completed acquisitions, realized gains and losses on ~~investments of our cash on hand~~foreign currency changes and ~~on funds held for customers related to our managed outsourcing services. Interest income~~other operating gains and losses. These amounts will ~~vary~~fluctuate as a result of ~~fluctuations~~ongoing merger and acquisition activities and for changes in ~~the future level of funds available for investment and the rate of return available in the market on such funds.~~foreign currency rates.

Interest (Income) Expense, net

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

Interest expense consists primarily of interest payments and other financing costs on our ~~debt~~bank credit facility. Interest expense includes ~~write downs~~amortization of deferred financing fees over the term of the credit facility or write-downs of such costs upon redemption of debt. Interest expense will vary as a result of fluctuations in the level of debt outstanding as well as interest rates on such debt. In addition, interest expense will include adjustments to the fair value of contracts that may be entered into to hedge risks associated with currency fluctuations for cash receipts or cash payments denominated in currencies other than U.S. dollars and which do not qualify for hedge accounting. In addition, changes in the settlement value of the future payment obligation for the Systax Sistemas Fiscais Limited (“Systax”) acquisition will be recorded as interest ~~expense, as described further in “Note 2—Acquisition”~~expense.

Interest income reflects earnings on investments of our cash on hand and on funds held for customers related to our ~~interim consolidated financial statements included~~managed outsourcing services. Interest income will vary as a result of fluctuations in ~~this Quarterly Report~~the future level of funds available for investment and the rate of return available in the market on ~~Form 10-Q.~~such funds.

Provision for Income Taxes

Prior to July 27, 2020, ~~we have been~~Vertex was taxed as an ~~S-corporation~~S-Corporation for U.S. federal and certain state income tax ~~purposes and for income tax purposes in most states.~~purposes. As a result, net income or loss prior to this date has been allocated to ~~our stockholders~~ and included on ~~their individual~~the income tax ~~returns. In certain states, we have been~~returns of the S-Corporation stockholders. Vertex was taxed at the corporate level ~~going forward.~~in certain states where the S-Corporation status was not recognized or where the state imposed a tax on S-Corporations. Accordingly, the income tax provision or benefit for such periods was based on taxable income allocated to those states. In certain foreign jurisdictions, our subsidiaries were taxed at the corporate ~~level. Similar to states,~~level, and the income tax provision or benefit is based on taxable income sourced to these foreign jurisdictions.

Effective as of July 27, 2020, weVertex converted to a ~~C-corporation,~~C-Corporation, which ~~will result~~resulted in our net income ~~of the Company~~ being taxed at the corporate level. As such, our provision for income taxes ~~will increase. Upon conversion~~has increased since we are now subject to ~~a C-corporation, we expect a pro forma entity level estimated effective tax rate of approximately 25%, inclusive of all applicable~~ U.S. federal and state ~~local and foreign~~corporate income taxes. ~~We recorded a tax benefit~~

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Table of $30.5 million upon such conversion, which is included in the condensed consolidated statement of comprehensive income (loss) for the three months ended September 30, 2020 included in Part 1 – Financial Information in this Quarterly Report on Form 10-Q.Contents

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, our consolidated financial statements and the notes thereto included in our ~~Prospectus~~Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on ~~July 30, 2020.~~March 15, 2021. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

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The following table sets forth our consolidated statements of comprehensive ~~income (loss)~~loss for the periods indicated.


	Three months ended								Six months ended
	June 30,								June 30,
(Dollars in thousands)	2021		2020		Period-Over-Period Change				2021		2020		Period-Over-Period Change
Revenues:
Software subscriptions	$	89,604	$	77,306	$	12,298	15.9	%	$	172,884	$	153,066	$	19,818	12.9	%
Services		15,334		13,965		1,369	9.8	%		30,290		27,450		2,840	10.3	%
Total revenues		104,938		91,271		13,667	15.0	%		203,174		180,516		22,658	12.6	%
Cost of revenues:
Software subscriptions¹		26,829		26,001		828	3.2	%		52,419		50,685		1,734	3.4	%
Services¹		10,550		15,744		(5,194)	(33.0)	%		21,893		30,522		(8,629)	(28.3)	%
Total cost of revenues		37,379		41,745		(4,366)	(10.5)	%		74,312		81,207		(6,895)	(8.5)	%
Gross profit		67,559		49,526		18,033	36.4	%		128,862		99,309		29,553	29.8	%
Operating expenses:
Research and development¹		11,926		13,617		(1,691)	(12.4)	%		23,385		26,696		(3,311)	(12.4)	%
Selling and marketing¹		24,865		24,544		321	1.3	%		45,015		48,877		(3,862)	(7.9)	%
General and administrative¹		24,865		37,758		(12,893)	(34.1)	%		49,717		75,394		(25,677)	(34.1)	%
Depreciation and amortization		2,878		2,505		373	14.9	%		5,705		5,374		331	6.2	%
Other operating expense, net		4,483		103		4,380	4,252.4	%		4,354		214		4,140	1,934.6	%
Total operating expenses		69,017		78,527		(9,510)	(12.1)	%		128,176		156,555		(28,379)	(18.1)	%
Income (loss) from operations		(1,458)		(29,001)		27,543	95.0	%		686		(57,246)		57,932	101.2	%
Interest (income) expense, net		(385)		1,059		(1,444)	(136.4)	%		150		1,628		(1,478)	90.8	%
Income (loss) before income taxes		(1,073)		(30,060)		28,987	96.4	%		536		(58,874)		59,410	100.9	%
Income tax benefit		(1,881)		(985)		(896)	91.0	%		(2,560)		(735)		(1,825)	248.3	%
Net income (loss)		808		(29,075)		29,883	102.8	%		3,096		(58,139)		61,235	105.3	%
Other comprehensive loss from foreign currency translations and revaluations, net of tax		3,359		276		3,083	1,117.0	%		4,336		3,274		1,062	32.4	%
Total comprehensive loss	$	(2,551)	$	(29,351)	$	26,800	91.3	%	$	(1,240)	$	(61,413)	$	60,173	98.0	%

Three months ended

Nine months ended






September 30

September 30

(Dollars in thousands) (unaudited)

2020

2019

Period-over-Period change

2020

2019

Period-over-Period change

Revenue:

















Software subscriptions

$
79,778

$
71,041

$
8,737

12.3
%
$
232,844

$
202,692

$
30,152

14.9
%
Services

14,827

11,398

3,429

30.1
%

42,277

32,736

9,541

29.1
%
Total revenue

94,605

82,439

12,166

14.8
%

275,121

235,428

39,693

16.9
%
Cost of Revenue:

















Software subscriptions⁽¹⁾

29,161

18,647

10,514

56.4
%

79,846

56,490

23,356

41.3
%
Services⁽¹⁾

18,807

8,786

10,021

114.1
%

49,329

23,616

25,713

108.9
%
Total cost of revenues

47,968

27,433

20,535

74.9
%

129,175

80,106

49,069

61.3
%
Gross profit

46,637

55,006

(8,369)

(15.2)
%

145,946

155,322

(9,376)

(6.0)
%
Operating expenses:

















Research and development⁽¹⁾

16,501

7,271

9,230

126.9
%

43,197

22,049

21,148

95.9
%
Selling and marketing⁽¹⁾

29,423

15,830

13,593

85.9
%

78,300

49,164

29,136

59.3
%
General and administrative⁽¹⁾

48,043

17,263

30,780

178.3
%

123,437

49,358

74,079

150.1
%
Depreciation and amortization

2,735

2,311

424

18.3
%

8,109

6,528

1,581

24.2
%
Other operating expense

(60)

4

(64)

(1,600.0)
%

154

472

(318)

(67.4)
%
Total operating expenses

96,642

42,679

53,963

126.4
%

253,197

127,571

125,626

98.5
%
Income (loss) from operations

(50,005)

12,327

(62,332)

(505.7)
%

(107,251)

27,751

(135,002)

(486.5)
%
Other (income) expense:

















Interest income

(79)

(251)

172

(68.5)
%

(535)

(775)

240

(31.0)
%
Interest expense

1,875

503

1,372

272.8
%

3,959

1,579

2,380

150.7
%
Total other expense, net

1,796

252

1,544

612.7
%

3,424

804

2,620

325.9
%
Income (loss) before income taxes

(51,801)

12,075

(63,876)

(529.0)
%

(110,675)

26,947

(137,622)

(510.7)
%
Income tax (benefit) expense

(30,773)

175

(30,948)

(17,684.6)
%

(31,508)

600

(32,108)

(5,351.3)
%
Net (loss) income

(21,028)

11,900

(32,928)

(276.7)
%

(79,167)

26,347

(105,514)

(400.5)
%
Other comprehensive loss from foreign currency translations

238

174

64

36.8
%

3,512

176

3,336

1,895.5
%
Total comprehensive income (loss)

$
(21,266)

$
11,726

$
(32,992)

(281.4)
%
$
(82,679)

$
26,171

$
(108,850)

(415.9)
%

~~(1)~~

Includes stock-based compensation expenses as ~~follows in~~shown on the ~~table below. For more details, see “Seasonality and Quarterly Trends.”~~following table.

~~-54-~~-44-

Table of Contents


	Three months ended				Six months ended
	June 30				June 30
(In thousands)	2021		2020		2021		2020
Stock-based compensation expense:
Cost of revenues, software subscriptions	$	572	$	4,168	$	1,132	$	7,660
Cost of revenues, services		622		6,251		1,216		11,489
Research and development		571		4,168		1,132		7,660
Selling and marketing		1,433		8,335		2,720		15,319
General and administrative		3,087		18,754		6,628		34,468
Total stock-based compensation expense	$	6,285	$	41,676	$	12,828	$	76,596

Three months ended

Nine months ended

September 30

September 30


2020

2019

2020

2019

(unaudited)

(In thousands)
Cost of revenues, software subscriptions

$
6,342

$
131

$
14,002

$
393
Cost of revenues, services

9,230

197

20,719

591
Research and development

6,340

131

14,000

393
Selling and marketing

12,821

261

28,140

784
General and administrative

29,561

590

64,029

1,769
Total stock-based compensation

$
64,294

$
1,310

$
140,890

$
3,930

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


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30				September 30				June 30				June 30
	2020		2019		2020		2019		2021		2020		2021		2020

	(unaudited)
Revenue:
Revenues:
Software subscriptions	84.3	%	86.2	%	84.6	%	86.1	%	85.4	%	84.7	%	85.1	%	84.8	%
Services	15.7	%	13.8	%	15.4	%	13.9	%	14.6	%	15.3	%	14.9	%	15.2	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Revenue:
Total revenues									100.0	%	100.0	%	100.0	%	100.0	%
Cost of Revenues:
Software subscriptions	30.8	%	22.6	%	29.0	%	24.0	%	25.6	%	28.5	%	25.8	%	28.1	%
Services	19.9	%	10.7	%	17.9	%	10.0	%	10.1	%	17.2	%	10.8	%	16.9	%
Total cost of revenues	50.7	%	33.3	%	46.9	%	34.0	%	35.7	%	45.7	%	36.6	%	45.0	%
Gross profit	49.3	%	66.7	%	53.1	%	66.0	%	64.3	%��	54.3	%	63.4	%	55.0	%
Operating expenses:
Research and development	17.4	%	8.8	%	15.7	%	9.4	%	11.4	%	14.9	%	11.5	%	14.8	%
Selling and marketing	31.1	%	19.2	%	28.5	%	20.9	%	23.7	%	26.9	%	22.2	%	27.1	%
General and administrative	50.8	%	20.9	%	44.9	%	21.0	%	23.7	%	41.4	%	24.5	%	41.8	%
Depreciation and amortization	2.9	%	2.8	%	2.9	%	2.8	%	2.7	%	2.7	%	2.8	%	3.0	%
Other operating expense, net	(0.1)	%	—	%	0.1	%	0.1	%	4.3	%	0.1	%	2.1	%	0.1	%
Total operating expenses	102.1	%	51.7	%	92.1	%	54.2	%	65.8	%	86.0	%	63.1	%	86.8	%
Income (loss) from operations	(52.8)	%	15.0	%	(39.0)	%	11.8	%	(1.4)	%	(31.8)	%	0.3	%	(31.8)	%
Other (income) expense:
Interest income	(0.1)	%	(0.3)	%	(0.2)	%	(0.3)	%
Interest expense	2.0	%	0.6	%	1.4	%	0.7	%
Total other expense, net	1.9	%	0.3	%	1.2	%	0.4	%
Interest (income) expense, net									(0.4)	%	1.2	%	0.1	%	(0.9)	%
Income (loss) before income taxes	(54.7)	%	14.7	%	(40.2)	%	11.4	%	(1.0)	%	(33.0)	%	0.2	%	(32.7)	%
Income tax (benefit) expense	(32.5)	%	0.2	%	(11.5)	%	0.3	%
Net (loss) income	(22.2)	%	14.5	%	(28.7)	%	11.1	%
Other comprehensive loss from foreign currency translations	0.3	%	0.2	%	1.3	%	0.1	%
Total comprehensive income (loss)	(22.5)	%	14.3	%	(30.0)	%	11.0	%
Income tax benefit									(1.8)	%	(1.1)	%	(1.3)	%	(0.4)	%
Net income (loss)									0.8	%	(31.9)	%	1.5	%	(32.3)	%
Other comprehensive loss from foreign currency translations, net of tax									3.2	%	0.3	%	2.1	%	(1.8)	%
Total comprehensive loss									(2.4)	%	(32.2)	%	(0.6)	%	(34.1)	%

~~-55-~~

~~Table of Contents~~

Three Months Ended ~~September~~June 30, ~~2020~~2021 Compared to Three Months Ended ~~September~~June 30, ~~2019~~2020

~~Revenue~~Revenues


	Three months ended
	June 30,
(Dollars in thousands)	2021		2020		Period-over-Period change
Revenues:
Software subscriptions	$	89,604	$	77,306	$	12,298	15.9	%
Services		15,334		13,965		1,369	9.8	%
Total revenues	$	104,938	$	91,271	$	13,667	15.0	%

Three months ended

September 30

(Dollars in thousands)

2020

2019

Period-over-Period change

Revenue:









Software subscriptions

$
79,778

$
71,041

$
8,737

12.3
%
Services

14,827

11,398

3,429

30.1
%
Total revenue

$
94,605

$
82,439

$
12,166

14.8
%

-45-

Table of Contents

~~Revenue~~Revenues increased ~~$12.2~~$13.7 million, or ~~14.8%~~15.0%, to ~~$94.6~~$104.9 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$82.4~~$91.3 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The increase in software subscriptions ~~revenue~~revenues of ~~$8.7~~$12.3 million, or ~~12.3%~~15.9%, was primarily driven by ~~$7.7~~and increase of $10.1 million in ~~revenue growth~~revenues derived from our existing customers and ~~$1.0~~a period over period increase of $2.2 million ~~of revenue growth~~in revenues derived from new customers. Software subscriptions revenues derived from new customers averaged 8.9% of total software subscriptions revenues in both periods.

The ~~$3.4~~$1.4 million increase in services ~~revenue is~~revenues was primarily driven by an increase of ~~$2.9~~$0.5 million in software subscription related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and existing customers upgrading to newer versions of our solutions. In addition, our managed services offering experienced a ~~$0.5~~$0.8 million increase in recurring services ~~revenue~~revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.

Cost of Software Subscriptions ~~Revenue~~Revenues


	Three months ended								Three months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Cost of software subscription revenue	$	29,161	$	18,647	$	10,514	56.4	%
Cost of software subscriptions revenues									$	26,829	$	26,001	$	828	3.2	%

Cost of software subscriptions ~~revenue~~revenues increased ~~$10.5~~$0.8 million, or ~~56.4%~~3.2%, to ~~$29.2~~$26.8 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$18.6~~$26.0 million for the three months ended ~~September~~June 30, ~~2019. Of this~~2020. This included a $4.0 million increase ~~59.1% is due to an increase~~ in stock-based compensation of $6.3 million for the three months ended September 30, 2020 over the same period in 2019. After excluding the impact of stock-based compensation there is a remaining increase of $4.2 million. Of this increase, $0.6 million is due primarily to increased amortization expense associated with late Q3 2019 release of O Series 9.0. The remaining $3.6 million variance is associated with increased costs of personnel supporting ~~year-over-year~~period over period growth of sales and customers and ongoing infrastructure investments to support expansion of customer transaction volumes for our cloud-based subscription customers. In addition, this included an increase in depreciation and amortization of capitalized software and acquired intangibles of $0.4 million associated with our ongoing investments in internal-use software for cloud-based subscription solutions and software developed for sale for new products and enhancements to existing products, and costs associated with the amortization of acquired intangible assets. These increases were partially offset by a $3.6 million decrease in stock-based compensation for the three months ended June 30, 2021 compared to the same period in 2020. As a percentage of total ~~revenue,~~revenues, the cost of software subscriptions ~~revenue increased~~revenues decreased to ~~30.8%~~25.6% for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~22.6% in September 30, 2019. Adjusting~~28.5% for the ~~increase~~same period in 2020. After excluding stock-based compensation ~~in 2020, cost of software subscriptions~~expense, as a percentage of total ~~revenue would have been 24.1% for the three months ended September 30,~~revenues, cost of software subscriptions revenues increased to 25.0% in 2021 compared to 23.9% in 2020.

Cost of Services ~~Revenue~~Revenues


	Three months ended								Three months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Cost of services revenue	$	18,807	$	8,786	$	10,021	114.1	%
Cost of services revenues									$	10,550	$	15,744	$	(5,194)	(33.0)	%

Cost of services revenue ~~increased $10.0~~decreased $5.2 million, or ~~114.1%~~33.0%, to ~~$18.8~~$10.6 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$8.8~~$15.7 million for the three months ended ~~September~~June 30, ~~2019. Of this increase, 90.1% is due to an increase in~~2020. This decline was primarily driven by a stock-based compensation decrease of ~~$9.2~~$5.6 million for the three months ended ~~September~~June 30, ~~2020 over~~2021 compared to the same period in ~~2019. The balance~~2020. After adjusting for the decline in stock-based compensation expense, cost of ~~the~~services revenues increased $0.4 million primarily driven by an increase ~~of $0.8 million is primarily due to headcount growth~~ in ~~the~~costs of service delivery ~~areas~~personnel to support revenue growth in software subscription related services and our managed services offering. As a percentage of total ~~revenue,~~revenues, cost of services ~~revenue increased~~revenues decreased to ~~19.9%~~10.1% in ~~2020~~2021 compared to ~~10.7% in 2019. Adjusting~~17.2% for the ~~increase~~

~~-56-~~

~~Table of Contents~~

same period in 2020. After excluding stock-based compensation ~~in 2020, cost of services revenue~~expense, as a percentage of total ~~revenue would have been 10.1% for the three months ended September 30,~~revenues, cost of services revenues decreased to 9.5% in 2021 compared to 10.4% in 2020.

Research and Development


	Three months ended
	June 30,
(Dollars in thousands)	2021		2020		Period-over-Period change
Research and development	$	11,926	$	13,617	$	(1,691)	(12.4)	%

Three months ended

September 30

(Dollars in thousands)

2020

2019

Period-over-Period change

Research and development

$
16,501

$
7,271

$
9,230

126.9
%

-46-

Table of Contents

Research and development expenses ~~increased $9.2~~decreased $1.7 million, or ~~126.9%~~12.4%, to ~~$16.5~~$11.9 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$7.3~~$13.6 million for the three months ended ~~September~~June 30, ~~2019. Of~~2020. However, this ~~increase, 67.3% is due to an increase in~~decline was driven by a stock-based compensation decrease of ~~$6.3~~$3.6 million for the three months ended ~~September~~June 30, ~~2020 over~~2021 compared to the same period in ~~2019~~2020. After adjusting for ~~personnel that participate~~the decline in ~~the Company’s~~ stock-based compensation ~~plans. The balance of the~~expense, research and development expenses increased $1.9 million primarily driven by an increase ~~of $2.9 million is primarily due to~~in costs associated with increased development activity associated with nascent technologies, ~~and~~ new solutions to address end-to-end data analysis and compliance needs of our ~~customers.~~customers, and continued expansion of connectors and application program interfaces (“APIs”) to customer ERP and other software platforms. As a percentage of total ~~revenue,~~revenues, research and development expenses decreased to 11.4% for the three months ended June 30, 2021 compared to 14.9% for the three months ended June 30, 2020. After excluding stock-based compensation expense, as a percentage of total revenues, research and development expenses increased to ~~17.4% for the three months ended September 30, 2020~~10.8% in 2021 compared to ~~8.8% for the three months ended September 30, 2019, driven~~10.4% in part by our expanded investment in developing our global compliance reporting solution. Adjusting for the increase in stock-based compensation in 2020, research and development expenses as a percentage of total revenue would have been 10.7% for the three months ended September 30, 2020.

Research and development expense excludes those costs that have been capitalized for solutions that have met our capitalization policy.

Selling and Marketing


	Three months ended								Three months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Selling and marketing	$	29,423	$	15,830	$	13,593	85.9	%	$	24,865	$	24,544	$	321	1.3	%

Selling and marketing expenses increased ~~$13.6~~$0.3 million, or ~~85.9%~~1.3%, to ~~$29.4~~$24.9 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$15.8~~$24.5 million for the same period in ~~2019. Of this increase, 92.4% is due to an increase in stock-based compensation of $12.8~~2020. This included a $5.0 million ~~for the three months ended September 30, 2020 over the same period in 2019. The balance of the increase of $0.8 million is primarily due to an~~ increase in payroll and related expenses associated with the growth in ~~year-over-year~~period over period subscription sales and services ~~revenue~~revenues and expansion of our partner and channel management ~~programs..~~programs. In addition, this included an increase of $2.3 million in advertising and promotional spending and expanded brand awareness efforts. These increases were partially offset by a $6.9 million decrease in stock-based compensation for the three months ended June 30, 2021 over the same period in 2020. As a percentage of total ~~revenue,~~revenues, selling and marketing expenses decreased to 23.7% for the three months ended June 30, 2021 compared to 26.9% for the same period in 2020. After excluding stock-based compensation expense, as a percentage of total revenues, selling and marketing expenses increased to ~~31.1% for the three months ended September 30, 2020~~22.3% in 2021 compared to ~~19.2% for the same period~~17.8% in ~~2019. Adjusting for the increase in stock-based compensation in 2020, selling and marketing expenses as a percentage of total revenue would have been 17.5% for the three months ended September 30,~~ 2020.

General and Administrative


	Three months ended								Three months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
General and administrative	$	48,043	$	17,263	$	30,780	178.3	%	$	24,865	$	37,758	$	(12,893)	(34.1)	%

General and administrative expenses ~~increased $30.8~~decreased $12.9 million, or ~~178.3%~~34.1%, to ~~$48.0~~$24.9 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$17.3~~$37.8 million for the same period in ~~2019. Of~~2020. However, this ~~increase, 94.1% is due to an increase in~~decline was driven by a stock-based compensation decrease of ~~$29.6~~$15.7 million for the three months ended ~~September~~June 30, ~~2020~~2021 over the same period in ~~2019. The balance of~~2020. After adjusting for the ~~increase of $1.2~~decline in stock-based compensation expense, general and administrative expenses increased $2.8 million is primarily ~~due to~~driven by planned strategic investments in information technology infrastructure, business process reengineering and other initiatives to drive future operating leverage, as well as investments in employees and other systems and resources in support of our growth. ~~Due to these factors, as~~As a percentage

~~-57-~~

~~Table of Contents~~

of total ~~revenue,~~revenues, general and administrative expenses ~~increased~~decreased to ~~50.8%~~23.7% for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~20.9%~~41.4% for the same period in ~~2019. Adjusting for the increase in~~2020. After excluding stock-based compensation ~~in 2020, general and administrative expenses~~expense, as a percentage of total ~~revenue would have been 19.5% for the three months ended September 30,~~revenues, general and administrative expenses were consistent at 20.8% in 2021 and 2020.

-47-

Table of Contents

Depreciation and Amortization


	Three months ended
	June 30,
(Dollars in thousands)	2021		2020		Period-over-Period change
Depreciation and amortization	$	2,878	$	2,505	$	373	14.9	%

Three months ended

September 30

(Dollars in thousands)

2020

2019

Period-over-Period change

Depreciation and amortization

$
2,735

$
2,311

$
424

18.3
%

Depreciation and amortization increased $0.4 million, or ~~18.3%~~14.9%, to ~~$2.7~~$2.9 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$2.3~~$2.5 million for the same period in ~~2019.~~2020. The increase was primarily due to the impact of infrastructure and technology purchases placed in service in ~~2019~~2020 and 2021and other capitalized infrastructure costs to support our growth. As a percentage of ~~revenue,~~total revenues, depreciation expense was ~~relative~~ consistent at ~~2.9%~~2.7% for 2021 and 2020

Other Operating Expense, Net


	Three months ended
	June 30,
(Dollars in thousands)	2021		2020		Period-Over-Period Change
Other operating expense, net	$	4,483	$	103	$	4,380	4,252.4	%

Other operating expense, net increased $4.4 million, or 4,252.4%, to $4.5 million of expense for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~2.8%~~$0.1 million of expense for the same period in ~~2019.~~2020. The increase was primarily due to $4.5 million in transaction costs associated with the Taxamo acquisition for the three months ended June 30, 2021. As a percentage of total revenues, other operating expense,net increased to 4.3% in 2021 compared to 0.1% in 2020.

Interest ~~Income~~(Income) Expense, Net


	Three months ended
	June 30,
(Dollars in thousands)	2021		2020		Period-over-Period change
Interest (income) expense, net	$	(385)	$	1,059	$	(1,444)	(136.4)	%

Three months ended

September 30

(Dollars in thousands)

2020

2019

Period-over-Period change

Interest income

$
(79)

$
(251)

$
172

56.5
%

Interest (income) expense, net changed $1.4 million, or 136.4%, to $0.4 million in interest income for the three months ended ~~September~~June 30, ~~2020 decreased $0.2~~2021 compared to $1.1 million ~~or 56.5% due primarily to a significant decline in money market investment yields as compared to~~of interest expense for the same period in ~~2019.~~2020. This change was primarily attributable to a decrease of $1.3 million in interest expense for the three months ended June 30, 2021 compared to 2020 due to the repayment of the Term Loan in July 2020. In addition, interest expense also decreased $0.2 million for the three months ended June 30, 2021 due to an increase in the valuation of foreign currency forward contracts. This was partially offset by lower interest income for the three months ended June 30, 2021 of $0.1 million due to a decline in investment yields in the current period as compared to 2020.

~~Interest Expense~~Income Tax Benefit


	Three months ended								Three months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Interest expense	$	1,875	$	503	$	1,372	272.8	%
Income tax benefit									$	(1,881)	$	(985)	$	(896)	91.0	%

~~Interest expense~~Income tax benefit increased ~~$1.4~~$0.9 million, or ~~272.8%~~91.0%, to $1.9 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$0.5~~$1.0 million for the same period in ~~2019. The~~2020. This increase is primarily due to the writedown of deferred financing fees of $1.4 million in connection with the July 2020 payoff of the New Term Loan with a portion of the proceeds from the IPO. This is offset by reductions in interest expense of $0.1 million due to the Company having no outstanding debt during the three months ended September 30, 2020 after this payoff, as compared to $51.6 million in outstanding debt for the same period in 2019.

~~Provision for Taxes~~

Three months ended

September 30

(Dollars in thousands)

2020

2019

Period-over-Period change

Income tax (benefit)

$
(30,773)

$
175

$
(30,948)

(17,684.6)
%

Income tax expense decreased $30.9 million, or 17,684.6%, to a $(30.8) million income tax benefit for the three months ended September 30, 2020 compared to $0.2 million of income tax expense for the same period in 2019. The decrease was primarily due to a ~~pretax~~pre-tax loss resulting from an increase in stock-based compensation in ~~2020. As~~2020 compared to the benefit for U.S. federal and state income taxes in 2021 now that we are taxed as a ~~percentage of revenue,~~C-Corporation. The income tax benefit ~~increased to (32.5)% for~~in the three months ended ~~September~~June 30, ~~2020 compared to expense~~2021 was primarily driven by exercises and vestings of ~~0.2% for~~stock awards partially offset by the ~~same period in 2019 due to a pretax loss in 2020 resulting from an increase in stock-based compensation.~~unfavorable impact of limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m).

~~-58-~~-48-

Table of Contents

~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020

~~Revenue~~Revenues


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Revenue:
Revenues:
Software subscriptions	$	232,844	$	202,692	$	30,152	14.9	%	$	172,884	$	153,066	$	19,818	12.9	%
Services		42,277		32,736		9,541	29.1	%		30,290		27,450		2,840	10.3	%
Total revenue	$	275,121	$	235,428	$	39,693	16.9	%
Total revenues									$	203,174	$	180,516	$	22,658	12.6	%

~~Revenue~~Revenues increased ~~$39.7~~$22.7 million, or ~~16.9%~~12.6%, to ~~$275.1~~$203.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$235.4~~$180.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The increase in software subscriptions ~~revenue~~revenues of ~~$30.2~~$19.8 million, or ~~14.9%~~12.9%, was primarily driven by ~~$27.1~~$17.5 million in revenue growth derived from our existing customers and ~~$3.1~~$2.3 million of ~~revenue~~revenues from new customers.

The ~~$9.5~~$2.8 million increase in services ~~revenue is primarily~~revenues was driven by an increase of ~~$7.7~~$1.4 million in software subscription-related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and upgrading existing customers ~~upgrading~~ to newer versions of our solutions. In addition, our managed services offering experienced a ~~$1.8~~$1.4 million increase in recurring services ~~revenue~~revenues over the prior year period due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.

Cost of Software Subscriptions ~~Revenue~~Revenues


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Cost of software subscription revenue	$	79,846	$	56,490	$	23,356	41.3	%
Cost of software subscriptions revenues									$	52,419	$	50,685	$	1,734	3.4	%

Cost of software subscriptions ~~revenue~~revenues increased ~~$23.4~~$1.7 million, or ~~41.3%~~3.4%, to ~~$79.8~~$52.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$56.5~~$50.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019. Of this~~2020. This included a $6.5 million increase ~~58.3% is due to an increase~~ in stock-based compensation of $14.0 million for the nine months ended September 30, 2020 over the same period in 2019. After excluding the impact of stock-based compensation there is a remaining increase of $9.4 million. Of this increase, $1.8 million is due primarily to increased amortization expense associated with the late Q3 2019 release of O Series 9.0. The remaining $7.6 million variance is associated with increased costs of personnel supporting ~~year-over-year~~period over period growth of sales and customers and ongoing infrastructure investments to support expansion of customer transaction volumes for our cloud-based subscription customers. In addition, this included an increase in depreciation and amortization of capitalized software and acquired intangibles of $1.7 million associated with our ongoing investments in internal-use software for cloud-based subscription solutions and software developed for sale for new products and enhancements to existing products, and costs associated with the amortization of acquired intangible assets. These increases were partially offset by a $6.5 million decrease in stock-based compensation for the six months ended June 30, 2021 compared to the same period in 2020. As a percentage of total ~~revenue,~~revenues, the cost of software subscriptions ~~revenue~~revenues increased to ~~29.0%~~25.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~24.0%~~28.1% in ~~September 30, 2019. Adjusting for~~ the ~~increase in~~prior year period. After excluding stock-based compensation ~~in 2020, cost of software subscriptions~~expense, as a percentage of total ~~revenue would have been 23.9% for the nine months ended September 30,~~revenues, cost of software subscriptions revenues increased to 25.2% in 2021 compared to 23.8% in 2020.

Cost of Services ~~Revenue~~Revenues


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Cost of services revenue	$	49,329	$	23,616	$	25,713	108.9	%
Cost of services revenues									$	21,893	$	30,522	$	(8,629)	(28.3)	%

Cost of services ~~revenue increased $25.7~~revenues decreased $8.6 million, or ~~108.9%~~28.3%, to ~~$49.3~~$21.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$23.6~~$30.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019. Of~~2020. However, this ~~increase, 78.3% is due to an increase in~~decline was driven by a stock-based compensation decrease of ~~$20.7~~$10.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 over~~2021 compared to the same period in ~~2019. The balance~~2020. After adjusting for the decline in stock-based compensation expense, cost of ~~the~~services revenues increased $1.7 million primarily driven by an increase ~~of $5.0 million is primarily due to headcount growth~~ in ~~the~~costs of service delivery ~~areas~~personnel to support revenue growth in software subscription

-49-

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related services and our managed services offering. As a percentage of

~~-59-~~

~~Table of Contents~~

total ~~revenue,~~revenues, cost of services ~~revenue increased~~revenues decreased to ~~17.9%~~10.8% in ~~2020~~the six months ended June 30, 2021 compared to ~~10.0%~~16.9% in ~~2019. Adjusting for~~ the ~~increase in~~prior year. After excluding stock-based compensation ~~in 2020, cost of services revenue~~expense, as a percentage of total ~~revenue would have been 12.8% for the nine months ended September 30,~~revenues, cost of services revenues decreased to 10.2% in 2021 compared to 10.5% in 2020.

Research and Development


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Research and development	$	43,197	$	22,049	$	21,148	95.9	%	$	23,385	$	26,696	$	(3,311)	(12.4)	%

Research and development expenses ~~increased $21.1~~decreased $3.3 million, or ~~95.9%~~12.4%, to ~~$43.2~~$23.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$22.0~~$26.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019. Of~~2020. However, this ~~increase, 64.3% is due to an increase in~~decline was primarily driven by a stock-based compensation decrease of ~~$14.0~~$6.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 over~~2021 compared to the same period in ~~2019~~2020. After adjusting for ~~personnel that participate~~the decline in ~~the Company’s~~ stock-based compensation ~~plans. The balance of the~~expense, research and development expenses increased $3.2 million primarily driven by an increase ~~of $7.1 million is primarily due to~~in costs associated with increased development activity associated with nascent technologies, ~~and~~ new solutions to address end-to-end data analysis and compliance needs of our ~~customers.~~customers, and continued expansion of connectors and application program interfaces (“APIs”) to customer ERP and other software platforms. As a percentage of total ~~revenue,~~revenues, research and development expenses ~~increased~~decreased to ~~15.7%~~11.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~9.4%~~14.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, driven in part by our expanded investment in ~~developing our global compliance reporting solution. Adjusting for the increase in~~multiple new market offerings. After excluding stock-based compensation ~~in 2020, research and development expenses~~expense, as a percentage of total ~~revenue would have been 10.6% for the nine months ended September 30,~~revenues, research and development expenses increased to 11.0% in 2021 compared to 10.5% in 2020.

Research and development expense excludes those costs that have been capitalized for solutions that have met our capitalization policy.

Selling and Marketing


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Selling and marketing	$	78,300	$	49,164	$	29,136	59.3	%	$	45,015	$	48,877	$	(3,862)	(7.9)	%

Selling and marketing expenses ~~increased $29.1~~decreased $3.9 million, or ~~59.3%~~7.9%, to ~~$78.3~~$45.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$49.2~~$48.9 million for the same period in ~~2019. Of~~2020. However, this ~~increase, 93.9% is due to an increase in~~decline was primarily driven by a stock-based compensation decrease of ~~$28.1~~$12.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 over the same period in ~~2019. The balance of~~2020. After adjusting for the decline in stock-based compensation expense, selling and marketing expenses increased $8.7 million. Of this $8.7 million increase, ~~of $1.0~~$5.1 million iswas primarily ~~due to~~driven by an increase in payroll and related expenses associated with the growth in ~~year-over-year~~period over period subscription sales and services ~~revenue~~revenues and expansion of our partner and channel management programs. In addition, ~~increases~~this increase included $3.8 million in advertising and promotional spending and expanded brand awareness efforts ~~contributed~~period over period. These increases were offset by decreases in travel period over period due to ~~this increase.~~continued 2021 COVID-19 travel restrictions. As a percentage of total ~~revenue,~~revenues, selling and marketing expenses decreased to 22.2% for the six months ended June 30, 2021 compared to 27.1% for the same period in 2020. After excluding stock-based compensation expense, as a percentage of total revenues, selling and marketing expenses increased to ~~28.5% for the nine months ended September 30, 2020~~20.8% in 2021 compared to ~~20.9% for the same period~~18.6% in ~~2019. Adjusting for the increase in stock-based compensation in 2020, selling and marketing expenses as a percentage of total revenue would have been 18.2% for the nine months ended September 30,~~ 2020.

General and Administrative


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
General and administrative	$	123,437	$	49,358	$	74,079	150.1	%	$	49,717	$	75,394	$	(25,677)	(34.1)	%

General and administrative expenses ~~increased $74.1~~decreased $25.7 million, or ~~150.1%~~34.1%, to ~~$123.4~~$49.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$49.4~~$75.4 million for the same period in ~~2019. Of~~2020. However, this ~~increase, 84.0% is due to an increase in~~ decline was primarily driven by a

-50-

Table of Contents

stock-based compensation decrease of ~~$64.0~~$27.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 over~~2021 compared to the same period in ~~2019.~~

~~-60-~~

~~Table of Contents~~

~~The balance of~~2020. After adjusting for the ~~increase of $10.1 million is~~decline in stock-based compensation expense, general and administrative expenses increased $2.1 primarily ~~due to~~driven by planned strategic investments in information technology infrastructure, business process reengineering and other initiatives to drive future operating leverage, as well as investments in employees and other systems and resources in support of our growth. Due to these factors, as a percentage of total ~~revenue,~~revenues, general and administrative expenses ~~increased~~decreased to ~~44.9%~~24.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~21.0%~~41.8% for the same period in ~~2019. Adjusting for the increase in~~2020. After excluding stock-based compensation ~~in 2020, general and administrative expenses~~expense, as a percentage of total ~~revenue would have been 21.6% for the nine months ended September 30,~~revenues, general and administrative expenses decreased to 21.2% in 2021 compared to 22.7% in 2020.

Depreciation and Amortization


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Depreciation and amortization	$	8,109	$	6,528	$	1,581	24.2	%	$	5,705	$	5,374	$	331	6.2	%

Depreciation and amortization increased ~~$1.6~~$0.3 million, or ~~24.2%~~6.2%, to ~~$8.1~~$5.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$6.5~~$5.4 million for the same period in ~~2019.~~2020. The increase was primarily due to the impact of infrastructure and technology purchases placed in service in ~~2019~~2020 and 2021 and other capitalized infrastructure costs to support our growth. As a percentage of ~~revenue,~~revenues, depreciation expense was relatively consistent at ~~2.9%~~2.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~2.8%~~3.0% for the same period in ~~2019.~~2020.

Other Operating Expense, Net


	Six months ended
	June 30,
(Dollars in thousands)	2021		2020		Period-Over-Period Change
Other operating expense, net	$	4,354	$	214	$	4,140	1,934.6	%

Other operating expense, net increased $4.1 million, or 1,934.6%, to $4.4 million of expense for the six months ended June 30, 2021 compared to $0.2 million of expense for the same period in 2020. This increase was primarily due to $4.7 million in transaction costs, which included $4.5 million associated with the Taxamo acquisition for the six months ended June 30, 2021. These costs were partially offset by other income of $0.4 million for the six months ended June 30, 2021 as compared to other expense of $0.2 million for the comparable period in 2020. As a percentage of total revenues, other operating expense,net increased to 2.1% in 2021 compared to 0.1% in 2020.

Interest ~~Income~~Expense, Net


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019		Period-over-Period change				2021		2020		Period-over-Period change
Interest income	$	(535)	$	(775)	$	240	56.5	%
Interest expense, net									$	150	$	1,628	$	(1,478)	(90.8)	%

Interest ~~income~~expense, net decreased $1.5 million, or 90.8%, to $0.2 million of expense for the ~~nine~~six months ended ~~September~~June 30, ~~2020 decreased $0.2~~2021 compared to $1.6 million ~~or 56.5% due~~of expense for the same period in 2020. This decrease was primarily attributable to a ~~decline~~decrease of $2.0 million in ~~money market investment yields as~~interest expense during the six months ended June 30, 2021 compared to the same period in ~~2019.~~2020 due to the repayment of the Term Loan in July 2020. This was partially offset during the six months ended June 30, 2021 by an increase in interest expense of $0.2 million due to a decrease in the valuation of foreign currency forward contracts and lower interest income in the current period of $0.3 million due to a decline in investment yields in 2021 as compared to 2020.

-51-

Table of Contents

~~Interest Expense~~Income Tax Benefit


	Nine months ended								Six months ended
	September 30								June 30,
(Dollars in thousands)	2020		2019			Period-over-Period change			2021		2020		Period-over-Period change
Interest expense	$	3,959	$	1,579	$	2,380	150.7	%
Income tax benefit									$	(2,560)	$	(735)	$	(1,825)	248.3	%

~~Interest expense~~Income tax benefit increased ~~$2.4~~$1.8 million, or ~~150.7%~~248.3%, to ~~$4.0~~$2.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$1.6~~$0.7 million for the same period in ~~2019. The~~2020. This increase includes the writedown of deferred financing fees of $1.4 million in connection with the July 2020 payoff of the New Term Loan with a portion of the proceeds from the IPO. The increase also includes interest expense of $0.4 million related to an overall increase of $41.0 million in the average balance of debt outstanding during the nine months ended September 30, 2020 due primarily to the New Term Loan of $175.0 million being outstanding for approximately four months in 2020.

~~Provision for Taxes~~

Nine months ended

September 30

(Dollars in thousands)

2020

2019

Period-over-Period change

Income tax (benefit) expense

$
(31,508)

$
600

$
(32,108)

(5,351.3)
%

Income tax expense decreased $32.1 million, or 5,351.3%, to a $(31.5) million income tax benefit for the nine months ended September 30, 2020 compared to $0.6 million of income tax expense for the same period in 2019. The decrease was primarily due to a pre-tax loss resulting from an increase in stock-based compensation in ~~2020. As~~2020 compared to the benefit for U.S. federal and state income taxes in 2021 now that we are taxed as a ~~percentage of revenue,~~

~~-61-~~

~~Table of Contents~~

C-Corporation. The income tax benefit ~~increased to (11.5)% for~~in the ~~nine~~six months ended ~~September~~June 30, ~~2020 compared to expense~~2021 was primarily driven by exercises and vestings of ~~0.3% for~~stock-based awards, partially offset by the ~~same period in 2019 due to a pre-tax loss in 2020 resulting from an increase in stock-based compensation.~~unfavorable impact of limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m).

Liquidity and Capital Resources

The Company’s Registration Statement on Form S-1 with the SEC was declared effective on July 28, 2020, resulting in the Class A shares being registered and available for trading on the NASDAQ exchange (the “Offering”). As of ~~September~~June 30, ~~2020,~~2021, we had cash and cash equivalents of ~~$270.3~~$101.6 million and retained earnings of ~~$21.7~~$25.5 million. Our primary sources of capital to date have been from sales of our solutions, ~~and~~ proceeds from bank lending ~~facilities.~~facilities and our Offering. On July 31, 2020, we received $423.0 million in proceeds from the Offering, net of underwriting fees and commissions, from the sale of 23,812,216 shares of Class A common stock and used a portion of the proceeds to pay off the $175.0 million term loan under the ~~New Credit Agreement.~~bank credit agreement. As a result, we have no outstanding bank debt after such ~~redemption.~~redemption and at June 30, 2021. The net proceeds remaining after payment of ~~IPO~~Offering costs and repayment of the term loan will be used for working capital and other corporate purposes as described in the Prospectus.

On May 12, 2021, we used approximately $190.2 million of our cash and cash equivalents to acquire Taxamo, a cloud-based provider of tax and payment automation for global eCommerce and marketplaces. The preliminary purchase price for the Taxamo acquisition was $200.7 million as of the acquisition date, consisting of (i) $190.2 million of cash paid at closing, (ii) an acquisition holdback of $0.5 million, and (iii) an option to purchase from and an option for the remaining shareholder to sell the remaining 5% of the outstanding equity at a fixed amount between August and December 2021 for $10.0 million.

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

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


	Six months ended
	June 30,
(Dollars in thousands)	2021		2020		Period-Over-Period Change
Net cash provided by operating activities	$	26,465	$	20,756	$	5,709	27.5	%
Net cash used in investing activities		(214,604)		(30,147)		(184,457)	611.9	%
Net cash provided by (used in) financing activities		8,740		(16,617)		25,357	(152.6)	%
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(221)		(204)		(17)	8.3	%
Net decrease in cash, cash equivalents and restricted cash	$	(179,620)	$	(26,212)	$	(153,408)	585.3	%

Nine months ended

September 30
(In thousands)

2020

2019

(unaudited)
Net cash provided by operating activities

$
20,044

$
45,799
Net cash used in investing activities

(36,546)

(25,660)
Net cash used in financing activities

212,435

(25,484)
Effect of foreign exchange rate changes

(412)

(176)
Net increase (decrease) in cash, cash equivalents and restricted cash

$
195,521

$
(5,521)

-52-

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Operating Activities. ~~Cash~~Net cash provided by operating activities was ~~$20.0~~$26.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$45.8~~$20.8 million for the same period in ~~2019, a decrease~~2020, an increase of ~~$25.8~~$5.7 million. The ~~decrease~~increase in cash ~~from~~provided by operating activities was driven primarily by a ~~$22.9 million payment for redemption of converted SARs~~net increase in ~~connection with the IPO, a reduction in cash provided by~~ changes in operating assets and liabilities of ~~$9.4~~$5.3 million partially offset by an increase in non-cash operating activity resulting from increases in depreciation and amortization of $5.4 million and the write-off of deferred financing fees of $1.4 million. The $22.9 million payment for redemption of converted SARs pertain to SARs converted to stock options and immediately redeemed for cash upon the IPO. The reduction in operating assets and liabilities of $9.4 million was primarily due to a reduction in deferred revenue of $9.3 million. Deferred revenue decreased due to a $5.6 million decrease in nonrecurring extended product support fees billed in the first half of 2019 related to older versions of software subscription solutions retired during 2019. The balance of the deferred revenue reduction of $3.7 million is due primarily to modifications to billing frequencies requested by customers, primarily to align all the annual subscription billings for their subscription licenses to the sameperiod over period. Such billing frequency modification results in a short-term reduction in deferred revenue, but no impact to revenue. The increase in depreciation and amortization of $5.4 million was due to increased development costs related to the release of O Series 9.0 and internal automation projects. The write-off of deferred financing fees of $1.4 million were a result of the redemption of debt during the nine months ended September 30, 2020.

Investing Activities. ~~Cash~~ Net cash used in investing activities was ~~$36.5~~$(214.6) million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$25.7~~$(30.1) million for the same period in ~~2019,~~2020, an increase in use of ~~$10.9~~funds for investing activities of $184.5 million. This increase was primarily ~~related~~due to a net increase in cash paid for acquisitions of $181.3 million period over period. During the six months ended June 30, 2021, we acquired Taxamo for approximately $187.5 million in cash, net of $2.6 million of Taxamo’s cash received in the acquisition, and Tellutax, LLC (“Tellutax”) for cash paid of $6.1 million. During the six months ended June 30, 2020, we acquired a controlling interest in Systax ~~a Brazilian transaction tax software and content subscription~~

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~~provider,~~Sistemas Fiscais LTDA (“Systax”) for ~~cash paid of~~approximately $12.3 million ~~during the three months ended March 31, 2020.~~in cash. For additional information on acquisitions, see ~~“Note 2~~Note 3, “Business Combinations” to ~~the Interim Condensed Consolidated Financial Statements (unaudited) —Acquisition.”~~our condensed consolidated financial statements.

Financing Activities. ~~Cash~~ Net cash provided by ~~(used in)~~ financing activities was ~~$212.4~~$8.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$(25.5)~~net cash used in financing activities of $(16.6) million ~~used~~ for the same period in ~~2019,~~2020, an increase in cash provided by financing activities of ~~$215.0~~$25.4 million. ~~This change~~Net cash provided by financing activities of $8.7 million for the six months ended June 30, 2021 was primarily driven by the increase in customer funds obligations of $22.2 million due primarily to ~~the $423.0~~timing differences between receipt of funds from customers and taxing jurisdiction withdrawls of these funds, partially offset by $10.7 million in ~~proceeds received from~~payments for taxes in connection with the ~~IPO,~~exercise of stock options whereby the award holders returned shares to us to satisfy their tax obligations. The net cash used in financing activities for the six months ended June 30, 2020 of $16.6 million was primarily driven by distributions to stockholders of $140.4 million, partially offset by the ~~payoff of the $175.0 million term loan~~net borrowings under the ~~New Credit Agreement.~~Term Loan of $121.1 million during this period.

Debt. As of ~~September~~June 30, ~~2020,~~2021, we had a $100 million line of credit with no outstanding borrowings. Interest on outstanding borrowings accrue at a Base Rate plus an applicable margin ~~(3.75%~~(3.25% as of ~~September~~June 30, ~~2020)~~2021) or the London Interbank Offered Rate (“LIBOR”) plus an applicable margin ~~(2.5%~~(2.00% as of ~~September~~June 30, ~~2020)~~2021). ~~As of September 30, 2020, the interest rate on the term loan was 2.50%. The Company has~~We have no outstanding bank debt at ~~September~~June 30, ~~2020.~~2021.

Funds Held for Customers and Customer Funds Obligations

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

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

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commitments

Other than the redemption of our outstanding debt through use of a portion of the Offering proceeds, there have been no material updates or changes to our contractual obligations and commitments compared to contractual obligations and commitments described in our ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the year ended December 31, 2020.

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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 also calculate AARPC, which is determine by dividing ARR by the number of software subscription customers as of the end of the respective period.


	June 30,
(Dollars in millions)	2021		2020		Period-over-Period Change
Annual Recurring Revenue	$	336.2	$	294.6	$	41.6	14.1	%

ARR increased by $41.6 million or 14.1% at June 30, 2021, as compared to June 30, 2020. The increase included $3.9 million related to the Taxamo acquisition during the three months ended June 30, 2021. The remainder of the increase was primarily driven by $16.6 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases, and $21.1 million of on-premise and cloud-based subscriptions of our tax solutions to new customers.

The number of customers and AARPC increased to 4,175 customers and approximately $80,500, respectively, at June 30, 2021 from 4,020 and approximately $73,300, respectively at June 30, 2020. The increase in customers included 135 customers and AARPC of approximately $28,900 from the Taxamo acquisition during the three months ended June 30, 2021. Excluding Taxamo, our AARPC was approximately $82,300 at June 30, 2021 resulting from existing customers expanding their use of our software, as well as from adding new customers.

Net Revenue Retention Rate.

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

The 200 basis point decline in NRR to 106% at June 30, 2021 from 108% for the same period in 2020 was primarily attributable to a reduction in salesgrowthto existing customers as compared to the prior year related to delays in signing deals due to their focus shifting to working remotely, and economic uncertainty in connection with the impact of the COVID-19 pandemic on their businesses.

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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 income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, stock-based compensation expense, severance expense and transaction costs. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison, our net income (loss) was $0.8 million and $(29.1) million for the three months ended June 30, 2021 and 2020, respectively, while our net income (loss) margin was 0.8% and (31.9)% over the same periods, respectively. Additionally, our net income (loss) was $3.1 million and $(58.1) million for the six months ended June 30, 2021 and 2020, respectively, while our net income margin (loss) was 1.5% and (32.2)% over the same periods, respectively.


	Three months ended						Six months ended
	June 30						June 30
(Dollars in thousands)	2021			2020			2021			2020
Adjusted EBITDA:
Net income (loss)	$	808		$	(29,075)		$	3,096		$	(58,139)
Interest (income) expense, net		(385)			1,059			150			1,628
Income tax benefit		(1,881)			(985)			(2,560)			(735)
Depreciation and amortization - property and equipment		2,878			2,505			5,705			5,374
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues		5,917			5,475			11,822			10,042
Amortization of acquired intangible assets - selling and marketing expense		86			—			170			—
Stock-based compensation expense		6,285			41,676			12,828			76,596
Severance expense		957			859			1,488			2,042
Transaction costs		4,522			—			4,672			—
Adjusted EBITDA	$	19,187		$	21,514		$	37,371		$	36,808

Adjusted EBITDA Margin:
Total revenues	$	104,938		$	91,271		$	203,174		$	180,516
Adjusted EBITDA margin		18.3	%		23.6	%		18.4	%		20.4	%

The decrease in Adjusted EBITDA for the three months ended June 30, 2021 of $2.3 million over the comparable period in 2020 is primarily driven by an increase in gross profit, offset by an increase in operating expenses including additional sales and marketing and research and development investments. Adjusted EBITDA margin decreased to 18.3% for the three months ended June 30, 2021 compared to 23.6% for the comparable period in 2020.

The increase in Adjusted EBITDA for the six months ended June 30, 2021 of $0.6 million over the comparable period in 2020 is primarily driven by an increase in gross profit, offset by an increase in operating expenses including additional sales and marketing and research and development investments. Adjusted EBITDA margin declined 2.0% for the six months ended June 30, 2021 over the comparable period in 2020 primarily due to increased investments in sales and marketing and research and development activities in 2021.

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, adjusted for the

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redemption of stock appreciation rights (“SARs”) in 2020 in connection with the Offering reflected as a reduction of cash provided by operating activities, less purchases of 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 in operating activities was $26.5 million and $20.8 million for the six months ended June 30, 2021 and 2020, respectively, while our operating cash flow margin was 13.0% and 11.5% over the same periods, respectively.


	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Free Cash Flow:
Net cash provided by operating activities	$	29,430		$	27,173		$	26,465		$	20,756
Property and equipment additions		(9,693)			(4,933)			(15,888)			(10,565)
Capitalized software additions		(2,904)			(3,558)			(5,125)			(7,264)
Free cash flow	$	16,833		$	18,682		$	5,452		$	2,927

Free Cash Flow Margin:
Total revenues	$	104,938		$	91,271		$	203,174		$	180,516
Free cash flow margin		16.0	%		20.5	%		2.7	%		1.6	%

Free cash flow decreased by $1.8 million for the three months ended June 30, 2021 as compared to the same period in 2020. This decrease was primarily driven by an increase of $4.8 million in investments in property and equipment additions to support our internal infrastructure investments. Free cash flow margin decreased to 16.0% for the three months ended June 30, 2021, compared to 20.5% for the same period in 2020.

Free cash flow increased by $2.5 million for the six months ended June 30, 2021 as compared to the same period in 2020. This increase was primarily driven by an increase in net cash provided by operating activities of $5.7 million, primarily due to an $5.3 million increase in cash provided by changes in operating assets and liabilities. This amount was offset by an increase of $5.3 million in investments in property and equipment additions to support our internal infrastructure investments. Free cash flow margin increased to 2.7% for the six months ended June 30, 2021, compared to 1.6% for the same period in 2020.

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 ~~sales~~selling and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income, and non-GAAP net income, ~~and free cash flow,~~ 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. ~~Management uses~~

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~~performance. We use non-GAAP financial measures of free cash flow and ~~liquidity.~~free cash flow margin to evaluate liquiditiy. 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

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prepared in accordance with GAAP financial measures, and should be read in conjunction with the condensed consolidated financial statements included ~~elsewhere~~ in this Quarterly Report on Form ~~10-Q~~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 ~~Prospectus.~~

~~We calculate these~~following additional non-GAAP financial measures ~~as follows:~~

are calculated and presented further below:

●

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

●

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

●

Non-GAAP gross margin is determined by adding back to GAAP gross margin the impact of stock-based compensation expense, and depreciation and amortization of capitalized software ~~costs~~and acquired intangible assets included in cost of revenues as a percentage of ~~revenue~~revenues for the respective periods.

●

Non-GAAP research and development ~~expense, non-GAAP selling and marketing~~ expense and non-GAAP general and administrative ~~expense~~expenses are determined by adding back to GAAP research and development ~~expense, GAAP selling and marketing~~ expense and GAAP general and administrative expense the stock-based compensation expense and severance expense included in the applicable expense categories 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 operating income is determined by adding back to GAAP ~~operating~~ income ~~(loss)~~or loss from operations the stock-based compensation expense, depreciation and amortization of capitalized software ~~costs~~ and acquired ~~intangibles,~~intangible assets – cost of subscription revenues, amortization of acquired intangible assets – selling and marketing expense, severance expense and transaction costs included in GAAP income or loss from operations for the respective periods.

●

Non-GAAP net income is determined by adding back to GAAP net ~~(loss)~~ income or loss the income tax benefit or expense, stock-based compensation expense, depreciation and amortization of capitalized software ~~costs~~ and acquired ~~intangibles, stock-based compensation~~intangible assets – cost of subscription revenues, amortization of acquired intangible assets – selling and marketing expense,~~the impact of converting from an S- to a C-corporation,~~ severance expense and ~~severance~~transaction costs included in GAAP net income or loss for the respective ~~periods.~~

●

~~Adjusted EBITDA~~periods to determine non-GAAP income or loss before income taxes. Non-GAAP income before income taxes is ~~determined by adding back to GAAP net (loss)~~then adjusted for income ~~the net interest expense,~~ taxes ~~depreciation and amortization of property and equipment, capitalized software costs and acquired intangibles, stock-based compensation expense and severance cost included for~~calculated using the respective ~~periods.~~

●

~~Adjusted EBITDA margin is determined by dividing Adjusted EBITDA by total revenues~~statutory tax rates for ~~the respective periods.~~

●

~~Free cash flow is determined by adjusting net cash provided by (used in) operating activities by adding back cash used~~applicable jurisdictions, which for ~~the redemption~~purposes of ~~SARs redeemed in connection with the IPO and reducing it for purchases of property and equipment and capitalized software additions for the respective periods.~~this determination were assumed to be 25.5%.

~~Free cash flow margin is determined by dividing free cash flow by total revenues for the respective periods.~~

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

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


	Three months ended						Six months ended
	June 30						June 30
(Dollars in thousands)	2021			2020			2021			2020
Non-GAAP cost of revenues, software subscriptions	$	20,340		$	16,358		$	39,465		$	32,983
Non-GAAP cost of revenues, services	$	9,928		$	9,493		$	20,677		$	19,033
Non-GAAP gross profit	$	74,670		$	65,420		$	143,032		$	128,500
Non-GAAP gross margin		71.2	%		71.7	%		70.4	%		71.2	%
Non-GAAP research and development expense	$	11,355		$	9,449		$	22,253		$	19,036
Non-GAAP selling and marketing expense	$	23,346		$	16,209		$	42,125		$	33,558
Non-GAAP general and administrative expense¹	$	20,821		$	18,145		$	41,601		$	38,884
Non-GAAP operating income	$	16,309		$	19,009		$	31,666		$	31,434
Non-GAAP net income²	$	12,437		$	13,373		$	23,479		$	22,205

¹The six month period ended June 30, 2021 includes $150 of transaction costs previously presented as a component of general and administrative expenses that was reclassified to ~~“Item 2. Management’s Discussion~~other operating expense, net, in the condensed consolidated statement of comprehensive loss.

²2020 Non-GAAP net income presentation adjusted to conform to 2021 presentation. The presentation was modified in the fourth quarter 2020 to tax effect, at the statutory income tax rate, the related non-GAAP adjustments to GAAP net income or loss. Thus, the income tax benefit for 2020 was removed and ~~Analysis of Financial Condition~~a statutory tax rate applied to Non-GAAP income after the non-GAAP adjustments. This reduced Non-GAAP net income before income taxes by $5,562 and $8,336 for the three and six months ended June 30, 2020, respectively. This will also reduce Non-GAAP net income by $8,229 and $16,565 for the three and nine months ended September 30, 2020, respectively.


	Three months ended						Six months ended
	June 30						June 30
(Dollars in thousands)	2021			2020			2021			2020
Non-GAAP Cost of Revenues, Software Subscriptions:
Cost of revenues, software subscriptions	$	26,829		$	26,001		$	52,419		$	50,685
Stock-based compensation expense		(572)			(4,168)			(1,132)			(7,660)
Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues		(5,917)			(5,475)			(11,822)			(10,042)
Non-GAAP cost of revenues, software subscriptions	$	20,340		$	16,358		$	39,465		$	32,983

Non-GAAP Cost of Revenues, Services:
Cost of revenues, services	$	10,550		$	15,744		$	21,893		$	30,522
Stock-based compensation expense		(622)			(6,251)			(1,216)			(11,489)
Non-GAAP cost of revenues, services	$	9,928		$	9,493		$	20,677		$	19,033

Non-GAAP Gross Profit:
Gross profit	$	67,559		$	49,526		$	128,862		$	99,309
Stock-based compensation expense		1,194			10,419			2,348			19,149
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues		5,917			5,475			11,822			10,042
Non-GAAP gross profit	$	74,670		$	65,420		$	143,032		$	128,500

Non-GAAP Gross Margin:
Total revenues	$	104,938		$	91,271		$	203,174		$	180,516
Non-GAAP gross margin		71.2	%		71.7	%		70.4	%		71.2	%

Non-GAAP Research and Development Expense:
Research and development expense	$	11,926		$	13,617		$	23,385		$	26,696
Stock-based compensation expense		(571)			(4,168)			(1,132)			(7,660)
Non-GAAP research and development expense	$	11,355		$	9,449		$	22,253		$	19,036

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	Three months ended					Six months ended
	June 30					June 30
(Dollars in thousands)	2021		2020			2021			2020
Non-GAAP Selling and Marketing Expense:
Selling and marketing expense	$	24,865	$	24,544		$	45,015		$	48,877
Stock-based compensation expense		(1,433)		(8,335)			(2,720)			(15,319)
Amortization of acquired intangible assets – selling and marketing expense		(86)		—			(170)			—
Non-GAAP selling and marketing expense	$	23,346	$	16,209		$	42,125		$	33,558

Non-GAAP General and Administrative Expense¹:
General and administrative expense	$	24,865	$	37,758		$	49,717		$	75,394
Stock-based compensation expense		(3,087)		(18,754)			(6,628)			(34,468)
Severance expense		(957)		(859)			(1,488)			(2,042)
Non-GAAP general and administrative expense	$	20,821	$	18,145		$	41,601	¹	$	38,884

Non-GAAP Operating Income:
Income (loss) from operations	$	(1,458)	$	(29,001)		$	686		$	(57,246)
Stock-based compensation expense		6,285		41,676			12,828			76,596
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues		5,917		5,475			11,822			10,042
Amortization of acquired intangible assets – selling and marketing expense		86		—			170			—
Severance expense		957		859			1,488			2,042
Transaction costs		4,522		—			4,672			—
Non-GAAP operating income	$	16,309	$	19,009		$	31,666		$	31,434

Non-GAAP Net Income:
Net income (loss)	$	808	$	(29,075)		$	3,096		$	(58,139)
Income tax benefit		(1,881)		(985)	²		(2,560)			(735)	²
Stock-based compensation expense		6,285		41,676			12,828			76,596
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues		5,917		5,475			11,822			10,042
Amortization of acquired intangible assets – selling and marketing expense		86		—			170			—
Severance expense		957		859			1,488			2,042
Transaction costs		4,522		—			4,672			—
Non-GAAP income before income taxes		16,694		17,950			31,516			29,806
Income tax adjustment at statutory rate		(4,257)		(4,577)	²		(8,037)			(7,601)	²
Non-GAAP net income	$	12,437	$	13,373	²	$	23,479		$	22,205	²

¹The six month period ended June 30, 2021 includes $150 of transaction costs previously presented as a component of general and ~~Results~~administrative expenses that was reclassified to other operating expense, net, in the condensed consolidated statement of ~~Operations - Key Business Metrics”~~ ~~for further discussion and reconciliation of Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin~~comprehensive loss.

²2020 Non-GAAP net income presentation adjusted to conform to 2021 presentation. The presentation was modified in the fourth quarter 2020 to tax effect, at the statutory income tax rate, the related non-GAAP adjustments to GAAP ~~financial measures.~~net income or loss. Thus, the income tax benefit for 2020 was removed and a statutory tax rate applied to Non-GAAP income after the non-GAAP adjustments. This reduced Non-GAAP net income before income taxes by $5,562 and $8,336 for the three and six months ended June 30 2020, respectively. This will also reduce Non-GAAP net income by $8,229 and $16,565 for the three and nine months ended September 30, 2020, respectively.

For the three months ended

For the nine months ended

September 30

September 30

(in thousands)

2020

2019

2020

2019

Non-GAAP cost of revenues, software subscriptions

$
17,512

$
14,829

$
50,495

$
44,473

Non-GAAP cost of revenues, services

$
9,577

$
8,589

$
28,610

$
23,025

Non-GAAP gross profit

$
67,516

$
59,021

$
196,016

$
167,930

Non-GAAP gross margin

71.4
%

71.6
%

71.2
%

71.3
%
Non-GAAP research and development expense

$
10,161

$
7,140

$
29,197

$
21,656

Non-GAAP selling and marketing expense

$
16,474

$
15,569

$
50,032

$
48,380

Non-GAAP general and administrative expense

$
18,410

$
16,672

$
57,294

$
46,641

Non-GAAP operating income

$
19,796

$
17,325

$
51,230

$
44,253

Non-GAAP net income

$
21,639

$
16,898

$
52,180

$
42,849

~~-65-~~

~~Table of Contents~~

For the three months ended

For the nine months ended

September 30

September 30

(in thousands)

2020

2019

2020

2019

Non-GAAP Cost of Revenue:













Cost of revenues, software subscriptions

$
29,161

$
18,647

$
79,846

$
56,490

Stock-based compensation

(6,342)

(131)

(14,002)

(393)

Depreciation and amortization - cost of subscription revenues

(5,307)

(3,687)

(15,349)

(11,624)

Non-GAAP cost of revenues, software subscriptions

$
17,512

$
14,829

$
50,495

$
44,473

Cost of revenues, services

$
18,807

$
8,786

$
49,329

$
23,616

Stock-based compensation

(9,230)

(197)

(20,719)

(591)

Non-GAAP cost of revenues, services

$
9,577

$
8,589

$
28,610

$
23,025

Non-GAAP Gross Profit:









Gross Profit

$
46,637

$
55,006

$
145,946

$
155,322

Stock-based compensation

15,572

328

34,721

984

Depreciation and amortization of capitalized software

5,307

3,687

15,349

11,624

Non-GAAP gross profit

$
67,516

$
59,021

$
196,016

$
167,930

Non-GAAP Gross Margin:









Gross margin

49.3
%

66.7
%

53.0
%

66.0
%
Stock-based compensation as a percentage of revenue

16.5
%

0.4
%

12.6
%

0.4
%
Depreciation and amortization - cost of subscription revenues as a percentage of revenue

5.6
%

4.5
%

5.6
%

4.9
%
Non-GAAP gross margin

71.4
%

71.6
%

71.2
%

71.3
%

Non-GAAP Research and Development Expense:









Research and development

$
16,501

$
7,271

$
43,197

$
22,049

Stock-based compensation

(6,340)

(131)

(14,000)

(393)

Non-GAAP research and development expense

$
10,161

$
7,140

$
29,197

$
21,656

Non-GAAP Selling and Marketing Expense:









Selling and marketing

$
29,423

$
15,830

$
78,300

$
49,164

Amortization of acquired intangibles - selling and marketing expense

(128)

—

(128)

—

Stock-based compensation

(12,821)

(261)

(28,140)

(784)

Non-GAAP selling and marketing

$
16,474

$
15,569

$
50,032

$
48,380

Non-GAAP General and Administrative Expense:









General and administrative

$
48,043

$
17,263

$
123,437

$
49,358

Stock-based compensation

(29,561)

(590)

(64,029)

(1,769)

Severance charges

(72)

(1)

(2,114)

(948)

Non-GAAP general and administrative

$
18,410

$
16,672

$
57,294

$
46,641

Non-GAAP Operating Income:









Income (loss) from operations

$
(50,005)

$
12,327

$
(107,251)

$
27,751

Stock-based compensation

64,294

1,310

140,890

3,930

Severance expense

72

1

2,114

948

Amortization of acquired intangibles - selling and marketing expense

128

—

128

—

Depreciation and amortization - cost of subscription revenues

5,307

3,687

15,349

11,624

Non-GAAP operating income

$
19,796

$
17,325

$
51,230

$
44,253

Reconciliation of Non-GAAP Net Income:









Net (loss) income

$
(21,028)

$
11,900

$
(79,167)

$
26,347

Stock-based compensation

64,294

1,310

140,890

3,930

Severance charges

72

1

2,114

948

Amortization of acquired intangibles - selling and marketing expense

128

—

128

—

Depreciation and amortization - cost of subscription revenues

5,307

3,687

15,349

11,624

Impact of S- to C-corporation conversion

(27,134)

—

(27,134)

—

Non-GAAP net income

$
21,639

$
16,898

$
52,180

$
42,849

~~-66-~~

~~Table of Contents~~

Critical Accounting Policies and Estimates

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

There have been no material updates or changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in our ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the period ended ~~June 30,~~December 31, 2020.

-59-

Table of Contents

Recent Accounting Pronouncements

For further information on recent accounting pronouncements, refer to Note 1, in“Summary of Significant Accounting Policies” to the ~~consolidated financial statements contained within this Quarterly Report on Form 10-Q.~~Condensed Consolidated Financial Statements.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We had cash and cash equivalents of ~~$270.3~~$103.7 million as of ~~September~~June 30, ~~2020.~~2021. In addition, the Company received proceeds, net of underwriter fees, from its Offering of $423.0 million on July 31, 2020, which it used to pay off outstanding debt of $175.0 million resulting in the Company having no outstanding bank debt after such redemption.

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 our investment portfolio as a result of changes in interest rates. Declines in interest rates ~~however,~~ would reduce future interest ~~income.~~income by an insignificant amount.

We are exposed to risk related to changes in interest rates. Borrowings under the ~~New Credit Agreement~~bank credit agreement bear interest at rates that are variable. We have no outstanding borrowings. Increases in the bank prime or LIBOR 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. Based on no outstanding borrowings as of June 30, 2021, increases in the bank prime or LIBOR rates would not result in a significant increase in interest expense.

Foreign Currency Exchange Risk

Our ~~revenue~~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 ~~revenue~~revenues and other operating results as expressed in U.S. dollars. For the ~~three and nine~~six months ended ~~September~~June 30, ~~2019~~2021 and 2020, approximately 2% and 1%, respectively, of our revenues were ~~generated~~denominated in currencies other than U.S. ~~dollars in each respective period.~~dollars.

We have experienced and will continue to experience fluctuations in our net ~~(loss)~~ income or loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We have historically recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operations and our risk grows. The acquisition of the controlling interest in Systax in January 2020 and the future purchase commitments associated with this acquisition are expected to increase our exposure to fluctuations of the Brazilian Real over time. In May 2020, we entered into a series of foreign currency forward contracts to hedge approximately 40% of our exposure to adverse fluctuations in the Brazilian Real associated with these future purchase commitments.

~~-67-~~

~~Table of Contents~~

Inflation

Historically, we do not believe that inflation had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

-60-

Table of Contents

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. Solely as a result of the material ~~weaknesses~~weakness described below, our principal executive officer and principal financial officer concluded that, as of ~~September~~June 30, ~~2020,~~2021, our disclosure controls and procedures were not effective.

We have performed additional analyses, reconciliations, and other post-closing procedures and have concluded that, notwithstanding the material ~~weaknesses~~weakness in our internal control over financial reporting, the unaudited interim condensed consolidated financial statements as of and for the periods covered by and included in this Quarterly Report on Form 10-Q fairly state, in all material respects, our financial position, results of operations and cash flows as of and for the periods presented in conformity with GAAP.

Previously Identified Material Weaknesses

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, we identified ~~three~~a material ~~weaknesses~~weakness in our internal control over financial reporting ~~during the two-year period ended December 31, 2019. These material weaknesses were~~ due to (i) the lack of an effective review control over the completeness and accuracy of significant conclusions regarding the impact of the new revenue recognition guidance prescribed by ASC 606, (ii) incorrect applications of software capitalization models and untimely identification of impairments of capitalized software development costs and (iii) an insufficient process for the provision and governance of user access to financially significant systems that resulted in a lack of segregation of duties related to journal ~~entries and cash disbursements. The material weaknesses resulted in several control deficiencies that could have the following effects:~~

●

~~the impact of new or revised accounting guidance on the Company’s financial statements may not be identified and accurately reflected in the Company’s financial statements;~~

●

errors in the amount of software development costs capitalized and impairment assessments that are either not captured in a timely manner or not appropriate based on whether such costs are internal-use software versus software to be sold, leased or marketed; and

●

~~an increased risk that unauthorized transactions will not be prevented and/or detected and corrected in a timely manner.~~

The material weaknesses relating to revenue recognition and capitalized software development costs resulted in errors that were not identified timely in conjunction with the issuance of our financial statements as of and for the years ended December 31, 2018 and 2019. These errors led to adjustments reflected in the 2019 and 2018 audited consolidated financial statements. We evaluated these errors under both quantitative and qualitative standards. No errors were identified with respect to the lack of segregation of user access to financially significant systems.entries.

A material weakness is a control deficiency, or combination of control deficiencies, that results in ~~more than~~ a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely ~~basis by a company’s internal controls.~~basis.

~~-68-~~

~~Table of Contents~~

~~Beginning in February 2020, we started specific efforts to remediate the material weaknesses described above, including the following:~~

●

~~implemented additional and more precise review controls over revenue recognition, particularly considering the complex nature of this accounting pronouncement;~~

●

~~instituted additional and more precise review controls over implementation of new accounting pronouncements, particularly where~~Our management, ~~seeks input from outside consultants with respect to implementation of those accounting pronouncements that are complex;~~

●

instituted a control in which senior members of our finance, accounting, technology and product teams meet quarterly and review all new software projects, existing software assets that have changes in projected use and/or pipeline, and business and market conditions that could impact classification or impairment of capitalized software development costs; and

●

~~began to implement changes needed over our user access governance practices to prevent individuals from having the ability to create and post journal entry or create a vendor and prepare checks.~~

~~We continue to implement new technology systems to automate certain processes, particularly~~ with respect to revenue recognition. We expect these efforts to continue throughout 2020 and, in the interim, we will continue to employ enhanced review controls. We also plan to increase the education and training available tooversight from our management regarding new and revised accounting standards to aid in our efforts to remediate the material weakness regarding our implementation of ASC 606 and future accounting pronouncements. Our executive team in charge of reviewing potential impairments of capitalized software development costs will continue to meet quarterly in 2020 and thereafter. Finally, we areAudit Committee, is in the process of ~~performing an overall review of~~remediating this material weakness. During 2020, we implemented changes to our user access governance practices to prevent individuals from having the ability to create and post journal entries and have implemented a periodic review cycle for ~~our core financial systems, which we expect may result in further segregation of duties. We also plan to periodically update our review of~~ user ~~access going forward.~~

~~The Company will require additional time to demonstrate the effectiveness of the remediation efforts. The~~access. However, this material ~~weaknesses~~weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing in 2021, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

Other than the changes described above regarding enhancements associated with ongoing remediation efforts, 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.

~~-69-~~

~~Table of Contents~~

PART II---OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we 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 our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition, or operating results.

ITEM 1A. RISK FACTORS

There are no material changes to the risk factors discussed in the Company’s ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~June 30,~~December 31, 2020 under the heading “Risk Factors.”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

-61-

Table of Contents

10-Q. If any of the events contemplated should occur, our business, results of operations, financial condition and cash flows could suffer significantly.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

~~-70-~~-62-

Table of Contents

ITEM 6. EXHIBITS


Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith	Furnished Herewith
10.1	Amendment to S Corporation Termination and Tax Sharing Agreement					X
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)

~~-71-~~-63-

Table of Contents

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: ~~November~~August 12, ~~2020~~2021	By:	/s/ David DeStefano
		David DeStefano
		President, Chief Executive Officer and Chairperson (principal executive officer)

Date: ~~November~~August 12, ~~2020~~2021	By:	/s/ John Schwab
		John Schwab
		Chief Financial Officer (principal financial officer)

~~-72-~~-64-


	September 30,		December 31,
	2020		2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	270,271	$	75,903
Funds held for customers		8,745		7,592
Accounts receivable, net of allowance of $7,567 (unaudited), and $7,515, respectively		66,789		70,367
Advances to stockholders		2		283
Prepaid expenses and other current assets		16,001		11,412
Total current assets		361,808		165,557
Property and equipment, net of accumulated depreciation		55,935		54,727
Capitalized software, net of accumulated amortization		32,619		32,075
Goodwill		18,667		—
Deferred commissions		10,372		11,196
Deferred income tax asset		32,440		219
Deposits and other assets		3,093		849
Total assets	$	514,934	$	264,623

Liabilities and Equity
Current liabilities:
Current portion of long-term debt	$	1,179	$	50,804
Accounts payable		11,828		10,729
Accrued expenses		15,014		13,308
Distributions payable		—		13,183
Customer funds obligations		8,711		7,553
Accrued salaries and benefits		20,276		15,195
Accrued variable compensation		16,154		22,237
Deferred compensation, current		3,220		8,935
Deferred revenue		185,445		191,745
Deferred rent and other		908		840
Future acquisition commitment, current		780		—
Total current liabilities		263,515		334,529
Deferred compensation, net of current portion		2,156		18,530
Deferred revenue, net of current portion		12,095		14,046
Long-term debt, net of current portion		329		682
Future acquisition commitment, net of current portion		9,485		—
Deferred other liabilities		8,793		9,268
Total liabilities		296,373		377,055
Commitments and contingencies (Note 11)
Options for redeemable shares		—		17,344
Stockholders' equity (deficit):
Preferred shares, $0.001 par value, 30,000 and 0 shares authorized, respectively; 0 and 0 shares issued and outstanding, respectively		—		—
Class A voting common stock, $0.001 par value, 0 and 600 shares authorized, respectively; 0 and 300 shares issued, respectively; 0 and 147 shares outstanding, respectively		—		—
Class B non-voting common stock, $0.001 par value, 0 and 299,400 shares authorized, respectively; 0 and 162,297 shares issued, respectively; 0 and 120,270 shares outstanding, respectively		—		54
Class A voting common stock, $0.001 par value, 300,000 and 0 shares authorized, respectively; 25,688 and 0 shares issued and outstanding, respectively		26		—
Class B voting common stock, $0.001 par value, 150,000 and 0 shares authorized, respectively; 120,417 and 0 shares issued and outstanding, respectively		120		—
Additional paid in capital		200,722		—
Retained earnings (accumulated deficit)		21,696		(90,701)
Accumulated other comprehensive loss		(4,003)		(491)
Treasury stock		—		(38,638)
Total stockholders' equity (deficit)		218,561		(129,776)
Total liabilities and equity	$	514,934	$	264,623


	For the three months ended
	September 30, 2020
	(unaudited)
	Balance		Net Change
Allowance balance, July 1	$	(7,669)
Allowance balance, September 30		(7,567)
Change in allowance			$	(102)
Deferred allowance balance, July 1		5,335
Deferred allowance balance, September 30		5,170
Change in deferred allowance				165
Net amount charged to revenue			$	63


	For the three months ended
	September 30, 2019
	(unaudited)
	Balance			Net Change
Allowance balance. July 1	$	(4,845)
Allowance balance, September 30		(5,500)
Change in allowance			$	655
Deferred allowance balance, July 1		3,720
Deferred allowance balance, September 30		4,198
Change in deferred allowance				(478)
Net amount charged to revenue			$	177


	Initial Purchase
Net Assets and Assumed Liabilities	Price Allocation
	(unaudited)
Cash and cash equivalents	$	56
Accounts receivable		867
Property and equipment		48
Other assets		18
Goodwill		26,124
Accounts payable and accrued expenses		(228)
Accrued compensation		(162)
Other liabilities		(5)
Total consideration at acquisition date	$	26,718


	2020
	(unaudited)
Balance, January 1	$	—
Acquisition of Systax, January		26,124
Foreign currency translation adjustment for the three months ended March 30		(5,893)
Foreign currency translation adjustment for the three months ended June 30		(876)
Foreign currency translation adjustment for the three months ended September 30		(688)
Balance, September 30	$	18,667


	Units outstanding July 27, 2020	Units (exchanged) issued in connection with Offering	Units outstanding July 28, 2020 (prior to exercises)

	(unaudited)
SARs	12,086	(12,038)	48
Amended Options	3,676	(3,676)	—
2020 Plan options	—	15,714	15,714
RSA's	—	694	694
RSU's	—	10	10


	Units			Range of
	Vested	Nonvested	Total	grant values

	(unaudited)
Balance, January 1, 2019	5,889	4,782	10,671	$	0.92–$3.17
Granted	297	2,112	2,409	$	3.73
Exercised	(609)	—	(609)	$	1.31–$2.50
Forfeited	—	(195)	(195)	$	2.13–$2.50
Vested	630	(630)	—
Balance, December 31, 2019	6,207	6,069	12,276	$	0.92–$3.73
Granted	21	681	702	$	4.70
Exercised	(829)	—	(829)	$	1.31–$2.50
Forfeited	—	(63)	(63)	$	2.50
Vested	1,410	(1,410)	—
Converted	(6,761)	(5,277)	(12,038)	$	0.92–$4.70
Balance September 30, 2020	48	—	48	$	2.50


	September 30
(In millions)	2020		2019		Period-over-Period change
Annual Recurring Revenue	$	306.5	$	265.6	$	40.9	15.4	%

June 30,

Net Revenue Retention Rate