Vertex, Inc. 10-K

Item 9A. Controls and Procedures Limitations on Effectiveness of Controls and Procedures In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect that there are resource constraints and that management is required to apply judgement in evaluating the benefits of possible controls and procedures relative to their costs. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures. Solely as a result of the material weakness described below, our principal executive officer and principal financial officer concluded that, as of December 31, 2020, our disclosure controls and procedures were not effective. We have performed additional analyses, reconciliations, and other post-closing procedures and have concluded that, notwithstanding the material weakness in our internal control over financial reporting, the audited consolidated financial statements for the periods covered by and included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. Description of Material Weakness As previously disclosed in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2020 and September 30, 2020, we identified a material weakness in our internal control over financial reporting during the two-year period ended December 31, 2019 due to an insufficient process for the provision and governance of user access to financially significant systems that resulted in a lack of segregation of duties related to journal entries and cash disbursements. A material weakness is a control deficiency, or combination of control deficiencies, that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Our management, with oversight from our Audit Committee, is in the process of remediating this material weakness. During 2020, we implemented changes to our user access governance practices to prevent individuals from having the ability to create and post journal entries or create a vendor and prepare checks, and we believe these measures have addressed the lack of segregation of duties related to cash disbursements. To date, we have also implemented changes to our user access governance practices to prevent individuals from having the ability to create and post journal entries and have implemented a periodic review cycle for user access. However, this material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Remediation of Previously Reported Material Weaknesses We previously identified two other material weaknesses in our internal control over financial reporting during the two-year period ended December 31, 2019 due to (i) the lack of an effective review control over the completeness and accuracy of significant conclusions regarding the impact of the new revenue recognition guidance prescribed by ASC 606 and (ii) incorrect applications of software capitalization models and untimely identification of impairments of capitalized software development costs. These material weaknesses resulted in errors that were not timely identified in conjunction with the issuance of our financial statements as of and for the years ended December 31, 2018 and 2019. These errors led to adjustments reflected in our 2019 and 2018 audited consolidated financial statements. We evaluated these errors under both quantitative and qualitative standards. 60 Table of Contents Due to the action taken by the Company to implement new controls and procedures, management has concluded that the material weaknesses related to revenue recognition and capitalized software development costs were remediated as of December 31, 2020. To remediate these material weaknesses, we: ● implemented additional and more precise review controls over revenue recognition; ● instituted additional and more precise review controls over implementation of new accounting pronouncements, particularly where management seeks input from outside consultants with respect to implementation of those accounting pronouncements that are complex; ● increased the education and training available to our management regarding new and revised accounting standards, including ASC 606; and ● instituted a control in which senior members of our finance, accounting, technology and product teams meet quarterly and review all new software projects, existing software assets that have changes in projected use and/or pipeline, and business and market conditions that could affect classification or impairment of capitalized software development costs. Exemption from Management’s Report on Internal Control Over Financial Reporting This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. ​ ​ Item 9B. Other Information None. ​ 61 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2020. ​ Item 11. Executive Compensation The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2020 . ​ Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2020 . ​ Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2020. ​ Item 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2020. ​ ​ 62 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as part of the Annual Report on Form 10-K: (1) Consolidated Financial Statements The financial statements filed as part of this Annual Report on Form 10-K are listed in the “Index to Consolidated Financial Statements” beginning on page F-1 of this Annual Report on Form 10-K. (2) Financial Statement Schedules All schedules are omitted because the information required to be set forth therein is not applicable or is presented in the consolidated financial statements or notes thereto beginning on page F-1 of this Annual Report on Form 10-K. (3) Exhibits The documents listed in the Index to Exhibits beginning on page E-1 of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). ​ Item 16. Form 10- K Summary None. ​ ​ 63 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ​ ​ Vertex, Inc. ​ ​ ​ Date: March 15, 2021 ​ By: /s/ DAVID DESTEFANO ​ ​ ​ David DeStefano ​ ​ ​ President, Chief Executive Officer and Chairperson ​ Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date /s/ DAVID DESTEFANO ​ President, Chief Executive Officer and Chairperson ​ ​ David DeStefano ​ (Principal Executive Officer) ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ JOHN SCHWAB ​ Chief Financial Officer ​ ​ John Schwab ​ (Principal Financial Officer) ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ LISA BUTLER ​ Chief Accounting Officer ​ ​ Lisa Butler ​ (Principal Accounting Officer) ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ ERIC ANDERSEN ​ ​ ​ ​ Eric Andersen ​ Director ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ TERRENCE KYLE ​ ​ ​ ​ Terrence Kyle ​ Director ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ KEVIN ROBERT ​ ​ ​ ​ Kevin Robert ​ Director ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ J. RICHARD STAMM ​ ​ ​ ​ J. Richard Stamm ​ Director ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ AMANDA WESTPHAL RADCLIFFE ​ ​ ​ ​ Amanda Westphal Radcliffe ​ Director ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ STEFANIE WESTPHAL THOMPSON ​ ​ ​ ​ Stefanie Westphal Thompson ​ Director ​ March 15, 2021 ​ ​ ​ ​ ​ /s/ JEFFREY WESTPHAL ​ ​ ​ ​ Jeffrey Westphal ​ Director ​ March 15, 2021 ​ ​ 64 Table of Contents INDEX TO EXHIBITS The following exhibits are filed as part of this Annual Report on Form 10-K. Exhibit Number ​ Exhibit Description ​ Form ​ File No. ​ Exhibit Filing Date Filed Herewith Furnished Herewith ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 3.1 ​ Form of Amended and Restated Certificate of Incorporation of Vertex, Inc. ​ S-1/A ​ a2242082zex-3_1 ​ 3.1 ​ 07/20/20 ​ ​ ​ ​ 3.2 ​ Form of Amended and Restated Bylaws of Vertex, Inc. ​ S-1/A ​ a2242082zex-3_1 ​ 3.2 ​ 07/20/20 ​ ​ ​ ​ 4.1 ​ Specimen Stock Certificate evidencing the shares of Class A common stock. ​ S-1/A ​ a2242119zex-4_1 ​ 4.1 ​ 07/24/20 ​ ​ ​ ​ 4.2 ​ Form of Third Amended and Restated Stockholders' Agreement. ​ S-1/A ​ a2242119zex-4_1 ​ 4.2 ​ 07/24/20 ​ ​ ​ ​ 4.3 ​ Description of Capital Stock ​ ​ ​ ​ ​ ​ ​ ​ ​ X ​ ​ 5.1 ​ Opinion of Latham & Watkins LLP. ​ S-1/A ​ a2242082zex-3_1 ​ 5.1 ​ 07/20/20 ​ ​ ​ ​ 10.1 ​ Credit Agreement by and among Vertex, Inc., the guarantors party thereto, PNC Bank, National Association, and the lenders party thereto, dated as of March 31, 2020. ​ S-1 ​ a2241987zs-1 ​ 10.1 ​ 07/02/20 ​ ​ ​ ​ 10.2 ​ First Amendment to Loan Documents, by and among Vertex, Inc., the guarantors party thereto, the lenders party thereto and PNC Bank, National Association, dated as of April 3, 2020. ​ S-1 ​ a2241987zs-1 ​ 10.2 ​ 07/02/20 ​ ​ ​ ​ 10.3# ​ Form of Indemnification Agreement between Vertex, Inc. and each of its Executive Officers and Directors. ​ S-1/A ​ a2242082zex-3_1 ​ 10.3 ​ 07/20/20 ​ ​ ​ ​ 10.4 ​ 2007 Stock Appreciation Plan . ​ S-1 ​ a2241987zs-1 ​ 10.4 ​ 07/02/20 ​ ​ ​ ​ 10.5# ​ Form of Executive Employment Agreement, as amended and restated, by and between Vertex, Inc. and Lisa Butler. ​ S-1/A ​ a2242082zex-3_1 ​ 10.5 ​ 07/20/20 ​ ​ ​ ​ 10.6# ​ Executive Employment Agreement, as amended and restated, by and between Vertex, Inc. and David DeStefano. ​ S-1/A ​ a2242082zex-3_1 ​ 10.6 ​ 07/20/20 ​ ​ ​ ​ 10.7# ​ Form of Executive Employment Agreement, as amended and restated, by and between Vertex, Inc. and Bryan Rowland. ​ S-1/A ​ a2242082zex-3_1 ​ 10.7 ​ 07/20/20 ​ ​ ​ ​ 10.8# ​ Form of Executive Employment Agreement, as amended and restated, by and between Vertex, Inc. and John Schwab. ​ S-1/A ​ a2242082zex-3_1 ​ 10.8 ​ 07/20/20 ​ ​ ​ ​ 10.9 ​ Form of S Corporation Termination and Tax Sharing Agreement. ​ S-1/A ​ a2242082zex-3_1 ​ 10.9 ​ 07/20/20 ​ ​ ​ ​ 10.10# ​ Vertex Inc. & Subsidiaries 2010 Long-Term Rewards Plan . ​ S-1/A ​ a2242082zex-3_1 ​ 10.10 ​ 07/20/20 ​ ​ ​ ​ 10.11# ​ Vertex Inc. & Subsidiaries 2018 Long-Term Rewards Plan . ​ S-1/A ​ a2242082zex-3_1 ​ 10.11 ​ 07/20/20 ​ ​ ​ ​ 10.12# ​ Form of Stock Option Amendment Agreement . ​ S-1/A ​ a2242082zex-3_1 ​ 10.12 ​ 07/20/20 ​ ​ ​ ​ 10.13# ​ Form of Option Award Agreement under 2020 Incentive Award Plan for Amended Options . ​ S-1/A ​ a2242082zex-3_1 ​ 10.13 ​ 07/20/20 ​ ​ ​ ​ E-1 Table of Contents Exhibit Number ​ Exhibit Description ​ Form ​ File No. ​ Exhibit Filing Date Filed Herewith Furnished Herewith ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 10.14# ​ Form of Option Award Agreement under 2020 Incentive Award Plan for Amended Stock Appreciation Rights . ​ S-1/A ​ a2242082zex-3_1 ​ 10.14 ​ 07/20/20 ​ ​ ​ ​ 10.15# ​ Vertex, Inc. 2020 Incentive Award Plan . ​ S-1/A ​ a2242082zex-3_1 ​ 10.15 ​ 07/20/20 ​ ​ ​ ​ 10.16# ​ Form of Option Award Agreement under 2020 Incentive Award Plan . ​ S-1/A ​ a2242082zex-3_1 ​ 10.16 ​ 07/20/20 ​ ​ ​ ​ 10.17# ​ Form of Restricted Stock Award Agreement under 2020 Incentive Award Plan . ​ S-1/A ​ a2242082zex-3_1 ​ 10.17 ​ 07/20/20 ​ ​ ​ ​ 10.18# ​ Form of Restricted Stock Unit Award Agreement under 2020 Incentive Award Plan . ​ S-1/A ​ a2242082zex-3_1 ​ 10.18 ​ 07/20/20 ​ ​ ​ ​ 10.19# ​ Form of Stock Award Agreement under 2020 Incentive Award Plan . ​ S-1/A ​ a2242082zex-3_1 ​ 10.19 ​ 07/20/20 ​ ​ ​ ​ 21.1 ​ List of Subsidiaries ​ S-1/A ​ a2242082zex-3_1 ​ 21.1 ​ 07/20/20 ​ ​ ​ ​ 23.1 ​ Consent of Crowe LLP ​ ​ ​ ​ ​ ​ ​ ​ ​ X ​ ​ 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ​ ​ ​ ​ ​ ​ ​ ​ ​ X ​ 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ​ ​ ​ ​ ​ ​ ​ ​ ​ X ​ 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ X 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ X 101.INS XBRL Instance Document ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ X 101.SCH XBRL Taxonomy Extension Schema Document ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ X 101.LAB XBRL Taxonomy Extension Label Linkbase Document ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ X # Indicates a management contract or compensatory plan. ​ ​ ​ ​ E-2 Table of Contents VERTEX, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ​ Page Audited Consolidated Financial Statements as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020: ​ ​ Report of Independent Registered Public Accounting Firm ​ F-2 Consolidated Balance Sheets ​ F-3 Consolidated Statements of Comprehensive Income (Loss) ​ F-4 Consolidated Statements of Changes in Equity ​ F-5 Consolidated Statements of Cash Flows ​ F-6 Notes to Consolidated Financial Statements ​ F-7 ​ ​ F-1 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of Vertex, Inc. King of Prussia, Pennsylvania Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Vertex, Inc. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. ​ ​ ​ ​ ​ ​ ​ ​ /s/ Crowe LLP ​ We have served as the Company’s auditor since 2019. New York, New York March 15, 2021 ​ ​ ​ F-2 Table of Contents Vertex, Inc. and Subsidiaries Consolidated Balance Sheets (Amounts in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2020 ​ 2019 Assets ​ ​ Current assets: ​ ​ Cash and cash equivalents ​ $ 303,051 ​ $ 75,903 Funds held for customers ​ 9,222 ​ 7,592 Accounts receivable, net of allowance of $8,592, and $7,515 ​ 77,159 ​ 70,367 Prepaid expenses and other current assets ​ 13,259 ​ 11,695 Total current assets ​ 402,691 ​ 165,557 Property and equipment, net of accumulated depreciation ​ 56,557 ​ 54,727 Capitalized software, net of accumulated amortization ​ 31,989 ​ 32,075 Goodwill and other intangible assets ​ 18,711 ​ — Deferred commissions ​ 11,743 ​ 11,196 Deferred income tax asset ​ ​ 29,974 ​ ​ 219 Other assets ​ 3,263 ​ 849 Total assets ​ $ 554,928 ​ $ 264,623 ​ ​ ​ ​ ​ Liabilities and Equity ​ ​ Current liabilities: ​ ​ Current portion of long-term debt ​ $ 882 ​ $ 50,804 Accounts payable ​ 8,876 ​ 10,729 Accrued expenses ​ 19,176 ​ 13,308 Distributions payable ​ 2,700 ​ 13,183 Customer funds obligations ​ 9,235 ​ 7,553 Accrued salaries and benefits ​ 17,326 ​ 15,195 Accrued variable compensation ​ 22,372 ​ 22,237 Deferred compensation, current ​ 2,057 ​ 8,935 Deferred revenue ​ 207,560 ​ 191,745 Deferred rent and other ​ 939 ​ 840 Purchase Commitment Liability, current ​ 845 ​ — Total current liabilities ​ 291,968 ​ 334,529 Deferred compensation, net of current portion ​ 5,010 ​ 18,530 Deferred revenue, net of current portion ​ 14,702 ​ 14,046 Long-term debt, net of current portion ​ 225 ​ 682 Purchase Commitment Liability, net of current portion ​ 8,905 ​ — Deferred other liabilities ​ 8,632 ​ 9,268 Total liabilities ​ 329,442 ​ 377,055 Commitments and contingencies (Note 12) ​ ​ Options for redeemable shares ​ — ​ 17,344 Stockholders' equity (deficit): ​ ​ Preferred shares, $0.001 par value, 30,000 and 0 shares authorized; 0 and 0 shares issued and outstanding ​ ​ — ​ — Class A voting common stock, $0.001 par value, 0 and 600 shares authorized; 0 and 300 shares issued; 0 and 147 shares outstanding ​ — ​ — Class B non-voting common stock, $0.001 par value, 0 and 299,400 shares authorized; 0 and 162,297 shares issued; 0 and 120,270 shares outstanding ​ — ​ 54 Class A voting common stock, $0.001 par value, 300,000 and 0 shares authorized; 26,327 and 0 shares issued and outstanding ​ ​ 26 ​ ​ — Class B voting common stock, $0.001 par value, 150,000 and 0 shares authorized; 120,117 and 0 shares issued and outstanding ​ ​ 120 ​ ​ — Additional paid in capital ​ ​ 206,541 ​ ​ — Retained earnings (accumulated deficit) ​ 21,926 ​ (90,701) Accumulated other comprehensive loss ​ (3,127) ​ (491) Treasury stock ​ — ​ (38,638) Total stockholders' equity (deficit) ​ 225,486 ​ (129,776) Total liabilities and equity ​ $ 554,928 ​ $ 264,623 ​ The accompanying notes are an integral part of the consolidated financial statements. F-3 Table of Contents Vertex, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (Amounts in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ ​ 2020 ​ 2019 ​ 2018 Revenues: ​ ​ ​ Software subscriptions ​ $ 316,763 ​ $ 275,629 ​ $ 235,663 Services ​ 57,902 ​ 45,871 ​ 36,740 Total revenues ​ 374,665 ​ 321,500 ​ 272,403 Cost of revenues: ​ ​ ​ Software subscriptions ​ 105,676 ​ 77,259 ​ 68,945 Services ​ 59,711 ​ 33,119 ​ 26,753 Total cost of revenues ​ 165,387 ​ 110,378 ​ 95,698 Gross profit ​ 209,278 ​ 211,122 ​ 176,705 Operating expenses: ​ ​ ​ Research and development ​ 54,340 ​ 30,557 ​ 23,755 Selling and marketing ​ 99,418 ​ 68,127 ​ 56,898 General and administrative ​ 149,057 ​ 71,014 ​ 58,947 Depreciation and amortization ​ 11,018 ​ 8,996 ​ 7,937 Impairment of asset ​ — ​ — ​ 32,692 Other operating expense (income), net ​ 203 ​ 573 ​ (691) Total operating expenses ​ 314,036 ​ 179,267 ​ 179,538 (Loss) income from operations ​ (104,758) ​ 31,855 ​ (2,833) Interest expense, net ​ 3,111 ​ 953 ​ 1,594 (Loss) income before income taxes ​ (107,869) ​ 30,902 ​ (4,427) Income tax (benefit) expense ​ (28,932) ​ (155) ​ 1,679 Net (loss) income ​ (78,937) ​ 31,057 ​ (6,106) Other comprehensive loss (income) from foreign currency translation adjustments and revaluations, net of tax ​ 2,636 ​ (5) ​ 355 Total comprehensive (loss) income ​ $ (81,573) ​ $ 31,062 ​ $ (6,461) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income attributable to Class A stockholders, basic ​ $ (6,660) ​ $ 23 ​ $ (16) Net (loss) income per Class A share, basic ​ $ (0.60) ​ $ 0.20 ​ $ (0.08) Weighted average Class A common stock, basic ​ 11,096 ​ 118 ​ 210 Net (loss) income attributable to Class A stockholders, diluted ​ $ (6,660) ​ $ 965 ​ $ (16) Net (loss) income per Class A share, diluted ​ $ (0.60) ​ $ 0.25 ​ $ (0.08) Weighted average Class A common stock, diluted ​ 11,096 ​ 3,861 ​ 210 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income attributable to Class B stockholders, basic ​ $ (72,277) ​ $ 31,034 ​ $ (6,090) Net (loss) income per Class B share, basic ​ $ (0.60) ​ $ 0.26 ​ $ (0.05) Weighted average Class B common stock, basic ​ 120,415 ​ 120,417 ​ 120,417 Net (loss) income attributable to Class B stockholders, diluted ​ $ (72,277) ​ $ 30,092 ​ $ (6,090) Net (loss) income per Class B share, diluted ​ $ (0.60) ​ $ 0.25 ​ $ (0.05) Weighted average Class B common stock, diluted ​ ​ 120,415 ​ ​ 120,417 ​ ​ 120,417 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Pro forma information (unaudited) (Note 1): ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss before income taxes ​ $ (107,869) ​ ​ ​ ​ ​ ​ Pro forma provision for income tax benefit ​ ​ (27,507) ​ ​ ​ ​ ​ ​ Pro forma net loss ​ $ (80,362) ​ ​ ​ ​ ​ ​ Pro forma net loss attributable to Class A stockholders ​ $ (6,780) ​ ​ ​ ​ ​ ​ Weighted average Class A common stock, basic and diluted ​ ​ 11,096 ​ ​ ​ ​ ​ ​ Pro forma net loss per Class A share, basic and diluted ​ $ (0.61) ​ ​ ​ ​ ​ ​ Pro forma net loss attributable to Class B stockholders ​ $ (73,582) ​ ​ ​ ​ ​ ​ Weighted average Class B common stock, basic and diluted ​ ​ 120,415 ​ ​ ​ ​ ​ ​ Pro forma net loss per Class B share, basic and diluted ​ $ (0.61) ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of the consolidated financial statements. ​ ​ F-4 Table of Contents ​ ​ Vertex, Inc. and Subsidiaries Consolidated Statements of Changes in Equity (Amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Before Recapitalization ​ After Recapitalization ​ ​ ​ ​ Retained ​ Accumulated ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ ​ Outstanding Class A Outstanding Class B ​ Outstanding ​ Class A ​ Outstanding ​ Class B ​ Additional Earnings Other Treasury ​ ​ Stockholders' Options for ​ ​ Class A ​ Common ​ Class B ​ Common ​ Class A ​ Common ​ Class B ​ Common ​ Paid In ​ (Accumulated ​ Comprehensive ​ Shares ​ Treasury ​ Equity ​ Redeemable ​ Shares Stock Shares Stock Shares Stock Shares Stock Capital Deficit) Loss Issued Stock (Deficit) Shares Balance, January 1, 2018 ​ 147 ​ $ — ​ 120,270 ​ $ 54 ​ — ​ $ — ​ — ​ $ — ​ $ — ​ $ (41,977) ​ $ (141) ​ 41,283 ​ $ (36,520) ​ $ (78,584) ​ $ 13,554 Remeasurement of options for redeemable shares ​ — ​ ​ — ​ ​ ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (1,027) ​ ​ — ​ — ​ ​ — ​ ​ (1,027) ​ ​ 1,027 Exercise of stock options, net ​ — ​ ​ — ​ 402 ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (12) ​ ​ — ​ — ​ ​ — ​ ​ (12) ​ ​ — Purchase of treasury stock ​ — ​ ​ — ​ (402) ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ 402 ​ ​ (1,277) ​ ​ (1,277) ​ ​ — Distributions declared ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (38,916) ​ ​ — ​ — ​ ​ — ​ ​ (38,916) ​ ​ — Foreign currency translation adjustments and revaluations ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ (355) ​ — ​ ​ — ​ ​ (355) ​ ​ — Net loss ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (6,106) ​ ​ — ​ — ​ ​ — ​ ​ (6,106) ​ ​ — Balance, December 31, 2018 147 ​ ​ — 120,270 ​ ​ 54 ​ — ​ ​ — — ​ ​ — ​ ​ — ​ ​ (88,038) ​ ​ (496) 41,685 ​ ​ (37,797) ​ ​ (126,277) ​ ​ 14,581 Remeasurement of options for redeemable shares — ​ — — ​ — ​ — ​ — — ​ — ​ — ​ (2,763) ​ — — ​ — ​ (2,763) ​ 2,763 Exercise of stock options, net — ​ — 225 ​ — ​ — ​ — — ​ — ​ — ​ (100) ​ — — ​ — ​ (100) ​ — Purchase of treasury stock ​ — ​ ​ — ​ (225) ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ 225 ​ ​ (841) ​ ​ (841) ​ ​ — Distributions declared ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (30,857) ​ ​ — ​ — ​ ​ — ​ ​ (30,857) ​ ​ — Foreign currency translation adjustments and revaluations — ​ — — ​ — ​ — ​ — — ​ — ​ — ​ — ​ 5 — ​ — ​ 5 ​ — Net loss — ​ — — ​ — ​ — ​ — — ​ — ​ — ​ 31,057 ​ — — ​ — ​ 31,057 ​ — Balance, December 31, 2019 147 ​ — 120,270 ​ 54 ​ — ​ — — ​ — ​ — ​ (90,701) ​ ​ (491) 41,910 ​ (38,638) ​ (129,776) ​ 17,344 Distributions declared — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (132,901) ​ ​ — ​ — ​ ​ — ​ ​ (132,901) ​ ​ — Exercise of stock options prior to Offering ​ — ​ ​ — ​ 173 ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 53 ​ ​ — ​ — ​ ​ — ​ ​ 53 ​ ​ — Reclassification of accumulated S Corporation earnings — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ (354,291) ​ ​ 354,291 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — Remeasurement of options for redeemable shares — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ (21,954) ​ ​ (29,879) ​ ​ — ​ — ​ ​ — ​ ​ (51,833) ​ ​ 51,833 Reclassification of options for redeemable shares ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ 69,177 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 69,177 ​ ​ (69,177) Recapitalization prior to Offering (147) ​ ​ — ​ (120,443) ​ ​ (54) ​ 173 ​ ​ — ​ 120,417 ​ ​ 120 ​ ​ (38,704) ​ ​ — ​ ​ — ​ (41,910) ​ ​ 38,638 ​ ​ — ​ ​ — Reclassification of SAR liability to equity in connection with Offering ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ 143,519 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 143,519 ​ ​ — Auto-exercised stock options in connection with Offering ​ — ​ ​ — ​ — ​ ​ — ​ 564 ​ ​ 1 ​ — ​ ​ — ​ ​ (13,809) ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ (13,808) ​ ​ — Shares issued in connection with Offering, net of Offering costs ​ — ​ ​ — ​ — ​ ​ — ​ 23,812 ​ ​ 24 ​ — ​ ​ — ​ ​ 416,778 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 416,802 ​ ​ — Exercise of stock options in connection with the Offering ​ — ​ ​ — ​ — ​ ​ — ​ 510 ​ ​ — ​ — ​ ​ — ​ ​ (7,023) ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ (7,023) ​ ​ — Vested restricted stock issued in connection with Offering ​ — ​ ​ — ​ — ​ ​ — ​ 19 ​ ​ — ​ — ​ ​ — ​ ​ 361 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 361 ​ ​ — Exercise of stock options subsequent to Offering, net ​ — ​ ​ — ​ — ​ ​ — ​ 890 ​ ​ 1 ​ — ​ ​ — ​ ​ 1,687 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 1,688 ​ ​ — Stock-based compensation expense from equity-classified awards under the 2020 Plan ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ 12,576 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 12,576 ​ ​ — Shares issued under ESPP ​ — ​ ​ — ​ — ​ ​ — ​ 59 ​ ​ — ​ — ​ ​ — ​ ​ 957 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 957 ​ ​ — Distributions paid or payable in connection with Tax Sharing Agreement ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ (2,733) ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ (2,733) ​ ​ — Class B shares exchanged for Class A shares ​ — ​ ​ — ​ — ​ ​ — ​ 300 ​ ​ — ​ (300) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — Foreign currency translation adjustments and revaluations, net of tax ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ (2,636) ​ — ​ ​ — ​ ​ (2,636) ​ ​ — Net loss — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (78,937) ​ ​ — ​ — ​ ​ — ​ ​ (78,937) ​ ​ — Balance, December 31, 2020 — ​ $ — — ​ $ — ​ 26,327 ​ $ 26 120,117 ​ $ 120 ​ $ 206,541 ​ $ 21,926 ​ $ (3,127) — ​ $ — ​ $ 225,486 ​ $ — The accompanying notes are an integral part of the consolidated financial statements. ​ ​ F-5 Table of Contents Vertex, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ 2020 2019 2018 Cash flows from operating activities: ​ ​ ​ Net (loss) income ​ $ (78,937) ​ $ 31,057 ​ $ (6,106) Adjustments to reconcile net (loss) income to net cash provided by operating activities: ​ ​ ​ ​ ​ Depreciation and amortization ​ 32,215 ​ 25,190 ​ 24,901 Impairment of asset ​ ​ — ​ ​ — ​ ​ 32,692 Provision for subscription cancellations and non-renewals, net of deferred allowance ​ 259 ​ 1,232 ​ 237 Amortization of deferred financing costs ​ 373 ​ 266 ​ 266 Write-off of deferred financing costs ​ ​ 1,387 ​ ​ — ​ ​ — Stock-based compensation expense ​ 147,904 ​ 9,460 ​ 5,108 Deferred income tax (benefit) provision ​ ​ (29,643) ​ ​ (848) ​ ​ 847 Redemption of Converted SARs ​ ​ (22,889) ​ ​ — ​ ​ — Other ​ 107 ​ 43 ​ 52 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ Accounts receivable ​ (6,762) ​ (10,116) ​ (16,958) Prepaid expenses and other current assets ​ (1,541) ​ (809) ​ 524 Deferred commissions ​ (547) ​ (2,366) ​ (3,154) Accounts payable ​ (1,842) ​ 3,868 ​ 3,397 Accrued expenses ​ 4,568 ​ 2,539 ​ 1,566 Accrued and deferred compensation ​ (632) ​ 5,318 ​ 2,060 Deferred revenue ​ 17,557 ​ 27,168 ​ 35,196 Other ​ (2,034) ​ 496 ​ (179) Net cash provided by operating activities ​ 59,543 ​ 92,498 ​ 80,449 Cash flows from investing activities: ​ ​ ​ Acquisition of business, net of cash acquired (Note 2) ​ (11,570) ​ — ​ — Property and equipment additions ​ (20,955) ​ (20,339) ​ (21,053) Capitalized software additions ​ (11,850) ​ (17,221) ​ (12,261) Net cash used in investing activities ​ (44,375) ​ (37,560) ​ (33,314) Cash flows from financing activities: ​ ​ ​ Net increase in customer funds obligations ​ 1,681 ​ 4,276 ​ 1,711 Proceeds from line of credit ​ 12,500 ​ — ​ — Principal payments on line of credit ​ ​ (12,500) ​ ​ — ​ ​ — Proceeds from long-term debt ​ 175,000 ​ — ​ — Principal payments on long-term debt ​ (226,251) ​ (5,566) ​ (3,284) Payments for deferred financing costs, net ​ (2,436) ​ — ​ — Proceeds from issuance of shares in connection with Offering ​ ​ 423,024 ​ ​ — ​ ​ — Payments for offering costs ​ ​ (6,222) ​ ​ — ​ ​ — Payments for taxes on exercised stock options ​ ​ (14,813) ​ ​ — ​ ​ — Purchase of treasury stock ​ ​ — ​ ​ (841) ​ ​ (1,277) Proceeds from purchases of stock under ESPP ​ ​ 957 ​ ​ — ​ ​ — Proceeds from exercise of stock options ​ 8,808 ​ 68 ​ 177 Distributions to stockholders ​ (146,116) ​ (28,566) ​ (28,024) Net cash provided by (used in) financing activities ​ 213,632 ​ (30,629) ​ (30,697) Effect of exchange rate changes on cash, cash equivalents and restricted cash ​ (22) ​ 12 ​ (402) Net increase in cash, cash equivalents and restricted cash ​ ​ 228,778 ​ ​ 24,321 ​ ​ 16,036 Cash, cash equivalents and restricted cash, beginning of period ​ 83,495 ​ 59,174 ​ 43,138 Cash, cash equivalents and restricted cash, end of period ​ $ 312,273 ​ $ 83,495 ​ $ 59,174 Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets, end of period: ​ ​ ​ Cash and cash equivalents ​ $ 303,051 ​ $ 75,903 ​ $ 55,838 Restricted cash—funds held for customers ​ 9,222 ​ 7,592 ​ 3,336 Total cash, cash equivalents and restricted cash, end of period ​ $ 312,273 ​ $ 83,495 ​ $ 59,174 The accompanying notes are an integral part of the consolidated financial statements. ​ ​ F-6 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Amounts in thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Vertex, Inc. (“Vertex”) and its direct and indirect wholly owned subsidiaries (collectively, the “Company”) operate as solutions providers of state, local and value added tax calculation, compliance and analytics, offering software products which are sold through software license and software as a service (“cloud”) subscriptions. The Company also provides implementation and training services in connection with its software license and cloud subscriptions, transaction tax returns outsourcing, and other tax-related services. The Company sells to customers located throughout the United States of America (“U.S.”) and internationally. Basis of Consolidation The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and include the accounts of the Company. All intercompany transactions have been eliminated in consolidation. On January 7, 2020, the Company acquired a 60% controlling interest in Systax Sistemas Fiscais LTDA (“Systax”), a provider of Brazilian transaction tax content and software. Systax is considered a Variable Interest Entity (“VIE”) and its accounts have been included in the consolidated financial statements from the acquisition date. Systax was determined to be a VIE as Vertex is the primary beneficiary of the equity interests in Systax and participates significantly in the variability in the fair value of Systax’s net assets. Although Vertex does not have full decision-making authority as it is shared with the minority interest owners, as the minority interest owners are considered a related party, Vertex is considered the most closely associated party to Systax and is required to consolidate. Systax’s assets may only be used to settle its own obligations and this will continue until such time as Vertex owns 100% of the VIE. As of December 31, 2020, the consolidated net assets of Systax, inclusive of goodwill and intangible assets recognized under purchase accounting, were $18,721. Vertex is at risk to the extent of its current 60% ownership of Systax, which risk will increase over time in proportion to increases in percentage ownership as Vertex exercises its future share purchase commitment through 2024. See Note 2. Registration of Company Stock and Initial Public Offering On July 28, 2020, the Company filed its amended and restated certificate of incorporation with the Delaware Secretary of State to: (i) effect a three-for-one forward stock split (the “Stock Split”); (ii) establish a new capital structure for the Company (the “New Capital Structure”); and (iii) effect a share exchange (the “Share Exchange”) (collectively, the “Recapitalization”). The Stock Split resulted in each one share owned by a stockholder being exchanged for three shares of common stock, and the number of shares of the Company’s common stock issued and outstanding was increased proportionately based on the Stock Split. After the Stock Split, the Share Exchange occurred, resulting in stockholders of record exchanging their existing Class A and Class B common stock (“former Class A” and “former Class B”, respectively) for newly created shares of Class A and Class B common stock (“Class A” and “Class B”, respectively) issued in connection with the New Capital Structure. The effect of the Stock Split and the Share Exchange are recognized retrospectively in the consolidated financial statements. The Company’s Registration Statement on Form S-1 with the Securities and Exchange Commission (“SEC”) was declared effective on July 28, 2020, resulting in the Class A shares being registered and available for trading on the NASDAQ exchange (the “Offering”). On July 31, 2020, the Company received $423,024 in proceeds from the sale of 23,812 shares of Class A at a public offering price of $19.00 per share, net of underwriting fees, and used a portion of the proceeds to pay off $175,000 in F-7 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) outstanding debt. The net proceeds remaining after payment of Offering costs are being used for working capital and other corporate purposes. Segments The Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”), the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s CODM allocates resources and assesses performance based upon discrete financial information at the consolidated level. For the years ended December 31, 2020, 2019 and 2018 approximately 5%, 4% and 4%, respectively, of the Company’s revenues were generated outside of the U.S. As of December 31, 2020, $287 of the Company’s property and equipment assets were held outside of the U.S. As of December 31, 2019, none of the Company’s property and equipment assets were held outside the U.S. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents, funds held for customers, accounts receivable and investment securities. The Company maintains the majority of its cash and cash equivalent balances and funds held for customers in four banks. These amounts exceed federally insured ("FDIC") limits. The Company periodically evaluates the creditworthiness of the banks. The Company has not experienced any losses in these accounts and believes they are not exposed to significant credit risk on such accounts. The Company does not require collateral from its customers. Allowances are maintained for subscription cancellations. Credit risk related to accounts receivable is limited due to the industry and geographic diversity within the Company's customer base. No single customer accounted for more than 10% of revenues for the years ended December 31, 2020, 2019 and 2018. 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. F-8 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 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. The Company may exercise considerable judgment when estimating fair value, particularly when evaluating what assumptions market participants would likely make. The use of different assumptions or estimation methodologies could have a material effect on the estimated fair values. Use of Estimates The preparation of 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 consolidated financial statements include: (i) the estimated allowance for subscription cancellations, (ii) the reserve for self-insurance, (iii) assumptions related to achievement of technological feasibility for software developed for sale, (iv) product life cycles, (v) estimated useful lives and potential impairment of long-lived assets, intangible assets and goodwill, (vi) determination of the fair value of tangible and intangible assets acquired, liabilities assumed and consideration transferred in an acquisition, (vii) amortization period of material rights and deferred commissions (viii) valuation of the Company’s stock used to measure stock-based compensation awards, (ix) Black-Scholes-Merton option pricing model (“Black-Scholes model”) input assumptions used to determine the fair value of stock-based compensation awards, and (x) the potential outcome of future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Actual results may differ from these estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an initial maturity date of three months or less to be cash equivalents. Funds held as investments in money market funds are included within cash and cash equivalents. In accordance with ASU No. 2016-18, Restricted Cash , the Company presents changes in restricted cash in the cash flow statement. Funds Held for Customers Funds held for customers in the consolidated balance sheets represents customer funds advanced for transaction tax returns outsourcing. Funds held for customers are restricted for the sole purpose of remitting such funds to satisfy obligations on behalf of such customers and are deposited at FDIC-insured institutions. Customer obligations are included in current liabilities in the consolidated balance sheets, as the obligations are expected to be settled within one year. Property and Equipment Property and equipment are stated at cost or fair value when acquired and presented net of accumulated depreciation. Normal maintenance and repairs are charged to expense, while major renewals and betterments are capitalized. Assets under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets and are depreciated over the shorter of the asset’s useful life or lease term. ​ Depreciation and amortization are computed straight-line over the estimated useful lives of the assets, as follows: ​ ​ ​ ​ Leasehold improvements 1 - 12 years Internal-use software developed 3 - 5 years Computer software purchased 3 - 7 years Equipment 3 - 10 years Furniture and fixtures 7 - 10 years ​ F-9 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 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. Capitalized internal-use software costs are primarily comprised of direct labor, related expenses and initial software licenses. ASC 350-40 includes specific guidance on costs not to be capitalized, such as overhead, general and administrative and training costs. Internal-use software includes software utilized for cloud-based solutions as well as software for internal systems and tools. Costs are capitalized once the project is defined, funding is committed and it is confirmed the software will be used for its intended purpose. 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. Internal-use software is included in internal-use software developed in property and equipment in the consolidated balance sheets once available for its intended use. 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, respectively, in the consolidated statements of comprehensive income (loss). Software Developed for Sale The costs incurred for the development of computer software to be sold, leased, or otherwise marketed are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed , when technological feasibility has been established. Technological feasibility generally occurs when all planning, design, coding and testing activities are completed that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements. The establishment of technological feasibility is an ongoing assessment of judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in technology. Capitalized software includes direct labor and related expenses for software development for new products and enhancements to existing products and acquired software. Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on a product-by-product basis using the straight-line method over periods between 3 to 5 years. Unamortized capitalized software development costs determined to be in excess of the net realizable value of the product are expensed immediately. 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. In the event of impairment, unamortized capitalized software costs are compared to the net realizable value of the related product and the carrying value of the related assets are written down to the net realizable value to the extent the unamortized capitalized costs exceed such value. The net realizable value is the estimated future gross revenues from the related product reduced by the estimated future costs of completing and disposing of such product, including the costs of providing related maintenance and customer support. Assessment of Long-Lived Assets The Company reviews the carrying value of long-lived assets, including internal-use software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Whenever such events or circumstances are present, an impairment loss equal to the excess of the asset carrying value over its fair value, if any, is recorded. F-10 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 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 assets and liabilities. 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 "). 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. Additionally, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluate these estimates and assumptions periodically and record any adjustments to preliminary estimates to goodwill, provided the Company is within the Measurement Period, with any adjustments to amortization of new or previously recorded identifiable intangibles being recorded to the consolidated statements of comprehensive income (loss) in the period in which they arise. In addition, if outside of the Measurement Period, any subsequent adjustments to the acquisition date fair values are recorded to the consolidated statements of comprehensive income (loss) in the period in which they arise. Goodwill Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. The Company evaluates goodwill for impairment annually at October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred. During the fourth quarter of 2020, the Company initiated a change in its method of applying an accounting principle and changed the date of its annual impairment test from December 31 to October 1. The change from our fiscal year end to such earlier date was preferrable to management in order to afford additional time to more effectively administer the assessment, including to facilitate interactions with third-party specialists, and in order to complete the year end closing process in a timelier fashion. Management has assessed that the change had no impact on the consolidated financial statements as of and for the year ended December 31, 2020. Had this change in accounting principle been applied in periods prior to 2020, it would have had no impact as the Company had no recognized goodwill. The Company has determined that its business comprises one reporting unit. The Company has the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, in which case a quantitative impairment test is not required. As provided for by Accounting Standards Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment , the quantitative goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired. An impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the fair value up to the amount of goodwill allocated to the reporting unit. Income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit are considered when measuring the goodwill impairment loss, if applicable. F-11 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 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 outstanding borrowings under bank debt are reflected as a reduction of current portion of long-term debt and long-term debt, net of current portion. Deferred financing costs related to undrawn debt are reflected in other assets in the consolidated balance sheets in accordance with ASC 835-30, Interest—Imputation of Interest . Stock-Based Compensation On the effective date of the Offering, the Company adopted the 2020 Incentive Award Plan (the “2020 Plan”) and the 2020 Employee Stock Purchase Plan (the “ESPP”), which provides for the award of stock appreciation rights (“SARs”) stock options (“options”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and participation in the ESPP (collectively, the "awards"), which are subject to guidance set forth in ASC 718, Compensation—Stock Compensation, ("ASC 718") for the award of equity-based instruments. The provisions of ASC 718 require a company to measure the fair value of stock-based compensation as of the grant date of the award. Stock-based compensation expense reflects the cost of employee services received in exchange for the awards. SARs are accounted for as liabilities under ASC 718 and, as such, the Company recognizes stock-based compensation expense by remeasuring the value of the SARs at the end of each reporting period and accruing the portion of the requisite service rendered at that date. Prior to July 2, 2020, the date management determined the Company was considered to have become a public entity, the Company measured SARs based on their intrinsic value which reflected the difference between the fair value of the Company’s former Class B common stock at the reporting date less the grant date fair value of the underlying shares as this was the value the SAR participant could derive from exercise of the SAR award. Prior to the Offering, the fair value of the Company’s common stock was determined periodically by the board of directors (the “Board”) with the assistance of management and a third-party valuation firm. Upon becoming a public entity, and up to the effective date of the Offering, management remeasured outstanding SARs using the fair value-based method under ASC 718. See Note 10 for discussion of the impact of the resulting change in accounting policy. Outstanding SARs are included in deferred compensation, current and deferred compensation, net of current portion in the consolidated balance sheets. Stock-based compensation expense for new options issued under the 2020 Plan after the Offering is measured based on the grant date fair value of the award and is estimated using the Black-Scholes model. Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the award. Stock-based compensation expense for RSAs and RSUs is based on the fair value of the Company’s underlying common stock on the date of grant. Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the award. The ESPP permits participants to purchase Class A common stock through payroll deductions, up to a specified percentage of their eligible compensation or a lump sum contribution amount for the initial offering period (July 28 to November 30, 2020), subject to the plan’s maximum purchase provisions during the specified offering periods. The plan is a compensatory plan as it allows participants to purchase stock at a 15% discount from the lower of the fair value of the Class A common on the first or last day of the ESPP offering period (the “ESPP discount”). The ESPP is accounted for as an equity-classified award. Stock-based compensation expense for the ESPP is measured based on the fair value of the ESPP award at the start of the offering period. The fair value is comprised of the value of the ESPP discount and the value associated with the variability in the Class A common stock price during the offering period (the “Call/Put”), which is F-12 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) estimated using the Black-Scholes model. Compensation cost is recognized on a straight-line basis over the respective offering period. The Company has elected to recognize award forfeitures as they occur. Operating Leases and Deferred Rent Rent expense for operating leases is recognized on a straight-line basis over the period of the related lease. For lease agreements that include future specific rent increases, rent concessions and/or tenant improvement allowances, the difference between the rent payments and the straight-line rent expense is included in deferred rent liability in the consolidated balance sheets. Self-insurance The Company is self-insured for the majority of its health insurance costs, including medical claims subject to certain stop-loss provisions. Management periodically reviews the adequacy of the Company’s stop-loss insurance coverage. The Company records an estimate of claims incurred but not reported, based on management’s judgment and historical experience. Self-insurance accruals are $1,766 and $1,473 at December 31, 2020 and 2019, respectively, and are reflected in accrued salaries and benefits in the consolidated balance sheets. Material differences may result in the amount and timing of insurance expense if actual experience differs significantly from management’s estimates. Revenue Recognition Revenue from contracts with customers On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers , (“ASC 606”). Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct, and accounted for as separate performance obligations. Revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers, which are subsequently remitted to governmental authorities. Nature of goods and services Licenses for on-premise software subscriptions provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates (collectively “updates”) and product support. The updates and support, which are part of the subscription agreement, are essential to the continued utility of the software; therefore, the Company has determined the software and the related updates and support to be a single performance obligation. Accordingly, when on-premise software is licensed, the revenue associated with this combined performance obligation is recognized ratably over the license term as these subscriptions are provided for the duration of the license term. Revenue recognition begins on the later of the beginning of the subscription period or the date the software is made available to the customer to download. The Company’s on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price (“new sale premium”) is a material right that provides customers with the right to this reduced renewal price. The Company recognizes revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years. Cloud-based subscriptions allow customers to use Company-hosted software over the contract period without taking possession of the software. The cloud-based offerings also include related updates and support. Cloud-based contracts F-13 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 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. 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. Disaggregation of revenue The table reflects revenue by major source for the following periods: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ ​ 2020 2019 2018 Sources of revenues: ​ ​ ​ ​ ​ ​ Software subscriptions ​ $ 316,763 ​ $ 275,629 ​ $ 235,663 Services ​ 57,902 ​ 45,871 ​ 36,740 Total revenues ​ $ 374,665 ​ $ 321,500 ​ $ 272,403 ​ Contract balances Timing of revenue recognition may differ from the timing of invoicing customers. A receivable is recorded in the consolidated balance sheets when customers are billed related to revenue to be collected and recognized for subscription agreements as there is an unconditional right to invoice and receive payment in the future related to these subscriptions. A receivable and related revenue may also be recorded in advance of billings to the extent services have been performed and the Company has a right under the contract to bill and collect for such performance. Subscription-based customers are generally invoiced annually at the beginning of each annual subscription period. Accounts receivable is presented net of an allowance for potentially uncollectible accounts and estimated cancellations of software license and cloud-based subscriptions (the “allowance”) of $8,592 and $7,515 at December 31, 2020 and 2019, respectively. The allowance is F-14 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) based on management’s assessment of uncollectible accounts on a specific identification basis, with the estimate of potential cancellations being determined based on management’s review of historical cancellation rates. The beginning and ending balances of accounts receivable, net of allowance, are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ 2020 2019 Balance, beginning of period ​ $ 70,367 ​ $ 62,235 Balance, end of period ​ 77,159 ​ 70,367 Increase, net ​ $ 6,792 ​ $ 8,132 ​ A contract liability is recorded as deferred revenue on the consolidated balance sheets when customers are billed in advance of performance obligations being satisfied, and revenue is recognized after invoicing ratably over the subscription period or over the amortization period of material rights. Deferred revenue is reflected net of a related deferred allowance for subscription cancellations (the “deferred allowance”) of $6,432 and $5,614 at December 31, 2020 and 2019, 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 Year Ended December 31, ​ ​ 2020 ​ 2019 ​ 2018 ​ Balance ​ Net Change Balance ​ Net Change Balance ​ Net Change Allowance balance, January 1 ​ $ (7,515) ​ ​ $ (5,527) ​ ​ $ (4,320) ​ Allowance balance, December 31 ​ (8,592) ​ ​ (7,515) ​ ​ (5,527) ​ Change in allowance ​ ​ ​ $ 1,077 ​ ​ ​ $ 1,988 ​ ​ ​ $ 1,207 Deferred allowance balance, January 1 ​ 5,614 ​ ​ 4,858 ​ ​ 3,888 ​ Deferred allowance balance, December 31 ​ 6,432 ​ ​ 5,614 ​ ​ 4,858 ​ Change in deferred allowance ​ ​ ​ (818) ​ ​ ​ (756) ​ ​ ​ (970) Net amount charged to revenues ​ ​ ​ $ 259 ​ ​ ​ $ 1,232 ​ ​ ​ $ 237 ​ The amount of revenue recognized during the years ended December 31, 2020, 2019 and 2018 that was included in the opening deferred revenue balance of the same fiscal year was approximately $191,745, $163,939, and $135,190, respectively. 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 consolidated balance sheets. F-15 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) The table provides information about the balances of and changes to deferred revenue for the following periods: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, ​ ​ 2020 ​ 2019 Balances: ​ ​ Deferred revenue, current ​ $ 207,560 ​ $ 191,745 Deferred revenue, non-current ​ 14,702 ​ 14,046 Total deferred revenue ​ $ 222,262 ​ $ 205,791 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ ​ 2020 ​ 2019 ​ 2018 Changes to deferred revenue: ​ ​ ​ Beginning balance ​ $ 205,791 ​ $ 178,703 ​ $ 139,059 Additional amounts deferred ​ 391,136 ​ 348,588 ​ 312,047 Revenues recognized ​ (374,665) ​ (321,500) ​ (272,403) Ending balance ​ $ 222,262 ​ $ 205,791 ​ $ 178,703 ​ Deferred revenue at December 31, 2020 will be recognized as follows for all future years: ​ ​ ​ ​ Year Ending December 31, ​ ​ 2021 ​ $ 207,560 2022 ​ 11,441 2023 ​ 3,261 Total ​ $ 222,262 ​ Contract costs Deferred sales commissions earned by the Company’s sales force and certain sales incentive programs and vendor referral agreements are considered incremental and recoverable costs of obtaining a contract with a customer. An asset is recognized for these incremental contract costs and reflected as deferred commissions in the consolidated balance sheets. These contract costs are amortized on a straight-line basis over a period consistent with the transfer of the associated product and services to the customer, which is generally three years. Amortization of these costs are included in selling and marketing expense in the consolidated statements of comprehensive income (loss). The Company periodically reviews these contract assets to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these assets. There were no impairment losses recorded for the periods presented. The table provides information about the changes to contract cost balances as of and for the following periods: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ ​ 2020 ​ 2019 ​ 2018 Changes to deferred commissions: ​ ​ ​ Beginning balance ​ $ 11,196 ​ $ 8,830 ​ $ 5,676 Additions ​ 8,291 ​ 10,140 ​ 8,691 Amortization ​ (7,744) ​ (7,774) ​ (5,537) Ending balance ​ $ 11,743 ​ $ 11,196 ​ $ 8,830 ​ 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 F-16 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 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 include the direct cost to develop, host and distribute software products, the direct cost to provide customer support, and amortization of costs capitalized for software developed for sale, for internal-use software utilized for cloud-based subscriptions and for acquired intangible assets. Cost of revenues, services include 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 consolidated statements of comprehensive income (loss). These amounts were $199, $1,107 and $902 for the years ended December 31, 2020, 2019 and 2018, respectively. Research and Development Research and development costs consist primarily of personnel and related expenses for research and development activities including salaries, benefits and other compensation. Research and development costs are expensed as incurred in accordance with ASC 730, Research and Development, and are included in the consolidated statements of comprehensive income (loss). Advertising Advertising expense is recorded as incurred and is reflected in selling and marketing expense in the consolidated statements of comprehensive income (loss). Total advertising expense was $11,069, $11,921 and $8,956 for the years ended December 31, 2020, 2019 and 2018, respectively. Foreign Currency The Company transacts business in various foreign currencies. Management has concluded that the local country’s currency is the functional currency of its foreign operations. Consequently, operating activities outside the U.S. are translated into U.S. Dollars using average exchange rates, while assets and liabilities of operations outside the U.S. are translated into U.S. Dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are included in stockholders' equity (deficit) as a component of accumulated other comprehensive loss in the consolidated balance sheets. Related periodic movements in exchange rates are included in other comprehensive income (loss) in the consolidated statements of comprehensive income (loss). Other operating expense (income), net in the consolidated statements of comprehensive income (loss) includes net foreign exchange transaction losses of $155, $84 and $121 for the years ended December 31, 2020, 2019 and 2018, respectively. Income Taxes On July 27, 2020, the Company’s S-Corporation election (the “S Election”) was terminated by the Company’s stockholders in connection with the Offering. As a result, Vertex will now be taxed at the corporate level as a C-Corporation for U.S federal and state income tax purposes. In connection with the S Election termination, the Company entered into an agreement with the S-Corporation stockholders pursuant to which the Company has indemnified them for unpaid income tax liabilities and may be required to make future payments in material amounts to them attributable to incremental income taxes resulting from an adjustment to S-Corporation related taxable income that arises after the F-17 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) effective date of the S Election termination (the “Tax Sharing Agreement”). In addition, the Tax Sharing Agreement indemnifies the S-Corporation stockholders for any interest, penalties, losses, costs or expenses arising out of any claim under the agreement. Correspondingly, the S-Corporation stockholders have indemnified the Company with respect to unpaid tax liabilities (including interest and penalties) to the extent that such unpaid tax liabilities are attributable to a decrease in S-Corporation stockholders’ taxable income for any period and a corresponding increase in our taxable income for any period. Prior to July 27, 2020, as Vertex was taxed as an S-Corporation for U.S. federal income tax purposes and for most states, net income or loss was allocated to the stockholders and was included on their individual income tax returns. Historically the Company distributed amounts to the stockholders to satisfy their tax liabilities resulting from allocated net income or loss. In certain states, Vertex was taxed at the corporate level. Accordingly, the income tax provision or benefit was based on taxable income allocated to these states. In certain foreign jurisdictions, Vertex subsidiaries were taxed at the corporate level. Similar to states, the income tax provision or benefit is based on taxable income sourced to these foreign jurisdictions. Certain foreign subsidiaries in which we own greater than 50% of the equity by measure of vote or value are treated as controlled foreign companies (“CFCs”) for U.S. federal income tax purposes and most states under the IRS foreign tax regulations. The income and loss from these entities is reported on the Company’s U.S. federal and some state income tax returns when the foreign earnings are repatriated or deemed to be repatriated to the U.S. In conjunction with the termination of the S Election, certain direct and indirect wholly owned foreign subsidiaries that were previously treated as disregarded entities for U.S. federal income tax purposes and most states under the Internal Revenue Service (“IRS”) “check-the-box” regulations, “unchecked-the-box” to become regarded entities and as a result, became CFCs. Prior to these elections, the income and loss from these entities was reported on the Company’s U.S. federal and most state income tax returns in addition to being reported on a foreign jurisdiction tax return regardless of whether or not the earnings were repatriated. The Company records deferred income taxes using the 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 consolidated financial statements and tax returns. The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law. 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 impact as a result of the application of ASC 740 is reflected in the 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. The Company recorded a $24,944 deferred tax asset during the year ended December 31, 2020 as a result of the conversion from an S-Corporation to a C-Corporation. The deferred tax asset is primarily due to future stock-based compensation deductions for tax purposes resulting from SARs that were previously issued by the Company, converted to options and immediately exercised upon the effective date of the Offering. The exercise of these options has resulted in a net operating loss for the C-Corporation short tax year beginning July 27, 2020 and ending December 31, 2020. Based on Management’s evaluation of the positive and negative evidence, it is more likely than not that the Company will realize these benefits on future U.S. tax returns. F-18 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Total Comprehensive Income (Loss) Total comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. GAAP are recorded as elements of stockholders' equity (deficit) but are excluded from net income. Other comprehensive income (loss) is comprised of foreign currency translation adjustments and revaluations. Earnings Per Share (“EPS”) The Company has two classes of common stock outstanding and thus calculates EPS following the two-class method. This method allocates earnings for the respective periods between the two classes of common stock in proportion to the weighted average shares outstanding for each class of common stock as a percentage of total weighted average shares of both classes of common stock outstanding. Neither the Class A nor Class B common stock has any liquidity or dividend preferences and are both considered to be participating securities. Basic and diluted net income (loss) per share attributable to common stockholders is calculated using the treasury stock method. The basic net income (loss) per share attributable to Class A common stockholders includes RSAs, RSUs and ESPP shares once vesting or purchase contingencies are resolved and the related shares are deemed to be outstanding. The diluted net income (loss) per share attributable to Class A common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, all options to purchase shares of Class A common stock, RSAs, and RSUs are considered common stock equivalents. Additionally, the portion of ESPP shares for which the Company has received payments but for which the related shares are not yet issued and outstanding are also considered common stock equivalents. In periods of net loss available to common stockholders, diluted calculations are equal to basic calculations because the inclusion of common stock equivalents would be anti-dilutive. In accordance with ASC 260, Earnings Per Share , the historical EPS was retrospectively restated similar to the treatment of a stock split to reflect the Share Exchange for all periods presented prior to the Offering as management concluded that there was no economic value attributable to the exchange of shares in connection with the Recapitalization. Class A common stock issued in connection with the Offering are reflected in the weighted average share calculation from their issuance date. Unaudited Pro Forma Income Taxes A pro forma income tax provision has been disclosed in the accompanying consolidated financial statements as if the Company was a taxable corporation for the entirety of the year ended December 31, 2020. The Company has computed pro forma entity level income tax expense using an estimated effective tax rate of 25.5%, inclusive of all applicable U.S. federal, state, local and foreign income taxes. F-19 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Unaudited Pro Forma Earnings Per Share The Company has presented pro forma earnings per share for the year ended December 31, 2020 to reflect the pro forma adjustment to income taxes resulting from the conversion to a C-Corporation effective July 27, 2020. ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ ​ December 31, 2020 ​ Class A common stock: ​ (unaudited) ​ Numerator: ​ Pro forma net loss attributable to all stockholders ​ $ (80,362) ​ Class A common stock as a percentage of total shares outstanding ​ 8.44 % Pro forma net loss attributable to Class A stockholders ​ $ (6,780) ​ ​ ​ ​ ​ ​ Denominator: ​ ​ Weighted average Class A common stock, basic and diluted ​ 11,096 ​ ​ ​ ​ ​ ​ Pro forma net loss per Class A share, basic and diluted ​ $ (0.61) ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ ​ December 31, 2020 ​ Class B common stock: (unaudited) ​ Numerator: ​ Pro forma net loss attributable to all stockholders ​ $ (80,362) ​ Class B common stock as a percentage of total shares outstanding ​ 91.56 % Pro forma net loss attributable to Class B stockholders ​ $ (73,582) ​ ​ ​ ​ ​ ​ Denominator: ​ ​ Weighted average Class B common stock, basic and diluted ​ 120,415 ​ ​ ​ ​ ​ ​ Pro forma net loss per Class B share, basic and diluted ​ $ (0.61) ​ ​ F-20 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Supplemental Cash Flow Disclosures Supplemental cash flow disclosures are as follows for the respective periods: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ 2020 2019 2018 Cash paid for: ​ ​ ​ Interest ​ $ 2,461 ​ $ 1,766 ​ $ 1,853 Income taxes ​ $ 588 ​ $ 945 ​ $ 668 Non-cash investing and financing activities: ​ ​ ​ Distributions payable ​ $ — ​ $ 13,183 ​ $ 10,892 Estimated distributions payable under Tax Sharing Agreement ​ $ 2,700 ​ $ — ​ $ — Purchase Commitment Liability at acquisition date (Note 2) ​ $ 12,592 ​ $ — ​ $ — Remeasurement of options for redeemable shares ​ $ 51,833 ​ $ 2,763 ​ $ 1,027 Conversion of SARs in connection with the Offering ​ $ 129,710 ​ $ — ​ $ — Exchange of Amended Options in connection with the Offering ​ $ 69,177 ​ $ — ​ $ — Exercised options exchanged in lieu of income taxes ​ $ — ​ $ 184 ​ $ 209 Equipment acquired through capital leases ​ $ 646 ​ $ 1,904 ​ $ — ​ Recently Issued Accounting Pronouncements As an "emerging growth company," the Jumpstart Our Business Startups Act (the “JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to delay adoption of certain new or revised accounting standards. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. In February 2016, the FASB issued ASU No. 2016-02, Leases . This standard amends several aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset, and a corresponding lease liability, measured at the present value of the future minimum lease payments. The standard is effective for public entities for fiscal years beginning after December 15, 2018, and after December 15, 2020 for all other companies, with early adoption permitted. The Company intends to adopt this standard effective January 1, 2021 using the modified retrospective transition method and therefore will not restate comparative periods. The Company plans to elect the "package of three" practical expedients permitted under the transition guidance, which among other things, allows a carry forward of the historical lease classification conclusions. The Company expects to recognize, among other adjustments, operating lease assets totaling approximately $24,000 and operating lease liabilities of approximately $33,000 on the consolidated balance sheet at January 1, 2021 as a result of the implementation of this standard. We do not expect this standard to materially impact our earnings upon adoption. As implementation of this standard results in adjustments to and reclassifications of assets and liabilities which are non-cash in nature, there will be no impact on the Company’s cash flows in connection with the adoption of this standard. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) : Measurement of Credit Losses on Financial Instruments , (“ASU 2016-13”) which replaces the existing incurred loss impairment model with an expected credit loss model and requires financial assets, including trade receivables, measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, for business entities that are public and meet the definition of an SEC filer (excluding smaller reporting companies), and after December 15, 2022 for all other entities. Adoption of this guidance requires using a modified retrospective approach through a cumulative-effect adjustment to retained earnings F-21 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) as of the effective date to align existing credit loss methodology with the new standard. The Company has assessed the impact of ASU 2016-13 and has determined that the adoption of this standard, effective January 1, 2021, will not have any impact on the Company’s consolidated financial statements. In December 2019, the FASB issued ASU Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , (“ASU 2019-12”) which simplifies the accounting for income taxes. ASU 2019-12 removes certain exceptions for performing intraperiod tax allocations, recognizing deferred taxes for investments, and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in interim periods. The guidance in ASU 2019-12 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2020, for business entities that are public, and after December 15, 2021, including interim periods within those annual periods for all other entities, with early adoption permitted. The Company has elected to adopt this guidance effective January 1, 2021. While the Company is continuing to assess the potential impacts of ASU 2019-12, it does not expect ASU 2019-12 to have a material effect on its financial statements. Risks and Uncertainties In December 2019, a novel strain of coronavirus (“COVID-19”) appeared. In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic is having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. To protect the health and well-being of Company employees and customers, substantial modifications were made to employee travel policies, our offices were closed and employees advised to work from home, and conferences and other marketing events were cancelled or shifted to virtual-only. The COVID-19 pandemic has impacted and may continue to adversely impact Company operations, including employees, customers and partners, and there is substantial uncertainty in the nature and degree of its continued effects over time. The Company did not experience any significant reductions in sales, revenues or collections in the year ended December 31, 2020 as a result of COVID-19. The uncertainty caused by the COVID-19 pandemic could, however, impact Company billings to new customers beyond 2020 as the pandemic continues to generate economic uncertainty, and it may also negatively impact Company efforts to maintain or 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 in 2021 as the pandemic continues to generate economic uncertainty. However, these delays are not expected to materially impact the business, and thus the Company has not recorded an additional 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 its ability to continue to service its debt or other financial obligations is not currently impaired. The extent to which the COVID-19 pandemic impacts the business going forward will depend on numerous evolving factors that cannot reliably be predicted, including the duration and scope of the pandemic; governmental, business, and individuals’ actions in response to the pandemic; and the impact on economic activity, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business and government spending on technology as well as customers’ ability to pay for Company products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including estimated allowance for subscription cancellations, product life cycles and estimated useful lives and potential impairment of long-lived assets, intangible assets and goodwill. Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on previously reported comprehensive income or loss. F-22 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 2. BUSINESS COMBINATIONS On January 7, 2020, the Company acquired a 60% controlling interest in Systax, a provider of Brazilian transaction tax content and software. Cash consideration for the purchase was $12,374 and was funded through borrowings under a revolving line of credit. This acquisition provides the Company with full access to a sizeable database of Brazilian tax content that is critical to supporting its global multi-national customers’ business expansion into Brazil. The Company has a contractual purchase commitment to acquire the remaining 40% equity interest from the original Systax Quotaholders incrementally between 2021 through 2024. Future purchase commitment payments for these incremental acquisition amounts are based on a multiple of Systax revenue and earnings before interest, depreciation, amortization and income taxes (“EBITDA”) performance at the end of 2020, 2022 and 2023, whereby the Company will have full ownership after the final transaction in 2024. Management has determined these future purchase commitments to be a forward contract, resulting in the Company being required to estimate and record an estimated future purchase commitment amount (the “Purchase Commitment Liability”) in connection with recording the initial purchase. The fair value of the Purchase Commitment Liability was initially estimated to be $14,344 at the acquisition date based on information available at that time. Subsequently, during the fourth quarter of 2020 and based on the receipt of additional information and analysis, the fair value of the Purchase Commitment Liability at the acquisition date was finalized to be $12,592, thereby necessitating an adjustment to goodwill. This amount will fluctuate as a result of changes in foreign currency exchange rates and is reflected in Purchase Commitment Liability in the consolidated balance sheet at December 31, 2020. Adjustments to the settlement date value that arise as a result of remeasurement at future balance sheet dates will be recorded as interest expense related to financing costs in the consolidated statements of comprehensive income (loss) in the period the change is identified. The acquisition was accounted for as a business combination and the total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the excess being recorded as goodwill. The preliminary values recorded were adjusted within the Measurement Period upon the receipt of further information that become available regarding the fair values of these amounts as of the acquisition date, and such adjusted values are reflected in the tables below. Any subsequent adjustments to these values not associated with determination of their fair values on the acquisition date will be recorded in the consolidated statements of comprehensive income (loss) in the period the change is identified. The following table reflects the purchase price for Systax: ​ ​ ​ ​ ​ ​ January 7, 2020 Cash paid to Systax Quotaholders at closing ​ $ 11,626 Cash held in escrow for benefit of Systax Quotaholders ​ 748 Initial cash consideration ​ ​ 12,374 Purchase Commitment Liability ​ 12,592 Less cash acquired ​ (56) Total ​ $ 24,910 ​ F-23 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed as recorded in the Company’s consolidated balance sheet as of the acquisition date: ​ ​ ​ ​ ​ ​ ​ January 7, 2020 Accounts receivable ​ $ 495 Property and equipment ​ 112 Other current assets ​ 14 Goodwill ​ 21,089 Other intangible assets ​ ​ 3,650 Accounts payable ​ (358) Accrued expenses ​ ​ (92) Total ​ $ 24,910 ​ The excess of the purchase consideration over the net assets acquired is recorded as goodwill and primarily reflects the value of expected future synergies, the existence of intangible assets not recognized under U.S. GAAP such as the value of the assembled workforce and other market factors. Goodwill is deductible for tax purposes. The Company has included the financial results of Systax in the consolidated statement of comprehensive income (loss) from the date of acquisition in accordance with ASC 810 due to the Company having a controlling financial interest in Systax. Systax revenue and net loss for the year ended December 31, 2020 reflected in the consolidated statement of comprehensive income (loss) were $4,430 and $(1,089), respectively. The transaction costs associated with the acquisition were $504 and were recorded in general and administrative expense in the year ended December 31, 2019. ​ 3. Financial instruments and fair value measurements Our financial instruments subject to fair value measurements include cash and cash equivalents, funds held for customers, accounts receivable, accounts payable, accrued expenses, debt, and derivatives. 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 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. The fair value of the Company’s investments in money market accounts, being the same as their carrying value, were $168,330 and $61,644 at December 31, 2020 and 2019, respectively. Assets and Liabilities for Which Fair Value is Only Disclosed The residual carrying amount of cash and cash equivalents and the carrying amount of funds held for customers were the same as their respective fair values and are considered Level 1 measurements. The carrying amounts for accounts receivable, accounts payable, accrued expenses and debt approximate their relative fair values due to their short-term nature and are considered Level 2 measurements. Non-recurring Fair Value Measurements The Systax acquisition was accounted for as a business combination and the total purchase price was allocated to the net assets acquired and liabilities assumed based on their estimated fair values. The fair values of identifiable intangible F-24 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) assets were determined by an income approach, with application of an appropriate underlying method, such as a multi-period excess earnings, cost savings and or relief from royalty method, which we consider to be Level 3 measurements. The fair value of property and equipment was determined at the individual asset level using a combination of cost, sales and income approaches, which we consider to be Level 3 measurements. The fair values of all other identifiable assets acquired and liabilities assumed were primarily based on their carrying values, which we consider to be Level 2 measurements. The Company’s obligation with respect to future purchase commitments to the Systax Quotaholders was determined to be a forward contract necessitating initial recognition based on fair value. We estimated the initial fair value of our Purchase Commitment Liability using a Monte Carlo simulation, which we consider to be a Level 3 measurement. The significant assumptions used in the Monte Carlo simulation include, among other variables, forecasted cash flow projections consistent with those used to support the overall purchase price, selection of comparable companies, asset volatility and discount rate determinations and the total number of simulations to compute. Subsequent remeasurements of the Purchase Commitment Liability, as and if required, are not expected to be based on fair value. Derivatives and Hedging Activities We may periodically engage in hedging activities to reduce our exposure to foreign currency exchange rates. Our hedging activities are typically designed to manage specific risks according to our strategies, which may change from time to time. In May 2020, we entered into a series of foreign currency forward contracts to hedge a portion of our exposure to adverse fluctuations in the Brazilian Real associated with our Purchase Commitment Liability. Such forward contracts, which do not qualify for hedge accounting and are not material to our consolidated financial statements, are remeasured at fair value on a recurring basis and classified within other assets in our consolidated balance sheets and with changes in estimated fair value recognized as interest expense in our consolidated statements of comprehensive income or loss. Our fair value determinations are based on foreign currency exchange rates in active markets, which we consider to be Level 2 measurements within the Fair Value Hierarchy. 4 . PROPERTY AND EQUIPMENT The major components of property and equipment are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, ​ ​ 2020 ​ 2019 Leasehold improvements ​ $ 20,907 ​ $ 20,887 Equipment ​ 41,410 ​ 40,639 Computer software purchased ​ 11,620 ​ 11,232 Internal-use software developed: ​ ​ ​ Cloud-based customer solutions ​ 65,423 ​ 51,442 Internal systems and tools ​ 25,349 ​ 23,957 Furniture and fixtures ​ 7,674 ​ 7,455 In-process internal-use software ​ 3,304 ​ 791 ​ ​ 175,687 ​ 156,403 Less accumulated depreciation ​ (119,130) ​ (101,676) Property and equipment, net ​ $ 56,557 ​ $ 54,727 ​ Depreciation expense for property and equipment, excluding all internal-use software developed and capital leases, was $7,833, $7,386 and $7,279 for the years ended December 31, 2020, 2019 and 2018, respectively. Depreciation for F-25 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) property and equipment, excluding internal-use software developed for cloud-based customer solutions, is reflected in depreciation and amortization in the consolidated statements of comprehensive income (loss). Assets under capital leases of $1,360 and $1,455, net of accumulated depreciation of $1,370 and $627, at December 31, 2020 and 2019, respectively, are included in property and equipment in the consolidated balance sheets. Depreciation expense for assets held under capital leases was $743, $565 and $40 for the years ended December 31, 2020, 2019 and 2018, respectively, and is included in depreciation and amortization in the consolidated statements of comprehensive income (loss). The major components of internal-use software developed are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, ​ ​ 2020 ​ 2019 Internal-use software developed ​ $ 90,772 ​ $ 75,399 Less accumulated depreciation ​ (65,090) ​ (53,852) ​ ​ 25,682 ​ 21,547 In-process internal-use software ​ 3,304 ​ 791 Internal-use software developed, net ​ $ 28,986 ​ $ 22,338 ​ Amounts capitalized for internal-use software developed and included in property and equipment additions on the consolidated statements of cash flows are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ ​ 2020 ​ 2019 ​ 2018 Cloud-based customer solutions $ 14,710 $ 10,179 $ 14,345 Internal systems and tools ​ 3,176 ​ 4,860 ​ 2,484 Total ​ $ 17,886 ​ $ 15,039 ​ $ 16,829 ​ In-process internal-use software developed is not depreciated until it is available for its intended use. Depreciation expense for internal-use software developed for cloud-based customer solutions for the years ended December 31, 2020, 2019 and 2018 was $8,818, $7,982 and $11,707, respectively, and is included in cost of revenues, software subscriptions in the consolidated statements of comprehensive income (loss). Depreciation expense for internal-use software developed for internal systems and tools for the years ended December 31, 2020, 2019 and 2018 was $2,442, $1,045 and $618, respectively, and is included in depreciation and amortization in the consolidated statements of comprehensive income (loss). Research and development costs associated with internal-use software developed for cloud-based customer solutions were $10,518, $10,765 and $11,038 for the years ended December 31, 2020, 2019 and 2018, respectively, and is included in research and development in the consolidated statements of comprehensive income (loss). Amortization expense of internal-use software developed, excluding in-process internal-use software not yet available for its intended use, at December 31, 2020 is as follows for all future years: ​ ​ ​ ​ ​ ​ ​ Year Ending December 31, Internal Systems and Tools Cloud-Based Customer Solutions 2021 ​ $ 2,362 ​ $ 10,534 2022 ​ 2,049 ​ 6,795 2023 ​ 957 ​ 2,443 2024 ​ 473 ​ — 2025 ​ 69 ​ — Total ​ $ 5,910 ​ $ 19,772 ​ F-26 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) During the year ended December 31, 2018, the Company recorded an impairment of capitalized internal-use software previously utilized to provide cloud-based solutions to customers of $32,692, net of accumulated amortization of $11,907, due to a product strategy shift that resulted in this service no longer being offered to customers after 2018. The software was deemed to be fully impaired due to the net book value of the software exceeding expected future cash flows. This amount is included in impairment of assets in the 2018 consolidated statement of comprehensive income (loss). ​ ​ ​ ​ 5. CAPITALIZED SOFTWARE Capitalized software includes acquired software and direct labor and related expenses for software developed for sale for new products and enhancements to existing products. Software development costs capitalized for the years ended December 31, 2020, 2019 and 2018 were $11,850, $17,221 and $12,261, respectively. The major components of capitalized software are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, ​ 2020 2019 Capitalized software ​ $ 63,071 ​ $ 47,862 Less accumulated amortization ​ (32,217) ​ (20,281) ​ ​ 30,854 ​ 27,581 In-process capitalized software ​ 1,135 ​ 4,494 Capitalized software, net ​ $ 31,989 ​ $ 32,075 ​ Capitalized software amortization expense for the years ended December 31, 2020, 2019 and 2018 was $11,936, $8,212 and $5,257, respectively, and is included in cost of revenues, software subscriptions in the consolidated statements of comprehensive income (loss). In-process capitalized software at December 31, 2020 was not available for general release to customers as of the balance sheet date and therefore not included in the table below. Amortization expense of capitalized software available for general release to customers as of December 31, 2020 is as follows for all future years: ​ ​ ​ ​ Year Ending December 31, ​ 2021 ​ $ 11,811 2022 ​ 8,596 2023 ​ 5,974 2024 ​ 3,783 2025 ​ 690 Total ​ $ 30,854 ​ ​ 6. GOODWILL AND OTHER INTANGIBLE ASSETS At December 31, 2020, goodwill and other intangible assets were as follows: ​ ​ ​ ​ ​ Goodwill ​ $ 16,329 Other intangible assets, net ​ 2,382 ​ ​ $ 18,711 ​ F-27 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) The changes in the carrying amount of goodwill for the year ended December 31, 2020 are as follows: ​ ​ ​ ​ ​ Balance, January 1, 2020 ​ $ — Acquisition of Systax (Note 2) ​ 21,089 Foreign currency translation adjustments ​ ​ (4,760) Balance, December 31, 2020, net ​ ​ 16,329 Accumulated impairment losses ​ ​ — Balance, December 31, 2020, gross ​ $ 16,329 ​ During the year ended December 31, 2020, the Company recognized various amortizable intangible assets in connection with the acquisition of Systax (Note 2), including relating to customer relationships, technology and tradenames. The following tables provide additional information for our other intangible assets, which are individually not material to our consolidated financial statements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, 2020 ​ Weighted Average Amortization Period (Years) ​ ​ Gross Value ​ Accumulated Amortization ​ Carrying Value Other intangible assets ​ 5.5 ​ ​ $ 2,825 ​ $ 443 ​ $ 2,382 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, 2020 ​ ​ ​ ​ ​ Cost of Revenues, Software Subscriptions ​ Selling and Marketing Expense ​ Total Expense Amortization of acquired intangible assets ​ ​ ​ ​ $ 267 $ 176 $ 443 ​ The following table presents estimated future amortization of intangible assets: ​ ​ ​ ​ ​ Year Ending December 31, ​ 2021 ​ $ 616 2022 ​ 500 2023 ​ 500 2024 ​ 499 2025 ​ 267 Total ​ $ 2,382 ​ ​ ​ 7. DEBT Credit Agreement On March 31, 2020, the Company entered into a credit agreement with a bank, which was subsequently amended on April 3, 2020 to permit another bank to be a party to the agreement, consisting of a $175,000 term loan (the “Term Loan”) and a $100,000 committed line of credit (the “Line of Credit”) (collectively, the “Credit Agreement”). Net proceeds from the Term Loan after payment of financing fees of $2,904 and repayment of aggregate amounts outstanding under a previous credit agreement of $61,656, were used to fund a portion of the $123,185 distribution made to the stockholders on May 29, 2020 (see Note 8). A portion of the Offering proceeds was used to repay the $175,000 Term Loan in full on July 31, 2020. The Company received a refund of $468 of financing fees as a result of repayment of the Term Loan within 90 days of execution of the F-28 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Credit Agreement, which was recorded as a reduction of deferred financing costs associated with the Term Loan. The Company wrote off the remaining balance of deferred financing costs associated with the Term Loan of $1,174, which was recorded as interest expense in the consolidated statement of comprehensive income (loss) for the year ended December 31, 2020. The Line of Credit matures in March 2025 and had no outstanding borrowings at closing or at December 31, 2020. The Company has the option to select an applicable interest rate at either the bank base rate plus an applicable margin (the “Base Rate Option”) or the LIBOR plus an applicable margin (the “LIBOR Option”). The applicable margins are determined by certain financial covenant performance as defined in the Credit Agreement. At December 31, 2020, the Base Rate Option and LIBOR Option applicable to Line of Credit borrowings were 3.25% and 2.00%, respectively. The Credit Agreement is collateralized by certain assets of the Company and contains financial and operating covenants. The Company was in compliance with these covenants at December 31, 2020. Prior Credit Agreement At December 31, 2019, the Company had a credit agreement consisting of a term loan (the “Prior Term Loan”) with an outstanding principal balance of $50,375 and a $40,000 committed line of credit (the “Prior Line of Credit”) with no outstanding borrowings (collectively, the “Prior Credit Agreement”). The Prior Term Loan required quarterly principal payments over five years, with a balloon payment in November 2020. The Prior Line of Credit was due to expire on November 1, 2020. As a result of the Prior Term Loan becoming due in November 2020, the balance outstanding of $50,375 was included in current portion of long-term debt on the consolidated balance sheet at December 31, 2019. Unamortized deferred financing costs of $221 at December 31, 2019 were included as a reduction in current portion of long-term debt in the consolidated balance sheet. Amortization expense of deferred financing costs on the Prior Term Loan was $44 and $266 for the year ended December 31, 2020 and 2019, respectively, which was recorded as interest expense in the consolidated statements of comprehensive income (loss). The Company wrote off the remaining unamortized deferred financing costs associated with the Prior Term Loan of $177, which was recorded as interest expense in the consolidated statement of comprehensive income (loss) for the year ended December 31, 2020. Capital Leases Capital lease obligations were $1,107 and $1,332 at December 31, 2020 and 2019, respectively, and are included in current portion of long-term debt and long-term debt, net of current portion in the consolidated balance sheets. Future minimum capital lease payments as of December 31, 2020 are as follows: ​ ​ ​ ​ Year Ending December 31, ​ 2021 ​ $ 915 2022 ​ 230 Total ​ 1,145 Less amount representing interest ​ 38 Present value of minimum lease payments ​ 1,107 Less current portion ​ 882 Capital lease obligations, net of current portion ​ $ 225 ​ ​ F-29 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 8 . STOCKHOLDERS’ EQUITY (DEFICIT) Termination of S-Corporation status In connection with termination of the Company’s S-Corporation status effective July 27, 2020, the Company had an accumulated deficit of $354,291 pertaining to the S-Corporation shareholders which was reclassified to additional paid in capital upon such termination. Common Stock In connection with the Recapitalization, the Company: (i) effected the three-for-one Stock Split, which is reflected retrospectively in the consolidated financial statements; (ii) established the New Capital Structure; and (iii) effected the Share Exchange. Prior to the Share Exchange, the Company had 147 shares of former Class A common stock and 120,443 shares of former Class B common stock outstanding. Members of a family (the “Family”) owned 99.9% of all outstanding shares of both former classes of common stock, which was comprised of 100% of the former Class A common stock and 120,270 shares of the former Class B common stock. The remaining 173 shares of former Class B common stock were owned by non-Family members. There were no dividend or liquidation preference differences between the former Class A and former Class B shares. In connection with establishing the New Capital Structure, the shareholders authorized 450,000 shares of common stock, par value $0.001 per share, and 30,000 shares of preferred stock, par value $0.001 per share. Common stock is divided into two classes, Class A with one vote per share, and Class B with ten votes per share. The rights of the holders of Class A and Class B are identical, except with respect to voting and conversion rights. Upon transfer of Class B shares to a non-Family member, such shares will automatically convert to an equivalent number of Class A shares with the respective voting rights attributable to such new shares. Authorized Class A and Class B shares are 300,000 and 150,000 shares, respectively. There are no dividend or liquidation preference differences between Class A and Class B. In connection with the Share Exchange, the Family members exchanged each share of former Class A and former Class B for the equivalent number of Class B shares established as part of the New Capital Structure. In addition, the non-Family members exchanged their former Class B shares for an equivalent number of Class A shares established as part of the New Capital Structure. No funds were exchanged in connection with the Share Exchange and the aggregate number of shares outstanding both immediately prior to and after the Share Exchange remained the same at 120,590. In addition, common stock equivalents, all of which were held by non-Family members and which were previously exercisable into former Class B shares, became exercisable into Class A shares established as part of the New Capital Structure. In April 2020, Vertex issued 173 shares of former Class B common stock in connection with the exercise of options by option holders for cash of $53. These shares were exchanged for Class A common stock in connection with the Recapitalization on July 28, 2020. Also, on July 28, 2020, the Company sold 23,812 shares of Class A in connection with the Offering for $423,024, net of underwriting fees. Offering costs paid from these proceeds aggregated $6,222 and are reflected as a reduction of additional paid in capital in stockholders’ equity. In addition, the Company issued 510 shares of Class A in connection with the exercise of options by option holders, net of 381 shares returned to the Company in lieu of payment of the exercise price and taxes due on these exercises. In connection with the Offering, the Company also issued an aggregate 564 shares of Class A related to the conversion of SARs into options and the immediate exercise of these options into shares, net of 860 shares returned to the Company in lieu of payment of the exercise price and taxes due on these exercises. The Company also issued 890 Class A shares in connection with the exercise of outstanding options and 19 Class A shares in connection with RSAs granted at the Offering, which vested immediately. A stockholder exchanged 300 shares of Class B common stock for an equivalent number of shares of Class A common stock during the year ended December 31, 2020. F-30 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) In April 2019, Vertex issued 225 shares of former Class B common stock in connection with the exercise of options by option holders for cash of $68, net of 51 shares that were immediately returned to Vertex upon exercise in lieu of payment of income taxes payable by the option holders. At December 31, 2019 the Company held repurchased shares (“Treasury Stock”) aggregating 41,910 which are carried at cost and included in Treasury Stock in the consolidated balance sheet. Such amount is comprised of 41,757 shares of former Class B common stock and 153 shares of former Class A common stock. In connection with the Recapitalization, the Treasury Stock was retired and amounts associated with the Treasury Stock were reclassified to additional paid in capital. At December 31, 2020, there was no Treasury Stock. The Board declared distributions of $4,010 ($0.03 per share) and $123,185 ($1.02 per share) during the three months ended March 31 and June 30, 2020, respectively, and $5,706 ($0.05 per share) through July 25, 2020, pro rata to stockholders of former Class A and former Class B common stock. The Board declared aggregate pro rata distributions to stockholders of former Class A and former Class B common stock of $30,857 ($0.11 per share) and $38,916 ($0.09 per share) during the year ended December 31, 2019 and 2018, respectively During the three months ended December 31, 2020, the Company distributed $33 in December 2020 to the former S-Corporation shareholders and additionally recognized an estimated liability of $2,700 to be distributed to the former S-Corporation shareholders for income taxes related to the allocation of taxable income to the S-Corporation short tax period ended July 26, 2020, each in connection with obligations under the Tax Sharing Agreement. The Company is required to settle this liability for the 2020 S-Corporation short tax period on or before July 30, 2021. All obligations of the Company under the Tax Sharing Agreement are satisfied by adjustments of additional paid in capital. ​ ​ F-31 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 9 . EARNINGS PER SHARE The table below illustrates the calculation of basic and diluted net (loss) income per common share for the Class A common and Class B common for the periods reflected below. The weighted average shares outstanding have been retrospectively restated to reflect the Share Exchange for all periods prior to the Offering, resulting in the Class A shares representing non-Family-owned shares and Class B representing Family-owned shares for all periods presented. See Note 8 for further information on the Share Exchange. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, Class A common stock: 2020 2019 2018 Numerator, basic: ​ ​ ​ ​ Net (loss) income attributable to all stockholders ​ $ (78,937) ​ $ 31,057 ​ $ (6,106) ​ Class A common stock as a percentage of total shares outstanding, basic ​ 8.44 % 0.08 % 0.26 % Net (loss) income attributable to Class A stockholders, basic ​ $ (6,660) ​ $ 23 ​ $ (16) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Numerator, diluted: ​ ​ ​ ​ Net (loss) income attributable to all stockholders ​ $ (78,937) ​ $ 31,057 ​ $ (6,106) ​ Class A common stock as a percentage of total shares outstanding, diluted ​ 8.44 % 3.11 % 0.26 % Net (loss) income attributable to Class A stockholders, diluted ​ $ (6,660) ​ $ 965 ​ $ (16) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator, basic and diluted: ​ ​ ​ ​ Weighted average Class A common stock, basic ​ 11,096 ​ 118 ​ 210 ​ Dilutive effect of common stock equivalents* ​ — ​ 3,743 ​ — ​ Weighted average Class A common stock, diluted ​ 11,096 ​ 3,861 ​ 210 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income per Class A share, basic ​ $ (0.60) ​ $ 0.20 ​ $ (0.08) ​ Net (loss) income per Class A share, diluted ​ $ (0.60) ​ $ 0.25 ​ $ (0.08) ​ * The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to Class A stockholders because the impact of including them would have been anti-dilutive: 7,158 and 4,013 for the year ended December 31, 2020 and 2018, respectively. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, Class B common stock: 2020 2019 2018 Numerator, basic: ​ ​ ​ ​ Net (loss) income attributable to all stockholders ​ $ (78,937) ​ $ 31,057 ​ $ (6,106) ​ Class B common stock as a percentage of total shares outstanding, basic ​ 91.56 % 99.92 % 99.74 % Net (loss) income attributable to Class B stockholders, basic ​ $ (72,277) ​ $ 31,034 ​ $ (6,090) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Numerator, diluted: ​ ​ ​ ​ Net (loss) income attributable to all stockholders ​ $ (78,937) ​ $ 31,057 ​ $ (6,106) ​ Class B common stock as a percentage of total shares outstanding, diluted ​ 91.56 % 96.89 % 99.74 % Net (loss) income attributable to Class B stockholders, diluted ​ $ (72,277) ​ $ 30,092 ​ $ (6,090) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator, basic and diluted: ​ ​ ​ ​ Weighted average Class B common stock, basic ​ 120,415 ​ 120,417 ​ 120,417 ​ Dilutive effect of common stock equivalents ​ — ​ — ​ — ​ Weighted average Class B common stock, diluted ​ 120,415 ​ 120,417 ​ 120,417 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income per Class B share, basic ​ $ (0.60) ​ $ 0.26 ​ $ (0.05) ​ Net (loss) income per Class B share, diluted ​ $ (0.60) ​ $ 0.25 ​ $ (0.05) ​ ​ ​ F-32 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 10 . EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS 401(k) Plan The Company maintains a 401(k) plan that covers eligible employees subject to certain age and length of service requirements. The Company matches up to 3% of eligible compensation during the period in which an eligible participant contributes to the plan. Matching contributions were $4,011, $3,419 and $2,893 for the years ended December 31, 2020, 2019 and 2018, respectively. In addition, a discretionary profit-sharing contribution of 3% of eligible compensation for eligible employees was approved and aggregated $4,035, $3,363 and $2,886 for the years ended December 31, 2020, 2019 and 2018, respectively, and is reflected in accrued salaries and benefits in the consolidated balance sheets. Long-Term Rewards Plan The Company has a long-term rewards (“LTR”) plan for certain key employees which provides for compensation related to growth in certain financial measures over a three-year period (the “Reward Performance Period’), subject to achieving an annual minimum net income target (the “Net Income Target”) during each year of the Reward Performance Period. Each year, eligible LTR plan participants receive an individual target award opportunity (“Award Opportunity”) for a new three-year Reward Performance Period (i.e., target award grant made in 2018 is for years 2018 through 2020). Compensation earned for growth in the financial measures over each Reward Performance Period is paid in cash in the year following the end of the respective Reward Performance Period, assuming the Net Income Target was achieved in the final year of the Reward Performance Period. Estimated compensation is recorded during each year of a Reward Performance Period (“accrued LTR Award Opportunities”). Compensation expense included $3,027, $2,462 and $2,012 for the years ended December 31, 2020, 2019 and 2018, respectively, for open Reward Performance Periods. Amounts paid to participants in 2020 for the Reward Performance Period starting in 2017 of $2,717 is reflected in deferred compensation, current in the consolidated balance sheet as of December 31, 2019. Amounts estimated to be paid in 2021 for performance through December 31, 2020 for the Reward Performance Period starting in 2018 of $1,987 is reflected in deferred compensation, current in the consolidated balance sheet as of December 31, 2020. The remaining balances of accrued LTR Award Opportunities for open Reward Performance Periods of $2,772 and $1,812 as of December 31, 2020 and 2019, respectively, are reflected in deferred compensation, net of current portion, in the consolidated balance sheets. After December 31, 2020, no new LTR Award Opportunities will be granted under the LTR plan as future long-term awards will only be made under the 2020 Plan. Stock-Based Award Plans On the effective date of the Offering, the Company adopted the 2020 Plan and the ESPP. The 2020 Plan provides the ability to grant cash and equity-based incentive awards to eligible employees, directors and service providers in order to attract, retain and motivate those that make important contributions to the Company. The 2020 Plan provides for the award of stock options, RSAs, RSUs, SARs and other cash compensation. The Company granted 694 RSAs and 10 RSUs on the effective date of the Offering. The ESPP provides eligible employees with rights during each six-month ESPP offering period to purchase shares of the Company’s Class A common at the ESPP discount through payroll deductions, or through lump sum payments during the initial offering period (July 28 to November 30, 2020). Amounts withheld or received from participants are reflected in accrued salaries and benefits in the consolidated balance sheets until such shares are purchased. Amounts withheld from participants for the offering period ending May 31, 2021 aggregated $246 as of December 31, 2020. F-33 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Stock-based award plan events and related activity are described further below. Prior to the adoption of the 2020 Plan, the Company had a SAR plan for the purpose of providing incentives to key members of management and consultants to contribute to the growth and financial success of the Company. As a result of the Offering, SAR participants were offered the option to either redeem their SARs upon the occurrence of the Offering or amend their SARs pursuant to which, upon effectiveness of the 2020 Plan, such SARs would become options to purchase shares of Class A common stock under the 2020 Plan (the “SAR Exchange Offer”). All SAR participants eligible to receive the SAR Exchange Offer accepted and had their outstanding SARs, which aggregated 12,038, converted to options with equivalent terms under the 2020 Plan at the Offering effective date (the “Converted SARs”). This was considered a modification of these SAR awards as described further below. The SAR plan was retired (“Retired SAR Plan”) and any future SARs will be granted under the 2020 Plan. This activity is described further below. Prior to the adoption of the 2020 Plan, the Company had options outstanding to purchase 3,676 shares of former Class B common stock. U pon the effectiveness of the Offering, these options were amended and exchanged for options to purchase an equivalent number of Class A shares at the same exercise price and vesting, subject to many of the terms of the 2020 Plan. These options remain subject to expiration in connection with a Triggering Event under the terms of the original option agreements (the “Amended Options”). This activity is described further below. The following table reflects the exchanges and new issuances of stock-based awards in connection with the Offering: ​ ​ ​ ​ ​ ​ ​ Units Outstanding July 27, 2020 ​ Units (Exchanged) Issued in Connection with Offering ​ Units Outstanding July 28, 2020 (Prior to Exercises) SARs 12,086 ​ (12,038) ​ 48 Amended Options 3,676 ​ (3,676) ​ — 2020 Plan options — ​ 15,714 ​ 15,714 RSAs — ​ 694 ​ 694 RSUs — ​ 10 ​ 10 ​ Compensation expense and additional information pertaining to stock-based awards is described further below. 2020 Plan An aggregate of 16,500 shares of our Class A common stock was initially available for issuance under the 2020 Plan. The number of shares initially available for issuance will be increased annually on January 1 of each calendar year beginning in 2021 and ending in and including 2030, equal to the lesser of (i) 4% of the shares of Class A and Class B common stock outstanding on the final day of the immediately preceding calendar year and (ii) a smaller number of shares as determined by the Board. No more than 3,000 shares of Class A common may be issued under the 2020 Plan upon the exercise of incentive stock options. Shares available under the 2020 Plan may consist of authorized but unissued shares, shares purchased on the open market, or treasury shares. If an award under the 2020 Plan expires, lapses or is terminated, exchanged for cash, surrendered, repurchased, or canceled without having been fully exercised or forfeited, any unused shares subject to the award will again be available for new grants under the 2020 Plan. Awards granted under the 2020 Plan in substitution for any options or other stock or stock-based awards granted by an entity before the entity’s merger or consolidation with or acquisition by the Company of the entity’s property or stock will not reduce the shares available for grant under the 2020 Plan but will count against the maximum number of shares that may be issued upon the exercise of incentive stock options. As of December 31, 2020, 1,869 shares of our Class A common were available for issuance under the 2020 Plan. No incentive stock options that would be subject to the 3,000 Class A share limit were issued or outstanding under the 2020 Plan at December 31, 2020. Awards issued under the 2020 Plan vest based on service criteria established by the Board. The Company has elected to account for forfeitures as they occur rather than estimate forfeitures at date of grant. F-34 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Retired SAR Plan The Retired SAR Plan enabled the Company to grant awards (“SAR Awards”) as a fixed number of shares of former Class B common stock (“SAR Units”). SAR Units outstanding aggregated 12,276 at December 31, 2019. SAR Units were issued at the equivalent of the fair value of the equivalent number of shares of the Company’s former Class B common stock on the grant date (“Base Value”), as determined by the Board with assistance from management and an independent third-party valuation provider, and compensation recorded based upon the appreciation of the SAR Units in excess of the Base Value over the requisite service period. SAR Awards were exercisable upon 50% vesting or upon the occurrence of a triggering event. Prior to the SAR Exchange Offer being made, vested SAR Units were redeemable upon the occurrence of a triggering event which included: (i) expiration of the term of the SAR Award; (ii) a change of control of the Company whereby stockholders holding at least 50% of the voting stock of the Company sell their shares; (iii) a merger of the Company with an unrelated third-party; (iv) an initial public offering; and (v) death, disability or retirement of a SAR participant. SAR participants were limited to exercising no more than 25% of their vested SAR Units in any given year. SAR Awards generally vested 50% and 100% after two years and five years, respectively, from the grant date, or as determined by the Board. Maximum contractual terms ranged from ten years to the term of employment of the participant. SAR Awards were settled in cash only, not through the issuance of shares. SAR Award exercises were limited each year to the proportion of the vested SAR Units to the total SAR Units outstanding multiplied by adjusted net cash from operating activities (the “Liquidity Pool”), which was defined as cash from operating activities less cash paid for property and equipment and capitalized software for a given period. The SAR Exchange Offer resulted in eligible SAR participants amending their SAR Units pursuant to which, upon effectiveness of the Company’s 2020 Plan, such SAR Units were exchanged for options under the 2020 Plan. Effective July 13, 2020, the SAR Exchange Offer period ended and all SAR participants eligible to receive the offer accepted and had their outstanding SAR Units converted to options with equivalent terms under the 2020 Plan on the effective date of the plan upon the Offering. This was considered an accounting modification of these SAR Awards. Converted SARs with either no expiration date or that expired during calendar year 2020 were converted to options and automatically exercised into shares (the “Auto Exercise New Options”) on the effective date of the Offering. Shares issued in connection with the Auto Exercise New Options were net of the number of shares of common stock necessary to satisfy the aggregate exercise price and the tax withholding obligation of such options of $13,835. The Auto Exercise New Option participants also had the ability to require the Company to repurchase all or a portion of these on the Offering effective date for cash based on the Offering price of $19.00 per share, which aggregated $9,054. The aggregate of these amounts of $22,889 is reflected as a reduction of cash provided by operating activities as these payment requirements arose when the original SARs were liability-classified prior to their conversion and exercise. Management continued to record changes in the intrinsic value of the SAR Units in 2020 up to July 2, 2020, the date on which management determined the Company was considered to have become a public entity. Management measured the change in accounting policy of $2,422 in accordance with ASC 718 during the year ended December 31, 2020, which included $1,299 of vested Converted SARs that were recognized as compensation expense during this period, with the remaining $1,122 of unvested Converted SARs being recognized as compensation expense over the remaining service period of one to five years through 2025. The additional incremental increase in fair value of the Converted SARs after July 2, 2020 and up to the time of the exchange on the Offering effective date resulting from the modification was recorded as compensation expense. The fair value of the Converted SARs, estimated using the Black-Scholes model, was $197,708, of which $153,366 was vested as of the Offering date. Management recorded additional compensation expense of $57,079 for vested Converted SARs from July 1 to the Offering effective date, which included the $1,299 impact of the change in accounting of vested Converted SARs. The remaining $44,342 of unvested Converted SAR liability, which includes the $1,122 of unvested Converted SARs in connection with the change in accounting policy on July 2, 2020, will be recognized F-35 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) as compensation expense over the remaining service period of one to five years through 2025. Upon modification, the Converted SARs are no longer being recorded as a liability under ASC 718 and the accumulated liability balance, net of amounts for payment of tax withholding and redemption, was reclassified to stockholders’ equity. No incremental compensation expense arose in connection with the SAR modification. The assumptions used in the Black-Scholes model to determine the fair value of the Converted SARs on the modification date are as follows: ​ ​ ​ ​ ​ Fair market value of common stock (per share) $ 19.00 ​ Volatility 36.70 % Expected term (years) 6.5 ​ Expected dividend yield — % Risk-free interest rate 0.40 % ​ As of the modification date, the Company lacked sufficient historical data on the volatility of its stock price. Selected volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term. The expected term represents the term of the Converted SARs, which ranges from within one year to ten years. The Company does not expect to pay dividends after the Offering. The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the SAR grants. Prior to the Offering, the fair value of the common stock underlying the SAR Awards was determined by the Board with assistance from management and an independent third-party valuation firm. The determination of value used the market and income approaches, with an adjustment for marketability discount pertinent to private company entities in arriving at the per share fair value (the “valuation methodology”). Under the market approach, the guideline public company method is used, which estimates the fair value of the Company based on market prices of stock of guideline public companies. The income approach involves projecting the future benefits of owning an asset and estimating the present value of those future benefits by discounting them based upon the time value of money and the investment risks associated with ownership. At the end of 2019, due to the consideration by the Board of pursuing the Offering, the valuation methodology began to consider the impact of such an event on the value of the Company’s common stock underlying the awards. As the Company approached the Offering effective date, this resulted in increases in the value of the SAR Awards which resulted in corresponding increases to compensation expense for the year ended December 31, 2020 which exceeded historical results. F-36 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) The below table represents SAR activity for the following periods: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Units Range of ​ Vested Nonvested Total Grant Values Outstanding at January 1, 2019 5,889 4,782 10,671 ​ $ 0.92–$3.17 Granted 297 2,112 2,409 ​ $ 3.73 Exercised (609) — (609) ​ $ 1.31–$2.50 Forfeited — (195) (195) ​ $ 2.13–$2.50 Vested 630 (630) — ​ Outstanding at December 31, 2019 6,207 6,069 12,276 ​ $ 0.92–$3.73 Granted 21 681 702 ​ $ 4.70 Exercised (877) — (877) ​ $ 1.31–$2.50 Forfeited — (63) (63) ​ $ 2.50 Vested 1,410 (1,410) — ​ Converted (6,761) (5,277) (12,038) ​ $ 0.92–$4.70 Outstanding at December 31, 2020 — — — ​ ​ — ​ Prior to July 2, 2020, the weighted average grant date intrinsic value of the SARs on grant date was zero as the Company’s Board granted all awards at a price per share not less than the per share fair value of the Company’s former Class B common stock underlying such awards on the date of grant. Accrued SAR Awards of $5,790 as of December 31, 2019, representing SAR Units scheduled for redemption and 25% of the vested SAR Units eligible for exercise within 12-months of the balance sheet date are reflected in deferred compensation, current in the consolidated balance sheets. The remaining balance of accrued SAR Awards of $16,506 at December 31, 2019 is reflected as deferred compensation, net of current portion, in the consolidated balance sheet. We had approximately $3,900 of total unrecognized compensation expense for unvested SAR awards at December 31, 2019. At the Offering effective date, the liability for total recognized compensation for vested SAR Awards of $143,519 was reclassified to additional paid in capital as these awards were reclassified to equity-based awards on this date subject to the terms of the 2020 Plan. Unrecognized compensation for unvested SAR awards of $44,342 will be recognized as compensation expense under the 2020 Plan over the respective service periods of one to five years. Amended Options On July 20, 2020, the Amended Options resulted from the Board amending the outstanding options to provide for their exchange for options to purchase an equivalent number of Class A shares available under the 2020 Plan at the same exercise price, vesting and term . The amendment of the options was deemed an accounting modification. No incremental compensation was recorded in connection with this modification as it was determined that the value of the Amended Options was the same both before and after the modification. The Amended Options remain exercisable upon: (i) the option holder no longer serving as an employee of the Company or a member of the Board; (ii) the Grantee’s death or disability; (iii) the occurrence of a Partial Triggering Event (as defined below); or (iv) the occurrence of a Triggering Event (as defined below). Prior to being amended, the option agreements provided employee option holders with the ability to exercise a portion of their options between April 15 and April 30 of each year based upon the fair value of the Class B common stock as of December 31 of the prior calendar year, provided that certain Company performance is achieved. Upon amendment, the options are instead now subject to restrictions on trading during certain periods (“blackout dates”). Option holders are permitted to satisfy tax withholding obligations incurred in connection with the exercise by exchanging exercised options in lieu of payment of income taxes paid by the Company on their behalf. In the event of the sale of at least 50% of the Company’s stock or all the assets of the Company (“Triggering Event”) in a single or multiple transactions, the option holders have the right to exercise their options and sell their related shares F-37 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) in connection with the transactions. Unexercised options expire after a Triggering Event. In the event of a sale of at least 25% of the Company’s assets to an unrelated third-party in a single or multiple transactions (“Partial Triggering Event”), the option holders have the right to exercise a portion of their options pro rata based on the sales price and sell their related shares in connection with the transaction. Unexercised options remaining after a Partial Triggering Event remain outstanding. In addition, in the event stockholders owning at least 51% of the outstanding stock of the Company (the “selling stockholders”) sell a portion of their stock to an unrelated third-party, the option holders have the right to exercise and sell an amount of options in the same proportion as the selling stockholders (a “tag-along right”). The option holders may also be required to exercise all their outstanding options and sell all related shares in the event the selling stockholders sell at least 51% of their ownership to an unrelated third-party (a “drag-along right”). Prior to the amendment, the options permitted holders to put their exercised shares back to the Company, thus the options were classified as temporary equity and included in “Options for Redeemable Shares” on the consolidated balance sheets. The Company recorded increases in the value of Options for Redeemable Shares of $51,833, $2,763 and $1,027 during the years ended December 31, 2020, 2019 and 2018, respectively. The option holders’ ability to put the exercised Amended Option shares to the Company in order to attain liquidity was exchanged for the right by the holders to exercise these options and sell the related shares on the NASDAQ exchange. As a result of this put right no longer being applicable, the options were no longer considered temporary equity and were reclassified to stockholders’ equity in the amount of $69,177 during the year ended December 31, 2020. The following table summarizes activity for the Amended Options from January 1, 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ Average ​ ​ ​ ​ ​ ​ ​ Average ​ Remaining ​ Aggregate ​ ​ ​ ​ ​ Exercise ​ Contractual ​ Intrinsic Amended Option Activity ​ Units ​ ​ Price ​ Life (Years) ​ Value Outstanding at January 1, 2019 ​ 4,125 ​ $ 0.20 ​ * ​ $ 14,581 Exercised ​ (276) ​ $ 0.25 ​ ​ ​ $ 957 Outstanding at December 31, 2019 ​ 3,849 ​ $ 0.19 ​ * ​ $ 17,344 Exercised through June 30 ​ (173) ​ $ 0.30 ​ ​ ​ $ 759 Amendment and exchange of options ​ (3,676) ​ $ 0.19 ​ * ​ $ 69,177 Outstanding at December 31, 2020 ​ — ​ ​ ​ ​ ​ ​ ​ ​ *Options have indefinite contractual lives ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ F-38 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Options under 2020 Plan The Company issued no options under the 2020 Plan through December 31, 2020 other than those associated with the Converted SARs and the Amended Options previously discussed. The following table summarizes activity for options outstanding under the 2020 Plan: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ Average ​ ​ ​ ​ ​ ​ ​ Average ​ Remaining ​ Aggregate ​ ​ ​ ​ ​ Exercise ​ Contractual ​ Intrinsic 2020 Plan Option Activity ​ Units ​ ​ Price ​ Life (Years) ​ Value Outstanding at January 1, 2020 ​ — ​ ​ — ​ ​ ​ ​ ​ Issued in connection with Converted SARs ​ 12,038 ​ $ 2.76 ​ ​ ​ ​ ​ Issued in connection with Amended Options ​ 3,676 ​ $ 0.19 ​ * ​ ​ ​ Total options granted ​ 15,714 ​ $ 2.16 ​ ​ ​ ​ ​ Forfeited ​ (156) ​ $ 3.29 ​ ​ ​ ​ ​ Exercised ​ (3,682) ​ $ 1.21 ​ ​ ​ $ 70,137 2020 Plan options outstanding at December 31, 2020 ​ 11,876 ​ $ 2.44 ​ 5.29 ​ $ 384,883 2020 Plan options exercisable at December 31, 2020 6,943 ​ $ 1.74 3.59 ​ $ 229,911 *Amended Options have indefinite contractual lives ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The detail of options outstanding, vested and exercisable under the 2020 Plan as of December 31, 2020 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Options Outstanding ​ Options Vested and Exercisable ​ ​ Weighted ​ Weighted ​ ​ ​ ​ Average ​ ​ ​ Average Exercise Prices ​ Units ​ Life (Years) ​ Units ​ Life (Years) $0.15 to $0.71 2,552 — 2,552 — $2.15 1,115 4.1 1,115 4.1 $2.50 2,816 5.4 1,808 5.4 $2.67 817 6.2 377 6.2 $3.17 1,563 7.3 813 7.3 $3.73 2,330 8.7 278 8.6 $4.70 683 9.1 — — ​ 11,876 ​ ​ 6,943 ​ ​ ​ The Board intends all options granted to be exercisable at a price per share not less than the per share fair market value of the Company’s Class A common stock underlying the options on the date of grant. Compensation expense for new option awards issued subsequent to the Offering to participants under the 2020 Plan are measured based on the grant date fair value of the awards and recognized in the consolidated statements of comprehensive income (loss) over the period during which the participant is required to perform the requisite services. The vesting period is generally one to four years. The grant date fair value of options is estimated using the Black-Scholes model. No new options were granted subsequent to the Offering through December 31, 2020. Unrecognized compensation expense associated with the Converted SARs was $33,671 at December 31, 2020 and is expected to be recognized over a weighted average period of approximately 3.4 years. F-39 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Restricted Stock Units The Company issued RSUs to eligible participants during the year ended December 31, 2020. The following table summarizes RSU activity for the year ended December 31, 2020: ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ Average ​ ​ ​ ​ Grant Date Fair ​ ​ Units ​ Value Per Share Outstanding at January 1, 2020 — ​ $ — Granted 101 ​ 23.80 Outstanding at December 31, 2020 101 ​ $ 23.80 ​ Stock-based compensation cost for RSUs is measured based on the fair value of the Company’s underlying common stock on the date of grant and aggregated $2,400 in the year ended December 31, 2020. This cost will be recognized on a straight-line basis in the consolidated statements of comprehensive income (loss) over the period during which the participant is required to perform services in exchange for the award, which is generally one to four years. During the year ended December 31, 2020 the Company recognized stock-based compensation expense of $171 related to these awards. At December 31, 2020, $2,229 of unrecognized compensation cost for RSUs is expected to be recognized over a weighted average period of approximately 3.4 years. Restricted Stock Awards The Company issued RSAs to eligible participants during the year ended December 31, 2020. The following table summarizes RSA activity for the year ended December 31, 2020: ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ Average ​ ​ ​ ​ Grant Date Fair ​ ​ Units ​ Value Per Share Outstanding at January 1, 2020 — ​ $ — Granted 694 ​ 19.00 Vested (21) ​ 19.00 Forfeited (3) ​ 19.00 Outstanding at December 31, 2020 670 ​ $ 19.00 ​ Stock-based compensation cost for RSAs is measured based on the fair value of the Company’s underlying common stock on the date of grant and aggregated $13,141 during the year ended December 31, 2020. This cost will be recognized on a straight-line basis in the consolidated statements of comprehensive income (loss) over the period during which the participants are required to perform services in exchange for the award, which is generally one to four years. During the year ended December 31, 2020, the Company recognized stock-based compensation expense of $4,284, net of forfeitures, related to these awards. At December 31, 2020, $8,857 of unrecognized compensation cost for RSAs is expected to be recognized over a weighted average period of approximately 2.2 years. Employee Stock Purchase Plan The ESPP permits participants to purchase Class A common stock through payroll deductions of up to a specified percentage of their eligible compensation, provided that participants will be permitted to make lump sum contributions to the ESPP during the initial offering period (July 28 to November 30, 2020). The maximum number of shares that may be purchased by a participant during any offering period is determined by the plan administrator in advance of each offering period. F-40 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) On the first trading day of each offering period, each participant will automatically be granted an option to purchase shares of Class A common. The option will expire at the end of the applicable offering period and will be exercised at that time to the extent of the payroll deductions accumulated or contributions made during such offering period. The purchase price of the shares, in the absence of a contrary designation, is 85% of the lower of the fair value of the Class A common on the first or last day of the ESPP offering period. Participants may voluntarily end their participation in the plan at any time during a specified period prior to the end of the applicable offering period and will be paid their accrued payroll deductions and related contributions, if applicable, that have not yet been used to purchase shares of Class A common. If a participant withdraws from the plan during an offering period, the participant cannot rejoin until the next offering period. Participation ends automatically upon a participant's termination of employment. A total of 1,000 shares of Class A common were initially reserved for issuance under the ESPP. The number of shares available for issuance under the ESPP will be increased annually on January 1 of each calendar year beginning in 2021 and ending in and including 2030, by an amount equal to the lesser of (i) 1% of the shares of Class A and Class B common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by the Board, provided that no more than 16,000 shares of Class A common stock may be issued. The ESPP is administered by a committee of the Board. During the year ended December 31, 2020, the Company recorded stock-based compensation expense of $326 related to the ESPP. Shares of Class A common stock purchased under the ESPP aggregated 59 for the year ended December 31, 2020. As of December 31, 2020, there was approximately $218 of unrecognized ESPP stock-based compensation cost that is expected to be recognized on a straight-line basis over the remaining term of the offering period that ends on May 31, 2021. The fair value of ESPP purchase rights is comprised of the value of the 15% ESPP discount and the value associated with the Call/Put over the ESPP offering period. The value of the Call/Put for the initial offering period (July 28 – November 30, 2020) and the second offering period (December 1, 2020 – May 31, 2021) was estimated using the Black-Scholes model with the following assumptions: ​ ​ ​ ​ ​ ​ ​ ​ Initial ​ Second ​ ​ Offering Period Offering Period Fair market value of common stock (per share) $ 19.00 ​ $ 25.83 ​ Volatility ​ 35.00 % 35.00 % Expected term (years) ​ 0.33 ​ 0.50 ​ Expected dividend yield ​ - % - % Risk-free interest rate ​ 0.11 % 0.11 % ​ The Company lacks sufficient historical data on the volatility of its stock price. Selected volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term. The expected term represents the term of the ESPP offering period, which is generally six months except for the initial offering period which was from July 28 to November 30, 2020. The Company does not expect to pay dividends after the Offering. The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the award at the date nearest the offering term. F-41 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Stock-Based Compensation The Company recognized total stock-based compensation cost related to incentive awards as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ 2020 2019 2018 Stock-based compensation expense: ​ ​ ​ SARs and Converted SARs ​ $ 143,123 ​ $ 9,460 ​ $ 5,108 Stock options ​ — ​ — ​ — RSUs ​ 171 ​ — ​ — RSAs ​ ​ 4,284 ​ ​ — ​ ​ — ESPP ​ 326 ​ — ​ — Total stock-based compensation expense ​ $ 147,904 ​ $ 9,460 ​ $ 5,108 ​ The Company recognized stock-based compensation cost in the consolidated statements of comprehensive income (loss) as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ 2020 2019 2018 Stock-based compensation expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenues, software subscriptions ​ $ 14,663 ​ $ 946 $ 512 Cost of revenues, services ​ 21,472 ​ 1,419 765 Research and development ​ 14,694 ​ 946 511 Selling and marketing ​ 29,551 ​ 1,892 1022 General and administrative ​ 67,524 ​ 4,257 2298 Total stock-based compensation expense ​ $ 147,904 ​ $ 9,460 ​ $ 5,108 ​ ​ 11. RELATED PARTIES The Company advanced amounts to certain stockholders of the Company of $283 at December 31, 2019. These amounts are non-interest bearing as they are short-term in nature and repaid within three months. These amounts are included in prepaid expenses and other current assets in the consolidated balance sheet. No amounts were outstanding at December 31, 2020. ​ 12. COMMITMENTS AND CONTINGENCIES The Company leases office space under operating leases that expire at various dates through September 2028. Rent expense under all property operating leases was $7,006, $6,408 and $6,291 for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts are reflected in general and administrative expense in the consolidated statements of comprehensive income (loss). F-42 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Future minimum lease obligations as of December 31, 2020 for all operating property leases for all future years, excluding operating costs, are as follows: ​ ​ ​ ​ Year Ending December 31, ​ 2021 ​ $ 5,442 2022 ​ 4,518 2023 ​ 4,459 2024 ​ 4,464 2025 ​ 4,382 Thereafter ​ 12,531 Total ​ $ 35,796 ​ The Company may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is not aware of any such legal proceedings or claims that management believes will have a material adverse effect on our business, financial condition, or operating results. ​ ​ 13. INCOME TAXES The Company has historically been taxed as an S-Corporation for U.S. federal income tax purposes and for income tax purposes in most states. As a result, income was not subject to U.S. federal income taxes or state income taxes in those states where the S-Corporation status is recognized. Therefore, previously, no provision or liability for federal or state income tax had been provided in the consolidated financial statements except for those states where the S-Corporation status was not recognized, or where states imposed a tax on S-Corporations. The provision for income tax in the historical periods prior to the Offering consists of these state taxes and taxes from certain foreign jurisdictions where the Company is subject to tax. Effective July 27, 2020 the Company converted to a C-Corporation, which has resulted in net income or losses for all future periods to be taxed at the corporate level. The termination of the S-Corporation status was treated as a change in tax status resulting in the deferred tax effects of such change being recorded to income from continuing operations on the date the S-Corporation status terminated. The termination of the S-Corporation election has had a material impact on the Company’s results of operations and financial condition. As such, the Company’s income tax provision for periods subsequent to the C-Corporation conversion will not be comparable to periods prior to such conversion. For U.S. corporate income tax purposes, the Company will apportion its 2020 taxable income ratably between the S-Corporation and C-Corporation periods. This allocation of income will effectively result in a blended income tax rate for the 2020 year, as only the C-Corporation earnings will be subject to both U.S. federal and state corporate income tax, while the S-Corporation earnings will only be subject to tax in those states that tax S-Corporations or do not recognize S-Corporation status. The components of net income (loss) before income taxes, by geography, are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ ​ 2020 2019 2018 U.S. ​ $ (107,959) ​ $ 32,131 ​ $ (1,999) Foreign ​ 90 ​ (1,229) ​ (2,428) Net income (loss) before income taxes ​ $ (107,869) ​ $ 30,902 ​ $ (4,427) ​ F-43 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Income tax benefit (expense) consists of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended December 31, ​ ​ 2020 2019 2018 Current income taxes: ​ ​ ​ Federal ​ $ — ​ $ — ​ $ — State and local ​ ​ (617) ​ ​ (578) ​ ​ (537) Foreign ​ (94) ​ (115) ​ (295) Total current ​ (711) ​ (693) ​ (832) Deferred income taxes: ​ ​ ​ Federal ​ ​ 23,931 ​ ​ — ​ ​ — State and local ​ 5,780 ​ 677 ​ (818) Foreign ​ (68) ​ 171 ​ (29) Total deferred ​ 29,643 ​ 848 ​ (847) Income tax benefit (expense) ​ $ 28,932 ​ $ 155 ​ $ (1,679) ​ During the year ended December 31, 2020, the Company recognized a $55 income tax benefit in accumulated other comprehensive loss relating to recognized losses from foreign currency translation adjustments and revaluations. ​ The reconciliation of the effective tax rate to tax at the statutory rates for the years ended December 31 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 2019 2018 ​ ​ Total ​ Tax Rate ​ Total ​ Tax Rate Total ​ Tax Rate Pretax net (loss) income ​ $ (107,869) ​ $ 30,902 ​ $ (4,427) ​ Taxes: ​ ​ ​ ​ U.S. federal income tax at statutory rate ​ $ (22,652) 21.0 % $ 6,489 21.0 % $ (930) 21.0 % State income taxes ​ ​ (1,811) 1.7 % ​ (98) (0.3) % ​ 1,355 (30.6) % Tax effect of S-Corporation status ​ ​ 21,325 ​ (19.8) % ​ (6,489) ​ (21.0) % ​ 930 ​ (21.0) % Impact of change in tax status ​ ​ (24,944) ​ 23.1 % ​ — ​ — % ​ — ​ — % Stock-based compensation expense ​ ​ (1,554) ​ 1.4 % ​ — ​ — % ​ — ​ — % Impact of foreign operations ​ (56) ​ — % (57) (0.2) % 324 (7.3) % Other permanent items, net ​ ​ 760 (0.6) % ​ — ​ — % ​ — ​ — % Taxes and effective tax rate ​ $ (28,932) 26.8 % $ (155) (0.5) % $ 1,679 (37.9) % ​ The effective tax rate in 2020 increased to 26.8% from 0.5% in 2019. For the year ended December 31, 2020, the Company recorded a $24,944 deferred tax benefit related to the remeasurement of its U.S. deferred tax assets and liabilities due to the change in tax status from an S-Corporation to a C-Corporation. The effective tax rate in 2019 decreased to 0.5% from 37.9% in 2018 primarily due to a $1.0 million charge in 2018 to establish deferred taxes for assets that were transferred to the U.S. from a taxing jurisdiction that had a 0% tax rate. F-44 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) Significant components of the Company's net deferred tax assets (liabilities) are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, Deferred tax assets: 2020 2019 Deferred revenue ​ $ 4,013 ​ $ 289 State operating loss carry forwards ​ 2,595 ​ 56 Federal and foreign loss carry forwards ​ 13,526 ​ 217 Accrued expenses ​ 3,952 ​ 98 Accrued variable compensation ​ 3,272 ​ (47) Deferred compensation ​ 24,933 ​ 548 Other ​ 727 ​ 46 Deferred tax assets ​ 53,018 ​ 1,207 Valuation allowance ​ (1,507) ​ (46) Total deferred tax assets ​ 51,511 ​ 1,161 Deferred tax liabilities: ​ ​ Depreciation and amortization ​ (19,998) ​ (860) Prepaid expenses ​ (1,556) ​ (40) Total deferred tax liabilities ​ (21,554) ​ (900) Net deferred tax asset ​ $ 29,957 ​ $ 261 ​ ​ ​ ​ ​ ​ ​ Classification in the consolidated balance sheets: ​ ​ ​ ​ ​ ​ Deferred income tax asset ​ $ 29,974 ​ $ 288 Deferred other liabilities ​ ​ (17) ​ ​ (27) Net deferred tax asset ​ $ 29,957 ​ $ 261 ​ At December 31, 2020, the Company has available U.S. federal operating loss carry forwards of $56,759, and U.S. state operating loss carry forwards of $44,613. The federal operating loss will carryforward indefinitely and the state operating loss will expire at varying dates beginning in 2026. Management expects to fully utilize these U.S. federal and U.S. state operating loss carry forwards. At December 31, 2020, the Company has available foreign operating losses of approximately $4,865, some of which expire as early as 2025, and others which carry forward indefinitely. In addition, the Company has $56 of foreign non-operating losses, which carry forward indefinitely. A valuation allowance for a portion of the foreign operating and all of the foreign non-operating losses are recorded at December 31, 2020 and 2019. During the year ended December 31, 2020, we recognized $1,269 of incremental valuation allowances through purchase accounting related to net operating losses associated with Systax. The Company does not assert any earnings to be permanently reinvested with respect to the undistributed earnings of its foreign subsidiaries. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which the Company operates. Under applicable U.S. federal statutes, tax years ended December 31, 2017 through December 31, 2020 remain subject to examination. Under applicable statutes, state and foreign corporate tax returns filed for the Company and its respective foreign subsidiaries for years ended December 31, 2015 through December 31, 2020 remain subject to examination by the respective authorities. ​ F-45 Table of Contents Vertex, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Amounts in thousands, except per share data) 14. SUBSEQUENT EVENTS On January 25, 2021, the Company acquired Tellutax, a Portland, Oregon-based edge computing technology startup for $6,100. The acquisition was funded through cash on hand and serves to strengthen our technology roadmap and hybrid cloud strategy, enabling us to better serve customers in an increasingly hyper-connected environment. Our accounting for the Tellutax acquisition, including whether it constitutes an asset or business purchase, is preliminary. F-46