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Item 7. Management’s Discussion and Analysis

2021-02-19 compared with 2020-02-21 · 180 added, 180 removed, 239 unchanged (60% of the section changed)

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

The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements and related notes included in "Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis, including information with respect to our plans and strategies for our business, includes forward-looking statements involving significant risks and uncertainties.

As a result of many factors, such as those set forth in "Risk Factors," our actual results may differ materially from the results described in, or implied by, these forward-looking statements.

This section of the Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018.

Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, and are incorporated by reference herein and considered part of this Form 10-K only to the extent referenced.

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes included in "Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis, including information with respect to our plans and strategies for our business, includes forward-looking statements involving significant risks and uncertainties.

As a result of many factors, such as those set forth in "Risk Factors," actual results may differ materially from the results described in, or implied by, these forward-looking statements.

This section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

Discussion of 2018 items and comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the year ended December 31, 2019, and are incorporated by reference herein and considered part of this Form 10-K only to the extent referenced.

(Throughout this discussion and analysis, dollars are in millions, excluding ARPU, and shares are in thousands.)

COVID-19 Pandemic

As discussed in "Our Response to the COVID-19 Pandemic," we have implemented a variety of measures to attempt to minimize its impact on our business, including a restructuring announced in June 2020 to address the sustainability of our U.S.

outbound sales and operations, which is further described in Note 13 to our financial statements.

While the pandemic did not have a material impact on our 2020 results, the extent to which it may impact our future financial results and operations will depend on future developments.

Such developments, which are highly uncertain and cannot be predicted, may include the emergence of new information concerning the severity of the outbreak and the domestic and international actions being taken to contain and treat it.

Due to the speed with which the situation continues to evolve, we are currently unable to fully determine the extent of its impact on our business, but the impact could be material to any future period affected either directly or indirectly by this pandemic.

We are actively monitoring the pandemic and the potential impacts it may have on our financial position, results of operations and cash flows in the future.

See "Risk Factors" for additional information on the risks we may face associated with COVID-19.

We are the global market leader in domain registration.

Securing a domain is usually the first step to creating a digital identity and our domain products can often serve as the starting point in our customer relationships.

As of December 31, 2020, approximately 88% of our customers had purchased a domain from us and we had 82.7 million domains under management.

Based on information reported in VeriSign's Domain Name Industry Brief, we had over 22% of the world's domains registered as of September 30, 2020.

We also offer hosting, presence and business applications products and services (products) enhancing our value proposition to our customers by enabling them to create, manage and syndicate their digital identities.

While these products are often purchased in conjunction with, or subsequent to, an initial domain registration, they may also be the starting points in our customer relationships.

As we have grown, our hosting, presence and business applications products have become increasingly important parts of our business, constituting approximately 55% of total revenue in 2019.

We also offer hosting, presence and business applications products and services (products) enhancing our value proposition by enabling our customers to create, manage and syndicate their, or their customers', digital identities.

These products are often purchased in conjunction with, or subsequent to, an initial domain registration.

As we have grown, these products have become increasingly important parts of our business, constituting approximately 54% of total revenue in 2020.

Financial Highlights

Below are our key financial highlights for 2019, with comparisons to 2018.

Below are key financial highlights for 2020, with comparisons to 2019.

• Total revenue of $3,316.7 million, an increase of 11.0%, or approximately 11.4% on a constant currency basis (1) .

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• Total bookings (2) of $3,775.5 million, an increase of 11.0%, or approximately 11.6% on a constant currency basis (1) .

• Net income of $138.4 million.

• Total customers increased 4.1% to 19.3 million.

• ARPU increased 6.6% to $158.

• Net loss of $494.1 million, which includes a $674.7 million charge incurred in connection with the settlement of our obligations under the TRAs, as discussed in Note 16 to our financial statements.

• Net cash provided by operating activities of $764.6 million, an increase of 5.7%.

(1) Discussion of constant currency is set forth in "Quantitative and Qualitative Disclosures about Market Risk."

(2) A reconciliation of total bookings to total revenue, its most directly comparable GAAP financial measure, is set forth in "Selected Financial Data—Reconciliation of Bookings."

(2) A reconciliation of total bookings to total revenue, its most directly comparable GAAP financial measure, is set forth in "Reconciliation of Bookings" below.

Our Financial Model

We have developed a stable and predictable business model driven by efficient customer acquisition, high customer retention rates and increasing lifetime spend.

We grew our total customers from 17.3 million as of December 31, 2017 to 19.3 million as of December 31, 2019, through a combination of our industry leading products built on a single cloud platform, brand advertising, direct marketing efforts, customer referrals and world-class customer care.

In each of the five years ended December 31, 2019, our customer retention rate exceeded 85%, and in 2019, our retention rate for customers who had been with us for over three years was approximately 92%.

We grew our total customers from 17.3 million as of December 31, 2017 to 20.6 million as of December 31, 2020, through a combination of our industry leading products built on a single cloud platform, brand advertising, direct marketing efforts, customer referrals, world-class customer care and acquisitions.

In each of the five years ended December 31, 2020, our customer retention rate exceeded 85%, and in 2020, our retention rate for customers who had been with us for over three years was more than 93%.

We believe the breadth and depth of our product offerings and the high quality and responsiveness of our customer care team build strong relationships with our customers and are key to our high level of customer retention.

We generate bookings and revenue from sales of product subscriptions, including domain products, hosting and presence products and business applications, as described below.

We offer our product subscriptions on a variety of terms, which average one year, but can range from monthly to multi-annual terms of up to ten years depending on the product.

We generate bookings and revenue from sales of product subscriptions, including domain products, hosting and presence products and business applications products.

We offer our subscriptions on a variety of terms, which average approximately one year, but can range from monthly to multi-annual terms of up to ten years depending on the product.

We monitor total bookings as we typically collect payment at the time of sale and recognize revenue ratably over the term of our customer contracts.

Accordingly, we believe total bookings is an indicator of the expected growth in our revenue and the operating performance of our business.

See "Selected Financial Data—Reconciliation of Bookings" for a reconciliation of total revenue to total bookings.

We generated 45% of our 2019 total revenue from the sale of domain products, primarily from domain registrations and renewals, domain add-ons such as privacy and aftermarket sales.

Accordingly, we believe total bookings is an indicator of the expected growth in our revenue and is a supplemental measure of the operating performance of our business.

See "Reconciliation of Bookings" below for a reconciliation of total bookings to total revenue.

We generated 46% of our 2020 total revenue from the sale of domain products, primarily from domain registrations and renewals, aftermarket domain sales and domain add-ons such as domain protection.

Total revenue from domain products grew at a CAGR of 12.7% over the three years ended December 31, 2020.

Hosting and Presence .

We generated 38% of our 2019 total revenue from the sale of hosting and presence products, primarily from a variety of website hosting products, website building products, security products and e-commerce products.

These products generally have higher margins than conventional domain registrations.

We generated 36% of our 2020 total revenue from the sale of hosting and presence products, primarily from a variety of website hosting products, website security products and website building products, which generally have higher margins than conventional domain registrations.

Total revenue from hosting and presence products grew at a CAGR of 12.3% over the three years ended December 31, 2020.

Business Applications .

We generated 17% of our 2019 total revenue from the sale of business applications products, primarily from productivity tools such as domain-specific email accounts, which generally also have higher margins than conventional domain registrations.

We generated 18% of our 2020 total revenue from the sale of business applications products, primarily from third-party productivity applications, which generally also have higher margins than conventional domain registrations.

Total revenue from business applications products grew at a CAGR of 22.5% over the three years ended December 31, 2020.

Revenue derived from each of our product categories has increased in each of the last three years, with our hosting, presence and business applications products growing faster in recent periods.

This mix shift has favorably impacted our margins.

Revenue derived from each of our product categories has increased in each of the last three years, with many of our non-domains products growing faster in recent periods.

In each of the five years ended December 31, 2020, greater than 85% of our total revenue, excluding the impact of purchase accounting, was generated by customers who were also customers in the prior year.

To track our growth and the stability of our customer base, we monitor, among other things, revenue, retention rates and ARPU generated by our annual customer cohorts over time, as well as corresponding marketing and advertising spend.

To track our growth and the stability of our customer base, we monitor, among other things, revenue, retention rates and average revenue per user (ARPU) generated by our annual customer cohorts over time, as well as corresponding marketing and advertising spend.

We define an annual customer cohort to include each customer who first became a customer during a calendar year.

For example, in 2014, we acquired 2.9 million customers, who we collectively refer to as our 2014 cohort, and spent $165 million in marketing and advertising expenses.

For example, in 2014, we acquired 2.9 million gross customers, who we collectively refer to as our 2014 cohort, and spent $165 million in marketing and advertising expenses.

By the end of 2020, the 2014 cohort had generated an aggregate of $1,472 million of total bookings and we expect this cohort will continue to generate bookings and revenue in the future.

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We believe our cohort analysis is important to illustrate the long-term value of our customers.

As described in "Selected Financial Data," we monitor the following key metrics to help us evaluate our business and assess operational performance.

These operational measures are supplemental to our GAAP results and we believe they are useful in evaluating our business.

A reconciliation of total bookings to total revenue, its most directly comparable GAAP financial measure, is set forth in "Selected Financial Data—Reconciliation of Bookings."

Year Ended December 31,

2019 2018 2017

Total bookings $ 3,401.2 $ 3,011.5 $ 2,618.2

Total customers at period end (in thousands) 19,274 18,518 17,339

Average revenue per user $ 158 $ 148 $ 139

Total bookings .

The 12.9% increase in total bookings in 2019 was primarily driven by an increase in total customers and domains under management, increased aftermarket domain sales and broadened customer adoption of non-domain products, partially offset by the impact of movements in foreign currency exchange rates.

Total customers.

The 4.1% increase in total customers in 2019 primarily resulted from our increased international presence, our ongoing marketing and advertising initiatives and our enhanced and expanded product offerings.

Average revenue per user .

The 6.6% increase in ARPU in 2019 was primarily due to broadened customer adoption of our products resulting in increased customer spend combined with a full year of revenue from our July 2018 acquisition of Main Street Hub (MSH).

Results of Operations

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General and administrative 323.8 9.8 % 362.1 12.1 % 334.0 12.6 %

Restructuring charges 43.6 1.3 % — — % — — %

Depreciation and amortization 202.7 6.1 % 209.7 7.0 % 234.1 8.8 %

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Other income (expense), net (1.6) — % 22.0 0.7 % 6.9 0.3 %

Income from continuing operations before income taxes 126.4 4.2 % 73.0 2.8 % 106.8 4.8 %

Income (loss) before income taxes (495.4) (14.9) % 126.4 4.2 % 73.0 2.8 %

Benefit for income taxes 1.3 — % 12.0 0.4 % 9.0 0.3 %

Income from continuing operations 138.4 4.6 % 82.0 3.1 % 125.7 5.6 %

Income from discontinued operations, net of income taxes — — % — — % 14.1 0.6 %

Net income 138.4 4.6 % 82.0 3.1 % 139.8 6.2 %

Net income (loss) (494.1) (14.9) % 138.4 4.6 % 82.0 3.1 %

net income attributable to non-controlling interests 1.0 — % 1.4 — % 4.9 0.2 %

Net income attributable to GoDaddy Inc.

Net income (loss) attributable to GoDaddy Inc.

$ (495.1) (14.9) % $ 137.0 4.6 % $ 77.1 2.9 %

Operating Metrics

In addition to our results determined in accordance with GAAP, we believe the following operating metrics are useful as supplements in evaluating our ongoing operational performance and help provide an enhanced understanding of our business:

Year Ended December 31,

2020 2019 2018

Total bookings $ 3,775.5 $ 3,401.2 $ 3,011.5

Total customers at period end (in thousands) 20,646 19,274 18,518

Average revenue per user $ 166 $ 158 $ 148

Total bookings .

Total bookings represents cash receipts from the sale of products to customers in a given period adjusted for products where we recognize revenue on a net basis and without giving effect to certain adjustments, primarily net refunds granted in the period.

Total bookings provides valuable insight into the sales of our products and the performance of our business since we typically collect payment at the time of sale and recognize revenue ratably over the term of our customer contracts.

We report total bookings without giving effect to refunds granted in the period because refunds often occur in periods different from the period of sale for reasons unrelated to the marketing efforts leading to the initial sale.

Accordingly, by excluding net refunds, we believe total bookings reflects the effectiveness of our sales efforts in a given period.

Total customers .

We define a customer as an individual or entity, as of the end of a period, having an account with one or more paid product subscriptions.

A single user may be counted as a customer more than once if they maintain paid subscriptions in multiple accounts.

Total customers is one way we measure the scale of our business and is an important part of our ability to increase our revenue base.

Average revenue per user .

We calculate ARPU as total revenue during the preceding 12 month period divided by the average of the number of total customers at the beginning and end of the period.

ARPU provides insight into our ability to sell additional products to customers, though the impact to date has been muted due to our continued growth in total customers.

Reconciliation of Bookings

The following table reconciles total bookings to total revenue, its most directly comparable GAAP financial measure:

Year Ended December 31,

2020 2019 2018

Total revenue $ 3,316.7 $ 2,988.1 $ 2,660.1

Change in deferred revenue (1)

210.5 180.5 163.2

Net refunds 247.3 233.4 192.6

Other 1.0 (0.8) (4.4)

Total bookings $ 3,775.5 $ 3,401.2 $ 3,011.5

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(1) Change in deferred revenue also includes the impact of realized gains or losses from the hedging of bookings in foreign currencies.

Comparison of 2020 and 2019

We generate substantially all of our revenue from sales of subscriptions, including domain registrations and renewals, hosting and presence products and business applications.

We generate substantially all of our revenue from sales of subscriptions, including domain registrations and renewals, hosting and presence products and business applications products.

Our subscription terms average one year, but can range from monthly terms to multi-annual terms of up to ten years depending on the product.

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Revenue is presented net of refunds, and we maintain a reserve to provide for refunds granted to customers.

Domains revenue primarily consists of revenue from the sale of domain registration subscriptions, domain add-ons and aftermarket domain sales.

Domains revenue primarily consists of revenue from the sale of domain registration subscriptions, aftermarket domain sales and domain add-ons such as domain protection.

Domain registrations provide a customer with the exclusive use of a domain during the applicable contract term.

After the contract term expires, unless renewed, the customer can no longer access the domain.

Hosting and presence revenue primarily consists of revenue from the sale of subscriptions for our website hosting products, website building products, website security products and online visibility products.

Hosting and presence revenue primarily consists of revenue from the sale of subscriptions for website hosting, website security and website building products.

Business applications revenue primarily consists of revenue from the sale of subscriptions for third-party productivity applications, email accounts, email marketing tools and telephony solutions.

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Total revenue $ 3,316.7 $ 2,988.1 $ 2,660.1 $ 328.6 11 % $ 328.0 12 %

The 12.3% increase in total revenue was driven by growth in total customers and ARPU as well as having a full year of revenue from MSH in 2019, partially offset by the impact of movements in foreign currency exchange rates.

The 11.0% increase in total revenue was driven by the 7.1% growth in total customers, the 5.1% growth in ARPU as well as incremental revenue from acquisitions completed in 2020.

The increase in customers impacted each of our revenue lines, as the additional customers purchased subscriptions across our product portfolio.

The 10.8% increase in domains revenue was primarily driven by the increase in domains under management from 77.6 million as of December 31, 2018 to 79.6 million as of December 31, 2019, increased aftermarket domain sales and international growth.

These increases were partially offset by the impact of adverse movements in foreign currency exchange rates.

The 12.1% increase in domains revenue was primarily driven by the increase in domains under management from 79.6 million as of December 31, 2019 to 82.7 million as of December 31, 2020, incremental revenue from acquisitions completed in 2020 and increased aftermarket domain sales and international growth.

Domains under management in 2020 was impacted by:

(i) approximately 0.8 million domains added from an acquisition and (ii) the expiration of approximately 1.0 million .uk domains for which we provided free initial registration to the owners of the associated third-level domains (e.g.

.co.uk) following the 2017 launch of the .uk ccTLD.

Hosting and presence.

The 10.7% increase in hosting and presence revenue was primarily driven by increased revenue from our website building and website security products as well as our acquisition of MSH.

The 6.6% increase in hosting and presence revenue was primarily driven by increased demand for our website building and website security products, partially offset by the adverse impact of lower demand for certain higher-priced subscriptions, such as GoDaddy Social, as a result of the economic disruption resulting from the COVID-19 pandemic.

Business applications .

The 20.8% increase in business applications was primarily driven by increased customer adoption of our email, productivity and telephony solutions.

The 17.8% increase in business applications revenue was primarily driven by increased customer adoption of our productivity solutions as well as an increase in customers purchasing higher product tiers.

The following table presents our total bookings for the periods indicated:

Year Ended December 31, 2020 to 2019 2019 to 2018

2020 2019 2018 $ change % change $ change % change

Total bookings (1)

$ 3,775.5 $ 3,401.2 $ 3,011.5 $ 374.3 11 % $ 389.7 13 %

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(1) A reconciliation of total bookings to total revenue, its most directly comparable GAAP financial measure, is set forth in "Reconciliation of Bookings" above.

The 11.0% increase in total bookings was primarily driven by increases in total customers and domains under management, increased aftermarket domain sales, broadened customer adoption of non-domain products and acquisitions completed in 2020, partially offset by the negative impact the economic disruption resulting from the COVID-19 pandemic had on subscriptions for certain of our higher-priced services as well as the adverse impact of movements in foreign currency exchange rates.

Costs and Operating Expenses

Cost of revenue

Costs of revenue are the direct costs we incur in connection with selling an incremental product to our customers.

Substantially all cost of revenue relates to domain registration fees paid to the various domain registries, payment processing fees, third-party commissions and licensing fees for third-party productivity applications.

Costs of revenue are the direct costs incurred in connection with selling an incremental product to our customers.

Substantially all cost of revenue relates to domain registration fees, payment processing fees, third-party commissions and licensing fees for third-party productivity applications.

Similar to our billing practices, we pay domain costs at the time of purchase for the life of each subscription, but recognize the costs of service ratably over the term of our customer contracts.

The terms of registry pricing are established by agreements between registries and registrars, and can vary significantly depending on the TLD.

We expect cost of revenue to increase in absolute dollars in future periods as we expand our domains business, increase our sales of third-party productivity applications, increase our customer base and expand our international presence.

Cost of revenue may increase or decrease as a percentage of total revenue, depending on the mix of products sold in a particular period.

The terms of registry pricing are established by agreements between registries and registrars, and can vary significantly depending on the top-level domain.

We expect cost of revenue to increase in absolute dollars in future periods related to the expansion of our domains business, higher sales of third-party productivity applications and growth in our customer base.

However, cost of revenue may fluctuate as a percentage of total revenue, depending on the mix of products sold in a particular period.

Subsequent to our acquisition of the registry operations of Neustar in August 2020, we no longer incur domain registration fees on purchases of former Neustar TLDs.

Year Ended December 31, 2020 to 2019 2019 to 2018

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$ 1,158.6 $ 1,026.8 $ 893.9 $ 131.8 13 % $ 132.9 15 %

The 14.9% increase in cost of revenue was primarily attributable to higher domain costs driven by the increase in domains under management and increased aftermarket domain sales, increased software licensing fees resulting from higher sales of email and productivity solutions and increased payment processing fees resulting from our bookings growth.

The 12.8% increase in cost of revenue was primarily attributable to higher domain costs driven by increases in domains under management and aftermarket domain sales, increased software licensing fees resulting from higher sales of productivity solutions and increased payment processing fees resulting from our bookings growth.

Technology and development

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These expenses primarily consist of personnel costs associated with the design, development, deployment, testing, operation and enhancement of our products, as well as costs associated with the data centers and systems infrastructure supporting those products, excluding depreciation expense.

We expect technology and development expense to increase in absolute dollars as we continue to enhance existing products, develop new products and migrate our infrastructure to a cloud-based third-party provider.

Technology and development expenses may increase or decrease as a percentage of total revenue depending on our level of investment in additional personnel and the pace of our infrastructure transition.

Our investments in additional technology and development expenses are made to enhance our integrated technology infrastructure and to support our new and enhanced product offerings and the overall growth of our business.

We expect technology and development expense to increase in absolute dollars as we continue to invest in product development and migrate our infrastructure to a cloud-based third-party provider.

Technology and development expenses may fluctuate as a percentage of total revenue depending on our level of investment in additional personnel and the pace of our infrastructure transition.

Year Ended December 31, 2020 to 2019 2019 to 2018

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$ 560.4 $ 492.6 $ 434.0 $ 67.8 14 % $ 58.6 14 %

Excluding the impact of the $7.2 million equity-based compensation correction discussed in Note 7 to our financial statements, technology and development expenses increased 15.2%, primarily attributable to increased compensation-related costs driven by higher average headcount associated with our continued product development and increased software costs related to the growth of our business.

As discussed in our 2019 Form 10-K, we recorded a $7.2 million reduction in equity-based compensation expense in 2019 to correct an error related to the accounting for certain PSUs in prior periods.

Excluding this correction, technology and development expenses increased 12.1%, primarily as a result of increased personnel costs driven by higher average headcount associated with our continued investment in product development and increased technology costs associated with the growth of our business and our migration to a cloud-based infrastructure.

Marketing and advertising

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These expenses also include personnel costs and affiliate program commissions.

We expect marketing and advertising expenses to fluctuate both in absolute dollars and as a percentage of total revenue depending on both the mix of internal and external marketing resources used and the size and scope of our future campaigns.

We expect marketing and advertising expenses to fluctuate depending on both the mix of internal and external marketing resources used, the size and scope of our future campaigns and the level of discretionary investments we make in marketing to drive future sales.

Year Ended December 31, 2020 to 2019 2019 to 2018

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$ 438.5 $ 345.6 $ 291.4 $ 92.9 27 % $ 54.2 19 %

The 18.6% increase in marketing and advertising expenses was primarily attributable to increased discretionary advertising spend and compensation-related costs driven by higher average headcount associated with continued growth of our business.

The 26.9% increase in marketing and advertising expenses was primarily attributable to increased discretionary spending and personnel costs associated with additional marketing investments we made in 2020 to capture increased demand for certain of our products during the COVID-19 pandemic.

Customer care

Customer care expenses represent the costs to guide and service our customers, primarily consisting of personnel costs.

We expect these expenses to increase in absolute dollars in the future as we expand our domestic and international Customer Care teams due to increases in total customers and increases in the number of interactions we have with our customers.

We expect customer care expenses to fluctuate as a percentage of total revenue depending on the level of personnel required to support the continued growth of our business.

We expect customer care expenses to fluctuate depending on the level of personnel required to support our business.

Year Ended December 31, 2020 to 2019 2019 to 2018

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$ 316.9 $ 348.7 $ 323.1 $ (31.8) (9) % $ 25.6 8 %

The 7.9% increase in customer care expenses was primarily driven by increased costs associated with the continued expansion of our international third-party Customer Care locations, the continued growth of our business, our acquisition of MSH and an increased level of customer interactions.

The 9.1% decrease in customer care expenses was primarily due to the headcount reductions related to the restructuring plan implemented during the second quarter of 2020, as further discussed below, in conjunction with operating efficiencies gained as we scale our business and increase our use of alternative methods of customer interaction.

We expect these expenses to remain lower in the short-term as a result of the headcount reductions associated with the restructuring.

General and administrative

General and administrative expenses primarily consist of personnel costs for our administrative functions, professional service fees, office rent for all locations, all employee travel expenses, acquisition-related expenses and other general costs.

We expect general and administrative expenses to increase in absolute dollars in the future as a result of our overall growth, increased personnel costs and public company expenses.

We expect general and administrative expenses to fluctuate depending on the level of personnel and other administrative costs required to support our business as well as the significance of any strategic acquisitions we choose to pursue.

Year Ended December 31, 2020 to 2019 2019 to 2018

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$ 323.8 $ 362.1 $ 334.0 $ (38.3) (11) % $ 28.1 8 %

Excluding the impact of the $6.1 million equity-based compensation correction and the $18.1 million legal settlement accrual discussed in Note 7 and Note 13 to our financial statements, respectively, general and administrative expenses increased 4.8%, primarily due to increased compensation-related costs driven by increased average headcount associated with the continued growth of our business and our acquisition of MSH, partially offset by lower acquisition-related expenses.

General and administrative, adjusted for certain items described below $ 333.8 $ 350.1 $ 334.0 $ (16.3) (5) % $ 16.1 5 %

The following items are included in general and administrative expenses in the periods indicated:

• As discussed in Note 12 to our financial statements, we recorded an $18.1 million legal settlement accrual in 2019.

During 2020, we reduced the settlement accrual by an aggregate of $10.0 million.

• As discussed in our 2019 Form 10-K, we recorded a $6.1 million reduction in equity-based compensation expense in 2019 to correct an error related to the accounting for certain PSUs in prior periods.

Excluding the items described above, the 4.7% decrease in general and administrative expenses was primarily driven by lower travel and other general costs, partially offset by an increase in acquisition-related expenses.

Restructuring charges

The $43.6 million in restructuring charges in 2020 were incurred pursuant to a restructuring plan implemented in June 2020, as further discussed in Note 13 to our financial statements.

We implemented the restructuring to address the sustainability of our U.S.

outbound sales and operations, which faced challenges with respect to soft customer demand for certain higher-priced, do-it-for-you services such as GoDaddy Social.

These challenges were exacerbated by the economic disruption resulting from the COVID-19 pandemic.

Restructuring charges included:

(i) $14.6 million in severance and related benefits to be paid to, or on behalf of, the approximately 470 employees who were involuntarily terminated and the approximately 110 employees who voluntarily did not accept alternate roles with us, as well as professional fees incurred in connection with the restructuring;

(ii) a $27.9 million impairment of operating lease assets associated with the closure of our leased offices in Austin, Texas;

and (iii) $1.1 million of accelerated depreciation and operating lease assets amortization related to the office closures.

We do not expect to incur any significant additional charges related to this restructuring.

Depreciation and amortization

Depreciation and amortization expenses consist of charges relating to the depreciation of the property and equipment used in our operations and the amortization of acquired intangible assets.

Depreciation and amortization may increase or decrease in absolute dollars in future periods depending on our future level of capital investments in hardware and other equipment as well as amortization expense associated with future acquisitions.

These expenses may increase or decrease in absolute dollars in future periods depending on our future level of capital investments in hardware and other equipment as well as the significance of any future acquisitions.

Year Ended December 31, 2020 to 2019 2019 to 2018

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$ 202.7 $ 209.7 $ 234.1 $ (7.0) (3) % $ (24.4) (10) %

The 10.4% decrease in depreciation and amortization expenses was primarily driven by intangible assets that became fully amortized during 2019.

The 3.3% decrease in depreciation and amortization expenses resulted from assets that became fully depreciated, partially offset by the impact of increased amortization expense related to acquisitions completed in 2020.

Interest expense

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$ 91.3 $ 92.1 $ 98.4 $ (0.8) (1) % $ (6.3) (6) %

There was no material change in interest expense.

The 0.9% decrease in interest expense was driven by more favorable effective interest rates on our variable rate borrowings, partially offset by the issuance of additional long-term debt in August 2020.

Loss on debt extinguishment

In 2019, we recognized a loss on debt extinguishment of $14.8 million, primarily related to the $600.0 million partial prepayment of our existing Term Loans with the proceeds of the issuance of the Senior Notes.

In 2019, we recognized a loss on debt extinguishment of $14.8 million, primarily related to the $600.0 million partial prepayment of term loan borrowings with the proceeds of the issuance of the Senior Notes.

See Note 9 to our financial statements for additional discussion.

Tax receivable agreements liability adjustment

In 2020, we recorded a $674.7 million charge as a result of the settlement of our obligations under the TRAs, as further described below and in Note 16 to our financial statements.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash flow generated from operations, long-term debt borrowings and stock option exercises.

Our principal uses of cash have been to fund operations, acquisitions and capital expenditures, as well as make interest payments and mandatory principal payments on our long-term debt and repurchase shares of our Class A common stock.

In general, we seek to deploy our capital in a systematically prioritized manner focusing first on requirements for operations, then on growth investments, and finally on equity holder returns.

Our principal uses of cash have been to fund operations, acquisitions and capital expenditures, as well as to make mandatory principal and interest payments on our long-term debt and to repurchase shares of our Class A common stock.

In general, we seek to deploy our capital in a prioritized manner focusing first on requirements for our operations, then on growth investments, and finally on equity holder returns.

Our strategy is to deploy capital from any potential source, whether debt, equity or internally generated cash, depending on the adequacy and availability of the source of capital and which source may be used most efficiently and at the lowest cost at such time.

Therefore, while cash from operations is our primary source of operating liquidity and we believe our internally-generated cash flows are sufficient to support our day-to-day operations, we may use a variety of capital sources to fund our needs for less predictable investment decisions such as strategic acquisitions and share repurchases.

We have incurred significant long-term debt, as described below, to fund acquisitions and for our working capital needs.

As a result of our debt, we are limited as to how we conduct our business and we may be unable to raise additional debt or equity financing or limited in the amount we are able to raise to compete effectively or to take advantage of new business opportunities, strategic acquisitions or share repurchases.

However, the restrictions under our debt agreements are subject to a number of qualifications and may be amended with the consent of the lenders and the holders of the Senior Notes, as applicable.

We believe our existing cash and cash equivalents and internally-generated cash flows will be sufficient to meet our anticipated operating cash needs for at least the next 12 months.

However, our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support domestic and international development efforts, continued brand development and advertising spend, the expansion of Customer Care and general and administrative activities, the introduction of new and enhanced product offerings, the costs to support new and replacement capital equipment, the completion of strategic acquisitions or share repurchases.

Should we pursue additional strategic acquisitions or share repurchases, we may need to raise additional capital, which may be in the form of additional long-term debt or equity financings.

We have incurred significant long-term debt to fund acquisitions and the settlement of the TRAs (as further discussed below) as well as for our working capital needs, and as a result, we are limited as to how we conduct our business and may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities, strategic acquisitions or share repurchases.

However, the restrictions under our long-term debt agreements are subject to a number of qualifications and may be amended with the consent of the lenders and the holders of the Senior Notes, as applicable.

We believe our existing cash and cash equivalents and cash generated by operating activities will be sufficient to meet our anticipated operating cash needs for at least the next 12 months.

However, our future capital requirements will depend on many factors, including our growth rate, macroeconomic activity, the length and severity of business disruptions associated with the COVID-19 pandemic, the timing and extent of spending to support domestic and international development efforts, continued brand development and advertising spend, the level of customer care and general and administrative activities, the introduction of new and enhanced product offerings, the costs to support new and replacement capital equipment, the completion of strategic acquisitions or share repurchases and other factors.

Some of the factors that may influence our operations are not within our control, such as general economic conditions and the length and severity of the ongoing COVID-19 pandemic.

Although there is uncertainty related to the potential impact of COVID-19 on our future results, we believe our business model and the strength of our balance sheet have well positioned us to manage our business through this crisis.

However, we will continue to monitor our liquidity position.

Should we pursue additional strategic acquisitions or share repurchases, we may need to raise additional capital, which may be in the form of long-term debt or equity financings.

Credit Facility and Senior Notes

Our credit facility, which matures on February 15, 2024, consists of term loans and a revolving credit loan.

In June 2019, we issued the unsecured 5.25% Senior Notes in an aggregate principal amount of $600.0 million.

The full principal of the Senior Notes is payable at maturity on December 1, 2027, subject to earlier repurchase or redemption, as described in the indenture governing the Senior Notes.

The proceeds from the issuance of the Senior Notes were used to prepay $600.0 million in aggregate principal amount of term loans.

Concurrent with the issuance of the Senior Notes, we amended our credit facility to increase the borrowing capacity of the revolving credit loan to $600.0 million and reduce its interest rate margins.

See further discussion of our debt agreements in Note 10 to our financial statements.

Our debt agreements contain covenants restricting, among other things, our ability, or the ability of our subsidiaries, to incur indebtedness, issue certain types of equity, incur liens, enter into fundamental changes including mergers and consolidations, sell assets, make restricted payments including dividends, distributions and investments, prepay junior indebtedness and engage in operations other than in connection with acting as a holding company, subject to customary exceptions.

As of December 31, 2019, we were in compliance with all such covenants and had no amounts drawn on the revolving credit loan.

Our long-term debt obligations consist of the Credit Facility and the Senior Notes.

In August 2020, we increased our borrowings under the Credit Facility through the issuance of an additional $750.0 million in term loans, which were used to partially fund the payments associated with the settlement of our obligations under the TRAs, as discussed below.

See Note 9 to our financial statements for additional information regarding our long-term debt.

Our long-term debt agreements contain covenants restricting, among other things, our ability, or the ability of our subsidiaries, to incur indebtedness, issue certain types of equity, incur liens, enter into fundamental changes including mergers and consolidations, sell assets, make restricted payments including dividends, distributions and investments, prepay junior indebtedness and engage in operations other than in connection with acting as a holding company, subject to customary exceptions.

As of December 31, 2020, we were in compliance with all such covenants and had no amounts drawn on our revolving credit loan.

We currently have no reason to believe we will be unable to satisfy these covenants;

however, the economic disruption resulting from the COVID-19 pandemic has made it more difficult to forecast our future results.

As further discussed in Note 10 to our financial statements, we have hedged a portion of our long-term debt through the use of cross-currency and interest rate swap derivative instruments.

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Tax Receivable Agreements

As described in "Critical Accounting Policies and Estimates—Payable to Related Parties Pursuant to the TRAs," we are a party to five TRAs.

As of December 31, 2019, the liability under the TRAs was $175.3 million, as described in Note 16 to our financial statements.

We currently do not expect to begin making payments related to the existing liability under the TRAs until 2023.

We may record additional liabilities under the TRAs as our estimates of the future utilization of the tax attributes, NOLs and other tax benefits change.

Because we are a holding company with no operations, we rely on Desert Newco to provide us with funds necessary to meet any financial obligations.

If we do not have sufficient funds to pay TRA, tax or other liabilities or to fund our operations (as a result of Desert Newco's inability to make distributions to us due to various limitations and restrictions or as a result of the acceleration of our obligations under the TRAs), we may have to borrow funds and thus our liquidity and financial condition could be materially and adversely affected.

As discussed in Note 16 to our financial statements, we entered into settlement and release agreements with respect to four of the TRAs and an amendment to the fifth TRA, pursuant to which settled all of our obligations under the TRAs in exchange for aggregate payments totaling $850.0 million, of which $849.8 million was paid during 2020.

Upon payment, we were released from all obligations to the parties to the TRAs, including the holders of unexchanged LLC Units.

The settlement payments were funded with a combination of cash and the proceeds from the issuance of the new term loans discussed above.

By entering into the TRA Settlement Agreements, we were able to achieve an attractive return by settling our obligations under the TRAs at a significant discount to the approximately $1.8 billion in estimated payments we would have potentially otherwise made under these agreements, assuming we are able to fully utilize the relevant acquired tax benefits.

Share Repurchase Programs

Our Board has authorized two separate $500.0 million share repurchase programs, as described in Note 6 to our financial statements.

During 2019, we repurchased a total of 7,125 shares of our Class A common stock in the open market under these programs, which were retired upon repurchase for an aggregate purchase price of $458.6 million, including commissions.

As of December 31, 2019, we have $541.4 million available to make additional repurchases under these programs.

Subsequent Events

In February 2020, we entered into agreements for two acquisitions with an aggregate purchase price of approximately $196.9 million, of which $149.1 million has been paid in cash.

The remaining $47.8 million will be paid upon receipt of certain regulatory approvals and satisfaction of other customary closing conditions as well as upon the expiration of the contractual holdback period.

Our Board has authorized a $500.0 million share repurchase program, as described in Note 5 to our financial statements.

During 2019 and 2020, we repurchased a total of 7,125 and 9,986 shares of our Class A common stock in the open market, respectively, pursuant to our previous share repurchase programs, for an aggregate purchase price of $458.6 million and $541.7 million, respectively, including commissions.

As of December 31, 2020, we have $500.0 million remaining available under our current share repurchase program.

See Note 3 to our financial statements for a discussion of cash payments made in connection with acquisitions completed in 2020.

In February 2021, we acquired Poynt Co.

for $329.2 million in cash paid at closing and an additional $45.0 million in deferred cash payments subject to certain performance and employment conditions over the three years subsequent to the closing date.

Poynt offers a suite of products allowing small businesses to sell and accept payments anywhere, including point-of-sale systems, payments, invoicing and transaction management.

Restructuring

As discussed in Note 13 to our financial statements, we implemented a restructuring plan in June 2020 to address the sustainability of our U.S.

outbound sales and operations.

Cash payments of $14.4 million related to the restructuring were made during 2020, and no material amounts remain as of December 31, 2020.

The following table summarizes our cash flows for the periods indicated:

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Effect of exchange rate changes on cash and cash equivalents 1.8 (0.8) (2.3)

Net increase in cash and cash equivalents $ 130.4 $ 349.7 $ 16.6

Net increase (decrease) in cash and cash equivalents $ (297.6) $ 130.4 $ 349.7

Operating Activities

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We expect cash inflows from operating activities to be primarily affected by increases in total bookings.

Our primary uses of cash from operating activities have been for domain registration costs paid to registries, software licensing fees related to third-party email and productivity solutions, personnel costs, discretionary marketing and advertising costs, technology and development costs and interest payments.

Our primary uses of cash from operating activities have been for domain registration costs paid to registries, licensing fees related to third-party productivity solutions, personnel costs, discretionary marketing and advertising costs, technology and development costs and interest payments.

We expect cash outflows from operating activities to be affected by the timing of payments we make to registries and increases in personnel and other operating costs as we continue to grow our business and increase our international presence.

Net cash provided by operating activities increased $163.6 million from $559.8 million in 2018 to $723.4 million in 2019, primarily driven by our bookings growth as well as increased interest income.

Net cash provided by operating activities increased $41.2 million from $723.4 million in 2019 to $764.6 million in 2020, primarily driven by our bookings growth.

Investing Activities

Our investing activities primarily consist of strategic acquisitions and purchases of property and equipment to support the overall growth of our business and our increased international presence.

Our investing activities primarily consist of strategic acquisitions and purchases of property and equipment to support the overall growth of our business.

We expect our investing cash flows to be affected by the timing of payments we make for capital expenditures and the strategic acquisition or other growth opportunities we decide to pursue.

Net cash used in investing activities decreased $119.5 million from $254.8 million in 2018 to $135.3 million in 2019, primarily due to a $106.9 million decrease in business acquisitions.

Net cash used in investing activities increased $347.0 million from $135.3 million in 2019 to $482.3 million in 2020, primarily due to a $384.4 million increase in spending for business acquisitions, partially offset by a $21.1 million decrease in capital expenditures and a $27.9 million increase in net inflows from short-term investments.

Financing Activities

Our financing activities primarily consist of long-term debt borrowings, the repayment of principal on long-term debt, stock option exercises and share repurchases.

Net cash from financing activities decreased $503.9 million from $47.0 million provided in 2018 to $456.9 million used in 2019, primarily resulting from $458.6 million of share repurchases in 2019, a $44.4 million increase in acquisition contingent consideration payments and $13.2 million of financing-related costs paid in 2019.

Net cash used in financing activities increased $124.8 million from $456.9 million in 2019 to $581.7 million in 2020, primarily due to $849.8 million in TRA settlement payments in 2020 and an $83.1 million increase in share repurchases, partially offset by the receipt of $746.3 million in net proceeds from the issuance of new term loans and a $54.3 million decrease in acquisition contingent consideration payments.

Deferred Revenue

See Note 8 to our financial statements for details regarding the expected future recognition of deferred revenue as of December 31, 2019.

See Note 7 to our financial statements for details regarding the expected future recognition of deferred revenue.

Contractual Obligations

The following table summarizes our material contractual obligations and commitments as of December 31, 2020:

Payments due by period

Total Payments Payments due by period

1 year 2-3 years 4-5 years 5+ years

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208.2 83.3 112.5 12.3 0.1

TRA payments (5)

— — 36.3 139.0

Total material contractual obligations $ 4,070.5 $ 252.6 $ 410.6 $ 1,915.8 $ 1,491.5

_________________________________

(1) See Note 9 to our financial statements for information regarding the terms of our long-term debt agreements.

(2) Interest on long-term debt excludes both the amortization of deferred debt issuance costs and original issue discount and the expected benefits associated with our interest rate swap.

(2) Interest on long-term debt excludes both the amortization of deferred debt issuance costs and original issue discount and the expected benefits associated with our interest rate swap arrangements.

Interest on our variable rate debt is calculated using the rate in effect at December 31, 2020.

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(4) See Note 12 to our financial statements for information regarding our service agreement commitments.

(5) Reflects the estimated timing of TRA payments as of December 31, 2019.

Such payments could be due later than estimated depending on the timing of our use of the underlying tax attributes.

As of December 31, 2019, we have recorded a liability of $175.3 million payable to the related parties under the TRAs, reflecting limitations on the use of the favorable tax attributes due to limitations of taxable income.

The estimated amounts payable under the TRAs do not include the up to $1,579.3 million of additional liabilities we may record in the future if utilization of such tax attributes becomes more-likely-than-not.

See "Risk Factors-Risks Related to Our Company and Our Organizational Structure" and Note 16 to our financial statements for additional information regarding our liability under the TRAs.

Off-Balance Sheet Arrangements

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Revenue Recognition

We recognize revenue when control of the promised products is transferred to our customers, in an amount reflecting the consideration we expect to be entitled to in exchange for those products.

We recognize revenue when control of the promised products is transferred to a customer, in an amount reflecting the consideration we expect to be entitled to in exchange for those products.

Payments received in advance of our performance are recorded as deferred revenue.

Revenue is recognized net of allowances for returns and applicable transaction-based taxes collected from customers.

Revenue is recognized net of allowances for returns and transaction-based taxes collected.

We generally sell our products with a right of return, which we account for as variable consideration when estimating the amount of revenue to recognize.

Refunds are estimated at contract inception using the expected value method based on historical refund experience and updated each reporting period as additional information becomes available.

Refunds result in a reduced amount of revenue recognized over the contract term of the applicable product compared to the amount originally expected.

Our annual refund rate has ranged from 6.4% to 6.9% of total bookings from 2018 to 2020.

We may sell multiple products to customers at the same time.

For example, we may design a customer website and separately offer other products such as hosting and a SSL certificate, or a customer may combine a domain registration with other products such as private registration or email.

Judgment may be required in determining whether products are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation.

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Our process for determining SSP requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each performance obligation.

We determine SSP based on prices charged to customers for individual products, taking into consideration factors including historical and expected discounting practices, the size, volume and term length of transactions, customer demographics, the geographic areas in which our products are sold and our overall go-to-market strategy.

We determine SSP based on prices charged to customers for individual products, taking into consideration other factors, which may include (i) historical and expected discounting practices;

(ii) the size, volume and term length of transactions;

(iii) customer demographics;

(iv) the geographic areas in which our products are sold;

and (v) our overall go-to-market strategy.

We sell our products directly to customers and also through a network of resellers.

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See Notes 2 and 7 to our financial statements for additional information regarding revenue recognition and deferred revenue.

Equity-Based Compensation

We grant stock options, restricted stock units (RSUs) and performance-based awards (PSUs) to our employees and independent directors, which are accounted for using the fair value method.

Options are granted at exercise prices equal to the fair market value of our Class A common stock as reported on the NYSE on the date of grant.

We measure and recognize compensation expense for such awards based on their accounting grant date fair values.

RSUs and PSUs are measured based on the fair market value of the underlying common stock on their respective accounting grant dates.

For options, the fair value is estimated using the Black-Scholes option-pricing model, which requires management to make assumptions and apply judgment in determining such value.

The most significant judgments include estimating the expected option term, expected stock price volatility and risk-free interest rates.

The assumptions we use represent management's best estimates.

If factors change and different assumptions are used, our equity-based compensation expense could be materially different in the future.

We also estimate a forfeiture rate for our awards, which is based on an analysis of historical forfeitures.

We evaluate the appropriateness of our estimate based on actual forfeiture experience, analysis of employee turnover and other factors.

Changes in our estimated forfeiture rate can have a significant impact on our equity-based compensation expense since the cumulative effect of adjusting this rate is recognized in the period in which the estimate is changed.

If a revised forfeiture rate were to increase, a resulting decrease in previously-recognized expense would be recorded.

If a revised forfeiture rate were to decrease, a resulting increase in previously-recognized expense would be recorded.

On a quarterly basis, we estimate when and if PSUs will be earned.

Expense is recognized only for awards considered probable of being earned.

The accounting grant date fair value of each award ultimately expected to vest is recognized as compensation expense, net of estimated forfeitures, over the requisite service period.

We will continue to use judgment in evaluating these assumptions on a prospective basis.

As we accumulate additional data related to our awards, we may refine our estimates, which could materially impact future expense.

See Notes 2 and 7 to our financial statements for additional information regarding equity-based compensation.

Business Combinations

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Critical estimates used in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows (primarily from customer relationships and developed technology) and discount rates.

Our contingent consideration liabilities, which relate to future earn-out payments associated with our acquisitions, are generally valued using discounted cash flow valuation methods.

Critical estimates used in valuing contingent consideration liabilities include estimated operating results scenarios for the applicable performance periods, probability weightings assigned to operating results scenarios and discount rates.

Contingent consideration liabilities, which relate to future earn-out payments associated with our acquisitions, are generally valued using discounted cash flow valuation methods.

Critical estimates used in valuing these liabilities include estimated operating results scenarios for the applicable performance periods, probability weightings assigned to operating results scenarios and discount rates.

We use our best estimates and assumptions to determine acquisition-date fair values.

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Goodwill and Indefinite-Lived Intangible Assets

We make estimates, assumptions and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocations of our acquisitions, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis.

We make estimates, assumptions and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocations of business combinations, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis.

We assess our goodwill and indefinite-lived intangible assets for impairment at least annually during the fourth quarter.

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If, based on our qualitative analysis, we were to determine it is more-likely-than-not the fair value of our single reporting unit is less than its carrying amount, we would record an impairment loss for the amount equal to such excess.

Our qualitative analyses during 2019, 2018 and 2017 did not indicate any impairment, and accordingly, none was recorded.

Our qualitative analyses during 2020, 2019 and 2018 did not indicate any impairment.

As of December 31, 2020, we believe such assets are recoverable;

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We account for income taxes under the asset and liability method, which requires the recognition of DTAs and DTLs for the expected future tax consequences of events included in our financial statements.

Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statements and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.

Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.

The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period in which the enactment date occurs.

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The tax benefits recognized from such positions are measured based on the largest benefit having a greater than 50% likelihood of being realized.

See Notes 2 and 15 to our financial statements for additional information regarding income taxes.

Payable to Related Parties Pursuant to the TRAs

We are a party to five TRAs.

Under four of these agreements, we are generally required to pay to certain pre-IPO owners approximately 85% of the amount of calculated tax savings, if any, we are deemed to realize (as described below) as a result of (1) any existing tax attributes associated with LLC Units acquired in the pre-IPO organizational transactions, the benefit of which is allocable to us as a result of such transactions (including the allocable share of Desert Newco's existing tax basis in its assets), (2) NOLs available as a result of such transactions and (3) tax benefits related to imputed interest.

Under the fifth of these agreements, we are generally required to pay our other pre-IPO owners approximately 85% of the amount of the calculated tax savings, if any, we are deemed to realize (as described below) as a result of (1) any step-up in tax basis created as a result of exchanges of their LLC Units (together with the corresponding shares of Class B common stock) for shares of our Class A common stock, (2) any existing tax attributes associated with their LLC Units, the benefit of which is allocable to us as a result of such exchanges (including the allocable share of Desert Newco's existing tax basis in its assets), (3) tax benefits related to imputed interest and (4) payments under the TRA.

The TRAs allow our pre-IPO owners to transfer their rights under the TRAs to third parties, who would then succeed to all rights under the TRAs.

In the event of such a transfer, we would be required to make the payments described above to the new TRA parties.

When LLC Units are exchanged, we receive certain tax attributes, including the original basis adjustments (the OBAs) created from the original acquisition of the LLC Units plus any anticipated basis adjustments.

The OBAs entitle us to the depreciation and amortization previously allocable to the original owner of such units.

The anticipated basis adjustments will increase, for tax purposes, our depreciation and amortization deductions.

To the extent these deductions are used to reduce our taxable income, thereby resulting in actual tax savings, we will be required to pay the original owners approximately 85% of such savings, which is recorded as an additional liability under the TRAs.

This increase in tax basis also creates additional DTAs and may also decrease gains, or increase losses, on future dispositions of certain assets to the extent tax basis is allocated to those assets.

For purposes of calculating the income tax savings we are deemed to realize under the TRAs, we will calculate the federal income tax savings using the actual applicable U.S.

federal income tax rate and will calculate the state and local income tax savings using 5% for the assumed combined state and local tax rate, which represents an approximation of our combined state and local income tax rate, net of federal income tax benefits.

The term of the TRAs commenced in 2015 upon the completion of our IPO and will continue until all such tax benefits have been utilized or expire, unless we exercise our rights to terminate the agreements or payments under the agreements are accelerated in the event we materially breach any of our material obligations under the agreements.

As a results of certain pre-IPO reorganization transactions, we received certain tax attributes, including the OBAs and NOL carryforwards, from certain of our pre-IPO owners, which entitle us to the depreciation and amortization previously allocable to such parties.

These deductions are allowed prior to the utilization of any NOL or tax credit carryforwards against income taxes.

Based on current projections of taxable income, and before deduction of any specially allocated depreciation and amortization, we anticipate having enough taxable income to utilize a portion of these specially allocated deductions related to the OBAs.

Accordingly, as of December 31, 2019, our liability under the TRAs was $175.3 million.

The projection of future taxable income involves significant judgment.

Actual taxable income may differ from our estimates, which could significantly impact the liability under the TRAs.

We have determined it is more-likely-than-not we will be unable to utilize all of our DTAs subject to TRAs;

therefore, we have not recorded a liability under the TRAs related to the tax savings we may realize from the utilization of NOL carryforwards and the amortization related to basis adjustments created by exchanges of LLC Units.

If utilization of these DTAs becomes more-likely-than-not in the future, at such time, we will record

liabilities under the TRAs of up to an additional $1,140.9 million as a result of basis adjustments under the Internal Revenue Code and up to an additional $438.4 million related to the utilization of NOL and credit carryforwards, which will be recorded through charges to our statements of operations.

However, if the tax attributes are not utilized in future years, it is reasonably possible no amounts would be paid under the TRAs.

In this scenario, the reduction of the liability under the TRAs would result in a benefit to our statements of operations.

See Notes 2 and 16 to our financial statements for additional information regarding the payable to related parties pursuant to the TRAs.

The TRAs are subject to a number of risks and uncertainties.

For a description of these risks, see "Risk Factors—Risks Related to Our Company and Our Organizational Structure."

See Notes 2 and 15 to our financial statements for additional information regarding income taxes and the considerations that could lead to a release of substantially all of the valuation allowance against our DTAs.

Indirect Taxes

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Until the final resolution of such matters, there may be an exposure to loss in excess of the amounts recorded, and such amounts could be material.

Should any of our

estimates and assumptions change or prove to have been incorrect, it could have a material impact on our business, operating results or financial condition.

Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material impact on our business, operating results or financial condition.

See Note 12 to our financial statements for additional information regarding loss contingencies.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis