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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-239644

21,150,000 Shares

GRAPHIC

VERTEX, INC.
Class A Common Stock



         This is Vertex, Inc.'s initial public offering. We are selling 21,150,000 shares of our Class A common stock. The public offering price is $19.00 per share. Currently, no public market exists for our Class A common stock. The shares of our Class A common stock will trade on the Nasdaq Global Market under the symbol "VERX."



         Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting, conversion and transfer rights. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock will be entitled to ten votes per share and will be convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately 98% of the voting power of our outstanding capital stock immediately following the completion of this offering, with members of our founder's family, and their respective affiliates, holding approximately 98% of the voting power of our capital stock following this offering. As a result, we will be a "controlled company" within the meaning of the corporate governance standards of the Nasdaq Global Market.



         We are an "emerging growth company" as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.



         Investing in our Class A common stock involves risks. See the "Risk Factors" section beginning on page 18 of this prospectus for factors you should consider before investing in our Class A common stock.

             
   
 
  Per Share
  Total
 
   

Public offering price

  $ 19.00   $ 401,850,000  

Underwriting discounts and commissions(1)

  $ 1.235   $ 26,120,250  

Proceeds, before expenses, to us

  $ 17.765   $ 375,729,750  

 

 
(1)
See "Underwriting" for additional disclosure regarding underwriting compensation and estimated offering expenses payable by us.

         To the extent that the underwriters sell more than 21,150,000 shares of our Class A common stock, the underwriters have the option for a period of 30 days to purchase up to an additional 2,662,216 shares of Class A common stock from us and 510,284 shares of Class A common stock from selling stockholders at the initial public offering price less underwriting discounts and commissions. If the underwriters exercise their option to purchase additional shares only in part, option shares shall be taken first from the selling stockholders and second from us. We will not receive any proceeds from any sales of shares by the selling stockholders.

         Neither the Securities and Exchange Commission nor any state securities commission has approved, or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

         The underwriters expect to deliver shares of our Class A common stock against payment in New York, New York on July 31, 2020.



(in alphabetical order)

Goldman Sachs & Co. LLC   Morgan Stanley

BofA Securities

 

Citigroup

 

Jefferies

 

JMP Securities   Stifel   William Blair   CastleOak Securities, L.P.



The date of this prospectus is July 28, 2020.


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TABLE OF CONTENTS

 
  Page

Market and Industry Data

  i

Trademarks

  i

Basis of Presentation

  i

S Corporation Status

  i

Non-GAAP Measures and Other Data

  ii

Prospectus Summary

  1

Risk Factors

  18

Cautionary Note Regarding Forward-Looking Statements

  41

Use of Proceeds

  43

Dividend Policy

  44

Capitalization

  45

Dilution

  47

Selected Consolidated Financial Information

  49

Management's Discussion and Analysis of Financial Condition and Results of Operations

  52

Business

  85

Management

  101

Executive and Director Compensation

  107

Certain Relationships and Related Party Transactions

  125

Principal and Selling Stockholders

  128

Description of Capital Stock

  130

Shares Eligible for Future Sale

  137

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

  139

Underwriting

  143

Legal Matters

  151

Experts

  151

Where You Can Find More Information

  151

Index to Consolidated Financial Statements

  F-1



        Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared or that have been prepared on our behalf, or to which we have referred you. Neither we, the selling stockholders nor the underwriters take responsibility for, and cannot provide assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered by this prospectus, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.

        For investors outside the United States: Neither we, the selling stockholders nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.


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MARKET AND INDUSTRY DATA

        The market data and other statistical information used throughout this prospectus are based on independent industry publications, reports by market research firms or other published independent sources. Certain market, ranking and industry data included in this prospectus, including the size of certain markets, our size or position and the positions of our competitors within these markets, and our solutions relative to our competitors, are based on estimates of our management. These estimates have been derived from our management's knowledge and experience in the markets in which we operate, as well as information obtained from surveys, reports by market research firms, trade and business organizations and other contacts in the markets in which we operate. Unless otherwise noted, all of our market share and market position information presented in this prospectus is an approximation based on management's knowledge. References herein to our being a leader in a market refer to our belief that we have a leading market share position in each such specified market, unless the context otherwise requires. In addition, the discussion herein regarding our various markets is based on how we define the markets for our solutions.

        This prospectus includes industry data that we obtained from periodic industry publications. Such data includes materials published by the Organisation for Economic Cooperation and Development ("OECD"), including the 2019 OECD tax database ("2019 OECD Tax Database") and OECD Revenue Statistics—the United States (2019) ("OECD Revenue Statistics"). Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein.


TRADEMARKS

        We own or otherwise have rights to the trademarks, copyrights and service marks, including those mentioned in this prospectus, used in conjunction with the marketing and sale of our solutions. This prospectus includes trademarks, such as VERTEX™ and O Series™, which are protected under applicable intellectual property laws and are our property and/or the property of our subsidiaries. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. We do not intend our use or display of other companies' trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and tradenames.


BASIS OF PRESENTATION

        References herein to the "Company," "Registrant," "we," "us," "our" and "our company" refer to Vertex, Inc., a Delaware corporation.

        Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.


S CORPORATION STATUS

        Since October 1, 1985, we have elected to be taxed for U.S. federal income tax purposes as an "S corporation" or "S Corporation" under the provisions of Sections 1361 to 1379 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, our taxable earnings have not been subject to,

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and we have not paid, U.S. federal income tax, and no provision or liability for U.S. federal income tax has been included in our consolidated financial statements. Instead, for U.S. federal income tax purposes, our taxable income is "passed through" to our existing stockholders who are required to pay income tax attributable to such income. Unless specifically noted otherwise, no amount of our consolidated net income or our earnings per share presented in this prospectus, including in our consolidated financial statements and the accompanying notes appearing in this prospectus, reflects any provision for or accrual of any expense for U.S. federal income tax liability for any period presented. In connection with this offering, our status as an S Corporation will terminate. Thereafter, our taxable earnings will be subject to U.S. federal income tax and we will bear the liability for those taxes.


NON-GAAP MEASURES AND OTHER DATA

        We believe that our financial statements and the other financial data included in this prospectus have been prepared in a manner that complies, in all material respects, with generally accepted accounting principles in the United States ("GAAP") and the regulations published by the Securities and Exchange Commission ("SEC"). However, we use Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin, as described in "Prospectus Summary—Summary Consolidated Financial and Operating Information," in various places in this prospectus. These non-GAAP financial measures are presented as supplemental disclosure and should not be considered in isolation from, or as a substitute for, the financial information prepared in accordance with GAAP, and should be read in conjunction with the financial statements included elsewhere in this prospectus. Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin may differ from similarly titled measures presented by other companies.

        See "Prospectus Summary—Summary Consolidated Financial and Operating Information" for a reconciliation of non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP, and a discussion of our management's use of Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin.

        Throughout this prospectus, we also provide a number of key business metrics used by management and typically used by our competitors in our industry. These and other key business metrics are discussed in more detail in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics."

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PROSPECTUS SUMMARY

Overview

        Our vision is to accelerate global commerce, one transaction at a time.

        Vertex delivers comprehensive tax solutions that enable global businesses to transact, comply and grow with confidence. Companies with complex tax operations rely on Vertex to automate their end-to-end indirect tax processes. Indirect tax is the largest corporate tax category, encompassing sales tax, seller's use tax, consumer use tax and value-added tax ("VAT"), among others. Indirect tax accounts for more than $3.5 trillion of annual tax revenue, which is 2.5 times the amount of corporate income taxes, according to the 2019 OECD Tax Database. 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. Today, we have more than 4,000 customers, including over half of the Fortune 500, and provide our customers with tax support in over 130 countries.

        Tax complexity is driven by the number of jurisdictions, products, distribution channels and systems of record within an organization. Each transaction must be tax-assessed for compliance purposes in real time and indirect taxes generally require filing each month, in every jurisdiction in which a company does business. Despite these complexities, there are still businesses that attempt to manage the tax lifecycle through a patchwork of static tax rate tables in spreadsheets, home-built systems or business applications, such as enterprise resources planning ("ERP") software, that were not designed for complex tax management. Each of these approaches relies heavily on finance personnel or outside professional services.

        The rapid changes taking place in today's global business, technology and regulatory environments are having a compounding effect on the complexity of indirect tax management. As companies expand their business models, enter new geographies and extend their distribution channels, they widen the aperture of their indirect tax obligations. Additionally, as they expand their core offerings to incorporate new digital products and services, they are increasingly impacted by new tax regulations being pursued by jurisdictions. For example, in the United States, nearly 40 states have now enacted marketplace facilitator regulations, requiring online marketplaces to collect and remit taxes for first- and third-party sales on their websites. This complexity demands intelligent solutions that enable businesses to satisfy tax obligations and support growth opportunities.

        We have pioneered tax technology for over 40 years. We first began electronic delivery of tax rules in the early 1980s and we first sold transaction tax processing software in 1982. 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. In order to maintain the quality of our content, our team includes many global tax and regulatory experts from industry and the public sector, who deliver monthly updates to our tax content, which are then incorporated directly into our software. 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.

        Our customers include the 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. As these companies expand geographically and pursue omnichannel business models, their tax determination and compliance requirements increase and become more complex. Our

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trusted brand and strong relationships with our customers enable us to capitalize on these sustainable organic growth opportunities.

        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, customer relationship management ("CRM"), procurement, billing, point of sale ("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 global commerce and compliance environment provides durable and accelerating growth opportunities for our business. We generated revenue of $272.4 million and $321.5 million in 2018 and 2019, respectively, and $74.6 million and $89.2 million for the three months ended March 31, 2019 and 2020, respectively. We had a net loss of $6.1 million and net income of $31.1 million in 2018 and 2019, respectively, and net income of $7.3 million and a net loss of $29.1 million for the three months ended March 31, 2019 and 2020, respectively. Adjusted EBITDA was $61.5 million and $67.9 million in 2018 and 2019, respectively, and $15.6 million and $15.3 million for the three months ended March 31, 2019 and 2020, respectively. Additionally, we generated net cash provided by operating activities of $80.4 million and $92.5 million in 2018 and 2019, respectively, and $9.9 million and $(6.4) million in the three months ended March 31, 2019 and 2020, respectively. Our free cash flow was $47.1 million and $54.9 million in 2018 and 2019, respectively, and $1.8 million and $(15.8) million in the three months ended March 31, 2019 and 2020, respectively. Adjusted EBITDA and free cash flow are non-GAAP financial measures. For more information about how we use these non-GAAP financial measures in our business, the limitations of these measures and reconciliations to the most directly comparable GAAP measures, see "Prospectus Summary—Summary Consolidated Financial and Operating Information." In connection with the offering, we will convert from an S Corporation to a C Corporation ("C Corporation"), which will result in net income of the Company being taxed at the corporate level. For additional information on the effect of such conversion, see "Prospectus Summary—Summary Consolidated Financial and Operating Information."


Industry Background

Indirect taxes are significant and growing revenue streams for governments around the world

        Indirect taxes are part of everyday commerce in many countries—they are levied on items such as food, clothing, business supplies and even data transmissions from mobile phones. According to the 2019 OECD Tax Database, more than $3.5 trillion of indirect taxes were collected by national, state and local governments around the world in 2018, which is 2.5 times the amount of corporate income taxes collected. Indirect taxes on goods and services represented more than 10% of GDP for OECD countries in 2018 and governments continuously seek new ways to increase this revenue stream. In the United States, sales and use taxes are the largest component of indirect taxes. According to OECD Revenue Statistics, the United States collected more than $800.0 billion in tax revenue from goods and services taxes in 2018.

Tax reporting and compliance pose tenacious challenges for all businesses

        In today's global economy, indirect taxation is highly nuanced and growing in its complexity for most businesses. In order to calculate taxes accurately, enterprises must identify every jurisdiction in which they operate, determine and maintain the applicable rates for each of those jurisdictions and map the applicable taxability to the products and services they deliver. Cross-border transactions increase the complexity of taxes. Understanding the variables surrounding transactions and how they change applicable taxes becomes difficult for tax departments to manage given the volume of purchasing, sourcing and sales activities conducted by large enterprises.

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        Indirect tax returns generally need to be filed on a monthly basis and noncompliance exposes companies to significant monetary liability, poor customer experiences and reputational risk. Tax audits can look back many years, creating a greater level of accountability for managing tax data than for typical business data. Additionally, it is not unusual for a large enterprise to have a substantial number of tax audits across numerous jurisdictions ongoing at any point in time. Each audit may require detailed traceability to individual transactions to defend historical tax positions taken.

Dynamic business, regulatory and technology drivers have a compounding effect on tax compliance

        We believe that trends in the digital economy are accelerating the need for adoption of sophisticated tax solutions among a broader and growing number of enterprises and global commerce platforms.

    Governments are increasingly adopting new and expanded indirect tax measures.

    Governments are mandating more frequent and more detailed tax reporting, using advanced technologies to scrutinize business tax filings.

    Businesses' geographic and channel expansion are creating new tax exposures.

    Governments are enacting new taxation on digital goods and services.

    Business-to-consumer ("B2C") and business-to-business ("B2B") marketplaces are increasingly responsible for collecting and remitting taxes for their third-party sellers.

    The expanded number of business applications being used by enterprises has increased the number of data sources necessary for indirect tax compliance.

Legacy approaches are insufficient

        Over the past several decades, many tax departments have addressed their indirect tax needs by relying on a patchwork of static tax rate tables in spreadsheets, home-built systems or business applications not designed for tax compliance. Each requires heavy reliance on finance personnel or outside professional services. As taxation becomes more complicated, we believe these approaches will begin to fracture as they are error-prone, inefficient and cannot scale, thus increasing exposure to fines, raising reserves and heightening the risk of tax audits across multiple jurisdictions.


Our Opportunity

        We believe the total addressable market for solutions that enable global commerce and compliance is robust, global and growing. We estimate our addressable market among global enterprises and other businesses with greater than $1.0 million in annual sales to be over $7.0 billion in the United States. We believe this potentially understates our total addressable market because it does not include businesses domiciled outside of the United States.


Key Benefits of Our Solutions

        We deliver comprehensive tax solutions that automate end-to-end indirect tax processes for enterprises and mid-market companies with complex tax operations. Our software includes tax determination, compliance and reporting, tax data management and document management fueled by our powerful and proprietary content database, which includes over 300 million data-driven effective tax rules supporting indirect tax compliance in more than 19,000 jurisdictions worldwide. Our solutions also include powerful pre-built integrations to core business applications, such as SAP and Oracle.

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        Our solutions deliver the following key benefits to our customers:

        Comprehensive, efficient and accurate indirect tax management.    Our solutions provide our customers with powerful tools to manage their end-to-end indirect tax processes and manage their indirect tax obligations accurately and efficiently, while reducing risk.

        Reduction in tax audit risk and tax audit-induced costs.    We believe that customers implement our solutions to increase accuracy and transparency in supporting the tax audit process, and to lower their overall costs of tax audit defense. This is driven by rich documentation and data support during tax audit discovery, which can mitigate tax audit-related adjustments and fines.

        Wide jurisdiction coverage to support geographic expansion.    Economic nexus for indirect taxes is often based on the geographic location of either operations or sales. We maintain expansive coverage of jurisdictions and continually update our global content database, allowing our customers to expand their operations around the world while maintaining compliance with the relevant indirect tax laws of each jurisdiction.

        Support of new business models.    As digital transformation continues to change our economy, many enterprises are adopting new business models and incorporating new technology in their products and operations to fuel growth, including diversified supply chains and omnichannel retail strategies. Many of these digital transformations result in new, complex indirect tax challenges. For example, data transmissions from internet-connected devices are subject to telecom taxes, which are often new and unfamiliar obligations to traditional manufacturers and retailers.


Our Competitive Strengths

        We have pioneered tax technology for over 40 years. We deliver comprehensive tax solutions that enable global businesses to transact, comply and grow with confidence. Companies with complex tax operations rely on us to automate their end-to-end indirect tax processes. Our key competitive strengths include:

        We provide a differentiated portfolio of end-to-end solutions for indirect tax globally.    Our solutions automate the end-to-end indirect tax processes for enterprises with complex tax operations and audit risk. Our software includes tax determination, compliance and reporting, tax data management, and document management tools, as well as pre-built integrations to major business applications. Customers can purchase these solutions individually or as part of a broader suite and can choose the delivery model that best aligns to their enterprise technology environments.

        Our software is underpinned by a comprehensive proprietary tax content database.    Our proprietary tax content database is significant and includes educational content, best practices guidance and over 300 million data-driven effective tax rules supporting indirect tax compliance in more than 19,000 jurisdictions worldwide, which are then embedded into our software. Our tax content provides meaningful insights and guidance to enterprises looking to address their tax exposure and we provide solutions by embedding these tax rules into our software. We employ over 70 tax professionals on our tax content team, which is comprised of subject matter experts with significant experience and includes Certified Public Accountants ("CPAs"), attorneys and chartered accountants, among others. Our content team combines legislative research, analysis, technical logic and automation to embed updated rules into our software. We believe that the knowledge, depth and breadth of our content database is a differentiated asset that gives us a competitive advantage.

        Our strong brand makes us a recognized and trusted provider in tax software.    We pioneered the first indirect tax software over 40 years ago and since then have built innovative tax software, a marquee customer base and a trusted brand. We continue to adapt to meet our customers' needs—from mainframe-based software to cloud and mobile technologies. Our culture of innovation, the name-brand

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recognition of our customer base and the mission-critical nature of our software for tax departments, provide leverage to our sales and marketing teams and enable us to successfully attract new customers.

        Powerful, robust technology with enterprise-grade scale and speed.    Our solutions are built upon a technology foundation purpose-built to meet the needs of highly discerning enterprises with complex indirect tax obligations. For example, our software is used by some of the largest companies in the world to automate indirect tax calculation in hundreds of locations, among thousands of suppliers and millions of customers, across tens of thousands of jurisdictions, and through multiple systems of record. By utilizing a common engine and data design, we offer consistency regardless of the technical infrastructure of our customers and partners. Our technology architecture and engineering expertise allow us to continue providing solutions with the enterprise scale and speed our customers expect, realizing rapid-time-to-value from our software and monthly content updates.

        Flexible delivery and configuration to meet the needs of our customers.    Our customers need software that allows them to automate tax but also allows for tax configurability that accommodates their specific company needs. Our configurability allows users to create their own taxability rules that can act as an override providing more flexibility and ensuring that all individual, company-specific tax scenarios can be met. We also offer a flexible delivery model that includes on-premise, cloud or a hybrid of both delivery models, giving our customers the ability to choose how to manage their tax determination and system deployments.

        Deep and high-quality partnerships and integrations.    Our partner ecosystem is a distinct strength to support both software development and our sales and marketing activities. We integrate with key technology partners that span ERP, CRM, procurement, billing, POS and eCommerce platforms. Our teams are embedded at a deep technical level and we conduct joint roadmap development with our partners. In addition, we collaborate with over 50 tax, accounting and consulting firms, which not only complement our global tax and technology expertise, but also help us identify new growth opportunities.


Our Growth Strategies

        We believe today's global commerce environment provides durable growth opportunities for our business. Our growth strategies include:

    Expand existing customer revenues.  The breadth of our solutions allows us to continually meet our customer needs, even as their needs expand in scope. As businesses continue to evolve through acquisitions and expand products and services, enter new geographies or expand their distribution channels, we believe they will need our software, services and content. We plan to continue to invest in new offerings and enhance our solutions to support the ongoing retention and expansion of revenue from our existing customers.

    Acquire new customers.  As enterprise and mid-market companies continue to expand and their tax complexity grows, we expect demand for our solutions to increase among new customers and partners. We also expect these companies to adopt our solutions much earlier in their corporate lifecycle. This adoption is driven by advances in cloud computing and digital commerce, which enable more companies to accelerate new product delivery and scale their business through online marketplaces and emerging commerce platforms.

    Broaden and deepen our partner ecosystem.  Our partners enhance our go-to-market capacity and extend our brand leadership and reach. We leverage our partnerships to maximize the benefits of our solutions for our customers and to identify new growth opportunities. We believe expanding our strategic alliances with emerging participants who are fueling global commerce, such as payment and digital commerce platforms, will create new value for our customers and new sources of revenue.

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    Extend global footprint.  We have a significant opportunity to further expand internationally, in terms of our regional operations, content depth and go-to-market coverage. By extending our global footprint, we believe we will also expand account penetration of existing customers with operations around the globe.

    Sustained investment in new product innovation.  Our approach to innovation is driven by our relationships with our customers and partners, with whom we create new solutions, align product roadmaps and embed our software within their platforms. We have also established an innovation lab where we design, test and incubate next-generation tax solutions and adjacent market opportunities like blockchain, payment platforms and machine learning technologies. Over time, we expect this will bring additional value to existing customers and help us acquire new customers.


Recent Developments

        Set forth below are certain estimated preliminary financial results and other key operating metrics for the three months ended June 30, 2020. These estimates represent the most current information available and are subject to change. We have provided ranges, rather than specific amounts, for the preliminary results described below because our financial closing procedures for the quarter ended June 30, 2020 are not yet complete. Our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time the financial results for our three months ended June 30, 2020 are finalized.

        These estimates should not be viewed as a substitute for our full interim or annual financial statements prepared in accordance with GAAP. Accordingly, you should not place undue reliance on this preliminary data. These estimated preliminary results should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. For additional information, please also refer to the section titled "Risk Factors."

        This data has been prepared by, and is the responsibility of, management. Our independent registered public accounting firm, Crowe LLP, has not audited, reviewed, compiled or performed any procedures with respect to the preliminary financial results. Accordingly, Crowe LLP does not express an opinion or any other form of assurance with respect thereto.

        The following are preliminary estimates for the quarter ended June 30, 2020:

        For the three months ended June 30, 2020, estimated total revenue was between $88.0 million and $91.0 million, compared to $78.4 million for the same period in 2019. This represents an increase of $11.1 million, or 14.2% year-over-year at the midpoint, compared to the same period in 2019. Annual Recurring Revenue ("ARR") was between $292.0 million and $295.0 million for the three months ended June 30, 2020, representing an increase of $40.5 million, or 16.0% year-over-year at the midpoint, compared to the same period in 2019. The growth of our revenue and ARR reflects the increase in revenue from existing customers through their expanded use of our solutions, new software subscriptions and price increases and as well as sales of our tax solutions to new customers.

        We have an expected loss from operations for the three months ended June 30, 2020, which is between $28.0 million and $32.0 million, compared to operating income of $7.7 million in the same period in 2019. The operating loss was primarily a result of higher stock-based compensation expense associated with this offering. Stock-based compensation expense was between $41.0 million and $42.0 million.

        Adjusted EBITDA for the three months ended June 30, 2020, was between $18.0 million and $21.0 million, representing a year-over-year increase of $4.0 million at the midpoint, as compared to

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the same period in 2019. This was primarily driven by an increase in total revenues and gross profit offset by increased operating expenses, including additional research and development and general and administrative expenses. Adjusted EBITDA margin increased for the three months ended June 30, 2020 by between approximately 200 basis points at the midpoint as compared to the same period in 2019. This is primarily due to revenue and gross margin increasing at a higher rate than our growth in operating expenses which were impacted by delays in hiring and launch of projects and decreases in travel and other operating activities due to the COVID-19 pandemic limiting such activities.

        Set forth below is a reconciliation of Adjusted EBITDA to the most directly comparable measure calculated in accordance with GAAP, net loss.

 
   
  Three Months Ended
June 30, 2020 Estimate
 
 
  Three Months
Ended
June 30, 2019
Actual
 
 
  Low   High  

Net income (loss)

  $ 7,122   $ (32,500 ) $ (28,000 )

Total depreciation and amortization

    6,180     8,000     7,150  

Interest, net

    307     1,150     950  

Income tax expense (benefit)

    221     (1,600 )   (800 )

Severance charge

    409     950     700  

Stock-based compensation

    1,310     42,000     41,000  

Adjusted EBITDA

  $ 15,549   $ 18,000   $ 21,000  

        Adjusted EBITDA is a non-GAAP financial measure. For more information about how we use non-GAAP financial measures in our business and the limitations of these measures, see "Prospectus Summary—Summary Consolidated Financial and Operating Information."

        For a discussion of the financial impact of the COVID-19 pandemic on our business for the three months ended June 30, 2020, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Impact of COVID-19." For additional information on the specific risks we face from COVID-19 and the potential future adverse impact that the COVID-19 pandemic and associated government responses could have on our results of operations, cash flows and financial condition, please refer to the section titled "Risk Factors."


Summary Risk Factors

        Investing in our Class A common stock involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading "Risk Factors" in this prospectus may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the most significant challenges and risks we face include the following:

    A large portion of our revenue depends on maintaining and growing our revenue from existing customers, and if we fail to retain our customers or expand their usage of our solutions, our business, results of operations, financial condition and cash flows would be harmed.

    Our business and success depend in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships.

    If we are unable to adapt to technological change by successfully introducing new and enhanced solutions and services, our business, results of operations, financial condition and cash flows would be adversely affected.

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    Any failures in information technology or infrastructure could lead to disruptions of our software, loss of customer data or untimely remittance of taxes, any of which could adversely affect our reputation and financial condition.

    Incorrect or improper implementation, integration or use of our solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition and cash flows.

    If we fail to attract and retain qualified technical and tax-content personnel, our business could be harmed.

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The Offering

Class A common stock offered by us

  21,150,000 shares (or 23,812,216 shares if the underwriters exercise in full their option to purchase additional shares).

Class A common stock to be outstanding after this offering

 

22,576,819 shares (or 25,749,319 shares if the underwriters exercise in full their option to purchase additional shares).

Class B common stock to be outstanding after this offering

 

120,417,000 shares.

Option to purchase additional shares of Class A common stock

 

The underwriters have an option to purchase up to an aggregate of 3,172,500 additional shares of Class A common stock from us and the selling stockholders at the initial public offering price, less underwriting discounts and commissions. Of these shares, 510,284 will be offered and sold by the selling stockholders upon exercise of stock options held by such selling stockholders. The underwriters can exercise this option at any time within 30 days from the date of this prospectus. We will not receive any proceeds from any sale of our shares of Class A common stock in this offering by the selling stockholders. The selling stockholders will only sell shares of Class A common stock in this offering if the underwriters exercise their option to purchase additional shares. In the event the underwriters do not exercise their option to purchase additional shares in full, the underwriters will first purchase shares from the selling stockholders, with any remaining shares being sold by us.

Use of proceeds

 

We estimate that the net proceeds to us from the sale of the shares of our Class A common stock in this offering will be approximately $369.4 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in this offering in full, we estimate that our net proceeds will be approximately $416.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from any sale of shares in this offering by the selling stockholders.

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We intend to use a portion of the net proceeds to repay all outstanding indebtedness under our existing credit agreement (the "New Credit Agreement") and to pay related fees and expenses. Prior to this offering, proceeds from the term loan entered into under the New Credit Agreement were used to repay amounts outstanding under the Company's previous credit agreement of $61.7 million, with the balance being used to fund a portion of a $123.0 million dividend to our stockholders on May 29, 2020 $122.8 million of which was paid to our directors Amanda Westphal Radcliffe, Stefanie Westphal Thompson and Jeffrey Westphal or trusts for their respective benefit or the benefit of their immediate family. In addition, we intend to use approximately $22.9 million of the proceeds from this offering to pay for costs we expect to incur in connection with the amendment of outstanding SARs as part of this offering. See "Executive Compensation." The remainder of the net proceeds will be used for working capital and other general corporate purposes, including investments in our solutions, technology and sales force. See "Use of Proceeds."

Dividend policy

 

Historically, we have been an S Corporation, and, as such, we have paid distributions to our existing stockholders, which have assisted them in paying the U.S. federal and state income taxes on our taxable income that is "passed through" to them, and we have historically made additional distributions to them for returns on capital. After this offering, our dividend policy and practice will change because we will no longer be taxed as an S Corporation. We do not currently anticipate paying dividends on our Class A or Class B common stock. Any declaration and payment of future dividends to holders of our Class A or Class B common stock may be limited by restrictive covenants in the agreements governing our indebtedness, will be at the sole discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. See "Dividend Policy."

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Voting rights

 

Shares of our Class A common stock will be entitled to one vote per share. Shares of our Class B common stock will be entitled to ten votes per share.

 

The holders of our Class A common stock and Class B common stock will generally vote together as a single class on all matters submitted to a vote of our stockholders unless otherwise required by Delaware law or our amended and restated certificate of incorporation. See "Description of Capital Stock."

Directed share program

 

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the Class A common stock offered by this prospectus for sale to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. See "Underwriting."

Proposed stock exchange symbol

 

"VERX."

Risk factors

 

See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.



        The number of shares of our Class A and Class B common stock to be outstanding after completion of this offering is based on 1,426,819 shares of our Class A common stock and 120,417,000 shares of our Class B common stock outstanding as of June 30, 2020, and 21,150,000 shares of Class A common stock to be sold in the offering, and reflects:

    the reclassification of our existing share capital into shares of Class A and Class B common stock (the "reclassification");

    the issuance of 562,199 shares of Class A common stock under the 2020 Incentive Award Plan (the "2020 Plan") pursuant to the amendment and exercise of certain fully vested stock appreciation rights ("SAR(s)") in connection with this offering; and

    the issuance of 692,120 shares of Class A common stock and restricted stock under the 2020 Plan to certain of our employees, consultants and directors in connection with this offering.

The shares of our common stock outstanding as of June 30, 2020 exclude the following:

    13,813,626 shares of Class A common stock under the 2020 Plan that will be issuable upon the exercise of options to purchase shares of our Class A common stock following the amendment of outstanding options to purchase shares of our common stock and SARs covering shares of our common stock in connection with this offering, based on the number of such options and SARS outstanding as of June 30, 2020, with a weighted-average exercise price of $2.27 per share, 8,536,302 of which are vested (and without giving effect to the exercise by the selling

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      stockholders of options to purchase a net amount of 510,284 shares of our Class A common stock, which such net exercise would result in 13,033,107 remaining shares of our Class A common stock, issuable upon the exercise of options to purchase shares of our Class A common stock with a weighted-average exercise price of $2.39);

    9,887 shares of Class A common stock that will be issuable upon the vesting of RSUs to be awarded under the 2020 Plan to certain non-U.S. employees in connection this offering;

    1,422,168 shares of Class A common stock that are available for issuance as awards under the 2020 Plan, as well as any additional shares of Class A common stock that may become available under the 2020 Plan pursuant to provisions in the 2020 Plan that automatically increase the Class A common stock reserve thereunder, which number excludes the number of shares subject to awards granted under the 2020 Plan in connection with this offering as described below; and

    1,000,000 shares of Class A common stock that are available for issuance under the 2020 Employee Stock Purchase Plan (the "2020 ESPP"), as well as any additional shares of Class A common stock that may become available under the 2020 ESPP pursuant to provisions in the 2020 ESPP that automatically increase the Class A common stock reserve thereunder.

        Unless otherwise stated, information in this prospectus (except for the historical financial statements and the related discussion of such financial information) assumes:

    the 3-for-1 forward split of our common stock, which occurred on July 28, 2020;

    the adoption of our amended and restated certificate of incorporation and amended and restated bylaws, which occurred on July 28, 2020;

    consummation of the reclassification, which occurred on July 28, 2020, pursuant to which each share of our common stock outstanding immediately prior to the reclassification became one share of Class B common stock, except for 172,500 shares of our non-voting stock that were held by individuals other than members of our founder's family, which were reclassified as Class A common stock;

    the termination of our status as an S Corporation, which occurred on July 27, 2020;

    the election by holders of outstanding SARs to amend their SARs so that they become options to purchase shares of our Class A common stock, and the automatic net exercise of certain of those options in connection with this offering resulting in the issuance of shares of Class A common stock under the 2020 Plan as described above (for additional information regarding the amendment of the outstanding SARs and the related issuance of shares, please see "Executive and Director Compensation—2007 Stock Appreciation Rights Plan");

    no exercise by the underwriters of their option to purchase up to an additional 3,172,500 shares of our Class A common stock from us and the selling stockholders (for the avoidance of doubt, the 3,172,500 shares of our Class A common stock will be comprised of 2,662,216 shares of our Class A common stock offered by us and 510,284 newly issued shares of Class A common stock offered by the selling stockholders in connection with their exercise of options to purchase shares of our Class A common stock, described above, and if the underwriters exercise their option to purchase only in part, option shares shall be taken first from the selling stockholders on a pro rata basis and second from us); and

    an initial public offering price of $19.00 per share.

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Summary Consolidated Financial and Operating Information

        The following table sets forth our summary historical consolidated financial information for the periods and dates indicated. The consolidated balance sheet data as of December 31, 2019 and 2018 and the consolidated statements of comprehensive income (loss) for the years ended December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of March 31, 2020 and the consolidated statements of comprehensive income (loss) for the three months ended March 31, 2020 and 2019 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited interim consolidated financial statements.

        The financial information set forth below is not necessarily indicative of future results of operations. In particular, 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. Effective July 27, 2020, we converted to a C Corporation, which will result in net income of the Company being taxed at the corporate level after this date. As such, our provision for taxes will change. Upon the conversion to a C Corporation, we estimate that the Company's effective tax rate will be approximately 25%, inclusive of all applicable U.S. federal, state, local and foreign income taxes. In addition, based on the deferred tax asset balances at March 31, 2020, we would anticipate recording a tax benefit of approximately $8.5 million as if such conversion occurred on such date.

        Share amounts for all periods presented, including the number of shares that common stock equivalents are convertible into, were retrospectively restated to reflect the three-for-one forward stock split, which was effective on July 28, 2020.

        This data should be read in conjunction with, and is qualified in its entirety by reference to, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Capitalization" sections of this prospectus and our audited consolidated financial statements and notes thereto for the periods and dates indicated included elsewhere in this prospectus. Revenue is reflected in accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, ("ASC 606"), which we adopted on January 1, 2018.

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  For the Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands except
per share data)

 

Revenue:

                         

Software subscriptions

  $ 275,629   $ 235,663   $ 75,760   $ 64,384  

Services

    45,871     36,740     13,485     10,230  

Total revenues

    321,500     272,403     89,245     74,614  

Cost of revenues:

                         

Software subscriptions(1)

    77,259     68,945     24,684     18,426  

Services(1)

    33,119     26,753     14,778     7,138  

Total cost of revenues

    110,378     95,698     39,462     25,564  

Gross profit

    211,122     176,705     49,783     49,050  

Operating expenses:

                         

Research and development(1)

    30,557     23,755     13,079     7,573  

Selling and marketing(1)

    68,127     56,898     24,333     16,047  

General and administrative(1)

    71,014     58,947     37,636     15,448  

Depreciation and amortization

    8,996     7,937     2,869     2,045  

Impairment of asset

        32,692          

Other operating (income) expense, net

    573     (691 )   111     163  

Total operating expenses

    179,267     179,538     78,028     41,276  

Income (loss) from operations

    31,855     (2,833 )   (28,245 )   7,774  

Other (income) expense:

                         

Interest income

    (1,083 )   (526 )   (355 )   (292 )

Interest expense

    2,036     2,120     924     537  

Total other expense, net

    953     1,594     569     245  

Income (loss) before income taxes

    30,902     (4,427 )   (28,814 )   7,529  

Income tax (benefit) expense

    (155 )   1,679     250     204  

Net income (loss)

    31,057     (6,106 )   (29,064 )   7,325  

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

    (5 )   355     2,998     (21 )

Total comprehensive income (loss)

  $ 31,062   $ (6,461 ) $ (32,062 ) $ 7,346  

Net income (loss) attributable to Class A stockholders

  $ 38   $ (7 ) $ (35 ) $ 9  

Net income (loss) per Class A share, basic and diluted

  $ 0.26   $ (0.05 ) $ (0.24 ) $ 0.06  

Weighted average Class A common stock, basic and diluted

    147     147     147     147  

Net income (loss) attributable to Class B stockholders

  $ 31,019   $ (6,099 ) $ (29,029 ) $ 7,316  

Net income (loss) per Class B share, basic

  $ 0.26   $ (0.05 ) $ (0.24 ) $ 0.06  

Weighted average Class B common stock, basic

    120,387     120,480     120,270     120,270  

Net income (loss) per Class B share, diluted

  $ 0.25   $ (0.05 ) $ (0.24 ) $ 0.06  

Weighted average Class B common stock, diluted

    124,119     120,480     120,270     124,179  

(1)
Includes stock-based compensation expenses as follows in the table below. For more details, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and Quarterly Trends."

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  For the Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands)
 

Cost of revenues, software subscriptions

  $ 946   $ 512   $ 3,492   $ 131  

Cost of revenues, services

    1,419     765     5,238     197  

Research and development

    946     511     3,492     131  

Selling and marketing

    1,892     1,022     6,984     261  

General and administrative

    4,257     2,298     15,714     590  

Total stock-based compensation

  $ 9,460   $ 5,108   $ 34,920   $ 1,310  


 
  As of December 31,   As of
March 31,
 
 
  2019   2018   2020  
 
   
   
  (unaudited)
 
 
  (In thousands)
 

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents

  $ 75,903   $ 55,838   $ 40,416  

Funds held for stockholder dividends

            110,000  

Total assets

    264,623     215,072     356,129  

Deferred revenue (current and non-current)

    205,791     178,703     201,484  

Debt (current and non-current)

    51,486     54,883     173,823  

Total liabilities

    377,055     326,768     504,633  

Options for redeemable shares

    17,344     14,581     32,586  

Total stockholders' deficit

    (129,776 )   (126,277 )   (181,090 )

 

 
  For the Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands)
 

Consolidated Statement of Cash Flows

                         

Net cash provided by (used in) operating activities

  $ 92,498   $ 80,449   $ (6,417 ) $ 9,899  

Net cash used in investing activities

    (37,560 )   (33,314 )   (21,656 )   (8,115 )

Net cash provided by (used in) financing activities

    (30,629 )   (30,697 )   103,654     (12,392 )

Effect of foreign exchange rate changes

    12     (402 )   (249 )   21  

Net increase in cash, cash equivalents and restricted cash

  $ 24,321   $ 16,036   $ 75,332   $ (10,587 )

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  For the Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands except percentages)
 

Financial Metrics:

                         

Net income (loss)

  $ 31,057   $ (6,106 ) $ (29,064 ) $ 7,325  

Net income (loss) margin

    9.7 %   (2.2 )%   (32.7 )%   9.9 %

Net cash provided by (used in) operating activities

  $ 92,498   $ 80,449   $ (6,417 ) $ 9,899  

Operating cash flow margin

    29 %   30 %   (7 )%   13 %

Non-GAAP Financial Data (unaudited):

                         

Adjusted EBITDA(1)

  $ 67,913   $ 61,471   $ 15,294   $ 15,596  

Adjusted EBITDA margin(1)

    21 %   23 %   17 %   21 %

Free cash flow(2)

  $ 54,938   $ 47,135   $ (15,755 ) $ 1,784  

Free cash flow margin(2)

    17 %   17 %   (18 )%   2 %

(1)
Adjusted EBITDA and Adjusted EBITDA margin are a non-GAAP financial measure used by our management and board of directors in measuring trends and our financial performance. In addition, 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 consider Adjusted EBITDA and Adjusted EBITDA margin to be important measures because we believe that they provide useful information in understanding and evaluating our operating results on a period over period basis without the impact of certain expenses that do not directly correlate to our operating performance and that can vary significantly from period to period. In addition, we base certain of our forward-looking estimates and budgets on Adjusted EBITDA and Adjusted EBITDA margin. We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation and amortization, asset impairments, share-based compensation expense and severance charges. We define Adjusted EBITDA margin as Adjusted EBITDA divided by total revenues for the same period.


Our definitions of Adjusted EBITDA and Adjusted EBITDA margin may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net income (loss):
 
  For the Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands except percentages)
 

Adjusted EBITDA

                         

Net income (loss)

  $ 31,057   $ (6,106 ) $ (29,064 ) $ 7,325  

Interest, net

    953     1,594     569     245  

Income tax (benefit) expense

    (155 )   1,679     250     204  

Depreciation and amortization—cost of subscription revenues

    16,194     16,964     4,567     3,929  

Depreciation and amortization

    8,996     7,937     2,869     2,045  

Impairment charge

        32,692          

Stock-based compensation

    9,460     5,108     34,920     1,310  

Severance charges

    1,408     1,603     1,183     538  

Adjusted EBITDA

  $ 67,913   $ 61,471   $ 15,294   $ 15,596  

Adjusted EBITDA margin

                         

Total revenues

  $ 321,500   $ 272,403   $ 89,245   $ 74,614  

Adjusted EBITDA margin

    21 %   23 %   17 %   21 %
(2)
Our management uses free cash flow as a critical measure in the evaluation of liquidity in conjunction with related GAAP amounts. It also uses 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 operating activities after our capital expenditures and capitalization of

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    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 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.


Our definitions of free cash flow and free cash flow margin may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our free cash flow and free cash flow margin should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. The following table reconciles free cash flow to the most directly comparable GAAP financial performance measure, which is net cash provided by operating activities:
 
  For the Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands except percentages)
 

Free cash flow

                         

Net cash provided by (used in) operating activities

  $ 92,498   $ 80,449   $ (6,417 ) $ 9,899  

Property and equipment additions

    (20,339 )   (21,053 )   (5,632 )   (4,200 )

Capitalized software additions

    (17,221 )   (12,261 )   (3,706 )   (3,915 )

Free cash flow

  $ 54,938   $ 47,135   $ (15,755 ) $ 1,784  

Free cash flow margin

                         

Total revenues

  $ 321,500   $ 272,403   $ 89,245   $ 74,614  

Free cash flow margin

    17 %   17 %   (18 )%   2 %

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RISK FACTORS

        An investment in our Class A common stock involves a high degree of risk. You should consider carefully the following risks, together with the information under the caption "Business—Competition," our financial statements and the related notes and the other information contained in this prospectus before you decide whether to buy our Class A common stock. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations, financial condition and cash flows could suffer significantly. As a result, the market price of our Class A common stock could decline, and you may lose all or part of the money you paid to buy our Class A common stock. The risks described below are those that we believe are the material risks that we face but other risks may arise from time to time. See "Cautionary Note Regarding Forward-Looking Statements" elsewhere in this prospectus.

Risks Relating to Our Business and Industry

A large portion of our revenue depends on maintaining and growing our revenue from existing customers, and if we fail to retain our customers or expand their usage of our solutions, our business, results of operations, financial condition and cash flows would be harmed.

        We cannot accurately predict customer behavior. Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their subscription periods and our customers may not renew subscriptions for a similar mix of solutions. Our retention rates would decline as a result of a number of factors, including customer dissatisfaction, decreased customer spending levels, decreased customer transaction volumes, increased competition, changes in tax laws or rules, pricing changes or legislative changes affecting tax compliance providers. If our customers do not renew their subscriptions, or our customers reduce the solutions purchased under their subscriptions, our revenue would decline and our business may be harmed.

        Our future success also depends in part on our ability to sell additional solutions to existing customers and on our customers' expanded use of our solutions. If our efforts to sell our additional solutions to our customers are not successful or if our customers do not expand their use of our solutions, it would decrease our revenue growth and harm our business, results of operations, financial condition and cash flows.

Our business and success depend in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships.

        We depend in part on, and anticipate that we will continue to depend in part on, various third-party relationships to sustain and grow our business. Our relationships with third-party publishers of software business applications, including accounting, ERP, eCommerce, POS, recurring billing and CRM systems, help drive our business because the integration of our solutions with their applications allows us to reach their sizeable customer bases. Our customers' user experience is dependent on our ability to connect easily to such third-party software applications. We may fail to retain and expand these integrations or relationships for many reasons, including due to failures by third parties to maintain, support or secure their technology platforms in general and our integrations in particular, or errors, bugs or defects in such third party technology, or changes in our technology platform. Any such failure could harm our relationship with our customers, our reputation and brand and our business and results of operations.

        In addition, integrating third-party technology can be complex, costly and time-consuming. Third parties may be unwilling to build integrations, and we may be required to devote additional resources to develop integrations for business applications on our own. Providers of business applications with which we have integrations may decide to compete with us or enter into arrangements with our competitors, resulting in such providers withdrawing support for our integrations. In addition, any failure of our solutions to operate effectively with business applications could reduce the demand for

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our solutions, resulting in customer dissatisfaction and harm to our business. If we are unable to respond to these changes or failures in a cost-effective manner, our solutions may become less marketable, less competitive or obsolete and our results of operations may be negatively impacted.

If we are unable to adapt to technological change by successfully introducing new and enhanced solutions and services, our business, results of operations, financial condition and cash flows would be adversely affected.

        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. The introduction of software embodying new technologies can quickly make existing software obsolete and unmarketable. Software solutions are inherently complex, and it can take a long time and require significant research and development expenditures to develop and test new or enhanced solutions. The success of any enhancements or improvements to our software solutions or any new solutions and services depends on several factors, including timely completion, competitive pricing, adequate quality testing, integration with existing technologies and our platform and overall market acceptance. We cannot be sure that we will succeed in developing, marketing and delivering on a timely and cost-effective basis enhancements or improvements to our software or any new solutions and services that respond to technological change or new customer requirements, nor can we be sure that any enhancements or improvements to our software or any new solutions and services will be free of errors and defects or that they will achieve market acceptance. Moreover, even if we introduce new solutions, we would experience a decline in revenue of our existing solutions that is not offset by revenue from the solutions. Customers may delay making purchases of new solutions to permit them to make a more thorough evaluation of these solutions or until industry and marketplace reviews become widely available. In addition, we may lose existing customers who choose a competitor's solutions rather than migrate to our new solutions. This could result in a temporary or permanent revenue shortfall and adversely affect our business.

Any failures in information technology or infrastructure could lead to disruptions of our software, loss of customer data or untimely remittance of taxes, any of which could adversely affect our reputation and financial condition.

        Our software depends on uninterrupted, high-speed access to the internet in order to provide real-time tax determinations and processing of indirect tax data. Failures in our or our customers' and partners' information technology and infrastructure or service outages at third-party internet providers could lead to disruptions to our software. Such failures may be caused by numerous factors, including mechanical failure, power outage, human error, physical or electronic security breaches, war, terrorism, fire, earthquake, hurricane, flood and other natural disasters, sabotage and vandalism. Disruptions to our software could cause customers to lose sensitive or confidential information and could also lead to our or our customers' inability to timely remit taxes to the appropriate authorities. Any of these outcomes could lead customers to switch to our competitors or avoid using our solutions, which would negatively impact our revenue and harm our opportunities for growth.

Incorrect or improper implementation, integration or use of our solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition and cash flows.

        Our customers may need training or education in the proper use of, and the variety of benefits that can be derived from, our solutions to maximize their potential benefits. If our solutions are not implemented or used correctly or as intended, inadequate performance may result. Because our customers rely on our solutions to manage a wide range of tax compliance operations, the incorrect or improper implementation or use of our solutions, or our failure to provide adequate support to our customers, may result in negative publicity or legal claims against us, which could harm our business, results of operations, financial condition and cash flows. Also, as we continue to expand our customer

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base, any failure by us to properly provide training and support will likely result in lost opportunities for additional subscriptions for our solutions.

If we fail to attract and retain qualified technical and tax-content personnel, our business could be harmed.

        Our technology is complex and our success depends in large part on our ability to attract and retain highly qualified personnel, particularly tax-content specialists, software developers, technical support and research and development personnel. Competition for skilled personnel is intense and we may not be successful in attracting, motivating and retaining needed personnel. We also may be unable to attract or integrate into our operations qualified personnel on the schedule we desire. Any inability to attract, integrate, motivate and retain the necessary personnel could harm our business. Dealing with the loss of the services of our executive officers or key personnel and the process to replace any of our executive officers or key personnel may involve significant time and expense, take longer than anticipated, and significantly delay or prevent the achievement of our business objectives, which would harm our financial condition, results of operations, and business.

We face competitive pressures from other tax software and services providers, as well as the challenge of convincing businesses using manual processes and native ERP functions to switch to our software.

        We face significant competitive challenges from other tax-specific software vendors and from outsourced transaction tax compliance services offered by accounting and specialized consulting firms. There are a number of competing tax-specific software vendors, some of which have substantially greater revenue, personnel and other resources than we do. Corporate competitors, as well as the state and local tax services offered by accounting firms, have historically targeted our customer base of large enterprise companies. In addition, our competitors who currently focus their tax compliance services on small- to medium-sized businesses may be better positioned to increase their market share with small- to medium-sized businesses and may choose to enter our markets, whether competing based on price, service or otherwise. We also face a growing number of competing private transaction tax compliance businesses focused primarily on eCommerce. Increased competition may impact our ability to add new customers and to retain and expand revenues from existing customers. It is also possible that large enterprises with substantial resources that operate in adjacent compliance, finance or eCommerce verticals may decide to pursue transaction tax compliance automation and become immediate, significant competitors. Our failure to successfully and effectively compete with current or future competitors could lead to lost business and negatively affect our revenue.

        In addition, many companies continue to employ manual processes that often rely on transaction-specific research, static tax tables, non-tax specific software or rate calculator services, as well as manual filing and remittance activities. Many businesses using manual approaches believe that these processes are adequate and may be unaware that there is an alternative that is more effective, resulting in an inertia that can be difficult to overcome. In addition, the upfront costs of our solutions can limit our sales to businesses using manual processes.

Our recent success may not be indicative of our future results of operations.

        We cannot predict with certainty our customers' future usage or retention given the diversity of our customer base across industries, geographies, customer size and other factors. Accordingly, we may be unable to accurately forecast our revenues notwithstanding our substantial investments in sales and marketing, tax content infrastructure and research and development in anticipation of continued growth in our business. If we do not realize returns on these investments in our growth, our results of operations could differ materially from our prior results, which could cause our stock price to decline.

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We currently derive a substantial portion of our revenue from our indirect tax software, and any failure of our software to satisfy customer requirements or to achieve increased market penetration could adversely affect our business, results of operations, financial condition and growth prospects.

        We currently derive a substantial portion of our revenue from subscriptions to our indirect tax software. We have added, and will continue to add, additional solutions to expand our offerings, but, at least in the near term, we expect to continue to derive the majority of our revenue from our indirect tax software. As such, the ability of our indirect tax software to meet our customers' requirements is critical to our success. Demand for our solutions is affected by a number of factors, many of which are beyond our control, such as continued market acceptance and continued employment of our solutions by existing and new customers, the timing of the development and release of upgraded or new solutions, the introduction or upgrading of products and services by our competitors, technological change and growth or contraction in our addressable market. If our indirect tax software does not continue to meet customer requirements, our business, results of operations, financial condition and growth prospects will suffer.

Changes to customers' and partners' software systems may impact our ability to offer a specific software deployment method to existing customers, which could cause a termination of customer contracts utilizing that deployment method, or otherwise effect our results of operations, financial condition and cash flow.

        Our solutions are integrated with the software systems and complex workflows of our customers and partners. In the event that such software systems are modified or updated in a way that is incompatible with our software, we may be unable to continue to support the operations of our customers and partners. If our customers are unable to implement our solutions successfully or in a timely manner, or if our partners are unable to integrate with our solutions through our integrations, customer perceptions of our solutions may be impaired, our reputation and brand may suffer and customers may choose not to renew or expand the use of our solutions. In addition, if we fail to anticipate technological changes that our customers and partners may look to adopt, our solutions may be perceived as being less effective or obsolete. Any of these changes could have a material adverse effect on our results of operations and financial condition.

We need to continue making significant investments in software development and equipment to improve our business.

        To improve the scalability, security and efficiency of our solutions, and to support the expansion of our software into other tax types, we will need to continue making significant capital expenditures and also invest in additional software and infrastructure development. If we experience increasing demand in subscriptions, we may not be able to augment our infrastructure quickly enough to accommodate such increasing demand. In the event of decreases in subscription sales, certain of our fixed costs, such as for capital expenditures, may make it difficult for us to quickly adjust our expenses downward. Additionally, we are continually updating our software and content, which increases expenses for us. We may also need to review or revise our software architecture as we grow, which may require significant resources and investments. As a result, although we may have significant research and development expenditures, which may be incurred and certain of which may be capitalized, there is no guarantee our 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.

Our continued growth depends in part on our ability to continue to grow our customer base.

        Increasing our customer base will depend, to a significant extent, on our ability to effectively expand our sales and marketing activities, as well as our partner ecosystem and other customer referral sources. We may not be able to recruit qualified sales and marketing personnel, train them to perform and achieve an acceptable level of sales production from them on a timely basis or at all. In the past, it

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has usually taken new members of our sales force at least six months to integrate into our operations and start converting sales leads at our expected levels. In addition, if we cannot continue to maintain or expand our relationships with our partners, we may receive fewer referrals, the set of integrations we offer may not keep up with the market and our customer expansion strategy may become less effective. If we are unable to maintain effective sales and marketing activities and maintain and expand our partner network, our ability to attract new customers could be harmed and our business, results of operations, financial condition and cash flows would suffer.

If we fail to effectively manage our growth, our business, results of operations, financial condition and cash flows will be harmed.

        We have experienced, and may continue to experience, growth in our headcount and operations, both domestically and internationally, which has placed, and may continue to place, significant demands on our management and our administrative, operational and financial reporting resources. We have also experienced significant growth in the number of customers, number of transactions and the amount of tax content that our platform and solutions support. Our growth will require us to hire additional employees and make significant expenditures, particularly in sales and marketing but also in our technology, professional services, finance and administration teams, as well as in our facilities and infrastructure. Our ability to effectively manage our growth will also require the allocation of valuable management and employee resources and improvements to our operational and financial controls and our reporting procedures and systems. In addition, as we seek to continue to expand internationally, we will likely encounter unexpected challenges and expenses due to unfamiliarity with local requirements, practices and markets. Our expenses may increase more than we plan, and we may fail to hire qualified personnel, expand our customer base, enhance our existing solutions, develop new solutions, integrate any acquisitions, satisfy the requirements of our existing customers, respond to competitive challenges or otherwise execute our strategies. If we are unable to effectively manage our growth, our business, results of operations, financial condition and cash flows would likely be harmed.

Future acquisitions of, and investments in, other businesses, software, tax content or technologies may not yield expected benefits, and our inability to successfully integrate acquisitions may negatively impact our business, results of operations, financial condition and cash flows.

        We may in the future seek to grow our operations by pursuing acquisitions of businesses, software and technologies. We may not realize the anticipated benefits, or any benefits, from future acquisitions. In addition, if we finance acquisitions by incurring debt or by issuing equity or convertible or debt securities, our existing stockholder may be diluted or we could face constraints related to covenants in the agreements governing the indebtedness, which could affect the market value of our capital stock. To the extent that the acquisition consideration is paid in the form of an earnout on future financial results, the success of such an acquisition will not be fully realized by us for a period of time as it is shared with the sellers. Further, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed and the value of your investment may decline. For us to realize the benefits of future acquisitions, we must successfully integrate the acquired businesses, software or technologies with ours. This may take time and divert management's attention from our day-to-day operations, which could negatively impact our business, results of operations, financial condition and cash flows.

Our quarterly and annual results of operations will fluctuate in future periods.

        We will experience quarterly or annual fluctuations in our results of operations due to a number of factors, many of which are outside of our control. This makes our future results difficult to predict and

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could cause our results of operations to fall below expectations or our predictions. Factors that might cause quarterly or annual fluctuations in our results of operations include:

        Any one of the factors above, or the cumulative effect of some or all of the factors referred to above, may result in significant fluctuations in our quarterly and annual results of operations. This variability and unpredictability could result in our failure to meet or exceed our internal operating plan. In addition, a percentage of our operating expenses is fixed in nature and is based on forecasted financial performance. In the event of revenue shortfalls, we may not be able to mitigate the negative impact on our results of operations quickly enough to avoid short-term impacts.

        We generally recognize revenue from subscription fees paid by customers ratably over the subscription term. As a result, most of the subscription revenue we report in each quarter is the result of agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not be fully reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as subscription revenue from new customers is generally recognized over the applicable subscription terms.

Operating globally involves challenges that may adversely affect our ability to grow.

        We plan to continue expanding our business operations globally and to enter new markets where we have limited or no experience in marketing, selling and deploying our solutions. If we fail to deploy or manage our operations in international markets successfully, our business may suffer. In the future, as our international operations increase, or more of our expenses are denominated in currencies other than the U.S. dollar, our results of operations may become more sensitive to fluctuations in the

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exchange rates of the currencies in which we do business. In addition, we are subject to a variety of risks inherent in doing business internationally, including:

        If we are unable to expand internationally and manage the complexity of our global operations successfully, our business could be seriously harmed.

We hold significant amounts of money that we remit to taxing authorities on behalf of our customers, and this may expose us to liability from errors, delays, fraud or system failures, which may not be covered by insurance.

        We handle significant amounts of our customers' money so that we can remit those amounts to various taxing jurisdictions on their behalf. If we make mistakes in the determination or remittance of tax payments to the appropriate jurisdictions, our reputation and results of operations could suffer. Moreover, if our banks' or our own internal compliance procedures regarding cash management fail, are hacked or sabotaged, or if our banks or we are the subject of fraudulent behavior by personnel or third parties, we could face significant financial losses. Our efforts to remit tax payments to applicable taxing jurisdictions after receiving the corresponding funds from our customers may fail, which would

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expose us to the financial risk of collecting from our customers after we have remitted funds on their behalf.

        Additionally, we are subject to risk from concentration of cash and cash equivalent accounts, including cash from our customers that is to be remitted to taxing jurisdictions, with financial institutions where deposits routinely exceed federal insurance limits. If the financial institutions in which we deposit our customers' cash were to experience insolvency or other financial difficulty, our access to cash deposits could be limited, any deposit insurance may not be adequate, we could lose our cash deposits entirely and we could be exposed to liability to our customers. Any of these events would negatively impact our liquidity, results of operations and our reputation.

If we are unable to successfully adapt to organizational changes and effectively implement strategic initiatives, our reputation and results of operations could be impacted.

        We have a dynamic organization and routinely implement changes to our priorities and workforce in order to keep up with the constantly evolving market in which we operate. We expect these types of changes to continue for the foreseeable future. Successfully managing these changes, including retention of key employees, is critical to our business success. In addition, we are generally a build-from-within company, and our success is dependent on identifying, developing and retaining key employees to provide uninterrupted leadership and direction for our business. This includes developing organizational capabilities in key growth markets where the depth of skilled employees is limited and competition for these resources is intense. Further, business and organizational changes may result in more reliance on third parties for various services, and that reliance may increase reputational, operational and compliance risks.

Errors in our customers' transaction tax determinations and reporting functions, or delays in the remittance of their tax payments, could harm our reputation, results of operations and growth prospects.

        The tax determinations functions that our customers have to perform are complicated from a data management standpoint, time-sensitive and dependent on the accuracy of the database of tax content underlying our solutions. Some of our processes are not fully automated, such as our process for monitoring updates to tax rates and rules, and even to the extent our processes are automated, our solutions are not proven to be without any possibility of errors. If errors are made in our customers' tax determinations and reporting functions, or delays occur in the remittance of their tax payments, our customers may be assessed interest and penalties. Although our agreements generally have disclaimers of warranties and limit our liability, a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold us liable for these errors. Additionally, erroneous tax determinations could result in overpayments to taxing authorities that are difficult to reclaim from the applicable taxing authorities or underpayments that could result in penalties. Any history of erroneous tax determinations for our customers could also harm our reputation, could result in negative publicity, loss of or delay in market acceptance of our solutions, loss of customer renewals and loss of competitive position. In addition, our insurance coverage may not cover all amounts claimed against us if such errors or failures occur. The financial and reputational costs associated with any erroneous tax determinations may be substantial and could harm our results of operations.

Changes in tax laws and regulations, or their interpretation or enforcement, may cause us to invest substantial amounts to modify our software, cause us to change our business model or draw new competitors to the market.

        Changes in tax laws or regulations or interpretations of existing taxation requirements in the United States or in other countries may require us to change the manner in which we conduct some aspects of our business and could harm our ability to attract and retain customers. For example, a material portion of our revenue is generated by performing what can be complex transaction tax

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determinations and the corresponding preparation of tax returns and remittance of taxes. Changes in tax laws or regulations that reduce complexity or decrease the frequency of tax filings could negatively impact our revenue. In addition, there is considerable uncertainty as to if, when and how tax laws and regulations might change. As a result, we may need to invest substantial funds to modify our solutions to adapt to new tax laws or regulations. If our software solutions are not flexible enough to adapt to changes in tax laws and regulations, our financial condition and results of operations may suffer.

        A number of states have considered or adopted laws that attempt to require out-of-state retailers to collect sales taxes on their behalf or to provide the jurisdiction with information enabling it to more easily collect use tax. On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair, Inc., upholding South Dakota's economic nexus law, which requires certain out-of-state retailers to collect and remit sales taxes on sales into South Dakota. Following the Supreme Court's decision, certain states with pre-existing economic nexus provisions announced that they would begin enforcing these provisions on out-of-state retailers and additional states have proceeded with similar efforts. There also has been consideration of federal legislation related to taxation of interstate sales, which, if enacted into law, would place guidelines or restrictions on states' authority to require online and other out of state merchants to collect and remit indirect tax on products and services that they may sell. Similar issues exist outside of the United States, where the application of value-added taxes or other indirect taxes on online retailers is uncertain and evolving. The effect of changes in tax laws and regulations is uncertain and dependent on a number of factors. Depending on the content of any indirect tax legislation, the role of third-party compliance vendors may change, we may need to invest substantial amounts to modify our solutions or our business model, we could see a decrease in demand, we could see new competitors enter the market, or we could be negatively impacted by such legislation in a way not yet known.

We are exposed to cybersecurity and data privacy risks that, if realized, could expose us to legal liability, damage our reputation and harm our business.

        We face risks of cyber-attacks, computer hacks, theft, viruses, malicious software, phishing, employee error, denial-of-service attacks and other security breaches that could jeopardize the performance of our software and expose us to financial and reputational harm. Any of these occurrences could create liability for us, put our reputation in jeopardy and harm our business. Such harm could be in the form of theft of our or our customers' confidential information, the inability of our customers to access our systems or the improper re-routing of customer funds through fraudulent transactions or other frauds perpetrated to obtain inappropriate payments. In some cases, we rely on the safeguards put in place by third parties to protect against security threats. These third parties, including vendors that provide products and services for our operations, could also be a source of security risk to us in the event of a failure or a security incident affecting their own security systems and infrastructure. Our network of ecosystem partners could also be a source of vulnerability to the extent their applications interface with ours, whether unintentionally or through a malicious backdoor. We do not review the software code included in third-party integrations in all instances. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we or these third parties may be unable to anticipate these techniques or to implement adequate preventative measures. We have internal controls designed to prevent cyber-related frauds related to authorizing the transfer of funds, but such internal controls may not be adequate. With the increasing frequency of cyber-related frauds to obtain inappropriate payments and other threats related to cyber-attacks, we may find it necessary to expend resources to remediate cyber-related incidents or to enhance and strengthen our cybersecurity. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service. Although we have insurance coverage for losses associated with cyber-attacks, as with all insurance policies, there are coverage exclusions and limitations, and our coverage may not be sufficient to cover all possible

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claims, and we may still suffer losses that could have a material adverse effect on our reputation and business.

        Our customers provide us with information that our solutions store, some of which may be confidential information about them or their financial transactions. In addition, we store personal information about our employees and, to a lesser extent, those who purchase products or services from our customers. We have security systems and information technology infrastructure designed to protect against unauthorized access to such information. The security systems and infrastructure we maintain may not be successful in protecting against all security breaches and cyber-attacks, social-engineering attacks, computer break-ins, theft and other improper activity. Threats to our information technology security can take various forms, including viruses, worms and other malicious software programs that attempt to attack our solutions or platform or to gain access to the data of our customers or their customers. Like other companies, we have on occasion and will continue to experience threats to our data and systems. Any significant data breach could result in the loss of business, litigation and regulatory investigations, loss of customers and fines and penalties that could damage our reputation and brand and adversely affect the growth of our business.

We may become involved in material legal proceedings and audits, the outcomes which could adversely affect our business, results of operations, financial condition and cash flows.

        From time to time, we are involved in claims, suits, investigations, audits and proceedings arising in the ordinary course of our business, and we may in the future become involved in legal proceedings and audits that could have a material adverse effect on our business, results of operations, financial condition and cash flows. Claims, suits, investigations, audits and proceedings are inherently difficult to predict and their results are subject to significant uncertainties, many of which are outside of our control. Regardless of the outcome, such legal proceedings could have a negative impact on us due to legal costs, diversion of management resources and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in reputational harm, substantial settlements, judgments, fines or penalties, criminal sanctions, consent decrees or orders preventing us from offering certain features, functionalities, products or services, requiring us to change our development process or other business practices.

        There is also inherent uncertainty in determining reserves for these matters. There is significant judgment required in the analysis of these matters, including assessing the probability of potential outcomes and determining whether a potential exposure can be reasonably estimated. Further, it may take time to develop factors on which reasonable judgments and estimates can be based. If we fail to establish appropriate reserves, our business could be negatively impacted.

Undetected errors, bugs or defects in our software could harm our reputation or decrease market acceptance of our software, which would harm our business and results of operations.

        Our software may contain undetected errors, bugs or defects. We have experienced these errors, bugs or defects in the past in connection with new software and software upgrades and we expect that errors, bugs or defects may be found from time to time in the future in new or enhanced software after their commercial release. Our software is often used in connection with large-scale computing environments with different operating systems, system management software, equipment and networking configurations, which may cause or reveal errors or failures in our software or in the computing environments in which they are deployed. Despite testing by us, errors, bugs or defects may not be found in our software until they are used by our customers. In the past, we have discovered errors, bugs and defects in our software after they have been deployed to customers.

        Any errors, bugs, defects, disruptions in service or other performance problems with our software may damage our customers' businesses and could hurt our reputation, brand and business. We may also

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be required, or may choose, for customer relations or other reasons, to expend additional resources to correct actual or perceived errors, bugs or defects in our software. If errors, bugs or defects are detected or perceived to exist in our software, we may experience negative publicity, loss of competitive position or diversion of the attention of our key personnel, our customers may delay or withhold payment to us or elect not to renew their subscriptions, or other significant customer relations problems may arise. We may also be subject to liability claims for damages related to errors, bugs or defects in our software. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our software may harm our business and results of operations.

Our software utilizes open-source software, and any defects or security vulnerabilities in the open-source software could negatively affect our business.

        Certain of our software employs open-source software and we expect to use open-source software in the future. To the extent that our software depends upon the successful operation of open-source software, any undetected errors or defects in this open-source software could prevent the deployment or impair the functionality of our software, delay the introduction of new solutions, result in a failure of our software, and injure our reputation. For example, undetected errors or defects in open source software could render it vulnerable to breaches or security attacks, and, in conjunction, make our systems more vulnerable to data breaches.

        In addition, the terms of various open-source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market certain of our software solutions. Some open-source licenses might require us to make our source code available for no cost, to make publicly available source code for modifications or derivative works that we create based upon, incorporating or using the open source software, and/or to license such modifications or derivative works under the terms of the particular open source license. While we try to insulate our proprietary code from the effects of such open-source license provisions, we cannot guarantee we will be successful. In addition to risks related to open-source license requirements, usage of open-source software can lead to greater risks than use of third-party commercial software, as open-source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open-source software cannot be eliminated and could negatively affect our business, financial condition and results of operations.

We rely on third-party data centers, systems and technologies to operate our business, and interruptions or performance problems with these third-party providers may adversely affect our business and results of operations.

        We rely on data centers and other technologies and services provided by third parties in order to operate our business. If any of these services becomes unavailable or otherwise is unable to serve our requirements, there could be interruptions to our software and provision of services to our customers. Our business depends on our ability to protect the growing amount of information stored in data centers and related systems, offices and hosting facilities against damage from earthquakes, floods, fires, other extreme weather conditions, power loss, telecommunications failures, hardware failures, viruses, terrorist attacks, acts of war, unauthorized electronic or physical intrusion, overload conditions and other events. If our data centers or related systems fail to operate properly or become disabled even for a brief period of time, we could suffer financial loss, a disruption of our business, liability to customers or damage to our reputation. Our response to any type of disaster may not be successful in preventing the loss of customer data, service interruptions, disruptions to our operations or damage to our important facilities. Our data center providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all, and it is possible that we will not be able to switch our operations to another provider in a timely and cost-effective manner should the need arise. If we are unable to renew our agreements with these providers on commercially reasonable terms, or if in the future we add additional data center facility providers, we may face additional costs or expenses or downtime, which could harm our business.

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        We also rely on computer hardware purchased or leased from, software licensed from, content licensed from and services provided by a variety of third parties, which include database, operating system, virtualization software, tax requirement content and geolocation content and services. Any errors, bugs or defects in such third-party hardware, software, content or services could result in errors or a failure of our solutions, which could harm our business. In the future, we might need to license other hardware, software, content or services to enhance our solutions and meet evolving customer requirements. Any inability to license or otherwise obtain such hardware or software could result in a reduction in functionality, or errors or failures of our products, until equivalent technology is either developed by us or, if available, is identified, obtained through purchase or license, and integrated into our solutions, any of which may reduce demand for our solutions and increase our expenses. In addition, third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs, all of which may increase our expenses and harm our results of operations.

If we fail to effectively protect, maintain and enhance our brand, our business may suffer.

        As a leader in our industry for over 40 years, our brand is one of our most valuable assets, and any failure to protect our brand could cause our business to suffer. In addition, the promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive and as we expand into new regions. The demand for and cost of online and traditional advertising have been increasing and may continue to increase. Our brand promotion efforts will require investment not just in our indirect tax solutions, but also in our full suite of software and services. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors and we could lose customers or fail to attract potential new customers, all of which would adversely affect our business, results of operations, financial condition and cash flows.

Changes in the application, scope, interpretation or enforcement of laws and regulations pertaining to our operations may harm our business or results of operations, subject us to liabilities and require us to implement new compliance programs or business methods.

        We perform a number of critical business functions for our customers, including remittance of the taxes our customers owe to taxing authorities. Our electronic payment of customers' taxes may be subject to federal or state laws or regulations relating to money transmission. The Federal Bank Secrecy Act requires that financial institutions, of which money transmitters are a subset, register with the U.S. Department of Treasury's Financial Crimes Enforcement Network and maintain policies and procedures reasonably designed to monitor, identify, report and, where possible, avoid money laundering and criminal or terrorist financing by customers. Most U.S. states also have laws that apply to money transmitters, and impose various licensure, examination and bonding requirements on them. We believe these federal and state laws and regulations were not intended to cover the business activity of remitting transaction taxes that taxpayers owe to the various states and localities. However, if federal or state regulators were to apply these laws and regulations to this business activity, whether through expansion of enforcement activities, new interpretations of the scope of certain of these laws or regulations or of available exemptions, or if our activities are held by a court to be covered by such laws or regulations, we could be required to expend time, money and other resources to deal with enforcement actions and any penalties that might be asserted, to institute and maintain a compliance program specific to money transmission laws, and possibly to change aspects of how we conduct our business to achieve compliance or minimize regulation. Application of these laws to our business could also make it more difficult or costly for us to maintain our banking relationships. Financial institutions may also be unwilling to provide banking services to us due to concerns about the large dollar volume

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moving in and out of our accounts on behalf of our customers in the ordinary course of our business. As we continue to expand the solutions we offer and the jurisdictions in which we offer them, we could become subject to other licensing, examination or regulatory requirements relating to financial services.

        Determining the taxes owed by our customers involves providing solutions tailored to the types and prices of products our customers sell, as well as information regarding addresses that products are shipped from and delivered to. Numerous federal, state and local laws and regulations govern the collection, dissemination, use and safeguarding of personal information and other data, the scope of which is changing, subject to differing interpretations, and which may be costly to comply with, inconsistent between jurisdictions or conflicting with other rules. We may be subject to these laws in certain circumstances. Most states have also adopted laws that require notice be given to affected consumers in the event of a security breach. In the event of a security breach, our compliance with these laws may subject us to costs associated with notice and remediation, as well as potential investigations from federal regulatory agencies and state attorneys general. A failure on our part to safeguard consumer data adequately or to destroy data securely may subject us, depending on the personal information in question, to costs associated with notice and remediation, as well as to potential regulatory investigations or enforcement actions, and possibly to civil liability, under federal or state data security or unfair practices or consumer protection laws. If federal or state regulators were to expand their enforcement activities, or change their interpretation of the applicability of these laws, or if new laws regarding privacy and protection of consumer data were to be adopted, the burdens and costs of complying with them could increase significantly, negatively affecting our results of operations and possibly the manner in which we conduct our business. For example, the European Union's General Data Protection Regulation requires certain operational changes for companies that receive or process personal data of residents of the EU and includes significant penalties for noncompliance. In addition, other governmental authorities around the world are considering implementing similar types of legislative and regulatory proposals concerning data protection. We may incur significant costs to comply with these mandatory privacy and security standards.

If economic conditions worsen, it may negatively affect our business and financial performance.

        Our financial performance depends, in part, on the state of the economy, both in the United States and globally. Declining levels of economic activity may lead to declines in spending and customer revenue, which may result in decreased revenue for us. Concern about the strength of the economy may slow the rate at which businesses of all sizes are willing to hire an outside vendor to perform the determination and remittance of their transaction taxes and filing of related returns. If our customers and potential customers experience financial hardship as a result of a weak economy, industry consolidation or other factors, the overall demand for our solutions could decrease. If economic conditions worsen, our business, results of operations, financial condition and cash flows could be harmed.

Natural disasters, epidemic outbreaks, terrorist acts and political events could disrupt business and result in lower sales and otherwise have a material adverse effect on our business, financial performance and results of operations.

        The occurrence of one or more major natural disasters, unusual weather conditions, epidemic outbreaks, terrorist attacks or disruptive political events, each of which is out of our control, may result in reduced consumer and supplier spending and transactions, which in turn could cause our revenues to decline and our business to suffer. Natural disasters including tornados, hurricanes, floods and earthquakes may damage the facilities of our customers or those of their suppliers or retailers or their other operations, which could lead to reduced revenue for our customers and thus less transaction tax due. In addition, a global epidemic outbreak may have a material adverse effect on global economic conditions, consumer spending and the stability of global financial markets. For example, in December 2019, a novel strain of coronavirus ("COVID-19") appeared. The COVID-19 pandemic is having

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widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work-from-home, supply chain logistical changes and closure of non-essential businesses. To protect the health and well-being of our employees and customers, we have made substantial modifications to employee travel policies, closed our offices as employees are advised to work-from-home and cancelled or shifted our conferences and other marketing events to virtual-only. The COVID-19 pandemic has impacted and may continue to adversely impact our business operations, including our employees, customers and partners, and there is substantial uncertainty in the nature and degree of its continued effects over time. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors that we cannot reliably predict, including (i) the duration and scope of the pandemic; (ii) actions of governments, businesses and individuals in response to the pandemic and (iii) the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact consumer and business spending as well as customers' ability to pay for our software and solutions on an ongoing basis. Similarly, terrorist attacks or disruptive political events, such as the imposition of retaliatory tariffs or governmental trade or price manipulation, could cause our customers, or their customers, to defer spending plans or otherwise reduce their economic activity. If any of the foregoing risks were to be realized, it could have a material adverse effect on or business, financial performance and results of operations.

We are subject to anti-corruption, anti-bribery and similar laws and noncompliance with such laws can subject us to criminal penalties or significant fines and harm our business and reputation.

        We are subject to requirements under the U.S. Treasury Department's Office of Foreign Assets Control, anti-corruption, anti-bribery and similar laws, such as the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act 2010, and other anti-corruption, anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly and prohibit companies and their employees and agents from promising, authorizing, making, offering or providing anything of value to a "foreign official" for the purposes of influencing official decisions or obtaining or retaining business, or otherwise obtaining favorable treatment. As we increase our international operations, our risks under these laws may increase. Non-compliance with these laws could subject us to investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, adverse media coverage and other consequences. Any investigations, actions or sanctions could harm our business, results of operations, financial condition and cash flows.

        In addition, in the future we may use third parties to sell access to our software and conduct business on our behalf abroad. We or such future third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities, and we can be held liable for the corrupt or other illegal activities of such future third-party intermediaries, and our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities. We cannot provide assurance that our internal controls and compliance systems will always protect us from liability for acts committed by employees, agents or business partners of ours (or of businesses we acquire or partner with) that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks, false claims, pricing, sales and marketing practices, conflicts of interest, competition, employment practices and workplace behavior, export and import compliance, economic and trade sanctions, money laundering, data privacy and other related laws. Any such improper actions or allegations of such acts could subject us to significant sanctions, including civil or criminal fines and penalties, disgorgement of

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profits, injunctions and debarment from government contracts, as well as related stockholder lawsuits and other remedial measures, all of which could adversely affect our reputation, business, results of operations and financial condition.

        Any violation of economic and trade sanction laws, export and import laws, the FCPA or other applicable anti-corruption laws or anti-money laundering laws could also result in whistleblower complaints, adverse media coverage, investigations and severe criminal or civil sanctions, any of which could have a materially adverse effect on our reputation, business, results of operations and prospects.

Our ability to protect our intellectual property is limited, and we may be subject to claims of infringement by third parties.

        Our success depends, in part, upon our proprietary technology, processes, trade secrets, and other proprietary information and our ability to protect this information from unauthorized disclosure and use. We primarily rely upon a combination of copyright, trademark and trade secret laws, as well as confidentiality procedures, contractual provisions and other similar measures to protect our proprietary or confidential information and intellectual property. Our trademarks and service marks include VERTEX™ and O Series™, which is our flagship indirect tax solution. Despite our efforts to protect our proprietary rights and intellectual property, unauthorized parties may attempt to copy aspects of our solutions or to obtain and use information that we regard as proprietary, and third parties may attempt to independently develop similar technology, and policing unauthorized use of our technology and intellectual property rights may be difficult and may not be effective.

        In addition, third parties may claim infringement by us with respect to current or future solutions or other intellectual property rights. The software and technology industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any claims and lawsuits to enforce our intellectual property rights or to defend ourselves against claims of infringement of third-party intellectual property rights, and the disposition of such claims and lawsuits, whether through settlement or licensing discussions, or litigation, could be time-consuming and expensive to resolve, divert management attention from executing our strategies, result in efforts to enjoin our activities, lead to attempts on the part of other parties to pursue similar claims, and, in the case of intellectual property claims, require us to change our technology, change our business practices, pay monetary damages, or enter into short- or long-term royalty or licensing agreements. Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our solutions to others, could be material to our financial condition or cash flows, or both, or could otherwise harm our results of operations.

Our ability to obtain additional capital on commercially reasonable terms may be limited.

        We intend to continue to make investments to support our business growth and may require additional funds, beyond those generated by this offering, to respond to business challenges, including to better support and serve our customers, develop new software or enhance our existing solutions, improve our operating and technology infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in public or private equity, equity-linked or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, including the ability to pay dividends. This may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing on terms

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satisfactory to us when we require it, our ability to continue to support our business growth and respond to business challenges could be significantly impaired, and our business and prospects could be adversely affected.

Risks Related to Being a Public Company

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

        Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The rapid growth of our operations and the planned initial public offering has created a need for additional resources within the accounting and finance functions due to the increasing need to produce timely financial information and to ensure the level of segregation of duties customary for a U.S. public company. We continue to reassess the sufficiency of finance personnel in response to these increasing demands and expectations.

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

We have identified material weaknesses in our internal control over financial reporting and may experience additional material weaknesses in the future. Our failure to remediate these material weaknesses and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, the inability to timely report our financial condition or results of operations, investors losing confidence in our reported financial information and our stock price being adversely affected.

        Management and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting that affected our financial statements for each of the years in the two year period ended December 31, 2019. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting."

        The material weaknesses in our internal control over financial reporting during each of the years ended December 31, 2018 and 2019 related to the implementation of ASC 606, application of software capitalization guidance and recording of impairments, and our procedures for segregating user access to financially significant systems, which resulted in a lack of segregation of incompatible duties.

        We cannot assure you that additional material weaknesses in our internal control over financial reporting will not be identified in the future. The failure to maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our periodic reporting obligations and cause investors to lose confidence in our reported financial information, which could lead to a decline in our stock price.

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We are an "emerging growth company" and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

        We are an "emerging growth company" as defined in the JOBS Act. 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. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We have elected to use this extended transition period and we intend to utilize this related to the FASB issued ASU No. 2016-02, Leases. This standard amends several aspects of lease accounting, including requiring lesees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset, and a corresponding lease liability, measured at the present value of the future minimum lease payments. The standard is effective for public companies for fiscal years beginning after December 15, 2018, and after December 15, 2020 for all other companies, with early adoption permitted. We intend to adopt this standard effective January 1, 2021 using the modified retrospective transition method and therefore will not restate comparative periods. While we have not yet quantified the impact, resulting adjustments are expected to materially increase total assets and total liabilities relative to such amounts reported prior to adoption, but not have a material impact on the consolidated statements of comprehensive income (loss) or consolidated statements of cash flows.

        For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

        We will remain an emerging growth company until the earliest of (i) the last day of the year in which we have total annual gross revenue of $1.07 billion or more; (ii) the last day of the year following the fifth anniversary of the date of the closing of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain qualified board members.

        As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global Market on which our Class A common stock will be traded and other applicable securities rules and regulations. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. We will need to institute a comprehensive compliance function and establish internal policies to ensure we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis and establish an investor

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relations function. Compliance with these rules and regulations may cause us to incur additional accounting, legal and other expenses that we did not incur as a private company. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under securities laws, as well as rules and regulations implemented by the SEC and the Nasdaq Global Market, particularly after we are no longer an "emerging growth company." We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, while also diverting some of management's time and attention from revenue-generating activities. Furthermore, these rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Our management team has limited experience managing a public company.

        Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could harm our business, results of operations, and financial condition.

Risks Related to This Offering and Ownership of Our Class A Common Stock

There is no existing market for our Class A common stock, and we do not know if one will develop to provide you with adequate liquidity to sell our Class A common stock at prices equal to or greater than the price you paid in this offering.

        Prior to this offering, there has been no public market for our Class A common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any of our shares that you purchase. The initial public offering price of our Class A common stock was determined by negotiation between the underwriters, us and the selling stockholders, and may not be indicative of prices that will prevail after the completion of this offering. The market price of our Class A common stock may decline below the initial public offering price, and you may not be able to resell your shares at, or above, the initial public offering price.

Substantial future sales of shares of our Class A common stock could cause the market price of our Class A common stock to decline.

        Sales of a substantial number of shares of our Class A common stock following the closing of this offering, particularly sales by our directors, executive officers and significant stockholders, or the perception that these sales might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock.

        All of our executive officers, directors and the holders of substantially all of our capital stock are subject to lock-up agreements that restrict their ability to transfer shares of our capital stock for 180 days from the date of this prospectus. Subject to certain exceptions, the lock-up agreements limit

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the number of shares of capital stock that may be sold immediately following this offering. Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC may, in their sole discretion, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements. Upon the closing of this offering, we will have 120,417,000 outstanding shares of our Class B common stock (all of which are convertible into Class A common stock on a one-for-one basis) and 22,576,819 outstanding shares of our Class A common stock, based on the number of shares outstanding as of June 30, 2020. This includes the shares included in this offering, which may be sold in the public market immediately without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except for any shares held by our affiliates as defined in Rule 144 under the Securities Act.

The dual class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our existing stockholders, who will hold in the aggregate 98% of the voting power of our capital stock following the completion of this offering. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments to our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.

        Our Class B common stock has ten votes per share and our Class A common stock, which is the stock we are offering in this initial public offering, has one vote per share. The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our current principal stockholders and their affiliates, which will limit your ability to influence the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term.

        Upon the completion of this offering, our current principal stockholders and their respective affiliates will hold, in aggregate 98% of the voting power of our outstanding capital stock. For more information, see "Principal Stockholders." As a result, these stockholders, acting together, will have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control or other liquidity event of our company, could deprive our stockholders of an opportunity to receive a premium for their shares of common stock as part of a sale or other liquidity event and might ultimately affect the market price of our common stock.

We cannot predict the impact our capital structure may have on our stock price.

        We cannot predict whether our dual class structure will result in a lower or more volatile market price of our Class A common stock, in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indices. In July 2017, the FTSE Russell announced that it plans to require new constituents of its indices to have greater than 5% of the company's voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. Also in 2017, Morgan Stanley Capital International ("MSCI"), a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily

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barred new multi-class listings from certain of its indices; however, in October 2018, MSCI announced its decision to include equity securities "with unequal voting structures" in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under such announced policies, the dual class structure of our common stock would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track those indices would not invest in our Class A common stock. It is unclear what effect, if any, these policies will have on the valuations of publicly traded companies excluded from such indices, but it is possible that they may depress valuations, as compared to similar companies that are included. As a result, the market price of our Class A common stock could be adversely affected.

The price of our Class A common stock may fluctuate significantly, and you could lose all or part of your investment.

        The market price of our Class A common stock is likely to be volatile and could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

        Recently, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our Class A common stock. If the market price of our Class A common stock after this offering does not exceed the public offering price, you may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management's attention.

We have entered into a tax sharing agreement with our existing stockholders and could become obligated to make payments to our existing stockholders for any additional federal, state or local income taxes assessed against them for tax periods prior to the completion of this offering.

        Prior to this offering, we have elected to be treated as an S Corporation for U.S. federal income tax purposes, as a result of which, our existing stockholders have been required to pay income taxes attributable to our earnings. We have historically paid distributions to our existing stockholders, which have assisted them in paying such income taxes. In connection with this offering, our S Corporation

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status will terminate and we will thereafter be subject to federal and increased state income taxes. Our existing stockholders may be required to pay additional income taxes for periods prior to the termination of our S Corporation status as a result of an adjustment to our taxable income for periods beginning after our S corporation status terminates. Accordingly, we intend to enter into an agreement with our existing stockholders in connection with this offering pursuant to which we may be required to make payments in material amounts to our existing stockholders with respect to any incremental income taxes resulting from an adjustment to our taxable income for any period beginning after our S Corporation status terminates. Furthermore, this agreement requires us to indemnify our existing stockholders with respect to unpaid income tax liabilities attributable to our taxable income for any period after the termination of our S Corporation status. We will also indemnify our existing stockholders for any interest, penalties, losses, costs or expenses arising out of any claim under the agreement. However, our existing stockholders will indemnify us with respect to our unpaid tax liabilities (including interest and penalties) to the extent that such unpaid tax liabilities are attributable to a decrease in our existing stockholders' taxable income for any period and a corresponding increase in our taxable income for any period. See "Certain Relationships and Related Party Transactions—Tax Sharing Agreement."

Prior to this offering, we were treated as an S Corporation, and claims of taxing authorities related to our prior status as an S Corporation could harm us.

        In connection with this offering, our status as an S Corporation will terminate and we will be taxed as a C Corporation, which is subject to entity-level federal income taxes under the Code. If one or more tax years for which we filed a tax return as an S Corporation are audited by the IRS, and we are determined not to have qualified for, or not to have properly maintained, our S Corporation status, we may be obligated to pay entity-level income tax, plus interest and possible penalties. The amounts that we could be obligated to pay could include taxes with respect to all of our taxable income for periods when we believed we properly were treated as an S Corporation. Any such claims could result in additional costs to us and could have a material adverse effect on our financial results.

We do not intend to pay dividends on our Class A common stock for the foreseeable future and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our Class A common stock.

        We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our Class A common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our Class A common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our Class A common stock that will prevail in the market will ever exceed the price that you paid.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Class A common stock adversely, the trading price of our Class A common stock and trading volume could decline.

        The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not control these analysts. If any of the analysts who cover us downgrade our Class A common stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our Class A common stock may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price or trading volume of our Class A common stock to decline and our Class A common stock to be less liquid.

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Purchasers in this offering will experience immediate and substantial dilution in the net tangible book value of their investment.

        The offering price of our Class A common stock is substantially higher than the net tangible book value per share of our Class A common stock, which after giving effect to this offering was $(0.19) per share of our Class A common stock as of June 30, 2020. As a result, you will incur immediate and substantial dilution in net tangible book value when you buy our Class A common stock in this offering. This means that you will pay a higher price per share than the amount of our total tangible assets, less our total liabilities, divided by the number of shares of all of our common stock outstanding. In addition, you may also experience additional dilution if rights to purchase our common stock that are outstanding or that we may issue in the future are exercised or converted or we issue additional shares of our common stock at prices lower than our net tangible book value at such time. See "Dilution."

Anti-takeover provisions contained in our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

        Our amended and restated certificate of incorporation contains provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

        These and other provisions in our amended and restated certificate of incorporation and under Delaware law could discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our Class A common stock and result in the market price of our Class A common stock being lower than it would be without these provisions. For more information, see the section of this prospectus captioned "Description of Capital Stock—Anti-Takeover Provisions."

Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware is the sole and exclusive forum for certain stockholder litigation matters, and that the federal district courts will be the exclusive forum for claims under the Securities Act of 1933, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

        Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:

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        In addition, our amended and restated certificate of incorporation provides that the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the "Securities Act").

        By becoming a stockholder in our Company, you will be deemed to have notice of and have consented to the provisions of our amended and restated certificate of incorporation related to choice of forum. This exclusive forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. This provision will not apply to claims arising under the Exchange Act. The enforceability of similar exclusive forum provisions (including exclusive federal forum provisions for actions, suits or proceedings asserting a cause of action arising under the Securities Act) in other companies' organizational documents has been challenged in legal proceedings, and there is uncertainty as to whether courts would enforce the exclusive forum provisions in our certificate of incorporation. Additionally, our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. If a court were to find the exclusive forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.

We are a "controlled company" within the meaning of the Nasdaq Rules and, as a result, expect to qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

        After this offering, our current principal stockholders will continue to beneficially own a majority of the combined voting power of all classes of our outstanding voting stock. As a result, we will continue to be a controlled company within the meaning of the applicable stock exchange corporate governance standards. Under the Nasdaq Rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:

        These requirements will not apply to us as long as we remain a controlled company. We have elected to take advantage of the exemption from the requirement that a majority of our board of directors consist of independent directors and that our nominating and corporate governance committee consist entirely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq Global Market.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Any statements made in this prospectus that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "could," "would," "may," "will," "forecast" and other similar expressions. These forward-looking statements are contained throughout this prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." We base these forward-looking statements on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances at such time. As you read and consider this prospectus, you should understand that these statements are not guarantees of future performance or results. The forward-looking statements are subject to and involve risks, uncertainties and assumptions, and you should not place undue reliance on these forward-looking statements. Although we believe that these forward-looking statements are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. Factors that may materially affect such forward-looking statements include:

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        These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this prospectus. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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USE OF PROCEEDS

        We estimate that the net proceeds to us from the sale of the shares of our Class A common stock in this offering will be approximately $369.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option to purchase additional shares in this offering in full, we estimate that our net proceeds will be approximately $416.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from any sale of shares in this offering by the selling stockholders.

        We intend to use a portion of the net proceeds to repay all outstanding indebtedness under our existing New Credit Agreement and to pay related fees and expenses. As of March 31, 2020, our indebtedness includes $175.0 million outstanding under the term loan entered into under the New Credit Agreement. Proceeds from the term loan were used to repay amounts outstanding under the Company's previous credit agreement of $61.7 million, with the balance being used to fund a portion of a $123.0 million dividend to our stockholders on May 29, 2020, $122.8 million of which was paid to our directors Amanda Westphal Radcliffe, Stefanie Westphal Thompson and Jeffrey Westphal and, in each case, related trusts held for his or her benefit or the benefit of his or her immediate family. The term loan bears interest at a rate of 2.50% and will become due in March 2023. In addition, we intend to use approximately $22.9 million of the proceeds from this offering to pay for costs we expect to incur in connection with the payment of withholding taxes of approximately $13.8 million and the repurchase by us of approximately 476,530 shares of Class A common stock for approximately $9.1 million as a result of the amendment of outstanding SARs as part of this offering. See "Executive Compensation." The remainder of the net proceeds will be used for working capital and other general corporate purposes, including investments in our products, technology and sales force. Under the terms of the New Credit Agreement, this offering will constitute a triggering event, which will require the immediate repayment of the New Term Loan.

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DIVIDEND POLICY

        Historically, we have been an S Corporation, and as such, we have paid distributions to our existing stockholders, which have assisted them in paying the U.S. federal and state income taxes on our taxable income that is "passed through" to them, and we have historically made additional distributions to them for returns on capital.

        We do not currently anticipate paying dividends on our Class A or Class B common stock. Any declaration and payment of future dividends to holders of our Class A and Class B common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. In addition, the terms of the agreements governing our indebtedness may limit our ability to pay dividends.

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CAPITALIZATION

        The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 31, 2020, as follows:

        The information in this table should be read in conjunction with "Use of Proceeds," "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition

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and Results of Operations" and our financial statements and related notes thereto appearing elsewhere in this prospectus.

 
  As of March 31, 2020  
 
  Actual   Pro forma   Pro forma
as adjusted
 
 
  (Unaudited)
 
 
  (amounts in thousands, except share
and per share data)

 

Cash and cash equivalents

  $ 40,416   $ 27,416   $ 198,921  

Funds held for stockholder dividends

    110,000          

Total cash, cash equivalents and funds held for stockholder dividends

  $ 150,416   $ 27,416   $ 198,921  

Debt:

                   

New Credit Agreement

  $ 173,153   $ 173,153   $  

Capitalized leases

    670     670     670  

Total debt

    173,823     173,823     670  

Total stockholders' deficit:

                   

Existing voting common stock, $0.001 par value, 600,000 shares authorized, 300,000 shares issued, 147,000 shares outstanding, actual; no shares authorized, issued or outstanding, on a pro forma and pro forma as adjusted basis

             

Existing non-voting common stock, $0.001 par value, 299,400,000 shares authorized, 162,297,000 shares issued, 40,090,000 shares outstanding, actual or pro forma as adjusted; no shares authorized, issued or outstanding, on a pro forma and pro forma as adjusted basis

    54          

Class A common stock, $0.001 par value; no shares authorized or issued, actual or pro forma as adjusted; 300,000,000 shares authorized and 172,500 issued and outstanding on a pro forma basis; 300,000,000 shares authorized and 22,576,819 issued and outstanding on a pro forma as adjusted basis

            23  

Class B common stock, $0.001 par value; no shares authorized or issued, actual; 150,000,000 shares authorized and 120,417,000 shares issued and outstanding, on a pro forma and a pro forma as adjusted basis

        120     120  

Additional paid in capital

        (292,221 )   77,141  

Accumulated deficit

    (139,017 )       (1,847 )

Accumulated other comprehensive loss

    (3,489 )   (3,489 )   (3,489 )

Treasury stock

    (38,638 )        

Total stockholders' deficit

    (181,090 )   (295,590 )   71,948  

Total capitalization

  $ (7,267 ) $ (121,767 ) $ 72,618  

        The number of shares of our Class A and Class B common stock to be outstanding after completion of this offering is based on 1,426,819 shares of our Class A common stock and 120,417,000 shares of our Class B common stock outstanding as of June 30, 2020 after giving effect to the reclassification and the issuances of Class A common stock in connection with this offering and the amendment and exercise of certain SARs and the restricted stock awards to be made as part of this offering, which excludes shares of Class A common stock reserved for issuance under the 2020 Plan and the 2020 ESPP, which adopted in connection with this offering.

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DILUTION

        If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock after this offering. Dilution results from the fact that the per share public offering price of the Class A common stock is substantially in excess of the book value per share of our Class A common stock after this offering. Our pro forma net tangible book value as of March 31, 2020 was $(315.8) million, or $(2.62) per share of our Class A common stock, after giving effect to (i) the termination of our status as an S Corporation in connection with and prior to the closing of this offering (which was effective on July 28, 2020), (ii) the reclassification of our existing voting and non-voting common stock on July 28, 2020, pursuant to which each share of our common stock outstanding immediately prior to the reclassification became one share of Class B common stock, except for 172,500 shares of our non-voting stock that were held by individuals other than members of our founder's family, which were reclassified as Class A common stock and (iii) the payment of a dividend in the amount of $123.0 million to our existing stockholders (which was completed on May 29, 2020). Net tangible book value per share is determined as stockholders' deficit reduced by goodwill (which was $20.2 million as of March 31, 2020), and not adjusted for deferred commissions, divided by the total number of shares of our common stock outstanding.

        After giving effect to (a) the sale of 21,150,000 shares of Class A common stock that we are offering, (b) the issuance of (i) 562,199 shares of Class A common stock in connection with the amendment and exercise of certain fully vested SARs and (ii) 692,120 shares of Class A common stock and restricted stock in connection with awards under the 2020 Plan and (c) the application of the proceeds from this offering as described in "Use of Proceeds," after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, as if each had occurred on March 31, 2020, our pro forma as adjusted net tangible book value as of March 31, 2020 would have been $51.7 million, or $0.36 per share of common stock. This amount represents an immediate increase in net tangible book value of $2.98 per share of common stock to our existing stockholders before this offering and an immediate and substantial dilution in net tangible book value of $18.64 per share of common stock to new investors purchasing shares of common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share of common stock after this offering from the amount of cash that a new investor paid for a share of common stock in this offering. The following table illustrates this dilution, assuming the underwriters do not exercise their option to purchase additional shares of common stock:

Assumed initial public offering price per share of Class A common stock

        $ 19.00  

Pro forma net tangible book value per share of common stock as of March 31, 2020

  $ (2.62 )      

Increase in pro forma net tangible book value per share of common stock attributable to new investors in this offering

    2.98        

Pro forma as adjusted net tangible book value per share of common stock immediately after this offering

          0.36  

Dilution in pro forma net tangible book value per share of common stock to new investors in this offering

        $ 18.64  

        If the underwriters' option to purchase additional shares of Class A common stock is exercised in full, the as pro forma adjusted net tangible book value per share of Class A common stock would be $0.68 per share, and the dilution in pro forma as adjusted net tangible book value per share of Class A common stock to new investors in this offering would be $18.32 per share.

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        During the past five years, none of our officers, directors or affiliates acquired any shares of our common stock or have had the right to acquire any shares of our common stock, other than the equity awards being granted to certain of our directors, officers and employees in connection with this offering and the amendment of our outstanding SARs, in each case as described under "Executive and Director Compensation."

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

        The following table sets forth our selected historical consolidated financial information for the periods and dates indicated. The consolidated balance sheet data as of December 31, 2019 and 2018 and the consolidated statements of comprehensive income (loss) for the years ended December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of March 31, 2020 and the consolidated statements of comprehensive income (loss) for the three months ended March 31, 2020 and 2019 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited interim consolidated financial statements.

        The financial information set forth below is not necessarily indicative of future results of operations. In particular, 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. Effective July 27, 2020 we converted to a C Corporation, which will result in our net income being taxed at the corporate level. As such, our provision for taxes will change. Upon the conversion to a C Corporation, we estimate that our effective tax rate will be approximately 25%, inclusive of all applicable U.S. federal, state, local and foreign income taxes. In addition, based on the deferred tax asset balances at March 31, 2020, we would anticipate recording a tax benefit of approximately $8.5 million as if the conversion had occurred on such date.

        Share amounts for all periods presented, including the number of shares that common stock equivalents are convertible into, were retrospectively restated to reflect the three-for-one forward stock split which was effective on July 28, 2020.

        This data should be read in conjunction with, and is qualified in its entirety by reference to, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Capitalization" sections of this prospectus and our audited consolidated financial statements and notes thereto for the periods and dates indicated included elsewhere in this prospectus. Revenue is reflected in accordance with ASC 606, which we adopted on January 1, 2018.

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  For the Year Ended
December 31,
  Three Months Ended March 31,  
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands except
per share data)

 

Revenue:

                         

Software subscriptions

  $ 275,629   $ 235,663   $ 75,760   $ 64,384  

Services

    45,871     36,740     13,485     10,230  

Total revenues

    321,500     272,403     89,245     74,614  

Cost of revenues:

                         

Software subscriptions(1)

    77,259     68,945     24,684     18,426  

Services(1)

    33,119     26,753     14,778     7,138  

Total cost of revenues

    110,378     95,698     39,462     25,564  

Gross profit

    211,122     176,705     49,783     49,050  

Operating expenses:

                         

Research and development(1)

    30,557     23,755     13,079     7,573  

Selling and marketing(1)

    68,127     56,898     24,333     16,047  

General and administrative(1)

    71,014     58,947     37,636     15,448  

Depreciation and amortization

    8,996     7,937     2,869     2,045  

Impairment of asset

        32,692          

Other operating (income) expense, net

    573     (691 )   111     163  

Total operating expenses

    179,267     179,538     78,028     41,276  

Income (loss) from operations

    31,855     (2,833 )   (28,245 )   7,774  

Other (income) expense:

                         

Interest income

    (1,083 )   (526 )   (355 )   (292 )

Interest expense

    2,036     2,120     924     537  

Total other expense, net

    953     1,594     569     245  

Income (loss) before income taxes

    30,902     (4,427 )   (28,814 )   7,529  

Income tax (benefit) expense

    (155 )   1,679     250     204  

Net income (loss)

    31,057     (6,106 )   (29,064 )   7,325  

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

    (5 )   355     2,998     (21 )

Total comprehensive income (loss)

  $ 31,062   $ (6,461 ) $ (32,062 ) $ 7,346  

Net income (loss) attributable to Class A stockholders

  $ 38   $ (7 ) $ (35 ) $ 9  

Net income (loss) per Class A share, basic and diluted

  $ 0.26   $ (0.05 ) $ (0.24 ) $ 0.06  

Weighted average Class A common stock, basic and diluted

    147     147     147     147  

Net income (loss) attributable to Class B stockholders

  $ 31,019   $ (6,099 ) $ (29,029 ) $ 7,316  

Net income (loss) per Class B share, basic

  $ 0.26   $ (0.05 ) $ (0.24 ) $ 0.06  

Weighted average Class B common stock, basic

    120,387     120,480     120,270     120,270  

Net income (loss) per Class B share, diluted

  $ 0.25   $ (0.05 ) $ (0.24 ) $ 0.06  

Weighted average Class B common stock, diluted

    124,119     120,480     120,270     124,179  

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  As of December 31,   As of March 31,  
 
  2019   2018   2020  
 
   
   
  (unaudited)
 
 
  (In thousands)
 

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents

  $ 75,903   $ 55,838   $ 40,416  

Funds held for stockholder dividends

            110,000  

Total assets

    264,623     215,072     356,129  

Deferred revenue (current and non-current)

    205,791     178,703     201,484  

Debt (current and non-current)

    51,486     54,883     173,823  

Total liabilities

    377,055     326,768     504,633  

Options for redeemable shares

    17,344     14,581     32,586  

Total stockholders' deficit

    (129,776 )   (126,277 )   (181,090 )

(1)
Includes stock-based compensation expenses as follows in the table below. For more details, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and Quarterly Trends."
 
  For the Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands)
 

Cost of revenues, software subscriptions

  $ 946   $ 512   $ 3,492   $ 131  

Cost of revenues, services

    1,419     765     5,238     197  

Research and development

    946     511     3,492     131  

Selling and marketing

    1,892     1,022     6,984     261  

General and administrative

    4,257     2,298     15,714     590  

Total stock-based compensation

  $ 9,460   $ 5,108   $ 34,920   $ 1,310  

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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 prospectus. 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 prospectus, particularly in the sections of this prospectus titled "Risk Factors" and "Special Note Regarding Forward-Looking Statements."

Overview

        Vertex delivers comprehensive tax solutions that enable global businesses to transact, comply and grow with confidence. Companies with complex tax operations rely on Vertex to automate their end-to-end indirect tax processes. Indirect tax is the largest corporate tax category, encompassing sales tax, seller's use tax, consumer use tax and VAT, among others. Indirect tax accounts for more than $3.5 trillion of annual tax revenue, which is 2.5 times the amount of corporate income taxes, according to the 2019 OECD Tax Database. 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. We first began electronic delivery of tax rules in the early 1980s and we first sold transaction tax processing software in 1982. 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. In order to maintain the quality of our content, our team includes many global tax and regulatory experts from industry and the public sector, who deliver monthly updates to our tax content, which are then incorporated directly into our software. Our solutions can be deployed on-premise, in the cloud, or both, with implementation services available to enable optimal customer outcomes and satisfy their 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.

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GRAPHIC

        We derive the majority of our revenue 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.

        We have over 4,000 customers, including the 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 March 31, 2020, we had over 4,000 customers and our ARR per customer was over $70,000, while at March 31, 2019, we had over 4,000 customers and our ARR per customer was over $59,000. 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 pricing model is aligned with our customers' objectives by adjusting with their growth over time. We principally price our solutions based on a customer's revenue base, in addition to a number of other factors.

        We employ a hybrid deployment model to align to our customers' technology preferences for their core financial management software across on-premise, cloud deployments 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 significantly faster rate than on-premise software subscription sales, which is a trend that we expect to continue over time. We generated 12.9% and 19.1% of software subscription revenue from cloud-based subscriptions in 2018 and 2019, respectively, and 16.6% and 24.1% for the three months ended March 31, 2019 and 2020, respectively. While our on-premise software subscription revenue comprises 80.9% of our 2019 software subscription revenue, we anticipate that it will decrease as a percentage of total software subscription revenue as cloud-based subscriptions accelerate.

        We sell 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 global commerce and compliance environment provides durable and accelerating growth opportunities for our business. We generated revenue of $272.4 million and $321.5 million in 2018 and 2019, respectively, and $74.6 million and $89.2 million for the three months ended March 31,

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2019 and 2020, respectively. We had a net loss of $6.1 million and net income of $31.1 million in 2018 and 2019, respectively, and net income of $7.3 million and a net loss of $29.1 million for the three months ended March 31, 2019 and 2020, respectively. Adjusted EBITDA was $61.5 million and $67.9 million in 2018 and 2019, respectively, and $15.6 million and $15.3 million for the three months ended March 31, 2019 and 2020, respectively. Additionally, we generated net cash provided by operating activities of $80.4 million and $92.5 million in 2018 and 2019, respectively, and $9.9 million and $(6.4) million in the three months ended March 31, 2019 and 2020, respectively. Our free cash flow was $47.1 million and $54.9 million in 2018 and 2019, respectively, and $1.8 million and $(15.8) million in the three months ended March 31, 2019 and 2020, respectively. Adjusted EBITDA and free cash flow are non-GAAP financial measures. For more information about how we use these non-GAAP financial measures in our business, the limitations of these measures and reconciliations to the most directly comparable GAAP measures, see "Prospectus Summary—Summary Consolidated Financial and Operating Information." In connection with the offering, we will convert from an S Corporation to a C Corporation, which will result in net income of the Company being taxed at the corporate level. For additional information on the effect of such conversion, see "Prospectus Summary—Summary Consolidated Financial and Operating Information."

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 revenue from existing customers, acquire new customers, deepen our partner ecosystem, continually innovate our software and invest in growth and scale our business. 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.

        Retention and expansion of revenue from existing customers.    Given the breadth of our customer base and their own internal growth, the majority of our revenue 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 revenue with our existing customers. We track net revenue retention rate ("NRR") in order to understand our ability to retain and grow revenue from our customers. Our NRR was 109% as of December 31, 2019 and March 31, 2020.

        Acquire new customers.    Our solutions address the complexity of aligning commerce and compliance and we believe the market for our solutions is large and underpenetrated, both in the United States 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

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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 B2C and 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. We believe continuing to enhance our existing software will increase our ability to generate revenue 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.

        Customer migration to cloud solutions.    Over time, we expect a continued shift to our cloud solutions from existing and newly acquired customers. Over the past two 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% and 19.1% of software subscription revenue from cloud-based subscriptions in 2018 and 2019, respectively. For the three months ended March 31, 2020, we generated 24.1% of software subscription revenue from cloud-based subscriptions, an increase from 16.6% for the three months ended March 31, 2019. 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-based subscriptions. To the extent that revenue from our cloud offerings increase as a percentage of total revenue, our gross margin may decrease due to the associated hosting costs of those offerings.

Recent Developments—Impact of COVID-19

        In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic is having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes and closure of non-essential businesses. To protect the health and well-being of our employees and customers, we have made substantial modifications to employee travel policies, closed our offices as employees are advised to work from home and cancelled or shifted our conferences and other marketing events to virtual-only. The COVID-19 pandemic has impacted and may continue to impact our business operations, including our employees, customers and partners, and there is substantial uncertainty in the nature and degree of its continued effects over time.

        During the first quarter of 2020, the COVID-19 pandemic had minimal impact on our revenue or results of operations, as we continue to derive the significant majority of our revenue 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

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grow our existing customer revenues. We did not experience an abnormal number of non-renewals in the first or second quarter of 2020, nor any declines in revenue 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 decreases in non-renewals or concessions to renewal customers would have a material impact on our revenues and cash flows. We did see a decline in new software subscription billings at the end of the first quarter of 2020. It is important to note that our sales metrics are assessed quarterly, and given the size and complexity of our sales process we often see variances from month to month due to legal or procurement processes. In the case of the first quarter of 2020 we achieved our new software billings targets as several deals were completed earlier in the quarter. The Company also experienced a negative variance in new software billings in the early part of the second quarter of 2020, but these billings picked up as the quarter progressed. For the second quarter of 2020, new software billings were in excess of our original second quarter of 2020 expectations. We have seen some delay 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 continue to impact our billings to new customers for the remainder of 2020, and it may also negatively impact our efforts to 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 that our growth strategies will be materially impacted by the COVID-19 pandemic, as companies continue to rely on the Company for their indirect tax solutions. There is potential for an increase in demand for our products over the long-term considering the amount of state debt being accumulated during the pandemic, which may result in increases in taxes and revenue department audits which our products are positioned to address customer needs.

        In addition to the impacts on our sales, our cash collections from existing customers were lower than expected at the end of the first quarter of 2020. During the second quarter of 2020, our collections exceeded our expectation as some of the procedural disruptions that customers experienced as they shifted to remote work in March had stabilized. We believe that we may see delays in collections over the coming months. 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 customer experiencing issues as a result of COVID-19, 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, including the New Credit Agreement entered into on March 31, 2020, 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 we cannot reliably predict, 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 lives of long lived assets.

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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 revenue from recurring software subscriptions. We believe ARR provides us with visibility to our projected software subscription revenue in order to evaluate the health of our business. Because we recognize subscription revenue 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 revenue ("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, 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
December 31
   
   
  Three Months
Ended March 31
   
   
 
 
  Year-Over-Year Change   Period-Over-
Period Change
 
(In millions)
  2019   2018   2020   2019  

Annual Recurring Revenue

  $ 278.5   $ 233.5   $ 45.0     19.2 % $ 284.2   $ 242.3   $ 41.9     17.3 %

        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 subscription sales of our tax solutions to new customers.

        ARR increased by $41.9 million or 17.3% during the three months ended March 31, 2020, as compared to the same period in 2019. The increase was primarily driven by $20.6 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases and $21.3 million of on-premise and cloud-based subscription sales 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 revenue 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 revenue lost from departing customers or customers who have downgraded as well as any revenue expansion from upgrades, cross-sells or upsells of our software.

 
  For the Year Ended
December 31
  For the Three Months
Ended March 31
 
 
  2019   2018   2020   2019  

Net Revenue Retention Rate

    109 %   104 %   109 %   106 %

        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.

        The 300 basis point increase in NRR during the three months ended March 31, 2020, as compared to the same period in 2019, was primarily driven by growth of $20.6 million in recurring subscription revenues from existing customers through their expanded use of our solutions as well as price increases.

        Adjusted EBITDA and Adjusted EBITDA Margin.    We believe that Adjusted EBITDA is a measure widely used by securities analysts and investors to evaluate the financial performance of our company

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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 New Credit Agreement. We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, gains or losses on assets and liabilities denominated in a foreign currency, share-based compensation expense, severance charges and transaction costs. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison, our net income (loss) in 2019 was $31.1 million and $(6.1) million in 2018, while our net income (loss) margin was 9.7% and (2.2)% over the same periods, respectively. Additionally, our net income (loss) was $(29.1) million and $7.3 million for the three months ended March 31, 2020 and 2019, respectively, while our net income margin was (32.7)% and 9.9% over the same periods, respectively.

 
  For the Year Ended
December 31
  Three Months
Ended March 31
 
 
  2019   2018   2020   2019  

Adjusted EBITDA (in thousands)

  $ 67,913   $ 61,471   $ 15,294   $ 15,596  

Adjusted EBITDA margin

    21 %   23 %   17 %   21 %

        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 2019, primarily because operating expenses increased at a higher rate than our increase in revenue. This growth in operating expenses is driven primarily by our ongoing investment in our research and development, sales and marketing organization and technology infrastructure to support our future growth.

        The decrease in Adjusted EBITDA for the three months ended March 31, 2020 of $0.3 million is primarily driven by an increase in operating expenses, including additional research and development and internal infrastructure investments, partially offset by an increase in gross profit. Adjusted EBITDA margin decreased for the three months ended March 31, 2020, primarily because operating expenses increased at a higher rate than our increase in revenue. This growth in operating expenses is driven primarily by our ongoing investment in our research and development, sales and marketing organization and technology infrastructure to support our 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 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. For purposes of comparison, our net cash provided by operating activities was $92.5 million and $80.4 million for the years ended December 31, 2019 and 2018, respectively, while our operating cash flow margin was 29% and 30% over the same periods, respectively. Our net cash used in operating activities was $(6.4) million and our net cash provided by operating activities was $9.9 million for the three months ended March 31, 2020 and 2019, respectively, while our operating cash flow margin was (7)% and 13% over the same periods, respectively. Net cash used in investing activities was $37.6 million and $33.3 million for the years ended December 31, 2019 and 2018, respectively, and $21.7 and $8.1 for the three months ended March 31, 2020 and 2019, respectively. Net cash used in financing activities was $30.6 million and $30.7 million for the years ended

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December 31, 2019 and 2018, respectively, net cash provided by financing activities was $103.7 million for the three months ended March 31, 2020 and net cash used in financing activities was $12.4 million for the three months ended March 31, 2019.

 
  For the Year Ended
December 31
  Three Months
Ended March 31
 
 
  2019   2018   2020   2019  

Free cash flow (in thousands)

  $ 54,938   $ 47,135   $ (15,755 ) $ 1,784  

Free cash flow margin

    17 %   17 %   (18 )%   2 %

        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 consistent with the prior year at 17%.

        Free cash flow decreased by $17.5 million for the three months ended March 31, 2020, driven primarily by a decrease in cash from operating activities of $16.3 million due to a reduction in cash provided by changes in operating assets and liabilities of $16.0 million. This reduction was primarily due to decreases in accrued and deferred compensation of $4.8 million, a reduction in deferred revenue of $7.6 million and a reduction in accounts receivable of $2.3 million. Accrued and deferred compensation decreased by $4.8 million due to payments for variable compensation for the first quarter of 2020 increasing over the prior year comparable quarter by $2.7 million due to increases in headcount, and due to payments of $2.8 million for stock appreciation right redemptions in the first quarter of 2020 as compared to the same quarter of 2019. Deferred revenue decreased $7.6 million due to a $4.8 million decrease in non-recurring extended product support fees billed in the first quarter of 2019 related to older versions of software subscription solutions retired during 2019. The balance of the deferred revenue reduction of $2.8 million, and the reduction in accounts receivable of $2.3 million are due primarily to modifications to billing frequencies requested by customers, primarily to align all the annual subscription billings for their subscription licenses to the same period. This results in a short-term reduction in deferred revenue, but no impact to revenue.

Components of Our Results of Operations

Revenue

        We generate revenue 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 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,

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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 Revenue

        We generate services revenue 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 revenue 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 revenue are 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%. Our managed services offering has recently experienced increased revenue associated with returns processing volume increases attributable to regulatory changes, as customers expanded their tax filings into more jurisdictions.

Cost of Revenue

Software Subscriptions

        Cost of software subscriptions revenue consists of costs related to providing and supporting our software subscriptions and includes personnel and related expenses, including salaries, benefits, bonuses

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and stock-based compensation. In addition, cost of revenue includes direct costs associated with information technology, such as data center and software hosting costs, and tax content maintenance. Cost of revenue 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. 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 revenue in absolute dollars.

Services

        Cost of services revenue 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 revenue. We expect growth in our business will result in an increase in the cost of services revenue 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, 2019 and 2018, $17.2 million and $12.3 million of software development costs were capitalized, respectively. For the three months ended March 31, 2020 and 2019, $3.7 million and $3.9 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 Expenses

        Selling 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 and costs associated with our annual customer conferences. 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

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absolute dollars and as a percentage of total revenue 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, 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 auditing activities, legal, insurance, SEC compliance and internal control compliance.

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 Income

        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.

Interest Expense

        Interest expense consists primarily of interest payments and other financing costs on our debt facility. Interest expense will vary as a result of fluctuations in the level of debt outstanding as well as interest rates on such debt.

Provision for Taxes

        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 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 is based on taxable income allocated to these states. In certain foreign jurisdictions, our subsidiaries were taxed at the corporate level. Similar to states, the income tax provision or benefit is based on taxable income sourced to these foreign jurisdictions.

        Effective July 27, 2020, we converted to a C Corporation, which will result in net income of the Company being taxed at the corporate level. As such, our provision for taxes will increase. Assuming the conversion to a C Corporation, we expect a pro forma entity level estimated effective tax rate of approximately 25%, inclusive of all applicable U.S. federal, state, local and foreign income taxes. In

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addition, based on the deferred tax asset balances at March 31, 2020, we would anticipate recording a tax benefit of approximately $8.5 million if the conversion has occurred on such date.

Results of Operations

        You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. 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 this offering, we will convert 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. Revenue is reflected in accordance with ASC 606, which we adopted on January 1, 2018.

 
  For the Year Ended
December 31
   
   
  Three Months
Ended March 31
   
   
 
 
   
   
  Period-Over-
Period Change
 
(In thousands)
  2019   2018   Year-Over-Year Change   2020   2019  
 
   
   
   
   
  (unaudited)
   
   
 

Revenue:

                                                 

Software subscriptions

  $ 275,629   $ 235,663   $ 39,966     17.0 % $ 75,760   $ 64,384   $ 11,376     17.7 %

Services

    45,871     36,740     9,131     24.9 %   13,485     10,230     3,255     31.8 %

Total revenue

    321,500     272,403     49,097     18.0 %   89,245     74,614     14,631     19.6 %

Cost of Revenue:

                                                 

Software subscriptions(1)

    77,259     68,945     8,314     12.1 %   24,684     18,426     6,258     34.0 %

Services(1)

    33,119     26,753     6,366     23.8 %   14,778     7,138     7,640     107.0 %

Total cost of revenues

    110,378     95,698     14,680     15.3 %   39,462     25,564     13,898     54.4 %

Gross profit

    211,122     176,705     34,417     19.5 %   49,783     49,050     733     1.5 %

Operating expenses:

                                                 

Research and development(1)

    30,557     23,755     6,802     28.6 %   13,079     7,573     5,506     72.7 %

Selling and marketing(1)

    68,127     56,898     11,229     19.7 %   24,333     16,047     8,286     51.6 %

General and administrative(1)

    71,014     58,947     12,067     20.5 %   37,636     15,448     22,188     143.6 %

Depreciation and amortization

    8,996     7,937     1,059     13.3 %   2,869     2,045     824     40.3 %

Impairment of asset

        32,692     (32,692 )   (100.0 )%                

Other operating expense (income)

    573     (691 )   1,264     (182.9 )%   111     163     (52 )   (31.9 )%

Total operating expenses

    179,267     179,538     (271 )   (0.2 )%   78,028     41,276     36,752     89.0 %

Income (loss) from operations

    31,855     (2,833 )   34,688     1,224.4 %   (28,245 )   7,774     (36,019 )   (463.3 )%

Other (income) expense:

                                                 

Interest income

    (1,083 )   (526 )   (557 )   (105.9 )%   (355 )   (292 )   (63 )   (21.6 )%

Interest expense

    2,036     2,120     (84 )   (4.0 )%   924     537     387     72.1 %

Total other expense, net

    953     1,594     (641 )   (40.2 )%   569     245     324     132.2 %

Income (loss) before income taxes

    30,902     (4,427 )   35,329     798.0 %   (28,814 )   7,529     (36,343 )   (482.7 )%

Income tax (benefit) expense

    (155 )   1,679     (1,834 )   (109.2 )%   250     204     46     22.5 %

Net income (loss)

    31,057     (6,106 )   37,163     (608.6 )%   (29,064 )   7,325     (36,389 )   (496.8 )%

Other comprehensive (income) loss from foreign currency translations

    (5 )   355     (360 )   (101.4 )%   2,998     (21 )   (3,019 )   (14376.2 )%

Total comprehensive income (loss)

  $ 31,062   $ (6,461 ) $ 37,523     (580.7 )% $ (32,062 ) $ 7,346   $ (39,408 )   (536.5 )%

(1)
Includes stock-based compensation expenses as follows in the table below. For more details, see "Seasonality and Quarterly Trends."

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  For the Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 
 
  (In thousands)
 

Cost of revenues, software subscriptions

  $ 946   $ 512   $ 3,492   $ 131  

Cost of revenues, services

    1,419     765     5,238     197  

Research and development

    946     511     3,492     131  

Selling and marketing

    1,892     1,022     6,984     261  

General and administrative

    4,257     2,298     15,714     590  

Total stock-based compensation

  $ 9,460   $ 5,108   $ 34,920   $ 1,310  

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

 
  For the Year Ended
December 31
  Three Months Ended
March 31
 
 
  2019   2018   2020   2019  
 
   
   
  (unaudited)
 

Revenue:

                         

Software subscriptions

    85.7 %   86.5 %   84.9 %   86.3 %

Services

    14.3 %   13.5 %   15.1 %   13.7 %

Total revenue

    100.0 %   100.0 %   100.0 %   100.0 %

Cost of Revenue:

                         

Software subscriptions

    24.0 %   25.3 %   27.7 %   24.7 %

Services

    10.3 %   9.8 %   16.6 %   9.6 %

Total cost of revenues

    34.3 %   35.1 %   44.3 %   34.3 %

Gross profit

    65.7 %   64.9 %   55.7 %   65.7 %

Operating expenses:

                         

Research and development

    9.5 %   8.7 %   14.7 %   10.1 %

Selling and marketing

    21.2 %   20.9 %   27.3 %   21.5 %

General and administrative

    22.1 %   21.6 %   42.2 %   20.7 %

Depreciation and amortization

    2.8 %   2.9 %   3.2 %   2.7 %

Impairment of asset

    0.0 %   12.0 %   0.0 %   0.0 %

Other operating expense (income), net

    0.2 %   (0.2 )%   0.1 %   0.2 %

Total operating expenses

    55.8 %   65.9 %   87.5 %   55.2 %

Income (loss) from operations

    9.9 %   (1.0 )%   (31.8 )%   10.5 %

Other (income) expense:

                         

Interest income

    (0.3 )%   (0.2 )%   (0.4 )%   (0.4 )%

Interest expense

    0.6 %   0.8 %   1.0 %   0.7 %

Total other expense, net

    0.3 %   0.6 %   0.6 %   0.3 %

Income (loss) before income taxes

    9.6 %   (1.6 )%   (32.4 )%   10.2 %

Income tax (benefit) expense

    0.1 %   (0.6 )%   0.3 %   0.3 %

Net income (loss)

    9.7 %   (2.2 )%   (32.7 )%   9.9 %

Other comprehensive (income) loss from foreign currency translations

    0.0 %   0.1 %   3.4 %   (0.0 )%

Total comprehensive income (loss)

    9.7 %   (2.3 )%   (36.1 )%   9.9 %

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Table of Contents

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019 (unaudited)

Revenue

 
  Three Months
Ended March 31
   
   
 
 
  Period-Over-Period Change  
(In thousands)
  2020   2019  
 
  (unaudited)
   
   
 

Revenue:

                         

Software subscriptions

  $ 75,760   $ 64,384   $ 11,376     17.7 %

Services

    13,485     10,230     3,255     31.8 %

Total revenue

  $ 89,245   $ 74,614   $ 14,631     19.6 %

        Revenue increased $14.6 million, or 19.6%, to $89.2 million for the three months ended March 31, 2020 compared to $74.6 million for the three months ended March 31, 2019. The increase in software subscriptions revenue of $11.4 million, or 17.7%, was primarily driven by $10.5 million in revenue growth derived from our existing customers and $0.9 million of revenue from new customers.

        The $3.3 million increase in services revenue is primarily driven by an increase of $2.5 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 $0.8 million increase in recurring services revenue 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 Revenue

 
  Three Months
Ended March 31
   
   
 
 
  Period-Over-Period Change  
(In thousands)
  2020   2019  
 
  (unaudited)
   
   
 

Cost of software subscriptions revenue

  $ 24,684   $ 18,426   $ 6,258     34.0 %

        Cost of software subscriptions revenue increased $6.3 million, or 34.0%, to $24.7 million for the three months ended March 31, 2020 compared to $18.4 million for the three months ended March 31, 2019. Of this increase, 53.7% is due to an increase in stock-based compensation of $3.4 million for the three months ended March 31, 2020 over the same period in 2019. The balance of the increase of $2.9 million is due primarily to 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 revenue, the cost of software subscriptions revenue increased to 27.7% for the three months ended March 31, 2020 compared to 24.7% in March 31, 2019. Adjusting for the increase in stock-based compensation in 2020, cost of software subscriptions as a percentage of total revenue would have been 23.9% for the three months ended March 31, 2020.

Cost of Services Revenue

 
  Three Months
Ended March 31
   
   
 
 
  Period-Over-Period Change  
(In thousands)
  2020   2019  
 
  (unaudited)
   
   
 

Cost of services revenue

  $ 14,778   $ 7,138   $ 7,640     107.0 %

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        Cost of services revenue increased $7.6 million, or 107.0%, to $14.8 million for the three months ended March 31, 2020 compared to $7.1 million for the three months ended March 31, 2019. Of this increase, 66.0% is due to an increase in stock-based compensation of $5.0 million for the three months ended March 31, 2020 over the same period in 2019. The balance of the increase of $2.6 million is 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 revenue, cost of services revenue increased to 16.6% in 2020 compared to 9.6% in 2019. Adjusting for the increase in stock-based compensation in 2020, cost of services revenue as a percentage of total revenue would have been 10.9% for the three months ended March 31, 2020.

Research and Development

 
  Three Months
Ended March 31
   
   
 
 
  Period-Over-Period Change  
(In thousands)
  2020   2019  
 
  (unaudited)
   
   
 

Research and development

  $ 13,079   $ 7,573   $ 5,506     72.7 %

        Research and development expenses increased $5.5 million, or 72.7%, to $13.1 million for the three months ended March 31, 2020 compared to $7.6 million for the three months ended March 31, 2019. Of this increase, 61.0% is due to an increase in stock-based compensation of $3.4 million for the three months ended March&