Vertex, Inc. 10-Q

Item 2. 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q, particularly in the section titled “Risk Factors” in Part II, Item 1A. 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, sellers 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. 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. 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 September 30, 2020, we had over 4,000 customers and our Annual Recurring Revenue (“ARR”) per customer was over $75,000, while at September 30, 2019, we had over 4,000 customers and our ARR per customer was over $65,000. As our customers expand geographically and pursue omnichannel business models, their tax determination and compliance requirements increase and become more complex, providing sustainable organic growth opportunities for our business. Our 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. -45- Table of Contents 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 28.7% and 21.0% of software subscription revenue from cloud-based subscriptions during the three months ended September 30, 2020 and 2019, respectively, and 26.6% and 18.7% for the nine months ended September 30, 2020 and 2019, respectively. While our on-premise software subscription revenue comprises 73.4% of our 2020 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 the compliance environment provides durable and accelerating growth opportunities for our business. We generated revenue of $82.4 million and $94.6 million for the three months ended September 30, 2019 and 2020, respectively. We generated revenue of $235.4 million and $275.1 million for the nine months ended September 30, 2019 and 2020, respectively. We had net income of $11.9 million and a net loss of $21.0 million for the three months ended September 30, 2019 and 2020, respectively. We had net income of $26.3 million and a net loss of $79.2 million for the nine months ended September 30, 2019 and 2020, respectively. Adjusted EBITDA was $19.6 million and $22.5 million for the three months ended September 30, 2019 and 2020, respectively. Adjusted EBITDA was $50.8 million and $59.3 million for the nine months ended September 30, 2019 and 2020, respectively. Additionally, we generated net cash provided by operating activities of $45.8 million and $20.0 million in the nine months ended September 30, 2019 and 2020, respectively. Our free cash flow was $3.7 million and $15.8 million in the three months ended September 30, 2019 and 2020, respectively. Our free cash flow was $20.1 million and $18.7 million in the nine months ended September 30, 2019 and 2020, respectively. Adjusted EBITDA and free cash flow are non-GAAP financial measures. Refer to “ Use and Reconciliation of Non-GAAP Financial Measures ” for further discussion of non-GAAP financial measures and their comparison to GAAP financial measures. Recent Developments— Initial Public Offering On July 31, 2020, we completed our initial public offering (“IPO”) in which we sold 23,812,216 shares of our Class A common stock, and certain selling stockholders sold an additional 510,284 shares of Class A common stock, at a public offering price of $19.00 per share. We received proceeds of approximately $423.0 million, after deducting underwriting discounts and commissions, from sales of our shares in the IPO. We did not receive any of the proceeds from the sale of shares by the selling stockholders. 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- -46- Table of Contents 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 half 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 grow our existing customer revenues. We did not experience an abnormal number of non-renewals in the first half of 2020, nor any material 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. For the third quarter of 2020, new software billings exceeded our original third quarter of 2020 forecasts. We have seen some delays 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 our growth strategies will be materially impacted by the COVID-19 pandemic, as companies continue to rely on us for their indirect tax solutions. 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 and third quarters 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 the COVID-19 pandemic, and we have not recorded an additional allowance for doubtful accounts in connection with any delays. Given that customers cannot forgo our monthly content updates, which are necessary to remain compliant with the most current regulations, we believe customers will continue to pay our renewal invoices in a timely, even if slightly elongated, manner. We believe that we currently have ample liquidity and capital resources to continue to meet our operating needs, and our ability to continue to service our debt or other financial obligations is not currently impaired. For a further description of our liquidity, 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. Key Business Metrics We regularly review the metrics identified below to evaluate growth trends, measure our performance, formulate financial projections and make strategic decisions. -47- Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ (In millions) 2020 2019 Period-over-Period change Annual Recurring Revenue ​ $ 306.5 ​ $ 265.6 ​ $ 40.9 15.4 % ​ ARR increased by $40.9 million or 15.4% for the twelve month period ended September 30, 2020, as compared to the same period in 2019. The increase was primarily driven by $20.0 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases and $20.9 million of on premise and cloud-based subscription sales of our tax solutions to new customers. Net Revenue Retention Rate. We believe that our Net Revenue Retention Rate (“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. ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30 ​ 2020 2019 Net Revenue Retention Rate 108 % 109 % ​ The NRR declined from 109% at September 30, 2019 to 108% at September 30, 2020 due primarily to a reduction in new sales to existing customers. 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 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, share-based compensation expense, severance charges and offering transaction costs. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison, our net (loss) income was $(21.0) million and $11.9 million for the three months ended September 30, 2020 and 2019, respectively, while our net income margin was (22.2)% and 14.4% over the same periods, respectively. Additionally, our net (loss) income was $(79.2) million and $26.3 million for the nine months ended -48- Table of Contents September 30, 2020 and 2019, respectively, while our net income margin was (28.8)% and 11.2% over the same periods, respectively. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended ​ For the nine months ended ​ ​ September 30 ​ September 30 (dollars in thousands) 2020 2019 2020 2019 Adjusted EBITDA: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income ​ $ (21,028) ​ $ 11,900 ​ $ (79,167) ​ $ 26,347 ​ Interest, net ​ 1,796 ​ 252 ​ 3,424 ​ 804 ​ Income tax (benefit) expense ​ (30,773) ​ 175 ​ (31,508) ​ 600 ​ Depreciation and amortization – cost of subscription revenues ​ 5,307 ​ 3,687 ​ 15,349 ​ 11,624 ​ Amortization of acquired intangibles - selling and marketing expense ​ ​ 128 ​ ​ — ​ ​ 128 ​ ​ — ​ Depreciation and amortization ​ 2,735 ​ 2,311 ​ 8,109 ​ 6,528 ​ Stock-based compensation ​ 64,294 ​ 1,310 ​ 140,890 ​ 3,930 ​ Severance charges ​ 72 ​ 1 ​ 2,114 ​ 948 ​ Adjusted EBITDA ​ $ 22,531 ​ $ 19,636 ​ $ 59,339 ​ $ 50,781 ​ Adjusted EBITDA Margin: ​ ​ ​ ​ ​ Total revenues ​ $ 94,605 ​ $ 82,439 ​ $ 275,121 ​ $ 235,428 ​ Adjusted EBITDA margin ​ 23.8 % 23.8 % 21.6 % 21.6 % ​ The increase in Adjusted EBITDA for the three months ended September 30, 2020 of $2.9 million over the comparable period 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 remained consistent at 23.8% for the three months ended September 30, 2020 over the comparable period in 2019. The increase in Adjusted EBITDA for the nine months ended September 30, 2020 of $8.6 million over the comparable period 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 remained consistent at 21.6% for the nine months ended September 30, 2020 over the comparable period in 2019. 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 this measure when considering available cash, including for decision making purposes related to dividends and discretionary investments. We consider free cash flow to be an important measure for investors because it measures the amount of cash we generate from our operations after our capital expenditures and capitalization of software development costs. In addition, we base certain of our forward-looking estimates and budgets on free cash flow and free cash flow margin. We define free cash flow as the total of net cash provided by operating activities, adjusted for the redemption of stock appreciation rights (“SARs”) in 2020 in connection with the Offering reflected as a reduction of cash provided by operating activities, less purchases of property and equipment and capitalized software. We define free cash flow margin as free cash flow divided by total revenues for the same period. Our net cash provided by operating activities was $20.0 million and $45.8 million for the nine months ended September 30, 2020 and 2019, respectively, while our operating cash flow margin was 7% and 19% over the same periods, respectively. Net cash used in investing activities was $36.5 million and $25.7 million for the nine months ended September 30, 2020 and 2019, respectively. Net cash provided -49- Table of Contents by (used in) financing activities was $212.4 million and $(25.5) million for the nine months ended September 30, 2020 and September 30, 2019, respectively. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ September 30 (dollars in thousands) 2020 2019 Free cash flow: ​ ​ ​ ​ ​ ​ ​ Cash provided by operating activities ​ $ 20,044 ​ $ 45,799 ​ Redemption of Converted SARs ​ ​ 22,889 ​ ​ — ​ Property and equipment additions ​ ​ (14,982) ​ ​ (13,315) ​ Capitalized software additions ​ ​ (9,246) ​ ​ (12,345) ​ Free cash flow ​ $ 18,705 ​ $ 20,139 ​ Free cash flow margin: ​ ​ ​ ​ ​ ​ ​ Total revenues ​ $ 275,121 ​ $ 235,428 ​ Free cash flow margin ​ 6.8 % 8.6 % ​ Free cash flow decreased by $1.4 million for the nine months ended September 30, 2020 as compared to the same period in 2019, driven primarily by a decrease in cash from operating activities of $25.8 million due to a $22.9 million payment for redemption of converted SARs in connection with the IPO, a reduction in cash provided by changes in operating assets and liabilities of $9.4 million, partially offset by an increase in non-cash operating activity resulting from increases in depreciation and amortization of $5.4 million and the write-off of deferred financing fees of $1.4 million. The $22.9 million payment for redemption of converted SARs pertain to SARs converted to stock options and immediately redeemed for cash upon the IPO. The reduction in operating assets and liabilities of $9.4 million was primarily due to a reduction in deferred revenue of $9.3 million. Deferred revenue decreased due to a $5.6 million decrease in nonrecurring extended product support fees billed in the first half of 2019 related to older versions of software subscription solutions retired during 2019. The balance of the deferred revenue reduction of $3.7 million is 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. Such billing frequency modification results in a short-term reduction in deferred revenue, but no impact to revenue. The increase in depreciation and amortization of $5.4 million was due to increased development costs related to the release of O Series 9.0 and internal automation projects. The write-off of deferred financing fees of $1.4 million was a result of the redemption of debt during the nine months ended September 30, 2020. ​ 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, 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. -50- Table of Contents 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 Vertex-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 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. -51- Table of Contents 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 nine months ended September 30, 2020 and 2019, $9.2 million and $12.3 million of software development costs were capitalized, respectively. Capitalized software development costs consist primarily of employee-related and third-party labor costs. We devote substantial resources to developing new products and enhancing existing products, conducting quality assurance testing and improving our core technology. We believe continued investments in research and development are critical to attain our strategic objectives and expect research and development costs to increase in absolute dollars. These investments include enhancing our solution offerings to address changing customer needs to support their growth, as well as implementing changes required to keep pace with our partners’ technology to ensure the continued ability of our solutions to work together and deliver value to our customers. The market for our solutions is characterized by rapid technological change, frequent new product and service introductions and enhancements, changing customer demands and evolving industry standards. As a result, although we are making significant research and development expenditures, which may be incurred and certain of which may be capitalized, there is no guarantee these solutions will be accepted by the market. This could result in increased costs or an impairment of capitalized development costs with no resulting future revenue benefit. Selling and Marketing 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, costs associated with our annual customer conferences and amortization of acquired intangibles. We intend to continue to invest in our sales and marketing capabilities in the future to continue to increase our brand awareness and expect these costs to increase on an absolute dollar basis as we grow our business and continue to expand our market and partner ecosystem penetration. Sales and marketing expense in absolute dollars and as a percentage of total 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, severance, stock-based compensation, professional fees, insurance premiums, facility costs and other internal support costs. We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, integrate future acquisitions and incur additional costs associated with becoming a publicly listed company. As a public company, we expect to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, SEC compliance and internal control compliance. -52- Table of Contents 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 includes write downs of deferred financing costs upon redemption of debt. Interest expense will vary as a result of fluctuations in the level of debt outstanding as well as interest rates on such debt. In addition, interest expense will include adjustments to the fair value of contracts that may be entered into to hedge risks associated with currency fluctuations for cash receipts or cash payments denominated in currencies other than U.S. dollars and which do not qualify for hedge accounting. In addition, changes in the settlement value of the future payment obligation for the Systax acquisition will be recorded as interest expense, as described further in “Note 2—Acquisition” to our interim consolidated financial statements included in this Quarterly Report on Form 10-Q. Provision for Taxes Prior to July 27, 2020, we have been taxed as an S-corporation for U.S. federal income tax purposes and for income tax purposes in most states. As a result, net income or loss prior to this date has been allocated to our stockholders and included on their individual income tax returns. In certain states, we have been taxed at the corporate level going forward. Accordingly, the income tax provision or benefit for such periods was based on taxable income allocated to those states. In certain foreign jurisdictions, our subsidiaries were 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 as of 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. Upon 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. We recorded a tax benefit of $30.5 million upon such conversion, which is included in the condensed consolidated statement of comprehensive income (loss) for the three months ended September 30, 2020 included in Part 1 – Financial Information in this Quarterly Report on Form 10-Q. Results of Operations You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Prospectus filed with the SEC on July 30, 2020. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. -53- Table of Contents The following table sets forth our consolidated statements of comprehensive income (loss) for the periods indicated. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ September 30 ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) (unaudited) 2020 2019 Period-over-Period change 2020 2019 ​ Period-over-Period change Revenue: ​ ​ ​ ​ ​ ​ ​ Software subscriptions ​ $ 79,778 ​ $ 71,041 ​ $ 8,737 12.3 % $ 232,844 ​ $ 202,692 ​ $ 30,152 14.9 % Services ​ 14,827 ​ 11,398 ​ 3,429 30.1 % 42,277 ​ 32,736 ​ 9,541 29.1 % Total revenue ​ 94,605 ​ 82,439 ​ 12,166 14.8 % 275,121 ​ 235,428 ​ 39,693 16.9 % Cost of Revenue: ​ ​ ​ ​ ​ ​ ​ Software subscriptions (1) ​ 29,161 ​ 18,647 ​ 10,514 56.4 % 79,846 ​ 56,490 ​ 23,356 41.3 % Services (1) ​ 18,807 ​ 8,786 ​ 10,021 114.1 % 49,329 ​ 23,616 ​ 25,713 108.9 % Total cost of revenues ​ 47,968 ​ 27,433 ​ 20,535 74.9 % 129,175 ​ 80,106 ​ 49,069 61.3 % Gross profit ​ 46,637 ​ 55,006 ​ (8,369) (15.2) % 145,946 ​ 155,322 ​ (9,376) (6.0) % Operating expenses: ​ ​ ​ ​ ​ ​ ​ Research and development (1) ​ 16,501 ​ 7,271 ​ 9,230 126.9 % 43,197 ​ 22,049 ​ 21,148 95.9 % Selling and marketing (1) ​ 29,423 ​ 15,830 ​ 13,593 85.9 % 78,300 ​ 49,164 ​ 29,136 59.3 % General and administrative (1) ​ 48,043 ​ 17,263 ​ 30,780 178.3 % 123,437 ​ 49,358 ​ 74,079 150.1 % Depreciation and amortization ​ 2,735 ​ 2,311 ​ 424 18.3 % 8,109 ​ 6,528 ​ 1,581 24.2 % Other operating expense ​ (60) ​ 4 ​ (64) (1,600.0) % 154 ​ 472 ​ (318) (67.4) % Total operating expenses ​ 96,642 ​ 42,679 ​ 53,963 126.4 % 253,197 ​ 127,571 ​ 125,626 98.5 % Income (loss) from operations ​ (50,005) ​ 12,327 ​ (62,332) (505.7) % (107,251) ​ 27,751 ​ (135,002) (486.5) % Other (income) expense: ​ ​ ​ ​ ​ ​ ​ Interest income ​ (79) ​ (251) ​ 172 (68.5) % (535) ​ (775) ​ 240 (31.0) % Interest expense ​ 1,875 ​ 503 ​ 1,372 272.8 % 3,959 ​ 1,579 ​ 2,380 150.7 % Total other expense, net ​ 1,796 ​ 252 ​ 1,544 612.7 % 3,424 ​ 804 ​ 2,620 325.9 % Income (loss) before income taxes ​ (51,801) ​ 12,075 ​ (63,876) (529.0) % (110,675) ​ 26,947 ​ (137,622) (510.7) % Income tax (benefit) expense ​ (30,773) ​ 175 ​ (30,948) (17,684.6) % (31,508) ​ 600 ​ (32,108) (5,351.3) % Net (loss) income ​ (21,028) ​ 11,900 ​ (32,928) (276.7) % (79,167) ​ 26,347 ​ (105,514) (400.5) % Other comprehensive loss from foreign currency translations ​ 238 ​ 174 ​ 64 36.8 % 3,512 ​ 176 ​ 3,336 1,895.5 % Total comprehensive income (loss) ​ $ (21,266) ​ $ 11,726 ​ $ (32,992) (281.4) % $ (82,679) ​ $ 26,171 ​ $ (108,850) (415.9) % ​ (1) Includes stock-based compensation expenses as follows in the table below. For more details, see “Seasonality and Quarterly Trends.” -54- Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ Nine months ended ​ ​ September 30 ​ September 30 ​ 2020 2019 2020 2019 ​ ​ (unaudited) ​ ​ (In thousands) Cost of revenues, software subscriptions ​ $ 6,342 ​ $ 131 ​ $ 14,002 ​ $ 393 Cost of revenues, services ​ 9,230 ​ 197 ​ 20,719 ​ 591 Research and development ​ 6,340 ​ 131 ​ 14,000 ​ 393 Selling and marketing ​ 12,821 ​ 261 ​ 28,140 ​ 784 General and administrative ​ 29,561 ​ 590 ​ 64,029 ​ 1,769 Total stock-based compensation ​ $ 64,294 ​ $ 1,310 ​ $ 140,890 ​ $ 3,930 ​ The following table sets forth our results of operations as a percentage of our total revenue for the periods presented. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ Nine months ended ​ ​ September 30 ​ September 30 ​ 2020 2019 2020 2019 ​ ​ (unaudited) Revenue: ​ Software subscriptions 84.3 % 86.2 % 84.6 % 86.1 % Services 15.7 % 13.8 % 15.4 % 13.9 % Total revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of Revenue: ​ Software subscriptions 30.8 % 22.6 % 29.0 % 24.0 % Services 19.9 % 10.7 % 17.9 % 10.0 % Total cost of revenues 50.7 % 33.3 % 46.9 % 34.0 % Gross profit 49.3 % 66.7 % 53.1 % 66.0 % Operating expenses: ​ Research and development 17.4 % 8.8 % 15.7 % 9.4 % Selling and marketing 31.1 % 19.2 % 28.5 % 20.9 % General and administrative 50.8 % 20.9 % 44.9 % 21.0 % Depreciation and amortization 2.9 % 2.8 % 2.9 % 2.8 % Other operating expense, net (0.1) % — % 0.1 % 0.1 % Total operating expenses 102.1 % 51.7 % 92.1 % 54.2 % Income (loss) from operations (52.8) % 15.0 % (39.0) % 11.8 % Other (income) expense: ​ Interest income (0.1) % (0.3) % (0.2) % (0.3) % Interest expense 2.0 % 0.6 % 1.4 % 0.7 % Total other expense, net 1.9 % 0.3 % 1.2 % 0.4 % Income (loss) before income taxes (54.7) % 14.7 % (40.2) % 11.4 % Income tax (benefit) expense (32.5) % 0.2 % (11.5) % 0.3 % Net (loss) income (22.2) % 14.5 % (28.7) % 11.1 % Other comprehensive loss from foreign currency translations 0.3 % 0.2 % 1.3 % 0.1 % Total comprehensive income (loss) (22.5) % 14.3 % (30.0) % 11.0 % ​ -55- Table of Contents Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Revenue: ​ ​ ​ ​ Software subscriptions ​ $ 79,778 ​ $ 71,041 ​ $ 8,737 12.3 % Services ​ 14,827 ​ 11,398 ​ 3,429 30.1 % Total revenue ​ $ 94,605 ​ $ 82,439 ​ $ 12,166 14.8 % ​ Revenue increased $12.2 million, or 14.8%, to $94.6 million for the three months ended September 30, 2020 compared to $82.4 million for the three months ended September 30, 2019. The increase in software subscriptions revenue of $8.7 million, or 12.3%, was primarily driven by $7.7 million in revenue growth derived from our existing customers and $1.0 million of revenue growth from new customers. The $3.4 million increase in services revenue is primarily driven by an increase of $2.9 million in software subscription related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and existing customers upgrading to newer versions of our solutions. In addition, our managed services offering experienced a $0.5 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 ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Cost of software subscription revenue ​ $ 29,161 ​ $ 18,647 ​ $ 10,514 56.4 % ​ Cost of software subscriptions revenue increased $10.5 million, or 56.4%, to $29.2 million for the three months ended September 30, 2020 compared to $18.6 million for the three months ended September 30, 2019. Of this increase, 59.1% is due to an increase in stock-based compensation of $6.3 million for the three months ended September 30, 2020 over the same period in 2019. After excluding the impact of stock-based compensation there is a remaining increase of $4.2 million. Of this increase, $0.6 million is due primarily to increased amortization expense associated with late Q3 2019 release of O Series 9.0. The remaining $3.6 million variance is associated with increased costs of personnel supporting year-over-year growth of sales and customers and ongoing infrastructure investments to support expansion of customer transaction volumes for our cloud-based subscription customers. As a percentage of total revenue, the cost of software subscriptions revenue increased to 30.8% for the three months ended September 30, 2020 compared to 22.6% in September 30, 2019. Adjusting for the increase in stock-based compensation in 2020, cost of software subscriptions as a percentage of total revenue would have been 24.1% for the three months ended September 30, 2020. Cost of Services Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Cost of services revenue ​ $ 18,807 ​ $ 8,786 ​ $ 10,021 114.1 % ​ Cost of services revenue increased $10.0 million, or 114.1%, to $18.8 million for the three months ended September 30, 2020 compared to $8.8 million for the three months ended September 30, 2019. Of this increase, 90.1% is due to an increase in stock-based compensation of $9.2 million for the three months ended September 30, 2020 over the same period in 2019. The balance of the increase of $0.8 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 19.9% in 2020 compared to 10.7% in 2019. Adjusting for the increase -56- Table of Contents in stock-based compensation in 2020, cost of services revenue as a percentage of total revenue would have been 10.1% for the three months ended September 30, 2020. Research and Development ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Research and development ​ $ 16,501 ​ $ 7,271 ​ $ 9,230 126.9 % ​ Research and development expenses increased $9.2 million, or 126.9%, to $16.5 million for the three months ended September 30, 2020 compared to $7.3 million for the three months ended September 30, 2019. Of this increase, 67.3% is due to an increase in stock-based compensation of $6.3 million for the three months ended September 30, 2020 over the same period in 2019 for personnel that participate in the Company’s stock-based compensation plans. The balance of the increase of $2.9 million is primarily due to costs associated with increased development activity associated with nascent technologies and new solutions to address end-to-end data analysis and compliance needs of our customers. As a percentage of total revenue, research and development expenses increased to 17.4% for the three months ended September 30, 2020 compared to 8.8% for the three months ended September 30, 2019, driven in part by our expanded investment in developing our global compliance reporting solution. Adjusting for the increase in stock-based compensation in 2020, research and development expenses as a percentage of total revenue would have been 10.7% for the three months ended September 30, 2020. Research and development expense excludes those costs that have been capitalized for solutions that have met our capitalization policy. Selling and Marketing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Selling and marketing ​ $ 29,423 ​ $ 15,830 ​ $ 13,593 85.9 % ​ Selling and marketing expenses increased $13.6 million, or 85.9%, to $29.4 million for the three months ended September 30, 2020 compared to $15.8 million for the same period in 2019. Of this increase, 92.4% is due to an increase in stock-based compensation of $12.8 million for the three months ended September 30, 2020 over the same period in 2019. The balance of the increase of $0.8 million is primarily due to an increase in payroll and related expenses associated with the growth in year-over-year subscription sales and services revenue and expansion of our partner and channel management programs.. As a percentage of total revenue, selling and marketing expenses increased to 31.1% for the three months ended September 30, 2020 compared to 19.2% for the same period in 2019. Adjusting for the increase in stock-based compensation in 2020, selling and marketing expenses as a percentage of total revenue would have been 17.5% for the three months ended September 30, 2020. General and Administrative ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change General and administrative ​ $ 48,043 ​ $ 17,263 ​ $ 30,780 178.3 % ​ General and administrative expenses increased $30.8 million, or 178.3%, to $48.0 million for the three months ended September 30, 2020 compared to $17.3 million for the same period in 2019. Of this increase, 94.1% is due to an increase in stock-based compensation of $29.6 million for the three months ended September 30, 2020 over the same period in 2019. The balance of the increase of $1.2 million is primarily due to planned strategic investments in information technology infrastructure, business process reengineering and other initiatives to drive future operating leverage, as well as investments in employees and other systems and resources in support of our growth. Due to these factors, as a percentage -57- Table of Contents of total revenue, general and administrative expenses increased to 50.8% for the three months ended September 30, 2020 compared to 20.9% for the same period in 2019. Adjusting for the increase in stock-based compensation in 2020, general and administrative expenses as a percentage of total revenue would have been 19.5% for the three months ended September 30, 2020. Depreciation and Amortization ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Depreciation and amortization $ 2,735 $ 2,311 $ 424 18.3 % ​ Depreciation and amortization increased $0.4 million, or 18.3%, to $2.7 million for the three months ended September 30, 2020 compared to $2.3 million for the same period in 2019. The increase was primarily due to the impact of infrastructure and technology purchases placed in service in 2019 and other capitalized infrastructure costs to support our growth. As a percentage of revenue, depreciation expense was relative consistent at 2.9% for the three months ended September 30, 2020 compared to 2.8% for the same period in 2019. Interest Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Interest income $ (79) $ (251) $ 172 56.5 % ​ Interest income for the three months ended September 30, 2020 decreased $0.2 million or 56.5% due primarily to a significant decline in money market investment yields as compared to the same period in 2019. Interest Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Interest expense $ 1,875 $ 503 $ 1,372 272.8 % ​ Interest expense increased $1.4 million, or 272.8%, to $1.9 million for the three months ended September 30, 2020 compared to $0.5 million for the same period in 2019. The increase is primarily due to the writedown of deferred financing fees of $1.4 million in connection with the July 2020 payoff of the New Term Loan with a portion of the proceeds from the IPO. This is offset by reductions in interest expense of $0.1 million due to the Company having no outstanding debt during the three months ended September 30, 2020 after this payoff, as compared to $51.6 million in outstanding debt for the same period in 2019. Provision for Taxes ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Income tax (benefit) $ (30,773) $ 175 $ (30,948) (17,684.6) % ​ Income tax expense decreased $30.9 million, or 17,684.6%, to a $(30.8) million income tax benefit for the three months ended September 30, 2020 compared to $0.2 million of income tax expense for the same period in 2019. The decrease was primarily due to a pretax loss resulting from an increase in stock-based compensation in 2020. As a percentage of revenue, income tax benefit increased to (32.5)% for the three months ended September 30, 2020 compared to expense of 0.2% for the same period in 2019 due to a pretax loss in 2020 resulting from an increase in stock-based compensation. -58- Table of Contents ​ Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Revenue: ​ ​ ​ ​ Software subscriptions ​ $ 232,844 ​ $ 202,692 ​ $ 30,152 14.9 % Services ​ 42,277 ​ 32,736 ​ 9,541 29.1 % Total revenue ​ $ 275,121 ​ $ 235,428 ​ $ 39,693 16.9 % ​ Revenue increased $39.7 million, or 16.9%, to $275.1 million for the nine months ended September 30, 2020 compared to $235.4 million for the nine months ended September 30, 2019. The increase in software subscriptions revenue of $30.2 million, or 14.9%, was primarily driven by $27.1 million in revenue growth derived from our existing customers and $3.1 million of revenue from new customers. The $9.5 million increase in services revenue is primarily driven by an increase of $7.7 million in software subscription-related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and existing customers upgrading to newer versions of our solutions. In addition, our managed services offering experienced a $1.8 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Cost of software subscription revenue $ 79,846 $ 56,490 $ 23,356 41.3 % ​ Cost of software subscriptions revenue increased $23.4 million, or 41.3%, to $79.8 million for the nine months ended September 30, 2020 compared to $56.5 million for the nine months ended September 30, 2019. Of this increase, 58.3% is due to an increase in stock-based compensation of $14.0 million for the nine months ended September 30, 2020 over the same period in 2019. After excluding the impact of stock-based compensation there is a remaining increase of $9.4 million. Of this increase, $1.8 million is due primarily to increased amortization expense associated with the late Q3 2019 release of O Series 9.0. The remaining $7.6 million variance is associated with increased costs of personnel supporting year-over-year growth of sales and customers and ongoing infrastructure investments to support expansion of customer transaction volumes for our cloud-based subscription customers. As a percentage of total revenue, the cost of software subscriptions revenue increased to 29.0% for the nine months ended September 30, 2020 compared to 24.0% in September 30, 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 nine months ended September 30, 2020. Cost of Services Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Cost of services revenue $ 49,329 $ 23,616 $ 25,713 108.9 % ​ Cost of services revenue increased $25.7 million, or 108.9%, to $49.3 million for the nine months ended September 30, 2020 compared to $23.6 million for the nine months ended September 30, 2019. Of this increase, 78.3% is due to an increase in stock-based compensation of $20.7 million for the nine months ended September 30, 2020 over the same period in 2019. The balance of the increase of $5.0 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 -59- Table of Contents total revenue, cost of services revenue increased to 17.9% in 2020 compared to 10.0% 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 12.8% for the nine months ended September 30, 2020. Research and Development ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Research and development $ 43,197 $ 22,049 $ 21,148 95.9 % ​ Research and development expenses increased $21.1 million, or 95.9%, to $43.2 million for the nine months ended September 30, 2020 compared to $22.0 million for the nine months ended September 30, 2019. Of this increase, 64.3% is due to an increase in stock-based compensation of $14.0 million for the nine months ended September 30, 2020 over the same period in 2019 for personnel that participate in the Company’s stock-based compensation plans. The balance of the increase of $7.1 million is primarily due to costs associated with increased development activity associated with nascent technologies and new solutions to address end-to-end data analysis and compliance needs of our customers. As a percentage of total revenue, research and development expenses increased to 15.7% for the nine months ended September 30, 2020 compared to 9.4% for the nine months ended September 30, 2019, driven in part by our expanded investment in developing our global compliance reporting solution. Adjusting for the increase in stock-based compensation in 2020, research and development expenses as a percentage of total revenue would have been 10.6% for the nine months ended September 30, 2020. Research and development expense excludes those costs that have been capitalized for solutions that have met our capitalization policy. Selling and Marketing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change Selling and marketing $ 78,300 $ 49,164 $ 29,136 59.3 % ​ Selling and marketing expenses increased $29.1 million, or 59.3%, to $78.3 million for the nine months ended September 30, 2020 compared to $49.2 million for the same period in 2019. Of this increase, 93.9% is due to an increase in stock-based compensation of $28.1 million for the nine months ended September 30, 2020 over the same period in 2019. The balance of the increase of $1.0 million is primarily due to an increase in payroll and related expenses associated with the growth in year-over-year subscription sales and services revenue and expansion of our partner and channel management programs. In addition, increases in advertising and promotional spending and expanded brand awareness efforts contributed to this increase. As a percentage of total revenue, selling and marketing expenses increased to 28.5% for the nine months ended September 30, 2020 compared to 20.9% for the same period in 2019. Adjusting for the increase in stock-based compensation in 2020, selling and marketing expenses as a percentage of total revenue would have been 18.2% for the nine months ended September 30, 2020. General and Administrative ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change General and administrative $ 123,437 $ 49,358 $ 74,079 150.1 % ​ General and administrative expenses increased $74.1 million, or 150.1%, to $123.4 million for the nine months ended September 30, 2020 compared to $49.4 million for the same period in 2019. Of this increase, 84.0% is due to an increase in stock-based compensation of $64.0 million for the nine months ended September 30, 2020 over the same period in 2019. -60- Table of Contents The balance of the increase of $10.1 million is primarily due to planned strategic investments in information technology infrastructure, business process reengineering and other initiatives to drive future operating leverage, as well as investments in employees and other systems and resources in support of our growth. Due to these factors, as a percentage of total revenue, general and administrative expenses increased to 44.9% for the nine months ended September 30, 2020 compared to 21.0% for the same period in 2019. Adjusting for the increase in stock-based compensation in 2020, general and administrative expenses as a percentage of total revenue would have been 21.6% for the nine months ended September 30, 2020. Depreciation and Amortization ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ 2020 2019 ​ Period-over-Period change Depreciation and amortization $ 8,109 $ 6,528 $ 1,581 24.2 % ​ Depreciation and amortization increased $1.6 million, or 24.2%, to $8.1 million for the nine months ended September 30, 2020 compared to $6.5 million for the same period in 2019. The increase was primarily due to the impact of infrastructure and technology purchases placed in service in 2019 and other capitalized infrastructure costs to support our growth. As a percentage of revenue, depreciation expense was relatively consistent at 2.9% for the nine months ended September 30, 2020 compared to 2.8% for the same period in 2019. Interest Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change ​ Interest income $ (535) $ (775) $ 240 56.5 % ​ Interest income for the nine months ended September 30, 2020 decreased $0.2 million or 56.5% due primarily to a decline in money market investment yields as compared to the same period in 2019. Interest Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 ​ Period-over-Period change Interest expense $ 3,959 $ 1,579 $ 2,380 150.7 % ​ Interest expense increased $2.4 million, or 150.7%, to $4.0 million for the nine months ended September 30, 2020 compared to $1.6 million for the same period in 2019. The increase includes the writedown of deferred financing fees of $1.4 million in connection with the July 2020 payoff of the New Term Loan with a portion of the proceeds from the IPO. The increase also includes interest expense of $0.4 million related to an overall increase of $41.0 million in the average balance of debt outstanding during the nine months ended September 30, 2020 due primarily to the New Term Loan of $175.0 million being outstanding for approximately four months in 2020. Provision for Taxes ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ ​ ​ ​ ​ ​ September 30 ​ ​ ​ ​ ​ (Dollars in thousands) 2020 2019 Period-over-Period change ​ Income tax (benefit) expense $ (31,508) $ 600 $ (32,108) (5,351.3) % ​ Income tax expense decreased $32.1 million, or 5,351.3%, to a $(31.5) million income tax benefit for the nine months ended September 30, 2020 compared to $0.6 million of income tax expense for the same period in 2019. The decrease was primarily due to a pre-tax loss resulting from an increase in stock-based compensation in 2020. As a percentage of revenue, -61- Table of Contents income tax benefit increased to (11.5)% for the nine months ended September 30, 2020 compared to expense of 0.3% for the same period in 2019 due to a pre-tax loss in 2020 resulting from an increase in stock-based compensation. Liquidity and Capital Resources As of September 30, 2020, we had cash and cash equivalents of $270.3 million and retained earnings of $21.7 million. Our primary sources of capital to date have been from sales of our solutions and proceeds from bank lending facilities. On July 31, 2020, we received $423.0 million in proceeds, net of underwriting fees and commissions, from the sale of 23,812,216 shares of Class A common stock and used a portion of the proceeds to pay off the $175.0 million term loan under the New Credit Agreement. As a result, we have no outstanding bank debt after such redemption. The net proceeds remaining after payment of IPO costs will be used for working capital and other corporate purposes as described in the Prospectus. We believe that our existing cash resources and our bank line of credit will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. However, if these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms unacceptable to us. The following table presents a summary of our cash flows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ ​ September 30 (In thousands) ​ 2020 ​ 2019 ​ ​ (unaudited) Net cash provided by operating activities $ 20,044 $ 45,799 Net cash used in investing activities ​ (36,546) ​ (25,660) Net cash used in financing activities ​ 212,435 ​ (25,484) Effect of foreign exchange rate changes ​ (412) ​ (176) Net increase (decrease) in cash, cash equivalents and restricted cash ​ $ 195,521 ​ $ (5,521) ​ Operating Activities. Cash provided by operating activities was $20.0 million for the nine months ended September 30, 2020 compared to $45.8 million for the same period in 2019, a decrease of $25.8 million. The decrease in cash from operating activities was driven primarily by a $22.9 million payment for redemption of converted SARs in connection with the IPO, a reduction in cash provided by changes in operating assets and liabilities of $9.4 million, partially offset by an increase in non-cash operating activity resulting from increases in depreciation and amortization of $5.4 million and the write-off of deferred financing fees of $1.4 million. The $22.9 million payment for redemption of converted SARs pertain to SARs converted to stock options and immediately redeemed for cash upon the IPO. The reduction in operating assets and liabilities of $9.4 million was primarily due to a reduction in deferred revenue of $9.3 million. Deferred revenue decreased due to a $5.6 million decrease in nonrecurring extended product support fees billed in the first half of 2019 related to older versions of software subscription solutions retired during 2019. The balance of the deferred revenue reduction of $3.7 million is 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. Such billing frequency modification results in a short-term reduction in deferred revenue, but no impact to revenue. The increase in depreciation and amortization of $5.4 million was due to increased development costs related to the release of O Series 9.0 and internal automation projects. The write-off of deferred financing fees of $1.4 million were a result of the redemption of debt during the nine months ended September 30, 2020. ​ Investing Activities. Cash used in investing activities was $36.5 million for the nine months ended September 30, 2020 compared to $25.7 million for the same period in 2019, an increase of $10.9 million. This increase was primarily related to the acquisition of a controlling interest in Systax, a Brazilian transaction tax software and content subscription -62- Table of Contents provider, for cash paid of $12.3 million during the three months ended March 31, 2020. For additional information, see “Note 2 to the Interim Condensed Consolidated Financial Statements (unaudited) —Acquisition.” Financing Activities. Cash provided by (used in) financing activities was $212.4 million for the nine months ended September 30, 2020 compared to $(25.5) million used for the same period in 2019, an increase of $215.0 million. This change was due primarily to the $423.0 million in proceeds received from the IPO, offset by the payoff of the $175.0 million term loan under the New Credit Agreement. Debt . As of September 30, 2020, we had a $100 million line of credit with no outstanding borrowings. Interest on outstanding borrowings accrue at a Base Rate plus an applicable margin (3.75% as of September 30, 2020) or London Interbank Offered Rate (“LIBOR”) plus an applicable margin (2.5% as of September 30, 2020). As of September 30, 2020, the interest rate on the term loan was 2.50%. The Company has no outstanding bank debt at September 30, 2020. Funds Held for Customers and Customer Funds Obligations We maintain trust accounts with financial institutions, which allows our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held for customers represents cash and cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Funds held for customers are not commingled with our operating funds. Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on our consolidated balance sheets as the obligations are expected to be settled within one year. Cash flows related to changes in customer funds obligations liability are presented as cash flows from financing activities. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations and Commitments Other than the redemption of our outstanding debt through use of a portion of the Offering proceeds, there have been no material updates or changes to our contractual obligations and commitments compared to contractual obligations and commitments described in our Quarterly Report on Form 10-Q for the period ended June 30, 2020. Use and Reconciliation of Non-GAAP Financial Measures In addition to our results determined in accordance with GAAP, we have calculated non-GAAP cost of revenues, non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP sales and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income, non-GAAP net income, and free cash flow, which are each non-GAAP financial measures. We have provided tabular reconciliations of each of these non-GAAP financial measures to its most directly comparable GAAP financial measure. Management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance and liquidity. Our non-GAAP financial measures are presented as supplemental disclosure as we believe they provide useful information to investors and others in understanding and evaluating our results, prospects, and liquidity period-over-period without the impact of certain items that do not directly correlate to our performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as comparing our financial results to those of other companies. Our definitions of these non-GAAP financial measures may differ from similarly titled measures presented by other companies, and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, the financial information -63- Table of Contents prepared in accordance with GAAP measures, and should be read in conjunction with the financial statements included elsewhere in this Quarterly Report on Form 10-Q and the Prospectus. We calculate these non-GAAP financial measures as follows: ​ ● Non-GAAP cost of revenues is determined by adding back to GAAP cost of revenue the stock-based compensation expense and the depreciation and amortization of capitalized software costs included in cost of revenue for the respective periods. ● Non-GAAP gross profit is determined by adding back to GAAP gross profit the stock-based compensation expense and the depreciation and amortization of capitalized software costs included in cost of revenue for the respective periods. ● Non-GAAP gross margin is determined by adding back to GAAP gross margin the impact of stock-based compensation expense and depreciation and amortization of capitalized software costs included in cost of revenues as a percentage of revenue for the respective periods. ● Non-GAAP research and development expense, non-GAAP selling and marketing expense, and non-GAAP general and administrative expense are determined by adding back to GAAP research and development expense, GAAP selling and marketing expense, and GAAP general and administrative expense, the stock-based compensation expense and severance expense included in the applicable expense categories for the respective periods. ● Non-GAAP operating income is determined by adding back to GAAP operating income (loss) the stock-based compensation expense, depreciation and amortization of capitalized software costs and acquired intangibles, and severance costs included for the respective periods. ● Non-GAAP net income is determined by adding back to GAAP net (loss) income amortization of capitalized software costs and acquired intangibles, stock-based compensation expense,the impact of converting from an S- to a C-corporation, and severance costs included for the respective periods. ● Adjusted EBITDA is determined by adding back to GAAP net (loss) income the net interest expense, taxes, depreciation and amortization of property and equipment, capitalized software costs and acquired intangibles, stock-based compensation expense and severance cost included for the respective periods. ● Adjusted EBITDA margin is determined by dividing Adjusted EBITDA by total revenues for the respective periods. ● Free cash flow is determined by adjusting net cash provided by (used in) operating activities by adding back cash used for the redemption of SARs redeemed in connection with the IPO and reducing it for purchases of property and equipment and capitalized software additions for the respective periods. · Free cash flow margin is determined by dividing free cash flow by total revenues for the respective periods. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view these non-GAAP financial measures in conjunction with the related GAAP financial measures. ​ The following schedules reflect our non-GAAP financial measures and reconcile our non-GAAP financial measures to the related GAAP financial measures. Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition -64- Table of Contents and Results of Operations - Key Business Metrics” for further discussion and reconciliation of Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin to the related GAAP financial measures. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended ​ For the nine months ended ​ ​ September 30 ​ September 30 (in thousands) ​ 2020 ​ 2019 ​ 2020 ​ 2019 Non-GAAP cost of revenues, software subscriptions $ 17,512 $ 14,829 $ 50,495 $ 44,473 ​ Non-GAAP cost of revenues, services ​ $ 9,577 ​ $ 8,589 ​ $ 28,610 ​ $ 23,025 ​ Non-GAAP gross profit ​ $ 67,516 ​ $ 59,021 ​ $ 196,016 ​ $ 167,930 ​ Non-GAAP gross margin ​ 71.4 % 71.6 % 71.2 % 71.3 % Non-GAAP research and development expense ​ $ 10,161 ​ $ 7,140 ​ $ 29,197 ​ $ 21,656 ​ Non-GAAP selling and marketing expense ​ $ 16,474 ​ $ 15,569 ​ $ 50,032 ​ $ 48,380 ​ Non-GAAP general and administrative expense ​ $ 18,410 ​ $ 16,672 ​ $ 57,294 ​ $ 46,641 ​ Non-GAAP operating income ​ $ 19,796 ​ $ 17,325 ​ $ 51,230 ​ $ 44,253 ​ Non-GAAP net income ​ $ 21,639 ​ $ 16,898 ​ $ 52,180 ​ $ 42,849 ​ ​ -65- Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended ​ For the nine months ended ​ ​ September 30 ​ September 30 (in thousands) ​ 2020 ​ 2019 ​ 2020 ​ 2019 Non-GAAP Cost of Revenue: ​ ​ ​ ​ ​ Cost of revenues, software subscriptions ​ $ 29,161 ​ $ 18,647 ​ $ 79,846 ​ $ 56,490 ​ Stock-based compensation ​ (6,342) ​ (131) ​ (14,002) ​ (393) ​ Depreciation and amortization - cost of subscription revenues ​ (5,307) ​ (3,687) ​ (15,349) ​ (11,624) ​ Non-GAAP cost of revenues, software subscriptions ​ $ 17,512 ​ $ 14,829 ​ $ 50,495 ​ $ 44,473 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenues, services ​ $ 18,807 ​ $ 8,786 ​ $ 49,329 ​ $ 23,616 ​ Stock-based compensation ​ (9,230) ​ (197) ​ (20,719) ​ (591) ​ Non-GAAP cost of revenues, services ​ $ 9,577 ​ $ 8,589 ​ $ 28,610 ​ $ 23,025 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Gross Profit: ​ ​ ​ ​ ​ Gross Profit ​ $ 46,637 ​ $ 55,006 ​ $ 145,946 ​ $ 155,322 ​ Stock-based compensation ​ 15,572 ​ 328 ​ 34,721 ​ 984 ​ Depreciation and amortization of capitalized software ​ 5,307 ​ 3,687 ​ 15,349 ​ 11,624 ​ Non-GAAP gross profit ​ $ 67,516 ​ $ 59,021 ​ $ 196,016 ​ $ 167,930 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Gross Margin: ​ ​ ​ ​ ​ Gross margin ​ 49.3 % 66.7 % 53.0 % 66.0 % Stock-based compensation as a percentage of revenue ​ 16.5 % 0.4 % 12.6 % 0.4 % Depreciation and amortization - cost of subscription revenues as a percentage of revenue ​ 5.6 % 4.5 % 5.6 % 4.9 % Non-GAAP gross margin ​ 71.4 % 71.6 % 71.2 % 71.3 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Research and Development Expense: ​ ​ ​ ​ ​ Research and development ​ $ 16,501 ​ $ 7,271 ​ $ 43,197 ​ $ 22,049 ​ Stock-based compensation ​ (6,340) ​ (131) ​ (14,000) ​ (393) ​ Non-GAAP research and development expense ​ $ 10,161 ​ $ 7,140 ​ $ 29,197 ​ $ 21,656 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Selling and Marketing Expense: ​ ​ ​ ​ ​ Selling and marketing ​ $ 29,423 ​ $ 15,830 ​ $ 78,300 ​ $ 49,164 ​ Amortization of acquired intangibles - selling and marketing expense ​ ​ (128) ​ ​ — ​ ​ (128) ​ ​ — ​ Stock-based compensation ​ (12,821) ​ (261) ​ (28,140) ​ (784) ​ Non-GAAP selling and marketing ​ $ 16,474 ​ $ 15,569 ​ $ 50,032 ​ $ 48,380 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP General and Administrative Expense: ​ ​ ​ ​ ​ General and administrative ​ $ 48,043 ​ $ 17,263 ​ $ 123,437 ​ $ 49,358 ​ Stock-based compensation ​ (29,561) ​ (590) ​ (64,029) ​ (1,769) ​ Severance charges ​ (72) ​ (1) ​ (2,114) ​ (948) ​ Non-GAAP general and administrative ​ $ 18,410 ​ $ 16,672 ​ $ 57,294 ​ $ 46,641 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Operating Income: ​ ​ ​ ​ ​ Income (loss) from operations ​ $ (50,005) ​ $ 12,327 ​ $ (107,251) ​ $ 27,751 ​ Stock-based compensation ​ 64,294 ​ 1,310 ​ 140,890 ​ 3,930 ​ Severance expense ​ 72 ​ 1 ​ 2,114 ​ 948 ​ Amortization of acquired intangibles - selling and marketing expense ​ ​ 128 ​ ​ — ​ ​ 128 ​ ​ — ​ Depreciation and amortization - cost of subscription revenues ​ 5,307 ​ 3,687 ​ 15,349 ​ 11,624 ​ Non-GAAP operating income ​ $ 19,796 ​ $ 17,325 ​ $ 51,230 ​ $ 44,253 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Reconciliation of Non-GAAP Net Income: ​ ​ ​ ​ ​ Net (loss) income ​ $ (21,028) ​ $ 11,900 ​ $ (79,167) ​ $ 26,347 ​ Stock-based compensation ​ 64,294 ​ 1,310 ​ 140,890 ​ 3,930 ​ Severance charges ​ 72 ​ 1 ​ 2,114 ​ 948 ​ Amortization of acquired intangibles - selling and marketing expense ​ ​ 128 ​ ​ — ​ ​ 128 ​ ​ — ​ Depreciation and amortization - cost of subscription revenues ​ ​ 5,307 ​ ​ 3,687 ​ ​ 15,349 ​ ​ 11,624 ​ Impact of S- to C-corporation conversion ​ (27,134) ​ — ​ (27,134) ​ — ​ Non-GAAP net income ​ $ 21,639 ​ $ 16,898 ​ $ 52,180 ​ $ 42,849 ​ -66- Table of Contents ​ Critical Accounting Policies and Estimates The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include software development costs, goodwill, accounting for stock-based compensation, revenue recognition, and income taxes, which are described in “Note 1—Summary of Significant Accounting Policies” in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no material updates or changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in our Quarterly Report on Form 10-Q for the period ended June 30, 2020. Recent Accounting Pronouncements For further information on recent accounting pronouncements, refer to Note 1 in the consolidated financial statements contained within this Quarterly Report on Form 10-Q.