UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) | ||
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(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading symbol |
| Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 2, 2024, the registrant had
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TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations and regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management, are forward-looking statements and should be evaluated as such. These statements often include words such as “anticipate,” “believe,” “expect,” “suggests,” “plans,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” and other similar expressions or the negatives of those terms. We base these forward-looking statements on our current expectations, plans, and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances at such time. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of future performance or results. The forward-looking statements are subject to and involve risks, uncertainties and assumptions, and you should not place undue reliance on these forward-looking statements. Although we believe that these forward-looking statements are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. Important factors that may materially affect such forward-looking statements include, but are not limited to:
● | our ability to maintain and grow revenue from existing customers and new customers, and expand their usage of our solutions; |
● | our ability to maintain and expand our strategic relationships with third parties; |
● | our ability to adapt to technological change and successfully introduce new solutions or provide updates to existing solutions; |
● | risks related to failures in information technology or infrastructure; |
● | challenges in using and managing use of Artificial Intelligence in our business; |
● | incorrect or improper implementation, integration or use of our solutions; |
● | failure to attract and retain qualified technical and tax-content personnel; |
● | competitive pressures from other tax software and service providers and challenges of convincing businesses using native enterprise resource planning (“ERP”) functions to switch to our software; |
● | our ability to accurately forecast our revenue and other future results of operations based on recent success; |
● | our ability to offer specific software deployment methods based on changes to customers’ and partners’ software systems; |
● | our ability to continue making significant investments in software development and equipment; |
● | our ability to sustain and expand revenues, maintain profitability, and to effectively manage our anticipated growth; |
● | our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content; |
● | risks related to the fluctuations in our results of operations; |
● | risks related to our expanding international operations; |
● | our exposure to liability from errors, delays, fraud or system failures, which may not be covered by insurance; |
● | our ability to adapt to organizational changes and effectively implement strategic initiatives; |
● | risks related to our determinations of customers’ transaction tax and tax payments; |
● | risks related to changes in tax laws and regulations or their interpretation or enforcement; |
● | our ability to manage cybersecurity and data privacy risks; |
● | our involvement in material legal proceedings and audits; |
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● | risks related to undetected errors, bugs or defects in our software; |
● | risks related to utilization of open-source software, business processes and information systems; |
● | risks related to failures in information technology, infrastructure, and third-party service providers; |
● | our ability to effectively protect, maintain, and enhance our brand; |
● | changes in application, scope, interpretation or enforcement of laws and regulations; |
● | global economic weakness and uncertainties, and disruption in the capital and credit markets; |
● | business disruptions related to natural disasters, epidemic outbreaks, including a global endemic or pandemic, terrorist acts, political events, or other events outside of our control; |
● | our ability to comply with anti-corruption, anti-bribery, and similar laws; |
● | our ability to protect our intellectual property; |
● | changes in interest rates, security ratings and market perceptions of the industry in which we operate, or our ability to obtain capital on commercially reasonable terms or at all; |
● | our ability to maintain an effective system of disclosure controls and internal control over financial reporting, or ability to remediate any material weakness in our internal controls; |
● | risks related to our Class A common stock and controlled company status; |
● | risks related to our indebtedness and adherence to the covenants under our debt instruments; |
● | our expectations regarding the effects of the Capped Call Transactions (as defined in the notes to the financial statements) and regarding actions of the Option Counterparties (as defined in the notes to the financial statements) and/or their respective affiliates; |
● | any statements of belief and any statements of assumptions underlying any of the foregoing; and |
● | other factors beyond our control. |
The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on February 29, 2024 (the “2023 Annual Report”). Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for us to identify all such risk factors, nor can we assess the impact of all such risk factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on our forward-looking statements, and you should not rely on forward-looking statements as predictions of future events. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this report. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Vertex, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of June 30, 2024 and December 31, 2023
(Amounts in thousands, except per share data)
June 30, |
| December 31, | |||
2024 | 2023 | ||||
(unaudited) |
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Assets | |||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | |
Funds held for customers |
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Accounts receivable, net of allowance of $ |
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Prepaid expenses and other current assets |
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Investment securities available-for-sale, at fair value (amortized cost of $ | | | |||
Total current assets |
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Property and equipment, net of accumulated depreciation |
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Capitalized software, net of accumulated amortization |
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Goodwill and other intangible assets |
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Deferred commissions |
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Deferred income tax asset | | | |||
Operating lease right-of-use assets | | | |||
Other assets |
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Total assets | $ | | $ | | |
Liabilities and Stockholders' Equity |
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Current liabilities: |
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Current portion of long-term debt | $ | — | $ | | |
Accounts payable | | | |||
Accrued expenses |
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Customer funds obligations |
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Accrued salaries and benefits |
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Accrued variable compensation |
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Deferred revenue, current |
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Current portion of operating lease liabilities | | | |||
Current portion of finance lease liabilities | | | |||
Purchase commitment and contingent consideration liabilities, current |
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Total current liabilities |
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Deferred revenue, net of current portion |
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Debt, net of current portion | | | |||
Operating lease liabilities, net of current portion | | | |||
Finance lease liabilities, net of current portion | | | |||
Purchase commitment and contingent consideration liabilities, net of current portion |
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Deferred other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 11) |
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Stockholders' equity: |
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Preferred shares, $ |
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Class A voting common stock, $ | | | |||
Class B voting common stock, $ | | | |||
Additional paid in capital | | | |||
Retained earnings (Accumulated deficit) |
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Accumulated other comprehensive loss |
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Total stockholders' equity |
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Total liabilities and stockholders' equity | $ | | $ | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Vertex, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the three and six months ended June 30, 2024 and 2023 (unaudited)
(Amounts in thousands, except per share data)
Three months ended June 30, | Six months ended June 30, | |||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||
(unaudited) | (unaudited) | |||||||||||
Revenues: |
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Software subscriptions | $ | | $ | | $ | | $ | | ||||
Services | |
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Total revenues |
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Cost of revenues: |
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Software subscriptions |
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Services |
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Total cost of revenues |
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Gross profit |
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Operating expenses: |
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Research and development |
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Selling and marketing |
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General and administrative |
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Depreciation and amortization |
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Other operating expense (income), net |
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Total operating expenses |
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Income (loss) from operations |
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Interest expense (income), net |
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Income (loss) before income taxes |
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Income tax (benefit) expense |
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Net income (loss) |
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Other comprehensive (income) loss: |
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Foreign currency translation adjustments, net of tax |
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Unrealized (gain) loss on investments, net of tax | ( | | ( | ( | ||||||||
Total other comprehensive (income) loss, net of tax | | ( | | ( | ||||||||
Total comprehensive income (loss) | $ | | $ | ( | $ | | $ | ( | ||||
Net income (loss) per share of Class A and Class B, basic | $ | | $ | ( | $ | | $ | ( | ||||
Net income (loss) per share of Class A and Class B, dilutive | $ | | $ | ( | $ | | $ | ( | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Vertex, Inc. and Subsidiaries |
Condensed Consolidated Statements of Changes in Stockholders’ Equity |
For the three and six months ended June 30, 2024 and 2023 (unaudited) |
(Amounts in thousands) |
Retained | Accumulated | ||||||||||||||||||||||
Outstanding | Class A | Outstanding | Class B | Additional |
| Earnings |
| Other |
| Total | |||||||||||||
Class A | Common | Class B | Common | Paid In | (Accumulated | Comprehensive | Stockholders' | ||||||||||||||||
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| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit) |
| Loss |
| Equity | |||||||
Balance, January 1, 2024 | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||||
Exercise of stock options, net | | — | — | — | ( | — | — | ( | |||||||||||||||
Shares issued upon vesting of Restricted Stock Units, net | | | — | — | ( | — | — | ( | |||||||||||||||
Stock-based compensation expense | — | — | — | — | | — | — | | |||||||||||||||
Foreign currency translation adjustments and revaluations, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||
Unrealized loss from available-for-sale investments, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||
Net income | — | — | — | — | — | | — | | |||||||||||||||
Balance, March 31, 2024 | | | | | | | ( | | |||||||||||||||
Exercise of stock options, net | | — | — | — | | — | — | | |||||||||||||||
Shares issued upon vesting of Restricted Stock Units, net | | — | — | — | ( | — | — | ( | |||||||||||||||
Shares issued upon vesting of Restricted Stock Awards, net | | — | — | — | — | — | — | — | |||||||||||||||
Stock-based compensation expense | — | — | — | — | | — | — | | |||||||||||||||
Shares issued under ESPP | | — | — | — | | — | — | | |||||||||||||||
Class B shares exchanged for Class A shares | | | ( | ( | — | — | — | — | |||||||||||||||
Purchase of capped calls, net of tax | — | — | — | — | ( | — | — | ( | |||||||||||||||
Foreign currency translation adjustments and revaluations, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||
Unrealized gain from available-for-sale investments, net of tax | — | — | — | — | — | — | | | |||||||||||||||
Net income | — | — | — | — | — | | — | | |||||||||||||||
Balance, June 30, 2024 | | $ | | | $ | | $ | | $ | | $ | ( | $ | | |||||||||
(Accumulated | Accumulated | ||||||||||||||||||||||
Outstanding | Class A | Outstanding | Class B | Additional |
| Deficit) |
| Other |
| Total | |||||||||||||
Class A | Common | Class B | Common | Paid In | Retained | Comprehensive | Stockholders' | ||||||||||||||||
Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| Loss |
| Equity | |||||||||
Balance, January 1, 2023 | | $ | | | $ | | $ | | $ | | $ | ( | $ | | |||||||||
Exercise of stock options, net | | | — | — | | — | — | | |||||||||||||||
Shares issued upon vesting of Restricted Stock Units, net | | — | — | — | ( | — | — | ( | |||||||||||||||
Shares issued upon vesting of Restricted Stock Awards, net | — | — | — | — | — | — | — | — | |||||||||||||||
Stock-based compensation expense | — | — | — | — | | — | — | | |||||||||||||||
Shares issued in connection with ESPP | — | — | — | — | — | — | — | — | |||||||||||||||
Class B shares exchanged for Class A shares | | | ( | ( | — | — | — | — | |||||||||||||||
Foreign currency translation adjustments and revaluations, net of tax | — | — | — | — | — | — | | | |||||||||||||||
Unrealized gain from available-for-sale investments, net of tax | — | — | — | — | — | — | | | |||||||||||||||
Net loss | — |
| — | — | — | — | ( | — | ( | ||||||||||||||
Balance, March 31, 2023 |
| | | | | | ( | ( | | ||||||||||||||
Exercise of stock options, net | | | — | — | | — | — | | |||||||||||||||
Shares issued upon vesting of Restricted Stock Units, net | | — | — | — | ( | — | — | ( | |||||||||||||||
Shares issued upon vesting of Restricted Stock Awards, net | | — | — | — | — | — | — | — | |||||||||||||||
Shares issued in connection with ESPP | | — | — | — | | — | — | | |||||||||||||||
Stock-based compensation expense | — | — | — | — | | — | — | | |||||||||||||||
Foreign currency translation adjustments and revaluations, net of tax | — | — | — | — | — | — | | | |||||||||||||||
Unrealized loss from available-for-sale investments, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||
Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||
Balance, June 30, 2023 |
| | $ | | | $ | | $ | | $ | ( | $ | ( | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Vertex, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2024 and 2023 (unaudited)
(Amounts in thousands)
Six months ended June 30, | ||||||
| 2024 |
| 2023 | |||
(unaudited) | ||||||
Cash flows from operating activities: |
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Net income (loss) | $ | | $ | ( | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of cloud computing implementation costs | | | ||||
Provision for subscription cancellations and non-renewals |
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Amortization of deferred financing costs |
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Change in fair value of contingent consideration liabilities | ( | | ||||
Change in settlement value of deferred purchase commitment liability | | — | ||||
Write-off of deferred financing costs | | — | ||||
Stock-based compensation expense |
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Deferred income tax benefit | ( | ( | ||||
Non-cash operating lease costs | | | ||||
Other |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Deferred commissions |
| ( |
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Accounts payable |
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Accrued expenses |
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Accrued and deferred compensation |
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Deferred revenue |
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Operating lease liabilities | ( | ( | ||||
Payments for purchase commitment and contingent consideration liabilities in excess of initial fair value | ( | — | ||||
Other |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: |
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Acquisition of assets, net of cash acquired |
| ( |
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Property and equipment additions |
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Capitalized software additions |
| ( |
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Purchase of investment securities, available-for-sale | ( | ( | ||||
Proceeds from sales and maturities of investment securities, available-for-sale | | | ||||
Other | ( | — | ||||
Net cash used in investing activities |
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Cash flows from financing activities: |
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Net increase in customer funds obligations |
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Proceeds from convertible senior notes |
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Principal payments on long-term debt |
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Payment for purchase of capped calls | ( | — | ||||
Payments for deferred financing costs |
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Proceeds from purchases of stock under ESPP | | | ||||
Payments for taxes related to net share settlement of stock-based awards | ( | ( | ||||
Proceeds from exercise of stock options |
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Payments for purchase commitment and contingent consideration liabilities | ( | ( | ||||
Payments of finance lease liabilities | ( | ( | ||||
Payments for deferred purchase commitments | — | ( | ||||
Net cash provided by (used in) financing activities |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| ( |
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Net increase (decrease) in cash, cash equivalents and restricted cash | | ( | ||||
Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period | $ | | $ | | ||
Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets, end of period: |
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Cash and cash equivalents | $ | | $ | | ||
Restricted cash—funds held for customers |
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Total cash, cash equivalents and restricted cash, end of period | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Vertex, Inc. and Subsidiaries |
Notes to Condensed Consolidated Financial Statements (unaudited) |
(Amounts in thousands, except per share data) |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Vertex, Inc. (“Vertex”) and its consolidated subsidiaries and variable interest entities (“VIE”) (collectively, the “Company”) operate as solutions providers of state, local, and value added tax calculation, compliance, and analytics, offering software products that are sold through software license and software as a service (“cloud”) subscriptions. The Company also provides implementation and training services in connection with its software license and cloud subscriptions, transaction tax returns outsourcing, and other tax-related services. The Company sells to customers located throughout the United States of America (“U.S.”) and internationally.
Basis of Consolidation
The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and include the accounts of the Company. All intercompany transactions have been eliminated in consolidation.
Prior to June 5, 2024, the Company owned an
Unaudited Interim Financial Information
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and include the accounts of the Company. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”) filed with the SEC on February 29, 2024. The condensed consolidated balance sheet as of December 31, 2023 has been derived from audited financial statements included in the 2023 Annual Report. The accompanying interim condensed consolidated balance sheet as of June 30, 2024, the interim condensed consolidated statements of comprehensive income (loss) and changes in stockholders’ equity for the three and six months ended June 30, 2024 and 2023, and the interim condensed consolidated statements of cash flows for the six months ended June 30, 2024 and 2023 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the annual audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items necessary for the fair presentation of the condensed consolidated financial statements. The operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results expected for the full year ending December 31, 2024.
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Vertex, Inc. and Subsidiaries |
Notes to Condensed Consolidated Financial Statements (unaudited) continued |
(Amounts in thousands, except per share data) |
Segments
The Company operates its business as
Use of Estimates
The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues, and expenses during the reporting period. Significant estimates used in preparing these condensed consolidated financial statements include: (i) the estimated allowance for subscription cancellations; (ii) expected credit losses associated with the allowance for doubtful accounts; (iii) allowance for credit losses on available-for-sale debt securities; (iv) the reserve for self-insurance; (v) assumptions related to achievement of technological feasibility for software developed for sale; (vi) product life cycles; (vii) estimated useful lives and potential impairment of long-lived assets, intangible assets, and capitalized cloud computing arrangement (“CCA”) software implementation costs; (viii) potential impairment of goodwill; (ix) determination of the fair value of tangible and intangible assets acquired, liabilities assumed, and consideration transferred in acquisitions; (x) amortization period of deferred commissions; (xi) Black-Scholes-Merton option pricing model (“Black-Scholes model”) input assumptions used to determine the fair value of certain stock-based compensation awards and Employee Stock Purchase Plan (“ESPP”) purchase rights; (xii) measurement of future purchase commitment, contingent consideration liabilities, and deferred purchase consideration liabilities associated with acquisitions; and (xiii) the potential outcome of future tax consequences of events that have been recognized in the condensed consolidated financial statements or tax returns. Actual results may differ from these estimates.
Convertible Senior Notes
The Company accounts for its convertible senior notes (the “Notes”) wholly as debt under ASU 2026-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20.) Debt issuance costs incurred in connection with the issuance of the Notes are reflected in the condensed consolidated balance sheets as a direct deduction from the carrying amount of the Notes. These costs are amortized on a straight-line basis, which approximates the effective interest method, over the contractual term of the Notes and are included within interest expense (income), net on the condensed consolidated statements of comprehensive income (loss). For further information on the Notes, refer to Note 7, “Debt”.
Capped Call Transactions