What changed in this filing

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Item 1. Financial Statements

2021-05-13 compared with 2020-11-13 · 499 added, 777 removed, 331 unchanged (79% of the section changed)

Financial Statements.

and Subsidiaries

Condensed Consolidated Balance Sheets

As of December 31, 2019 and September 30, 2020 (unaudited)

(Amounts in thousands)

September 30,

As of March 31, 2021 and December 31, 2020

(Amounts in thousands, except per share data)

Current assets:

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Funds held for customers

Accounts receivable, net of allowance of $7,567 (unaudited), and $7,515, respectively

Advances to stockholders

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

Prepaid expenses and other current assets

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Capitalized software, net of accumulated amortization

Goodwill and other intangible assets

Deferred commissions

Deferred income tax asset

Deposits and other assets

Operating lease right-of-use assets

Liabilities and Equity

Current liabilities:

Current portion of long-term debt

Accounts payable

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Deferred revenue

Current portion of long-term debt

Current portion of operating lease liabilities

Current portion of finance lease liabilities

Deferred rent and other

Future acquisition commitment, current

Purchase commitment and contingent consideration liabilities, current

Total current liabilities

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Deferred revenue, net of current portion

Long-term debt, net of current portion

Future acquisition commitment, net of current portion

Debt, net of current portion

Operating lease liabilities, net of current portion

Finance lease liabilities, net of current portion

Purchase commitment and contingent consideration liabilities, net of current portion

Deferred other liabilities

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Commitments and contingencies (Note 13)

Options for redeemable shares

Stockholders' equity (deficit):

Preferred shares, $0.001 par value, 30,000 and 0 shares authorized, respectively;

0 and 0 shares issued and outstanding, respectively

Class A voting common stock, $0.001 par value, 0 and 600 shares authorized, respectively;

0 and 300 shares issued, respectively;

0 and 147 shares outstanding, respectively

Class B non-voting common stock, $0.001 par value, 0 and 299,400 shares authorized, respectively;

0 and 162,297 shares issued, respectively;

0 and 120,270 shares outstanding, respectively

Class A voting common stock, $0.001 par value, 300,000 and 0 shares authorized, respectively;

Stockholders' equity:

Preferred shares, $ 0.001 par value, 30,000 shares authorized;

no shares issued and outstanding

Class A common stock, $ 0.001 par value, 300,000 shares authorized;

26,972 and 26,327 shares issued and outstanding , respectively

Class B voting common stock, $0.001 par value, 150,000 and 0 shares authorized, respectively;

Class B common stock, $ 0.001 par value, 150,000 shares authorized;

120,117 and 120,117 shares issued and outstanding, respectively

Additional paid in capital

Retained earnings (accumulated deficit)

Retained earnings

Accumulated other comprehensive loss

Treasury stock

Total stockholders' equity (deficit)

Total stockholders' equity

Total liabilities and equity

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

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

and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three and nine months ended September 30, 2019 and 2020 (unaudited)

For the three months ended March 31, 2021 and 2020

(Amounts in thousands, except per share data)

Three Months Ended

Nine months ended

September 30,

Software subscriptions

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Income (loss) from operations

Other (income) expense:

Interest income

Interest expense

Total other expense, net

Interest expense, net

Income (loss) before income taxes

Income tax (benefit) expense

Net (loss) income

Net income (loss)

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

Total comprehensive income (loss)

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

Net (loss) income per Class A share, basic

Net income attributable to Class A stockholders

Net income per Class A share, basic

Weighted average Class A common stock, basic

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

Net (loss) income per Class A share, diluted

Weighted average common Class A stock, diluted

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

Net (loss) income per Class B share, basic

Weighted average common Class B stock, basic

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

Net (loss) income per Class B share, diluted

Weighted average common Class B stock, diluted

Loss before income taxes

Pro forma provision for income tax benefit

Pro forma net loss

Pro forma net loss attributable to Class A stockholders

Weighted average Class A common stock, basic and diluted

Pro forma net loss per Class A share, basic and diluted

Pro forma net loss attributable to Class B stockholders

Weighted average Class B common stock, basic and diluted

Pro forma net loss per Class B share, basic and diluted

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

Net income attributable to Class A stockholders, diluted

Net income per Class A share, diluted

Weighted average Class A common stock, diluted

Net income (loss) attributable to Class B stockholders

Net income (loss) per Class B share, basic

Weighted average Class B common stock, basic

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

Net income (loss) per Class B share, diluted

Weighted average Class B common stock, diluted

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

and Subsidiaries

Condensed Consolidated Statements of Changes in Equity (Deficit)

For the nine months ended September 30, 2019 (unaudited)

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

(Amounts in thousands)

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After Recapitalization

Stockholders'

Comprehensive

Stockholders'

Balance, January 1, 2020

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Balance, March 31, 2020

Remeasurement of options for redeemable shares

Exercise of stock options, net

Distributions declared

Foreign currency translation adjustments and revaluations

Balance, June 30, 2019

Remeasurement of options for redeemable shares

Foreign currency translation adjustments and revaluations

Balance, September 30, 2019

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

Condensed Consolidated Statements of Changes in Equity (Deficit) (Continued)

For the nine months ended September 30, 2020 (unaudited)

(Amounts in thousands)

Before Recapitalization

After Recapitalization

Stockholders'

Comprehensive

Stockholders'

Balance, January 1, 2021

Remeasurement of options for redeemable shares

Distributions declared

Foreign currency translation adjustments and revaluations

Balance, March 31, 2020

Remeasurement of options for redeemable shares

Exercise of stock options, net

Distributions declared

Foreign currency translation adjustments and revaluations

Balance, June 30, 2020

Distributions declared

Reclassification of accumulated S Corporation earnings

Remeasurement of options for redeemable shares

Reclassification of options for redeemable shares

Recapitalization prior to Offering

Reclassification of SAR liability to equity in connection with Offering

Auto-exercised options in connection with Offering

Shares issued in connection with Offering, net of Offering costs

Exercise of stock options in connection with the Offering

Vested restricted stock issued in connection with Offering

ASC 842 transition adjustment

Exercise of stock options, net

Shares issued upon vesting of Restricted Stock Units

Stock-based compensation expense

Foreign currency translation adjustments and revaluations

Balance, September 30, 2020

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

Foreign currency translation adjustments and revaluations, net of tax

Balance, March 31, 2021

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

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2019 and 2020 (unaudited)

For the three months ended March 31, 2021 and 2020

(Amounts in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities:

Net (loss) income

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

Net income (loss)

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

Depreciation and amortization

Provision for subscription cancellations and non-renewals

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

Amortization of deferred financing costs

Write-off of deferred financing costs

Stock-based compensation expense

Deferred income taxes

Redemption of Converted SARs

Deferred income tax (benefit) provision

Non-cash operating lease costs

Changes in operating assets and liabilities:

Accounts receivable

Advances to stockholders

Prepaid expenses and other current assets

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Deferred revenue

Net cash provided by operating activities

Operating lease liabilities

Net cash used in operating activities

Cash flows from investing activities:

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Payments for deferred financing costs, net

Proceeds from issuance of shares in connection with Offering

Payments for offering costs

Payments for taxes on exercised options

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

Proceeds from exercise of stock options

Distributions to stockholders

Net cash provided by (used in) financing activities

Payments on financing lease liabilities

Net cash (used in) provided by financing activities

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

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

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

Cash, cash equivalents and restricted cash, beginning of period

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Cash and cash equivalents

Restricted cash—funds held for stockholder distributions

Restricted cash—funds held for customers

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

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

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

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

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The Company sells to customers located throughout the United States of America (“U.S.”) and internationally.

Effective 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 the Company 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 the Company does not have full decision-making authority as it is shared with the minority interest owners, as the minority interest owners are considered related parties, the Company 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 the Company owns 100% of the VIE.

As of September 30, 2020, the net assets of Systax were $20,556 (unaudited).

The Company 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 the Company exercises its future share purchase commitment through 2024.

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 (the “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”).

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 on July 28, 2020, net of underwriting fees, and used a portion of the proceeds to pay off $175,000 in outstanding debt.

The net proceeds remaining after payment of Offering costs will be used for working capital and other corporate purposes as described in the S-1.

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for interim financial information and include the accounts of the Company.

Basis of Consolidation

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S.

GAAP”) and include the accounts of the Company.

All intercompany transactions have been eliminated in consolidation.

On January 7, 2020, the Company acquired a 60 % controlling interest in Systax Sistemas Fiscais LTDA (“Systax”), a provider of Brazilian transaction tax content and software.

Systax is considered a Variable Interest Entity (“VIE”) and its accounts have been included in the condensed consolidated financial statements from the acquisition date.

Systax was determined to be a VIE as Vertex is the primary beneficiary of the equity interests in Systax and participates significantly in the variability in the fair value of Systax’s net assets.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and include the accounts of the Company.

Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the U.S.

(“GAAP”) have been condensed or omitted.

Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2019 included in the Company’s final S-1 dated July 28, 2020 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, (the “Securities Act”), on July 30, 2020 (the “Prospectus”).

The accompanying interim condensed consolidated balance sheet as of September 30, 2020, the interim condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019, and the interim condensed consolidated statements of changes in equity (deficit) and cash flows for the nine months ended September 30, 2020 and 2019 are unaudited.

The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the annual audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements.

The operating results for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results expected for the full year periods ending December 31, 2020 and 2019, respectively.

Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”) filed with the SEC on March 15, 2021.

The interim condensed consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements included in the 2020 Annual Report on Form 10-K for the year ended December 31, 2020.

The accompanying interim condensed consolidated balance sheet as of March 31, 2021, and the interim condensed consolidated statements of comprehensive income (loss), changes in equity (deficit) and cash flows for the three months ended March 31, 2021 and 2020 are unaudited.

The operating results for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the full year ending December 31, 2021.

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 three and nine months ended September 30, 2020 and 2019, approximately 3% of the Company’s revenues were generated outside the U.S.

in each respective period.

As of December 31, 2019, none of the Company’s long-lived assets were held outside of the U.S.

As of September 30, 2020, 18%, or $18,870, of the Company’s long-lived assets were held outside of the U.S.

(unaudited) and consists primarily of goodwill of $18,667 (unaudited) at September 30, 2020 related to the acquisition of the controlling interest in Systax, which is located in Brazil.

For the three months ended March 31, 2021 and 2020, approximately 5 % and 3 %, respectively, of the Company’s revenues were generated outside the U.S..

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

A three-level fair value hierarchy (the “Fair Value Hierarchy”) prioritizes the inputs used to measure fair value.

The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:

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:

Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

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The inputs require significant management judgment or estimation.

The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

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 were $159,851 and $38,520 at September 30, 2020 and December 31, 2019, respectively.

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, funds held for customers, accounts receivable, accounts payable, accrued expenses and debt approximate their related fair values.

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

Use of Estimates

The preparation of 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 determine the intrinsic value of stock-based compensation awards, (iv) 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.

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses during the reporting period.

Significant estimates used in preparing these condensed consolidated financial statements include:

(i) the estimated allowance for subscription cancellations, (ii) expected credit losses associated with the allowance for doubtful accounts;

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

Actual results may differ from these estimates.

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.

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 funds 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 in a business combination 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

Internal-use software developed

Computer software

Furniture and fixtures

Software Development Costs

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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 and is depreciated over periods between 3 to 5 years.

Depreciation expense for internal-use software utilized for cloud-based solutions and for software for internal systems and tools is included in cost of revenues, software subscriptions and depreciation and amortization expense, respectively, in the consolidated statements of comprehensive income (loss).

Internal-use software is included in internal-use software developed in property and equipment in the condensed consolidated balance sheets once available for its intended use and is depreciated over periods between 3 to 5 years .

Depreciation expense for internal-use software utilized for cloud-based solutions and for software for internal systems and tools is included in cost of revenues, software subscriptions and depreciation and amortization expense, respectively, in the condensed consolidated statements of comprehensive income (loss).

Software Developed for Sale

The costs incurred for the development of computer software to be sold, leased, or otherwise marketed are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed , when technological feasibility has been established.

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.

Amortization is provided on a product-by-product basis using the straight-line method over periods between 3 to 5 years and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive income (loss).

Capitalized software costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies at least annually at December 31, and whenever events or circumstances make it more likely than not that impairment may have occurred.

In event of an 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.

Business Combinations

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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 December 31 and whenever events or circumstances make it more likely than not that impairment may have occurred.

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.

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.

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 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 deposits and other assets in the consolidated balance sheets in accordance with ASC 835-30, Interest—Imputation of Interest .

Accounting for 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, for the award of equity-based instruments.

The Company evaluates goodwill for impairment annually at October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred.

Stock-Based Compensation

The Company’s Registration Statement on Form S-1 with the SEC was declared effective on July 28, 2020, resulting in the Class A shares being registered and available for trading on the NASDAQ exchange (the “Offering”).

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

The Company applies the provisions of ASC 718, Compensation—Stock Compensation, for the award of equity-based instruments.

The provisions of ASC 718 require a company to measure the fair value of stock-based compensation as of the grant date of the award.

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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 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 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 9 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.

Prior to July 2, 2020, the date management determined the Company was considered to have become a public entity, the Company measured SARs at their intrinsic value.

After such date, management remeasured outstanding SARs using the fair value-based method under ASC 718.

Stock-based compensation expense for stock options issued under the 2020 Plan after the Offering is measured based on the grant date fair value of the award and is estimated using the Black-Scholes model.

Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the award.

Stock-based compensation expense for RSAs and RSUs is based on the the fair value of the Company’s underlying common stock on the date of grant.

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.

The ESPP permits participants to purchase Class A common stock through payroll deductions, up to a specified percentage of their eligible compensation or a lump sum contribution amount for the initial offering period.

The plan is a compensatory plan as it allows participants to purchase stock at a 15 % discount from the lower of the fair value of the Class A common on the first or last day of the ESPP offering period (the “ESPP discount”).The ESPP is accounted for as an equity classified award.

Stock-based compensation expense for the ESPP is measured based on the fair value of the ESPP award at the start of the offering period.

The fair value is comprised of the value of the ESPP discount and the value associated with the variability in the Class A common stock price during the offering period (the “Call”), which is estimated using the Black-Scholes model.

The fair value is comprised of the value of the ESPP discount and the value associated with the variability in the Class A common stock price during the offering period (the “Call/Put”), which is estimated using the Black-Scholes model.

Compensation cost is recognized on a straight-line basis over the respective offering period.

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

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 $1,473 and $2,068 at December 31, 2019 and September 30, 2020 (unaudited), 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

The Company recognizes revenue in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , (“ASC 606”).

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers .

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services.

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The cloud-based offerings also include related updates and support.

Cloud-based contracts consistently provide a benefit to the customer during the subscription period, thus the associated revenue is recognized

ratably over the related subscription period.

Cloud-based contracts consistently provide a benefit to the customer during the subscription period;

thus, the associated revenue is recognized ratably over the related subscription period.

Revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based solutions.

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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 three months ended

For the nine months ended

September 30,

Sources of revenue:

Software subscriptions

Total revenue

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 $7,515 and $7,567 at December 31, 2019 and September 30, 2020 (unaudited), respectively.

The allowance is 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

For the nine months ended

September 30,

Balance, beginning of period

Balance, end of period

Increase (decrease), net

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 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 $5,614 and $5,170 at December 31, 2019 and September 30, 2020 (unaudited), respectively.

The deferred allowance represents the portion of the allowance for subscription cancellations associated with deferred revenue.

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

For the three months ended

September 30, 2020

Allowance balance, July 1

Allowance balance, September 30

Change in allowance

Deferred allowance balance, July 1

Deferred allowance balance, September 30

Change in deferred allowance

Net amount charged to revenue

For the three months ended

September 30, 2019

Allowance balance.

Allowance balance, September 30

Change in allowance

Deferred allowance balance, July 1

Deferred allowance balance, September 30

Change in deferred allowance

Net amount charged to revenue

For the nine months ended

September 30, 2020

Allowance balance.

Allowance balance, September 30

Change in allowance

Deferred allowance balance, January 1

Deferred allowance balance, September 30

Change in deferred allowance

Net amount charged to revenue

For the nine months ended

September 30, 2019

Allowance balance.

Allowance balance, September 30

Change in allowance

Deferred allowance balance, January 1

Deferred allowance balance, September 30

Change in deferred allowance

Net amount charged to revenue

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

As of December 31,

As of September 30,

Deferred revenue, current

Deferred revenue, non-current

For the three months ended

For the nine months ended

September 30,

Changes to deferred revenue:

Beginning balance

Additional amounts deferred

Revenue recognized

Ending balance

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 three months ended

For the nine months ended

September 30,

Deferred commissions:

Beginning balance

Ending balance

Payment terms

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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).

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).

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).

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

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, t he 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 effective date of the S election termination (the “Tax Sharing Agreement”).

As a result, Vertex became taxable at the corporate level as a C-Corporation for U.S federal and state income tax purposes.

In connection with the S Election termination, the Company entered into an agreement with the S-Corporation stockholders pursuant to which the Company has indemnified them for unpaid income tax liabilities and may be required to make future payments in material amounts to them attributable to incremental income taxes resulting from an adjustment to S-Corporation related taxable income (the “Tax Sharing Agreement”).

In addition, the Tax Sharing Agreement indemnifies the S-Corporation stockholders for any interest, penalties, losses, costs or expenses arising out of any claim under the agreement.

Correspondingly, the S-corporation stockholders have indemnified the Company with respect to unpaid tax liabilities (including interest and penalties) 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.

Correspondingly, the S-Corporation stockholders have indemnified the Company with respect to unpaid tax liabilities (including interest and penalties) attributable to a decrease in S-Corporation stockholders’ taxable income and a corresponding increase in our taxable income as a C-Corporation for any period.

Prior to July 27, 2020, as Vertex was taxed as an S-Corporation for U.S.

federal 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.

federal and certain states income tax purposes, net income or loss was allocated to and included on the income tax returns of the S-Corporation stockholders.

Historically, the Company distributed amounts to the S-Corporation stockholders to satisfy their tax liabilities resulting from allocated net income or loss.

Vertex was taxed at the corporate level in those states where the S-Corporation status was not recognized or where the state imposed a tax on an S-Corporation.

Accordingly, the income tax provision or benefit was based on taxable income allocated to these states.

In certain foreign jurisdictions, Vertex subsidiaries were taxed at

the corporate level.

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 $32,440 deferred tax asset during the three months ended September 30, 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 is projected to result in a net operating loss for the C-corporation short tax year beginning July 27, 2020 and ending December 31, 2020, for which it is more likely than not the Company will realize this benefit within the next several tax years.

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.

Total Comprehensive Income (Loss)

Total comprehensive income (loss) consists of net (loss) income 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 solely 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 (loss) income per share attributable

to common stockholders is calculated using the treasury stock method.

The basic net (loss) income 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 (loss) income 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, options to purchase shares of Class A common stock, RSAs and RSUs, and ESPP shares for which the Company has received payments for are considered common stock equivalents.

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

Effective July 27, 2020, the Company converted to and will be taxed as a C-corporation for U.S.

income tax purposes.

Accordingly, a pro forma income tax provision has been disclosed as if the Company was a taxable corporation for the three and nine months ended September 30, 2020.

The Company has computed pro forma entity level income tax expense using an estimated effective tax rate of approximately 25% for these periods, inclusive of all applicable U.S.

federal, state, local and foreign income taxes.

Unaudited Pro Forma Earnings Per Share

The Company has presented pro forma earnings per share for the three and nine months ended September 30, 2020 to reflect the pro forma adjustment to income taxes resulting from the conversion to a C-corporation effective July 27, 2020.

For the three months ended

For the nine months ended

September 30,

Class A common stock:

Pro forma net loss attributable to all stockholders

Class A stock as a percentage of total shares outstanding

Pro forma net loss attributable to Class A stockholders

Weighted average Class A common stock, basic and diluted

Pro forma net loss per Class A share, basic and diluted

For the three months ended

For the nine months ended

September 30,

Class B common stock:

Pro forma net loss attributable to all stockholders

Class B stock as a percentage of total shares outstanding

Pro forma net loss attributable to Class B stockholders

Weighted average Class B common stock outstanding, basic and diluted

Pro forma net loss per Class B share, basic and diluted

In certain foreign jurisdictions, Vertex subsidiaries were taxed at the corporate level, and the income tax provision or benefit was based on taxable income sourced to these foreign jurisdictions.

Supplemental Cash Flow Disclosures

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

For the nine months ended

September 30,

Cash paid for:

For the three months ended

Cash paid for interest

Cash paid for income taxes

Operating cash flows from operating leases

Operating cash flows from finance leases

Non-cash investing and financing activities:

Acquisition purchase commitment liability at acquisition date

Equipment acquired through capital leases

Purchase commitment and contingent consideration liabilities

Remeasurement of options for redeemable shares

Conversions of SAR's in connection with the Offering

Exchange of Amended Options in connection with the Offering

Leased assets obtained in exchange for new finance lease liabilities

Recently Issued Accounting Pronouncements

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As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No.

2016-02, Leases .

This standard amends several of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset, and a corresponding lease liability, measured at the present value of the future minimum lease payments.

The standard is effective for public entities for fiscal years and interim periods beginning after December 15, 2018, 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 expects to elect the "package of three"

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

adoption of the new standard.

The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

While the Company has not yet quantified the impact, resulting adjustments are expected to materially increase total assets and total liabilities relative to such amounts reported prior to adoption, but not have a material impact on the consolidated statements of comprehensive income (loss) or consolidated statements of cash flows.

This standard amends several of aspects of lease accounting, including requiring lessees to recognize operating leases with a initial term greater than one year on their balance sheet as a right-of-use asset, and a corresponding lease liability, measured at the present value of the future minimum lease payments.

The standard is effective for public entities for fiscal years and interim periods beginning after December 15, 2018.

The standard is effective for all other entities for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted.

The Company adopted ASU No.

2016-02 on January 1, 2021 using the modified retrospective transition method, which did not require the Company to adjust comparative periods.

The Company’s lease assets and lease liabilities are recognized on the lease commencement date in an amount that represents the present value of future lease payments.

The Company’s incremental borrowing rate, which is based on information available at the adoption date for existing leases and the commencement date for leases commencing after the adoption date, is used to determine the present value of lease payments.

The Company elected the "package of three"

As a result of the adoption of ASC 842 on January 1, 2021, the Company recorded both operating lease right-of-use assets of $ 24,004 and operating lease liabilities of $ 32,562 .

An adjustment to retained earnings of $ 508 , net of the deferred tax impact, was also recorded.

The adoption of ASC 842 had an immaterial impact on the condensed consolidated statements of comprehensive income and cash flows for the three months ended March 31, 2021.

The adoption of this standard also resulted in a change in the naming convention for leases classified historically as capital leases.

These leases are now referred to as finance leases within property and equipment, with corresponding short-term and long-term debt

liabilities being presented as “Current portion of finance lease liabilities” and “Finance lease liabilities, net of current portion”, respectively.

See Note 7 for further information.

The Company does not recognize leases with an initial term less than one year (“short-term leases”) on its condensed consolidated balance sheets, and recognizes such lease payments in the condensed consolidated statements of comprehensive income (loss) on a straight-line basis over the lease term.

Leases with an option to extend the related lease term or terminate early are reflected in the lease term when it is reasonably certain that the Company will exercise such options.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) :

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ASU 2016-13 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, for business entities that are public and meet the definition of an SEC filer (excluding smaller reporting companies), and after December 15, 2022 for all other entities.

The Company has elected to delay adoption of this guidance until January 1, 2021.

The implementation of ASU 2016-13 is not expected to have a material impact on the Company’s financial position.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment , (“ASU 2017-04”) to eliminate step two of the goodwill impairment test requiring a hypothetical purchase price allocation.

Goodwill impairment, if any, is determined by comparing the reporting unit’s fair value to its carrying value.

An impairment loss is recognized in an amount equal to the excess of the reporting unit’s carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit.

In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.

ASU 2017-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, for business entities that are public and meet the definition of an SEC filer (excluding smaller reporting companies), and after December 15, 2022 for all other entities.

The Company has adopted this guidance effective as of January 1, 2020.

The Company adopted this standard effective January 1, 2021 and this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued ASU Update No.

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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 will adopt this guidance on January 1, 2021.

The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

The Company adopted this standard on January 1, 2021.

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

Risks and Uncertainties

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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 is continuing to have widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices.

To protect the health and well-being of Company employees and customers, substantial modifications were made to employee travel policies, our offices were closed, and remained closed through March 31, 2021, with employees directed to work from home.

In addition, conferences and other marketing events were cancelled or shifted to virtual-only, and the Company continued to participate virtually through March 31, 2021.

The COVID-19 pandemic has impacted and may continue to impact Company operations, including employees, customers and partners, and there is substantial uncertainty in the nature and degree of its continued effects over time.

The Company did not experience any significant reductions in sales, revenues or collections through September 30, 2020 as a result of COVID-19.

The Company did not experience any significant reductions in sales, revenues or collections through March 31, 2021 as a result of COVID-19.

The uncertainty caused by the COVID-19 pandemic could, however, impact Company billings to new customers for the remainder of 2021, and may also negatively impact Company efforts to expand revenues from existing customers as they continue to evaluate certain long-term projects and budget constraints.

In addition to the potential impact on sales, the Company may see delays in collections over the coming months.

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.

In addition to the potential impact on sales, the Company may see delays in collections during 2021 as customers adjust their operating protocols to accommodate implementation of new criteria to protect the health and well-being of their employees and customers.

However, these delays are not expected to materially impact the business, and thus the Company has not recorded additional credit losses associated with the allowance for doubtful accounts in connection with any delays.

The Company believes it has ample liquidity and capital resources to continue to meet its operating needs, and to service debt and other financial obligations.

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This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including estimated allowance for subscription cancellations, product life cycles and estimated lives of long-lived assets.

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 the revolving line of credit (the “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 payment 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 Purchase Commitment Liability is estimated to be $14,344 at the acquisition date based on information available at that time.

This amount will fluctuate as a result of foreign currency translation adjustments and is reflected in future acquisition commitment in the consolidated balance sheet at September 30, 2020.

Any adjustments to the acquisition date fair value of this commitment will be adjusted to goodwill during the Measurement Period.

Adjustments to the settlement date value that arise as a result of remeasurement after the acquisition date 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 preliminary purchase price was allocated to the net tangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the excess being recorded as goodwill.

The net tangible assets acquired and liabilities assumed were valued at their respective carrying amounts as of the acquisition date pending the receipt of additional information during the Measurement Period.

The contractual value of accounts receivable was $867 at acquisition date.

The excess of the purchase consideration over the net tangible assets is recorded as goodwill and primarily reflects the value of the tax content database, the customer list, the assembled workforce and expected future synergies.

Goodwill is deductible for tax purposes.

The preliminary values recorded will be adjusted during the Measurement Period as more detailed analyses are performed and further information becomes available regarding the fair values of these amounts as of the acquisition date.

Any such adjustments may be material.

Subsequent adjustments to these values not associated with determination of their fair values on the acquisition date would be recorded in the consolidated statements of comprehensive income (loss) in the period the change is identified.

The following table presents the preliminary purchase price allocation recorded in the Company’s consolidated balance sheet as of the acquisition date (unaudited):

Initial Purchase

Net Assets and Assumed Liabilities

Price Allocation

Cash and cash equivalents

Accounts receivable

Property and equipment

Accounts payable and accrued expenses

Accrued compensation

Other liabilities

Total consideration at acquisition date

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 three months ended September 30, 2020 (unaudited) reflected in the consolidated statement of comprehensive income (loss), after elimination of intercompany activity, were $915 and $(242), respectively.

Systax revenue and net loss for the nine months ended September 30, 2020 (unaudited) reflected in the consolidated statement of comprehensive income (loss), after elimination of intercompany activity, were $3,002 and $(523), respectively.

As the Systax acquisition did not have a material impact on the Company’s reported revenue or net loss for the three and nine months ended September 30, 2020, pro forma financial information has not been presented.

The transaction costs associated with the acquisition were approximately $504 and were recorded in general and administrative expense in the year ending December 31, 2019.

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.

REVENUE RECOGNITION

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

Disaggregation of revenue

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

Three months ended

Sources of revenues:

Software subscriptions

Total revenues

Contract balances

Timing of revenue recognition may differ from the timing of invoicing customers.

Subscription-based customers are generally invoiced annually at the beginning of each annual subscription period.

Accounts receivable is presented net of an allowance for potentially uncollectible accounts and estimated cancellations of software license and cloud-based subscriptions (the “allowance”) of $ 8,059 and $ 8,592 at March 31, 2021 and December 31, 2020, respectively.

The allowance represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations.

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

For the three months ended

For the year ended

March 31, 2021

December 31, 2020

Balance, beginning of period

Balance, end of period

(Decrease) increase, net

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 $ 5,515 and $ 6,432 at March 31, 2021 and December 31, 2020, respectively.

The deferred allowance represents the portion of the allowance for subscription cancellations associated with deferred revenue.

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

For the three months ended March 31,

Allowance balance, January 1

Allowance balance, March 31

Change in allowance

Deferred allowance balance, January 1

Deferred allowance balance, March 31

Change in deferred allowance

Net amount charged to revenues

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

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

As of March 31,

As of December 31,

Deferred revenue, current

Deferred revenue, non-current

Total deferred revenue

For the three months ended

Changes to deferred revenue:

Beginning balance

Additional amounts deferred

Revenues recognized

Ending balance

Contract costs

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 three months ended

Deferred commissions:

Beginning balance

Ending balance

BUSINESS COMBINATION

On January 25, 2021, the Company executed an Asset Purchase Agreement with Tellutax LLC, a Portland, Oregon-based edge computing technology startup (“Tellutax”), to acquire substantially all of Tellutax’s assets (the “Tellutax Acquisition”).

Cash consideration paid for the acquisition was $ 6,100 , funded through cash on hand, and serves to strengthen the Company’s technology roadmap and hybrid cloud strategy enabling it to better serve customers in an increasingly hyper-connected environment.

The Tellutax Acquisition entitles the sellers to contingent consideration if sales targets are met during a period of time following the acquisition.

The Tellutax Acquisition was accounted for as a business combination.

The total preliminary purchase price was allocated to the net assets acquired based on Management’s determination of their estimated fair values using available information as of the acquisition date.

The excess of purchase consideration over the net assets acquired is recorded as goodwill, which primarily reflects the value of expected future synergies, the existence of intangible assets not recognized under U.S.

GAAP such as the value of the assembled workforce and other market factors.

The Company expects that goodwill associated with the Tellutax Acquisition will be deductible for tax purposes.

The preliminary values recorded, which are reflected in the table below, will be adjusted during the measurement period as more detailed analyses are performed and further information becomes available regarding the fair values of these amounts on the acquisition date.

Any subsequent adjustments to these values not associated with determination of their fair values on the acquisition date will be recorded in the consolidated statements of comprehensive income (loss) in the period the change is identified.

The preliminary purchase price for the Tellutax Acquisition includes cash paid at closing plus an estimated fair value of contingent consideration of $ 2,200 (the “Tellutax Contingent Consideration”) as of January 25, 2021.

The following table presents the allocation of the preliminary purchase price recorded in the condensed consolidated balance sheet as of the acquisition date:

January 25, 2021

Capitalized Software - Developed technology

The Company has included the financial results of Tellutax in the condensed consolidated statement of comprehensive income (loss) from the date of acquisition.

As the Tellutax Acquisition did not have a material impact on the Company’s reported revenue or net income for the three months ended March 31, 2021, pro forma financial information has not been presented.

The fair value of developed technology was valued using the multi-period excess earnings method, which is a variation of the income approach.

This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset.

The significant assumptions used in the developed technology valuation included forecasted results and discount rate.

The fair value of Tellutax Contingent Consideration is estimated using a Monte-Carlo simulation to compute the expected cash flows from earn-out payments specified in the purchase agreement.

Such estimate represents a recurring fair value measurement with significant unobservable inputs, which management considers to be Level 3 measurements under the Fair Value Hierarchy.

The significant assumptions used in these calculations included forecasted results and the estimated likelihood for each performance scenario.

The Tellutax Contingent Consideration is based on three potential earn-out payments determined by periodic revenue achievements over a thirty-month period.

Earn-out payments had no maximum limit, but if certain targets are not met, there would be no earn-out payment for the applicable measurement period.

The estimated fair value of the Tellutax Contingent Consideration recorded as of the acquisition date was $ 2,200 .

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company has investments in money market accounts, which are included in cash and cash equivalents on the consolidated balance sheets.

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.

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

Fair Value Measurements Using

As of March 31, 2021

Prices in active markets for identical assets (Level 1)

Significant other observable inputs

Significant unobservable inputs

Money market funds

Tellutax Contingent Consideration*

Fair Value Measurements Using

As of December 31, 2020

Prices in active markets for identical assets (Level 1)

Significant other observable inputs

Significant unobservable inputs

Money market funds

As discussed in Note 3, this amount reflects the Tellutax Contingent Consideration for potential payments based on achievement of future revenue targets.

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, and accrued expenses approximate their relative fair values due to their short-term nature and are considered Level 2 measurements.

Non-recurring Fair Value Measurements

The Tellutax Acquisition on January 25, 2021, 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.

PROPERTY AND EQUIPMENT

The major components of property and equipment are as follows:

As of March 31,

As of December 31,

As of September 30,

Leasehold improvements

Computer software acquired

Computer software purchased

Internal-use software developed:

Cloud-based services

Cloud-based customer solutions

Internal systems and tools

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Property and equipment, net

Depreciation expense for property and equipment, excluding all internal-use software and capital leases, was $1,970 and $1,707 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $5,918 and $4,495 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively.

Depreciation for property and equipment,

excluding cloud-based internal-use software, is reflected in depreciation and amortization in the consolidated statements of comprehensive income (loss).

Assets under capital leases of $1,455 and $1,769, net of accumulated depreciation of $627 and $1,140, at December 31, 2019 and September 30, 2020 (unaudited), respectively, are included in property and equipment in the consolidated balance sheets.

Depreciation expense for assets held under capital leases was $178 and $168 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $513 and $397 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively.

Depreciation expense for assets held under capital leases is included in depreciation and amortization expense in the consolidated statements of comprehensive income (loss).

Depreciation expense for property and equipment, excluding all internal-use software developed and finance leases, was $ 1,906 and $ 2,175 for the three months ended March 31, 2021 and 2020 (unaudited), respectively.

Depreciation for property and equipment, excluding internal-use software developed for cloud-based customer solutions, is reflected in depreciation and amortization in the condensed consolidated statements of comprehensive income (loss).

Finance lease amortization was $ 224 for the three months ended March 31, 2021 and depreciation expense for assets held under capital leases was $ 168 for the three months ended March 31, 2020, and are included in depreciation and amortization expense in the condensed consolidated statements of comprehensive income (loss).

Assets under finance leases was $ 1,533 , net of accumulated depreciation of $ 224 , at March 31, 2021 are included in property and equipment in the condensed consolidated balance sheets.

Assets under capital leases of $ 1,360 , net of accumulated depreciation of $ 1,369 , at March 31, 2020 (unaudited) are included in property and equipment in the condensed consolidated balance sheets.

The major components of internal-use software are as follows:

As of March 31,

As of December 31,

As of September 30,

Internal-use software developed

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Internal-use software developed, net

Amounts capitalized for internal-use software and included in property and equipment additions on the consolidated statements of cash flows are as follows:

For the nine months ended September 30,

Cloud-based solutions

Amounts capitalized for internal-use software and included in property and equipment additions on the condensed consolidated statements of cash flows are as follows:

As of March 31,

Cloud-based customer solutions

Internal systems and tools

In-process internal-use software is not depreciated until it is available for its intended use.

Depreciation expense for internal-use software used for cloud-based solutions for the three months ended September 30, 2020 and 2019 (unaudited) was $2,183 and $1,899, respectively, and $6,647 and $6,118 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively.

Depreciation expense for internal-use software used for cloud-based solutions is included in cost of revenues, software subscriptions in the consolidated statements of comprehensive income (loss).

Depreciation expense for internal-use software utilized for internal systems and tools for the three months ended September 30, 2020 and 2019 (unaudited) was $587 and $436, respectively, and $1,678 and $1,636 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively.

Depreciation expense for internal-use software utilized for internal systems and tools is included in depreciation and amortization in the consolidated statements of comprehensive income (loss).

Research and development costs associated with internal-use software were $3,119 and $2,778 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $7,119 and $8,639 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively.

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 three months ended March 31, 2021 and 2020 (unaudited) was $ 2,676 and $ 2,011 , respectively, and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive income (loss).

Depreciation expense for internal-use software developed for internal systems and tools for the three months ended March 31, 2021 and 2020 (unaudited) was $ 697 and $ 526 , respectively, and is included in depreciation and amortization in the condensed consolidated statements of comprehensive income (loss).

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 three months

ended September 30, 2020 and 2019 (unaudited) were $2,591 and $4,244, respectively, and $9,246 and $12,345 for the nine months ended September 30, 2020 and 2019 (audited), respectively.

The major components of capitalized software are as follows:

As of March 31,

As of December 31,

As of September 30,

Capitalized software

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Capitalized software, net

Capitalized software amortization expense for the three months ended September 30, 2020 and 2019 was $3,124 and $1,788, respectively, and $8,702 and $5,506 for the nine months ended September 30, 2020 and 2019, respectively, and is included in cost of revenues, software subscriptions in the consolidated statements of comprehensive income (loss).

The changes in the carrying amount of goodwill for the nine months ended September 30, 2020 are as follows:

Software development costs capitalized for the three months ended March 31, 2021 and 2020 (unaudited) were $ 2,221 and $ 3,706 , respectively.

During the three months ended March 31, 2021, a preliminary value of $ 3,600 for developed technology the Company acquired in the Tellutax business combination was recorded and is reflected in in-process capitalized software as the Company undertakes necessary enhancements to integrate it with the Company’s existing software architecture.

Capitalized software amortization expense for the three months ended March 31, 2021 and 2020 was $ 3,168 and $ 2,556 , respectively, and is included in cost of revenues, software subscriptions in the condensed consolidated statements of comprehensive income (loss).

The Company leases office space, IT equipment and office equipment.

Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets and lease expense is recognized over the term of these leases on a straight-line basis.

The Company’s leases have remaining terms of up to 9 years .

The following table sets forth the Company’s lease assets and liabilities and their balance sheet location as follows:

As of March 31,

Balance Sheet Location

Lease assets:

Operating lease right-of-use assets

Finance lease assets

Property and equipment, net (Note 5)

Total lease assets

Lease liabilities:

Operating lease liabilities

Current portion of operating lease liabilities

Finance lease liabilities

Current portion of finance lease liabilities

Total current lease liabilities

Operating lease liabilities

Operating lease liabilities, net of current portion

Finance lease liabilities

Finance lease liabilities, net of current portion

Total non-current lease liabilities

Total lease liabilities

The major components of lease cost is as follows:

For the three months ended

March 31, 2021

Operating lease cost

Finance lease cost:

Amortization of lease assets

Interest on lease liabilities

Total lease cost

The weighted-average term and discount rate for leases is as follows:

As of March 31,

Weighted-average remaining lease term (years):

Operating leases

Finance leases

Weighted-average discount rate:

Operating leases

Finance leases

Lease liability maturities for the next five years and thereafter are as follows as of March 31, 2021:

Operating Leases

Finance Leases

Remainder of 2021 (nine months remaining)

Total lease payments

Imputed interest

Present value of lease liabilities

Lease liability maturities for the next five years and thereafter under the previous lease accounting standard are as follows:

As of December 31, 2020

Operating Leases

Capital Leases

Total Lease Payments

Less amount representing interest

Present value of minimum lease payments

Less current portion

Capital lease obligations, net of current portion

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets were as follows:

As of March 31,

As of December 31,

Other intangible assets, net

The changes in the carrying amount of goodwill for the three months ended March 31, 2021 are as follows:

Balance, January 1, 2021

Acquisition of Systax, January

Foreign currency translation adjustment for the three months ended March 30

Foreign currency translation adjustment for the three months ended June 30

Foreign currency translation adjustment for the three months ended September 30

Balance, September 30

New Credit Agreement (unaudited)

On March 31, 2020, the Company entered into a new 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 “New Term Loan”) and a $100,000 committed line of credit (the “New Line of Credit”) (collectively, the “New Credit Agreement”).

Net proceeds from the New Term Loan after payment of financing fees of $2,904 and repayment of aggregate amounts outstanding at March 31, 2020 under the previous credit agreement term loan and line of credit of $61,656, were used to fund a portion of the $123,185 distribution made to the stockholders on May 29, 2020.

A portion of the Offering proceeds was used to repay the $175,000 New 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 New Term Loan within 90 days of execution of the New Credit Agreement, which was recorded as a reduction of deferred financing costs associated with the New Term Loan.

The Company wrote off the remaining balance of deferred financing costs associated with the New Term Loan of $1,174, which was recorded as interest expense in the consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

The New Line of Credit matures in March 2025 and had no outstanding borrowings at closing or at September 30, 2020.

The Company has the option to select an applicable interest rate at either the bank base rate plus an applicable margin (the “New Base Rate Option”) or the LIBOR plus an applicable margin (the “New LIBOR Option”).

The applicable margins are determined by certain financial covenant performance as defined in the New Credit Agreement.

At September 30, 2020, the New Base Rate Option and New LIBOR Option were 3.75% and 2.50%, respectively.

The New 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 September 30, 2020.

Acquisition of Tellutax (Note 3)

Foreign currency translation adjustments

Balance, March 31, 2021, gross

Accumulated impairment losses

Balance, March 31, 2021, net

The Company has recognized various amortizable other intangible assets in connection with acquisitions, including related to customer relationships, technology, and tradenames.

The following tables provide additional information for other intangible assets, which are individually not material to the condensed consolidated financial statements:

As of March 31,

As of December 31,

Other intangible assets

Weighted average amortization period (years)

Accumulated amortization

Carrying value

For the three months ended March 31, 2021

Cost of Revenues, Software Subscriptions

Marketing Expense

Total Expense

Amortization of acquired intangible assets

Credit Agreement

At December 31, 2019, the Company had a credit agreement (the “Credit Agreement”) consisting of a term loan (the “Term Loan”) with an outstanding principal balance of $50,375 and a $40,000 committed Line of Credit with no outstanding borrowings.

The Company had the option to select an applicable interest rate at either the bank base rate plus an applicable margin (the "Base Rate Option") or the London Interbank Offered Rate (“LIBOR”) plus an applicable margin (the “LIBOR Option”).

The applicable margins were determined by certain financial covenant performance as defined in the Credit Agreement.

At December 31, 2019, the Base Rate Option and LIBOR Option resulted in rates of 4.75% and 2.69%, respectively.

The Credit Agreement was collateralized by certain assets of the Company and contained financial and operating covenants, which included limitations on the amount of dividends payable in a given period.

The Company was in compliance with these covenants at December 31, 2019.

The Term Loan required quarterly principal payments over five years, with a balloon payment in November 2020.

The interest rate on the Term Loan was 2.69% at December 31, 2019 as the Company selected the LIBOR Option.

Term Loan outstanding amounts are reported in current portion of long-term debt and long-term debt, net of current portion, in the consolidated balance sheets.

As a result of the 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.

The Line of Credit was due to expire on November 1, 2020.

The Company was required to pay a quarterly fee on the difference between the $40,000 maximum borrowings allowed under the Line of Credit and the unpaid principal balance outstanding under the line at an applicable rate.

The applicable rate, determined by certain financial covenant performance as defined in the Credit Agreement, was 0.20%.

Unamortized deferred financing costs of $221 at December 31, 2019 are included as a reduction in current portion of long-term debt in the consolidated balance sheets.

Amortization expense of deferred financing costs on the Term Loan was $44 for the nine months ended September 30, 2020.

The Company wrote off the remaining unamortized deferred financing costs associated with the Term Loan of $177, which was recorded as interest expense in the consolidated statement of comprehensive income for the three and nine months ended September 30, 2020.

Capital Leases

Capital lease obligations were $1,333 and $1,509 at December 31, 2019 and September 30, 2020 (unaudited), respectively, and are included in current portion of long-term debt and long-term debt, net of current portion in the consolidated balance sheets.

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.

In connection with the Recapitalization, the Company:

(i) effected the three-for-one Stock Split, which is reflected retrospectively in the condensed 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.

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”).

A portion of the Offering proceeds was used to repay the $ 175,000 Term Loan in full on July 31, 2020.

The Line of Credit matures in March 2025 and had no outstanding borrowings at March 31, 2021 or 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 March 31, 2021, 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 March 31, 2021.

STOCKHOLDERS’ EQUITY

Recapitalization 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 effect of the Stock Split is recognized retrospectively in the condensed consolidated financial statements.

In connection with the New Capital Structure, Treasury Stock was retired and amounts associated with the Treasury Stock were reclassified to additional paid in capital.

Thus, at March 31, 2021 and December 31, 2020, there was no Treasury Stock.

During March 31, 2021, the Company issued an aggregate 640 shares of Class A related to the exercise of stock options, net of 356 shares returned to the Company in lieu of payment of the exercise price and taxes due on these exercises.

During March 31, 2021, the Company also issued 5 shares Class A in connection with the vesting of RSUs, net of 1 share returned to the Company in lieu of payment of taxes due on the vesting of these RSUs.

At March 31, 2020, the Company had 147 shares of former Class A common stock and 120,270 shares of former Class B common stock outstanding.

At March 31, 2020, members of a family (the “Family”) owned all outstanding shares of both former classes of common stock.

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.

There were common stock equivalents outstanding at March 31, 2020 held by non-Family members that entitled such holders to receive an equivalent number of former Class B shares upon exercise.

In connection with establishing the New Capital Structure in July 2020, 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.

In connection with the New Capital Structure, 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.

2 unchanged sentences

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 stock 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 stock 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 610 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.

In April 2019, Vertex issued 225 shares of former Class B common stock in connection with the exercise of stock 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 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 September 30, 2020, there was no Treasury Stock outstanding.

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.

No distributions were declared subsequent to the termination of the S election.

The Board declared distributions of $5,255 ($0.04 per share) and $6,105 ($0.05 per share) during the three months ended March 31 and June 30, 2019, respectively, pro rata to stockholders of former Class A and former Class B common stock.

No distributions were declared during the three months ended September 30, 2019.

Distributions

The Board declared and paid aggregate distributions pro rata to stockholders of the former Class A and Class B common stock of $ 4,010 ($ 0.03 per share) during the three months ended March 31, 2020.

Tax Sharing Agreement Payments

In connection with termination of the Company’s S-Corporation status effective July 27, 2020, the Company entered into a Tax Sharing Agreement with the former S-Corporation shareholders.

During the three months ended March 31, 2021, the Company did not distribute to or receive any amounts from the former S-Corporation shareholders under the Tax Sharing Agreement.

The Company has an estimated liability of $ 2,700 at March 31, 2021 and December 31, 2020 in connection with obligations under the Tax Sharing Agreement for estimated amounts 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.

This number is subject to change based upon the finalization of the associated tax returns for the 2020 S-Corporation short tax period.

The Company is required to settle this liability on or before July 30, 2021 under the Tax Sharing Agreement.

All obligations of the Company under the Tax Sharing Agreement are satisfied by adjustments of additional paid in capital.

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.

The table below illustrates the calculation of basic and diluted net income (loss) 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 10 for further information on the Share Exchange.

For the three months ended

For the nine months ended

September 30,

For the Three Months Ended March 31,

Class A common stock:

Numerator, basic:

Net (loss) income attributable to all stockholders

Class A stock as a percentage of total shares outstanding, basic

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

Net income (loss) attributable to all stockholders

Class A common stock as a percentage of total shares outstanding, basic

Net income attributable to Class A stockholders, basic

Numerator, diluted:

Net (loss) income attributable to all stockholders

Class A stock as a percentage of total shares outstanding, diluted

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

Net income (loss) attributable to all stockholders

Class A common stock as a percentage of total shares outstanding, diluted

Net income attributable to Class A stockholders, diluted

Denominator, basic and diluted:

2 unchanged sentences

Weighted average Class A common stock, diluted

Net (loss) income per Class A share, basic

Net (loss) income per Class A share, diluted

For the three months ended

For the nine months ended

September 30,

Net income per Class A share, basic

Net income per Class A share, diluted

* The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net income (loss) per share attributable to Class A stockholders because the impact of including them would have been anti-dilutive:

84 and 3,734 for the three months ended March 31, 2021 and 2020, respectively.

For the Three Months Ended March 31,

Class B common stock:

Numerator, basic:

Net (loss) income attributable to all stockholders

Class B stock as a percentage of total shares outstanding, basic

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

Net income (loss) attributable to all stockholders

Class B common stock as a percentage of total shares outstanding, basic

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

Numerator, diluted:

Net (loss) income attributable to all stockholders

Class B stock as a percentage of total shares outstanding, diluted

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

Net income (loss) attributable to all stockholders

Class B common stock as a percentage of total shares outstanding, diluted

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

Denominator, basic and diluted:

2 unchanged sentences

Weighted average Class B common stock, diluted

Net (loss) income per Class B share, basic

Net (loss) income per Class B share, diluted

EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS

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 $913 and $818 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $3,003 and $2,747 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively.

In addition, a discretionary profit-sharing contribution of 3% of eligible compensation for eligible employees was approved and aggregated $3,363 for the year ended December 31, 2019 and is reflected in accrued salaries and benefits in the consolidated balance sheet.

Accrued salaries and benefits includes $981 and $2,923 for the three and nine months ended September 30, 2020 (unaudited), respectively, for an estimated discretionary profit-sharing contribution for 2020.

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).

For Reward Performance Periods prior to 2018, 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 for each year of the respective Reward Performance Period.

Starting in 2018, the Net Income Target is only required to be 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 $732 and $817 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $2,329 and $1,802 for the nine months ended September 30, 2020 and 2019 (unaudited), 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 September 30, 2020 for the Reward Performance Period starting in 2018 of $2,096 (unaudited) is reflected in deferred compensation, current in the consolidated balance sheet as of September 30, 2020.

The remaining balances of accrued LTR Award Opportunities for open Reward Performance Periods of $1,812 and $1,965 at December 31, 2019 and September 30, 2020 (unaudited) are reflected in deferred compensation, net of current portion, in the consolidated balance sheets.

Net income (loss) per Class B share, basic

Net income (loss) per Class B share, diluted

STOCK-BASED AWARD PLANS

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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 sheet until such shares are purchased.

Lump sum payments from ESPP participants for the initial offering period will be due prior to the end of the offering period, and none were received by September 30, 2020.

Stock-based award plan events and related activity are described further below.

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, except for the initial offering period (July 28 to November 30, 2020) whereby the participants were permitted to make lump sum contributions to the ESPP for such period.

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 $ 810 as of March 31, 2021.

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 stock 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.

All SAR participants eligible to receive the SAR Exchange Offer accepted and had their outstanding SARs converted to stock options with equivalent terms under the 2020 Plan at the Offering effective date (the “Converted SARs”) of July 28, 2020.

This was considered a modification of these SAR awards which was recorded in the respective quarter this occured.

The SAR plan was subsequently retired (“Retired SAR Plan”) and any SARs issued after such date will be granted under the 2020 Plan.

Prior to the adoption of the 2020 Plan, the Company had options outstanding to purchase shares of former Class B common stock.

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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)

Amended Options

2020 Plan options

Compensation expense and additional information pertaining to stock-based awards is described further below.

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.

Any options issued subsequent to this exchange will be granted under the 2020 Plan.

As of March 31, 2021, 1,857 shares of Class A common were available for issuance under the 2020 Plan.

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.

Amended and 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;

(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 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 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 SARs pursuant to which, upon effectiveness of the Company’s 2020 Plan, such SARs 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 SARs converted to stock options with equivalent terms under the 2020 Plan on the effective date of the plan upon the Offering.

This was considered a 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, which aggregated $9,054 (unaudited).

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 SARs in 2020 up to July 2, 2020, the date on which management determined the Company was considered to have become a public entity.

Management recorded the change in accounting policy of $2,422 in accordance with ASC 718 during the three months ended September 30, 2020, which included $1,299 of vested Converted SARs that was 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 (unaudited), of which $153,366 (unaudited) is vested.

Management recorded additional compensation expense of $57,079 (unaudited) 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 (unaudited) 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 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 paymentof taxwithholding 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

Expected term (years)

Expected dividend yield

Risk-free interest rate

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 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.

Retired SAR Plan

At March 31, 2020, 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”).

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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 three and nine months ended September 30, 2020 which exceeded historical results.

The below table represents SAR activity for the following periods:

g rant values

Balance, January 1, 2019

Balance, December 31, 2019

Balance September 30, 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 and $1,051 at December 31, 2019 and September 30, 2020 (unaudited), respectively, 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 which we expect to recognize over the respective service periods of one to five years.

At the Offering effective date, the total unrecognized compensation for unvested SAR Awards of $44,342 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.

This amount 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 a 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 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 $21,954 and $579 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $69,177 and $762 for the nine months ended September 20, 2020 and 2019 (unaudited), 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 three months ended September 30, 2020.

The following table summarizes activity for the Amended Options from January 1, 2019:

Amended Option Activity

(in thousands)

Outstanding at January 1, 2019

Outstanding at December 31, 2019

Exercised through June 30

Amendment and exchange of options

Outstanding at September 30, 2020

*Options have indefinite contractual lives

Prior to the amendment of the options in connection with the Offering in July 2020, 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 condensed consolidated balance sheet at March 31, 2020.

The Company recorded an increase in the value of Options for Redeemable Shares of $ 15,242 during the three months ended March 31, 2020, pertaining to the 3,849 in options outstanding.

As all options outstanding were fully vested, no related compensation expense was recorded for the three months ended March 31, 2020.

In connection with the amendment, 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 the put right no longer being applicable, the options were no longer considered temporary equity and were reclassified to stockholders equity at the time of the exchange.

Options under 2020 Plan

The Company issued no options under the 2020 Plan through September 30, 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:

2020 Plan Option Activity

(in thousands)

Outstanding at January 1, 2021

Issued in connection with Converted SARs

Issued in connection with Amended Options

2020 Plan options outstanding as of September 30, 2020

2020 Plan options exercisable as of September 30, 2020

*Amended Options have indefinite contractual lives

The detail of options outstanding, vested and exercisable under the 2020 Plan as of September 30, 2020 is as follows:

2020 Plan options outstanding at March 31, 2021

2020 Plan options exercisable at March 31, 2021

The detail of options outstanding, vested and exercisable under the 2020 Plan as of March 31, 2021 is as follows:

Options Outstanding

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$ 0.15 to $ 0.71

*Amended Options have indefinite contractual lives

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 operations over the period during which the participant is required to perform the requisite services.

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 condensed 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 September 30, 2020.

Unrecognized compensation expense associated with the Converted SARs was $40,434 at September 30, 2020 (unaudited), which will be recognized over the respective remaining service periods of one to five years.

There were no options issued or outstanding under the 2020 Plan for the three months ended March 31, 2020.

The Company issued 251 options under the 2020 Plan during the three months ended March 31, 2021.

The assumptions used

in the Black-Scholes model to determine the value of the options issued during the three months ended March 31, 2021 are as follows:

Fair market value of common stock

Expected term (years)

Expected dividend yield

Risk-free interest rate

The fair market value of common stock reflects the market closing price on NASDAQ on the option grant date.

As of the valuation 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 the options are expected to be exercised over, which differs from the term of the option grants which is ten years .

The Company does not expect to pay dividends.

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 option grants.

During the three months ended March 31, 2021, the Company recognized aggregate stock-based compensation expense for options and Converted SARs that were exchanged for options under the 2020 Plan of $ 3,768 .

At March 31, 2021, $ 30,605 of unrecognized compensation expense associated with options and Converted SARs is expected to be recognized over a weighted average period of approximately 3.6 years.

Restricted Stock Units

The Company issued RSUs to eligible participants during the quarter ended September 30, 2020.

The following table summarizes RSU activity for the nine months ended September 30, 2020:

The following table summarizes RSU activity for the three months ended March 31, 2021:

Grant Date Fair

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Outstanding at January 1, 2021

Outstanding at September 30, 2020

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 $1,958.

This cost will be recognized on a straight-line basis in the consolidated statements of operations 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 three and nine months ended September 30, 2020, the Company recorded stock-based compensation expense of $18 related to these awards.

At September 30, 2020, $1,940 of unrecognized compensation cost is expected to be recognized over a weighted average period of approximately 4.0 years.

Outstanding at March 31, 2021

There were no RSUs issued or outstanding for the three months ended March 31, 2020.

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 is recognized on a straight-line basis in the condensed 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 .

Vested RSUs are settled by issuing Class A shares or the equivalent value in cash at the Board’s discretion.

During the three months ended March 31, 2021, the Company recognized stock-based compensation expense for RSUs of $ 436 .

At March 31, 2021, $ 10,775 of unrecognized compensation cost for RSUs is expected to be recognized over a weighted average period of approximately 3.8 years.

Restricted Stock Awards

The Company issued RSAs to eligible participants during the quarter ended September 30, 2020.

The following table summarizes RSA activity for the nine months ended September 30, 2020:

The following table summarizes RSA activity for the three months ended March 31, 2021:

Grant Date Fair

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Outstanding at January 1, 2021

Outstanding at September 30, 2020

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 $13,190 during the three months ended September 30, 2020.

This cost will be recognized on a straight-line basis in the consolidated statements of operations 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 three and nine months ended September 30, 2020, the Company recorded stock-based compensation expense of $2,014, net of forfeitures, related to these awards.

At September 30, 2020, $11,158 of unrecognized compensation cost is expected to be recognized over a weighted average period of approximately 2.2 years.

Outstanding at March 31, 2021

There were no RSAs issued or outstanding for the three months ended March 31, 2020.

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 is recognized on a straight-line basis in the condensed 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 .

Vested RSAs are settled by issuing Class A shares upon vesting.

During the three months ended March 31, 2021, the Company recognized stock-based compensation expense for RSAs of $ 2,209 , net of forfeitures related to these awards.

At March 31, 2021, $ 6,588 of unrecognized compensation cost for RSAs is expected to be recognized over a weighted average period of approximately 2.4 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 adminstrator in advance of each offering period.

The ESPP permits participants to purchase Class A common stock through payroll deductions of up to a specified percentage of their eligible compensation.

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.

On the first trading day of each offering period, each participant will automatically be granted an option to purchase shares of Class A common.

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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 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 three and nine months ended September 30, 2020, the Company recorded stock-based compensation expense of $121 related to the ESPP initial offering period.

No shares of Class A common stock were purchased under the ESPP as no amounts were withheld through payroll or contributed by participants through this date.

As of September 30, 2020, there was approximately $116 of unrecognized stock-based compensation cost related to the ESPP’s initial offering period that is expected to be recognized on a straight-line basis over the remaining term of the offering period that ends on November 30, 2020.

For the periods presented, the fair value of ESPP purchase rights is comprised of the value of the 15% ESPP discount and the value associated with the the Call over the ESPP offering period.

The value of the Call was estimated using the Black-Scholes model with the following assumptions:

For the three months ended

For the nine months ended

September 30,

During the three months ended March 31, 2021, the Company recorded stock-based compensation expense of $ 130 related to the ESPP.

There were no shares of Class A common stock purchased under the ESPP during the three months ended March 31, 2021 as the current offering period does not end until May 31, 2021.

As of March 31, 2021, there was approximately $ 88 of unrecognized ESPP stock-based compensation cost that is expected to be recognized on a straight-line basis over the remaining term of the current offering period.

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 current offering period (December 1, 2020 – May 31, 2021) was estimated using the Black-Scholes model with the following assumptions:

Offering Period

Fair market value of common stock

4 unchanged sentences

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 is from July 28 to November 30, 2020.

The expected term represents the term of the ESPP offering period, which is generally six months .

The Company does not expect to pay dividends after the Offering.

3 unchanged sentences

The Company recognized total stock-based compensation cost related to incentive awards as follows:

For the three months ended

For the nine months ended

September 30,

Stock-based compensation cost:

Stock-based compensation expense:

SARs and Converted SARs

Stock options

Total stock-based compensation cost

Total stock-based compensation expense

The Company recognized stock-based compensation cost in the condensed consolidated statements of comprehensive income (loss) as follows:

For the three months ended

For the nine months ended

September 30,

Stock-based compensation expense:

Cost of revenues, software subscriptions

3 unchanged sentences

General and administrative

Total stock-based compensation

RELATED PARTIES

The Company advanced amounts to certain stockholders of the Company of $283 and $2 at December 31, 2019 and September 30, 2020 (unaudited), respectively.

The 2019 amounts are short-term in nature and repaid within three months.

The amounts in 2020 are related to settlement of S-Corporation tax obligations as permitted under the Tax Sharing Agreement.

These amounts are included in advances to stockholders in the consolidated balance sheets.

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 $1,736 and $1,628 for the three months ended September 30, 2020 and 2019 (unaudited), respectively, and $5,187 and $4,720 for the nine months ended September 30, 2020 and 2019 (unaudited), respectively.

These amounts are reflected in general and administrative expense in the consolidated statements of comprehensive income (loss).

Total stock-based compensation expense

LEGAL PROCEEDINGS

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.

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 the Company’s business.

The Company is not aware of any such legal proceedings or claims that management believes will have a material adverse effect on its business, financial condition, or operating results.

SUBSEQUENT EVENTS

On May 12, 2021, the Company acquired EVAT Solutions Limited and its subsidiaries, doing business as Taxamo (collectively “Taxamo”), a cloud-based pioneer in tax and payment automation for global e-commerce and marketplaces for approximately $ 200,000 in cash on hand.

The acquisition supports and accelerates the Company’s growth strategies across ecommerce platforms and marketplaces in the enterprise and mid-market in Europe and North America, and among its existing global customers.

The Company’s accounting for the Taxamo acquisition, including whether it constitutes an asset or business purchase, is preliminary.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements