10q10k10q10k.net

What changed in Vertex, Inc.'s 10-K — 2022 vs 2023

vs

Paragraph-level year-over-year comparison of Vertex, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+212 added−263 removedSource: 10-K (2024-02-29) vs 10-K (2023-03-10)

Top changes in Vertex, Inc.'s 2023 10-K

212 paragraphs added · 263 removed · 176 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

11 edited+1 added−0 removed80 unchanged
Biggest changeWe have been recognized as one of the best places to work in Philadelphia for the past eight years according to The Philadelphia Inquirer. We create and nurture an engaging work environment that embodies our core values of collaboration, performance, integrity, innovation, and fun, and we actively support our employees' participation in community service and philanthropy.
Biggest changeWe create and nurture an engaging work environment that embodies our core values of collaboration, performance, integrity, innovation, and fun, and we actively support our employees' participation in community service and philanthropy. As of December 31, 2023, we had over 1,500 full-time employees.
You may also access, free of charge, our reports filed with the SEC (for example, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K and any amendments to those forms) through the “Investors” portion of our website 8 Table of Contents (https://www.vertexinc.com/).
You may also access, free of charge, our reports filed with the SEC (for example, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, and 8 Table of Contents our Current Reports on Form 8-K and any amendments to those forms) through the “Investors” portion of our website (https://www.vertexinc.com/).
Our solutions are supported by a suite of powerful, pre-built integrations that enable real-time coordination between our solutions and major business applications, such as Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Workday and Zuora, among many others.
Our solutions are supported by a suite of powerful, pre-built integrations that enable real-time coordination between our solutions and major business applications, such as Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Shopify, Workday, and Zuora, among many others.
Our pre-built integrations with key partners including Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Workday, and Zuora, among many others, are key differentiators that enable our customers to seamlessly connect our solutions into their business applications and processes.
Our pre-built integrations with key partners including Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Shopify, Workday, and Zuora, among many others, are key differentiators that enable our customers to seamlessly connect our solutions into their business applications and processes.
While most of our revenue is currently generated by customers domiciled in the U.S., many of our customers are multinational organizations with global business operations. We also provide tax software solutions outside the U.S., primarily in Canada and Europe. No single customer represented more than 10% of our total revenue for the years ended December 31, 2022, 2021 or 2020.
While most of our revenue is currently generated by customers domiciled in the U.S., many of our customers are multinational organizations with global business operations. We also provide tax software solutions outside the U.S., primarily in Canada and Europe. No single customer represented more than 10% of our total revenue for the years ended December 31, 2023, 2022 or 2021.
Customers can also license indirect tax returns outsourcing as a managed service for compliance in the U.S. and Canada. These managed services include indirect tax return preparation, filing and tax payment and notice management. Our Tax Content All our software and solutions are underpinned by our proprietary content database, which currently supports over 500 million effective tax rules.
Customers can also license indirect tax returns outsourcing as a managed service for compliance in the U.S. and Canada. These managed services include indirect tax return preparation, filing and tax payment, and notice management. Our Tax Content All our software and solutions are underpinned by our proprietary content database, which currently supports over 900 million effective tax rules.
Indirect taxes, such as sales tax, use tax, and value-added tax (“VAT”) are complex. In the United States (“U.S.”) alone, Vertex tax content addresses indirect taxes for over 13,000 unique taxing jurisdictions. Compounding the complexity, rules, regulations, and indirect tax rates are constantly changing.
Indirect taxes, such as sales tax, use tax, and value-added tax (“VAT”) are complex. In the United States (“U.S.”) alone, Vertex tax content addresses indirect taxes for over 19,000 unique taxing jurisdictions. Compounding the complexity, rules, regulations, and indirect tax rates are constantly changing.
Our software is fueled by over 500 million data-driven effective tax rules and supports indirect tax compliance in more than 19,000 jurisdictions worldwide. Our solutions can be deployed in the cloud, on-premise environments, or at the network edge, all with implementation services available to enable optimal customer outcomes and satisfy unique business requirements.
Our software is fueled by over 900 million data-driven effective tax rules and supports indirect tax compliance in more than 20,000 jurisdictions worldwide. Our solutions can be deployed in the cloud, on-premise environments, or at the network edge, all with implementation services available to enable optimal customer outcomes and satisfy unique business requirements.
Today, we have over 4,200 customers, including the majority of the Fortune 500, and provide our customers with tax support in over 130 countries.
Today, we have over 4,300 customers, including the majority of the Fortune 500, and provide our customers with tax support in over 190 countries.
While we include these marketplaces and service providers in our customer counts, the tens of thousands of their end-user customers are not included in our customer counts. As of December 31, 2022, we had 4,289 customers and our Annual Recurring Revenue (“ARR”) per customer was over $100,500.
While we include these marketplaces and service providers in our customer counts, the tens of thousands of their end-user customers are not included in our customer counts. As of December 31, 2023, we had 4,310 customers and our Annual Recurring Revenue (“ARR”) per customer was $118,910.
As of December 31, 2022, we had over 1,400 full-time employees. Of these employees, 89% were based in the U.S., 10% based in Europe and 1% in Latin America. We believe we have a strong relationship with our employees, and we have not experienced any work stoppages.
Of these employees, 88% were based in the U.S., 10% based in Europe and 2% in other countries. We believe we have a strong relationship with our employees, and we have not experienced any work stoppages.
Added
Vertex has received recognition as one of Built In’s 2024 Remote Best Large Places to Work. Vertex has previously been recognized for eight consecutive years as a Top Workplace by the Philadelphia Inquirer .

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

41 edited+9 added−7 removed173 unchanged
Biggest changeIf we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is required but unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our Class A common stock could be adversely affected and we could become subject to litigation or investigations by NASDAQ, the SEC, or other regulatory authorities, which could require additional financial and management resources.
Biggest changeIn addition, if we are not able to comply with changing disclosure or compliance requirements in a timely manner, the trading price of our Class A common stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC, or other regulatory authorities, which would require additional financial and management resources. ​ Item 1B.
Factors that might cause quarterly or annual fluctuations in our results of operations include, but are not limited to: ● our ability to attract new customers and retain and grow revenue from existing customers; ● our ability to maintain, expand, train and achieve an acceptable level of production from our sales and marketing teams; ● our ability to find and nurture successful sales opportunities; ● the timing of our introduction of new solutions or updates to existing solutions; ● our ability to grow and maintain our relationships with our ecosystem of third-party partners, including integration partners and referral partners; ● the success of our customers' businesses; ● the timing of large subscriptions and customer renewal rates; ● new government regulations; ● changes in our pricing policies or those of our competitors; ● the amount and timing of our expenses related to the expansion of our business, operations and infrastructure; ● any impairment of our intangible assets, capitalized software, long-lived assets and goodwill; ● any seasonality in connection with new customer agreements, as well as renewal and upgrade agreements, each of which have historically occurred at a higher rate in the fourth quarter of each year; 13 Table of Contents ● future costs related to acquisitions of content, technologies or businesses and their integration; and ● general economic conditions.
Factors that might cause quarterly or annual fluctuations in our results of operations include, but are not limited to: ● our ability to attract new customers and retain and grow revenue from existing customers; ● our ability to maintain, expand, train and achieve an acceptable level of production from our sales and marketing teams; ● our ability to find and nurture successful sales opportunities; ● the timing of our introduction of new solutions or updates to existing solutions; ● our ability to grow and maintain our relationships with our ecosystem of third-party partners, including integration partners and referral partners; 13 Table of Contents ● the success of our customers' businesses; ● the timing of large subscriptions and customer renewal rates; ● new government regulations; ● changes in our pricing policies or those of our competitors; ● the amount and timing of our expenses related to the expansion of our business, operations and infrastructure; ● any impairment of our intangible assets, capitalized software, long-lived assets and goodwill; ● any seasonality in connection with new customer agreements, as well as renewal and upgrade agreements, each of which have historically occurred at a higher rate in the fourth quarter of each year; ● future costs related to acquisitions of content, technologies or businesses and their integration; and ● general economic conditions.
We continue to reassess the sufficiency of finance personnel in response to these increasing demands and expectations. Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
We continue to reassess the sufficiency of accounting and finance personnel in response to these increasing demands and expectations. Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The market price of our Class A common stock is likely to be volatile and could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including: ● actual or anticipated fluctuations in our results of operations and financial condition; ● variance in our financial performance from expectations of securities analysts; ● changes in our software subscription revenue; 22 Table of Contents ● changes in our projected operating and financial results; ● changes in tax laws or regulations; ● announcements by us or our competitors of significant business developments, acquisitions or new offerings; ● our involvement in any litigation; ● our sale of our Class A common stock or other securities in the future; ● changes in senior management or key personnel; ● the trading volume of our Class A common stock; ● changes in the anticipated future size and growth rate of our market; and ● general economic, regulatory and market conditions.
The market price of our Class A common stock is likely to be volatile and could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including: ● actual or anticipated fluctuations in our results of operations and financial condition; ● variance in our financial performance from expectations of securities analysts; ● changes in our software subscription revenue; ● changes in our projected operating and financial results; ● changes in tax laws or regulations; ● announcements by us or our competitors of significant business developments, acquisitions or new offerings; ● our involvement in any litigation; ● our sale of our Class A common stock or other securities in the future; ● changes in senior management or key personnel; ● the trading volume of our Class A common stock; 22 Table of Contents ● changes in the anticipated future size and growth rate of our market; and ● general economic, regulatory and market conditions.
In addition, we are subject to a variety of risks inherent in doing business internationally, including: ● political, social and economic instability; ● risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to privacy, localization and content laws as well as unexpected changes in laws, regulatory requirements and enforcement due to the wide discretion given to some local lawmakers and regulators regarding the enactment, interpretation and implementation of local regulations; ● potential damage to our brand and reputation due to compliance with local laws, including potential censorship and requirements to provide user information to local authorities; ● fluctuations in currency exchange rates; ● higher levels of credit risk and payment fraud; ● complying with the tax laws and regulations of multiple tax jurisdictions; ● enhanced difficulties of integrating any foreign acquisitions; ● complying with a variety of foreign laws, including certain employment laws requiring national collective bargaining agreements that set minimum salaries, benefits, working conditions and termination requirements; ● reduced protection for intellectual property rights in some countries; ● difficulties in staffing and managing global operations and the increased travel, infrastructure and compliance costs associated with multiple international locations; ● regulations that might add difficulties in repatriating cash earned outside our core markets and otherwise prevent us from freely moving cash; ● import and export restrictions and changes in trade regulation; ● complying with statutory equity requirements; ● complying with the U.S.
In addition, we are subject to a variety of risks inherent in doing business internationally, including: ● political, social and economic instability; ● risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to privacy, localization and content laws as well as unexpected changes in laws, regulatory requirements and enforcement due to the wide discretion given to some local lawmakers and regulators regarding the enactment, interpretation and implementation of local regulations; ● potential damage to our brand and reputation due to compliance with local laws, including potential censorship and requirements to provide user information to local authorities; ● fluctuations in currency exchange rates; ● higher levels of credit risk and payment fraud; ● complying with the tax laws and regulations of multiple tax jurisdictions; ● enhanced difficulties of integrating any foreign acquisitions; ● complying with a variety of foreign laws, including certain employment laws requiring national collective bargaining agreements that set minimum salaries, benefits, working conditions and termination requirements; ● reduced protection for intellectual property rights in some countries; 14 Table of Contents ● difficulties in staffing and managing global operations and the increased travel, infrastructure and compliance costs associated with multiple international locations; ● regulations that might add difficulties in repatriating cash earned outside our core markets and otherwise prevent us from freely moving cash; ● import and export restrictions and changes in trade regulation; ● complying with statutory equity requirements; ● complying with the U.S.
If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is required but unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by NASDAQ, the SEC, or other regulatory authorities, which could require additional financial and management resources. ​ The price of our Class A common stock may fluctuate significantly, and you could lose all or part of your investment.
If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by NASDAQ, the SEC, or other regulatory authorities, which could require additional financial and management resources. ​ The price of our Class A common stock may fluctuate significantly, and you could lose all or part of your investment.
Changes to customers' and partners' software systems may impact our ability to offer a specific software deployment method to existing customers, which could cause a termination of customer contracts utilizing that deployment method, or otherwise affect our results of operations, financial condition and cash flow.
Changes to customers’ and partners’ software systems may impact our ability to offer a specific software deployment method to existing customers, which could cause a termination of customer contracts utilizing that deployment method, or otherwise affect our results of operations, financial condition, and cash flows.
The financial and reputational costs associated with any erroneous tax determinations may be substantial and could harm our results of operations. 15 Table of Contents Changes in tax laws and regulations, or their interpretation or enforcement, may cause us to invest substantial amounts to modify our software, cause us to change our business model or draw new competitors to the market.
The financial and reputational costs associated with any erroneous tax determinations may be substantial and could harm our results of operations. Changes in tax laws and regulations, or their interpretation or enforcement, may cause us to invest substantial amounts to modify our software, cause us to change our business model or draw new competitors to the market.
In addition, third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs, all of which may increase our expenses and harm our results of operations.
In addition, third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of our own proprietary 18 Table of Contents technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs, all of which may increase our expenses and harm our results of operations.
As we increase our international operations, our risks under these laws may increase. Non-compliance with these laws could subject us to investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, adverse media coverage and other consequences.
As we increase our international operations, our risks under these laws may increase. Non-compliance with these laws could subject us to investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, 20 Table of Contents damages, other civil and criminal penalties or injunctions, adverse media coverage and other consequences.
Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our solutions to others, could be material to our financial condition or cash flows, or both, or could otherwise harm our results of operations. 21 Table of Contents Our ability to obtain additional capital on commercially reasonable terms may be limited.
Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our solutions to others, could be material to our financial condition or cash flows, or both, or could otherwise harm our results of operations. Our ability to obtain additional capital on commercially reasonable terms may be limited.
If we experience increasing demand in subscriptions, we may not be able to augment our infrastructure quickly enough to accommodate such increasing demand. In the event of decreases in subscription sales, certain of our fixed costs, such as for capital expenditures, may make it difficult for us to quickly adjust our expenses downward.
If we experience increasing demand in subscriptions, we may not be able to augment our infrastructure quickly enough to accommodate such increasing demand. In the event of decreases in subscription sales, 12 Table of Contents certain of our fixed costs, such as for capital expenditures, may make it difficult for us to quickly adjust our expenses downward.
We rely upon internal processes and information systems to support key business functions, including our assessment of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. The efficient operation 18 Table of Contents of these processes and systems is critical, and these processes and systems need to be scalable to support our growth.
We rely upon internal processes and information systems to support key business functions, including our assessment of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. The efficient operation of these processes and systems is critical, and these processes and systems need to be scalable to support our growth.
There is no guarantee that we will be able to offset this inflationary pressure through price increases, and a sustained or further increase in inflation could have an adverse impact on our operating expenses our business, results of operations, financial condition and cash flows.
There is no guarantee that we will be able to offset inflationary pressure through price increases, and a sustained increase in inflation could have an adverse impact on our operating expenses our business, results of operations, financial condition and cash flows.
If we identify additional material weaknesses in our internal control over financial reporting, our management will be unable to assert that our disclosure controls and procedures and our internal control over financial reporting is effective.
If we identify any material weaknesses in our internal control over financial reporting, our management will be unable to assert that our disclosure controls and procedures and our internal control over financial reporting is effective.
We are subject to requirements under the U.S. Treasury Department's Office of Foreign Assets Control, anti-corruption, anti-bribery and similar laws, such as the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 20 Table of Contents 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K.
We are subject to requirements under the U.S. Treasury Department's Office of Foreign Assets Control, anti-corruption, anti-bribery and similar laws, such as the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K.
If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock.
If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and 21 Table of Contents privileges superior to those of holders of our Class A common stock.
Although we have insurance coverage for losses associated with cyber-attacks, as with all insurance policies, there are coverage exclusions and limitations, and our coverage may not be sufficient to cover all possible claims, and we may still suffer losses that could have a material adverse effect on our reputation and business.
Although we have insurance coverage for losses associated with cyber-attacks, as with all insurance policies, there are coverage exclusions and limitations, and our coverage may not be sufficient to 16 Table of Contents cover all possible claims, and we may still suffer losses that could have a material adverse effect on our reputation and business.
Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations. See "Special Note Regarding Forward-Looking Statements" elsewhere in this Annual Report on Form 10-K.
Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations. See “Special Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.
We have security systems and information technology infrastructure designed to protect against unauthorized access to such information. The security systems and infrastructure 16 Table of Contents we maintain may not be successful in protecting against all security breaches and cyber-attacks, social-engineering attacks, computer break-ins, theft and other improper activity.
We have security systems and information technology infrastructure designed to protect against unauthorized access to such information. The security systems and infrastructure we maintain may not be successful in protecting against all security breaches and cyber-attacks, social-engineering attacks, computer break-ins, theft and other improper activity.
Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act and similar laws in other jurisdictions; and 14 Table of Contents ● complying with export controls and economic sanctions administered by the relevant local authorities, including in the U.S. and European Union, in our international business.
Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act and similar laws in other jurisdictions; and ● complying with export controls and economic sanctions administered by the relevant local authorities, including in the U.S. and European Union, in our international business.
We have also experienced significant growth in the number 12 Table of Contents of customers, number of transactions and the amount of tax content that our platform and solutions support.
We have also experienced significant growth in the number of customers, number of transactions, and the amount of tax content that our platform and solutions support.
Additionally, erroneous tax determinations could result in overpayments to taxing authorities that are difficult to reclaim from the applicable taxing authorities or underpayments that could result in penalties.
Additionally, erroneous tax determinations could result in overpayments to taxing authorities 15 Table of Contents that are difficult to reclaim from the applicable taxing authorities or underpayments that could result in penalties.
Numerous 19 Table of Contents federal, state and local laws and regulations govern the collection, dissemination, use and safeguarding of personal information and other data, the scope of which is changing, subject to differing interpretations, and which may be costly to comply with, inconsistent between jurisdictions or conflicting with other rules.
Numerous federal, state and local laws and regulations govern the collection, dissemination, use and safeguarding of personal information and other data, the scope of which is changing, subject to differing interpretations, and which may be costly to comply with, inconsistent between jurisdictions or conflicting with other rules. We may be subject to these laws in certain circumstances.
If we fail to effectively protect, maintain and enhance our brand, our business may suffer. As a leader in our industry for over 40 years, our brand is one of our most valuable assets, and any failure to protect our brand could cause our business to suffer.
As a leader in our industry for over 40 years, our brand is one of our most valuable assets, and any failure to protect our brand could cause our business to suffer.
In addition, a global epidemic or pandemic outbreak, such as the outbreak of coronavirus disease 2019 (“COVID-19”), may have a material adverse effect on global economic conditions, consumer spending and the stability of global financial markets.
In addition, a global epidemic or pandemic outbreak may have a material adverse effect on global economic conditions, consumer spending and the stability of global financial markets.
Also, as we continue to expand our customer base, any failure by us to properly provide training and support will likely result in lost opportunities for additional subscriptions for our solutions. In addition, the upfront costs of our solutions can limit our sales to businesses using manual processes.
Also, as we continue to expand our customer base, any failure by us to properly provide training and support will likely result in lost opportunities for additional subscriptions for our solutions.
In the event of a security breach, our compliance with these laws may subject us to costs associated with notice and remediation, as well as potential investigations from federal regulatory agencies and state attorneys general.
Most states have also adopted laws that require notice be given to affected consumers in the event 19 Table of Contents of a security breach. In the event of a security breach, our compliance with these laws may subject us to costs associated with notice and remediation, as well as potential investigations from federal regulatory agencies and state attorneys general.
Any issues, problems, and errors with the implementation of the ERP system or its subsequent operation may impact our continued ability to successfully operate our business or to timely and accurately report our financial results.
We have recently implemented a new ERP system, which included multiple business areas across the organization. Any issues, problems, and errors from the implementation of the ERP system or its subsequent operation may impact our continued ability to successfully operate our business or to timely and accurately report our financial results.
If we fail to attract and retain qualified technical and tax-content personnel, our business could be harmed. Our technology is complex and our success depends in large part on our ability to attract and retain highly qualified personnel, particularly tax-content specialists, software developers, technical support and research and development personnel.
Our technology is complex and our success depends in large part on our ability to attract and retain highly qualified personnel, particularly tax-content specialists, software developers, technical support, and research and development personnel. Competition for skilled personnel is intense and we may not be successful in attracting, motivating, and retaining needed personnel.
Dealing with the loss of the services of our executive officers or key personnel and the process to replace any of our executive officers or key personnel may involve significant time and expense, take longer than anticipated, and significantly delay or prevent the achievement of our business objectives, which would harm our financial condition, results of operations, and business. 11 Table of Contents We face competitive pressures from other tax software and services providers, as well as the challenge of convincing businesses using native ERP functions to switch to our software.
Dealing with the loss of the services of our executive officers or key personnel and the process to replace any of our executive officers or key personnel may involve significant time and expense, take longer than anticipated, and significantly delay or prevent the achievement of our business objectives, which would harm our financial condition, results of operations, and business.
We also may be unable to attract or integrate into our operations qualified personnel on the schedule we desire. Any inability to attract, integrate, motivate and retain the necessary personnel could harm our business.
We have recently experienced efforts by a significant competitor to solicit our employees, and other competitors may take similar actions in the future. We also may be unable to attract or integrate into our operations qualified personnel on the schedule we desire. Any inability to attract, integrate, motivate, and retain the necessary personnel could harm our business.
Any errors, bugs, defects, disruptions in service or other performance problems with our software may damage our customers' businesses and could hurt our reputation, brand and business. We may also be required, or may choose, for customer relations or other reasons, to expend additional resources to correct actual or perceived errors, bugs or defects in our software.
Any errors, bugs, defects, disruptions in service or other performance problems with our software may damage our customers' businesses and could hurt our reputation, brand and business.
Certain of our software employs open-source software and we expect to use open-source software in the future.
Our software utilizes open-source software, and any defects or security vulnerabilities in the open-source software could negatively affect our business. Certain of our software employs open-source software and we expect to use open-source software in the future.
Any of these outcomes could lead customers to switch to our competitors or avoid using our solutions, which would negatively impact our revenue and harm our opportunities for growth . Incorrect or improper implementation, integration or use of our solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition and cash flows.
Any of these outcomes could lead customers to switch to our competitors or avoid using our solutions, which would negatively impact our revenue and harm our opportunities for growth .
In addition, failure to implement new or updated controls governing the new ERP system, or difficulties encountered in its implementation, could harm our results of operations or cause us to fail to meet our reporting obligations. ​ In connection with the ERP system implementation, material weaknesses or significant deficiencies may be identified.
In addition, failure of our new or updated controls governing the new ERP system, or difficulties encountered from its implementation, or subsequent operation, could harm our results of operations or cause us to fail to meet our reporting obligations. ​ If we fail to effectively protect, maintain and enhance our brand, our business may suffer.
Corporate competitors, as well as the state and local tax services offered by accounting firms, have historically targeted our customer base of large enterprise companies.
There are a number of competing tax-specific software vendors, and technologies, some of which have substantially greater revenue, personnel, and other resources than we do. Corporate competitors, as well as the state and local tax services offered by accounting firms, have historically targeted our customer base of large enterprise companies.
We may also be subject to liability claims for damages related to errors, bugs or defects in our software.
We may also be subject to liability claims for damages related to errors, bugs or defects in our software. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our software may harm our business and results of operations.
Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ Global Market. ​ ​ Item 1B. Unresolved Staff Comments Not applicable. ​
Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ Global Market. ​ We are no longer an “emerging growth company,” and we are no longer able to take advantage of the reduced disclosure requirements applicable to “emerging growth companies,” which may increase our costs.
We may become involved in material legal proceedings and audits, the outcomes which could adversely affect our business, results of operations, financial condition and cash flows.
There can be no assurance that our cybersecurity risk management program and processes, including our policies, controls, or procedures, will be fully implemented, complied with or effective in protecting our systems and information. ​ We may become involved in material legal proceedings and audits, the outcomes which could adversely affect our business, results of operations, financial condition and cash flows.
We face significant competitive challenges from other tax-specific software vendors and from outsourced transaction tax compliance services offered by accounting and specialized consulting firms. There are a number of competing tax-specific software vendors, some of which have substantially greater revenue, personnel and other resources than we do.
We face competitive pressures from other tax software and services providers, as well as the challenge of convincing businesses using native ERP functions to switch to our software. We face significant competitive challenges from other tax-specific software vendors and from outsourced transaction tax compliance services offered by accounting and specialized consulting firms.
Removed
Competition for skilled personnel is intense and we may not be successful in attracting, motivating and retaining needed personnel. We have recently experienced efforts by a significant competitor to solicit our employees, and other competitors may take similar actions in the future.
Added
We may face challenges in using and properly managing use of Artificial Intelligence (“AI”) in our business, which could result in reputational or competitive harm, and legal liability, and could adversely and materially affect the results of our business, operations, financial condition, and cash flows .
Removed
A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our software may harm our business and results of operations. 17 Table of Contents Our software utilizes open-source software, and any defects or security vulnerabilities in the open-source software could negatively affect our business.
Added
We may incorporate AI solutions into our platform, offerings, and/or services, and these solutions may grow over time and become significant in our operations. If the content, analyses, or recommendations that AI applications assist in producing are or are alleged to be deficient, inaccurate, or biased, our business, operations, or financial condition may be adversely and materially affected.
Removed
We have launched a project to implement a new ERP system. The scope of the project includes multiple business areas across the organization, and has consumed and will continue to consume significant time, and requires significant resource allocation in the planning, executing, and testing phases.
Added
The use of AI applications have resulted in cybersecurity incidents that implicate the personal data of end users of such applications. Any such cybersecurity incidents related to our use of AI applications could adversely affect our reputation and operations.
Removed
If we identify weaknesses or deficiencies in our internal control over financial reporting that we are unable to sufficiently remediate, our management may be unable to assert that our disclosure controls and procedures and our internal control over financial reporting is effective.
Added
AI also presents emerging ethical issues and if our use of AI becomes controversial, we may experience brand or reputational harm, competitive harm, or legal liability. Incorrect or improper implementation, integration, or use of our solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition, and cash flows.
Removed
We may be subject to these laws in certain circumstances. Most states have also adopted laws that require notice be given to affected consumers in the event of a security breach.
Added
In addition, the upfront costs of our solutions can limit our sales to businesses using manual processes. 11 Table of Contents If we fail to attract and retain qualified technical and tax-content personnel, our business could be harmed.
Removed
Additionally, over the past year, the consumer price index has increased substantially year over year. Federal policies to stimulate the economy during the pandemic and more recent global events, such as the rising price of oil and the conflict between Russia and Ukraine, may have exacerbated, and may continue to exacerbate, inflation and increases in the consumer price index.
Added
We may also be required, or may choose, for 17 Table of Contents customer relations or other reasons, to expend additional resources to correct actual or perceived errors, bugs or defects in our software.
Removed
We previously identified and disclosed certain material weaknesses in our internal control over financial reporting in our Annual Report on Form 10-K for the year ended December 31, 2020. These material weaknesses have since been remediated, but additional material weaknesses or significant deficiencies may be discovered in the future.
Added
We no longer qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012.
Added
As a result, we are now subject to various disclosure and compliance requirements that did not previously apply to us, such as: ● the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act; ● the requirement that we adopt new or revised accounting standards when they are applicable to public companies, instead of delaying their adoption until they are applicable to private companies; ● compliance with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding obligatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and financial statements; ● the requirement that we provide full and more detailed disclosures regarding executive compensation; and ● the requirement that we hold a non-binding advisory vote on executive compensation and obtain stockholder approval of any golden parachute payments not previously approved.
Added
We expect that the loss of emerging growth company status and compliance with these additional requirements will increase our legal and financial compliance costs and cause management and other personnel to divert attention from 23 Table of Contents operational and other business matters to devote substantial time to public company reporting requirements.

Item 2. Properties

Properties — owned and leased real estate

1 edited+0 added−0 removed1 unchanged
Biggest changeProperties Our corporate headquarters, which includes our operations and development teams, is located in King of Prussia, Pennsylvania, and consists of approximately 189,500 square feet of space under a lease that expires on September 30, 2028. 23 Table of Contents We also lease offices in Naperville, Illinois; London, United Kingdom; Amsterdam, The Netherlands; Frankfurt, Germany; Sao Paulo, Brazil; Chennai, India; Killorglin, Ireland; and Cork, Ireland.
Biggest changeItem 2. Properties Our corporate headquarters, which includes our operations and development teams, is located in King of Prussia, Pennsylvania, and consists of approximately 189,500 square feet of space under a lease that expires on September 30, 2028. We also lease offices in Naperville, Illinois; Frankfurt, Germany; Sao Paulo, Brazil; Chennai, India; Killorglin, Ireland; and Cork, Ireland.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

3 edited+2 added−2 removed1 unchanged
Biggest changeWe believe that the allegations in the complaint, once proven, are sufficient to prevail in this matter. However, the eventual outcome of the case is subject to a number of uncertainties, and therefore we cannot offer any assurance as to the ultimate impact of this case on our business and operations.
Biggest changeHowever, the eventual outcome of the case is subject to a number of uncertainties, and therefore we cannot offer any assurance as to the ultimate impact of this case on our business and operations. In addition to the foregoing matter, from time to time, we may be involved in various legal proceedings arising from the normal course of business activities.
We are not presently a party to any litigation the outcome of which we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. ​ ​ Item 4. Mine Safety Disclosures Not applicable. ​ ​ 24 Table of Contents PART II
We are not presently a party to any litigation the outcome of which we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows, or financial condition. 25 Table of Contents ​ ​ Item 4.
We are seeking a permanent injunction to prevent Avalara from further interfering in our contractual relations and to prohibit them from using or disclosing in any way our confidential, proprietary, and/or trade secret information. We are also seeking monetary damages, including punitive damages, and attorneys’ fees.
We are seeking a permanent injunction to prevent Avalara from further interference with our contractual relations and to prohibit the disclosure in any way of our confidential, proprietary, and/or trade secret information. We are also seeking monetary damages, including punitive damages and attorney’s fees. Avalara has filed a motion to dismiss for lack of personal jurisdiction.
Removed
On February 7, 2022, Avalara filed a motion to dismiss the complaint for lack of personal jurisdiction. Avalara withdrew that motion on February 17, 2022, and filed a renewed motion to dismiss the amended complaint for lack of personal matter jurisdiction on March 2, 2022. Vertex’s opposition to the motion to dismiss was filed in 2022.
Added
As of December 31, 2023, the matter remains before the Court as the parties pursue jurisdictional discovery, after which, further briefs will be filed. We believe the allegations in the complaint, once proven, are sufficient to prevail in this matter.
Removed
In addition to the foregoing matter, from time to time, we may be involved in various legal proceedings arising from the normal course of business activities.
Added
Mine Safety Disclosures Not applicable. ​ ​ 26 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

8 edited+0 added−0 removed2 unchanged
Biggest changeAll rights reserved. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Base Date ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company / Index 7/28/20 9/30/20 ​ 12/31/20 ​ 3/31/21 ​ 6/30/21 ​ 9/30/21 ​ 12/31/21 ​ 3/31/22 ​ 6/30/22 ​ 9/30/22 ​ 12/30/22 Vertex, Inc. ​ $ 100.00 ​ $ 96.11 ​ $ 145.63 ​ $ 91.85 ​ $ 91.68 ​ $ 80.32 ​ $ 66.32 ​ $ 64.10 ​ $ 47.34 ​ $ 57.12 ​ $ 60.63 S&P 500 ​ $ 100.00 ​ $ 103.54 ​ $ 116.12 ​ $ 123.29 ​ $ 133.83 ​ $ 134.61 ​ $ 149.46 ​ $ 142.58 ​ $ 119.63 ​ $ 113.79 ​ $ 122.39 NASDAQ U.S.
Biggest changeAll rights reserved. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Base Date ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company / Index 7/28/20 9/30/20 12/31/20 3/31/21 6/30/21 9/30/21 12/31/21 3/31/22 6/30/22 9/30/22 12/31/22 3/31/23 6/30/23 9/30/23 12/31/23 Vertex, Inc. ​ $ 100.00 ​ $ 96.11 ​ $ 145.63 ​ $ 91.85 ​ $ 91.68 ​ $ 80.32 ​ $ 66.32 ​ $ 64.10 ​ $ 47.34 ​ $ 57.12 ​ $ 60.63 ​ $ 86.45 ​ $ 81.47 ​ $ 96.51 ​ $ 112.55 S&P 500 ​ $ 100.00 ​ $ 103.54 ​ $ 116.12 ​ $ 123.29 ​ $ 133.83 ​ $ 134.61 ​ $ 149.46 ​ $ 142.58 ​ $ 119.63 ​ $ 113.79 ​ $ 122.39 ​ $ 131.56 ​ $ 143.07 ​ $ 138.38 ​ $ 154.56 NASDAQ U.S.
Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. 25 Table of Contents Stock Performance Graph The graph below (1) compares the cumulative total return on our Class A common stock with that of the S&P 500 Index (2) and the NASDAQ U.S.
Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. 27 Table of Contents Stock Performance Graph The graph below (1) compares the cumulative total return on our Class A common stock with that of the S&P 500 Index (2) and the NASDAQ U.S.
The stock price performance graph is not necessarily indicative of future price performance. 1 Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2023. 2 S&P 500 Index Data: Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved. 3 NASDAQ Index Data: Copyright NASDAQ OMX, Inc. Used with permission.
The stock price performance graph is not necessarily indicative of future price performance. 1 Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2024. 2 S&P 500 Index Data: Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved. 3 NASDAQ Index Data: Copyright NASDAQ OMX, Inc. Used with permission.
Benchmark Software TR Index (3) . The period shown commences on July 28, 2020, and ends on December 31, 2022, the end of our most recent fiscal year. The graph assumes an investment of $100 in each of the aforementioned on the close of market on July 28, 2020.
Benchmark Software TR Index (3) . The period shown commences on July 28, 2020, and ends on December 31, 2023, the end of our most recent fiscal year. The graph assumes an investment of $100 in each of the aforementioned on the close of market on July 28, 2020.
Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders. As of December 31, 2022, there were 28 stockholders of record of our Class B common stock.
Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders. As of December 31, 2023, there were 22 stockholders of record of our Class B common stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. ​ ​ Item 6. [Reserved] ​ ​ 26 Table of Contents
Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. ​ ​ Item 6. [Reserved] ​ ​ 28 Table of Contents
Our Class B common stock is not listed on any stock exchange nor traded on any public market. Holders As of December 31, 2022, we had 11 holders of record of our Class A common stock.
Our Class B common stock is not listed on any stock exchange nor traded on any public market. Holders As of December 31, 2023, we had 6 holders of record of our Class A common stock.
Benchmark Software TR ​ $ 100.00 ​ $ 105.29 ​ $ 114.08 ​ $ 115.33 ​ $ 132.90 ​ $ 136.71 ​ $ 149.28 ​ $ 132.14 ​ $ 106.79 ​ $ 97.20 ​ $ 100.01 ​ Recent Sales of Unregistered Securities None.
Benchmark Software TR ​ $ 100.00 ​ $ 105.29 ​ $ 114.08 ​ $ 115.33 ​ $ 132.90 ​ $ 136.71 ​ $ 149.28 ​ $ 132.14 ​ $ 106.79 ​ $ 97.20 ​ $ 100.01 ​ $ 120.21 ​ $ 140.52 ​ $ 133.68 ​ $ 159.09 ​ ​ ​ Recent Sales of Unregistered Securities None.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

112 edited+24 added−78 removed83 unchanged
Biggest changeNon-GAAP income or loss before income taxes is then adjusted for income taxes calculated using the respective statutory tax rates for applicable jurisdictions, which for purposes of this determination were assumed to be 25.5%. ​ 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. ​ 44 Table of Contents The following schedules reflect our additional non-GAAP financial measures and reconciles our additional non-GAAP financial measures to the related GAAP financial measures. ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ ​ December 31, ​ (Dollars in thousands) ​ 2022 ​ 2021 ​ Non-GAAP cost of revenues, software subscriptions $ 95,047 ​ $ 81,567 Non-GAAP cost of revenues, services $ 49,628 ​ $ 43,050 ​ Non-GAAP gross profit $ 346,949 ​ $ 300,931 ​ Non-GAAP gross margin 70.6 % 70.7 % Non-GAAP research and development expense $ 40,079 ​ $ 41,398 ​ Non-GAAP selling and marketing expense $ 115,272 ​ $ 91,821 ​ Non-GAAP general and administrative expense $ 112,650 ​ $ 89,592 ​ Non-GAAP operating income $ 66,233 ​ $ 66,302 ​ Non-GAAP net income $ 47,818 ​ $ 48,662 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ ​ December 31, ​ ​ (Dollars in thousands) 2022 ​ 2021 ​ ​ Non-GAAP Cost of Revenues, Software Subscriptions: ​ ​ Cost of revenues, software subscriptions $ 142,071 ​ $ 116,194 ​ ​ Stock-based compensation expense (2,090) ​ (2,336) ​ ​ Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues (44,934) ​ (32,291) ​ ​ Non-GAAP cost of revenues, software subscriptions $ 95,047 ​ $ 81,567 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Cost of Revenues, Services: ​ ​ ​ ​ ​ ​ ​ Cost of revenues, services $ 51,061 ​ $ 45,698 ​ ​ Stock-based compensation expense (1,433) ​ (2,648) ​ ​ Non-GAAP cost of revenues, services $ 49,628 ​ $ 43,050 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Gross Profit: ​ ​ ​ ​ ​ Gross profit $ 298,492 ​ $ 263,656 ​ ​ Stock-based compensation expense 3,523 ​ 4,984 ​ ​ Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues 44,934 ​ 32,291 ​ ​ Non-GAAP gross profit $ 346,949 ​ $ 300,931 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Gross Margin: ​ ​ ​ ​ ​ Total revenues $ 491,624 ​ $ 425,548 ​ ​ Non-GAAP gross margin 70.6 % 70.7 % ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Research and Development Expense: ​ ​ ​ ​ ​ Research and development expense $ 41,877 ​ $ 44,018 ​ ​ Stock-based compensation expense (1,798) ​ (2,620) ​ ​ Non-GAAP research and development expense $ 40,079 ​ $ 41,398 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Selling and Marketing Expense: ​ ​ ​ ​ ​ Selling and marketing expense $ 125,335 ​ $ 99,005 ​ ​ Stock-based compensation expense (6,284) ​ (6,371) ​ ​ Amortization of acquired intangible assets – selling and marketing expense ​ (3,779) ​ ​ (813) ​ ​ Non-GAAP selling and marketing expense $ 115,272 ​ $ 91,821 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP General and Administrative Expense: ​ ​ ​ ​ ​ General and administrative expense $ 121,651 ​ $ 107,009 ​ ​ Stock-based compensation expense (8,124) ​ (12,185) ​ ​ Severance expense ​ (877) ​ (5,232) ​ ​ Non-GAAP general and administrative expense $ 112,650 ​ $ 89,592 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 45 Table of Contents ​ For the Year Ended ​ ​ ​ December 31, ​ ​ ​ 2022 ​ 2021 ​ ​ (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ Non-GAAP Operating Income: ​ ​ ​ ​ ​ Loss from operations $ (8,082) ​ $ (2,942) ​ ​ Stock-based compensation expense 19,729 ​ 26,160 ​ ​ Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues 44,934 ​ 32,291 ​ ​ Amortization of acquired intangible assets – selling and marketing expense ​ 3,779 ​ ​ 813 ​ ​ Severance expense ​ 877 ​ ​ 5,232 ​ ​ Acquisition contingent consideration ​ 2,300 ​ ​ — ​ ​ Litigation settlement ​ 2,000 ​ ​ — ​ ​ Transaction costs (1) 696 ​ 4,748 ​ ​ Non-GAAP operating income $ 66,233 ​ $ 66,302 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Net Income: ​ ​ ​ ​ ​ Net Loss $ (12,304) ​ $ (1,479) ​ ​ Income tax expense (benefit) ​ 2,174 ​ ​ (2,447) ​ ​ Stock-based compensation expense 19,729 ​ 26,160 ​ ​ Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues ​ 44,934 ​ ​ 32,291 ​ ​ Amortization of acquired intangible assets – selling and marketing expense ​ 3,779 ​ ​ 813 ​ ​ Severance expense 877 ​ 5,232 ​ ​ Acquisition contingent consideration ​ 2,300 ​ ​ — ​ ​ Litigation settlement ​ 2,000 ​ ​ — ​ ​ Transaction costs (1) ​ 696 ​ 4,748 ​ ​ Non-GAAP income before income taxes ​ 64,185 ​ ​ 65,318 ​ ​ Income tax adjustment at statutory rate (16,367) ​ (16,656) ​ ​ Non-GAAP net income $ 47,818 ​ $ 48,662 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (1) The 2022 period includes offering costs related to the sale of shares of certain of our Class B shareholders, which are not representative of normal business operations. ​ ​ ​ 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.
Biggest changeNon-GAAP income or loss before income taxes is then adjusted for income taxes calculated using the respective statutory tax rates for applicable jurisdictions, which for purposes of this determination were assumed to be 25.5%. ​ 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. ​ 46 Table of Contents The following schedules reflect our additional non-GAAP financial measures and reconciles our additional non-GAAP financial measures to the related GAAP financial measures. ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ December 31, ​ (Dollars in thousands) ​ 2023 ​ ​ 2022 ​ Non-GAAP cost of revenues, software subscriptions $ 106,038 ​ $ 95,047 Non-GAAP cost of revenues, services $ 59,042 ​ $ 49,628 ​ Non-GAAP gross profit $ 407,307 ​ $ 346,949 ​ Non-GAAP gross margin 71.2 % 70.6 % Non-GAAP research and development expense $ 52,218 ​ $ 40,079 ​ Non-GAAP selling and marketing expense $ 129,216 ​ $ 115,272 ​ Non-GAAP general and administrative expense $ 124,925 ​ $ 112,650 ​ Non-GAAP operating income $ 85,646 ​ $ 66,233 ​ Non-GAAP net income $ 63,699 ​ $ 47,818 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ December 31, ​ (Dollars in thousands) 2023 ​ 2022 ​ Non-GAAP Cost of Revenues, Software Subscriptions: ​ ​ Cost of revenues, software subscriptions $ 162,920 ​ $ 142,071 ​ Stock-based compensation expense (2,834) ​ (2,090) ​ Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues (54,048) ​ (44,934) ​ Non-GAAP cost of revenues, software subscriptions $ 106,038 ​ $ 95,047 ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Cost of Revenues, Services: ​ ​ ​ ​ ​ ​ Cost of revenues, services $ 60,888 ​ $ 51,061 ​ Stock-based compensation expense (1,846) ​ (1,433) ​ Non-GAAP cost of revenues, services $ 59,042 ​ $ 49,628 ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Gross Profit: ​ ​ ​ ​ Gross profit $ 348,579 ​ $ 298,492 ​ Stock-based compensation expense 4,680 ​ 3,523 ​ Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues 54,048 ​ 44,934 ​ Non-GAAP gross profit $ 407,307 ​ $ 346,949 ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Gross Margin: ​ ​ ​ ​ Total revenues $ 572,387 ​ $ 491,624 ​ Non-GAAP gross margin 71.2 % 70.6 % ​ ​ ​ ​ ​ ​ ​ Non-GAAP Research and Development Expense: ​ ​ ​ ​ Research and development expense $ 58,212 ​ $ 41,877 ​ Stock-based compensation expense (5,994) ​ (1,798) ​ Non-GAAP research and development expense $ 52,218 ​ $ 40,079 ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Selling and Marketing Expense: ​ ​ ​ ​ Selling and marketing expense $ 140,237 ​ $ 125,335 ​ Stock-based compensation expense (8,380) ​ (6,284) ​ Amortization of acquired intangible assets – selling and marketing expense ​ (2,641) ​ ​ (3,779) ​ Non-GAAP selling and marketing expense $ 129,216 ​ $ 115,272 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 47 Table of Contents ​ For the year ended ​ (Dollars in thousands) December 31, ​ ​ 2023 ​ 2022 ​ Non-GAAP General and Administrative Expense: ​ ​ ​ ​ General and administrative expense $ 145,936 ​ $ 121,651 ​ Stock-based compensation expense (14,865) ​ (8,124) ​ Severance expense ​ (3,576) ​ (877) ​ Amortization of cloud computing implementation costs – general and administrative ​ (2,570) ​ ​ — ​ Non-GAAP general and administrative expense $ 124,925 ​ $ 112,650 ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Operating Income: ​ ​ ​ ​ Loss from operations $ (17,510) ​ $ (8,082) ​ Stock-based compensation expense 33,919 ​ 19,729 ​ Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues 54,048 ​ 44,934 ​ Amortization of acquired intangible assets – selling and marketing expense ​ 2,641 ​ ​ 3,779 ​ Amortization of cloud computing implementation costs – general and administrative ​ 2,570 ​ ​ — ​ Severance expense ​ 3,576 ​ ​ 877 ​ Acquisition contingent consideration ​ 1,549 ​ ​ 2,300 ​ Litigation settlement ​ — ​ ​ 2,000 ​ Transaction costs (1) 4,853 ​ 696 ​ Non-GAAP operating income $ 85,646 ​ $ 66,233 ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Net Income: ​ ​ ​ ​ Net loss $ (13,093) ​ $ (12,304) ​ Income tax expense (benefit) ​ (8,581) ​ ​ 2,174 ​ Stock-based compensation expense 33,919 ​ 19,729 ​ Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues ​ 54,048 ​ ​ 44,934 ​ Amortization of acquired intangible assets – selling and marketing expense ​ 2,641 ​ ​ 3,779 ​ Amortization of cloud computing implementation costs – general and administrative ​ 2,570 ​ ​ — ​ Severance expense 3,576 ​ 877 ​ Acquisition contingent consideration ​ 1,549 ​ ​ 2,300 ​ Litigation settlement ​ — ​ ​ 2,000 ​ Transaction costs (1) ​ 4,853 ​ 696 ​ Change in settlement value of deferred purchase commitment liability – interest expense ​ 4,020 ​ ​ — ​ Non-GAAP income before income taxes ​ 85,502 ​ ​ 64,185 ​ Income tax adjustment at statutory rate (21,803) ​ (16,367) ​ Non-GAAP net income $ 63,699 ​ $ 47,818 ​ (1) The year ended December 31, 2023 includes costs associated with a public tender offer, which was withdrawn by the Company on January 14, 2024.
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.
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, Shopify, Workday, and Zuora.
Increased investment in selling and marketing expense is driven by increased expenses associated with the growth in period over period subscription sales and services revenue and expansion of our partner and channel management programs. In addition, there was increased advertising and promotional spending and brand awareness efforts.
Increased investment in selling and marketing expense was driven by increased expenses associated with the growth in period over period subscription sales and services revenue, and expansion of our partner and channel management programs. In addition, there was increased advertising and promotional spending and brand awareness efforts.
Other Operating Expense, net Other operating expense, net consists primarily of transactions costs associated with merger and acquisition activities, periodic remeasurement of contingent consideration associated with completed acquisitions, realized gains and losses on foreign currency fluctuations and other operating gains and losses.
Other Operating Expense (Income), net Other operating expense (income), net consists primarily of transactions costs associated with merger and acquisition activities, periodic remeasurement of contingent consideration associated with completed acquisitions, realized gains and losses on foreign currency fluctuations, and other operating gains and losses.
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.” T his section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
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.” T his section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.
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 1,400 professionals and serves companies across the globe.
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 1,500 professionals and serves companies across the globe.
Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021.
Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 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, 2022.
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. 39 Table of Contents Contractual Obligations and Commitments .
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. 41 Table of Contents Contractual Obligations and Commitments .
We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, integrate current and future acquisitions and incur additional costs associated with becoming a publicly-listed company.
We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, integrate current and future acquisitions, and incur additional costs associated with being a publicly-listed company.
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. 46 Table of Contents 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.
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.
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%.
Fluctuations in services revenue are directly correlated to fluctuations in our subscription revenues with respect to implementation and training services as we have historically experienced an attachment rate to subscription sales for these services of approximately 60%.
Net Revenue Retention Rate (“NRR”). ​ We believe that our NRR provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it demonstrates to investors our ability to expand existing customer 40 Table of Contents revenues, which is one of our key growth strategies.
Net Revenue Retention Rate (“NRR”). ​ We believe that our NRR provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it demonstrates to investors our ability to expand existing customer revenues, which is one of our key growth strategies.
However, we may pursue acquisitions, development arrangements with partners or similar activities to accelerate these investments. We believe continuing to enhance our existing software 28 Table of Contents 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.
However, we may pursue acquisitions, development arrangements with partners or similar activities to accelerate these investments. We believe continuing to enhance our existing software 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.
The increase was primarily due to the impact of infrastructure and technology purchases and other capitalized infrastructure costs to support our growth which were placed in service during 2022 and 2021.
The increase was primarily due to the impact of infrastructure and technology purchases and other capitalized infrastructure costs to support our growth, which were placed in service during 2023 and 2022.
See Note 3 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K. (3) The Company has a contingent consideration liability related to the 2021 Acquisition of Tellutax.
See Note 4 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K. (2) The Company has a contingent consideration liability related to the 2021 acquisition of Tellutax.
With the pace of change in commerce and compliance, we believe it is important to 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.
With the pace of change in commerce and compliance, we believe it is important to continue innovating and extending the functionality and breadth of our software. We plan to continue 30 Table of Contents investing to further enhance our content and the speed and usability of our software. Historically such innovation has been accomplished through internal development efforts.
At December 31, 2022, outstanding foreign currency forward contracts provide a hedge of approximately 50% of our future purchase commitment liability.
At December 31, 2023, outstanding foreign currency forward contracts provide a hedge of approximately 50% of our future purchase commitment liability.
In addition, this included an increase in depreciation and amortization of capitalized software and acquired intangible assets of $12.6 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.
In addition, this included an increase in depreciation and amortization of capitalized software and acquired intangible assets of $9.1 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.
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 41% and 35% of software subscription revenues from cloud-based subscriptions in 2022 and 2021, respectively. We host our cloud-based subscriptions.
Over the past three years, cloud sales to new customers have grown at a faster rate than sales of on-premise solutions, which is a trend that we expect to continue over time. We generated 45% and 41% of software subscription revenues from cloud-based subscriptions in 2023 and 2022, respectively. We host our cloud-based subscriptions.
Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison, our net loss was ($12.3) million and ($1.5) million in 2022 and 2021, respectively, while our net loss margin was (2.5)% and (0.3)% over the same periods, respectively.
Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison, our net loss was ($13.1) million and ($12.3) million in 2023 and 2022, respectively, while our net loss margin was (2.3)% and (2.5)% over the same periods, respectively.
We had a net loss of ($12.3) million and ($1.5) million in 2022 and 2021, respectively. These amounts are presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”).
We had a net loss of ($13.1) million and ($12.3) million in 2023 and 2022, respectively. These amounts are presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”).
Adjusted EBITDA was $78.7 million and $78.0 million in 2022 and 2021, 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.
Adjusted EBITDA was $100.8 million and $78.7 million in 2023 and 2022, 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.
Increases or declines in interest rates would be expected to augment or reduce future interest income by an insignificant amount. We are exposed to risk related to changes in interest rates on our outstanding borrowings. Borrowings under the Second Amendment bear interest at rates that are variable.
Increases or declines in interest rates would be expected to augment or reduce future interest income by an insignificant amount. We are exposed to risk related to changes in interest rates on our outstanding borrowings. Borrowings under our credit agreement bear interest at rates that are variable.
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.
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.
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 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.
We also collaborate with numerous accounting firms who have built implementation practices around our software to serve their customer base. 27 Table of Contents We believe that global commerce and the compliance environment provides durable and accelerating growth opportunities for our business. We generated revenues of $491.6 million and $425.5 million in 2022 and 2021, respectively.
We also collaborate with numerous accounting firms who have built implementation practices around our software to serve their customer base. 29 Table of Contents We believe that global commerce and the compliance environment provides durable and accelerating growth opportunities for our business. We generated revenues of $572.4 million and $491.6 million in 2023 and 2022, respectively.
Accordingly, the income tax provision or benefit was based on taxable income allocated to these states. In foreign jurisdictions, our subsidiaries are generally taxed at the corporate level, and the income tax provision or benefit is based on income or loss sourced to these foreign jurisdictions at the tax rates applicable in those jurisdictions.
In foreign jurisdictions, our subsidiaries are generally taxed at the corporate level, and the income tax provision or benefit is based on income or loss sourced to these foreign jurisdictions at the tax rates applicable in those jurisdictions.
We generated 41% and 35% of software subscription revenues from cloud-based subscriptions in 2022 and 2021, respectively. While our on-premise software subscription revenues comprised 59% and 65% of our software subscription revenues for 2022 and 2021, respectively, they continue to decrease as a percentage of total software subscriptions revenues as cloud-based subscriptions grow.
We generated 45% and 41% of software subscription revenues from cloud-based subscriptions in 2023 and 2022, respectively. While our on-premise software subscription revenues comprised 55% and 59% of our software subscription revenues for 2023 and 2022, respectively, they continue to decrease as a percentage of total software subscriptions revenues as cloud-based subscriptions grow.
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. Historical patterns should not be considered a reliable indicator of our future performance.
We have also invested in acquisitions and product innovation to expand our product portfolio. We anticipate our operating expenses will increase in future periods as we invest to support the ongoing expansion of our business. Historical patterns should not be considered a reliable indicator of our future performance.
AARPC represents average annual revenue per customer and is calculated by dividing ARR by the number of software subscription customers at the end of the respective period: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in millions) ​ 2022 ​ 2021 ​ Year-Over-Year Change Annual Recurring Revenue ​ $ 431.1 ​ $ 370.2 ​ $ 60.9 16.5 % ​ ARR increased by $60.9 million or 16.5% in 2022 as compared to 2021.
AARPC represents average annual revenue per customer and is calculated by dividing ARR by the number of software subscription customers at the end of the respective period: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in millions) ​ 2023 ​ 2022 ​ Year-Over-Year Change Annual Recurring Revenue ​ $ 512.5 ​ $ 431.1 ​ $ 81.4 18.9 % ​ ARR increased by $81.4 million or 18.9% in 2023 as compared to 2022.
In addition, our managed 34 Table of Contents services offering experienced a $5.2 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.
In addition, our managed services offering experienced a $4.1 million increase in recurring services revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.
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.
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.
After excluding stock-based compensation expense, as a percentage of total revenues general and administrative expenses increased 23.1% in 2022 compared to 22.3 % in 2021.
After excluding stock-based compensation expense, as a percentage of total revenues general and administrative expenses decreased to 22.9% in 2023 compared to 23.1% in 2022.
Our subsidiaries in foreign jurisdictions are generally taxed at the corporate level, and the income tax provision or benefit is based on the income or loss sourced to these foreign jurisdictions at the tax rates applicable in those jurisdictions. 32 Table of Contents 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.
Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could materially differ from our projections. ​ Our subsidiaries in foreign jurisdictions are generally taxed at the corporate level, and the income tax provision or benefit is based on the income or loss sourced to these foreign jurisdictions at the tax rates applicable in those jurisdictions. 34 Table of Contents 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.
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.
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.
Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk We had unrestricted cash and cash equivalents of $91.8 million and $73.3 million as of December 31, 2022 and 2021, respectively, and investments of $11.2 million as of December 31, 2022.
Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk We had unrestricted cash and cash equivalents of $68.2 million and $91.8 million as of December 31, 2023 and 2022, respectively, and investments of $9.5 million and $11.2 million as of December 31, 2023 and 2022, respectively.
After excluding stock-based compensation expense, as a percentage of services revenues, cost of services revenues increased to 65.2% in 2022 compared to 64.1% for the same period in 2021.
As a percentage of services revenues, cost of services revenues decreased to 66.5% in 2023 compared to 67.1% for the same period in 2022. After excluding stock-based compensation expense, as a percentage of services revenues, cost of services revenues decreased to 64.5% in 2023 compared to 65.2% for the same period in 2022.
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.
General and Administrative General and administrative expenses consist primarily of personnel and related expenses for administrative, finance, information technology, legal, risk management, facilities, and human resources staffing, including salaries, benefits, bonuses, severance, stock-based compensation, professional fees, insurance premiums, facility costs, amortization of cloud computing arrangement implementation costs related to our ERP modernization initiative, and other internal support and infrastructure costs.
This included a $13.3 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.
This increase was primarily driven by a $12.1 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.
We had 4,272 customers and approximately $86,700 of AARPC at December 31, 2021. The increase in customers and AARPC was due to expansion of usage by existing customers and adding new customers through organic growth.
We had 4,289 customers and approximately $100,500 of AARPC at December 31, 2022. The increase in customers and AARPC was due to expansion of usage by existing customers and adding new customers through organic growth.
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, ​ ​ 2022 2021 ​ Net Revenue Retention Rate 110 % 108 % ​ The 200 basis point increase in NRR to 110% at December 31, 2022 from 108% for the same period in 2021 was primarily attributable to a decrease in customer downgrades and losses.
Our NRR calculation takes into account any revenue lost from departing customers or customers who have downgraded or reduced 42 Table of Contents 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, ​ ​ 2023 2022 ​ Net Revenue Retention Rate 113 % 110 % ​ The 300 basis point increase in NRR to 113% at December 31, 2023 from 110% for the same period in 2022 was primarily attributable to an increase in customer cross-sell and additional entitlements.
Other operating expense, net for the year ended December 31, 2022 was primarily comprised of $2.0 million in costs related to a legal settlement, $2.3 million of an increase to the Tellutax, LLC (“Tellutax”) contingent consideration liability, and $0.7 million in offering costs related to the sale of shares of certain of our Class B shareholders.
Other operating expense, net for the year ended December 31, 2022 was primarily comprised of $2.0 million in costs related to a legal settlement, $2.3 million of an increase to the Tellutax contingent consideration liability, and $0.7 million in offering costs related to the sale of shares of certain of our Class B common stock shareholders. ​ As a percentage of total revenues, other operating expense, net was 1.1% for 2023, which was unchanged compared to the same period in 2022.
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.
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, or customer usage tier true-ups, may have a higher concentration during the end of the year.
Additional Non-GAAP Financial Measures In addition to Adjusted EBITDA, Adjusted EBITDA margin, free cash flow, and free cash flow margin calculated and discussed in “Key Business Metrics,” the following additional non-GAAP financial measures are calculated and presented further below: ​ ● Non-GAAP cost of revenues, software subscriptions is determined by adding back to GAAP cost of revenues, software subscriptions, the stock-based compensation expense, and depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues for the respective periods. ​ 43 Table of Contents ● Non-GAAP cost of revenues, services is determined by adding back to GAAP cost of revenues, services, the stock-based compensation expense included in cost of revenues, services for the respective periods. ​ ● Non-GAAP gross profit is determined by adding back to GAAP gross profit the stock-based compensation expense, and depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues for the respective periods. ​ ● Non-GAAP gross margin is determined by dividing non-GAAP gross profit by total revenues for the respective periods. ​ ● Non-GAAP research and development expense is determined by adding back to GAAP research and development expense the stock-based compensation expense included in research and development expense for the respective periods. ​ ● Non-GAAP selling and marketing expense is determined by adding back to GAAP selling and marketing expense the stock-based compensation expense and the amortization of acquired intangible assets included in selling and marketing expense for the respective periods. ​ ● Non-GAAP general and administrative expense is determined by adding back to GAAP general and administrative expense the stock-based compensation expense and severance expense included in general and administrative expense for the respective periods. ​ ● Non-GAAP operating income is determined by adding back to GAAP loss or income from operations the stock-based compensation expense, depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues, amortization of acquired intangible assets included in selling and marketing expense, severance expense, acquisition contingent consideration, litigation settlements, and transaction costs which includes offering costs related to the sale of shares of certain of our Class B shareholders which are not representative of normal business operations, included in GAAP loss or income from operations for the respective periods. ​ ● Non-GAAP net income is determined by adding back to GAAP net loss or income the income tax benefit or expense, stock-based compensation expense, depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues, amortization of acquired intangible assets included in selling and marketing expense, severance expense, acquisition contingent consideration, litigaton settlements, and transaction costs which includes offering costs related to the sale of shares of certain of our Class B shareholders which are not representative of normal business operations, included in GAAP net loss or income for the respective periods to determine non-GAAP loss or income before income taxes.
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: ​ 45 Table of Contents ● Non-GAAP cost of revenues, software subscriptions is determined by adding back to GAAP cost of revenues, software subscriptions, the stock-based compensation expense, and depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues for the respective periods. ​ ● Non-GAAP cost of revenues, services is determined by adding back to GAAP cost of revenues, services, the stock-based compensation expense included in cost of revenues, services for the respective periods. ​ ● Non-GAAP gross profit is determined by adding back to GAAP gross profit the stock-based compensation expense, and depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues for the respective periods. ​ ● Non-GAAP gross margin is determined by dividing non-GAAP gross profit by total revenues for the respective periods. ​ ● Non-GAAP research and development expense is determined by adding back to GAAP research and development expense the stock-based compensation expense included in research and development expense for the respective periods. ​ ● Non-GAAP selling and marketing expense is determined by adding back to GAAP selling and marketing expense the stock-based compensation expense and the amortization of acquired intangible assets included in selling and marketing expense for the respective periods. ​ ● Non-GAAP general and administrative expense is determined by adding back to GAAP general and administrative expense the stock-based compensation expense, amortization of cloud computing implementation costs and severance expense included in general and administrative expense for the respective periods. ​ ● Non-GAAP operating income is determined by adding back to GAAP loss or income from operations the stock-based compensation expense, depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues, amortization of acquired intangible assets included in selling and marketing expense, amortization of cloud computing implementation costs in general and administrative expense, severance expense, acquisition contingent consideration, litigation settlements, and transaction costs , included in GAAP loss or income from operations for the respective periods. ​ ● N on-GAAP net income is determined by adding back to GAAP net loss or income the income tax benefit or expense, stock-based compensation expense, depreciation and amortization of capitalized software and acquired intangible assets included in cost of subscription revenues, amortization of acquired intangible assets included in selling and marketing expense, amortization of cloud computing implementation costs in general and administrative expense, severance expense, acquisition contingent consideration, adjustments to the settlement value of deferred purchase commitment liabilities recorded as interest expense, litigation settlements, and transaction costs , included in GAAP net loss or income for the respective periods to determine non-GAAP loss or income before income taxes.
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.
We have reviewed these critical accounting estimates and related disclosures with our Audit Committee. 48 Table of Contents 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.
This decline was 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.
This increase was primarily due to a $12.1 million increase in personnel costs related to development work associated with new solutions to address end-to-end data analysis and compliance needs of our customers, and continued expansion of connectors and application program interfaces (“APIs”) to customer ERP and other software platforms.
As a percentage of revenues, depreciation expense decreased slightly to 2.5% in 2022 compared to 2.7% for the same period in 2021. 36 Table of Contents Other Operating Expense, Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 ​ 2021 ​ Year-Over-Year Change Other operating expense, net $ 5,271 ​ $ 4,888 ​ $ 383 7.8 % ​ Other operating expense, net, increased $0.4 million, or 7.8%, to $5.3 million of expense in 2022 compared to $4.9 million in 2021.
As a percentage of revenues, depreciation expense increased slightly to 2.7% in 2023 compared to 2.5% for the same period in 2022. 38 Table of Contents Other Operating Expense, Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2023 ​ 2022 ​ Year-Over-Year Change Other operating expense, net $ 6,502 ​ $ 5,271 ​ $ 1,231 23.4 % ​ Other operating expense, net, increased $1.2 million, or 23.4%, to $6.5 million of expense in 2023 compared to $5.3 million in 2022.
The increase was primarily driven by $25.3 million of growth in revenues from subscriptions of our tax solutions to new customers, and $35.6 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases. We had 4,289 customers and AARPC was approximately $100,500 at December 31, 2022.
The increase was primarily driven by $23.7 million of growth in revenues from subscriptions of our tax solutions to new customers, and $57.7 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases. We had 4,310 customers and AARPC was approximately $118,910 at December 31, 2023.
Interest Expense, Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 ​ 2021 ​ Year-Over-Year Change Interest expense, net $ 2,048 ​ $ 984 ​ $ 1,064 108.1 % ​ Interest expense, net increased $1.1 million, or 108.1%, to $2.0 million in 2022 compared to $1.0 million in 2021.
Interest Expense, Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2023 ​ 2022 ​ Year-Over-Year Change Interest expense, net $ 4,164 ​ $ 2,048 ​ $ 2,116 103.3 % ​ Interest expense, net increased $2.1 million, or 103.3%, to $4.2 million in 2023 compared to $2.0 million in 2022.
Quarterly fluctuations in our costs and expenses overall primarily reflect changes in our headcount, infrastructure and sales and marketing investments, and other costs related to certain technology development projects and the development and scaling of our cloud solutions.
As such, certain periods may be less comparable due to the timing of our customers purchase patterns. Quarterly fluctuations in our costs and expenses overall primarily reflect changes in our headcount, infrastructure, and sales and marketing investments, and other costs related to certain technology development projects and the development and scaling of our cloud solutions.
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.
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.
Effective January 1, 2022, we changed the pricing structure for on-premise software so the initial year price and renewal prices were consistent, thus removing the material right for transactions after this date. The material right for applicable transactions prior to this pricing change will continue to be recognized over the remaining estimated period of benefit to the customer.
We recognize revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years. Effective January 1, 2022, we changed the pricing structure for on-premise software so the initial year price and renewal prices were consistent, thus removing the material right for transactions after this date.
In addition, changes in the settlement value of the future payment obligation for the Systax Sistemas Fiscais Limited (“Systax”) acquisition and amortization of the discount on deferred purchase consideration associated with the LCR-Dixon acquisition will be recorded as interest expense.
In addition, changes in the settlement value of the future payment obligation for the Systax Sistemas Fiscais Limited (“Systax”) acquisition and amortization of the discount on deferred purchase consideration associated with the LCR-Dixon Corporation (“LCR-Dixon”) acquisition were recorded as interest expense. Interest income reflects earnings on investments of our cash on hand and our investment securities.
This increase was offset by a decline in stock-based compensation of $4.1 million for the year ended December 31, 2022 over the same period in 2021. As a percentage of total revenues, general and administrative expenses were 24.7% in 2022 compared to 25.1% in 2021.
Lastly, there was an increase in stock-based compensation of $6.7 million for the year ended December 31, 2023 over the same period in 2022. ​ As a percentage of total revenues, general and administrative expenses increased to 25.5% in 2023 compared to 24.7% in 2022.
Our NRR was 110% and 108% in 2022 and 2021, 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.
Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations– Key Business Metrics– Net Revenue Retention Rate and Gross Revenue Retention Rate” and for further discussion. Acquire new customers.
Revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based solutions. All services within the cloud-based contracts consistently provide a benefit to the customer during the subscription period, thus the associated revenue is recognized ratably over the subscription period.
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.
Depreciation and Amortization ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 ​ 2021 ​ Year-Over-Year Change Depreciation and amortization $ 12,440 ​ $ 11,678 ​ $ 762 6.5 % ​ Depreciation and amortization increased $0.8 million, or 6.5%, to $12.4 million in 2022 compared to $11.7 million in 2021.
Depreciation and Amortization ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2023 ​ 2022 ​ Year-Over-Year Change Depreciation and amortization $ 15,202 ​ $ 12,440 ​ $ 2,762 22.2 % ​ Depreciation and amortization increased $2.8 million, or 22.2%, to $15.2 million in 2023 compared to $12.4 million in 2022.
We define free cash flow margin as free cash flow divided by total revenues for the same period. Our net cash provided by operating activities was $76.8 million and $92.0 million in 2022 and 2021, respectively, while our operating cash flow margin was 15.6% and 21.6% over the same periods, respectively.
We define free cash flow margin as free cash flow divided by total revenues for the same period. 44 Table of Contents Our net cash provided by operating activities was $74.3 million and $63.8 million in 2023 and 2022, respectively, while our operating cash flow margin was 13.0% and 13.0% over the same periods, respectively.
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. Funds Held for Customers and Customer Funds Obligations .
Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms unacceptable to us.
The Line of Credit expires in March 2027. We are required to pay a quarterly fee on the difference between the $200.0 million allowed maximum borrowings and the unpaid principal balance outstanding under the line at the applicable rate.
We are required to pay a quarterly fee on the difference between the $200.0 million allowed maximum borrowings and the unpaid principal balance outstanding under the line at the applicable rate. At December 31, 2023, the base rate option and the SOFR Option applicable to the Line of Credit were 8.50% and 6.48%, respectively.
For the years ended December 31, 2022, 2021 and 2020, approximately 3%, 4% and 2% of our revenues were generated in currencies other than U.S. dollars in each respective period. 51 Table of Contents 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 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.
The $9.0 million increase in services revenues is primarily driven by an increase of $3.8 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.
Software subscriptions revenues derived from new customers averaged 6.2% and 8.0% of total software subscriptions revenues in 2023 and 2022, respectively. ​ ​ 36 Table of Contents The $15.4 million increase in services revenues was primarily driven by an increase of $11.3 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.
Research and Development ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 ​ 2021 ​ Year-Over-Year Change Research and development $ 41,877 ​ $ 44,018 ​ $ (2,141) (4.9) % ​ Research and development expenses decreased $2.1 million, or 4.9%, to $41.9 million in 2022 compared to $44.0 million in 2021.
Research and Development ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2023 ​ 2022 ​ Year-Over-Year Change Research and development $ 58,212 ​ $ 41,877 ​ $ 16,335 39.0 % ​ Research and development expenses increased $16.3 million, or 39.0%, to $58.2 million in 2023 compared to $41.9 million in 2022.
Cost of Software Subscriptions Revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Year-Over-Year Change Cost of software subscriptions revenues $ 142,071 ​ $ 116,194 ​ $ 25,877 22.3 % ​ Cost of software subscriptions revenues increased $25.9 million, or 22.3%, to $142.1 million in 2022 compared to $116.2 million in 2021.
Cost of Software Subscriptions Revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2023 2022 Year-Over-Year Change Cost of software subscriptions revenues $ 162,920 ​ $ 142,071 ​ $ 20,849 14.7 % ​ Cost of software subscriptions revenues increased $20.8 million, or 14.7%, to $162.9 million in 2023 compared to $142.1 million in 2022.
Depending on such timing, these decisions can create volatility in the amount of business transacted by our sales team and 37 Table of Contents 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.
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 sales team and the amount of revenues recorded in each quarter.
We plan to continue to significantly expand our infrastructure and 30 Table of Contents personnel to support our future growth and increases in transaction volumes of our cloud-based solutions, including through acquisitions. We expect growth in our business will result in an increase in cost of software subscriptions revenue in absolute dollars.
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.
Variations in the actual outcome of these future tax consequences could materially impact the consolidated financial statements. ​ 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. 50 Table of Contents 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.
Variations in the actual outcome of these future tax consequences could materially impact the consolidated financial statements. ​ 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. ​ ​ 49 Table of Contents Item 7A.
To the extent that revenues from our cloud-based solutions continue to increase as a percentage of total revenues, our gross margin may decrease due to the associated hosting costs of those offerings.
To the extent that revenues from our cloud-based solutions continue to increase as a percentage of total revenues, our gross margin may decrease due to the associated hosting costs of those offerings. Recent Developments On December 13, 2023, we announced that we had commenced a public tender offer to acquire a global provider of e-invoicing solutions.
Prior to January 1, 2022, certain on-premise software subscription prices in the initial subscription year were higher than standard renewal prices. The excess initial year price over the renewal price is considered to be a material right. We recognized revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years.
Prior to January 1, 2022, certain on-premise software subscription prices in the initial subscription year were higher than standard renewal prices. The excess initial year price over the renewal price is a material right that provides customers 31 Table of Contents with the right to this reduced renewal price.
As a percentage of total revenues, selling and marketing expenses increased to 25.5% in 2022 compared to 23.3% for the same period in 2021. After excluding stock-based compensation expense, as a percentage of total revenues, selling and marketing expenses increased to 24.2% in 2022 compared to 21.8% in 2021.
As a percentage of total revenues, selling and marketing expenses decreased to 24.5% in 2023 compared to 25.5% for the same period in 2022.
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.
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 our current and past investments related to the expansion of our brand awareness and product innovation.
Liquidity and Capital Resources As of December 31, 2022, we had unrestricted cash and cash equivalents of $91.8 million and retained earnings of $12.5 million. In addition, we had $11.2 million in investment securities with a maturity date exceeding three months as of December 31, 2022 not included in unrestricted cash and cash equivalents.
Liquidity and Capital Resources As of December 31, 2023, we had unrestricted cash and cash equivalents of $68.2 million and an accumulated deficit o f $0.6 million. In addition, we had $9.5 million in investment securities with a maturity date exceeding three months as of Decembe r 31, 2023 which are not included in unrestricted cash and cash equivalents.
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. Identification of the Performance Obligations We enter into contracts with customers that may include promises to transfer various combinations of software subscriptions and services.
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. Our most critical judgments required in applying ASC 606 relate to the identification of performance obligations.
Free cash flow margin decreased in 2022 by 1030 basis points compared to 2021, primarily due to the increase in cash consumed by our investments in cloud-based customer solutions and internal infrastructure modernization efforts as well as the decrease in cash from operations noted above during a period of expansion of total revenues of $66.1 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.
Free cash flow margin increased in 2023 by 400 basis points compared to 2022. ​ 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 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.
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.
As a public company, we expect to incur increased expenses related to accounting, 31 Table of Contents 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.
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 in compliance with Section 404(b) of the Sarbanes-Oxley Act of 2002. 33 Table of Contents 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.
This change was attributable to increases in interest expense primarily associated with: (i) a $1.0 million increase to the settlement value of our deferred purchase commitment liability associated with the Systax acquisition which is treated as a financing cost; (ii) increased amortization related to the write-off of deferred financing costs of $0.4 million associated with refinancing of our credit agreement; and (iii) an increase in note payable interest expense of $1.8 million primarily due to the increased borrowings under our new credit agreement (see Note 10 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K).
This change was attributable to increases in interest expense primarily associated with: (i) an increase in interest expense of $3.2 million that reflects a year-over-over increase to the settlement value of our deferred purchase commitment liability associated with our acquisition of Systax, which is treated as a financing cost; and (ii) a year-over-year increase in note payable interest expense of $1.3 million primarily due to increased borrowing costs from rising interest rates under our credit agreement.
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.
These assets include leasehold improvements for our facilities, computers and equipment needed to support our customers and our internal infrastructure and capitalized internal-use software associated with our internal tools. Depreciation and amortization will fluctuate in correlation with our ongoing investment in internal infrastructure costs to support our growth.
After excluding stock-based compensation, research and development expenses as a percentage of total revenue would have been 8.2% in 2022 compared to 9.7% in 2021. 35 Table of Contents Selling and Marketing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 ​ 2021 ​ Year-Over-Year Change Selling and marketing $ 125,335 ​ $ 99,005 ​ $ 26,330 26.6 % ​ Selling and marketing expenses increased $26.3 million, or 26.6%, to $125.3 million in 2022 compared to $99.0 million in 2021, primarily driven by an $16.1 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.
Selling and Marketing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2023 ​ 2022 ​ Year-Over-Year Change Selling and marketing $ 140,237 ​ $ 125,335 ​ $ 14,902 11.9 % ​ Selling and marketing expenses increased $14.9 million, or 11.9%, to $140.2 million in 2023 compared to $125.3 million in 2022, primarily driven by a $13.5 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.
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, acquisition contingent consideration, litigation settlements, and transaction costs which includes offering costs related to the sale of shares of certain of our Class B shareholders which are not representative of normal business operations.
We define Adjusted EBITDA as net income or loss before interest (including adjustments to the settlement value of deferred purchase commitment liabilities), taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, stock-based compensation expense, amortization of cloud computing arrangement implementation costs, severance expense, acquisition contingent consideration, litigation settlements, and transaction costs.

… 134 more changes not shown on this page.

Other VERX 10-K year-over-year comparisons