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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Overview

Vertex is a leading provider of enterprise tax technology solutions. Our vision is to accelerate global commerce, one transaction at a time. Companies with complex tax operations rely on Vertex to automate their end-to-end indirect tax processes. Our software, content and services address the increasing complexities of global commerce and compliance by reducing friction, enhancing transparency, and enabling greater confidence in meeting indirect tax obligations. As a result, our software is ubiquitous within our customers' business systems, touching nearly every line item of every transaction that an enterprise can conduct.

We have pioneered tax technology for over 40 years. Today, we have over 4,000 customers, including over half of the Fortune 500, and provide our customers with tax support in over 130 countries. Today, our software enables tax determination, compliance and reporting, tax data management and document management with powerful pre-built integrations to core business applications used by most companies, particularly those applications that have a significant impact on global commerce. Our software is fueled by over 300 million data-driven effective tax rules and supports indirect tax compliance in more than 19,000 jurisdictions worldwide. Our solutions can be deployed on-premise, in the cloud, or both, with implementation services available to enable optimal customer outcomes and satisfy unique business requirements.

We have accumulated industry-specific tax knowledge for over four decades and our customers leverage our in-depth content through their use of our software. This allows our customers to comply with the dynamic regulatory landscape in real time and mitigates our customers’ risk exposure. As our customers expand their global footprint and business models, we are actively supporting their expansion by continuously strengthening our content offering and allowing for additional jurisdiction-specific tax compliance.

We derive the majority of our revenues from software subscriptions. These subscriptions include use of our software and ongoing monthly content updates. Our software is offered on a subscription basis to our customers, regardless of their deployment preferences. On-premise subscriptions are typically sold through one-year contracts and cloud-based subscriptions are typically sold through one- to three-year contracts. We bill almost all of our customers annually in advance of the subscription period.

Our customers include a majority of the Fortune 500, as well as a majority of the top 10 companies by revenue in multiple industries such as retail, technology and manufacturing, in addition to leading marketplaces. At December 31, 2020, we had over 4,000 customers and our Annual Recurring Revenue (“ARR”) per customer was over $78,000, while at December 31, 2019 our ARR per customer was over $65,000. As our customers expand geographically and pursue omnichannel business models, their tax determination and compliance requirements increase and become more complex, providing sustainable organic growth opportunities for our business. Our flexible, tiered transaction-based pricing model also results in our customers growing their spend with us as they grow and continue to use our solutions. We principally price our solutions based on a customer’s revenue base, in addition to a number of other factors. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics – Annual Recurring Revenue” for further discussion of ARR.

We employ a hybrid deployment model to align to our customers’ technology preferences for their core financial management software across cloud deployments, on-premise or any combination of these models. Over time, we expect both existing and newly acquired customers to continue to shift towards cloud deployment models. Cloud-based subscription sales to new customers have grown at a faster rate than on-premise software subscription sales, which is a trend that we expect to continue over time. We generated 27.5%, 19.1% and 12.9% of software subscription revenues from cloud-based subscriptions in 2020, 2019 and 2018, respectively. While our on-premise software subscription revenues

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comprise 72.5% of our 2020 software subscription revenues, we anticipate that it will continue to decrease as a percentage of total software subscription revenues as our customers’ technology preferences increasingly continue to favor cloud deployment solutions.

We license our solutions primarily through our direct sales force, which focuses on selling to qualified leads provided by our marketing efforts, and through our network of referral partners. We also utilize indirect sales to a lesser extent to efficiently grow and scale our enterprise and mid-market revenues.

Our partner ecosystem is a differentiating, competitive strength in both our software development and our sales and marketing activities. We integrate with key technology partners that span ERP, CRM, procurement, billing, POS and eCommerce. These partners include Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Workday and Zuora. We also collaborate with numerous accounting firms who have built implementation practices around our software to serve their customer base.

We believe that the global commerce and compliance environments provide durable and accelerating growth opportunities for our business. We generated revenues of $374.7 million, $321.5 million and $272.4 million in 2020, 2019 and 2018, respectively. We had a net income (loss) of $(78.9) million, $31.1 million and $(6.1) million in 2020, 2019 and 2018, respectively. Adjusted EBITDA was $78.4 million, $67.9 million and $61.5 million in 2020, 2019 and 2018, respectively. Adjusted EBITDA is a financial measure that is not prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics – Adjusted EBITDA and Adjusted EBITDA Margin” for further discussion.

Income Tax Status Change, Recapitalization and Initial Public Offering

Our financial information has been impacted by certain events which occurred in 2020.

We have historically been taxed as an S-Corporation for U.S. federal income tax purposes and for income tax purposes in most states. As a result, net income or loss has been allocated to our stockholders and included on their individual income tax returns prior to July 27, 2020. Effective July 27, 2020 we converted to a C-Corporation, which has resulted in our net income or losses for all future periods to be taxed at the corporate level. As such, our income tax provision will not be comparable for periods prior to the C-Corporation conversion. During the year ended December 31, 2020, we recognized an income tax benefit of $24.9 million specifically associated with our conversion to a C-Corporation.

On July 28, 2020, the Company effected the Recapitalization, which included effecting the Stock Split, establishing the New Capital Structure and effecting the Share Exchange. The effect of the Stock Split and the Share Exchange are recognized retrospectively in our consolidated financial statements. Historical earnings per share information for all periods presented prior to the Offering was retrospectively restated.

Our Registration Statement was declared effective on July 28, 2020. On July 31, 2020, the Company receiving $423.0 million in proceeds from the sale of 23,812,216 shares of Class A common stock at an Offering price of $19.00 per share, net of underwriting fees. After payment of Offering costs of $6.2 million, the Company used a portion of the proceeds to pay off $175.0 million in outstanding debt. The net proceeds remaining after these payments are being used for working capital and other corporate purposes.

Key Factors Affecting Performance

The growth of our business and our future success depends on many factors, including our ability to retain and expand our revenues from existing customers, acquire new customers, broaden and deepen our partner ecosystem, continually innovate our software, invest in growth and scale our business and manage customer migrations to cloud solutions. While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We anticipate that we will continue to expand our operations and headcount. The expected addition of new personnel and the investments that we anticipate will be necessary to manage our anticipated growth may make it more difficult for us to achieve or maintain profitability. Many of these investments will occur in advance of experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently.

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Retention and expansion of revenues from existing customers. Given the breadth of our customer base and their own internal growth, the majority of our revenues and revenue growth comes from existing customers. This revenue growth is comprised of the acquisition of new licenses for additional products, increases in subscription fees due to expanded usage of currently licensed software and price increases. We plan to continue to invest in new innovations and offerings and in our sales and marketing teams in order to support the ongoing strong retention and expansion of revenues with our existing customers. We monitor our net revenue retention rate (“NRR”) in order to understand our ability to retain and grow revenues from our customers. Our NRR was 106%, 109% and 104% in 2020, 2019 and 2018, respectively. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics – Net Revenue Retention Rate” for further discussion.

Acquire new customers. Our solutions address the complexity of aligning commerce and compliance and we believe the market for our software and solutions is large and underpenetrated, both in the U.S. and globally. As enterprise and mid-market companies continue to expand their business operations—both through their product and service offerings and their global footprint—we expect demand for our tax solutions to increase due to the fact that legacy solutions such as spreadsheets, manual processes, native ERP functionality or home-built solutions are error prone, inefficient and cannot scale. We plan to continue to invest in our sales and marketing teams and our solution development in order to address this increased demand from new customers. This increased investment will result in increases in expenses in advance of revenues attributable to these investments.

Broaden and deepen our partner ecosystem. We have an extensive network of partners that spans ERP, CRM, procurement, billing, POS and eCommerce platforms. Our partners enhance the coverage and adoption of our solutions and promote our thought leadership. We leverage our partnerships to maximize the benefits of our solutions for our customers and to identify new customer opportunities. By forming additional strategic alliances with participants in the global digital transformation, such as payments and eCommerce platforms, we can continue to expand our exposure to all transactions, both business-to-consumer (“B2C”) and business-to-business (“B2B”). Future partnerships with large-scale digital payments companies will allow us to develop additional customer-centric solutions and further expand our customer base.

Continued innovation of our software. With the pace of change in commerce and compliance, we believe it is important to continue innovating and extending the functionality and breadth of our software. We plan on investing to further enhance our content and the speed and usability of our software. Historically such innovation has been accomplished through internal development efforts. However, we may pursue acquisitions, development arrangements with partners or similar activities to accelerate these investments. On January 25, 2021, we acquired Tellutax, a designer of edge-based technology utilizing a container architecture, which enables customers to deliver tax solutions seamlessly at the point of need with increased scalability and simplified management. We believe continuing to enhance our existing software and expanding our tax content will increase our ability to generate revenues by broadening the appeal of our software to new customers as well as increasing our engagement with existing customers.

Investing in growth and scaling our business. We believe that our market opportunity is large, and we will continue to invest significantly in scaling across organizational functions in order to support the anticipated growth in our operations both domestically and internationally. Any investments we make in our research and development and our sales and marketing organization will occur in advance of experiencing the benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating resources in those areas. The company may pursue acquisitions or partner arrangements to accelerate its growth initiatives. On January 7, 2020, we acquired Systax Sistemas Fiscais LTDA (“Systax”), a provider of Brazilian transaction tax content and software. See Note 2 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.

Customer migration to cloud solutions. Over time, we expect a continued shift to our cloud solutions from existing and newly acquired customers. Generally, when existing customers migrate from on-premise to cloud-based solutions, this generally has a favorable impact on our long-term ARR due to price structures and opportunities to promote additional license sales. Over the past three years, cloud sales to new customers have grown at a significantly faster rate than sales of on-premise solutions, which is a trend that we expect to continue over time. We generated 12.9%, 19.1% and 27.5% of software subscription revenues from cloud-based subscriptions in 2018, 2019 and 2020, respectively. We recognize revenue from the sale of cloud-based subscriptions ratably over the life of the contract, whereas for on-premise subscriptions, the first year pricing includes a premium that is not included in future renewal pricing. The premium is recognized ratably over the estimated period of benefit to the customer, which is generally three years. Therefore, as more of our sales shift to cloud-based subscriptions, our revenue growth rate may increase. We provide hosting for our cloud-

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based subscriptions. To the extent that revenues from our cloud offerings increase as a percentage of total revenues, our gross margin may decrease due to the associated hosting costs of those offerings.

Recent Developments—Impact of COVID-19

During 2020, the COVID-19 pandemic had minimal impact on our revenues and results of operations, as we continue to derive the significant majority of our revenues from our existing software subscriptions. As we principally price our solutions based on our customers’ revenues within certain revenue bands, elongated declines in our existing customers’ revenues may impact our ability to grow our existing customer revenues. We did not experience an abnormal number of non-renewals in 2020, nor any material declines in revenues associated with declines in our customers’ revenues, and we currently expect our existing customer base to remain largely stable, as it did through the recession in 2008 and 2009. However, significant increases in non-renewals or concessions to renewal customers would have a material impact on our revenues and cash flows. During 2020, we did see some delays in signing deals due to prospects shifting to working remotely, and some due to economic uncertainty. We expect that the uncertainty caused by the COVID-19 pandemic could impact our billings to new customers beyond 2020 as the pandemic continues to generate economic uncertainty, and it may also negatively impact our efforts to maintain or expand revenues from our existing customers as they continue to evaluate certain long-term projects and budget constraints. However, we do not anticipate that overall demand for our software and solutions, our ability to deliver such software and solutions, or our growth strategies will be materially impacted by the COVID-19 pandemic, as companies continue to rely on us for their indirect tax solutions.

Our cash collections for the year were consistent with our expectations as some of the procedural disruptions that customers experienced as they shifted to remote work early in the year stabilized by the end of 2020. We believe that we may see delays in collections in 2021 as the pandemic continues to generate economic uncertainty. However, we do not believe that these delays will materially impact our business; we continue to expect that we will be able to collect amounts due under subscription contracts from customers experiencing issues as a result of the COVID-19 pandemic, and we have not recorded an additional allowance for doubtful accounts in connection with any delays. Given that customers cannot forgo our monthly content updates, which are necessary to remain compliant with the most current regulations, we believe customers will continue to pay our renewal invoices in a timely, even if slightly elongated, manner. We believe that we currently have ample liquidity and capital resources to continue to meet our operating needs, and our ability to continue to service our debt or other financial obligations is not currently impaired. For a further description of our liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors that cannot reliably be predicted, including the duration and scope of the pandemic; governmental, business, and individuals’ actions in response to the pandemic; and the impact on economic activity, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business and government spending on technology as well as customers’ ability to pay for our products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including estimated allowance for subscription cancellations, product life cycles and estimated useful lives and potential impairment of long-lived assets, intangible assets and goodwill.

Key Business Metrics

We regularly review several metrics identified below to evaluate growth trends, measure our performance, formulate financial projections and make strategic decisions.

Annual Recurring Revenue. We derive the vast majority of our revenues from recurring software subscriptions. We believe ARR provides us with visibility to our projected software subscription revenues in order to evaluate the health of our business. Because we recognize subscription revenues ratably, we believe investors can use ARR to measure our expansion of existing customer revenues, new customer activity, and as an indicator of future software subscription revenues. ARR is based on monthly recurring revenues (“MRR”) from software subscriptions for the most recent month at period end, multiplied by twelve. MRR is calculated by dividing the software subscription price, inclusive of discounts,

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by the number of subscription covered months. MRR only includes customers with MRR at the end of the last month of the measurement period.

For the Year Ended For the Year Ended

December 31, December 31,

ARR increased by $37.9 million or 13.6% from 2019 to 2020. The increase was primarily driven by $17.5 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases, and $20.4 million of on-premise and cloud-based subscriptions of our tax solutions to new customers.

ARR increased by $45.0 million or 19.2% from 2018 to 2019. The increase was primarily driven by $21.6 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases, and $23.4 million of on-premise and cloud-based subscriptions of our tax solutions to new customers.

Net Revenue Retention Rate. We believe that our NRR provides insight into our ability to retain and grow revenues from our customers, as well as their potential long-term value to us. We also believe it demonstrates to investors our ability to expand existing customer revenues, which is one of our key growth strategies. Our NRR refers to the ARR expansion during the 12 months of a reporting period for all customers who were part of our customer base at the beginning of the reporting period. Our NRR calculation takes into account any revenues lost from departing customers or customers who have downgraded or reduced usage, as well as any revenue expansion from migrations, new licenses for additional products or contractual and usage-based price changes.

For the Year Ended

December 31,

The 300 basis point decrease in NRR from 2019 to 2020 was primarily attributable to a reduction in salesgrowthto existing customers as compared to the prior year related to delays in signing deals due to their focus shifting to working remotely, and economic uncertainty in connection with the impact of the COVID-19 pandemic on their businesses.

The 500 basis point increase in NRR from 2018 to 2019 was primarily driven by growth of $21.6 million in recurring subscription revenues from existing customers through their expanded use of our solutions.

Adjusted EBITDA and Adjusted EBITDA Margin. We believe that Adjusted EBITDA and Adjusted EBITDA margin are measures widely used by securities analysts and investors to evaluate the financial performance of our Company and other companies. We believe that Adjusted EBITDA and Adjusted EBITDA margin are useful as supplemental measures to evaluate our overall operating performance as they measure business performance focusing on cash-related charges and because they are important metrics to lenders under our credit agreements. We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, stock-based compensation expense, severance charges, and transaction costs. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. The following schedules reconcile Adjusted EBITDA and Adjusted EBITDA margin to net income (loss), the most closely directly comparable GAAP financial measure. For more information about how we use these and other non-GAAP financial measures in our business, the limitations of these measures and reconciliations to the most directly comparable GAAP measures, see “Management’s

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Discussion and Analysis of Financial Condition and Results of Operations — “Use and Reconciliation of Non-GAAP Financial Measures.”

For the Year Ended

December 31,

Adjusted EBITDA:

Impairment of asset — — 32,692

Adjusted EBITDA Margin:

The increase in Adjusted EBITDA of $10.5 million in 2020 is primarily driven by an increase of $36.8 million in non-GAAP gross profit, partially offset by increases in various non-GAAP operating expense categories including $13.2 million in non-GAAP general and administrative expense, $10.0 million in non-GAAP research and development expense, and $3.5 million in non-GAAP selling and marketing expense. Growth in these operating expense categories is driven primarily by our ongoing investment in our research and development, sales and marketing teams and technology infrastructure to support current and future growth.

The increase in Adjusted EBITDA of $6.4 million in 2019 is primarily driven by an increase in gross profit, offset by an increase in operating expenses including additional sales and marketing and research and development investments.

Adjusted EBITDA margin decreased in 2020 and 2019 by 20 basis points and 150 basis points, respectively, in comparison to the immediately preceding period, primarily because operating expenses increased at a higher rate than our increase in revenue, driven by our previously noted investments to enable future growth.

Free Cash Flow and Free Cash Flow Margin. Our management uses free cash flow as a critical measure in the evaluation of liquidity in conjunction with related GAAP amounts. We also use the measure when considering available cash, including for decision making purposes related to dividends and discretionary investments. We consider free cash flow to be an important measure for investors because it measures the amount of cash we generate from our operations after our capital expenditures and capitalization of software development costs. In addition, we base certain of our forward-looking estimates and budgets on free cash flow and free cash flow margin. We define free cash flow as the total of net cash provided by operating activities, adjusted for the redemption of stock appreciation rights (“SARs”) in 2020 in connection with the Offering reflected as a reduction of cash provided by operating activities, less purchases of property and equipment and capitalized software. We define free cash flow margin as free cash flow divided by total revenues for the same period. The following schedule reconciles free cash flow and free cash flow margin to net cash provided by operating activities, the most closely directly comparable GAAP financial measure. For more information about how we use these and other non-GAAP financial measures in our business, the limitations of these measures, and reconciliations

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to the most directly comparable GAAP measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Use and Reconciliation of Non-GAAP Financial Measures.”

For the Year Ended

December 31,

Free Cash Flow:

Redemption of Converted SARs 22,889 — —

Free Cash Flow Margin:

Free cash flow decreased by $5.3 million in 2020 compared to 2019, driven primarily by a net decrease of $10.1 million in cash provided by operating activities, after reflecting the addback of $22.9 million in cash consumed by the redemption of SARs converted to stock options and subsequently redeemed in the Offering (“Converted SARs”), which was partially offset by a year over year reduction in cash consumed by investments in on-premise capitalized software development of $5.4 million. This decrease in on-premise capitalized software development costs is associated with the continued shift in our development efforts to cloud-based solutions. Investments in cloud-based solutions increased by $4.5 million in 2020 over 2019 and are included in internal use software as additions to property and equipment. These increased investments in cloud-based solutions offset the reductions in investments in other property and equipment due to the COVID-19 pandemic. Cash flow from operating activities, excluding the impact of the Converted SARs, were unfavorably impacted during the 2020 period as a result of an increase in costs associated with increased development activity associated with nascent technologies, and comparatively lower cash generated through changes in operating assets and liabilities, which included changes in accounts receivable and deferred revenues as a result of timing, sales mix and differences in customer payment terms. Cash flow from operations was favorably impacted by our expansion of Adjusted EBITDA in 2020 of $10.5 million as previously discussed. Free cash flow margin decreased in 2020 by 390 basis points compared to 2019, primarily due to the decline in cash from operations noted above during a period of expansion of total revenues of $53.2 million.

Free cash flow increased by $7.8 million in 2019 over 2018, driven primarily by an increase in cash from operating activities of $12.0 million, due to a $4.5 million increase in net income after excluding the impact of the asset impairment in 2018 and an increase in cash provided by changes in operating assets and liabilities. This amount is offset by an increase of $5.0 million in investments in capitalized software costs to support the growth of our customers. Free cash flow margin remained relatively consistent with the prior year at approximately 17%.

Components of Our Results of Operations

Revenues

We generate revenues from software subscriptions and services.

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. We enter into contracts that include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers that are subsequently remitted to governmental authorities.

Software Subscriptions

Licenses for on-premise software subscriptions, which are generally one year, provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates and product support. The updates and support, which are part

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of the subscription agreement, are essential to the continued utility of the software; therefore, we have determined the software and the related updates and support to be a single performance obligation. Accordingly, when on-premise software is licensed, the revenue associated with this combined performance obligation is recognized ratably over the license term as these subscriptions are provided for the duration of the license term. Revenue recognition begins on the later of the beginning of the subscription period or the date the software is made available to the customer to download. Our on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price is a material right that provides customers with the right to this reduced renewal price. We recognize revenue associated with this material right over the estimated period of benefit to the customer, which is generally three years.

Our cloud-based subscriptions allow customers to use Company-hosted software over the contract period without taking possession of the software. The contracts are generally for one to three years and are generally billed annually in advance of the subscription period. Our cloud-based offerings also include related updates and support. All services within the cloud-based contracts consistently provide a benefit to the customer during the subscription period, thus the associated revenue is recognized ratably over the subscription period. Revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based solutions.

Revenue is impacted by the timing of sales and our customers’ growth or contractions resulting in their need to expand or contract their subscription usage, the purchase of new solutions or the non-renewal of existing solutions. In addition, revenue will fluctuate with the cessation of extended product support fees charged for older versions of our software subscription solutions when they are retired and these fees are no longer charged. Contracts for on-premise licenses permit cancellations at the end of the license term, which is generally one year. Legacy cloud-based subscription contracts for multi-year periods previously provided customers the right to terminate their contract for services prior to the end of the subscription period at a significant penalty. This penalty requires the payment of a percentage of the remaining months of the then current contract term. Current cloud-based contracts do not contain such termination rights. Terminations of cloud-based subscriptions prior to the end of the subscription term have occurred infrequently and the impact has been immaterial. The allowance for subscription and non-renewal cancellations reflects an estimate of the amount of such cancellations and non-renewals based upon our historical experience.

Services

We generate services revenues primarily in support of our customers’ needs associated with our software and to enable them to realize the full benefit of our solutions. These software subscription-related services include configuration, data migration and implementation, and premium support and training. In addition, we generate services revenues through our managed services offering which allows customers to outsource all or a portion of their indirect tax operations to us. These services include indirect tax return preparation, filing and tax payment and notice management. We generally bill for services on a per-transaction or time and materials basis, and we recognize revenue from deliverable-based professional services as services are performed.

Fluctuations in services revenues are typically directly correlated to fluctuations in our subscription revenues with respect to implementation and training services as we have historically experienced an attachment rate to subscription sales for these services in excess of 60%. However, demand for services in 2020 exceeded historical levels as certain customers migrated to a newer version of the software which is not expected to be a significant driver of our services revenues growth in 2021. In addition, and to a lesser extent, our managed services offering has continued to experience increased revenues associated with returns processing volume increases attributable to regulatory changes, as customers expanded their tax filings into more jurisdictions.

Cost of Revenues

Software Subscriptions

Cost of software subscriptions revenues consists of costs related to providing and supporting our software subscriptions and includes personnel and related expenses, including salaries, benefits, bonuses and stock-based compensation. In addition, cost of revenues includes direct costs associated with information technology, such as data center and software hosting costs, and tax content maintenance. Cost of revenues also includes amortization associated with direct labor and related expenses for capitalized internal-use software and developed software for new products and enhancements to existing products and cloud-based subscription solutions, and costs associated with the amortization of

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acquired intangible assets. We plan to continue to significantly expand our infrastructure and personnel to support our future growth and increases in transaction volumes of our cloud-based solutions, including through acquisitions. We expect growth in our business will result in an increase in cost of revenues in absolute dollars.

Services

Cost of services revenues consists of direct costs of software subscription-related services and our managed services offering. These costs include personnel and related expenses, including salaries, benefits, bonuses, stock-based compensation and the cost of third-party contractors and other direct expenses. We plan to continue to expand our infrastructure and personnel as necessary to support our future growth and related increases in our service revenues. We expect growth in our business will result in an increase in the cost of services revenues in absolute dollars but may decrease as a percentage of revenues as we scale our operations.

Research and Development

Research and development expenses consist primarily of personnel and related expenses for our research and development activities, including salaries, benefits, bonuses and stock-based compensation, and the cost of third-party developers and other contractors. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. For the years ended December 31, 2020, 2019 and 2018, $11.9 million, $17.2 million and $12.3 million of software development costs were capitalized, respectively. Capitalized software development costs consist primarily of employee-related and third-party labor costs.

We devote substantial resources to developing new products and enhancing existing products, conducting quality assurance testing and improving our core technology. We believe continued investments in research and development are critical to attain our strategic objectives and expect research and development costs to increase in absolute dollars. These investments include enhancing our solution offerings to address changing customer needs to support their growth, as well as implementing changes required to keep pace with our partners’ technology to ensure the continued ability of our solutions to work together and deliver value to our customers. The market for our solutions is characterized by rapid technological change, frequent new product and service introductions and enhancements, changing customer demands and evolving industry standards. As a result, although we are making significant research and development expenditures, which may be incurred and certain of which may be capitalized, there is no guarantee these solutions will be accepted by the market. This could result in increased costs or an impairment of capitalized development costs with no resulting future revenue benefit.

Selling and Marketing

Selling and marketing expenses consist primarily of personnel and related expenses in support of sales and marketing efforts. These costs include salaries, benefits, bonuses and stock-based compensation. In addition, selling expense includes costs related to advertising and promotion efforts, branding costs, partner-based commissions, costs associated with our annual customer conferences, and the amortization of certain acquired intangible assets. We intend to continue to invest in our sales and marketing capabilities in the future to continue to increase our brand awareness and expect these costs to increase on an absolute dollar basis as we grow our business and continue to expand our market and partner ecosystem penetration. Sales and marketing expense in absolute dollars and as a percentage of total revenues may fluctuate from period-to-period based on total revenue levels and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods.

General and Administrative

General and administrative expenses consist primarily of personnel and related expenses for administrative, finance, information technology, legal, risk management, facilities and human resources staffing, including salaries, benefits, bonuses, severance, stock-based compensation, professional fees, insurance premiums, facility costs and other internal support costs.

We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, integrate future acquisitions and incur additional costs associated with becoming a publicly listed company. As a public company, we expect to incur increased expenses related to accounting, tax and

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auditing activities, legal, insurance, SEC and internal control compliance, including the design, implementation and testing of increasingly formalized systems of internal control over financial reporting.

Depreciation and Amortization

Depreciation and amortization expense consists of the allocation of purchased and developed asset costs over the future periods benefitted by the use of these assets. These assets include leasehold improvements for our facilities, computers and equipment needed to support our customers and our internal infrastructure and capitalized internal-use software associated with our internal infrastructure and tools. Depreciation and amortization will fluctuate in correlation with our ongoing investment in internal infrastructure costs to support our growth.

Interest Expense, Net

Interest expense, net reflects the amount of our interest expense that exceeds interest income over the same period.

Interest expense consists primarily of interest payments and other financing costs on our debt facility. Interest expense includes write-downs of deferred financing costs upon redemption of debt. Interest expense will vary as a result of fluctuations in the level of debt outstanding as well as interest rates on such debt. In addition, interest expense will include adjustments to the fair value of contracts that may be entered into to hedge risks associated with currency fluctuations for cash receipts or cash payments denominated in currencies other than U.S. dollars and which do not qualify for hedge accounting. In addition, changes in the settlement value of the future payment obligation for the Systax acquisition will be recorded as interest expense, as described further in Note 2 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.

Interest income reflects earnings on investments of our cash on hand and on funds held for customers related to our managed outsourcing services. Interest income will vary as a result of fluctuations in the future level of funds available for investment and the rate of return available in the market on such funds.

Provision for Taxes

Prior to July 27, 2020, we have been taxed as an S-Corporation for U.S. federal income tax purposes and for income tax purposes in most states. As a result, net income or loss prior to this date has been allocated to our stockholders and included on their individual income tax returns. In certain states, we have been taxed at the corporate level. Accordingly, the income tax provision or benefit for such periods was based on taxable income allocated to those states. In certain foreign jurisdictions, our subsidiaries were also taxed at the corporate level. Similar to states, the income tax provision or benefit is based on taxable income sourced to these foreign jurisdictions.

Effective July 27, 2020 we converted to a C-Corporation, which has resulted in our net income or losses for all future periods being taxed at the corporate level. As such, our income tax provision will not be comparable for periods prior to the C-Corporation conversion. During the year ended December 31, 2020, we recognized an income tax benefit of $24.9 million specifically associated with our conversion to a C-Corporation.

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Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto beginning on page F-1 of this Annual Report on Form 10-K. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. In particular, in connection with the Offering, we converted to a C-Corporation, which will result in taxation at the corporate level.

The following table sets forth our consolidated statements of comprehensive income (loss) for the periods indicated. Revenues are reflected in accordance with ASC 606, which we adopted on January 1, 2018.

For the Year Ended For the Year Ended

December 31, December 31,

Revenues:

Cost of revenues:

Operating expenses:

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For the Year Ended

December 31,

Stock-based compensation expense:

Cost of revenues, software subscriptions $ 14,663 $ 946 $ 512

Total stock-based compensation expense $ 147,904 $ 9,460 $ 5,108

The following table sets forth our results of operations as a percentage of our total revenues for the periods presented.

For the Year Ended

December 31

Revenues:

Cost of Revenues: %

Operating expenses:

Research and development 14.5 % 9.5 % 8.7 %

General and administrative 39.8 % 22.1 % 21.6 %

Depreciation and amortization 2.9 % 2.8 % 2.9 %

Impairment of asset — % — % 12.0 %

Other operating expense (income), net 0.1 % 0.2 % (0.2) %

(Loss) income from operations (27.9) % 9.9 % (1.0) %

Interest expense, net 0.8 % 0.3 % 0.6 %

(Loss) income before income taxes (28.7) % 9.6 % (1.6) %

Income tax (benefit) expense (7.7) % (0.1) % 0.6 %

Net (loss) income (21.0) % 9.7 % (2.2) %

Total comprehensive (loss) income (21.7) % 9.7 % (2.3) %

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Revenues

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Revenues:

Revenues increased $53.2 million, or 16.5%, to $374.7 million in 2020 compared to $321.5 million in 2019. The increase in software subscriptions revenues of $41.1 million, or 14.9%, was primarily driven by an increase of $37.5 million in revenues derived from our existing customers and a year over year increase of $3.6 million in revenues derived from new customers.

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The $12.0 million increase in services revenues is primarily driven by an increase of $9.8 million in software subscription-related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and upgrading existing customers to newer versions of our solutions. In addition, our managed services offering experienced a $2.2 million increase in recurring services revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.

Cost of Software Subscriptions Revenues

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Cost of software subscriptions revenues increased $28.4 million, or 36.8%, to $105.7 million in 2020 compared to $77.3 million in 2019. Of this increase, 48.3% is due to an increase in stock-based compensation expense of $13.7 million. After excluding the impact of stock-based compensation there is a remaining increase of $14.7 million. Of this increase, $3.7 million is due to increased amortization expense associated with the late Q3 2019 release of O Series 9.0. The remaining $11.0 million variance is primarily associated with increased costs of personnel supporting year-over-year growth of sales and customers and ongoing infrastructure investments to support expansion of customer transaction volumes for our cloud-based subscription customers.

As a percentage of total revenues, the cost of software subscriptions revenues increased to 28.2% in 2020 compared to 24.0% in 2019. Adjusting for the increase in stock-based compensation in 2020, cost of software subscriptions revenues as a percentage of total revenues would have been 24.5% in 2020.

Cost of Services Revenues

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Cost of services revenues increased $26.6 million, or 80.3%, to $59.7 million in 2020 compared to $33.1 million in 2019. Of this increase, 75.4% is due to an increase in stock-based compensation of $20.1 million. After excluding the impact of stock-based compensation there is a remaining increase of $6.5 million primarily due to headcount growth in the service delivery areas to support revenue growth in software subscription-related services and our managed services offering.

As a percentage of total revenues, cost of services revenues increased to 15.9% in 2020 compared to 10.3% in 2019. Adjusting for the increase in stock-based compensation in 2020, cost of services revenues as a percentage of total revenues would have been 10.6% in 2020.

Research and Development

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Research and development expenses increased $23.8 million, or 77.8%, to $54.3 million in 2020 compared to $30.6 million in 2019. Of this increase, 57.8% is due to an increase in stock-based compensation of $13.7 million. After excluding the impact of stock-based compensation there is a remaining increase of $10.1 million. The increase was primarily due to costs associated with increased development activity associated with nascent technologies and new solutions to address end-to-end data analysis and compliance needs of our customers.

As a percentage of total revenues, research and development expenses increased to 14.5% in 2020 compared to 9.5% in 2019. Adjusting for the increase in stock-based compensation in 2020, research and development expenses as a percentage of total revenue would have been 10.8% in 2020.

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Selling and Marketing

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Selling and marketing expenses increased $31.3 million, or 45.9%, to $99.4 million in 2020 compared to $68.1 million in 2019. Of this increase, 88.4% is due to an increase in stock-based compensation of $27.7 million. After excluding the impact of stock-based compensation there is a remaining increase of $3.6 million. The increase was primarily due to an increase in employee-related expenses to support the growth in year-over-year subscription and services revenues and expansion of our partner and channel management programs. In addition, we expanded our promotional and brand awareness efforts to support sales growth. Partially offsetting these increases, we experienced a reduction in travel and external marketing events in 2020 due to COVID-19 travel and conference restrictions. These costs are expected to increase once travel and conference restrictions are lifted, although it is uncertain whether these costs will return to their historical levels experienced pre-COVID-19.

As a percentage of total revenues, selling and marketing expenses increased to 26.5% in 2020 compared to 21.2% in 2019. Adjusting for the increase in stock-based compensation in 2020, selling and marketing expenses as a percentage of total revenues would have been 19.2% in 2020.

General and Administrative

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

General and administrative expenses increased $78.0 million, or 109.9%, to $149.1 million in 2020 compared to $71.0 million in 2019. Of this increase, 81.1% is due to an increase in stock-based compensation of $63.3 million. After excluding the impact of stock-based compensation there is a remaining increase of $14.7 million. The increase was primarily due to planned strategic investments in information technology infrastructure to drive automation and modernization of our infrastructure, combined with other continuing initiatives to support future operating leverage. Lastly, there were investments in employees and other systems and resources in support of our growth.

Due to these factors, as a percentage of total revenues, general and administrative expenses increased to 39.8% in 2020 compared to 22.1% in 2019. Adjusting for the increase in stock-based compensation in 2020, general and administrative expenses as a percentage of total revenue would have been 22.9%.

Depreciation and Amortization

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Depreciation and amortization increased $2.0 million, or 22.5%, to $11.0 million in 2020 compared to $9.0 million in 2019. The increase was primarily due to the impact of infrastructure and technology purchases placed in service in 2019 and other capitalized infrastructure costs to support our growth.

As a percentage of total revenues, depreciation and amortization expense increased to 2.9% in 2020 compared to 2.8% in 2019.

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Interest Expense, Net

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Interest expense increased $2.2 million, or 226.4%, to $3.1 million in 2020 compared to $1.0 million in 2019. The increase is primarily due to the write-down of deferred financing fees of $1.4 million in connection with the July 2020 payoff of the $175.0 million term loan facility with a portion of the proceeds from the Offering. Additionally, interest income decreased $0.5 million in 2020 primarily due to a significant reduction in investment rates of return on cash balances which we believe was attributable to Federal Reserve actions due to the COVID-19 pandemic.

Provision for Taxes

For the Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Income tax benefit increased $28.8 million to $28.9 million in 2020 compared to $0.2 million in 2019. The change in tax benefit was primarily driven by the establishment of deferred tax assets at the higher C-Corporation tax rate in connection with our conversion to a C-Corporation on July 27, 2020, resulting in a benefit of $24.9 million being recorded in 2020. The substantial increases in stock-based compensation expense led to an overall pretax loss in 2020, thereby increasing our deferred tax assets and the recognition of an increased income tax benefit in 2020 at the higher C-Corporation tax rate.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenues

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Revenues:

Revenues increased $49.1 million, or 18.0%, to $321.5 million in 2019 compared to $272.4 million in 2018. The increase in software subscriptions revenues of $40.0 million, or 17.0%, was primarily driven by $29.0 million in revenue growth derived from our existing customers and $11.0 million of revenues from new customers.

The $9.1 million increase in services revenues is primarily driven by an increase of $5.3 million in software subscription-related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and upgrading existing customers to newer versions of our solutions. In addition, our managed services offering experienced a $2.5 million increase in recurring services revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.

Cost of Software Subscriptions Revenues

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Cost of software subscriptions revenues increased $8.3 million, or 12.1%, to $77.3 million in 2019 compared to $68.9 million in 2018. The increase was primarily due to costs of personnel supporting year-over-year growth of sales and

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customers, as well as ongoing infrastructure investments to support expansion of customer transaction volumes for our cloud-based subscription customers. Specifically, services headcount grew by 34% in 2019 as compared to 2018.

As a percentage of total revenues, the cost of software subscriptions revenues decreased to 24.0% in 2019 compared to 25.3% in 2018.

Cost of Services Revenues

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Cost of services revenues increased $6.4 million, or 23.8%, to $33.1 million in 2019 compared to $26.8 million in 2018. The increase was primarily due to headcount growth in the service delivery areas to support revenue growth in software subscription-related services and our managed services offering.

As a percentage of total revenues, cost of services revenues increased to 10.3% in 2019 compared to 9.8% in 2018.

Research and Development

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Research and development expenses increased $6.8 million, or 28.6%, to $30.6 million in 2019 compared to $23.8 million in 2018. The increase was primarily due to costs associated with increased development activity associated with nascent technologies and new solutions to address end-to-end data analysis and compliance needs of our customers.

As a percentage of total revenues, research and development expenses increased to 9.5% in 2019 compared to 8.7% in 2018, driven in part by our expanded investment in developing our global compliance reporting solution.

Selling and Marketing

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Selling and marketing expenses increased $11.2 million, or 19.7%, to $68.1 million in 2019 compared to $56.9 million in 2018. The increase was primarily due to an increase in payroll and related expenses associated with the growth in year-over-year subscription and services revenues and expansion of our partner and channel management programs. In addition, increases in advertising and promotional spending and expanded brand awareness efforts contributed to this increase.

As a percentage of total revenues, selling and marketing expenses increased to 21.2% in 2019 compared to 20.9% in 2018.

General and Administrative

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

General and administrative expenses increased $12.1 million, or 20.5%, to $71.0 million in 2019 compared to $59.0 million in 2018. The increase was primarily due to planned strategic investments of $6.8 million in information technology infrastructure, business process reengineering and other initiatives to drive future operating leverage, as well as investments aggregating $3.7 million in employees and other systems and resources in support of our growth.

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Due to these factors, as a percentage of total revenues, general and administrative expenses increased to 22.1% in 2019 compared to 21.6% in 2018.

Depreciation and Amortization

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Depreciation and amortization increased $1.0 million, or 13.3%, to $9.0 million in 2019 compared to $7.9 million in 2018. The increase was primarily due to the impact of infrastructure and technology purchases placed in service in 2018 and 2019 and other capitalized infrastructure costs to support our growth.

As a percentage of total revenues, depreciation and amortization expense decreased to 2.8% in 2019 compared to 2.9% in 2018.

Impairment of Asset

During the year ended December 31, 2018, we recorded an impairment of $32.7 million for capitalized internal-use software previously utilized to provide cloud-based services to customers, net of accumulated amortization of $11.9 million. This impairment was related to a product strategy shift that resulted in this cloud offering no longer being made available for sale to customers after 2018. The capitalized development costs were deemed to be fully impaired due to the net book value of the asset exceeding its future expected cash flows.

Interest Expense, Net

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Interest expense, net decreased $0.6 million, or 40.2%, to $1.0 million in 2019 compared to $1.6 million in 2018. The decrease was primarily due to increases in interest income through returns earned on higher balances of cash on hand available for investment and increase in funds held for customers during 2019. Interest expense was relatively consistent with the prior year, reflecting only a slight decrease primarily due to the decrease in outstanding balance of debt due to principal payments made during 2019.

Provision for Taxes

For the Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Provision for taxes decreased $1.8 million, or 109.2%, to an income tax benefit of $0.2 million in 2019 compared to income tax expense of $1.7 million in 2018. The decrease in expense was primarily due to a $1.0 million charge in 2018 to establish deferred taxes for assets that were transferred to the U.S. from a taxing jurisdiction that had a 0% tax rate.

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the periods presented, as well as the percentage of total revenues that each line item represented for each quarter. In management’s opinion, the data below have been prepared on the same basis as the audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K and reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results to be expected for a full year or any future period. Historical periods are also impacted by acquisitions. The following quarterly financial data should be read in conjunction with our consolidated financial statements and related notes beginning on page F-1 of this Annual Report on Form 10-K.

For the Three Months Ended (Unaudited)

Revenues:

Cost of revenues:

Operating expenses:

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For the Three Months Ended (Unaudited)

The following table sets forth our results of operations as a percentage of our total revenues for the periods presented.

For the Three Months Ended (Unaudited)

Revenues:

Cost of revenues:

Operating expenses:

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The following table sets forth our quarterly earnings per share information for the periods presented.

For the Three Months Ended (Unaudited)

Earnings Per Share Data:

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Seasonality and Quarterly Trends

We have historically signed a higher percentage of software subscription agreements with new and existing customers in the fourth quarter of each year. This can be attributed to buying patterns typical in the software industry. Since most of our customer agreement terms are annual, agreements initially entered into in the fourth quarter will generally come up for renewal at that same time in subsequent years. As a result, customer agreement cancellations may have a higher concentration during the end of the year. This seasonality is reflected in our revenues, though the impact to overall annual or quarterly revenues is typically minimal since we recognize subscription revenue ratably over the term of the customer contract. Additionally, this seasonality is reflected in commission expenses to our sales personnel and our partners.

Our quarterly revenues have generally increased over the last two years primarily due to new sales to existing customers and sales to new customers. However, the pace of our revenue growth has not been consistent. Many of our customers are enterprise and large corporations and their purchase patterns can be sensitive to timing of budget decisions. Depending on such timing, these decisions can create volatility in the amount of business transacted by our salesforce and the amount of revenues recorded in each quarter. As such, certain periods may be less comparable due to the timing of our customers purchase patterns.

Our operating expenses generally have increased over the two-year period due to increases in headcount and related expenses to support our growth. Quarterly fluctuations in our costs and expenses overall primarily reflect changes in our headcount, and other costs related to certain technology development projects and the development and scaling of our cloud solutions. In particular, research and development expenses have fluctuated based on the timing of personnel additions, capitalized costs and related spending on product development. Increases in our selling and marketing expenses primarily reflect personnel additions and various sales and marketing initiatives, the timing of which may fluctuate from quarter to quarter. We anticipate our operating expenses will continue to increase in future periods as we invest in the long-term growth of our business.

We have used stock-based compensation programs as a component of overall compensation expense for certain of our employees. We recorded stock-based compensation expense of $147.9 million and $9.5 million in 2020 and 2019, respectively. Prior to the Offering, certain of these programs required the appreciation in value of our common stock underlying the related awards to be recorded as compensation expense at each measurement date for services rendered by participants over the requisite service period for such awards. Beginning in the fourth quarter 2019 and continuing up to the Offering date of July 28, 2020, we recorded significant increases in compensation expense associated with these programs due to the value of our common stock rising significantly as our proximity to an initial public offering became more likely. As the awards associated with these programs either converted to equity-based awards or were redeemed upon the occurrence of the Offering, compensation expense is no longer required to be recorded for the appreciation in value of our common stock at each measurement date. At the Offering date, there was $44.3 million in unrecognized compensation expense for unvested converted awards that will be recognized over the remaining service period of one to four years. In addition, in connection with the Offering, we granted equity awards to certain of our employees, consultants and directors with a fair value of approximately $15.1 million, of which $4.4 million was recorded as stock-based compensation expense in 2020, with the balance being recorded over the requisite service period of one to four years. We expect that our stock-based compensation expense will be significantly higher relative to historical periods for the foreseeable future, and as a result, historical financial information is not necessarily indicative of our future results.

Historical patterns should not be considered a reliable indicator of our future performance.

Use and Reconciliation of Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we have calculated non-GAAP cost of revenues, non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP selling and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income, non-GAAP net income, Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin, which are each non-GAAP financial measures. We have provided tabular reconciliations of each of these non-GAAP financial measures to its most directly comparable GAAP financial measure.

Management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance and liquidity. Our non-GAAP financial measures are presented as supplemental disclosure as we believe they provide useful information to

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investors and others in understanding and evaluating our results, prospects, and liquidity period-over-period without the impact of certain items that do not directly correlate to our operating performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as comparing our financial results to those of other companies. Our definitions of these non-GAAP financial measures may differ from similarly titled measures presented by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, the financial information prepared in accordance with GAAP financial measures, and should be read in conjunction with the consolidated financial statements included in this Annual Report on Form 10-K

We calculate these non-GAAP financial measures as follows:

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We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view these non-GAAP financial measures in conjunction with the related GAAP financial measures.

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Business Metrics” for further discussion and reconciliation of Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin to the related GAAP financial measures.

The following schedules reflect all other non-GAAP financial measures and reconcile such non-GAAP financial measures to the related GAAP financial measures:

For the Year Ended

December 31,

Non-GAAP cost of revenues, software subscriptions $ 69,992 $ 60,119 $ 51,469

Non-GAAP research and development expense $ 39,646 $ 29,611 $ 23,244

Non-GAAP general and administrative expense $ 78,502 $ 65,349 $ 55,046

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For the Year Ended

December 31,

Non-GAAP Cost of Revenues, Software Subscriptions:

Stock-based compensation expense (14,663) (946) (512)

Non-GAAP Cost of Revenues, Services:

Stock-based compensation expense (21,472) (1,419) (765)

Non-GAAP Gross Profit:

Non-GAAP Gross Margin:

Stock-based compensation expense as a percentage of revenues 9.6 % 0.7 % 0.5 %

Non-GAAP Research and Development Expense:

Stock-based compensation expense (14,694) (946) (511)

Non-GAAP research and development expense $ 39,646 $ 29,611 $ 23,244

Non-GAAP Selling and Marketing Expense:

Non-GAAP General and Administrative Expense:

Non-GAAP general and administrative expense $ 78,502 $ 65,349 $ 55,046

Non-GAAP Operating Income:

Impairment of asset — — 32,692

Non-GAAP Net Income:

Impairment of asset — — 32,692

Income tax adjustment at statutory rate 16,387 1,159 1,039

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Liquidity and Capital Resources

As of December 31, 2020, we had cash and cash equivalents of $303.1 million and retained earnings of $21.9 million. Prior to July 31, 2020, our primary sources of capital had been from sales of our solutions and proceeds from bank lending facilities. On July 31, 2020, we received $423.0 million in proceeds, net of underwriting fees and commissions, from the sale of 23,812,216 shares of our Class A common stock and used a portion of the proceeds to pay off the $175.0 million term loan facility. As a result, we have no outstanding bank debt after such redemption. The net proceeds remaining after payment of Offering costs are being used for working capital and other corporate purposes.

We believe that our existing cash resources and our $100 million bank line of credit will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. However, if these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or borrow from our banks. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms unacceptable to us.

Historical Cash Flows

Years Ended December 31, 2020 and 2019

The following table presents a summary of our cash flows for the periods indicated:

Year Ended

December 31,

(Dollars in thousands) 2020 2019 Year-Over-Year Change

Effect of foreign exchange rate changes (22) 12 (34) (283.3) %

Operating Activities. Cash provided by operating activities was $59.5 million in 2020 compared to $92.5 million in 2019, a decrease of $33.0 million. This decrease was primarily attributable to $22.9 million in cash payments for redemption of SARs converted to stock options in connection with the Offering where such cash flows are required under GAAP to be classified as operating consistent with the original SARs’ liability classification. The remaining decrease in operating cash flows of $10.1 million was a result of an increase in costs associated with increased development activity associated with nascent technologies and comparatively lower cash generated through changes in operating assets and liabilities, which included changes in accounts receivable and deferred revenues as a result of timing, sales mix and differences in customer payment terms.

Investing Activities. Cash used in investing activities was $44.4 million in 2020 compared to $37.6 million in 2019, an increase of $6.8 million. This increase was primarily related to the acquisition of a controlling interest in Systax, partially offset by a $5.4 million decrease in cash consumed to support on-premise capitalized software additions in 2020 compared to 2019. This decrease in on-premise capitalized software development costs is associated with the continued shift in our development efforts to cloud-based solutions. Investments in cloud-based solutions increased by $4.5 million in 2020 over 2019 and are included in internal use software as additions to property and equipment. These increased investments in cloud-based solutions offset the reductions in investments in other property and equipment due to delays as a result of the COVID-19 pandemic.

Financing Activities. Cash provided by (used in) financing activities was $213.6 million in 2020 compared to $(30.6) million in 2019, an increase of $244.2 million. This increase was primarily due to $423.0 million in net proceeds received from the Offering, partially offset by $117.6 million of increased distributions paid to stockholders prior to the Offering and a $45.7 million increase in net repayments of indebtedness.

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Years Ended December 31, 2019 and 2018

The following table presents a summary of our cash flows for the periods indicated:

Year Ended

December 31,

(Dollars in thousands) 2019 2018 Year-Over-Year Change

Net cash used in financing activities (30,629) (30,697) 68 (0.2) %

Effect of foreign exchange rate changes 12 (402) 414 (103.0) %

Operating Activities. Cash provided by operating activities was $92.5 million in 2019 compared to $80.4 million in 2018, an increase of $12.1 million. This increase was primarily due to increased net income of $4.5 million, after adding back the 2018 asset impairment of $32.7 million, increases in stock-based compensation of $4.4 million and a net increase in cash from operating assets and liabilities of $3.6 million.

Investing Activities. Cash used in investing activities was $37.6 million in 2019 compared to $33.3 million in 2018, an increase of $4.2 million. This increase is due to investments focused on productivity enhancement associated with process automation and implementation of new tools.

Financing Activities. Cash used in financing activities was $30.6 million in 2019 compared to $30.7 million in 2018, a decrease of $0.1 million. This decrease was primarily due to an increase in principal repayments of bank debt of $2.3 million, offset by an increase in cash collected with respect to customer funds obligations of $2.6 million.

Indebtedness

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 $175.0 million term loan (the "Term Loan") and a $100.0 million committed line of credit (the "Line of Credit") (collectively, the "Credit Agreement").

Net proceeds from the Term Loan after payment of financing fees of $2.9 million and repayment of the amounts outstanding under a previous credit agreement of $61.7 million were used to fund a portion of the $123.0 million distribution made to stockholders on May 29, 2020. As required by the terms of the Credit Agreement, we repaid the Term Loan principal with the net proceeds of the Offering.

The Line of Credit matures in March 2025 and had no outstanding borrowings at December 31, 2020. The Company has the option to select an applicable interest rate at either the bank base rate plus an applicable margin (the “Base Rate Option”) or the London Interbank Offered Rate (“LIBOR”) plus an applicable margin (the “LIBOR Option”). The applicable margins are determined by certain financial covenant performance as defined in the Credit Agreement. At December 31, 2020 the Base Rate Option and LIBOR Option applicable to Line of Credit borrowings were 3.25% and 2.00%, respectively.

The Credit Agreement is collateralized by certain assets of the Company and contains financial and operating covenants that we are in compliance with as of December 31, 2020.

For more information on our indebtedness see Note 7 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.

Funds Held for Customers and Customer Funds Obligations

We maintain trust accounts with financial institutions, which allows our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held for customers represent cash and cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Funds held for customers are not commingled with our operating funds.

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Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on our consolidated balance sheets as the obligations are expected to be settled within one year. Cash flows related to changes in customer funds obligations are presented as cash flows from financing activities.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of December 31, 2020 are summarized in the table below:

Payments Due by Year

(In thousands) Total Less Than 1 year 1-3 Years 3-5 Years More Than 5 Years

Long-term debt $ — $ — $ — $ — $ —

Critical Accounting Policies and Estimates

The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our consolidated financial statements cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could materially differ from those estimates.

The policies and estimates discussed below are considered by management to be critical to an understanding of our consolidated financial statements because their application places the most significant demands on management’s judgment. Specific risks for these critical accounting policies are described in the following sections. For all of these policies, we caution that future events rarely develop exactly as forecast, and such estimates routinely require adjustment. We have reviewed these critical accounting policies and estimates and related disclosures with our Audit Committee.

Our discussion of critical accounting policies and estimates is intended to supplement, not duplicate, our summary of significant accounting policies so that readers will have greater insight into the uncertainties involved in applying our critical accounting policies and estimates. For a summary of our significant accounting policies, see Note 1 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.

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Revenue Recognition

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. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Licenses for on-premise software subscriptions provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates and product support. The updates and support, which are part of the subscription agreement, are essential to the continued utility of the software. Therefore, we have determined the software and the related updates and support to be a single performance obligation. Accordingly, when on-premise software is licensed, the revenue associated with this combined performance obligation is recognized ratably over the license term as these subscription services are provided for the duration of the license term. Revenue recognition begins on the later of the beginning of the subscription period or the date the software is made available to the customer to download. Our on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price ("new sale premium") is considered to be a material right. We recognize revenue associated with the material right over the estimated period of benefit to the customer, generally three years.

Cloud-based subscriptions allow customers to use Company-hosted software over the contract period without taking possession of the software. The cloud-based offerings also include related updates and support. All services within the cloud-based contracts would consistently provide a benefit to the customer during the subscription period, thus the associated revenue is recognized ratably over the 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 services.

Revenue from deliverable-based services is recognized as services are delivered. Revenue from fixed fee services is recognized as services are performed using the percentage of completion input method.

We have elected the "right to invoice" practical expedient for revenue related to services that are billed on an hourly basis, which enables revenue to be recognized as the services are performed.

We have determined that the methods applied to measuring our progress toward complete satisfaction of performance obligations recognized over time are a faithful depiction of our transfer of control of software and services to customers.

Significant Judgments

Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Identification of the amortization periods of material rights and contract costs requires significant judgement by management.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing customers. A receivable, or contract asset, is recorded in the consolidated balance sheet 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 we have a right under the contract to bill and collect for such performance. Subscription-based customers are generally invoiced at the beginning of each annual subscription period. A contract liability is recorded as deferred revenue on the consolidated balance sheet when subscription-based customers are billed in advance of performance obligations being satisfied, and revenue is recognized subsequent to invoicing ratably over the subscription period or over the amortization period of material rights.

Deferred sales commissions earned by our 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 sheet.

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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). We periodically review 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 contract asset impairment losses recorded for the periods presented.

Payment Terms

Payment terms and conditions vary by contract, although our terms generally include a requirement of payment within 30 days. In instances where the timing of revenue recognition differs from the timing of payment, we have determined that our contracts do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, not to receive financing from customers or to provide customers with financing.

Stock-Based Compensation

We apply 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. Stock-based compensation expense reflects the cost of employee services received in exchange for the awards.

SARs are accounted for as liabilities under ASC 718 and, as such, we recognize 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, we measured SARs based on their intrinsic value which reflected the difference between the fair value of the former Class B common stock at the reporting date less the grant date fair value of the underlying shares as this was the value the SAR participant could derive from exercise of the SAR award. Prior to the Offering, the fair value of the Company’s common stock was determined periodically by the board of directors 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, outstanding SARs were remeasured using the fair value-based method under ASC 718. See Note 10 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for discussion of the impact of the resulting change in accounting policy.

Stock-based compensation expense for new 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 fair value of the Company’s underlying common stock on the date of grant. Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the award.

The ESPP permits participants to purchase Class A common stock through payroll deductions, up to a specified percentage of their eligible compensation or a lump sum contribution amount for the initial offering period (July 28 to November 30, 2020), subject to the plan’s maximum purchase provisions during the specified offering periods. The plan is a compensatory plan as it allows participants to purchase stock at a 15% discount from the lower of the fair value of the Class A common on the first or last day of the ESPP offering period (the “ESPP discount”). The ESPP is accounted for as an equity-classified award. Stock-based compensation expense for the ESPP is measured based on the fair value of the ESPP award at the start of the offering period. The fair value is comprised of the value of the ESPP discount and the value associated with the variability in the Class A common stock price during the offering period (the “Call/Put”), which is 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.

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Common Stock Valuations

Prior to the Offering, the fair value of the common stock underlying the SAR Awards was determined by the board of directors with assistance from management and an independent third-party valuation firm. The determination of value used the market and income approaches, with an adjustment for marketability discount pertinent to private company entities in arriving at the per share fair value (the “valuation methodology”). Under the market approach, the guideline public company method is used, which estimates the fair value of the Company based on market prices of stock of guideline public companies. The income approach involves projecting the future benefits of owning an asset and estimating the present value of those future benefits by discounting them based upon the time value of money and the investment risks associated with ownership. At the end of 2019, due to the consideration by the board of directors of pursuing the Offering, the valuation methodology began to consider the impact of such an event on the value of the Company’s common stock underlying the awards. As the Company approached the Offering effective date, this resulted in increases in the value of the SAR Awards which resulted in corresponding increases to compensation expense for the year ended December 31, 2020 which exceeded historical results. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Trends.”

Following the closing of the Offering, the fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on the applicable grant date.

Software Development Costs

Internal-Use Software

We follow ASC 350-40, Goodwill and Other, Internal-Use Software, to account for development costs incurred for the costs of computer software developed or obtained for internal use. ASC 350-40 requires such costs to be capitalized once certain criteria are met. Capitalized internal-use software costs are primarily comprised of direct labor, related expenses and initial software licenses. ASC 350-40 includes specific guidance on costs not to be capitalized, such as overhead, general and administrative and training costs. Internal-use software includes software utilized for cloud-based services 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 available for its intended use is included in internal-use software developed in property and equipment in the consolidated balance sheets once available for its intended use. Depreciation expense for internal-use software utilized for cloud-based customer solutions and for software for internal systems and tools is included in cost of revenues, software subscriptions and depreciation and amortization, respectively, in the consolidated statements of comprehensive income (loss).

We review the carrying value of internal-use software, for impairment whenever events or changes in circumstances indicate that the carrying amount of such software 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.

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 three to five years. Unamortized capitalized software development costs determined to be in excess of the net realizable value of the product are expensed immediately.

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Capitalized software costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies at least annually and whenever events or circumstances make it more likely than not that impairment may have occurred. In the event of impairment, unamortized capitalized software costs are compared to the net realizable value of the related product and the carrying value of the related assets are written down to the net realizable value to the extent the unamortized capitalized costs exceed such value. The net realizable value is the estimated future gross revenues from the related product reduced by the estimated future costs of completing and disposing of such product, including the costs of providing related maintenance and customer support.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. We evaluate goodwill for impairment annually at October 1 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. We have the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, in which case a quantitative impairment test is not required.

As provided for by ASU 2017-04, Simplifying the Test for Goodwill Impairment, the quantitative goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired. An impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the fair value up to the amount of goodwill allocated to the reporting unit. Income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit are considered when measuring the goodwill impairment loss, if applicable.

Income taxes

On July 27, 2020, the Company’s S-Corporation election (the “S Election”) was terminated by the Company’s stockholders in connection with the Offering. As a result, the Company will now be taxed at the corporate level as a C-Corporation for U.S federal and state income tax purposes. Prior to July 27, 2020, as the Company 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. In certain states, the Company was taxed at the corporate level. Accordingly, the income tax provision or benefit was based on taxable income allocated to these states. In certain foreign jurisdictions, the Company was taxed at the corporate level. Similar to states, the income tax provision or benefit was 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.

We record deferred income taxes using the liability method. We recognize deferred tax assets and liabilities for future tax consequences of events that have been previously recognized in the 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.

We record 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

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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.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 1 to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.

JOBS Act

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include:

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of our Offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer, ” our annual gross revenues exceed $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in this Annual Report on Form 10-K and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different from what you might receive from other public reporting companies in which you hold equity interests.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We had cash and cash equivalents of $303.1million and $75.9million as of December31, 2020 and 2019, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with financial institutions. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.

The Company has no outstanding bank debt at December 31, 2020. Any debt we incur in the future may bear interest at variable rates.

Foreign Currency Exchange Rate Risk

Our revenues and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the Canadian Dollar, Euro, British Pound, Swedish Krona, Indian Rupee and Brazilian Real. Decreases in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenues and other operating results as expressed in U.S. dollars. For the years ended December 31, 2020, 2019 and 2018, approximately 1% of our revenues were generated in currencies other than U.S. dollars in each respective period.

We have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We have historically recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operations and our risk grows. For example, our acquisition of the controlling interest in Systax in January 2020 and the future purchase commitments associated with this acquisition are expected to increase our exposure to fluctuations of the Brazilian Real over time. In May 2020, we entered into a series of foreign currency forward contracts to hedge a portion of our exposure to adverse fluctuations in the Brazilian Real associated with these future purchase commitments. Fluctuations in the value of these forward contracts are reflected in interest expense, net in the consolidated statements of comprehensive income (loss). At December 31, 2020, outstanding foreign currency forward contracts provide a hedge of approximately 50% of our future purchase commitment liability.

Inflation

In the past three years, we do not believe that inflation had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Item 8. Financial Statements and Supplementary Data

The information required by this item is presented at the end of this report beginning on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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Item 9A. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect that there are resource constraints and that management is required to apply judgement in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures. Solely as a result of the material weakness described below, our principal executive officer and principal financial officer concluded that, as of December 31, 2020, our disclosure controls and procedures were not effective.

We have performed additional analyses, reconciliations, and other post-closing procedures and have concluded that, notwithstanding the material weakness in our internal control over financial reporting, the audited consolidated financial statements for the periods covered by and included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Description of Material Weakness

As previously disclosed in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2020 and September 30, 2020, we identified a material weakness in our internal control over financial reporting during the two-year period ended December 31, 2019 due to an insufficient process for the provision and governance of user access to financially significant systems that resulted in a lack of segregation of duties related to journal entries and cash disbursements.

A material weakness is a control deficiency, or combination of control deficiencies, that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Our management, with oversight from our Audit Committee, is in the process of remediating this material weakness. During 2020, we implemented changes to our user access governance practices to prevent individuals from having the ability to create and post journal entries or create a vendor and prepare checks, and we believe these measures have addressed the lack of segregation of duties related to cash disbursements. To date, we have also implemented changes to our user access governance practices to prevent individuals from having the ability to create and post journal entries and have implemented a periodic review cycle for user access. However, this material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Remediation of Previously Reported Material Weaknesses

We previously identified two other material weaknesses in our internal control over financial reporting during the two-year period ended December 31, 2019 due to (i) the lack of an effective review control over the completeness and accuracy of significant conclusions regarding the impact of the new revenue recognition guidance prescribed by ASC 606 and (ii) incorrect applications of software capitalization models and untimely identification of impairments of capitalized software development costs. These material weaknesses resulted in errors that were not timely identified in conjunction with the issuance of our financial statements as of and for the years ended December 31, 2018 and 2019. These errors led to adjustments reflected in our 2019 and 2018 audited consolidated financial statements. We evaluated these errors under both quantitative and qualitative standards.

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Due to the action taken by the Company to implement new controls and procedures, management has concluded that the material weaknesses related to revenue recognition and capitalized software development costs were remediated as of December 31, 2020. To remediate these material weaknesses, we:

Exemption from Management’s Report on Internal Control Over Financial Reporting

This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2020.

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

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PART IV

VERX US Equity

VERX · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits, Financial Statement Schedules

VERX US Equity☆

VERX · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits, Financial Statement Schedules

VERX US Equity