Item 7. 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 consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this Annual Report on Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
Vertex is a leading global provider of indirect tax software and solutions. Our mission is to deliver the most trusted tax technology enabling global businesses to transact, comply and grow with confidence. Vertex provides cloud-based and on-premise solutions that can be tailored to specific industries for every major line of indirect tax, including sales and consumer use, value-added and payroll. Headquartered in North America, and with offices in South America and Europe, Vertex employs over 1,300 professionals and serves companies across the globe.
We derive the majority of our revenue from software subscriptions. These subscriptions include use of our software and ongoing monthly content updates. Our software is offered on a subscription basis to our customers, regardless of their deployment preferences. On-premise subscriptions are typically sold through one-year contracts and cloud-based subscriptions are typically sold through one- to three-year contracts. We bill almost all of our customers annually in advance of the subscription period.
Our customers include a majority of the Fortune 500, as well as a majority of the top 10 companies by revenue in multiple industries such as retail, technology and manufacturing, in addition to leading marketplaces. As our customers expand geographically and pursue omnichannel business models, their tax determination and compliance requirements increase and become more complex, providing sustainable organic growth opportunities for our business. Our flexible, tiered transaction-based pricing model also results in our customers growing their spend with us as they grow and continue to use our solutions. We principally price our solutions based on a customer’s revenue base, in addition to a number of other factors.
We employ a hybrid deployment model to align to our customers’ technology preferences for their core financial management software across on-premise, cloud deployments or any combination of these models. Over time, we expect both existing and newly acquired customers to continue to shift toward cloud deployment models. Cloud-based subscription sales to new customers have grown at a significantly faster rate than on-premise software subscription sales, which is a trend that we expect to continue over time. We generated 35.4% and 27.5% of software subscription revenues from cloud-based subscriptions in 2021 and 2020, respectively. While our on-premise software subscription revenues comprise 64.6% of our software subscription revenues in 2021, it continues to decrease as a percentage of total software subscriptions revenues as cloud-based subscriptions grow.
We license our solutions primarily through our direct sales force, which focuses on selling to qualified leads provided by our marketing efforts, and through our network of referral partners. We also utilize indirect sales to a lesser extent to efficiently grow and scale our enterprise and mid-market revenues.
Our partner ecosystem is a differentiating, competitive strength in both our software development and our sales and marketing activities. We integrate with key technology partners that span ERP, CRM, procurement, billing, POS and eCommerce. 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.
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We believe that global commerce and the compliance environment provides durable and accelerating growth opportunities for our business. We generated revenues of $425.5 million and $374.7 million in 2021 and 2020, respectively. We had a net (loss) of $(1.5) million and $(75.1) million in 2021 and 2020, respectively. These amounts are 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 $78.0 million and $78.4 million in 2021 and 2020, respectively. Adjusted EBITDA is a non-GAAP financial measure. Refer to “Key Business Metrics” and “Use and Reconciliation of Non-GAAP Financial Measures” for further discussion of key business metrics and non-GAAP financial measures and their comparison to GAAP financial measures.
Key Factors Affecting Performance
The growth of our business and our future success depends on many factors, including our ability to retain and expand our revenues from existing customers, acquire new customers, broaden and deepen our partner ecosystem, continually innovate our software, invest in growth and scale our business and manage customer migrations to cloud solutions. While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We anticipate that we will continue to expand our operations and headcount. The expected addition of new personnel and the investments that we anticipate will be necessary to manage our anticipated growth may make it more difficult for us to achieve or maintain profitability. Many of these investments will occur in advance of experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently.
Retention and expansion of revenues from existing customers. Given the breadth of our customer base and their owninternal growth, the majority of our revenues and revenue growth comes from existing customers. This revenue growth is comprised of the acquisition of new licenses for additional products, increases in subscription fees due to expanded usage of currently licensed software and price increases. We plan to continue to invest in new innovations and offerings and in our sales and marketing teams in order to support the ongoing strong retention and expansion of revenues with our existing customers. We monitor our net revenue retention rate (“NRR”) in order to understand our ability to retain and grow revenues from our customers. Our NRR was 108% and 106% in 2021 and 2020, respectively. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics – Net Revenue Retention Rate” for further discussion.
Acquire new customers. Our solutions address the complexity of aligning commerce and compliance, and we believe themarket for our software and solutions is large and underpenetrated, both in the U.S. and globally. As enterprise and mid-market companies continue to expand their business operations—both through their product and service offerings and their global footprint—we expect demand for our tax solutions to increase due to the fact that legacy solutions such as spreadsheets, manual processes, native ERP functionality or home-built solutions are error prone, inefficient and cannot scale. We plan to continue to invest in our sales and marketing teams and our solution development in order to address this increased demand from new customers. This increased investment will result in increases in expenses in advance of revenues attributable to these investments.
Broaden and deepen our partner ecosystem. We have an extensive network of partners that spans ERP, CRM,procurement, billing, POS and eCommerce platforms. Our partners enhance the coverage and adoption of our solutions and promote our thought leadership. We leverage our partnerships to maximize the benefits of our solutions for our customers and to identify new customer opportunities. By forming additional strategic alliances with participants in the global digital transformation, such as payments and eCommerce platforms, we can continue to expand our exposure to all transactions, both business-to-consumer (“B2C”) and business-to-business (“B2B”). Future partnerships with large-scale digital payments companies will allow us to develop additional customer-centric solutions and further expand our customer base.
Continued innovation of our software. With the pace of change in commerce and compliance, we believe it is importantto continue innovating and extending the functionality and breadth of our software. We plan on investing to further enhance our content and the speed and usability of our software. Historically such innovation has been accomplished through internal development efforts. However, we may pursue acquisitions, development arrangements with partners or similar activities to accelerate these investments. We believe continuing to enhance our existing software
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and expanding our tax content will increase our ability to generate revenues by broadening the appeal of our software to new customers as well as increasing our engagement with existing customers. See Note 3, Business Combinations to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for a discussion of our acquisitions.
Investing in growth and scaling our business. We believe that our market opportunity is large, and we will continue toinvest significantly in scaling across organizational functions in order to support the anticipated growth in our operations both domestically and internationally. Any investments we make in our research and development and our sales and marketing organization will occur in advance of experiencing the benefits from such investments; therefore, it may be difficult for us to determine if we are efficiently allocating resources in those areas. The company may pursue acquisitions or partner arrangements to accelerate its growth initiatives. See Note 3, Business Combinations to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for a discussion of our acquisitions.
Customer migration to cloud solutions. Over time, we expect a continued shift to our cloud solutions from existing and newly acquired customers. When existing customers migrate from on-premise to cloud-based solutions, this generally has a favorable impact on our long-term ARR due to price structures and opportunities to promote additional license sales. Over the past three years, cloud sales to new customers have grown at a significantly faster rate than sales of on-premise solutions, which is a trend that we expect to continue over time. We generated 35.4% and 27.5% of software subscription revenues from cloud-based subscriptions in 2021 and 2020, respectively. We recognize revenue from the sale of cloud-based subscriptions ratably over the life of the contract, whereas for on-premise subscriptions, the first year pricing includes a premium that is not included in future renewal pricing. The premium is recognized ratably over the estimated period of benefit to the customer, which is generally three years. Therefore, as more of our sales shift to cloud-based subscriptions, our revenue growth rate may increase. We provide hosting for our cloud-based subscriptions. To the extent that revenues from our cloud offerings increase as a percentage of total revenues, our gross margin may decrease due to the associated hosting costs of those offerings.
Recent Developments
Impact of COVID-19
The COVID-19 pandemic had minimal impact on our revenues and results of operations in 2020 and 2021 as we continue to derive the significant majority of our revenues from our existing software subscriptions. As we principally price our solutions based on our customers’ revenues within certain revenue bands, elongated declines in our existing customers’ revenues may impact our ability to grow our existing customer revenues. We did not experience an abnormal number of non-renewals in 2020 or 2021, nor any material declines in revenues associated with declines in our customers’ revenues, and we currently expect our existing customer base to remain largely stable, as it did through the recession in 2008 and 2009. However, significant increases in non-renewals or concessions to renewal customers would have a material impact on our revenues and cash flows. During 2020 and 2021, we have seen some delays in signing deals due to prospects’ 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 impact our billings to new customers beyond 2020 and 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, nor our growth strategies will be materially impacted by the COVID-19 pandemic, as companies continue to rely on us for their indirect tax solutions.
Our cash collections for 2020 and 2021 were consistent with our expectations as some of the procedural disruptions that customers experienced as they shifted to remote work early in the year stabilized by the end of 2020. We believe that we may see delays in collections in 2022 as the resurgence of COVID-19 globally 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 customers experiencing issues as a result of the COVID-19 pandemic, and we have not recorded additional credit losses associated with the allowance for doubtful accounts in connection with any delays. Given that customers cannot forgo our monthly content updates, which are necessary to remain compliant with the most current regulations, we believe customers will continue to pay our renewal invoices in a timely, even if slightly elongated, manner. We believe that we currently have ample liquidity and capital resources to continue to meet our operating needs, and our ability to continue to service our debt or other financial
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obligations is not currently impaired. For a further description of our liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
The extent to which the COVID-19 pandemic impacts our 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 global 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 potential impairment of long-lived assets and intangible assets, and potential impairment of goodwill.
Components of Our Results of Operations
Revenues
We generate revenues 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. Certain on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price is a material right that provides customers with the right to this reduced renewal price. We recognize revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years.
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
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cancellations and non-renewals based on past experience, current information and forward-looking economic considerations.
Services Revenue
We generate services revenue primarily in support of our customers’ needs associated with our software and to enable them to realize the full benefit of our solutions. These software subscription-related services include configuration, data migration and implementation, and premium support and training. In addition, we generate services revenue through our managed services offering which allows customers to outsource all or a portion of their indirect tax operations to us. These services include indirect tax return preparation, filing and tax payment and notice management. We generally bill for services on a per-transaction or time and materials basis, and we recognize revenue from deliverable-based professional services as services are performed.
Fluctuations in services revenue are directly correlated to fluctuations in our subscription revenues with respect to implementation and training services as we have historically experienced an attachment rate to subscription sales for these services in excess of 60%. In addition, our managed services offering has continued to experience increased revenues associated with returns processing volume increases attributable to regulatory changes, as customers expanded their tax filings into more jurisdictions.
Cost of Revenue
Software Subscriptions
Cost of software subscriptions revenue consists of costs related to providing and supporting our software subscriptions and includes personnel and related expenses, including salaries, benefits, bonuses and stock-based compensation. In addition, cost of revenue includes direct costs associated with information technology, such as data center and software hosting costs, and tax content maintenance. Cost of revenue also includes amortization associated with direct labor and related expenses for capitalized internal-use software for cloud-based subscription solutions and software developed for sale for new products and enhancements to existing products, and costs associated with the amortization of acquired intangible assets. We plan to continue to significantly expand our infrastructure and personnel to support our future growth and increases in transaction volumes of our cloud-based solutions, including through acquisitions. We expect growth in our business will result in an increase in cost of revenue in absolute dollars.
Services
Cost of services revenue consists of direct costs of software subscription-related services and our managed services offering. These costs include personnel and related expenses, including salaries, benefits, bonuses, stock-based compensation and the cost of third-party contractors and other direct expenses. We plan to continue to expand our infrastructure and personnel as necessary to support our future growth and related increases in our service revenue. We expect growth in our business will result in an increase in the cost of services revenue in absolute dollars 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.
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
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may be incurred and certain of which may be capitalized, there is no guarantee these solutions will be accepted by the market. This could result in increased costs or an impairment of capitalized development costs with no resulting future revenue benefit.
Selling and Marketing Expenses
Selling expenses consist primarily of personnel and related expenses in support of sales and marketing efforts. These costs include salaries, benefits, bonuses and stock-based compensation. In addition, selling expense includes costs related to advertising and promotion efforts, branding costs, partner-based commissions, costs associated with our annual customer conferences and amortization of certain acquired intangible assets. We intend to continue to invest in our sales and marketing capabilities in the future to continue to increase our brand awareness and expect these costs to increase on an absolute dollar basis as we grow our business and continue to expand our market and partner ecosystem penetration. Sales and marketing expense in absolute dollars and as a percentage of total revenue may fluctuate from period-to-period based on total revenue levels and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods. 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 publicly listed company. As a public company, we expect to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, SEC compliance and internal control compliance, including the design, implementation and testing of increasingly formalized systems of internal control over financial reporting.
Depreciation and Amortization
Depreciation and amortization expense consists of the allocation of purchased and developed asset costs over the future periods benefitted by the use of these assets. These assets include leasehold improvements for our facilities, computers and equipment needed to support our customers and our internal infrastructure and capitalized internal-use software associated with our internal infrastructure and tools. Depreciation and amortization will fluctuate in correlation with our ongoing investment in internal infrastructure costs to support our growth.
Other Operating Expense, net
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 foreign currency fluctuations and other operating gains and losses. These amounts will fluctuate as a result of ongoing merger and acquisition activities and for changes in foreign currency rates.
Interest (Income) Expense, net
Interest (income) expense, net reflects the net amount of interest expense and interest income over the same period.
Interest expense consists primarily of interest incurred related to borrowings, bank credit facility and leases. Interest expense includes amortization of deferred financing fees over the term of the credit facility or write-downs of such costs upon redemption of debt. Interest expense will vary as a result of fluctuations in the level of debt outstanding as well as interest rates on such debt. In addition, interest expense will include adjustments to the fair value of contracts that may be entered into to hedge risks associated with currency fluctuations for cash receipts or cash payments denominated in currencies other than U.S. dollars and which do not qualify for hedge accounting. In addition, changes in the settlement value of the future payment obligation for the Systax Sistemas Fiscais Limited (“Systax”) acquisition and amortization of
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the discount on deferred purchase consideration associated with the LCR-Dixon Corporation “(LCR-Dixon”) acquisition will be recorded as interest expense.
Interest income reflects earnings on investments of our cash on hand and on funds held for customers related to our managed outsourcing services. Interest income will vary as a result of fluctuations in the future level of funds available for investment and the rate of return available in the market on such funds.
Provision for Income Taxes
Prior to July 27, 2020, Vertex was taxed as an S-Corporation for U.S. federal and certain state income tax purposes. As a result, net income or loss prior to this date has been allocated to and included on the income tax returns of the S-Corporation stockholders. Vertex was taxed at the corporate level 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, and the income tax provision or benefit is based on taxable income sourced to these foreign jurisdictions.
Effective July 27, 2020, Vertex converted to a C-Corporation, and our results are subsequently taxed at the corporate level. As such, our statutory income tax rate has increased since we are now subject to U.S. federal and state corporate income taxes.
Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto beginning on page F-1 of this Annual Report on Form 10-K. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. The following table sets forth our consolidated statements of comprehensive income (loss) for the periods indicated.
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Revenues:
Cost of revenues:
Operating expenses:
1Includes stock-based compensation expenses as follows in the table below. For more details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Trends.”
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2We have revised the previously reported amounts for the year ended December 31, 2020. See Note 1, Summary of Significant Accounting Policies under the section Revision of Previously Issued Financial Statements to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for additional information.
For the Year Ended
December 31,
Stock-based compensation expense:
Cost of revenues, software subscriptions $ 2,336 $ 14,663
Total stock-based compensation expense $ 26,160 $ 147,904
The following table sets forth our results of operations as a percentage of our total revenues for the periods presented.
For the Year Ended
December 31
Revenues:
Software subscriptions 84.2 % 84.5 %
Cost of Revenues:
Software subscriptions 27.3 % 28.2 %
Total cost of revenues 38.0 % 44.1 %
Operating expenses:
Research and development 10.3 % 14.5 %
Selling and marketing 23.3 % 26.5 %
General and administrative 25.1 % 39.8 %
Depreciation and amortization 2.7 % 2.9 %
Other operating expense, net 1.1 % 0.1 %
Total operating expenses 62.5 % 83.8 %
Loss from operations (0.5) % (27.9) %
Interest expense, net 0.3 % 0.8 %
Loss before income taxes (0.8) % (28.7) %
Income tax benefit (0.6) % (8.8) %
Total comprehensive loss (3.6) % (20.6) %
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenues
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Revenues:
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Revenues increased $50.9 million, or 13.6%, to $425.5 million in 2021 compared to $374.7 million in 2020. The increase in software subscriptions revenues of $41.7 million, or 13.1%, was primarily driven by an increase of $35.7 million in revenues derived from our existing customers and a year-over-year increase of $6.0 million in revenues derived from new customers. Software subscriptions revenues derived from new customers averaged 8.6% and 7.9% of total software subscriptions revenues in 2021 and 2020, respectively.
The $9.2 million increase in services revenues is primarily driven by an increase of $5.3 million in software subscription-related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and upgrading existing customers to newer versions of our solutions. In addition, our managed services offering experienced a $3.9 million increase in recurring services revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.
Cost of Software Subscriptions Revenues
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Cost of software subscriptions revenues increased $10.5 million, or 10.0%, to $116.2 million in 2021 compared to $105.7 million in 2020. This included a $10.5 million increase in costs of personnel supporting period over period growth of sales and customers and ongoing hosting and 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 $12.3 million associated with our ongoing investments in internal-use software for cloud-based subscription solutions, software developed for sale for new products and enhancements to existing products, and costs associated with the amortization of acquired intangible assets. These increases were partially offset by a $12.3 million decrease in stock-based compensation in 2021 compared to the same period in 2020.
As a percentage of software subscriptions revenues, the cost of software subscriptions revenues decreased to 32.4% in 2021 compared to 33.4% in 2020. After excluding stock-based compensation expense, as a percentage of software subscriptions revenues, cost of software subscriptions revenues increased to 31.8% in 2021 compared to 28.7% in 2020.
Cost of Services Revenues
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Cost of services revenues decreased $14.0 million, or 23.5%, to $45.7 million in 2021 compared to $59.7 million in 2020. This decline was primarily driven by a stock-based compensation decrease of $18.8 million in 2021 compared to the same period in 2020. After adjusting for the decline in stock-based compensation expense, cost of services revenues increased $4.8 million primarily driven by an increase in costs of service delivery personnel to support revenue growth in software subscription related services and our managed services offering.
As a percentage of services revenues, cost of services revenues decreased to 68.1% in 2021 compared to 103.1% for the same period in 2020. After excluding stock-based compensation expense, as a percentage of services revenues, cost of services revenues decreased to 64.1% in 2021 compared to 66.0% for the same period in 2020.
Research and Development
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
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Research and development expenses decreased $10.3 million, or 19.0%, to $44.0 million in 2021 compared to $54.3 million in 2020. This decline was primarily driven by a stock-based compensation decrease of $12.1 million in 2021 compared to the same period in 2020. After adjusting for the decline in stock-based compensation expense, research and development expenses decreased $1.8 million, primarily driven by an increase in development work capitalized associated with new solutions to address end-to-end data analysis and compliance needs of our customers and continued expansion of connectors and application program interfaces (“APIs”) to customer ERP and other software platforms.
As a percentage of total revenues, research and development expenses decreased to 10.3% in 2021 compared to 14.5% in 2020. After excluding stock-based compensation, research and development expenses as a percentage of total revenue would have been 9.7% in 2021 compared to 10.6% in 2020.
Selling and Marketing
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Selling and marketing expenses decreased $0.4 million, or 0.4%, to $99.0 million in 2021 compared to $99.4 million in 2020. However, this decline was driven by a stock-based compensation decrease of $23.2 million in 2021 over the same period in 2020. After adjusting for the decline in stock-based compensation expense, selling and marketing expenses increased $22.8 million primarily driven by an $8.2 million increase in payroll and related expenses associated with the growth in period over period subscription sales and services revenues and expansion of our partner and channel management programs. In addition, this included an increase of $9.3 million in advertising and promotional spending, and expanded brand awareness efforts.
As a percentage of total revenues, selling and marketing expenses decreased to 23.3% in 2021 compared to 26.5% for the same period in 2020. After excluding stock-based compensation expense, as a percentage of total revenues, selling and marketing expenses increased to 21.8% in 2021 compared to 18.6% in 2020.
General and Administrative
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
General and administrative expenses decreased $42.0 million, or 28.2%, to $107.0 million in 2021 compared to $149.1 million in 2020. However, this decline was driven by a stock-based compensation decrease of $55.3 million in 2021 over the same period in 2020. After adjusting for the decline in stock-based compensation expense, general and administrative expenses increased $13.3 million primarily driven by planned strategic investments in information technology infrastructure, business process reengineering and other initiatives to drive future operating leverage, as well as investments in employees, systems and resources in support of our growth and public company reporting and compliance activities.
Due to these factors, as a percentage of total revenues, general and administrative expenses were 25.1% in 2021 compared to 39.8% in 2020. After excluding stock-based compensation expense, as a percentage of total revenues general and administrative expenses would have been 22.3% in 2021 compared to 21.8% in 2020.
Depreciation and Amortization
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
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Depreciation and amortization increased $0.7 million, or 6.0%, to $11.7 million in 2021 compared to $11.0 million in 2020. The increase was primarily due to the impact of infrastructure and technology purchases placed in service in late 2020 and 2021 and other capitalized infrastructure costs to support our growth. As a percentage of revenues, depreciation expense was relatively consistent at 2.7% in 2021 compared to 2.9% for the same period in 2020.
Other Operating Expense, Net
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Other operating expense, net, increased $4.7 million, or 2,307.9%, to $4.9 million of expense in 2021 compared to $0.2 million of expense for the same period in 2020. This increase was primarily comprised of $4.7 million of transaction costs associated with acquisitions in 2021. As a percentage of total revenues, other operating expense, net increased to 1.1% in 2021 compared to 0.1% in 2020.
Interest Expense, Net
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Interest expense, net decreased $2.1 million, or 68.4%, to $1.0 million in 2021 compared to $3.1 million of expense for the same period in 2020. This change was primarily attributable to the write-down of $1.2 million in deferred financing costs in 2020 and a decrease in term loan interest expense of $2.0 million from 2021 due to the term loan repayment in July 2020. Offsetting these reductions was an increase of $0.9 million in interest expense related to the value of foreign currency contracts and a reduction of $0.5 million in interest income due to lower investment yields.
Provision for Taxes
For the Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Income tax benefit decreased $30.3 million, or 92.5%, to $2.4 million in 2021 compared to $32.8 million for the same period in 2020. This decrease was primarily due to a pre-tax loss resulting from an increase in stock-based compensation in 2020. The income tax benefit in 2021 was primarily driven by exercises and vestings of stock awards partially offset by the unfavorable impact of limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m) and acquisition costs.
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Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the periods presented, as well as the percentage of total revenues that each line item represented for each quarter. In management’s opinion, the data below have been prepared on the same basis as the audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K and reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results to be expected for a full year or any future period. Historical periods are also impacted by acquisitions. The following quarterly financial data should be read in conjunction with our consolidated financial statements and related notes beginning on page F-1 of this Annual Report on Form 10-K.
For the Three Months Ended (Unaudited)
Revenues:
Cost of revenues:
Operating expenses:
For the Three Months Ended (Unaudited)
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The following table sets forth our results of operations as a percentage of our total revenues for the periods presented.
For the Three Months Ended (Unaudited)
Revenues:
Cost of revenues:
Operating expenses:
The following table sets forth our quarterly earnings per share information for the periods presented.
For the Three Months Ended (Unaudited)
Earnings Per Share Data:
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Seasonality and Quarterly Trends
We have historically signed a higher percentage of software subscription agreements with new and existing customers in the fourth quarter of each year. This can be attributed to buying patterns typical in the software industry. Since most of our customer agreement terms are annual, agreements initially entered into in the fourth quarter will generally come up for renewal at that same time in subsequent years. As a result, customer agreement cancellations may have a higher concentration during the end of the year. This seasonality is reflected in our revenues, though the impact to overall annual or quarterly revenues is typically minimal since we recognize subscription revenue ratably over the term of the customer contract. Additionally, this seasonality is reflected in commission expenses to our sales personnel and our partners.
Our quarterly revenues have generally increased over the last two years primarily due to new sales to existing customers and sales to new customers. However, the pace of our revenue growth has not been consistent. Many of our customers are enterprise and large corporations and their purchase patterns can be sensitive to timing of budget decisions. Depending on such timing, these decisions can create volatility in the amount of business transacted by our salesforce and the amount of revenues recorded in each quarter. As such, certain periods may be less comparable due to the timing of our customers purchase patterns. In addition, acquisitions that occurred in the second and third quarters of 2021 have resulted in increases in revenues in the second, third and fourth quarters above historical experience.
Our operating expenses generally have decreased over the two-year period due primarily to a decrease in stock-based compensation. Quarterly fluctuations in our costs and expenses overall primarily reflect changes in our headcount, and other costs related to certain technology development projects and the development and scaling of our cloud solutions. In particular, research and development expenses have fluctuated based on the timing of personnel additions, capitalized costs and related spending on product development. Increases in our selling and marketing expenses primarily reflect expansion of go-to-market and partner and channel management personnel and various promotion and branding activities, the timing of which may fluctuate from quarter to quarter. We have also actively invested in acquisitions and product innovation to expand our product portfolio. We anticipate our operating expenses will increase in future periods as we invest in the long-term growth of our business.
We have used and will continue to use stock-based compensation programs as a component of our overall talent strategy to attract and retain key talent. Stock-based compensation aggregated $147.9 million and $26.2 million in 2020 and 2021, respectively. Our 2020 stock-based compensation expense was primarily related to the significant appreciation in value of our common stock leading up to our initial public offering (the “Offering”) and due to the value of stock awards issued in 2020 in connection with the Offering. We expect that our stock-based compensation expense will continue to be meaningful in connection with the need to attract and retain key talent to support our continued growth and expansion. As a result of the varying talent demands and fluctuations in our grant date common stock value of awards when issued which cannot be predicted, stock-based compensation is expected to vary for the foreseeable future, and as a result, historical financial information is not necessarily indicative of our future results.
Historical patterns should not be considered a reliable indicator of our future performance.
Liquidity and Capital Resources
As of December 31, 2021, we had unrestricted cash and cash equivalents of $73.3 million and retained earnings of $24.8 million. Our primary sources of capital to date have been from sales of our solutions, proceeds from bank lending facilities and the Offering of our Class A common stock in July 2020. We have no outstanding bank debt at December 31, 2021.
On September 22, 2021, we executed a stock purchase agreement with LCR-Dixon. The purchase price was $98.7 million as of the acquisition date consisting of (i) $59.7 million in cash, partially offset by $1.9 million in cash received in the acquisition resulting in $57.8 million of net cash paid at closing, and (ii) the non-interest-bearing deferred purchase consideration aggregating $40.0 million before consideration of related discount on this amount of $1.0 million. Cash consideration was funded through cash on hand.
On May 12, 2021, we used approximately $190.2 million of our cash and cash equivalents to acquire EVAT Solutions Ltd. and its subsidiaries (“Taxamo”). 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,
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and (iii) an option to purchase the remaining 5% of outstanding equity (the “Taxamo Option”) for $10.0 million. The Taxamo Option was exercised on August 20, 2021 for $10.0 million funded through cash on hand.
On March 8, 2022, we amended our existing $100 million credit facility with a $250 million facility consisting of a $50 million term loan and a $200 million line of credit. The proceeds will be used for working capital, capital expenditures, permitted acquisitions and general corporate purposes.
We believe that our existing cash resources and our bank line of credit, as amended, 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 were to 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.
Historical Cash Flows
Years Ended December 31, 2021 and 2020
The following table presents a summary of our cash flows for the periods indicated:
Year Ended
December 31,
(Dollars in thousands) 2021 2020 Year-Over-Year Change
Effect of foreign exchange rate changes (479) (22) (457) 2,077.3 %
Operating Activities.Net cash provided by operating activities was $92.0 million in 2021 compared to $59.5 million in 2020, an increase of $32.4 million. The increase in cash provided by operating activities in 2021 was driven primarily by the $22.9 million nonrecurring payment in 2020 for redemption of converted stock appreciation rights (“Converted SARs”) in connection with the Offering, combined with a year-over-year net increase in changes in operating assets and liabilities of $11.7 million.
Investing Activities. Net cash used in investing activities was $296.4 million in 2021 compared to $44.4 million in 2020, an increase in use of funds for investing activities of $252.1 million. This increase was primarily due to a net increase in cash paid for acquisitions of $239.8 million in 2021 over 2020. In 2021 we acquired Taxamo for approximately $187.5 million in net cash, LCR-Dixon for approximately $57.8 million in net cash, and Tellutax, LLC (“Tellutax”) for cash paid of $6.1 million. In 2020, we acquired a controlling interest in Systax for approximately $12.3 million in cash. For additional information on acquisitions, see Note 3, “Business Combinations” to our consolidated financial statements.
Financing Activities. Net cash used in financing activities was $(9.1) million in 2021 compared to net cash provided by financing activities of $213.6 million in 2020, a decrease in cash provided by financing activities of $222.7 million. Net cash used in financing activities of $(9.1) million in 2021 was primarily driven by (i) $12.8 million in payments for taxes in connection with the exercise of stock options whereby the award holders returned shares to us to satisfy their tax obligations, payments for acquisition purchase commitment liabilities of $10.8 million and $2.7 million in payments made under tax sharing agreements, partially offset by (ii) an increase in customer funds obligations of $14.2 million due primarily to timing differences between receipt of funds from customers and taxing jurisdiction withdrawals of these funds and proceeds of $4.0 million from exercises of stock options and participant contributions with respect to the employee stock purchase plan (the “ESPP”). The net cash provided by financing activities in 2020 of $213.6 million was primarily driven by the (i) $417.2 million in proceeds from the Offering net of Offering costs, $172.6 million in proceeds from bank debt net of borrowing costs, and proceeds of $9.8 million from exercises of stock options and participant contributions with respect to the ESPP, offset by the payoff of bank debt aggregating $226.3 million, distributions to stockholders prior to the Offering of $146.1 million, and $14.8 million in payments for taxes in connection with the exercise of stock options whereby the award holders returned shares to us to satisfy their tax obligations.
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Indebtedness
As of December 31, 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 (3.25% as of December 31, 2021) or the London Interbank Offered Rate (“LIBOR”) plus an applicable margin (2.00% as of December 31, 2021). We have no outstanding bank debt at December 31, 2021.
The line of credit is collateralized by certain assets of the Company and contains financial and operating covenants with which we are in compliance as of December 31, 2021.
For more information on our indebtedness see Notes 9 and 16 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.
Deferred Purchase Consideration
On September 22, 2021, the Company acquired LCR-Dixon for $98.7 million. In connection with this acquisition, the Company deferred $40.0 million of the purchase price to be paid in four equal installments of $10.0 million every six-months beginning March 2022 and ending September 2023 (the “deferred purchase consideration”). See Note 3 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.
Funds Held for Customers and Customer Funds Obligations
We maintain trust accounts with financial institutions, to accumulate cash from our customers that outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held for customers represent cash and cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Funds held for customers are not commingled with our operating funds.
Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on our consolidated balance sheets as the obligations are expected to be settled within one year. Cash flows related to changes in customer funds obligations 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.
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Contractual Obligations and Commitments
Our contractual obligations and commitments as of December 31, 2021 are summarized in the table below:
Payments Due by Year
(In thousands) Total Less Than 1 year 1-3 Years 3-5 Years More Than 5 Years
Long-term debt $ — $ — $ — $ — $ —
Financing lease liabilities 358 289 69 — —
Purchase commitment liability (2) 11,297 468 10,829 — —
Key Business Metrics
We regularly review the metrics identified below to evaluate growth trends, measure our performance, formulate financial projections and make strategic decisions.
Annual Recurring Revenue (“ARR”) and Average Annual Revenue Per Customer (“AARPC”).
We derive the vast majority of our revenue from recurring software subscriptions. We believe ARR provides us with visibility to our projected software subscription revenue in order to evaluate the health of our business. Because we recognize subscription revenue ratably, we believe investors can use ARR to measure our expansion of existing customer revenues, new customer activity, and as an indicator of future software subscription revenues. ARR is based on monthly recurring revenue (“MRR”) from software subscriptions for the most recent month at period end, multiplied by twelve. MRR is calculated by dividing the software subscription price, inclusive of discounts, by the number of subscription covered months. MRR only includes customers with MRR at the end of the last month of the measurement period.
We also calculate AARPC, which is determined by dividing ARR by the number of software subscription customers as of the end of the respective period.
For the Year Ended
December 31,
(Dollars in millions) 2021 2020 Year-Over-Year Change
ARR increased by $53.8 million or 17.0% in 2021 as compared to 2020. The increase was primarily driven by $28.0 million of growth in revenues from subscriptions of our tax solutions to new customers, including acquisitions, and $25.8 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases. Of the $28.0 million from new customers, $6.0 million was related to 2021 acquisitions.
The number of customers and AARPC increased to 4,272 customers and approximately $86,700, respectively, at December 31, 2021, from 4,017 and approximately $78,700, respectively, at December 31, 2020. The increase in customers and AARPC was due to expansion of usage by existing customers, adding new customers through organic growth, and acquisitions.
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Net Revenue Retention Rate.
We believe that our NRR provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it demonstrates to investors our ability to expand existing customer revenues, which is one of our key growth strategies. Our NRR refers to the ARR expansion during the 12 months of a reporting period for all customers who were part of our customer base at the beginning of the reporting period. Our NRR calculation takes into account any revenue lost from departing customers or 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.
For the Year Ended
December 31,
Net Revenue Retention Rate 108 % 106 %
The 200 basis point increase in NRR to 108% at December 31, 2021 from 106% for the same period in 2020 was primarily attributable to an increase in sales growth to existing customers as compared to the prior year.
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 loss was $(1.5) million and $(75.1) million in 2021 and 2020, respectively, while our net loss margin was (0.0)% and (20.0)% over the same periods, respectively. The following schedules reconcile Adjusted EBITDA and Adjusted EBITDA margin to net loss, the most closely directly comparable GAAP financial measure.
For the Year Ended
December 31,
Adjusted EBITDA:
Interest expense, net 984 3,111
Depreciation and amortization - property and equipment 11,678 11,018
Transaction costs 4,748 —
Adjusted EBITDA Margin:
Adjusted EBITDA margin 18.3 % 20.9 %
The decrease in Adjusted EBITDA of $(0.4) million in 2021 is primarily driven by an increase of $34.5 million in non-GAAP gross profit, offset by increases in various non-GAAP operating expense categories including $22.1 million in non-GAAP selling and marketing expense, $11.1 million in non-GAAP general and administrative expense, and $1.8 million in non-GAAP research and development expense. Growth in these operating expense categories is driven primarily by our ongoing investment in our research and development, sales and marketing teams, and technology infrastructure to support current and future growth.
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Adjusted EBITDA margin decreased in 2021 and 2020 by 260 basis points and 20 basis points, respectively, in comparison to the immediately preceding period, primarily because operating expenses increased at a higher rate than our increases in revenues, driven by our previously noted investments to enable future growth.
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 add back of cash used for the Converted SARs redeemed 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 $92.0 million and $59.5 million in 2021 and 2020, respectively, while our operating cash flow margin was 11.0% and 13.2% over the same periods, respectively. The following schedule reconciles free cash flow and free cash flow margin to net cash provided by operating activities, the most closely directly comparable GAAP financial measure.
For the Year Ended
December 31,
Free Cash Flow:
Cash provided by operating activities $ 91,969 $ 59,543
Redemption of Converted SARs — 22,889
Property and equipment additions (33,386) (20,955)
Capitalized software additions (11,660) (11,850)
Free Cash Flow Margin:
Free cash flow margin 11.0 % 13.2 %
Free cash flow decreased by $2.7 million in 2021 compared to 2020, driven primarily by a net increase of $9.5 million in cash provided by operating activities, after reflecting the addback in 2020 of $22.9 million in cash consumed by the redemption of the Converted SARs, which was partially offset by a year-over-year increase in cash consumed by investments in internal-use software developed of $12.4 million reflected as increases in property and equipment additions. Property and equipment additions includes $19.8 million of costs capitalized associated with our cloud-based customer solutions and $11.5 million for internal system modernization investments. Free cash flow margin decreased in 2021 by 220 basis points compared to 2020, primarily due to the increase in cash consumed by our investments in cloud-based customer solutions and internal system modernization efforts, partially offset by the increase in cash from operations noted above during a period of expansion of total revenues of $50.9 million.
Use and Reconciliation of Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we have calculated Adjusted EBITDA, Adjusted EBITDA margin, free cash flow, free cash flow margin, non-GAAP cost of revenues, non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP selling and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income, and non-GAAP net income, which are each non-GAAP financial measures. We have provided tabular reconciliations of each of these non-GAAP financial measures to its most directly comparable GAAP financial measure.
We use these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance. We use non-GAAP financial measures of free cash flow and free cash flow margin to evaluate liquidity. Our non-GAAP financial measures are presented as supplemental disclosure as we believe they provide useful information to investors and others in
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understanding and evaluating our results, prospects, and liquidity period-over-period without the impact of certain items that do not directly correlate to our operating performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as comparing our financial results to those of other companies. Our definitions of these non-GAAP financial measures may differ from similarly titled measures presented by other companies, and therefore, comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, the financial information prepared in accordance with GAAP financial measures, and should be read in conjunction with the consolidated financial statements included in this Annual Report on Form 10-K.
Additional Non-GAAP Financial Measures
In addition to Adjusted EBITDA, Adjusted EBITDA margin, free cash flow, and free cash flow margin calculated and discussed in “Key Business Metrics,” the following additional non-GAAP financial measures are calculated and presented further below:
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We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view these non-GAAP financial measures in conjunction with the related GAAP financial measures.
The following schedules reflect our additional non-GAAP financial measures and reconcile our additional non-GAAP financial measures to the related GAAP financial measures.
For the Year Ended
December 31,
Non-GAAP cost of revenues, software subscriptions $ 81,567 $ 69,992
Non-GAAP cost of revenues, services $ 43,050 $ 38,239
Non-GAAP gross margin 70.7 % 71.1 %
Non-GAAP research and development expense $ 41,398 $ 39,646
Non-GAAP selling and marketing expense $ 91,821 $ 69,691
Non-GAAP general and administrative expense $ 89,592 $ 78,502
For the Year Ended
December 31,
Non-GAAP Cost of Revenues, Software Subscriptions:
Cost of revenues, software subscriptions $ 116,194 $ 105,676
Stock-based compensation expense (2,336) (14,663)
Non-GAAP cost of revenues, software subscriptions $ 81,567 $ 69,992
Non-GAAP Cost of Revenues, Services:
Stock-based compensation expense (2,648) (21,472)
Non-GAAP cost of revenues, services $ 43,050 $ 38,239
Non-GAAP Gross Profit:
Stock-based compensation expense 4,984 36,135
Non-GAAP Gross Margin:
Non-GAAP gross margin 70.7 % 71.1 %
Non-GAAP Research and Development Expense:
Research and development expense $ 44,018 $ 54,340
Stock-based compensation expense (2,620) (14,694)
Non-GAAP research and development expense $ 41,398 $ 39,646
Non-GAAP Selling and Marketing Expense:
Selling and marketing expense $ 99,005 $ 99,418
Stock-based compensation expense (6,371) (29,551)
Non-GAAP selling and marketing expense $ 91,821 $ 69,691
Non-GAAP General and Administrative Expense:
Stock-based compensation expense (12,185) (67,524)
Severance expense (5,232) (3,031)
Non-GAAP general and administrative expense $ 89,592 $ 78,502
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Non-GAAP Operating Income:
Transaction costs 4,748 —
Non-GAAP Net Income:
Transaction costs 4,748 —
Non-GAAP income before income taxes 65,318 64,263
Income tax adjustment at statutory rate 16,656 16,387
Critical Accounting Estimates
The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our consolidated financial statements cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could materially differ from those estimates.
The estimates discussed below are considered by management to be critical to an understanding of our consolidated financial statements because their application places the most significant demands on management’s judgment. Specific risks for these critical accounting estimates are described in the following sections. For all of these estimates, we caution that future events rarely develop exactly as forecast, and such estimates routinely require adjustment. We have reviewed these critical accounting estimates and related disclosures with our Audit Committee.
Our discussion of critical accounting estimates is intended to supplement, not duplicate, our summary of significant accounting policies so that readers will have greater insight into the uncertainties involved in applying our critical accounting policies and estimates. For a summary of our significant accounting policies, see Note 1 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.
Revenue Recognition
We account for our revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which requires judgment and the use of estimates. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. We recognized revenue of $425.5 million and $374.7 million in 2021 and 2020, respectively.
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Identification of the Performance Obligations
We enter into contracts with customers that may include promises to transfer various combinations of software subscriptions and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Software subscriptions include the related software, consisting of both on-premise and cloud-based software, 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 that the software, updates and support should be combined into a single performance obligation.
Determination of the Transaction Price
The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to the customer. We recognize revenue net of allowance for subscription and non-renewal cancellations. 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. Therefore, the transaction price is adjusted for our estimate of the amount of such cancellations and non-renewals based on past experience, current information and forward-looking economic considerations.
Allocation of Transaction Price to the Performance Obligations
If the contract with the customer contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. If the contract with the customer contains multiple performance obligations, we allocate the transaction price to each performance obligation based on a relative standalone selling price.
Recognition of Revenue
We satisfy performance obligations either over time or at a point in time. Revenue is recognized as the related performance obligation is satisfied with the transfer of control of a promised good or service to a customer. On-premise software revenue associated with the combined performance obligation is recognized ratably over the license term as these subscription services 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. Cloud-based subscriptions allow customers to use Company-hosted software over the contract period without taking possession of the software. Revenue from cloud-based subscriptions, including subscriptions that include related updates and support, is recognized ratably over the license term as the performance obligation is satisfied.
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 ("new sale premium") is considered to be a material right. We recognize revenue associated with the material right ratably over the estimated period of benefit to the customer, generally three years. Accordingly, on-premise software revenue is recognized ratably over the license term as the performance obligation is satisfied.
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.
We have 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.
Costs Capitalized to Obtain Revenue Contracts
Costs capitalized related to obtaining revenue contracts include deferred sales commissions earned by our sales force and certain sales incentive programs and vendor referral agreements. 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
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three years. We periodically review 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 contract asset impairment losses recorded for the periods presented.
Business Combination Fair Value Estimates
The results of a business acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in tangible and intangible assets acquired, liabilities assumed, consideration transferred, and amounts attributed to noncontrolling interests of an acquired business being recorded at their estimated fair values on the acquisition date, which may be considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date (the “Measurement Period”). Any excess consideration over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of these amounts requires significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, royalty rates, and selection of comparable companies. We continue to collect information and reevaluate these estimates and assumptions periodically and record any adjustments to preliminary estimates to goodwill, provided we are within the Measurement Period, with any adjustments to amortization of new or previously recorded assets and identifiable intangibles being recorded to the consolidated statements of comprehensive income (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) in the period in which they arise.
We use our best estimates, information and assumptions available at the acquisition date to assign preliminary fair values to the assets acquired, liabilities assumed, consideration transferred, and amounts attributed to noncontrolling interests. We engage the assistance of third-party valuation specialists to perform valuations of these amounts and to assist us in concluding on these fair value measurements. The resulting fair values and useful lives assigned to acquisition-related assets impact the amount and timing of future amortization expense.
These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the respective acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates, and if such events occur, we may be required to record a charge against the value ascribed to an acquired asset, an increase in the amounts recorded for assumed liabilities, or an impairment of some or all of the goodwill.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. We evaluate goodwill for impairment annually at 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. We have 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.
As provided for by ASU 2017-04, Simplifying the Test for Goodwill Impairment, the quantitative goodwill impairment test is performed by comparing the fair value of 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 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 goodwill on the carrying amount of the reporting unit are considered when measuring the goodwill impairment loss, if applicable.
Stock-Based Compensation
We apply the provisions of ASC 718, Compensation—Stock Compensation, for the award of equity-based instruments. The provisions of ASC 718 require a company to measure the fair value of stock-based compensation as of the grant date of the award. Stock-based compensation expense reflects the cost of employee services received in exchange for the awards. We recognized stock-based compensation cost of $26.2 million and $147.9 million in 2021 and 2020, respectively.
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On the effective date of the Offering, the Company adopted the 2020 Incentive Award Plan (the “2020 Plan”) and the ESPP, which provides for the award of stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights (“SARs”) and other cash compensation as well as the grant of rights to purchase shares of our Class A common stock at the ESPP discount.
Stock-based compensation expense for RSAs and RSUs is measured based on the grant date fair value of our common stock. Stock-based compensation expense for stock options issued under the 2020 Plan is measured based on the grant date fair value of the award and is estimated using the Black-Scholes model. Stock-based compensation expense for the ESPP is measured based on the fair value of the ESPP award at the start of the ESPP offering period 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 stock-based award. The Company has elected to recognize award forfeitures as they occur.
The use of the Black-Scholes model to estimate compensation cost for stock options granted under the 2020 Plan and the ESPP requires the input of certain assumptions including the fair value of our stock, expected term, volatility, risk-free interest rate, and dividend yield. The fair value of our common stock is based on quoted market prices on the NASDAQ exchange. The expected term is based on our analysis of the facts and circumstances underlying the stock-based award. The volatility is based on our estimate of the expected future volatility of our common stock over the expected term using the implied volatility of comparable publicly traded companies. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximating the stock-based awards’ expected term. The dividend yield is zero based on our assumption that we will not pay any dividends over the expected term.
Prior to the Offering, the fair value of the common stock underlying the SAR Awards was determined by the board of directors 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 directors 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 year ended December 31, 2020 which exceeded historical results. See Note 12 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for further information. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Trends.”
Software Development Costs
Internal-Use Software
We follow 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. 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 use.
We review the carrying value of internal-use software, for impairment whenever events or changes in circumstances indicate that the carrying amount of such software 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.
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
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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.
Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on a product-by-product basis using the straight-line method over periods between three to five years. Unamortized capitalized software development costs determined to be in excess of the net realizable value of the product are expensed immediately.
Capitalized software costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies at least annually and whenever events or circumstances make it more likely than not that impairment may have occurred. In the event of 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 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.
Income taxes
On July 27, 2020, the Company’s S-Corporation election (the “S Election”) was revoked by the Company’s stockholders in connection with the Offering. As a result, the Company is now taxed at the corporate level as a C-Corporation for U.S federal and state income tax purposes. Prior to July 27, 2020, as the Company was taxed as an S-Corporation for U.S. federal income tax purposes and for most states, net income or loss was allocated to the stockholders and included on their income tax returns. In certain states, the Company was taxed at the corporate level. Accordingly, the income tax provision or benefit was based on taxable income allocated to these states. In certain foreign jurisdictions, the Company was taxed at the corporate level. Similar to states, the income tax provision or benefit was based on taxable income sourced to these foreign jurisdictions.
Certain foreign subsidiaries in which we own greater than 50% of the equity by measure of vote or value are treated as controlled foreign companies (“CFCs”) for U.S. federal income tax and most states purposes. In conjunction with the termination of the S Election, certain direct and indirect wholly owned foreign subsidiaries that were previously treated as disregarded entities for U.S. federal income tax purposes and most states under the Internal Revenue Service (“IRS”) “check-the-box” regulations, “unchecked-the-box” to become regarded entities 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.
We record deferred income taxes using the liability method. We recognize deferred tax assets and liabilities for future tax consequences of events that have been previously recognized in the consolidated financial statements and tax returns. The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The effects of future changes in tax laws or rates are not anticipated. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.
We record uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process whereby: (i) management determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (ii) for those tax positions that meet the more likely than not recognition threshold, management recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The 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 available at the reporting date.
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Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in Note 1 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.
JOBS Act
As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include:
We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of our Offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
We have elected to take advantage of certain of the reduced disclosure obligations in this Annual Report on Form 10-K and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different from what you might receive from other public reporting companies in which you hold equity interests.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We had unrestricted cash and cash equivalents of $73.3million and $303.1 million as of December 31, 2021 and 2020, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with 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.
The Company has no outstanding bank debt at December 31, 2021. Any debt we incur in the future may bear interest at variable rates.
Foreign Currency Exchange Rate Risk
Our revenues and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the Canadian Dollar, Euro, British Pound, Swedish Krona, Indian Rupee and Brazilian Real. Decreases in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenues and other operating results as expressed in U.S. dollars. For the years ended December 31, 2021, 2020 and 2019, approximately 4%, 2% and 1% of our revenues were generated in currencies other than U.S. dollars in each respective period.
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We have experienced and will continue to experience fluctuations in our net income (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. For example, our 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 a portion of our exposure to adverse fluctuations in the Brazilian Real associated with these future purchase commitments. Fluctuations in the value of these forward contracts are reflected in interest expense, net in the consolidated statements of comprehensive income (loss). At December 31, 2021, outstanding foreign currency forward contracts provide a hedge of approximately 50% of our future purchase commitment liability.
Inflation
In the past three years, 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.
Item 8. Financial Statements and Supplementary Data
The information required by this item is presented at the end of this report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of December 31, 2021.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include those designed to ensure that such information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on the evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective at a reasonable assurance level.
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Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework and criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2021, our internal control over financial reporting was effective.
On May 12, 2021, we acquired EVAT Solutions Limited and its wholly owned subsidiaries and on September 22, 2021, we acquired LCR-Dixon Corporation. As permitted by the U.S. Securities and Exchange Commission staff interpretative guidance on newly acquired businesses, we excluded these acquisitions from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021. Total assets excluded from this assessment were $7.2 million, representing 1% of the Company’s consolidated total assets as of December 31, 2021; total liabilities excluded from this assessment were $7.7 million, representing 2% of the Company’s consolidated total liabilities as of December 31, 2021; and total revenue excluded from this assessment was $5.2 million, representing 1% of the Company’s total revenues for the year ended December 31, 2021.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting due to an exemption established by the JOBS Act for emerging growth companies.
Remediation of Previously Reported Material Weaknesses
We previously identified a material weakness in our internal control over financial reporting as of December 31, 2020 due to 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.
Due to the actions taken to implement new controls and procedures, we have concluded that the material weakness related to the 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 was remediated as of December 31, 2021. To remediate this material weakness, we have:
● Performed a review and evaluated appropriate segregation of duties; and
● Implemented a periodic review cycle for user access.
Changes in Internal Control over Financial Reporting
Other than changes described above regarding enhancements associated with our remediation efforts, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of the Annual Report on Form 10-K:
(1) Consolidated Financial Statements
The financial statements filed as part of this Annual Report on Form 10-K are listed in the “Index to Consolidated Financial Statements” beginning on page F-1 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
All schedules are omitted because the information required to be set forth therein is not applicable or is presented in the consolidated financial statements or notes thereto beginning on page F-1 of this Annual Report on Form 10-K.
(3) Exhibits
The documents listed in the Index to Exhibits beginning on page E-1 of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
Item 16. Form 10-K Summary
None.
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INDEX TO EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 10-K.
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23.1 Consent of Crowe LLP X
101.INS Inline XBRL Instance Document X
101.SCH Inline XBRL Taxonomy Extension Schema Document X
# Indicates a management contract or compensatory plan.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Vertex, Inc.
Date: March 16, 2022 By: /s/ DAVID DESTEFANO
David DeStefano
President, Chief Executive Officerand Chairperson
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ DAVID DESTEFANO President, Chief Executive Officer and Chairperson
David DeStefano (Principal Executive Officer) March 16, 2022
/s/ JOHN SCHWAB Chief Financial Officer
John Schwab (Principal Financial Officer) March 16, 2022