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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

    

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

For the quarterly period ended September 30, 2020

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: 333-239644

VERTEX, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

    

 

    

23-2081753

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2301 Renaissance Blvd
King of Prussia, Pennsylvania

 

19406 

(Address of principal executive offices)

 

(Zip Code)

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

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

Title of each class

    

Trading symbol

    

Name of each exchange on which registered

Class A Common Stock, Par Value $0.001 Per Share

VERX

NASDAQ

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

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

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

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company

 

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

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

As of November 10, 2020, the registrant had 25,687,503 shares of Class A common stock, $0.001 par value per share, and 120,417,000 shares of Class B common stock, $0.001 par value per share, outstanding.


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TABLE OF CONTENTS

    

 

Page

Part I - Financial Information 

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of December 31, 2019 and September 30, 2020 (unaudited)

5

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2020 (unaudited)

6

Condensed Consolidated Statements of Changes in Equity (Deficit) for the Nine Months Ended September 30, 2019 and 2020 (unaudited)

7

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2020 (unaudited)

9

Notes to Condensed Consolidated Financial Statements (unaudited)

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

45

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

67

Item 4.

Controls and Procedures

68

Part II - Other Information

70

Item 1.

Legal Proceedings

70

Item 1A.

Risk Factors

70

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3.

Defaults Upon Senior Securities

70

Item 4.

Mine Safety Disclosures

70

Item 5.

Other Information

70

Item 6.

Exhibits

71

Signatures

72


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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), that involve substantial risks and uncertainties. All statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations and regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management, are forward-looking statements and should be evaluated as such. These statements often include words such as “anticipate,” “believe,” “expect,” “suggests,” “plan,” “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:

the potential effects on our business of the current novel coronavirus (“COVID-19”) pandemic;
our ability to attract new customers on a cost-effective basis and the extent to which existing customers renew and upgrade their subscriptions;
our ability to sustain and expand revenues, maintain profitability, and to effectively manage our anticipated growth;
the timing of our introduction of new solutions or updates to existing solutions;
our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services or content;
our ability to maintain and expand our strategic relationships with third-parties;
risks related to our expanding international operations;
our ability to deliver our solutions to customers without disruption or delay;
our exposure to liability from errors, delays, fraud or system failures, which may not be covered by insurance;
risks related to our determinations of customers’ transaction tax and tax payments;
risks related to changes in tax laws and regulations or their interpretation or enforcement;
our ability to manage cybersecurity and data privacy risks;
risks related to failures in information technology, infrastructure and third party service providers;
our ability to effectively protect, maintain and enhance our brand;
global economic weakness and uncertainties, and disruption in the capital and credit markets;
business disruptions related to natural disasters, epidemic outbreaks, terrorist acts, political events or other events outside of our control;
our ability to comply with anti-corruption, anti-bribery and similar laws;
changes in interest rates, security ratings and market perceptions of the industry in which we operate, or our ability to obtain capital on commercially reasonable terms or at all;
any statements of belief and any statements of assumptions underlying any of the foregoing;
other factors beyond our control; and

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other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections titled “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and under Part II, Item 1A. “Risk Factors.”

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.

Condensed Consolidated Balance Sheets

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

(Amounts in thousands)

September 30, 

    

December 31, 

2020

2019

    

(unaudited)

    

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

270,271

$

75,903

Funds held for customers

 

8,745

 

7,592

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

 

66,789

 

70,367

Advances to stockholders

 

2

 

283

Prepaid expenses and other current assets

 

16,001

 

11,412

Total current assets

 

361,808

 

165,557

Property and equipment, net of accumulated depreciation

 

55,935

 

54,727

Capitalized software, net of accumulated amortization

 

32,619

 

32,075

Goodwill

 

18,667

 

Deferred commissions

 

10,372

 

11,196

Deferred income tax asset

32,440

219

Deposits and other assets

 

3,093

 

849

Total assets

$

514,934

$

264,623

 

 

Liabilities and Equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of long-term debt

$

1,179

$

50,804

Accounts payable

 

11,828

 

10,729

Accrued expenses

 

15,014

 

13,308

Distributions payable

 

 

13,183

Customer funds obligations

 

8,711

 

7,553

Accrued salaries and benefits

 

20,276

 

15,195

Accrued variable compensation

 

16,154

 

22,237

Deferred compensation, current

 

3,220

 

8,935

Deferred revenue

 

185,445

 

191,745

Deferred rent and other

 

908

 

840

Future acquisition commitment, current

 

780

 

Total current liabilities

 

263,515

 

334,529

Deferred compensation, net of current portion

 

2,156

 

18,530

Deferred revenue, net of current portion

 

12,095

 

14,046

Long-term debt, net of current portion

 

329

 

682

Future acquisition commitment, net of current portion

 

9,485

 

Deferred other liabilities

 

8,793

 

9,268

Total liabilities

 

296,373

 

377,055

Commitments and contingencies (Note 11)

 

  

 

  

Options for redeemable shares

 

 

17,344

Stockholders' equity (deficit):

 

  

 

  

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

 

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

 

 

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

 

 

54

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

26

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

120

Additional paid in capital

200,722

Retained earnings (accumulated deficit)

 

21,696

 

(90,701)

Accumulated other comprehensive loss

 

(4,003)

 

(491)

Treasury stock

 

 

(38,638)

Total stockholders' equity (deficit)

 

218,561

 

(129,776)

Total liabilities and equity

$

514,934

$

264,623

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

-5-


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Vertex, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

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

(Amounts in thousands, except per share data)

Three months ended

Nine months ended

September 30, 

September 30, 

2020

2019

2020

2019

(unaudited)

(unaudited)

Revenues:

    

  

    

  

    

  

    

  

Software subscriptions

$

79,778

$

71,041

$

232,844

$

202,692

Services

 

14,827

 

11,398

 

42,277

 

32,736

Total revenues

 

94,605

 

82,439

 

275,121

 

235,428

Cost of revenues:

 

  

 

  

 

  

 

  

Software subscriptions

 

29,161

 

18,647

 

79,846

 

56,490

Services

 

18,807

 

8,786

 

49,329

 

23,616

Total cost of revenues

 

47,968

 

27,433

 

129,175

 

80,106

Gross profit

 

46,637

 

55,006

 

145,946

 

155,322

Operating expenses:

 

  

 

  

 

  

 

  

Research and development

 

16,501

 

7,271

 

43,197

 

22,049

Selling and marketing

 

29,423

 

15,830

 

78,300

 

49,164

General and administrative

 

48,043

 

17,263

 

123,437

 

49,358

Depreciation and amortization

 

2,735

 

2,311

 

8,109

 

6,528

Other operating (income) expense, net

 

(60)

 

4

 

154

 

472

Total operating expenses

 

96,642

 

42,679

 

253,197

 

127,571

Income (loss) from operations

 

(50,005)

 

12,327

 

(107,251)

 

27,751

Other (income) expense:

 

  

 

  

 

  

 

  

Interest income

 

(79)

 

(251)

 

(535)

 

(775)

Interest expense

 

1,875

 

503

 

3,959

 

1,579

Total other expense, net

 

1,796

 

252

 

3,424

 

804

Income (loss) before income taxes

 

(51,801)

 

12,075

 

(110,675)

 

26,947

Income tax (benefit) expense

 

(30,773)

 

175

 

(31,508)

 

600

Net (loss) income

 

(21,028)

 

11,900

 

(79,167)

 

26,347

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

 

238

 

174

 

3,512

 

176

Total comprehensive income (loss)

$

(21,266)

$

11,726

$

(82,679)

$

26,171

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

$

(2,751)

$

22

$

(2,427)

$

21

Net (loss) income per Class A share, basic

$

(0.15)

$

0.10

$

(0.40)

$

0.16

Weighted average Class A common stock, basic

 

18,124

 

225

 

6,129

 

134

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

$

(2,751)

$

373

$

(2,427)

$

826

Net (loss) income per Class A share, diluted

$

(0.15)

$

0.10

$

(0.40)

$

0.21

Weighted average common Class A stock, diluted

 

18,124

 

3,893

 

6,129

 

3,898

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

$

(18,277)

$

11,878

$

(76,740)

$

26,326

Net (loss) income per Class B share, basic

$

(0.15)

$

0.10

$

(0.64)

$

0.22

Weighted average common Class B stock, basic

 

120,417

 

120,417

 

120,417

 

120,417

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

$

(18,277)

$

11,527

$

(76,740)

$

25,521

Net (loss) income per Class B share, diluted

$

(0.15)

$

0.10

$

(0.64)

$

0.21

Weighted average common Class B stock, diluted

120,417

120,417

120,417

120,417

Loss before income taxes

$

(51,801)

$

(110,675)

Pro forma provision for income tax benefit

(13,106)

(28,001)

Pro forma net loss

$

(38,695)

$

(82,674)

Pro forma net loss attributable to Class A stockholders

$

(5,062)

$

(4,004)

Weighted average Class A common stock, basic and diluted

18,124

6,129

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

$

(0.28)

$

(0.65)

Pro forma net loss attributable to Class B stockholders

$

(33,633)

$

(78,670)

Weighted average Class B common stock, basic and diluted

120,417

120,417

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

$

(0.28)

$

(0.65)

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

-6-


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Vertex, Inc.

Condensed Consolidated Statements of Changes in Equity (Deficit)

For the nine months ended September 30, 2019 (unaudited)

(Amounts in thousands)

Before Recapitalization

After Recapitalization

Retained

Accumulated

Total

Outstanding 

    

Class A 

Outstanding

    

Class B

Outstanding

 

Class A

 

Outstanding

 

Class B

Additional

Earnings

Other 

Treasury

    

    

Stockholders'

    

Options for 

Class A

Common

Class B

Common

Class A

Common

Class B

Common

Paid-in

(Accumulated

Comprehensive 

Shares

Treasury

Equity

Redeemable 

    

Shares

    

 Stock

    

Shares

    

Stock

Shares

  

 Stock

  

Shares

  

Stock

  

Capital

  

Deficit)

  

Loss

  

Issued

  

Stock

  

(Deficit)

  

Shares

Balance, January 1, 2019

 

147

$

 

120,270

$

54

$

 

$

$

$

(88,038)

$

(496)

 

41,685

$

(37,797)

$

(126,277)

$

14,581

Remeasurement of options for redeemable shares

 

 

 

 

 

 

 

 

 

(607)

 

 

 

 

(607)

 

607

Distributions declared

 

 

 

 

 

 

 

 

 

(5,255)

 

 

 

 

(5,255)

 

Foreign currency translation adjustments and revaluations

 

 

 

 

 

 

 

 

 

 

21

 

 

 

21

 

Net income

 

 

 

 

 

 

 

 

 

7,325

 

 

 

 

7,325

 

Balance, March 31, 2019

 

147

 

 

120,270

 

54

 

 

 

 

 

(86,575)

(475)

 

41,685

 

(37,797)

 

(124,793)

 

15,188

Remeasurement of options for redeemable shares

 

 

 

 

 

 

 

 

 

424

 

 

 

 

424

 

(424)

Exercise of stock options, net

 

 

 

225

 

 

 

 

 

 

(116)

 

 

 

 

(116)

 

Distributions declared

 

 

 

 

 

 

 

 

 

(6,105)

 

 

 

 

(6,105)

 

Foreign currency translation adjustments and revaluations

 

 

 

 

 

 

 

 

 

 

(23)

 

 

 

(23)

 

Net income

 

 

 

 

 

 

 

 

 

7,122

 

 

 

 

7,122

 

Balance, June 30, 2019

 

147

 

 

120,495

 

54

 

 

 

 

 

(85,250)

(498)

 

41,685

 

(37,797)

 

(123,491)

 

14,764

Remeasurement of options for redeemable shares

 

 

 

 

 

 

 

 

 

(579)

 

 

 

 

(579)

 

579

Foreign currency translation adjustments and revaluations

 

 

 

 

 

 

 

 

 

 

(174)

 

 

 

(174)

 

Net income

 

 

 

 

 

 

 

 

 

11,900

 

 

 

 

11,900

 

Balance, September 30, 2019

 

147

$

 

120,495

$

54

$

 

$

$

$

(73,929)

$

(672)

 

41,685

$

(37,797)

$

(112,344)

$

15,343

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

-7-


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Vertex, Inc.

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

For the nine months ended September 30, 2020 (unaudited)

(Amounts in thousands)

Before Recapitalization

After Recapitalization

Retained

Accumulated

Total

Outstanding

  

Class A

  

Outstanding

  

Class B

Outstanding

Class A

Outstanding

Class B

Additional

  

Earnings

  

Other 

  

Treasury

  

  

Stockholders'

  

Options for

Class A 

Common

Class B

Common

Class A

Common

Class B

Common

Paid-in

(Accumulated

Comprehensive 

Shares

Treasury

Equity

Redeemable

    

Shares 

  

 Stock

  

Shares

  

Stock

  

Shares

  

 Stock

  

Shares

  

Stock

  

Capital

  

Deficit)

  

Loss

  

Issued

  

Stock

  

(Deficit)

  

Shares

Balance, January 1, 2020

 

147

$

 

120,270

$

54

$

 

$

$

$

(90,701)

$

(491)

41,910

$

(38,638)

$

(129,776)

$

17,344

Remeasurement of options for redeemable shares

 

 

 

 

 

 

 

 

 

(15,242)

 

 

 

(15,242)

 

15,242

Distributions declared

 

 

 

 

 

 

 

 

 

(4,010)

 

 

 

(4,010)

 

Foreign currency translation adjustments and revaluations

 

 

 

 

 

 

 

 

 

 

(2,998)

 

 

(2,998)

 

Net loss

 

 

 

 

 

 

 

 

 

(29,064)

 

 

 

(29,064)

 

Balance, March 31, 2020

 

147

 

 

120,270

 

54

 

 

 

 

 

(139,017)

 

(3,489)

41,910

 

(38,638)

 

(181,090)

 

32,586

Remeasurement of options for redeemable shares

 

 

 

 

 

 

 

 

 

(14,637)

 

 

 

(14,637)

 

14,637

Exercise of stock options, net

 

 

 

173

 

 

 

 

 

 

53

 

 

 

53

 

Distributions declared

 

 

 

 

 

 

 

 

 

(123,185)

 

 

 

(123,185)

 

Foreign currency translation adjustments and revaluations

 

 

 

 

 

 

 

 

 

 

(276)

 

 

(276)

 

Net loss

 

 

 

 

 

 

 

 

 

(29,075)

 

 

 

(29,075)

 

Balance, June 30, 2020

 

147

 

 

120,443

 

54

 

 

 

 

 

(305,861)

 

(3,765)

41,910

 

(38,638)

 

(348,210)

 

47,223

Distributions declared

 

 

 

 

 

(5,706)

 

 

 

(5,706)

 

Reclassification of accumulated S Corporation earnings

 

 

 

(354,291)

 

354,291

 

 

 

Remeasurement of options for redeemable shares

 

 

 

 

 

 

 

 

(21,954)

 

 

 

 

(21,954)

 

21,954

Reclassification of options for redeemable shares

 

 

 

 

 

 

 

69,177

 

 

 

 

69,177

 

(69,177)

Recapitalization prior to Offering

(147)

(120,443)

(54)

173

120,417

120

(38,704)

(41,910)

38,638

Reclassification of SAR liability to equity in connection with Offering

143,519

143,519

Auto-exercised options in connection with Offering

564

1

(13,809)

(13,808)

Shares issued in connection with Offering, net of Offering costs

 

 

 

 

23,812

24

416,778

 

 

 

 

416,802

 

Exercise of stock options in connection with the Offering

510

(7,023)

(7,023)

Vested restricted stock issued in connection with Offering

19

361

361

Exercise of stock options, net

610

1

1,007

1,008

Stock-based compensation expense

5,661

5,661

Foreign currency translation adjustments and revaluations

 

 

 

 

 

 

(238)

 

 

(238)

 

Net loss

 

 

 

 

 

(21,028)

 

 

 

(21,028)

 

Balance, September 30, 2020

 

$

 

$

25,688

$

26

 

120,417

$

120

$

200,722

$

21,696

$

(4,003)

$

$

218,561

$

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

-8-


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Vertex, Inc.

Condensed Consolidated Statements of Cash Flows

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

(Amounts in thousands)

Nine Months Ended

September 30, 

    

2020

    

2019

(unaudited)

Cash flows from operating activities:

 

  

 

  

Net (loss) income

$

(79,167)

$

26,347

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

23,586

 

18,152

Provision for subscription cancellations and non-renewals

 

52

 

(27)

Amortization of deferred financing costs

 

356

 

199

Write-off of deferred financing costs

1,351

Stock-based compensation expense

 

140,890

 

3,930

Deferred income taxes

(32,004)

Redemption of Converted SARs

(22,889)

Other

 

86

 

51

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

4,143

 

3,010

Advances to stockholders

 

281

 

115

Prepaid expenses and other current assets

 

(4,613)

 

(1,379)

Deferred commissions

 

824

 

(253)

Accounts payable

 

1,193

 

128

Accrued expenses

 

1,382

 

(1,767)

Accrued and deferred compensation

 

(5,399)

 

(4,197)

Deferred revenue

 

(8,251)

 

1,053

Other

 

(1,777)

 

437

Net cash provided by operating activities

 

20,044

 

45,799

Cash flows from investing activities:

 

  

 

  

Acquisition of business, net of cash acquired

 

(12,318)

 

Property and equipment additions

 

(14,982)

 

(13,315)

Capitalized software additions

 

(9,246)

 

(12,345)

Net cash used in investing activities

 

(36,546)

 

(25,660)

Cash flows from financing activities:

 

  

 

  

Net increase in customer funds obligations

 

1,158

 

1,223

Proceeds from line of credit

 

12,500

 

Principal payments on line of credit

(12,500)

Proceeds from long-term debt

 

175,000

 

Principal payments on long-term debt

 

(226,029)

 

(4,339)

Payments for deferred financing costs, net

 

(2,436)

 

Proceeds from issuance of shares in connection with Offering

423,024

Payments for offering costs

(6,222)

Payments for taxes on exercised options

(11,999)

(184)

Proceeds from exercise of stock options

 

6,023

 

68

Distributions to stockholders

 

(146,084)

 

(22,252)

Net cash provided by (used in) financing activities

 

212,435

 

(25,484)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(412)

 

(176)

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

195,521

(5,521)

Cash, cash equivalents and restricted cash, beginning of period

 

83,495

 

59,174

Cash, cash equivalents and restricted cash, end of period

$

279,016

$

53,653

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

 

  

 

  

Cash and cash equivalents

$

270,271

$

49,094

Restricted cash—funds held for customers

 

8,745

 

4,559

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

$

279,016

$

53,653

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

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Table of Contents

Vertex, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

(Amounts in thousands, except per share data)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

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

Registration of Company Stock and Initial Public Offering

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

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

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

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Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for interim financial information and include the accounts of the Company. All intercompany transactions have been eliminated in consolidation. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been condensed or omitted. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2019 included in the Company’s final S-1 dated July 28, 2020 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, (the “Securities Act”), on July 30, 2020 (the “Prospectus”). The accompanying interim condensed consolidated balance sheet as of September 30, 2020, the interim condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019, and the interim condensed consolidated statements of changes in equity (deficit) and cash flows for the nine months ended September 30, 2020 and 2019 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 consolidated financial statements. The operating results for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results expected for the full year periods ending December 31, 2020 and 2019, respectively.

Segments

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

Fair Value Measurement

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

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

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

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

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

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

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

Use of Estimates

The preparation of 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 consolidated financial statements include: (i) the estimated allowance for subscription cancellations, (ii) the reserve for self-insurance, (iii) assumptions related to achievement of technological feasibility for software developed for sale, (iv) product life cycles, (v) estimated useful lives and potential impairment of long-lived assets, intangible assets and goodwill, (vi) determination of the fair value of tangible and intangible assets acquired, liabilities assumed and consideration transferr