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, 2022

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 6, 2022, the registrant had 42,582,525 shares of Class A common stock, $0.001 par value per share, and 106,807,000 shares of Class B common stock, $0.001 par value per share, outstanding.

1

TABLE OF CONTENTS

		Page
	Part I - Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (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	51
Item 4.	Controls and Procedures	52
	Part II - Other Information	53
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
	Signatures	56

2

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 coronavirus disease 2019 (“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.

3

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, 2021 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.

4

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Vertex, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2022 and December 31, 2021

(Amounts in thousands, except per share data)

	March 31,		December 31,
	2022		2021
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	97,340	$	73,333
Funds held for customers		25,899		24,873
Accounts receivable, net of allowance of $8,450 and $9,151, respectively		75,807		76,929
Prepaid expenses and other current assets		21,513		20,536
Total current assets		220,559		195,671
Property and equipment, net of accumulated depreciation		102,228		98,390
Capitalized software, net of accumulated amortization		33,053		33,442
Goodwill and other intangible assets		272,633		272,702
Deferred commissions		11,679		12,555
Deferred income tax asset		34,554		35,298
Operating lease right-of-use assets		19,644		20,249
Other assets		3,158		1,900
Total assets	$	697,508	$	670,207
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	1,250	$	—
Accounts payable		14,578		13,000
Accrued expenses		27,286		22,966
Tax sharing agreement distributions payable		—		536
Customer funds obligations		24,507		23,461
Accrued salaries and benefits		13,992		16,671
Accrued variable compensation		9,917		26,462
Deferred compensation, current		4,202		4,202
Deferred revenue, current		235,236		237,344
Current portion of operating lease liabilities		4,145		3,933
Current portion of finance lease liabilities		286		284
Deferred purchase consideration, current		19,905		19,805
Purchase commitment and contingent consideration liabilities, current		1,258		468
Total current liabilities		356,562		369,132
Deferred compensation, net of current portion		2,056		1,963
Deferred revenue, net of current portion		10,479		11,666
Debt, net of current portion		48,554		—
Operating lease liabilities, net of current portion		23,360		24,320
Finance lease liabilities, net of current portion		68		68
Deferred purchase consideration, net of current portion		9,519		19,419
Purchase commitment and contingent consideration liabilities, net of current portion		12,152		10,829
Deferred other liabilities		1,927		2,726
Total liabilities		464,677		440,123
Commitments and contingencies (Note 12)
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; 42,561 and 42,286 shares issued and outstanding, respectively		42		42
Class B voting common stock, $0.001 par value, 150,000 shares authorized; 106,807 shares issued and outstanding		107		107
Additional paid in capital		227,751		222,621
Retained earnings		24,477		24,811
Accumulated other comprehensive loss		(19,546)		(17,497)
Total stockholders' equity		232,831		230,084
Total liabilities and stockholders' equity	$	697,508	$	670,207

5

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

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

For the three months ended March 31, 2022 and 2021

(Amounts in thousands, except per share data)

	Three Months Ended March 31,
	2022		2021
	(unaudited)
Revenues:
Software subscriptions	$	97,131	$	83,280
Services		17,853		14,956
Total revenues		114,984		98,236
Cost of revenues:
Software subscriptions		32,913		25,590
Services		11,953		11,343
Total cost of revenues		44,866		36,933
Gross profit		70,118		61,303
Operating expenses:
Research and development		9,633		11,459
Selling and marketing		27,452		20,150
General and administrative		28,757		24,852
Depreciation and amortization		2,960		2,827
Other operating expense (income), net		848		(129)
Total operating expenses		69,650		59,159
Income from operations		468		2,144
Interest (income) expense, net		(6)		535
Income before income taxes		474		1,609
Income tax expense (benefit)		808		(679)
Net (loss) income		(334)		2,288
Other comprehensive loss from foreign currency translation adjustments and revaluations, net of tax		2,049		977
Total comprehensive (loss) income	$	(2,383)	$	1,311
Net (loss) income attributable to Class A stockholders, basic	$	(95)	$	413
Net (loss) income per Class A share, basic	$	(0.00)	$	0.02
Weighted average Class A common stock, basic		42,349		26,458
Net (loss) income attributable to Class A stockholders, diluted	$	(95)	$	550
Net (loss) income per Class A share, diluted	$	(0.00)	$	0.01
Weighted average Class A common stock, diluted		42,349		38,003
Net (loss) income attributable to Class B stockholders, basic	$	(239)	$	1,875
Net (loss) income per Class B share, basic	$	(0.00)	$	0.02
Weighted average Class B common stock, basic		106,807		120,117
Net (loss) income attributable to Class B stockholders, diluted	$	(239)	$	1,738
Net (loss) income per Class B share, diluted	$	(0.00)	$	0.01
Weighted average Class B common stock, diluted		106,807		120,117

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

6

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2022 and 2021 (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, 2021	26,327	$	26	120,117	$	120	$	206,541	$	25,782	$	(3,127)	$	229,342
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, net	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	$	28,578	$	(4,104)	$	230,432
											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

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

7

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2022 and 2021

(Amounts in thousands)

	Three Months Ended March 31,
	2022		2021
	(unaudited)
Cash flows from operating activities:
Net (loss) income	$	(334)	$	2,288
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		12,906		8,816
Provision for subscription cancellations and non-renewals, net of deferred allowance		(279)		379
Amortization of deferred financing costs		53		53
Change in fair value of contingent consideration liability		700		—
Write-off of deferred financing costs		372		—
Stock-based compensation expense		4,933		6,543
Deferred income tax (benefit) provision		62		(615)
Non-cash operating lease costs		622		998
Other		412		(14)
Changes in operating assets and liabilities:
Accounts receivable		2,688		13,810
Prepaid expenses and other current assets		(1,091)		(13,437)
Deferred commissions		875		50
Accounts payable		1,555		2,258
Accrued expenses		3,806		(3,048)
Accrued and deferred compensation		(19,254)		(14,966)
Deferred revenue		(3,718)		(5,046)
Operating lease liabilities		(763)		(1,519)
Other		(950)		485
Net cash provided by (used in) operating activities		2,595		(2,965)
Cash flows from investing activities:
Acquisition of business, net of cash acquired		(474)		(6,100)
Property and equipment additions		(13,873)		(6,195)
Capitalized software additions		(2,912)		(2,221)
Net cash used in investing activities		(17,259)		(14,516)
Cash flows from financing activities:
Net increase (decrease) in customer funds obligations		1,046		(438)
Proceeds from term loan		50,000		—
Payments for deferred financing costs		(993)		—
Payments for taxes related to net share settlement of stock-based awards		(337)		(7,178)
Proceeds from exercise of stock options		600		147
Distributions under Tax Sharing Agreement		(536)		—
Payments of finance lease liabilities		—		(671)
Payments for deferred purchase commitments		(10,000)		—
Net cash provided by (used in) financing activities		39,780		(8,140)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(83)		(226)
Net increase (decrease) in cash, cash equivalents and restricted cash		25,033		(25,847)
Cash, cash equivalents and restricted cash, beginning of period		98,206		312,273
Cash, cash equivalents and restricted cash, end of period	$	123,239	$	286,426
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets, end of period:
Cash and cash equivalents	$	97,340	$	277,681
Restricted cash—funds held for customers		25,899		8,745
Total cash, cash equivalents and restricted cash, end of period	$	123,239	$	286,426

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

8

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% equity interest in Systax Sistemas Fiscais LTDA (“Systax”), a provider of Brazilian transaction tax content and software. Systax is considered a Variable Interest Entity given that the equity investors, as a group, lack the characteristics of a controlling financial interest. Vertex includes Systax in the condensed consolidated financial statements 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 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, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) filed with the SEC on March 16, 2022. The interim condensed consolidated balance sheet as of December 31, 2021 has been derived from audited financial statements included in the 2021 Annual Report. The accompanying interim condensed consolidated balance sheet as of March 31, 2022, the interim condensed consolidated statements of comprehensive (loss) income, changes in stockholders’ equity and cash flows for the three months ended March 31, 2022 and 2021 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, 2022 are not necessarily indicative of the results expected for the full year ending December 31, 2022.

Segments

The Company operates its business as one operating segment. For the three months ended March 31, 2022 and 2021, approximately 5% and 5%, respectively, of the Company’s revenues were generated from customers located outside the U.S. As of March 31, 2022 and December 31, 2021, $852 and $699, respectively, of the Company’s property and equipment assets were held outside of the U.S.

9

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

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 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 and intangible assets, (vii) potential impairment of goodwill, (viii) determination of the fair value of tangible and intangible assets acquired, liabilities assumed and consideration transferred in acquisitions, (ix) amortization period of material rights and deferred commissions (x) Black-Scholes-Merton option pricing model (“Black-Scholes model”) input assumptions used to determine the fair value of stock-based compensation awards, (xi) measurement of future purchase commitment, contingent consideration liabilities and deferred purchase consideration liabilities associated with acquisitions, and (xii) 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 customer 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 (loss) income.

10

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

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 three to five years and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive (loss) income. 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.

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 condensed consolidated statements of comprehensive (loss) income 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 condensed consolidated statements of comprehensive (loss) income 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^st, and whenever events or circumstances make it more likely than not that impairment may have occurred.

Deferred Financing Costs

The Company capitalizes costs related to obtaining, renewing or extending loan agreements and amortizes these costs on a straight-line basis, which approximates the effective interest method, over the life of the loan. Deferred financing costs related to term loans outstanding are reflected as a reduction of current portion of long-term debt and long-term debt net of current portion in the condensed consolidated balance sheets. Deferred financing costs related to undrawn debt are reflected in other assets in the condensed consolidated balance sheets.

11

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Stock-Based Compensation

The Company has stock awards issued under the 2020 Incentive Award Plan (the “2020 Plan”) and the 2020 Employee Stock Purchase Plan (the “ESPP”). The awards are subject to, and the Company applies, the guidance set forth in 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. 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 performance obligations are satisfied over 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. Prior to January 1, 2022, certain on-premise software subscription prices in the initial subscription year were 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. Effective January 1, 2022, the Company changed the pricing structure for on-premise software so the initial year price and renewal prices were consistent, thus removing the material right for transactions after this date. The material right for applicable transactions prior to this pricing change will continue to be recognized over the estimated period of benefit to the customer.

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.

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.

12

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

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 maintain, host and distribute software products, the direct cost to provide customer support, the direct cost to maintain tax content and depreciation and amortization of costs of capitalized software, acquired intangibles, and 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 (loss) income.

Income Taxes

Vertex accounts for income taxes using the asset and liability method. The Company recognizes deferred tax assets and liabilities for future tax consequences of events that have been previously recognized in the Company’s condensed consolidated financial statements and tax returns. The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The effects of future changes in tax laws or rates are not anticipated. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process whereby: (i) management determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (ii) for those tax positions that meet the more likely than not recognition threshold, management recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company records interest related to underpayment of income taxes as interest expense and penalties as other operating expenses in the condensed consolidated comprehensive statements of (loss) income.

The impact as a result of the application of ASC 740 is reflected in the condensed consolidated financial statements. The Company assesses its income tax positions and records tax benefits or expense based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. Variations in the actual outcome of these future tax consequences could materially impact the condensed consolidated financial statements.  The Company’s effective income tax rate is based on estimated income for the year, the estimated composition of the income/losses in different jurisdictions, and discrete adjustments in the applicable quarterly periods.  Potential discrete adjustments generally include tax charges or benefits related to stock-based compensation and changes in tax legislation, among other items.

13

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

The Company’s effective income tax rate was 171% and (42%) for the three months ended March 31, 2022, and 2021, respectively.  For the three months ended March 31, 2022, the effective income tax rate was higher than the US federal statutory rate primarily due to foreign losses benefited at lower rates, shortfall in tax benefits related to stock-based compensation, and limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m) (“Section 162(m)”).  For the three months ended March 31, 2021, the effective income tax rate was lower than the U.S. federal statutory rate primarily due to excess tax benefits related to stock-based compensation, offset by limitations on deductions of certain employees’ compensation under Section 162(m).

The Tax Cuts and Jobs Act of 2017 generally requires taxpayers to capitalize research and experimental expenditures effective for tax years beginning after December 31, 2021, and amortize the capitalized costs over a period of five or 15 years depending on where the research is conducted.  The latest versions of the proposed Build Back Better Act delay the effective date on which these expenditures are required to be capitalized. However, it is unclear if this act will pass in its current form or if any other legislation might be enacted to defer or repeal the effective date of capitalization.  If the capitalization requirement is not deferred or repealed, the Company expects the capitalization of research and experimental expenditures to increase its current U.S. federal and state income tax expense.

Supplemental Balance Sheet Disclosures

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

	As of March 31,		As of December 31,
	2022		2021
	(unaudited)
Prepaid expenses and other current assets:
Prepaid expenses	$	9,572	$	8,903
Prepaid insurance		2,070		3,348
Prepaid licenses and support		9,871		8,285
Prepaid expenses and other current assets	$	21,513	$	20,536
Accrued expenses:
Accrued general expenses	$	14,027	$	10,771
Accrued contract labor and professional fees		10,668		9,688
Accrued income and other taxes		2,591		2,507
Accrued expenses	$	27,286	$	22,966

Supplemental Cash Flow Disclosures

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

	For three months ended March 31,
	2022		2021
	(unaudited)
Cash paid for:
Interest	$	443	$	69
Income taxes, net of refunds	$	67	$	132
Operating cash flows from operating leases	$	1,066	$	1,320
Operating cash flows from finance leases	$	—	$	28
Non-cash investing and financing activities:
Purchase commitment and contingent consideration liabilities	$	700	$	2,200
Leased assets obtained in exchange for new finance lease liabilities	$	—	$	173

14

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Recently Issued 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 (“FASB”) issued Accounting Standards Update (“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. ASU 2021-08 will be effective for public entities with fiscal years beginning after December 15, 2022, and for all other entities with fiscal years beginning after December 15, 2023, with early adoption permitted. ASU 2021-08 will be applied prospectively to business combinations occurring on or after the applicable effective date. The Company is currently evaluating the impact this guidance will have on the Company’s condensed consolidated financial statements.

Risks and Uncertainties

In March 2020, the World Health Organization declared the outbreak of the cononavirus disease 2019 (“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, and our offices were closed, and remained closed through March 31, 2022, with employees directed to work from home. Although conferences and other marketing events were cancelled or shifted to virtual-only at the outset, some such events have started to shift to on-site and the Company has begun to participate in on-site events in addition to virtual, based on the event, through March 31, 2022.  The COVID-19 pandemic has impacted, and may continue to impact, Company operations, including employees, customers and partners, and there is substantial uncertainty regarding 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, 2022 as a result of COVID-19. The ongoing uncertainty caused by the COVID-19 pandemic could, however, impact Company billings to new customers for the remainder of 2022, 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 2022 as customers continue to 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.

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 ongoing 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, inflation 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.

15

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

2.     REVENUE RECOGNITION

See Note 1 – Summary of Significant Accounting Policies 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,
		2022	2021
	(unaudited)
Software subscriptions:
Software licenses	$	58,857	$	56,350
Cloud subscriptions		38,274		26,930
Software subscriptions		97,131		83,280
Services		17,853		14,956
Total revenues	$	114,984	$	98,236

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”) $8,450 and $9,151 at March 31, 2022 and December 31, 2021, 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, 2022		For the year ended December 31, 2021
	(unaudited)
Balance, beginning of period	$	76,929	$	77,159
Balance, end of period		75,807		76,929
Decrease, net	$	(1,122)	$	(230)

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 $6,098 and $6,537 at March 31, 2022 and December 31, 2021, respectively. The deferred allowance represents the portion of the allowance for subscription cancellations associated with deferred revenue.

16

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

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,
	2022				2021
	Balance			Net Change	Balance			Net Change
	(unaudited)
Allowance balance, January 1	$	(9,151)			$	(8,592)
Allowance balance, March 31		(8,450)				(8,059)
Change in allowance			$	(701)			$	(533)
Deferred allowance balance, January 1		6,537				6,432
Deferred allowance balance, March 31		6,098				5,515
Change in deferred allowance				439				917
Net amount charged to revenues			$	(262)			$	384

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,
	2022		2021
	(unaudited)
Balances:
Deferred revenue, current	$	235,236	$	237,344
Deferred revenue, non-current		10,479		11,666
Total deferred revenue	$	245,715	$	249,010

	For the three months ended March 31,
	2022		2021
	(unaudited)
Changes to deferred revenue:
Beginning balance	$	249,010	$	222,262
Additional amounts deferred		111,689		94,107
Revenues recognized		(114,984)		(98,236)
Ending balance	$	245,715	$	218,133

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) income. 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.

17

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

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,
	2022		2021
	(unaudited)
Changes to deferred commissions:
Beginning balance	$	12,555	$	11,743
Additions		1,750		2,058
Amortization		(2,626)		(2,108)
Ending balance	$	11,679	$	11,693

3.    BUSINESS COMBINATIONS

LCR-Dixon

On September 22, 2021, the Company executed a stock purchase agreement with LCR-Dixon Corporation (“LCR-Dixon”), a provider of SAP technologies and tax intelligence solutions. LCR-Dixon’s solutions were specifically developed to improve functionality and performance for SAP indirect tax processes and are integrated with the Company’s tax determination software. The LCR-Dixon acquisition was accounted for as a business combination. The Company’s accounting for the LCR-Dixon acquisition is preliminary.

The preliminary purchase price was $99,218 as of the acquisition date consisting of (i) $59,720 of cash paid at closing, partially offset by $1,899 of LCR-Dixon cash received in the acquisition, resulting in net cash consideration at closing of $57,821, (ii) $474 cash paid related to the final determination of LCR-Dixon’s cash and net working capital as of the acquisition date (the “Post-closing Adjustment”) and (iii) non-interest bearing deferred payments aggregating $40,000 to be paid in four equal installments of $10,000 every six-months beginning March 2022 and ending September 2023, net of a discount of $976 (the “deferred purchase consideration”). Cash consideration was funded from available cash on hand. The discount recorded as a reduction of the deferred purchase consideration will be recorded as interest expense over the payment period using the effective interest method. The deferred purchase consideration, net of discount, is included in current liabilities and long-term liabilities in the condensed consolidated balance sheets at (i) $19,905 and $9,519, respectively, at March 31, 2022, and (ii) $19,805 and $19,419, respectively, at December 31, 2021.

The Post-closing Adjustment payment of $474 was made to the LCR-Dixon sellers in January 2022 based on the final determination of LCR-Dixon’s cash and net working capital as of the acquisition date. The following table summarizes the preliminary purchase price, including the Post-closing Adjustment, for LCR-Dixon:

	As of Acquisition Date
Cash paid at closing	$	59,720
Cash paid for Post-closing adjustment		474
Fair value of deferred purchase consideration		39,024
Total	$	99,218

The 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 preliminary excess of purchase consideration over the net assets acquired is recorded as goodwill, which primarily reflects the existence of intangible assets not recognized under U.S. GAAP such as the value of expected future synergies, the value of the assembled workforce and other market factors. The Company expects that goodwill associated with the LCR-Dixon acquisition will not 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.

18

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

The Company does not have a preliminary estimate of identifiable intangible assets as of the acquisition date. A third-party expert has been engaged to assist in the valuation of identifiable intangible assets and deferred payments as part of the acquisition. Any subsequent adjustments to the preliminary values not associated with determination of their fair values on the acquisition date will be recorded in the condensed consolidated statements of comprehensive (loss) income in the period in which the adjustment is identified.

The Company and LCR-Dixon had a pre-existing relationship in the form of a royalty agreement at the acquisition date. The Company owed LCR-Dixon royalties in connection with licenses sold by the Company to end users when collected by the Company from end users (the “Royalty Agreement”). The Royalty Agreement terminated upon consummation of the acquisition and the Company wrote-off $252 of royalties payable to LCR-Dixon with an offset to goodwill. The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as recorded in the Company’s condensed consolidated balance sheet as of the acquisition date:

	As of Acquisition Date
Cash and cash equivalents	$	1,899
Accounts receivable		1,437
Prepaid expenses and other current assets		326
Property and equipment		4
Goodwill		97,442
Accounts payable		(19)
Accrued expenses		(306)
Accrued compensation		(1,746)
Deferred revenue		(71)
Total	$	98,966

The Company has included the financial results of LCR-Dixon in the condensed consolidated statement of comprehensive (loss) income from the date of acquisition. The transaction costs associated with the acquisition were not significant.

4.      FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company has investments in money market accounts, 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 account fair values are known and observable through daily published floating net asset values.

19

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)