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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, 2023

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: 001-39413

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

The Nasdaq Stock Market LLC

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

Smaller reporting company

Emerging growth company

 

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

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

As of May 5, 2023, the registrant had 53,860,965 shares of Class A common stock, $0.001 par value per share, and 97,718,000 shares of Class B common stock, $0.001 par value per share, outstanding.

1

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TABLE OF CONTENTS

 

Page

Part I - Financial Information 

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (unaudited)

5

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2023 and 2022 (unaudited)

6

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022 (unaudited)

7

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited)

8

Notes to Condensed Consolidated Financial Statements (unaudited)

9

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

45

Part II - Other Information

46

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3.

Defaults Upon Senior Securities

46

Item 4.

Mine Safety Disclosures

46

Item 5.

Other Information

46

Item 6.

Exhibits

47

Signatures

48

2

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:

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;
the potential effects on our business from the existence of a global endemic or pandemic;
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.

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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, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2023 (the “2022 Annual Report”). Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for us to identify all such risk factors, nor can we assess the impact of all such risk factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on our forward-looking statements, and you should not rely on forward-looking statements as predictions of future events. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this report. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

4

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Vertex, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2023 and December 31, 2022

(Amounts in thousands, except per share data)

March 31, 

    

December 31, 

2023

2022

(unaudited)

    

Assets

Current assets:

  

 

  

Cash and cash equivalents

$

68,643

$

91,803

Funds held for customers

 

25,972

 

14,945

Accounts receivable, net of allowance of $10,641 and $9,554, respectively

 

102,760

 

102,885

Prepaid expenses and other current assets

 

22,536

 

20,383

Investment securities available-for-sale, current, at fair value (amortized cost of $11,552 and $11,220, respectively)

11,524

11,173

Total current assets

 

231,435

 

241,189

Property and equipment, net of accumulated depreciation

 

117,444

 

115,768

Capitalized software, net of accumulated amortization

 

38,790

 

39,012

Goodwill and other intangible assets

 

259,303

 

257,023

Deferred commissions

 

15,921

 

15,463

Deferred income tax asset

43,542

30,938

Operating lease right-of-use assets

16,462

17,187

Other assets

 

2,621

 

2,612

Total assets

$

725,518

$

719,192

Liabilities and Stockholders' Equity

 

 

Current liabilities:

 

  

 

  

Current portion of long-term debt

$

2,500

$

2,188

Accounts payable

17,420

14,329

Accrued expenses

 

55,896

 

38,234

Customer funds obligations

 

23,110

 

12,121

Accrued salaries and benefits

 

15,142

 

10,790

Accrued variable compensation

 

8,045

 

23,729

Deferred compensation, current

 

2,352

 

2,809

Deferred revenue, current

 

276,004

 

268,847

Current portion of operating lease liabilities

3,141

4,086

Current portion of finance lease liabilities

75

103

Deferred purchase consideration, current

9,924

19,824

Purchase commitment and contingent consideration liabilities, current

 

8,340

 

6,149

Total current liabilities

 

421,949

 

403,209

Deferred revenue, net of current portion

 

7,112

 

10,289

Debt, net of current portion

46,093

46,709

Operating lease liabilities, net of current portion

20,057

20,421

Finance lease liabilities, net of current portion

10

Purchase commitment and contingent consideration liabilities, net of current portion

 

6,813

 

8,412

Deferred other liabilities

 

19

 

417

Total liabilities

 

502,043

 

489,467

Commitments and contingencies (Note 11)

 

  

 

  

 

 

Stockholders' equity:

 

  

 

  

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

 

Class A voting common stock, $0.001 par value, 300,000 shares authorized; 53,586 and 50,014 shares issued and outstanding, respectively

53

50

Class B voting common stock, $0.001 par value, 150,000 shares authorized; 97,718 and 100,307 shares issued and outstanding, respectively

98

100

Additional paid in capital

253,566

244,820

(Accumulated deficit) retained earnings

 

(5,625)

 

12,507

Accumulated other comprehensive loss

 

(24,617)

 

(27,752)

Total stockholders' equity

 

223,475

 

229,725

Total liabilities and stockholders' equity

$

725,518

$

719,192

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

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Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the three months ended March 31, 2023 and 2022

(Amounts in thousands, except per share data)

Three months ended March 31,

2023

2022

(unaudited)

Revenues:

  

    

  

Software subscriptions

$

111,014

$

97,131

Services

21,737

 

17,853

Total revenues

 

132,751

 

114,984

Cost of revenues:

 

  

 

  

Software subscriptions

 

37,403

 

32,913

Services

 

14,344

 

11,953

Total cost of revenues

 

51,747

 

44,866

Gross profit

 

81,004

 

70,118

Operating expenses:

 

  

 

  

Research and development

 

15,862

 

9,633

Selling and marketing

 

35,736

 

27,452

General and administrative

 

34,310

 

28,757

Depreciation and amortization

 

3,741

 

2,960

Other operating expense, net

 

284

 

848

Total operating expenses

 

89,933

 

69,650

(Loss) income from operations

 

(8,929)

 

468

Interest expense, net

 

(350)

 

(6)

(Loss) income before income taxes

 

(8,579)

 

474

Income tax expense

 

9,553

 

808

Net loss

 

(18,132)

 

(334)

Other comprehensive (income) loss:

 

Foreign currency translation adjustments and revaluations, net of tax

 

(3,122)

 

2,049

Unrealized gain on investments, net of tax

(13)

Total other comprehensive (income) loss, net of tax

(3,135)

2,049

Total comprehensive loss

$

(14,997)

$

(2,383)

Net loss attributable to Class A stockholders, basic

$

(6,072)

$

(95)

Net loss per Class A share, basic

$

(0.12)

$

(0.00)

Weighted average Class A common stock, basic

 

50,456

 

42,349

Net loss attributable to Class A stockholders, diluted

$

(6,072)

$

(95)

Net loss per Class A share, diluted

$

(0.12)

$

(0.00)

Weighted average Class A common stock, diluted

 

50,456

 

42,349

Net loss attributable to Class B stockholders, basic

$

(12,060)

$

(239)

Net loss per Class B share, basic

$

(0.12)

$

(0.00)

Weighted average Class B common stock, basic

 

100,221

 

106,807

Net loss attributable to Class B stockholders, diluted

$

(12,060)

$

(239)

Net loss per Class B share, diluted

$

(0.12)

$

(0.00)

Weighted average Class B common stock, diluted

100,221

106,807

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

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Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2023 and 2022 (unaudited)

(Amounts in thousands)

Accumulated

Outstanding

Class A

Outstanding

Class B

Additional

  

  

Other 

  

Total

Class A

Common

Class B

Common

Paid In

Retained

Comprehensive 

Stockholders'

  

  

Shares

  

 Stock

  

Shares

  

Stock

Capital

  

Earnings

  

Loss

  

Equity

Balance, January 1, 2022

42,286

$

42

106,807

$

107

$

222,621

$

24,811

$

(17,497)

$

230,084

Exercise of stock options, net

 

272

 

 

 

 

278

 

 

 

278

Shares issued upon vesting of Restricted Stock Units, net

3

(15)

(15)

Stock-based compensation expense

4,867

4,867

Foreign currency translation adjustments and revaluations, net of tax

 

 

 

 

 

 

 

(2,049)

 

(2,049)

Net loss

 

 

 

 

 

 

(334)

 

 

(334)

Balance, March 31, 2022

 

42,561

$

42

 

106,807

$

107

$

227,751

$

24,477

$

(19,546)

$

232,831

(Accumulated

Accumulated

Outstanding

Class A

Outstanding

Class B

Additional

  

Deficit)

  

Other 

  

Total

Class A

Common

Class B

Common

Paid In

Retained

Comprehensive 

Stockholders'

Shares

  

 Stock

  

Shares

  

Stock

Capital

  

Earnings

  

Loss

  

Equity

Balance, January 1, 2023

50,014

$

50

100,307

$

100

$

244,820

$

12,507

$

(27,752)

$

229,725

Exercise of stock options, net

592

1

1,279

1,280

Shares issued upon vesting of Restricted Stock Units, net

391

(3,471)

(3,471)

Stock-based compensation expense

10,938

10,938

Class B shares exchanged for Class A shares

2,589

2

(2,589)

(2)

Foreign currency translation adjustments and revaluations, net of tax

3,122

3,122

Unrealized gain from available-for-sale investments, net of tax

13

13

Net loss

 

(18,132)

(18,132)

Balance, March 31, 2023

 

53,586

$

53

97,718

$

98

$

253,566

$

(5,625)

$

(24,617)

$

223,475

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, 2023 and 2022

(Amounts in thousands)

Three months ended March 31, 

2023

    

2022

(unaudited)

Cash flows from operating activities:

  

 

  

Net loss

$

(18,132)

$

(334)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

  

Depreciation and amortization

 

16,942

 

12,906

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

 

697

 

(279)

Amortization of deferred financing costs

 

63

 

53

Change in fair value of contingent consideration liability

200

700

Write-off of deferred financing costs

372

Stock-based compensation expense

 

11,434

 

4,933

Deferred income tax (benefit) expense

(12,984)

62

Non-cash operating lease costs

726

622

Other

 

(4)

 

412

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

(795)

 

2,688

Prepaid expenses and other current assets

 

(2,109)

 

(1,091)

Deferred commissions

 

(459)

 

875

Accounts payable

 

3,065

 

1,555

Accrued expenses

 

17,578

 

3,806

Accrued and deferred compensation

 

(12,452)

 

(19,254)

Deferred revenue

 

4,352

 

(3,718)

Operating lease liabilities

(1,309)

(763)

Other

 

(58)

 

(950)

Net cash provided by operating activities

 

6,755

 

2,595

Cash flows from investing activities:

 

  

 

  

Acquisition of business, net of cash acquired

 

 

(474)

Property and equipment additions

 

(13,313)

 

(13,873)

Capitalized software additions

 

(4,007)

 

(2,912)

Purchase of investment securities, available-for-sale

(3,491)

Proceeds from maturities of investment securities, available-for-sale

3,250

Net cash used in investing activities

 

(17,561)

 

(17,259)

Cash flows from financing activities:

 

  

 

  

Net increase in customer funds obligations

 

10,989

 

1,046

Proceeds from term loan

 

 

50,000

Principal payments on long-term debt

 

(313)

 

Payments for deferred financing costs

 

 

(993)

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

(3,681)

(337)

Proceeds from exercise of stock options

 

1,490

 

600

Distributions under Tax Sharing Agreement

(536)

Payments of finance lease liabilities

(16)

Payments for deferred purchase commitments

(10,000)

(10,000)

Net cash (used in) provided by financing activities

 

(1,531)

 

39,780

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

 

204

 

(83)

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

(12,133)

25,033

Cash, cash equivalents and restricted cash, beginning of period

 

106,748

 

98,206

Cash, cash equivalents and restricted cash, end of period

$

94,615

$

123,239

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

 

  

 

  

Cash and cash equivalents

$

68,643

$

97,340

Restricted cash—funds held for customers

 

25,972

 

25,899

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

$

94,615

$

123,239

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

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(Amounts in thousands, except per share data)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Vertex, Inc. (“Vertex”) and its consolidated subsidiaries and variable interest entities (“VIE”) (collectively, the “Company”) operate as solutions providers of state, local and value added tax calculation, compliance and analytics, offering software products 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.

The Company has a 65% controlling equity interest in Systax Sistemas Fiscais LTDA (“Systax”), a provider of Brazilian transaction tax content and software. Systax was determined to be a VIE and the accounts are included in the condensed consolidated condensed financial statements. Vertex does not have full decision-making authority over Systax; however, Vertex is the entity that most significantly participates in the variability of the fair value of Systax’s net assets and is considered the entity most closely associated to Systax. As such, Vertex is deemed the primary beneficiary of Systax and consolidates Systax into its condensed consolidated financial statements.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and include the accounts of the Company. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”) filed with the SEC on March 10, 2023. The condensed consolidated balance sheet as of December 31, 2022 has been derived from audited financial statements included in the 2022 Annual Report. The accompanying interim condensed consolidated balance sheet as of March 31, 2023, the interim condensed consolidated statements of comprehensive loss for the three months ended March 31, 2023 and 2022, and the interim condensed consolidated statements of changes in stockholders’ equity and the interim condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 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, 2023 are not necessarily indicative of the results expected for the full year ending December 31, 2023.

Segments

The Company operates its business as one operating segment. For the three months ended March 31, 2023 and 2022, approximately 7% and 5%, respectively, of the Company’s revenues were generated from customers located outside the U.S. As of March 31, 2023 and December 31, 2022, $895 and $827, respectively, of the Company’s property and equipment assets were held outside the U.S.

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Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Use of Estimates

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses during the reporting period. Significant estimates used in preparing these condensed consolidated financial statements include: (i) the estimated allowance for subscription cancellations, (ii) expected credit losses associated with the allowance for doubtful accounts; (iii) allowance for credit losses on available-for-sale debt securities; (iv) the reserve for self-insurance, (v) assumptions related to achievement of technological feasibility for software developed for sale, (vi) product life cycles, (vii) estimated useful lives and potential impairment of long-lived assets and intangible assets, (viii) potential impairment of goodwill, (ix) determination of the fair value of tangible and intangible assets acquired, liabilities assumed and consideration transferred in acquisitions, (x) amortization period of material rights and deferred commissions (xi) Black-Scholes-Merton option pricing model (“Black-Scholes model”) input assumptions used to determine the fair value of certain stock-based compensation awards and Employee Stock Purchase Plan (“ESPP”) purchase rights (xii) measurement of future purchase commitment, contingent consideration liabilities and deferred purchase consideration liabilities associated with acquisitions, and (xiii) the potential outcome of future tax consequences of events that have been recognized in the condensed consolidated financial statements or tax returns. Actual results may differ from these estimates.

Supplemental Balance Sheet Disclosures

Supplemental balance sheet disclosures are as follows for the respective periods:

March 31,

December 31,

    

2023

2022

 

(unaudited)

Prepaid expenses and other current assets:

 

  

 

  

Prepaid expenses

$

9,244

$

5,875

Prepaid insurance

1,469

2,291

Prepaid licenses and support

11,823

12,217

Prepaid expenses and other current assets

$

22,536

$

20,383

Accrued expenses:

Accrued general expenses

$

17,599

$

18,485

Accrued contract labor and professional fees

14,579

17,421

Accrued income and other taxes

23,718

2,328

Accrued expenses

$

55,896

$

38,234

Recently Issued or Adopted Accounting Pronouncements

As an “emerging growth company,” the Jumpstart Our Business Startups 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.

Deferred Revenue

In October 2021, the Financial Accounting Standard Board issued ASU No. 2021-08, Business Combinations (“ASU 2021-08”). ASU 2021-08 provides specific guidance on how to recognize and measure contract assets and contract liabilities related to revenue contracts with customers acquired in a business combination. This will align the accounting for these acquired contracts to the accounting for revenue contracts originated by the acquirer and will provide more comparable information to investors and other financial statement users seeking to better understand the financial impact of these acquisitions. The Company adopted this standard effective January 1, 2023 on a prospective basis for business combinations occurring on or after this date. Although this standard does not have a material impact on the Company’s

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Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

current condensed consolidated financial statements, adoption could have a material impact on the accounting for future acquisitions reflected in the Company’s condensed consolidated financial statements.  

2.     REVENUE RECOGNITION

Disaggregation of revenue

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

Three months ended March 31, 

    

2023

    

2022

 

(unaudited)

Software subscriptions:

  

Software licenses

$

62,808

$

58,857

Cloud subscriptions

48,206

38,274

Software subscriptions

111,014

97,131

Services

 

21,737

 

17,853

Total revenues

$

132,751

$

114,984

Contract balances

Timing of revenue recognition may differ from the timing of invoicing customers. A receivable is recorded in the condensed 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 $10,641 and $9,554 at March 31, 2023 and December 31, 2022, respectively. The allowance for potentially uncollectible accounts 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 March 31, 2023

For the year ended December 31, 2022

(unaudited)

Balance, beginning of period

$

102,885

$

76,929

Balance, end of period

 

102,760

 

102,885

Increase (decrease), net

$

(125)

$

25,956

A contract liability is recorded as deferred revenue on the condensed 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 for subscription cancellations (the “deferred allowance”) of $7,516 and $7,133 at March 31, 2023 and December

11

Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

31, 2022, 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, 

2023

2022

Balance

    

Net Change

    

Balance

    

Net Change

(unaudited)

Allowance balance, January 1,

$

(9,554)

 

  

$

(9,151)

 

  

Allowance balance, March 31, 

 

(10,641)

 

  

 

(8,450)

 

  

Change in allowance

 

$

1,087

 

$

(701)

Deferred allowance balance, January 1,

 

7,133

 

  

 

6,537

 

  

Deferred allowance balance, March 31, 

 

7,516

 

  

 

6,098

 

  

Change in deferred allowance

 

 

(383)

 

 

439

Net amount charged to revenues

 

$

704

 

$

(262)

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, 

2023

2022

    

(unaudited)

    

Balances:

 

  

 

  

Deferred revenue, current

$

276,004

$

268,847

Deferred revenue, non-current

 

7,112

 

10,289

Total deferred revenue

$

283,116

$

279,136

For the three months ended March 31, 

2023

2022

(unaudited)

Changes to deferred revenue:

    

  

    

  

Beginning balance

$

279,136

$

249,010

Additional amounts deferred

 

136,731

 

111,689

Revenues recognized

 

(132,751)

 

(114,984)

Ending balance

$

283,116

$

245,715

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 condensed 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 condensed consolidated statements of comprehensive loss. The Company periodically reviews 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.

12

Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

The changes to contract cost balances as of and for the following periods are:

For the three months ended March 31, 

2023

2022

(unaudited)

Deferred commissions:

    

  

    

  

Beginning balance

$

15,463

$

12,555

Additions

 

2,851

 

1,750

Amortization

 

(2,393)

 

(2,626)

Ending balance

$

15,921

$

11,679

3.      FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the Company’s fair value for its financial assets and liabilities measured at fair value on a recurring basis:

Fair Value Measurements Using

As of March 31, 2023 (unaudited)

Fair Value

    

Prices in active markets for identical assets (Level 1)

    

Significant other observable inputs
(Level 2)

    

Significant unobservable inputs
(Level 3)

Money Market Funds

$

46,617

$

46,617

$

$

Commercial Paper

9,722

9,722

U.S. Treasury Securities

5,338

5,338

Tellutax Contingent Consideration

5,000

5,000

Foreign Currency Forward Contracts

817

817

Fair Value Measurements Using

As of December 31, 2022

Fair Value

    

Prices in active markets for identical assets (Level 1)

    

Significant other observable inputs
(Level 2)

    

Significant unobservable inputs
(Level 3)

Money Market Funds

$

67,430

$

67,430

$

$

Commercial Paper

9,660

9,660

U.S. Treasury Securities

5,203

5,203

Tellutax Contingent Consideration

4,800

4,800

Foreign Currency Forward Contracts

569

569

The Company has investments in high quality, short-term money market instruments which are issued and payable in U.S. dollars (“Money Market Funds”), which are included in cash and cash equivalents on the condensed consolidated balance sheets. Fair value inputs for these investments are considered Level 1 measurements within the fair value hierarchy since Money Market Fund fair values are known and observable through daily published floating net asset values. Securities classified as available-for-sale are reported at fair value using Level 2 inputs. The Company has investments in bank and corporate issued commercial paper (“Commercial Paper”), and U.S. treasury securities (“U.S. Treasury Securities”), the Company believes that Level 2 designation is appropriate under Accounting Standards Codification, (“ASC”) 820-10, Fair Value Measurements and Disclosures, as these securities are fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.

13

Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

In connection with the January 2021 Tellutax LLC (“Tellutax”) acquisition, the sellers are entitled to contingent consideration if sales targets are met during a period of time following the acquisition (the “Tellutax Contingent Consideration”).

The Tellutax Contingent Consideration is based on three potential earn-out payments determined by periodic revenue achievements over a thirty-month period. Such estimate represents a recurring fair value measurement with significant unobservable inputs, which management considers to be Level 3 measurements under the Fair Value Hierarchy. The significant assumptions used in these calculations included forecasted results and the estimated likelihood for each performance scenario. The fair value of Tellutax Contingent Consideration is estimated using a Monte Carlo Simulation to compute the expected cash flows from the payments specified in the purchase agreement. Such payments have no maximum limit, but if certain targets are not met, there will be no payment for the applicable measurement period.

A fair value adjustment of $200 and $700 was recorded in other operating expense, net for the three months ended March 31, 2023 and 2022, respectively. At March 31, 2023, the Tellutax Contingent Consideration of $3,400 and $1,600 is included in purchase commitment and contingent consideration liabilities, current, and purchase commitment and contingent consideration liabilities, net of current portion, respectively, in the condensed consolidated balance sheets. At December 31, 2022, the Tellutax Contingent Consideration of $1,400 and $3,400 is included in purchase commitment and contingent consideration liabilities, current, and purchase commitment and contingent consideration liabilities, net of current portion, respectively, in the condensed consolidated balance sheets.

Tellutax Contingent Consideration fair value as of March 31, 2023 and December 31, 2022 and unobservable inputs used for the Monte Carlo Simulation valuation were as follows:

March 31, 2023 (unaudited)

Liability

    

Fair Value

    

Valuation Technique

    

Unobservable Inputs

Tellutax Contingent Consideration

$

5,000

Monte Carlo Simulation

Revenue volatility

70.0

%

Revenue discount rate

22.1

%

Term (in years)

2.1

December 31, 2022

Liability

    

Fair Value

    

Valuation Technique

    

Unobservable Inputs

Tellutax Contingent Consideration

$

4,800

Monte Carlo Simulation

Revenue volatility

75.0

%

Revenue discount rate

22.4

%

Term (in years)

2.4

Changes in the fair value of Tellutax Contingent Consideration during the three months ended March 31, 2023 were as follows:

Tellutax

Contingent

Consideration

(unaudited)

Balance, January 1, 2023

$

4,800

Fair value adjustments

200

Balance, March 31, 2023

$

5,000

Assets and Liabilities for Which Fair Value is Only Disclosed

The carrying amounts of cash and cash equivalents and the carrying amount of funds held for customers were the same as their respective fair values and are considered Level 1 measurements.

The carrying amount of our bank debt approximates fair value as the variable rates on the debt approximate those commercially available in the market, and is considered a Level 3 measurement.

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Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Non-recurring Fair Value Measurements

The LCR-Dixon Corporation (“LCR-Dixon”) acquisition on September 22, 2021, the acquisition of EVAT Solutions Limited (“EVAT”) and its wholly owned subsidiaries (collectively, “Taxamo”) on May 12, 2021, the Tellutax acquisition on January 25, 2021, and the Systax acquisition on January 10, 2020, were accounted for as business combinations and the total purchase price for each acquisition was allocated to the net assets acquired and liabilities assumed based on their estimated fair values.

Deferred purchase consideration associated with the LCR-Dixon acquisition was $9,924 and $19,824 at March 31, 2023 and December 31, 2022, respectively.

The Company has a contractual commitment to acquire the remaining equity interest from the original Systax quotaholders incrementally through 2024. Future purchase commitment payments for these incremental acquisition amounts are based on a multiple of Systax revenue and earnings before interest, depreciation, amortization and income taxes (“EBITDA”) performance at the end of 2022 and 2023, whereby the Company will have full ownership after the final transaction in 2024. Management determined these future purchase commitments to be a forward contract, resulting in the Company being required to estimate and record an estimated future purchase commitment amount (the “Purchase Commitment Liability”) in connection with recording the initial purchase. The fair value of the Purchase Commitment Liability at the acquisition date was finalized to be $12,592. This amount will fluctuate as a result of changes in foreign currency exchange rates and is reflected in purchase commitment and contingent consideration liabilities in the condensed consolidated balance sheets, with such changes in exchange rates being reflected in other comprehensive loss or income in the condensed consolidated statements of comprehensive loss. Adjustments to the settlement date value that arise as a result of remeasurement at future balance sheet dates will be recorded as interest expense related to financing costs in the condensed consolidated statements of comprehensive income (loss) in the period the change is identified. No such adjustments