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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 March 31, 2021

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 May 11, 2021, the registrant had 27,458,773 shares of Class A common stock, $0.001 par value per share, and 120,117,000 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 March 31, 2021 and December 31, 2020 (unaudited)

5

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2021 and 2020 (unaudited)

6

Condensed Consolidated Statements of Changes in Equity (Deficit) for the Three Months Ended March 31, 2021 and 2020 (unaudited)

7

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited)

8

Notes to Condensed Consolidated Financial Statements (unaudited)

9

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

50

Item 4.

Controls and Procedures

51

Part II - Other Information

52

Item 1.

Legal Proceedings

52

Item 1A.

Risk Factors

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

Signatures

54

Table of Contents

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:

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; and
other factors beyond our control.

Table of Contents

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, 2020 and in other sections of this Quarterly Report on Form 10-Q, including under Part II, Item 1A, Risk Factors. 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.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Vertex, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2021 and December 31, 2020

(Amounts in thousands, except per share data)

March 31, 

    

December 31, 

2021

2020

    

(unaudited)

    

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

277,681

$

303,051

Funds held for customers

 

8,745

 

9,222

Accounts receivable, net of allowance of $8,059, and $8,592

 

63,798

 

77,159

Prepaid expenses and other current assets

 

26,696

 

13,259

Total current assets

 

376,920

 

402,691

Property and equipment, net of accumulated depreciation

 

57,408

 

56,557

Capitalized software, net of accumulated amortization

 

34,642

 

31,989

Goodwill and other intangible assets

 

21,553

 

18,711

Deferred commissions

 

11,693

 

11,743

Deferred income tax asset

30,373

29,974

Operating lease right-of-use assets

22,981

Other assets

 

2,767

 

3,263

Total assets

$

558,337

$

554,928

 

 

Liabilities and Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

11,115

$

8,876

Accrued expenses

 

15,936

 

19,176

Distributions payable

 

2,700

 

2,700

Customer funds obligations

 

8,798

 

9,235

Accrued salaries and benefits

 

18,065

 

17,326

Accrued variable compensation

 

5,854

 

22,372

Deferred compensation, current

 

2,057

 

2,057

Deferred revenue

 

204,971

 

207,560

Current portion of long-term debt

882

Current portion of operating lease liabilities

4,665

Current portion of finance lease liabilities

267

Deferred rent and other

 

 

939

Purchase commitment and contingent consideration liabilities, current

 

767

 

845

Total current liabilities

 

275,195

 

291,968

Deferred compensation, net of current portion

 

6,048

 

5,010

Deferred revenue, net of current portion

 

13,162

 

14,702

Debt, net of current portion

 

 

225

Operating lease liabilities, net of current portion

26,671

Finance lease liabilities, net of current portion

334

Purchase commitment and contingent consideration liabilities, net of current portion

 

10,287

 

8,905

Deferred other liabilities

 

64

 

8,632

Total liabilities

 

331,761

 

329,442

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders' equity:

 

  

 

  

Preferred shares, $0.001 par value, 30,000 shares authorized; no shares issued and outstanding

Class A common stock, $0.001 par value, 300,000 shares authorized; 26,972 and 26,327 shares issued and outstanding, respectively

27

26

Class B common stock, $0.001 par value, 150,000 shares authorized; 120,117 and 120,117 shares issued and outstanding, respectively

120

120

Additional paid in capital

205,811

206,541

Retained earnings

 

24,722

 

21,926

Accumulated other comprehensive loss

 

(4,104)

 

(3,127)

Total stockholders' equity

 

226,576

 

225,486

Total liabilities and equity

$

558,337

$

554,928

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

-5-

Table of Contents

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three months ended March 31, 2021 and 2020

(Amounts in thousands, except per share data)

Three Months Ended

March 31, 

2021

2020

(unaudited)

Revenues:

    

    

  

    

  

Software subscriptions

$

83,280

$

75,760

Services

 

14,956

 

13,485

Total revenues

 

98,236

 

89,245

Cost of revenues:

 

  

 

  

Software subscriptions

 

25,590

 

24,684

Services

 

11,343

 

14,778

Total cost of revenues

 

36,933

 

39,462

Gross profit

 

61,303

 

49,783

Operating expenses:

 

  

 

  

Research and development

 

11,459

 

13,079

Selling and marketing

 

20,150

 

24,333

General and administrative

 

24,852

 

37,636

Depreciation and amortization

 

2,827

 

2,869

Other operating (income) expense, net

 

(129)

 

111

Total operating expenses

 

59,159

 

78,028

Income (loss) from operations

 

2,144

 

(28,245)

Interest expense, net

 

535

 

569

Income (loss) before income taxes

 

1,609

 

(28,814)

Income tax (benefit) expense

 

(679)

 

250

Net income (loss)

 

2,288

 

(29,064)

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

 

977

 

2,998

Total comprehensive income (loss)

$

1,311

$

(32,062)

Net income attributable to Class A stockholders

$

413

$

Net income per Class A share, basic

$

0.02

$

Weighted average Class A common stock, basic

 

26,458

 

Net income attributable to Class A stockholders, diluted

$

550

$

Net income per Class A share, diluted

$

0.01

$

Weighted average Class A common stock, diluted

 

38,003

 

Net income (loss) attributable to Class B stockholders

$

1,875

$

(29,064)

Net income (loss) per Class B share, basic

$

0.02

$

(0.24)

Weighted average Class B common stock, basic

 

120,117

 

120,417

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

$

1,738

$

(29,064)

Net income (loss) per Class B share, diluted

$

0.01

$

(0.24)

Weighted average Class B common stock, diluted

120,117

120,417

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 Equity (Deficit)

For the three months ended March 31, 2021 and 2020 (unaudited)

(Amounts in thousands)

Before Recapitalization

After Recapitalization

Accumulated

Outstanding

Class A

Outstanding

Class B

Outstanding

Class A

Outstanding

Class B

Additional

  

  

Other 

  

Treasury

  

  

Total

  

Options for

Class A

Common

Class B

Common

Class A

Common

Class B

Common

Paid In

Accumulated

Comprehensive 

Shares

Treasury

Stockholders'

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

Before Recapitalization

After Recapitalization

Accumulated

Outstanding

Class A

Outstanding

Class B

Outstanding

Class A

Outstanding

Class B

Additional

  

  

Other 

  

Treasury

  

  

Total

  

Options for

Class A

Common

Class B

Common

Class A

Common

Class B

Common

Paid-in

Retained

Comprehensive 

Shares

Treasury

Stockholders'

Redeemable

Shares

  

 Stock

  

Shares

  

Stock

Shares

  

 Stock

  

Shares

  

Stock

  

Capital

  

Earnings

  

Loss

  

Issued

  

Stock

  

Equity

  

Shares

Balance, January 1, 2021

$

$

26,327

$

26

120,117

$

120

$

206,541

$

21,926

$

(3,127)

$

$

225,486

$

ASC 842 transition adjustment

 

 

 

508

508

Exercise of stock options, net

640

 

1

 

 

(6,998)

(6,997)

Shares issued upon vesting of Restricted Stock Units

5

 

 

 

(34)

(34)

Stock-based compensation expense

 

 

 

6,302

6,302

Foreign currency translation adjustments and revaluations, net of tax

 

 

 

(977)

(977)

Net income

 

 

 

2,288

2,288

Balance, March 31, 2021

$

 

$

26,972

$

27

 

120,117

$

120

$

205,811

$

24,722

$

(4,104)

$

$

226,576

$

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 three months ended March 31, 2021 and 2020

(Amounts in thousands)

Three Months Ended

March 31, 

    

2021

    

2020

(unaudited)

Cash flows from operating activities:

 

  

 

  

Net income (loss)

$

2,288

$

(29,064)

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

 

 

Depreciation and amortization

 

8,816

 

7,436

Provision for subscription cancellations and non-renewals, net of deferred allowance

 

379

 

(39)

Amortization of deferred financing costs

 

53

 

221

Stock-based compensation expense

 

6,543

 

34,920

Deferred income tax (benefit) provision

(615)

Non-cash operating lease costs

998

Other

 

(14)

 

72

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

13,810

 

9,453

Prepaid expenses and other current assets

 

(13,437)

 

(2,167)

Deferred commissions

 

50

 

634

Accounts payable

 

2,258

 

(2,697)

Accrued expenses

 

(3,048)

 

(1,042)

Accrued and deferred compensation

 

(14,966)

 

(19,706)

Deferred revenue

 

(5,046)

 

(4,307)

Operating lease liabilities

(1,519)

Other

 

485

 

(131)

Net cash used in operating activities

 

(2,965)

 

(6,417)

Cash flows from investing activities:

 

  

 

  

Acquisition of business, net of cash acquired

 

(6,100)

 

(12,318)

Property and equipment additions

 

(6,195)

 

(5,632)

Capitalized software additions

 

(2,221)

 

(3,706)

Net cash used in investing activities

 

(14,516)

 

(21,656)

Cash flows from financing activities:

 

  

 

  

Net increase in customer funds obligations

 

(438)

 

(208)

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

 

 

(51,041)

Payments for deferred financing costs, net

 

 

(2,904)

Payments for taxes related to net share settlement of stock-based awards

(7,178)

Proceeds from exercise of stock options

 

147

 

Distributions to stockholders

 

 

(17,193)

Payments on financing lease liabilities

(671)

Net cash (used in) provided by financing activities

 

(8,140)

 

103,654

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

 

(226)

 

(249)

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

(25,847)

75,332

Cash, cash equivalents and restricted cash, beginning of period

 

312,273

 

83,495

Cash, cash equivalents and restricted cash, end of period

$

286,426

$

158,827

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

 

  

 

  

Cash and cash equivalents

$

277,681

$

40,416

Restricted cash—funds held for stockholder distributions

110,000

Restricted cash—funds held for customers

 

8,745

 

8,411

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

$

286,426

$

158,827

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 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.

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.

On 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 condensed consolidated financial statements from the acquisition date. Systax was determined to be a VIE as Vertex 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.

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 accounting principles generally accepted in the 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, 2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”) filed with the SEC on March 15, 2021. The interim condensed consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements included in the 2020 Annual Report on Form 10-K for the year ended December 31, 2020. The accompanying interim condensed consolidated balance sheet as of March 31, 2021, and the interim condensed consolidated statements of comprehensive income (loss), changes in equity (deficit) and cash flows for the three months ended March 31, 2021 and 2020 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 months ended March 31, 2021 are not necessarily indicative of the results expected for the full year ending December 31, 2021.

Segments

The Company operates its business as one operating segment. For the three months ended March 31, 2021 and 2020, approximately 5% and 3%, respectively, of the Company’s revenues were generated outside the U.S..

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 a measurement date. A three-level fair value hierarchy (the “Fair Value

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Hierarchy”) prioritizes the inputs used to measure fair value. The Fair Value Hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. Classification in the Fair Value Hierarchy is based on the lowest of the following levels that is significant to the measurement:

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.

The Company’s assessment of the significance of an input to a fair value measurement requires judgment, which may affect the determination of fair value and the measurement’s classification within the Fair Value Hierarchy.

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) the reserve for self-insurance, (iv) assumptions related to achievement of technological feasibility for software developed for sale, (v) product life cycles, (vi) estimated useful lives and potential impairment of long-lived assets, intangible assets and goodwill, (vii) determination of the fair value of tangible and intangible assets acquired, liabilities assumed and consideration transferred in an acquisition, (viii) amortization period of material rights and deferred commissions (ix) valuation of the Company’s stock used to measure stock-based compensation awards, (x) Black-Scholes-Merton option pricing model (“Black-Scholes model”) input assumptions used to determine the fair value of stock-based compensation awards, and (x) 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.

Software Development Costs

Internal-Use Software

The Company follows Accounting Standard Codification (“ASC”) 350-40, Goodwill and Other, Internal-Use Software, to account for development costs incurred for the costs of computer software developed or obtained for internal use. ASC 350-40 requires such costs to be capitalized once certain criteria are met. Internal-use software is included in internal-use software developed in property and equipment in the condensed consolidated balance sheets once available for its intended use and is depreciated over periods between 3 to 5 years. Depreciation expense for internal-use software utilized for cloud-based solutions and for software for internal systems and tools is included in cost of revenues, software subscriptions and depreciation and amortization expense, respectively, in the condensed consolidated statements of comprehensive income (loss).

Software Developed for Sale

The costs incurred for the development of computer software to be sold, leased, or otherwise marketed are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed, when technological feasibility has been established. Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on a product-by-product basis using the straight-line method over periods between 3 to 5 years and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive income (loss). Capitalized software costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies at least annually at December 31, and whenever events or circumstances make it more likely than not that impairment may have occurred.

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Business Combinations

Upon acquisition of a company, the Company determines if the transaction is a business combination, which is accounted for using the acquisition method of accounting. Under the acquisition method, once control is obtained of a business, the assets acquired, liabilities assumed, consideration transferred and amounts attributed to noncontrolling interests, are recorded at fair value. The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired, liabilities assumed, consideration transferred, and amounts attributed to noncontrolling interests at the acquisition date. One of the most significant estimates relates to the determination of the fair value of these amounts. The determination of the fair values is based on estimates and judgments made by management. The Company’s estimates of fair value are based upon assumptions it believes to be reasonable, but which are inherently uncertain and unpredictable. Measurement period adjustments to these values as of the acquisition date are reflected at the time identified, up through the conclusion of the measurement period, which is the time at which all information for determination of the values of assets acquired, liabilities assumed, consideration transferred and noncontrolling interests is received, and is not to exceed one year from the acquisition date (the “Measurement Period”). Thus the Company may record adjustments to the fair value of these tangible and intangible assets acquired, liabilities assumed, consideration transferred and noncontrolling interests, with the corresponding offset to goodwill during this Measurement Period. Additionally, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluate these estimates and assumptions periodically and record any adjustments to preliminary estimates to goodwill, provided the Company is within the Measurement Period, with any adjustments to amortization of new or previously recorded identifiable intangibles being recorded to the consolidated statements of comprehensive income (loss) in the period in which they arise. In addition, if outside of the Measurement Period, any subsequent adjustments to the acquisition date fair values are reflected in the consolidated statements of comprehensive income (loss) in the period in which they arise.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. The Company evaluates goodwill for impairment annually at October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred.

Stock-Based Compensation

The Company’s Registration Statement on Form S-1 with the 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”). On the effective date of the Offering, the Company adopted the 2020 Incentive Award Plan (the “2020 Plan”) and the 2020 Employee Stock Purchase Plan (the “ESPP”), which provides for the award of stock appreciation rights (“SARs”), stock options (“options”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and participation in the ESPP (collectively, the "awards"), which are subject to guidance set forth in ASC 718, Compensation—Stock Compensation, ("ASC 718") for the award of equity-based instruments.

The Company applies the provisions of ASC 718, Compensation—Stock Compensation, for the award of equity-based instruments. The provisions of ASC 718 require a company to measure the fair value of stock-based compensation as of the grant date of the award. Stock-based compensation expense reflects the cost of employee services received in exchange for the awards.

SARs are accounted for as liabilities under ASC 718 and, as such, the Company recognizes stock-based compensation expense by remeasuring the value of the SARs at the end of each reporting period and accruing the portion of the requisite service rendered at that date. Prior to July 2, 2020, the date management determined the Company was considered to have become a public entity, the Company measured SARs at their intrinsic value. After such date, management remeasured outstanding SARs using the fair value-based method under ASC 718.

Stock-based compensation expense for stock options issued under the 2020 Plan after the Offering is measured based on the grant date fair value of the award and is estimated using the Black-Scholes model. Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the award.

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Stock-based compensation expense for RSAs and RSUs is based on the fair value of the Company’s underlying common stock on the date of grant. Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the award.

The ESPP permits participants to purchase Class A common stock through payroll deductions, up to a specified percentage of their eligible compensation or a lump sum contribution amount for the initial offering period. The plan is a compensatory plan as it allows participants to purchase stock at a 15% discount from the lower of the fair value of the Class A common on the first or last day of the ESPP offering period (the “ESPP discount”).The ESPP is accounted for as an equity classified award. Stock-based compensation expense for the ESPP is measured based on the fair value of the ESPP award at the start of the offering period. The fair value is comprised of the value of the ESPP discount and the value associated with the variability in the Class A common stock price during the offering period (the “Call/Put”), which is estimated using the Black-Scholes model. Compensation cost is recognized on a straight-line basis over the respective offering period.

The Company has elected to recognize award forfeitures as they occur.

Revenue Recognition

Revenue from contracts with customers

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct, and accounted for as separate performance obligations. Revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of goods and services

Licenses for on-premise software subscriptions provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates (collectively “updates”) and product support. The updates and support, which are part of the subscription agreement, are essential to the continued utility of the software; therefore, the Company has determined the software and the related updates and support to be a single performance obligation. Accordingly, when on-premise software is licensed, the revenue associated with this combined performance obligation is recognized ratably over the license term as these subscriptions are provided for the duration of the license term. Revenue recognition begins on the later of the beginning of the subscription period or the date the software is made available to the customer to download. The Company’s on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price (“new sale premium”) is a material right that provides customers with the right to this reduced renewal price. The Company recognizes revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years.

Cloud-based subscriptions allow customers to use Company-hosted software over the contract period without taking possession of the software. The cloud-based offerings also include related updates and support. Cloud-based contracts consistently provide a benefit to the customer during the subscription period; thus, the associated revenue is recognized ratably over the related subscription period. Revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based solutions.

Revenue from deliverable-based services is recognized as services are delivered. Revenue from fixed fee services is recognized as services are performed using the percentage of completion input method.

The Company has elected the "right to invoice" practical expedient for revenue related to services that are billed on an hourly basis, which enables revenue to be recognized as the services are performed.

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The Company has determined that the methods applied to measuring its progress toward complete satisfaction of performance obligations recognized over time are a faithful depiction of the transfer of control of software subscriptions and services to customers.

Significant Judgments

Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Identification of the amortization periods of material rights and contract costs requires significant judgement by management.

Payment terms

Payment terms and conditions vary by contract, although the Company’s terms generally include a requirement of payment within 30-days. In instances where the timing of revenue recognition differs from the timing of payment, the Company has determined that its contracts do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, not to receive financing from customers or to provide customers with financing.

Cost of Revenues

Cost of revenues, software subscriptions includes the direct cost to develop, host and distribute software products, the direct cost to provide customer support, and amortization of costs capitalized for software developed for sale and for internal-use software utilized for cloud-based subscriptions. Cost of revenues, services includes the direct costs of implementation, training, transaction tax returns outsourcing and other tax-related services.

Reimbursable Costs

Reimbursable costs passed through and invoiced to customers of the Company are recorded as services revenues with the associated expenses recorded as cost of revenues, services in the condensed consolidated statements of comprehensive income (loss).

Income Taxes

On July 27, 2020, the Company’s S-Corporation election (the “S Election”) was terminated by the Company’s stockholders in connection with the Offering. As a result, Vertex became taxable at the corporate level as a C-Corporation for U.S federal and state income tax purposes. In connection with the S Election termination, the Company entered into an agreement with the S-Corporation stockholders pursuant to which the Company has indemnified them for unpaid income tax liabilities and may be required to make future payments in material amounts to them attributable to incremental income taxes resulting from an adjustment to S-Corporation related taxable income (the “Tax Sharing Agreement”). In addition, the Tax Sharing Agreement indemnifies the S-Corporation stockholders for any interest, penalties, losses, costs or expenses arising out of any claim under the agreement. Correspondingly, the S-Corporation stockholders have indemnified the Company with respect to unpaid tax liabilities (including interest and penalties) attributable to a decrease in S-Corporation stockholders’ taxable income and a corresponding increase in our taxable income as a C-Corporation for any period.

Prior to July 27, 2020, as Vertex was taxed as an S-Corporation for U.S. federal and certain states income tax purposes, net income or loss was allocated to and included on the income tax returns of the S-Corporation stockholders. Historically, the Company distributed amounts to the S-Corporation stockholders to satisfy their tax liabilities resulting from allocated net income or loss. Vertex was taxed at the corporate level in those states where the S-Corporation status was not recognized or where the state imposed a tax on an S-Corporation. Accordingly, the income tax provision or benefit was based on taxable income allocated to these states. In certain foreign jurisdictions, Vertex subsidiaries were taxed at the corporate level, and the income tax provision or benefit was based on taxable income sourced to these foreign jurisdictions.

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Supplemental Cash Flow Disclosures

Supplemental cash flow disclosures are as follows for the respective periods:

For the three months ended

March 31,

    

2021

    

2020

 

(unaudited)

Cash paid for interest

$

69

$

559

Cash paid for income taxes

$

132

$

104

Operating cash flows from operating leases

$

1,320

$

Operating cash flows from finance leases

$

28

$

Non-cash investing and financing activities:

 

  

 

  

Purchase commitment and contingent consideration liabilities

$

2,200

$

14,344

Remeasurement of options for redeemable shares

$

$

15,242

Leased assets obtained in exchange for new finance lease liabilities

$

173

$

Recently Issued Accounting Pronouncements

As an "emerging growth company," the Jumpstart Our Business Startups Act (the “JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to delay adoption of certain new or revised accounting standards. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases. This standard amends several of aspects of lease accounting, including requiring lessees to recognize operating leases with a initial term greater than one year on their balance sheet as a right-of-use asset, and a corresponding lease liability, measured at the present value of the future minimum lease payments. The standard is effective for public entities for fiscal years and interim periods beginning after December 15, 2018. The standard is effective for all other entities for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted.

The Company adopted ASU No. 2016-02 on January 1, 2021 using the modified retrospective transition method, which did not require the Company to adjust comparative periods. The Company’s lease assets and lease liabilities are recognized on the lease commencement date in an amount that represents the present value of future lease payments. The Company’s incremental borrowing rate, which is based on information available at the adoption date for existing leases and the commencement date for leases commencing after the adoption date, is used to determine the present value of lease payments.

The Company elected the "package of three" practical expedients permitted under the transition guidance, which allows (i) a carry forward of the historical lease classification conclusions, (ii) management’s assessment on whether a contract is or contains a lease, and (iii) the initial direct costs for any leases that exist prior to adoption of the new standard.

As a result of the adoption of ASC 842 on January 1, 2021, the Company recorded both operating lease right-of-use assets of $24,004 and operating lease liabilities of $32,562. An adjustment to retained earnings of $508, net of the deferred tax impact, was also recorded. The adoption of ASC 842 had an immaterial impact on the condensed consolidated statements of comprehensive income and cash flows for the three months ended March 31, 2021. The adoption of this standard also resulted in a change in the naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases within property and equipment, with corresponding short-term and long-term debt

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liabilities being presented as “Current portion of finance lease liabilities” and “Finance lease liabilities, net of current portion”, respectively. See Note 7 for further information.

The Company does not recognize leases with an initial term less than one year (“short-term leases”) on its condensed consolidated balance sheets, and recognizes such lease payments in the condensed consolidated statements of comprehensive income (loss) on a straight-line basis over the lease term. Leases with an option to extend the related lease term or terminate early are reflected in the lease term when it is reasonably certain that the Company will exercise such options.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”) which replaces the existing incurred loss impairment model with an expected credit loss model and requires financial assets, including trade receivables, to be measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, for business entities that are public and meet the definition of an SEC filer (excluding smaller reporting companies), and after December 15, 2022 for all other entities. The Company adopted this standard effective January 1, 2021 and this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Income Taxes

In December 2019, the FASB issued ASU Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, (“ASU 2019-12”) which simplifies the accounting for income taxes. The guidance in ASU 2019-12 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2020, for business entities that are public, and after December 15, 2021, including interim periods within those annual periods, for all other entities, with early adoption permitted.

The Company adopted this standard on January 1, 2021. There was no impact to the condensed consolidated financial statements from the implementation of this standard on the determination of income taxes for the quarter ended March 31, 2021.

Risks and Uncertainties

In December 2019, a novel strain of coronavirus (“COVID-19”) appeared. In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic is continuing to have widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. To protect the health and well-being of Company employees and customers, substantial modifications were made to employee travel policies, our offices were closed, and remained closed through March 31, 2021, with employees directed to work from home. In addition, conferences and other marketing events were cancelled or shifted to virtual-only, and the Company continued to participate virtually through March 31, 2021. The COVID-19 pandemic has impacted and may continue to impact Company operations, including employees, customers and partners, and there is substantial uncertainty in the nature and degree of its continued effects over time.

The Company did not experience any significant reductions in sales, revenues or collections through March 31, 2021 as a result of COVID-19. The uncertainty caused by the COVID-19 pandemic could, however, impact Company billings to new customers for the remainder of 2021, and may also negatively impact Company efforts to expand revenues from existing customers as they continue to evaluate certain long-term projects and budget constraints. In addition to the potential impact on sales, the Company may see delays in collections during 2021 as customers adjust their operating protocols to accommodate implementation of new criteria to protect the health and well-being of their employees and customers. However, these delays are not expected to materially impact the business, and thus the Company has not recorded additional credit losses associated with the allowance for doubtful accounts in connection with any delays. The Company believes it has ample liquidity and capital resources to continue to meet its operating needs, and to service debt and other financial obligations.

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The extent to which the COVID-19 pandemic impacts the business going forward will depend on numerous evolving factors that cannot reliably be predicted, including the duration and scope of the pandemic; governmental, business, and individuals’ actions in response to the pandemic; and the impact on economic activity, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business and government spending on technology as well as customers’ ability to pay for Company products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including estimated allowance for subscription cancellations, product life cycles and estimated lives of long-lived assets.

Reclassifications

Certain amounts in the  prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on previously reported comprehensive income or loss.

2. REVENUE RECOGNITION    

See Note 1 for a description of the Company’s revenue recognition accounting policy.

Disaggregation of revenue

The table reflects revenue by major source for the following periods:

Three months ended

March 31, 

    

2021

    

2020

    

 

(unaudited)

 

Sources of revenues:

  

  

Software subscriptions

$

83,280

$

75,760

Services

 

14,956

 

13,485

Total revenues

$

98,236

$

89,245

Contract balances

Timing of revenue recognition may differ from the timing of invoicing customers. A receivable is recorded in the consolidated balance sheets when customers are billed related to revenue to be collected and recognized for subscription agreements as there is an unconditional right to invoice and receive payment in the future related to these subscriptions. A receivable and related revenue may also be recorded in advance of billings to the extent services have been performed and the Company has a right under the contract to bill and collect for such performance. Subscription-based customers are generally invoiced annually at the beginning of each annual subscription period. Accounts receivable is presented net of an allowance for potentially uncollectible accounts and estimated cancellations of software license and cloud-based subscriptions (the “allowance”) of $8,059 and $8,592 at March 31, 2021 and December 31, 2020, respectively. The allowance represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations.

The beginning and ending balances of accounts receivable, net of allowance, are as follows:

For the three months ended

For the year ended

March 31, 2021

December 31, 2020

(unaudited)

Balance, beginning of period

$

77,159

$

70,367

Balance, end of period

 

63,798

 

77,159

(Decrease) increase, net

$

(13,361)

$

6,792

A contract liability is recorded as deferred revenue on the consolidated balance sheets when customers are billed in advance of performance obligations being satisfied, and revenue is recognized after invoicing ratably over the subscription period or over the amortization period of material rights. Deferred revenue is reflected net of a related deferred allowance

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for subscription cancellations (the “deferred allowance”) of $5,515 and $6,432 at March 31, 2021 and December 31, 2020, respectively. The deferred allowance represents the portion of the allowance for subscription cancellations associated with deferred revenue.

The beginning and ending balances of and changes to the allowance and the deferred allowance are as follows:

For the three months ended March 31,

2021

2020

    

Balance

    

Net Change

    

Balance

    

Net Change

Allowance balance, January 1

$

(8,592)

 

  

$

(7,515)

 

  

Allowance balance, March 31

 

(8,059)

 

  

 

(7,476)

 

  

Change in allowance

 

$

(533)

 

$

(39)

Deferred allowance balance, January 1

 

6,432

 

  

 

5,614

 

  

Deferred allowance balance, March 31

 

5,515

 

  

 

5,118

 

  

Change in deferred allowance

 

 

917

 

 

496

Net amount charged to revenues

 

$

384

 

$

(457)

The portion of deferred revenue expected to be recognized in revenue beyond one year is included in deferred revenue, net of current portion in the condensed consolidated balance sheets.

The tables provide information about the balances of and changes to deferred revenue for the following periods:

As of March 31, 

As of December 31,

2021

2020

    

(unaudited)

Balances:

 

  

 

  

Deferred revenue, current

$

204,971

$

207,560

Deferred revenue, non-current

 

13,162

 

14,702

Total deferred revenue

$

218,133

$

222,262

For the three months ended

March 31, 

2021

2020

(unaudited)

Changes to deferred revenue:

    

  

    

  

Beginning balance

$

222,262

$

205,791

Additional amounts deferred

 

94,107

 

84,938

Revenues recognized

 

(98,236)

 

(89,245)

Ending balance

$

218,133

$

201,484

Contract costs

Deferred sales commissions earned by the Company’s sales force and certain sales incentive programs and vendor referral agreements are considered incremental and recoverable costs of obtaining a contract with a customer. An asset is recognized for these incremental contract costs and reflected as deferred commissions in the consolidated balance sheets. These contract costs are amortized on a straight-line basis over a period consistent with the transfer of the associated product and services to the customer, which is generally three years. Amortization of these costs are included in selling and marketing expense in the consolidated statements of comprehensive income (loss). The Company periodically reviews

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these contract assets to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these assets. There were no impairment losses recorded for the periods presented.

The table provides information about the changes to contract cost balances as of and for the following periods:

For the three months ended

    

March 31, 

2021

2020

Deferred commissions:

    

(unaudited)

    

Beginning balance

$

11,743

$

11,196

Additions

 

2,058

 

1,972

Amortization

 

(2,108)

 

(2,605)

Ending balance

$

11,693

$

10,563

3.    BUSINESS COMBINATION

On January 25, 2021, the Company executed an Asset Purchase Agreement with Tellutax LLC, a Portland, Oregon-based edge computing technology startup (“Tellutax”), to acquire substantially all of Tellutax’s assets (the “Tellutax Acquisition”). Cash consideration paid for the acquisition was $6,100, funded through cash on hand, and serves to strengthen the Company’s technology roadmap and hybrid cloud strategy enabling it to better serve customers in an increasingly hyper-connected environment. The Tellutax Acquisition entitles the sellers to contingent consideration if sales targets are met during a period of time following the acquisition. 

The Tellutax Acquisition was accounted for as a business combination. The total preliminary purchase price was allocated to the net assets acquired based on Management’s determination of their estimated fair values using available information as of the acquisition date. The excess of purchase consideration over the net assets acquired is recorded as goodwill, which primarily reflects the value of expected future synergies, the existence of intangible assets not recognized under U.S. GAAP such as the value of the assembled workforce and other market factors. The Company expects that goodwill associated with the Tellutax Acquisition will be deductible for tax purposes. The preliminary values recorded, which are reflected in the table below, will be adjusted during the measurement period as more detailed analyses are performed and further information becomes available regarding the fair values of these amounts on the acquisition date. Any subsequent adjustments to these values not associated with determination of their fair values on the acquisition date will be recorded in the consolidated statements of comprehensive income (loss) in the period the change is identified.

The preliminary purchase price for the Tellutax Acquisition includes cash paid at closing plus an estimated fair value of contingent consideration of $2,200 (the “Tellutax Contingent Consideration”) as of January 25, 2021. The following table presents the allocation of the preliminary purchase price recorded in the condensed consolidated balance sheet as of the acquisition date: