SEC Filing | Vertex, Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

Table of Contents

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


☐		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.

Table of Contents

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

Table of Contents

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

Table of Contents

●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.

Table of Contents

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-

Table of Contents

Vertex, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

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

(Amounts in thousands, except per share data)


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019

	(unaudited)				(unaudited)
Revenues:
Software subscriptions	$	79,778	$	71,041	$	232,844	$	202,692
Services		14,827		11,398		42,277		32,736
Total revenues		94,605		82,439		275,121		235,428
Cost of revenues:
Software subscriptions		29,161		18,647		79,846		56,490
Services		18,807		8,786		49,329		23,616
Total cost of revenues		47,968		27,433		129,175		80,106
Gross profit		46,637		55,006		145,946		155,322
Operating expenses:
Research and development		16,501		7,271		43,197		22,049
Selling and marketing		29,423		15,830		78,300		49,164
General and administrative		48,043		17,263		123,437		49,358
Depreciation and amortization		2,735		2,311		8,109		6,528
Other operating (income) expense, net		(60)		4		154		472
Total operating expenses		96,642		42,679		253,197		127,571
Income (loss) from operations		(50,005)		12,327		(107,251)		27,751
Other (income) expense:
Interest income		(79)		(251)		(535)		(775)
Interest expense		1,875		503		3,959		1,579
Total other expense, net		1,796		252		3,424		804
Income (loss) before income taxes		(51,801)		12,075		(110,675)		26,947
Income tax (benefit) expense		(30,773)		175		(31,508)		600
Net (loss) income		(21,028)		11,900		(79,167)		26,347
Other comprehensive loss from foreign currency translation adjustments and revaluations, net of tax		238		174		3,512		176
Total comprehensive income (loss)	$	(21,266)	$	11,726	$	(82,679)	$	26,171
Net (loss) income attributable to Class A stockholders, basic	$	(2,751)	$	22	$	(2,427)	$	21
Net (loss) income per Class A share, basic	$	(0.15)	$	0.10	$	(0.40)	$	0.16
Weighted average Class A common stock, basic		18,124		225		6,129		134
Net (loss) income attributable to Class A stockholders, diluted	$	(2,751)	$	373	$	(2,427)	$	826
Net (loss) income per Class A share, diluted	$	(0.15)	$	0.10	$	(0.40)	$	0.21
Weighted average common Class A stock, diluted		18,124		3,893		6,129		3,898
Net (loss) income attributable to Class B stockholders, basic	$	(18,277)	$	11,878	$	(76,740)	$	26,326
Net (loss) income per Class B share, basic	$	(0.15)	$	0.10	$	(0.64)	$	0.22
Weighted average common Class B stock, basic		120,417		120,417		120,417		120,417
Net (loss) income attributable to Class B stockholders, diluted	$	(18,277)	$	11,527	$	(76,740)	$	25,521
Net (loss) income per Class B share, diluted	$	(0.15)	$	0.10	$	(0.64)	$	0.21
Weighted average common Class B stock, diluted		120,417		120,417		120,417		120,417
Loss before income taxes	$	(51,801)			$	(110,675)
Pro forma provision for income tax benefit		(13,106)				(28,001)
Pro forma net loss	$	(38,695)			$	(82,674)
Pro forma net loss attributable to Class A stockholders	$	(5,062)			$	(4,004)
Weighted average Class A common stock, basic and diluted		18,124				6,129
Pro forma net loss per Class A share, basic and diluted	$	(0.28)			$	(0.65)
Pro forma net loss attributable to Class B stockholders	$	(33,633)			$	(78,670)
Weighted average Class B common stock, basic and diluted		120,417				120,417
Pro forma net loss per Class B share, basic and diluted	$	(0.28)			$	(0.65)

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

-6-

Table of Contents

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-

Table of Contents

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-

Table of Contents

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.

-9-

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.

-10-

Table of Contents

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC 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.

-11-

Table of Contents

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 obser