10-Q 1 verx-20240331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

    

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

For the quarterly period ended March 31, 2024

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 3, 2024, the registrant had 64,952,704 shares of Class A common stock, $0.001 par value per share, and 90,161,000 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, 2024 (unaudited) and December 31, 2023

5

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2024 and 2023 (unaudited)

6

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2024 and 2023 (unaudited)

7

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (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

48

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

50

Signatures

51

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:

our ability to maintain and grow revenue from existing customers and new customers, and expand their usage of our solutions;
our ability to maintain and expand our strategic relationships with third parties;
our ability to adapt to technological change and successfully introduce new solutions or provide updates to existing solutions;
risks related to failures in information technology or infrastructure;
challenges in using and managing use of Artificial Intelligence in our business;
incorrect or improper implementation, integration or use of our solutions;
failure to attract and retain qualified technical and tax-content personnel;
competitive pressures from other tax software and service providers and challenges of convincing businesses using native enterprise resource planning (“ERP”) functions to switch to our software;
our ability to accurately forecast our revenue and other future results of operations based on recent success;
our ability to offer specific software deployment methods based on changes to customers’ and partners’ software systems;
our ability to continue making significant investments in software development and equipment;
our ability to sustain and expand revenues, maintain profitability, and to effectively manage our anticipated growth;
our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content;
risks related to the fluctuations in our results of operations;
risks related to our expanding international operations;
our exposure to liability from errors, delays, fraud or system failures, which may not be covered by insurance;
our ability to adapt to organizational changes and effectively implement strategic initiatives;
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;
our involvement in material legal proceedings and audits;

3

risks related to undetected errors, bugs or defects in our software;
risks related to utilization of open-source software, business processes and information systems;
risks related to failures in information technology, infrastructure, and third-party service providers;
our ability to effectively protect, maintain, and enhance our brand;
changes in application, scope, interpretation or enforcement of laws and regulations;
global economic weakness and uncertainties, and disruption in the capital and credit markets;
business disruptions related to natural disasters, epidemic outbreaks, including a global endemic or pandemic, terrorist acts, political events, or other events outside of our control;
our ability to comply with anti-corruption, anti-bribery, and similar laws;
our ability to protect our intellectual property;
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;
our ability to maintain an effective system of disclosure controls and internal control over financial reporting, or ability to remediate any material weakness in our internal controls;
risks related to our Class A common stock and controlled company status;
risks related to our indebtedness and adherence to the covenants under our debt instruments;
our expectations regarding the effects of the Capped Call Transactions (as defined below) and regarding actions of the Option Counterparties (as defined below) and/or their respective affiliates;
any statements of belief and any statements of assumptions underlying any of the foregoing; and
other factors beyond our control.

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, 2023, filed with the Securities and Exchange Commission (the “SEC”) on February 29, 2024 (the “2023 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

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Vertex, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2024 and December 31, 2023

(Amounts in thousands, except per share data)

March 31, 

    

December 31, 

2024

2023

    

(unaudited)

    

Assets

Current assets:

 

  

 

Cash and cash equivalents

$

56,134

$

68,175

Funds held for customers

 

36,546

 

20,976

Accounts receivable, net of allowance of $20,241 and $16,272, respectively

 

133,149

 

141,752

Prepaid expenses and other current assets

 

31,906

 

26,173

Investment securities available-for-sale, at fair value (amortized cost of $9,123 and $9,550, respectively)

9,101

9,545

Total current assets

 

266,836

 

266,621

Property and equipment, net of accumulated depreciation

 

100,594

 

100,734

Capitalized software, net of accumulated amortization

 

38,532

 

38,771

Goodwill and other intangible assets

 

255,681

 

260,238

Deferred commissions

 

21,301

 

21,237

Deferred income tax asset

44,311

41,708

Operating lease right-of-use assets

13,773

14,605

Other assets

 

14,774

 

16,013

Total assets

$

755,802

$

759,927

Liabilities and Stockholders' Equity

 

 

Current liabilities:

 

  

 

  

Current portion of long-term debt

$

2,500

$

2,500

Accounts payable

22,431

23,596

Accrued expenses

 

36,754

 

44,735

Customer funds obligations

 

33,670

 

17,731

Accrued salaries and benefits

 

18,659

 

12,277

Accrued variable compensation

 

14,562

 

34,105

Deferred revenue, current

 

296,845

 

290,143

Current portion of operating lease liabilities

3,633

3,717

Current portion of finance lease liabilities

60

74

Purchase commitment and contingent consideration liabilities, current

 

13,390

 

11,901

Total current liabilities

 

442,504

 

440,779

Deferred revenue, net of current portion

 

4,146

 

2,577

Debt, net of current portion

43,458

44,059

Operating lease liabilities, net of current portion

15,523

16,567

Finance lease liabilities, net of current portion

41

51

Purchase commitment and contingent consideration liabilities, net of current portion

 

 

2,600

Deferred other liabilities

 

 

313

Total liabilities

 

505,672

 

506,946

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; 62,316 and 60,989 shares issued and outstanding, respectively

62

61

Class B voting common stock, $0.001 par value, 150,000 shares authorized; 92,661 and 92,661 shares issued and outstanding, respectively

93

93

Additional paid in capital

273,647

275,155

Retained earnings (Accumulated deficit)

 

2,098

 

(586)

Accumulated other comprehensive loss

 

(25,770)

 

(21,742)

Total stockholders' equity

 

250,130

 

252,981

Total liabilities and stockholders' equity

$

755,802

$

759,927

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

5

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three months ended March 31, 2024 and 2023 (unaudited)

(Amounts in thousands, except per share data)

Three months ended March 31, 

2024

2023

(unaudited)

Revenues:

    

Software subscriptions

$

131,830

$

111,014

Services

24,951

21,737

Total revenues

156,781

 

132,751

Cost of revenues:

Software subscriptions

45,128

37,403

Services

15,861

14,344

Total cost of revenues

60,989

 

51,747

Gross profit

95,792

 

81,004

Operating expenses:

Research and development

16,845

15,862

Selling and marketing

40,491

35,736

General and administrative

35,542

34,310

Depreciation and amortization

5,006

3,741

Other operating expense (income), net

(527)

284

Total operating expenses

97,357

 

89,933

Loss from operations

(1,565)

 

(8,929)

Interest expense (income), net

286

(350)

Loss before income taxes

(1,851)

 

(8,579)

Income tax (benefit) expense

(4,535)

9,553

Net income (loss)

2,684

 

(18,132)

Other comprehensive (income) loss:

Foreign currency translation adjustments, net of tax

4,011

(3,122)

Unrealized (gain) loss on investments, net of tax

17

(13)

Total other comprehensive (income) loss, net of tax

4,028

(3,135)

Total comprehensive loss

$

(1,344)

$

(14,997)

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

$

1,071

$

(6,072)

Net income (loss) per Class A share, basic

$

0.02

$

(0.12)

Weighted average Class A common stock, basic

 

61,560

 

50,456

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

$

1,135

$

(6,072)

Net income (loss) per Class A share, diluted

$

0.02

$

(0.12)

Weighted average Class A common stock, diluted

 

67,921

 

50,456

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

$

1,613

$

(12,060)

Net income (loss) per Class B share, basic

$

0.02

$

(0.12)

Weighted average Class B common stock, basic

 

92,661

 

100,221

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

$

1,549

$

(12,060)

Net income (loss) per Class B share, diluted

$

0.02

$

(0.12)

Weighted average Class B common stock, diluted

92,661

100,221

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, 2024 and 2023 (unaudited)

(Amounts in thousands)

Retained

Accumulated

Outstanding

Class A

Outstanding

Class B

Additional

  

Earnings

  

Other 

  

Total

Class A

Common

Class B

Common

Paid In

(Accumulated

Comprehensive 

Stockholders'

  

  

Shares

  

 Stock

  

Shares

  

Stock

  

Capital

  

Deficit)

  

Loss

  

Equity

Balance, January 1, 2024

60,989

$

61

92,661

$

93

$

275,155

$

(586)

$

(21,742)

$

252,981

Exercise of stock options, net

653

(5,454)

(5,454)

Shares issued upon vesting of Restricted Stock Units, net

674

1

(10,899)

(10,898)

Stock-based compensation expense

14,845

14,845

Foreign currency translation adjustments and revaluations, net of tax

(4,011)

(4,011)

Unrealized loss from available-for-sale investments

(17)

(17)

Net income

2,684

2,684

Balance, March 31, 2024

62,316

$

62

92,661

$

93

$

273,647

$

2,098

$

(25,770)

$

250,130

Retained

Accumulated

Outstanding

Class A

Outstanding

Class B

Additional

  

Earnings

  

Other 

  

Total

Class A

Common

Class B

Common

Paid In

(Accumulated

Comprehensive 

Stockholders'

Shares

  

 Stock

  

Shares

  

Stock

  

Capital

  

Deficit)

  

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

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.

7

Vertex, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2024 and 2023 (unaudited)

(Amounts in thousands)

Three months ended March 31, 

    

2024

    

2023

(unaudited)

Cash flows from operating activities:

 

  

 

Net income (loss)

$

2,684

$

(18,132)

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

 

 

  

Depreciation and amortization

 

20,948

 

16,942

Amortization of cloud computing implementation costs

994

Provision for subscription cancellations and non-renewals

 

1,082

 

697

Amortization of deferred financing costs

 

146

 

63

Change in fair value of contingent consideration liabilities

(800)

200

Stock-based compensation expense

 

16,324

 

11,434

Deferred income tax benefit

(2,588)

(12,984)

Non-cash operating lease costs

828

726

Other

 

(106)

 

(4)

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

4,478

 

(795)

Prepaid expenses and other current assets

 

(7,335)

 

(3,740)

Deferred commissions

 

(64)

 

(459)

Accounts payable

 

(1,153)

 

3,065

Accrued expenses

 

(8,486)

 

17,578

Accrued and deferred compensation

 

(14,515)

 

(12,452)

Deferred revenue

 

11,177

 

4,352

Operating lease liabilities

(1,125)

(1,309)

Other

 

2,077

 

(1,691)

Net cash provided by operating activities

 

24,566

 

3,491

Cash flows from investing activities:

 

  

 

  

Property and equipment additions

 

(14,449)

 

(10,049)

Capitalized software additions

 

(5,615)

 

(4,007)

Purchase of investment securities, available-for-sale

(4,271)

(3,491)

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

4,800

3,250

Net cash used in investing activities

 

(19,535)

 

(14,297)

Cash flows from financing activities:

 

  

 

  

Net increase in customer funds obligations

 

15,939

 

10,989

Principal payments on long-term debt

 

(625)

 

(313)

Payments for deferred financing costs

 

(89)

 

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

(17,862)

(3,681)

Proceeds from exercise of stock options

 

1,510

 

1,490

Payments of finance lease liabilities

(26)

(16)

Payments for deferred purchase commitments

(10,000)

Net cash used in financing activities

 

(1,153)

 

(1,531)

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

 

(349)

 

204

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

3,529

(12,133)

Cash, cash equivalents and restricted cash, beginning of period

 

89,151

 

106,748

Cash, cash equivalents and restricted cash, end of period

$

92,680

$

94,615

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

 

  

 

  

Cash and cash equivalents

$

56,134

$

68,643

Restricted cash—funds held for customers

 

36,546

 

25,972

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

$

92,680

$

94,615

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

8

Table of Contents

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 that 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 an 80% 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 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, 2023 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”) filed with the SEC on February 29, 2024. The condensed consolidated balance sheet as of December 31, 2023 has been derived from audited financial statements included in the 2023 Annual Report. The accompanying interim condensed consolidated balance sheet as of March 31, 2024, the interim condensed consolidated statements of comprehensive income (loss) and changes in stockholders’ equity for the three months ended March 31, 2024 and 2023, and the interim condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 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, 2024 are not necessarily indicative of the results expected for the full year ending December 31, 2024.

Segments

The Company operates its business as one operating segment. For both the three months ended March 31, 2024 and March 31, 2023, approximately 7% of the Company’s revenues were generated from customers located outside the U.S.  As of March 31, 2024 and December 31, 2023, $527 and $633, respectively, of the Company’s property and equipment assets were held outside the U.S.

9

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, intangible assets, and capitalized cloud computing arrangement (“CCA”) software implementation costs; (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 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.

Software Development Costs

Cloud Computing Software Implementation Costs

The Company follows Accounting Standards Codification (“ASC”) 350-40, Goodwill and Other, Internal-Use Software, to account for development costs incurred for cloud computing software implementations. ASC 350-40 requires such costs to be capitalized once certain criteria are met. Costs are primarily comprised of third-party consulting fees, direct labor, and related expenses. ASC 350-40 includes specific guidance on costs not to be capitalized, such as overhead, general and administrative and training costs. Costs are capitalized once the project is defined, funding is committed, and it is confirmed the software will be used for its intended use. Capitalization of these costs concludes once the project is substantially complete and the software is ready for its intended purpose. Post-configuration training and maintenance costs are expensed as incurred.

Cloud computing software implementation costs incurred in hosting arrangements are capitalized and reported as a component of prepaid expenses and other current assets, or other assets, once available for their intended use. These costs are amortized using the straight-line method over their respective contract service periods, including periods covered by an option to extend, ranging from two to five years.

Amortization expense for capitalized cloud computing implementation costs for the three months ended March 31, 2024 was $994 and is included in general and administrative expense in the condensed consolidated statements of comprehensive income (loss). There was no amortization expense for the three months ended March 31, 2023.

10

Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

Supplemental Balance Sheet Disclosures

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

As of March 31, 

As of December 31,

    

2024

2023

 

(unaudited)

Prepaid expenses and other current assets:

 

  

 

  

Prepaid expenses

$

12,694

$

11,558

Unamortized cloud computing implementation costs

3,995

3,995

Prepaid insurance

1,002

521

Prepaid licenses and support

14,215

10,099

Prepaid expenses and other current assets

$

31,906

$

26,173

Other assets:

 

 

Unamortized cloud computing implementation costs

$

11,480

$

12,475

Other assets

3,294

3,538

Total other assets

$

14,774

$

16,013

Accrued expenses:

Accrued general expenses

$

17,362

$

25,998

Accrued contract labor and professional fees

13,914

13,372

Accrued income and other taxes

5,478

5,365

Accrued expenses

$

36,754

$

44,735

Recently Issued or Adopted Accounting Pronouncements

Segment Reporting

In November 2023, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in ASU 2023-07 improve reportable segment disclosure requirements through enhanced disclosures. These new requirements include: disclosure of significant segment expenses regularly provided to the CODM, the title and position of the CODM, and the extension of certain annual disclosures to interim periods, permitting the disclosure of multiple measures of segment profit or loss, provided that certain criteria are met. The standard also clarifies that entities with a single reportable segment are subject to new and existing segment reporting requirements. The standard will be effective for annual periods in fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Entities must adopt the changes to the segment reporting guidance on a retrospective basis. The Company is continuing to assess the potential impacts of the amendments, and it does not expect this pronouncement to have a material effect on its consolidated financial statements, other than the required changes to the segment disclosures.

Income Tax Disclosures

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires entities to disclose additional information in specified categories in the reconciliation of the effective tax rate to the statutory rate for federal, state, and foreign income taxes. ASU 2023-09 also requires greater detail about individual reconciling items in the rate reconciliation to the extent the impact of those items exceeds a specified threshold and eliminates certain existing disclosures. In addition to new disclosures associated with the rate reconciliation, the standard requires information pertaining to taxes paid (net of refunds received) to be disaggregated for federal, state, and foreign taxes and further disaggregated for specific jurisdictions to the extent the related amounts exceed a quantitative threshold. The standard will be effective for annual periods in fiscal years beginning after December 15, 2024, and for

11

Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

interim periods for fiscal years beginning after December 15, 2025. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively, and early adoption is permitted. The Company is continuing to assess the potential impacts of the standard, and it does not expect this pronouncement to have a material effect on its financial statements, other than the required changes to the income tax disclosures.

2.     REVENUE RECOGNITION

Disaggregation of revenue

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

Three months ended March 31, 

    

2024

    

2023

 

(unaudited)

Software subscriptions:

  

Software licenses

$

69,994

$

62,808

Cloud subscriptions

61,836

48,206

Software subscriptions

131,830

111,014

Services

 

24,951

 

21,737

Total revenues

$

156,781

$

132,751

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 $20,241 and $16,272 at March 31, 2024 and December 31, 2023, 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, 2024

For the year ended December 31, 2023

(unaudited)

Balance, beginning of period

$

141,752

$

102,885

Balance, end of period

 

133,149

 

141,752

Increase (decrease), net

$

(8,603)

$

38,867

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. Deferred revenue is reflected net of a related deferred allowance for subscription cancellations (the

12

Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

“deferred allowance”) of $14,634 and $11,741 at March 31, 2024 and December 31, 2023, 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, 

2024

2023

Balance

    

Net Change

    

Balance

    

Net Change

(unaudited)

Allowance balance, January 1,

$

(16,272)

 

  

$

(9,554)

 

  

Allowance balance, March 31, 

 

(20,241)

 

  

 

(10,641)

 

  

Change in allowance

 

$

3,969

 

$

1,087

Deferred allowance balance, January 1,

 

11,741

 

  

 

7,133

 

  

Deferred allowance balance, March 31, 

 

14,634

 

  

 

7,516

 

  

Change in deferred allowance

 

 

(2,893)

 

 

(383)

Net amount charged to revenues

 

$

1,076

 

$

704

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 following table provides information about the balances of and changes to deferred revenue for the following periods:

For the three months ended March 31, 

2024

2023

(unaudited)

Changes to deferred revenue:

    

  

    

  

Beginning balance

$

292,720

$

279,136

Additional amounts deferred

 

165,052

 

136,731

Revenues recognized

 

(156,781)

 

(132,751)

Ending balance

$

300,991

$

283,116

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 income (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.

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

For the three months ended March 31, 

2024

2023

(unaudited)

Deferred commissions:

    

  

    

  

Beginning balance

$

21,237

$

15,463

Additions

 

3,984

 

2,851

Amortization

 

(3,920)

 

(2,393)

Ending balance

$

21,301

$

15,921

13

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Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

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, 2024 (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

$

42,763

$

42,763

Commercial Paper

6,158

6,158

U.S. Treasury Securities

4,430

4,430

Tellutax Contingent Consideration

4,100

4,100

Foreign Currency Forward Contracts

677

677

Fair Value Measurements Using

As of December 31, 2023

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

$

53,049

$

53,049

$

$

Commercial Paper

7,168

7,168

U.S. Treasury Securities

3,621

3,621

Tellutax Contingent Consideration

4,900

4,900

Foreign Currency Forward Contracts

849

849

The Company has investments in high quality, short-term money market instruments, which are issued and payable in U.S. dollars (“Money Market Funds”) and 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 for Commercial Paper and U.S. Treasury Securities under 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.

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.

14

Table of Contents

Vertex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited) continued

(Amounts in thousands, except per share data)

A fair value adjustment of $(800) was recorded in other operating expense (income), net for the three months ended March 31, 2024. A fair value adjustment of $200 was recorded in other operating expense (income), net for the three months ended March 31, 2023. At March 31, 2024, the Tellutax Contingent Consideration of $4,100 is included in purchase commitment and contingent consideration liabilities, current in the condensed consolidated balance sheets. At December 31, 2023, the Tellutax Contingent Consideration of $2,300 and $2,600 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.

Tellutax Contingent Consideration fair value as of March 31, 2024 and December 31, 2023 and unobservable inputs used for the Monte Carlo Simulation valuation were as follows:

March 31, 2024 (unaudited)

Liability

    

Fair Value

    

Valuation Technique

    

Unobservable Inputs

Tellutax Contingent Consideration

$

4,100

Monte Carlo Simulation

Revenue volatility

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