What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-12 compared with 2021-05-13 · 361 added, 200 removed, 312 unchanged (64% of the section changed)

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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 32.3% and 25.1% of software subscription revenue

from cloud-based subscriptions during the three months ended March 31, 2021 and 2020, respectively.

While our on-premise software subscription revenue comprises 67.7% of our 2021 software subscription revenue, it continues to decrease as a percentage of total software subscription revenue as cloud-based subscriptions accelerate.

We generated 36% and 26% of software subscription revenue from

cloud-based subscriptions during the three months ended June 30, 2021 and 2020, respectively, and 34% and 26% for the six months ended June 30, 2021 and 2020, respectively.

While our on-premise software subscription revenue comprised 64% and 74% of our software subscription revenues during the three months ended June 30, 2021 and 2020, respectively, and 66% and 74% for the six months ended June 30, 2021 and 2020, respectively, it continues to decrease as a percentage of total software subscriptions revenues as cloud-based subscriptions accelerate.

We license our solutions primarily through our direct sales force, which focuses on selling to qualified leads provided by our marketing efforts, and through our network of referral partners.

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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.

We integrate with key technology partners that span ERP, CRM, procurement, billing, POS and e-commerce.

These partners include Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Workday and Zuora.

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We believe that global commerce and the compliance environment provides durable and accelerating growth opportunities for our business.

We generated revenue of $98.2 million and $89.2 million for the three months ended March 31, 2021 and 2020, respectively.

We had net income of $2.3 million and a net loss of $29.1 million for the three months ended March 31, 2021 and 2020, respectively.

Adjusted EBITDA was $18.2 million and $15.3 million for the three months ended March 31, 2021 and 2020, respectively.

We generated revenue of $104.9 million and $91.3 million for the three months ended June 30, 2021 and 2020, respectively.

We generated revenue of $203.2 million and $180.5 million for the six months ended June 30, 2021 and 2020, respectively.

We had a net income of $0.8 million and a net loss of $(29.1) million for the three months ended June 30, 2021 and 2020, respectively.

We had a net income of $3.1 million and a net loss of $(58.1) million for the six months ended June 30, 2021 and 2020, respectively.

Net income is presented in accordance with generally accepted accounting principles in the U.S.

We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude charges for asset impairments, stock-based compensation expense, severance expense and transaction costs.

Adjusted EBITDA was $19.2 million and $21.5 million for the three months ended June 30, 2021 and 2020, respectively.

Adjusted EBITDA was $37.4 million and $36.8 million for the six months ended June 30, 2021 and 2020, respectively.

Adjusted EBITDA is a non-GAAP financial measure.

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.

Refer to “Key Business Metrics” and “Use and Reconciliation of Non-GAAP Financial Measures” for further discussion of key business metrics and non-GAAP financial measures and their comparison to GAAP financial measures.

Recent Developments

Taxamo Acquisition

On May 12, 2021, we acquired EVAT Solutions Limited and its subsidiaries, doing business as Taxamo (collectively “Taxamo”), a cloud-based pioneer in tax and payment automation for global e-commerce and marketplaces for approximately $200.0 million in cash on hand.

This acquisition supports and accelerates our growth strategies across ecommerce platforms and marketplaces in the enterprise and mid-market in Europe and North America, and among our existing global customers.

On May 12, 2021, the Company acquired 95% of the outstanding equity of EVAT Solutions Limited (“EVAT”) and its wholly owned subsidiaries (collectively “Taxamo”), a cloud-based provider of tax and payment automation for global eCommerce and marketplaces.

This acquisition supports the Company’s growth strategies across eCommerce platforms and marketplaces in Europe and North America.

The preliminary purchase price for the Taxamo acquisition was $200.7 million as of the acquisition date, consisting of (i) $190.2 million of cash paid at closing, (ii) an acquisition holdback of $0.5 million, and (iii) an option to purchase from and an option for the remaining shareholder to sell the remaining 5% of the outstanding equity of EVAT at a fixed amount between August and December 2021 for $10.0 million.

Impact of COVID-19

During 2020, the COVID-19 pandemic had minimal impact on our revenues and results of operations, as we continue to derive the significant majority of our revenues from our existing software subscriptions.

During 2020 and for the six months ended June 30, 2021, the COVID-19 pandemic had minimal impact on our revenues and results of operations, as we continue to derive the significant majority of our revenues from our existing software subscriptions.

As we principally price our solutions based on our customers’ revenues within certain revenue bands, elongated declines in our existing customers’ revenues may impact our ability to grow our existing customer revenues.

We did not experience an abnormal number of non-renewals in 2020, nor any material declines in revenues associated with declines in our customers’ revenues, and we currently expect our existing customer base to remain largely stable, as it did through the recession in 2008 and 2009.

However, significant increases in non-renewals or concessions to renewal customers would have a material impact on our revenues and cash flows.

During 2020, we did see some delays in signing deals due to prospects shifting to working remotely, and some due to economic uncertainty.

We expect that the uncertainty caused by the COVID-19 pandemic could impact our billings to new customers beyond 2020 as the pandemic continues to generate economic uncertainty, and it may also negatively impact our efforts to maintain or expand revenues from our existing customers as they continue to evaluate certain long-term projects and budget constraints.

We did not experience an abnormal number of non-renewals in 2020 or for the six months ended June 30, 2021, nor any material declines in revenues associated with declines in our customers’ revenues, and we currently expect our existing customer base to remain largely stable, as it did through the recession in 2008 and 2009.

However, significant increases in non-renewals or concessions to renewal customers would have a material impact on our revenues and cash

During 2020 and through the six months ended June 30, 2021, we have seen some delays in signing deals due to prospects ongoing adjustments to working remotely for extended periods of time, and some due to economic uncertainty.

We expect that the uncertainty caused by the COVID-19 pandemic could impact our billings to new customers beyond 2020 and the six months ended June 30, 2021 as the pandemic continues to generate economic uncertainty.

In addition, it may also negatively impact our efforts to maintain or expand revenues from our existing customers as they continue to evaluate certain long-term projects and budget constraints.

However, we do not anticipate that overall demand for our software and solutions, our ability to deliver such software and solutions, or our growth strategies will be materially impacted by the COVID-19 pandemic, as companies continue to rely on us for their indirect tax solutions.

Our cash collections for the year were consistent with our expectations as some of the procedural disruptions that customers experienced as they shifted to remote work early in the year stabilized by the end of 2020.

We believe that we may see delays in collections in 2021 as the pandemic continues to generate economic uncertainty.

Our cash collections for 2020 were consistent with our expectations as some of the procedural disruptions that customers experienced as they shifted to remote work early in the year stabilized by the end of 2020.

We believe that we may see delays in collections in 2021 as the recent resurgence of COVID-19 continues to generate economic uncertainty.

However, we do not believe that these delays will materially impact our business;

we continue to expect that we will be able to collect amounts due under subscription contracts from customers experiencing issues as a result of the COVID-19 pandemic, and we have

not recorded additional credit losses associated with the allowance for doubtful accounts in connection with any delays.

we continue to expect that we will be able to collect amounts due under subscription contracts from customers experiencing issues as a result of the COVID-19 pandemic, and we have not recorded additional credit losses associated with the 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.

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These factors may adversely impact consumer, business and government spending on technology as well as customers’ ability to pay for our products and services on an ongoing basis.

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

Key Business Metrics

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

Annual Recurring Revenue.

We derive the vast majority of our revenue from recurring software subscriptions.

We believe Annual Recurring Revenue (“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.

Three months ended

(Dollars in millions)

Year-Over-Year Change

Annual Recurring Revenue

ARR increased by $35.9 million or 12.6% for the three months ended March 31, 2021, as compared to the same period in 2020.

The increase was primarily driven by $14.7 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases and $21.2 million of on-premise and cloud-based subscriptions 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 or reduced usage, as well as any revenue expansion from migrations, new licenses for additional products or contractual and usage-based price changes.

Three months ended

Net Revenue Retention Rate

The 400 basis point decline in NRR from 109% for the three months ended March 31, 2020 to 105% for the same period in 2021 was primarily attributable to a reduction in sales growth to existing customers as compared to the prior year related to delays in signing deals due to their focus shifting to working remotely, and economic uncertainty in connection with the impact of the COVID-19 pandemic on their businesses.

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.

Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period.

For purposes of comparison, our net income (loss) was $2.3 million and $(29.1) million for the three months ended March 31, 2021 and 2020, respectively, while our net income margin was 2.3% and (32.6%) over the same periods, respectively.

Three months ended

(Dollars in thousands)

Adjusted EBITDA:

Net income (loss)

Interest expense, net

Income tax (benefit) expense

Depreciation and amortization - property and equipment

Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues

Amortization of acquired intangible assets - selling and marketing expense

Stock-based compensation expense

Severance expense

Transaction costs

Adjusted EBITDA

Adjusted EBITDA Margin:

Total revenues

Adjusted EBITDA margin

The increase in Adjusted EBITDA for the three months ended March 31, 2021 of $2.9 million over the comparable period in 2020 is primarily driven by an increase in net income of $31.4 million, offset by the decrease in stock-based compensation of $28.4 million.

Adjusted EBITDA margin increased to 18.5% for the three months ended March 31, 2021 compared to 17.1% for the comparable period in 2020.

Free Cash Flow and Free Cash Flow Margin.

We use 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 our initial public offering (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 used in operating activities was $(3.0) million and $(6.4) million for the three months ended March 31, 2021 and 2020, respectively, while our operating cash flow margin was (3.0%) and (7.2%) over the same periods, respectively.

Net cash used in investing activities was $(14.5) million and $(21.7) million for the three months ended March 31, 2021 and 2020, respectively.

Net cash (used in) provided by financing activities was $(8.1) million and $103.7 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

Three months ended

(Dollars in thousands)

Free Cash Flow:

Cash used in operating activities

Property and equipment additions

Capitalized software additions

Free cash flow

Free Cash Flow Margin:

Total revenues

Free cash flow margin

Free cash flow increased by $4.4 million for the three months ended March 31, 2021 as compared to the same period in 2020.

This increase was primarily driven by an increase in net income of $31.4 million, offset by the decrease in stock-based compensation of $28.4 million.

Historically, our cash flows in the first quarter are lower than the remaining calendar quarters as they are heavily influenced by annual employee bonus and other variable compensation payments.

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, estimated useful lives and potential impairment of long-lived assets and intangible assets, and potential impairment of goodwill.

Components of Our Results of Operations

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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.

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.

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Cost of revenue also includes amortization associated with direct labor and related expenses for capitalized internal-use software for cloud-based subscription solutions and software developed for sale for new products and enhancements to existing products, and costs associated with the amortization of acquired intangible assets.

We plan to continue to significantly expand our infrastructure and personnel to support our future growth and increases in transaction volumes of our cloud-based solutions, including through acquisitions.

We 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.

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Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred.

For the three months ended March 31, 2021 and 2020, $2.2 million and $3.7 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.

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In addition, travel restrictions due to COVID-19 continue to result in reductions in travel and external marketing events.

These costs are expected to increase once travel and conference restrictions are lifted, although it is uncertain whether they will return to their historical levels experienced pre-COVID-19.

These costs are expected to increase once travel and conference restrictions are lifted, although it is uncertain whether they will return to historical levels experienced pre-COVID-19.

General and Administrative

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Depreciation and amortization will fluctuate in correlation with our ongoing investment in internal infrastructure costs to support our growth.

Interest Expense, net

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

Other Operating Expense, net

Other operating expense, net consists primarily of transactions costs associated with merger and acquisition activities, quarterly remeasurement of contingent consideration associated with completed acquisitions, realized gains and losses on foreign currency changes and other operating gains and losses.

These amounts will fluctuate as a result of ongoing merger and acquisition activities and for changes in foreign currency rates.

Interest (Income) Expense, net

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

Interest expense consists primarily of interest payments and other financing costs on our bank credit facility.

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Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, our consolidated financial statements and the notes with our Annual Report on Form 10-K filed with the SEC on March 15, 2021, and our Prospectus filed with the SEC on July 30, 2020.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 15, 2021.

The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

The following table sets forth our consolidated statements of comprehensive income (loss) for the periods indicated.

The following table sets forth our consolidated statements of comprehensive loss for the periods indicated.

Three months ended

Six months ended

(Dollars in thousands)

Period-Over-Period Change

Software subscriptions

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Depreciation and amortization

Other operating (income) expense, net

Other operating expense, net

Total operating expenses

Income (loss) from operations

Interest expense, net

Interest (income) expense, net

Income (loss) before income taxes

Income tax (benefit) expense

Income tax benefit

Net income (loss)

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

Total comprehensive income (loss)

(1) Includes stock-based compensation expenses as follows in the table below.

Total comprehensive loss

Includes stock-based compensation expenses as shown on the following table.

Three months ended

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(In thousands)

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Total stock-based compensation expense

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

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

Three months ended

Six months ended

Software subscriptions

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Depreciation and amortization

Other operating (income) expense, net

Other operating expense, net

Total operating expenses

Income (loss) from operations

Interest expense, net

Interest (income) expense, net

Income (loss) before income taxes

Income tax (benefit) expense

Income tax benefit

Net income (loss)

Other comprehensive loss from foreign currency translations, net of tax

Total comprehensive income (loss)

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Total comprehensive loss

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Three months ended

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Total revenues

Revenue increased $9.0 million, or 10.1%, to $98.2 million for the three months ended March 31, 2021 compared to $89.2 million for the three months ended March 31, 2020.

The increase in software subscriptions revenue of $7.5 million, or 9.9%, was primarily driven by and increase of $7.3 million in revenues derived from our existing customers and a year over year increase of $0.2 million in revenues derived from new customers.

Software subscriptions revenue derived from new customers averaged 7.5% of total software subscriptions revenue in both periods.

The $1.5 million increase in services revenue is primarily driven by an increase of $1.0 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

Revenues increased $13.7 million, or 15.0%, to $104.9 million for the three months ended June 30, 2021 compared to $91.3 million for the three months ended June 30, 2020.

The increase in software subscriptions revenues of $12.3 million, or 15.9%, was primarily driven by and increase of $10.1 million in revenues derived from our existing customers and a period over period increase of $2.2 million in revenues derived from new customers.

Software subscriptions revenues derived from new customers averaged 8.9% of total software subscriptions revenues in both periods.

The $1.4 million increase in services revenues was primarily driven by an increase of $0.5 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 $0.8 million increase in recurring services revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.

Cost of Software Subscriptions Revenues

Three months ended

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Period-over-Period change

Cost of software subscription revenues

Cost of software subscriptions revenue increased $0.9 million, or 3.7%, to $25.6 million for the three months ended March 31, 2021 compared to $24.7 million for the three months ended March 31, 2020.

This is primarily driven by a $3.8 million increase in 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.

This increase is partially offset by a $2.9 million decrease in stock-based compensation for the three months ended March 31, 2021 over the same period in 2020.

As a percentage of total revenue, the cost of software subscriptions revenue decreased to 26.0% for the three months ended March 31, 2021 compared to 27.7% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenue, cost of software subscriptions revenue increased to 25.5% in 2021 compared to 23.7% in 2020.

Cost of Services Revenue

Cost of software subscriptions revenues

Cost of software subscriptions revenues increased $0.8 million, or 3.2%, to $26.8 million for the three months ended June 30, 2021 compared to $26.0 million for the three months ended June 30, 2020.

This included a $4.0 million increase in costs of personnel supporting period over period growth of sales and customers and ongoing infrastructure investments to support expansion of customer transaction volumes for our cloud-based subscription customers.

In addition, this included an increase in depreciation and amortization of capitalized software and acquired intangibles of $0.4 million associated with our ongoing investments in internal-use software for cloud-based subscription solutions and software developed for sale for new products and enhancements to existing products, and costs associated with the amortization of acquired intangible assets.

These increases were partially offset by a $3.6 million decrease in stock-based compensation for the three months ended June 30, 2021 compared to the same period in 2020.

As a percentage of total revenues, the cost of software subscriptions revenues decreased to 25.6% for the three months ended June 30, 2021 compared to 28.5% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenues, cost of software subscriptions revenues increased to 25.0% in 2021 compared to 23.9% in 2020.

Cost of Services Revenues

Three months ended

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Period-over-Period change

Cost of services revenuess

Cost of services revenue decreased $3.4 million, or 23.2%, to $11.3 million for the three months ended March 31, 2021 compared to $14.8 million for the three months ended March 31, 2020.

This decline is primarily driven by a stock-based compensation decrease of $4.6 million for the three months ended March 31, 2021 over the same period in 2020.

After adjusting for the decline in stock-based compensation expense, cost of services revenue is increasing $1.2 million primarily driven by an increase in costs of personnel supporting 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 decreased to 11.5% in 2021 compared to 16.6% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenue, cost of services revenue increased to 10.9% in 2021 compared to 10.7% in 2020.

Cost of services revenues

Cost of services revenue decreased $5.2 million, or 33.0%, to $10.6 million for the three months ended June 30, 2021 compared to $15.7 million for the three months ended June 30, 2020.

This decline was primarily driven by a stock-based compensation decrease of $5.6 million for the three months ended June 30, 2021 compared to the same period in 2020.

After adjusting for the decline in stock-based compensation expense, cost of services revenues increased $0.4 million primarily driven by an increase in costs of service delivery personnel to support revenue growth in software subscription related services and our managed services offering.

As a percentage of total revenues, cost of services revenues decreased to 10.1% in 2021 compared to 17.2% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenues, cost of services revenues decreased to 9.5% in 2021 compared to 10.4% in 2020.

Research and Development

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Research and development

Research and development expenses decreased $1.6 million, or 12.4%, to $11.5 million for the three months ended March 31, 2021 compared to $13.1 million for the three months ended March 31, 2020.

However, this decline is primarily driven by a stock-based compensation decrease of $2.9 million for the three months ended March 31, 2021 over the same period in 2020.

After adjusting for the decline in stock-based compensation expense, research and development expenses are increasing $1.3 million primarily driven by an increase in 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 decreased to 11.7% for the three months ended March 31, 2021 compared to 14.7% for the three months ended March 31, 2020.

After excluding stock-based compensation expense, as a percentage of total revenue, research and development expenses increased to 11.1% in 2021 compared to 10.7% in 2020.

Research and development expenses decreased $1.7 million, or 12.4%, to $11.9 million for the three months ended June 30, 2021 compared to $13.6 million for the three months ended June 30, 2020.

However, this decline was driven by a stock-based compensation decrease of $3.6 million for the three months ended June 30, 2021 compared to the same period in 2020.

After adjusting for the decline in stock-based compensation expense, research and development expenses increased $1.9 million primarily driven by an increase in costs associated with increased development activity associated with nascent technologies, new solutions to address end-to-end data analysis and compliance needs of our customers, and continued expansion of connectors and application program interfaces (“APIs”) to customer ERP and other software platforms.

As a percentage of total revenues, research and development expenses decreased to 11.4% for the three months ended June 30, 2021 compared to 14.9% for the three months ended June 30, 2020.

After excluding stock-based compensation expense, as a percentage of total revenues, research and development expenses increased to 10.8% in 2021 compared to 10.4% in 2020.

Research and development expense excludes those costs that have been capitalized for solutions that have met our capitalization policy.

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Selling and marketing

Selling and marketing expenses decreased $4.2 million, or 17.2%, to $20.2 million for the three months ended March 31, 2021 compared to $24.3 million for the same period in 2020.

However, this decline is primarily driven by a stock-based compensation decrease of $5.7 million for the three months ended March 31, 2021 over the same period in 2020.

After adjusting for the decline in stock-based compensation expense, selling and marketing expenses are increasing $1.5 million primarily driven by 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 decreased to 20.5% for the three months ended March 31, 2021 compared to 27.3% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenue, selling and marketing expenses decreased to 19.2% in 2021 compared to 19.4% in 2020.

Selling and marketing expenses increased $0.3 million, or 1.3%, to $24.9 million for the three months ended June 30, 2021 compared to $24.5 million for the same period in 2020.

This included a $5.0 million increase in payroll and related expenses associated with the growth in period over period subscription sales and services revenues and expansion of our partner and channel management programs.

In addition, this included an increase of $2.3 million in advertising and promotional spending and expanded brand awareness efforts.

These increases were partially offset by a $6.9 million decrease in stock-based compensation for the three months ended June 30, 2021 over the same period in 2020.

As a percentage of total revenues, selling and marketing expenses decreased to 23.7% for the three months ended June 30, 2021 compared to 26.9% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenues, selling and marketing expenses increased to 22.3% in 2021 compared to 17.8% in 2020.

General and Administrative

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General and administrative

General and administrative expenses decreased $12.8 million, or 34.0%, to $24.9 million for the three months ended March 31, 2021 compared to $37.6 million for the same period in 2020.

However, this decline is primarily driven by a stock-based compensation decrease of $12.2 million for the three months ended March 31, 2021 over the same period in 2020.

After adjusting for the decline in stock-based compensation expense, general and administrative expenses are decreasing an additional $0.6 million primarily driven by a decrease in travel costs due to COVID-19 travel restrictions and an increase in capitalized costs associated with internal optimization efforts, partially offset by increased costs associated with public company status.

As a percentage of total revenue, general and administrative expenses decreased to 25.3% for the three months ended March 31, 2021 compared to 42.2% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenue, general and administrative expenses decreased to 21.7% in 2021 compared to 24.6% in 2020.

Provision for Taxes

General and administrative expenses decreased $12.9 million, or 34.1%, to $24.9 million for the three months ended June 30, 2021 compared to $37.8 million for the same period in 2020.

However, this decline was driven by a stock-based compensation decrease of $15.7 million for the three months ended June 30, 2021 over the same period in 2020.

After adjusting for the decline in stock-based compensation expense, general and administrative expenses increased $2.8 million primarily driven by 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.

As a percentage of total revenues, general and administrative expenses decreased to 23.7% for the three months ended June 30, 2021 compared to 41.4% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenues, general and administrative expenses were consistent at 20.8% in 2021 and 2020.

Depreciation and Amortization

Three months ended

1 unchanged sentence

Period-over-Period change

Income tax (benefit) expense

Income tax expense decreased $0.9 million, or 371.6%, to $(0.7) million of income tax benefit for the three months ended March 31, 2021 compared to $0.3 million of income tax expense for the same period in 2020.

The decrease was primarily due to a pretax loss resulting from an increase in stock-based compensation in 2020 compared to the benefit for U.S.

Depreciation and amortization

Depreciation and amortization increased $0.4 million, or 14.9%, to $2.9 million for the three months ended June 30, 2021 compared to $2.5 million for the same period in 2020.

The increase was primarily due to the impact of infrastructure and technology purchases placed in service in 2020 and 2021and other capitalized infrastructure costs to support our growth.

As a percentage of total revenues, depreciation expense was consistent at 2.7% for 2021 and 2020

Other Operating Expense, Net

Three months ended

(Dollars in thousands)

Period-Over-Period Change

Other operating expense, net

Other operating expense, net increased $4.4 million, or 4,252.4%, to $4.5 million of expense for the three months ended June 30, 2021 compared to $0.1 million of expense for the same period in 2020.

The increase was primarily due to $4.5 million in transaction costs associated with the Taxamo acquisition for the three months ended June 30, 2021.

As a percentage of total revenues, other operating expense,net increased to 4.3% in 2021 compared to 0.1% in 2020.

Interest (Income) Expense, Net

Three months ended

(Dollars in thousands)

Period-over-Period change

Interest (income) expense, net

Interest (income) expense, net changed $1.4 million, or 136.4%, to $0.4 million in interest income for the three months ended June 30, 2021 compared to $1.1 million of interest expense for the same period in 2020.

This change was primarily attributable to a decrease of $1.3 million in interest expense for the three months ended June 30, 2021 compared to 2020 due to the repayment of the Term Loan in July 2020.

In addition, interest expense also decreased $0.2 million for the three months ended June 30, 2021 due to an increase in the valuation of foreign currency forward contracts.

This was partially offset by lower interest income for the three months ended June 30, 2021 of $0.1 million due to a decline in investment yields in the current period as compared to 2020.

Income Tax Benefit

Three months ended

(Dollars in thousands)

Period-over-Period change

Income tax benefit

Income tax benefit increased $0.9 million, or 91.0%, to $1.9 million for the three months ended June 30, 2021 compared to $1.0 million for the same period in 2020.

This increase was primarily due to a pre-tax loss resulting from an increase in stock-based compensation in 2020 compared to the benefit for U.S.

federal and state income taxes in 2021 now that we are taxed as a C-Corporation.

The income tax benefit in the three months ended March 31, 2021 is primarily driven by exercises of stock options partially offset by the unfavorable impact of limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m).

The income tax benefit in the three months ended June 30, 2021 was primarily driven by exercises and vestings of stock awards partially offset by the unfavorable impact of limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m).

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Six months ended

(Dollars in thousands)

Period-over-Period change

Software subscriptions

Total revenues

Revenues increased $22.7 million, or 12.6%, to $203.2 million for the six months ended June 30, 2021 compared to $180.5 million for the six months ended June 30, 2020.

The increase in software subscriptions revenues of $19.8 million, or 12.9%, was primarily driven by $17.5 million in revenue growth derived from our existing customers and $2.3 million of revenues from new customers.

The $2.8 million increase in services revenues was driven by an increase of $1.4 million in software subscription-related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and upgrading existing customers to newer versions of our solutions.

In addition, our managed services offering experienced a $1.4 million increase in recurring services revenues over the prior year period due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.

Cost of Software Subscriptions Revenues

Six months ended

(Dollars in thousands)

Period-over-Period change

Cost of software subscriptions revenues

Cost of software subscriptions revenues increased $1.7 million, or 3.4%, to $52.4 million for the six months ended June 30, 2021 compared to $50.7 million for the six months ended June 30, 2020.

This included a $6.5 million increase in costs of personnel supporting period over period growth of sales and customers and ongoing infrastructure investments to support expansion of customer transaction volumes for our cloud-based subscription customers.

In addition, this included an increase in depreciation and amortization of capitalized software and acquired intangibles of $1.7 million associated with our ongoing investments in internal-use software for cloud-based subscription solutions and software developed for sale for new products and enhancements to existing products, and costs associated with the amortization of acquired intangible assets.

These increases were partially offset by a $6.5 million decrease in stock-based compensation for the six months ended June 30, 2021 compared to the same period in 2020.

As a percentage of total revenues, the cost of software subscriptions revenues increased to 25.8% for the six months ended June 30, 2021 compared to 28.1% in the prior year period.

After excluding stock-based compensation expense, as a percentage of total revenues, cost of software subscriptions revenues increased to 25.2% in 2021 compared to 23.8% in 2020.

Cost of Services Revenues

Six months ended

(Dollars in thousands)

Period-over-Period change

Cost of services revenues

Cost of services revenues decreased $8.6 million, or 28.3%, to $21.9 million for the six months ended June 30, 2021 compared to $30.5 million for the six months ended June 30, 2020.

However, this decline was driven by a stock-based compensation decrease of $10.3 million for the six months ended June 30, 2021 compared to the same period in 2020.

After adjusting for the decline in stock-based compensation expense, cost of services revenues increased $1.7 million primarily driven by an increase in costs of service delivery personnel to support revenue growth in software subscription

related services and our managed services offering.

As a percentage of total revenues, cost of services revenues decreased to 10.8% in the six months ended June 30, 2021 compared to 16.9% in the prior year.

After excluding stock-based compensation expense, as a percentage of total revenues, cost of services revenues decreased to 10.2% in 2021 compared to 10.5% in 2020.

Research and Development

Six months ended

(Dollars in thousands)

Period-over-Period change

Research and development

Research and development expenses decreased $3.3 million, or 12.4%, to $23.4 million for the six months ended June 30, 2021 compared to $26.7 million for the six months ended June 30, 2020.

However, this decline was primarily driven by a stock-based compensation decrease of $6.5 million for the six months ended June 30, 2021 compared to the same period in 2020.

After adjusting for the decline in stock-based compensation expense, research and development expenses increased $3.2 million primarily driven by an increase in costs associated with increased development activity associated with nascent technologies, new solutions to address end-to-end data analysis and compliance needs of our customers, and continued expansion of connectors and application program interfaces (“APIs”) to customer ERP and other software platforms.

As a percentage of total revenues, research and development expenses decreased to 11.5% for the six months ended June 30, 2021 compared to 14.8% for the six months ended June 30, 2020, driven in part by our expanded investment in multiple new market offerings.

After excluding stock-based compensation expense, as a percentage of total revenues, research and development expenses increased to 11.0% in 2021 compared to 10.5% in 2020.

Research and development expense excludes those costs that have been capitalized for solutions that have met our capitalization policy.

Selling and Marketing

Six months ended

(Dollars in thousands)

Period-over-Period change

Selling and marketing

Selling and marketing expenses decreased $3.9 million, or 7.9%, to $45.0 million for the six months ended June 30, 2021 compared to $48.9 million for the same period in 2020.

However, this decline was primarily driven by a stock-based compensation decrease of $12.6 million for the six months ended June 30, 2021 over the same period in 2020.

After adjusting for the decline in stock-based compensation expense, selling and marketing expenses increased $8.7 million.

Of this $8.7 million increase, $5.1 million was primarily driven by an increase in payroll and related expenses associated with the growth in period over period subscription sales and services revenues and expansion of our partner and channel management programs.

In addition, this increase included $3.8 million in advertising and promotional spending and expanded brand awareness efforts period over period.

These increases were offset by decreases in travel period over period due to continued 2021 COVID-19 travel restrictions.

As a percentage of total revenues, selling and marketing expenses decreased to 22.2% for the six months ended June 30, 2021 compared to 27.1% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenues, selling and marketing expenses increased to 20.8% in 2021 compared to 18.6% in 2020.

General and Administrative

Six months ended

(Dollars in thousands)

Period-over-Period change

General and administrative

General and administrative expenses decreased $25.7 million, or 34.1%, to $49.7 million for the six months ended June 30, 2021 compared to $75.4 million for the same period in 2020.

However, this decline was primarily driven by a

stock-based compensation decrease of $27.8 million for the six months ended June 30, 2021 compared to the same period in 2020.

After adjusting for the decline in stock-based compensation expense, general and administrative expenses increased $2.1 primarily driven by 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 revenues, general and administrative expenses decreased to 24.5% for the six months ended June 30, 2021 compared to 41.8% for the same period in 2020.

After excluding stock-based compensation expense, as a percentage of total revenues, general and administrative expenses decreased to 21.2% in 2021 compared to 22.7% in 2020.

Depreciation and Amortization

Six months ended

(Dollars in thousands)

Period-over-Period change

Depreciation and amortization

Depreciation and amortization increased $0.3 million, or 6.2%, to $5.7 million for the six months ended June 30, 2021 compared to $5.4 million for the same period in 2020.

The increase was primarily due to the impact of infrastructure and technology purchases placed in service in 2020 and 2021 and other capitalized infrastructure costs to support our growth.

As a percentage of revenues, depreciation expense was relatively consistent at 2.8% for the six months ended June 30, 2021 compared to 3.0% for the same period in 2020.

Other Operating Expense, Net

Six months ended

(Dollars in thousands)

Period-Over-Period Change

Other operating expense, net

Other operating expense, net increased $4.1 million, or 1,934.6%, to $4.4 million of expense for the six months ended June 30, 2021 compared to $0.2 million of expense for the same period in 2020.

This increase was primarily due to $4.7 million in transaction costs, which included $4.5 million associated with the Taxamo acquisition for the six months ended June 30, 2021.

These costs were partially offset by other income of $0.4 million for the six months ended June 30, 2021 as compared to other expense of $0.2 million for the comparable period in 2020.

As a percentage of total revenues, other operating expense,net increased to 2.1% in 2021 compared to 0.1% in 2020.

Interest Expense, Net

Six months ended

(Dollars in thousands)

Period-over-Period change

Interest expense, net

Interest expense, net decreased $1.5 million, or 90.8%, to $0.2 million of expense for the six months ended June 30, 2021 compared to $1.6 million of expense for the same period in 2020.

This decrease was primarily attributable to a decrease of $2.0 million in interest expense during the six months ended June 30, 2021 compared to the same period in 2020 due to the repayment of the Term Loan in July 2020.

This was partially offset during the six months ended June 30, 2021 by an increase in interest expense of $0.2 million due to a decrease in the valuation of foreign currency forward contracts and lower interest income in the current period of $0.3 million due to a decline in investment yields in 2021 as compared to 2020.

Income Tax Benefit

Six months ended

(Dollars in thousands)

Period-over-Period change

Income tax benefit

Income tax benefit increased $1.8 million, or 248.3%, to $2.6 million for the six months ended June 30, 2021 compared to $0.7 million for the same period in 2020.

This increase was primarily due to a pre-tax loss resulting from an increase in stock-based compensation in 2020 compared to the benefit for U.S.

federal and state income taxes in 2021 now that we are taxed as a C-Corporation.

The income tax benefit in the six months ended June 30, 2021 was primarily driven by exercises and vestings of stock-based awards, partially offset by the unfavorable impact of limitations on deductions of certain employees’ compensation under Internal Revenue Code Section 162(m).

Liquidity and Capital Resources

As of March 31, 2021, we had cash and cash equivalents of $277.7 million and retained earnings of $24.7 million.

Our primary sources of capital to date have been from sales of our solutions, and proceeds from bank lending facilities.

In addition, on July 31, 2020, we received $423.0 million in proceeds from the Offering, 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 bank credit agreement.

As a result, we have no outstanding bank debt after such redemption and at March 31, 2021.

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

On May 12, 2021, we used approximately $200.0 million of our cash and cash equivalents to acquire Taxamo, a cloud-based pioneer in tax and payment automation for global e-commerce and marketplaces.

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

As of June 30, 2021, we had cash and cash equivalents of $101.6 million and retained earnings of $25.5 million.

Our primary sources of capital to date have been from sales of our solutions, proceeds from bank lending facilities and our Offering.

On July 31, 2020, we received $423.0 million in proceeds from the Offering, 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 bank credit agreement.

As a result, we have no outstanding bank debt after such redemption and at June 30, 2021.

The net proceeds remaining after payment of Offering costs and repayment of the term loan will be used for working capital and other corporate purposes as described in the Prospectus.

On May 12, 2021, we used approximately $190.2 million of our cash and cash equivalents to acquire Taxamo, a cloud-based provider of tax and payment automation for global eCommerce and marketplaces.

The preliminary purchase price for the Taxamo acquisition was $200.7 million as of the acquisition date, consisting of (i) $190.2 million of cash paid at closing, (ii) an acquisition holdback of $0.5 million, and (iii) an option to purchase from and an option for the remaining shareholder to sell the remaining 5% of the outstanding equity at a fixed amount between August and December 2021 for $10.0 million.

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.

5 unchanged sentences

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

Three months ended

Six months ended

(Dollars in thousands)

Period-Over-Period Change

Net cash used in operating activities

Net cash provided by operating activities

Net cash used in investing activities

Net cash (used in) provided by financing activities

Effect of foreign exchange rate changes

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

Net cash provided by (used in) financing activities

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

Net decrease in cash, cash equivalents and restricted cash

Operating Activities.

Net cash used in operating activities was $3.0 million for the three months ended March 31, 2021 compared to $6.4 million for the same period in 2020, a decrease of $3.5 million.

The decrease in the use of cash from operating activities was driven primarily by an increase in net income of $31.4 million offset by a decrease in stock-based compensation of $28.4 million.

Historically, our cash flows from operating activities are lower in the first quarter than the remaining calendar quarters as they are heavily influenced by annual employee bonus and other variable compensation payments made in the first quarter of each year.

Net cash provided by operating activities was $26.5 million for the six months ended June 30, 2021 compared to $20.8 million for the same period in 2020, an increase of $5.7 million.

The increase in cash provided by operating activities was driven primarily by a net increase in changes in operating assets and liabilities of $5.3 million period over period.

Investing Activities.

Cash used in investing activities was $14.5 million for the three months ended March 31, 2021 compared to $21.7 million for the same period in 2020, an decrease of $7.1 million.

This decrease was primarily due to a decrease in cash paid for acquisitions of $6.2 million period over period.

We acquired a controlling interest in Systax, a Brazilian transaction tax software and content subscription provider, for cash of $12.3 million during the three months ended March 31, 2020, partially offset by the acquisition of Tellutax, an Oregon-based computing edge technology company, for cash paid of $6.1 million during the three months ended March 31, 2021.

For additional information on the Tellutax acquisition, see “Note 3 to the Interim Condensed Consolidated Financial Statements (unaudited) —Acquisition.”

Net cash used in investing activities was $(214.6) million for the six months ended June 30, 2021 compared to $(30.1) million for the same period in 2020, an increase in use of funds for investing activities of $184.5 million.

This increase was primarily due to a net increase in cash paid for acquisitions of $181.3 million period over period.

During the six months ended June 30, 2021, we acquired Taxamo for approximately $187.5 million in cash, net of $2.6 million of Taxamo’s cash received in the acquisition, and Tellutax, LLC (“Tellutax”) for cash paid of $6.1 million.

During the six months ended June 30, 2020, we acquired a controlling interest in Systax Sistemas Fiscais LTDA (“Systax”) for approximately $12.3 million in cash.

For additional information on acquisitions, see Note 3, “Business Combinations” to our condensed consolidated financial statements.

Financing Activities.

Cash (used in) provided by financing activities was $(8.1) million for the three months ended March 31, 2021 compared to $103.7 million for the same period in 2020, a decrease of $111.8 million.

The three months ended March 31, 2020 included net borrowings under the bank credit agreement of $121.1 million, offset by distributions to stockholders of $17.2 million.

None of this activity recurred in the comparable period in 2021.

The three months ended

March 31, 2021 included $7.2 million in payments for taxes in connection with the exercise of stock options whereby the award holders returned shares to us to satisfy their tax obligations.

As of March 31, 2021, 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 (3.25% as of March 31, 2021) or the London Interbank Offered Rate (“LIBOR”) plus an applicable margin (2.00% as of March 31, 2021).

We have no outstanding bank debt at March 31, 2021.

Net cash provided by financing activities was $8.7 million for the six months ended June 30, 2021 compared to net cash used in financing activities of $(16.6) million for the same period in 2020, an increase in cash provided by financing activities of $25.4 million.

Net cash provided by financing activities of $8.7 million for the six months ended June 30, 2021 was primarily driven by the increase in customer funds obligations of $22.2 million due primarily to timing differences between receipt of funds from customers and taxing jurisdiction withdrawls of these funds, partially offset by $10.7 million in payments for taxes in connection with the exercise of stock options whereby the award holders returned shares to us to satisfy their tax obligations.

The net cash used in financing activities for the six months ended June 30, 2020 of $16.6 million was primarily driven by distributions to stockholders of $140.4 million, partially offset by the net borrowings under the Term Loan of $121.1 million during this period.

As of June 30, 2021, 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 (3.25% as of June 30, 2021) or the London Interbank Offered Rate (“LIBOR”) plus an applicable margin (2.00% as of June 30, 2021).

We have no outstanding bank debt at June 30, 2021.

Funds Held for Customers and Customer Funds Obligations

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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 Annual Report on Form 10-K for the year ended December 31, 2020.

Key Business Metrics

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

Annual Recurring Revenue (“ARR”) and Average Annual Revenue Per Customer (“AARPC”).

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.

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.

We also calculate AARPC, which is determine by dividing ARR by the number of software subscription customers as of the end of the respective period.

(Dollars in millions)

Period-over-Period Change

Annual Recurring Revenue

ARR increased by $41.6 million or 14.1% at June 30, 2021, as compared to June 30, 2020.

The increase included $3.9 million related to the Taxamo acquisition during the three months ended June 30, 2021.

The remainder of the increase was primarily driven by $16.6 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases, and $21.1 million of on-premise and cloud-based subscriptions of our tax solutions to new customers.

The number of customers and AARPC increased to 4,175 customers and approximately $80,500, respectively, at June 30, 2021 from 4,020 and approximately $73,300, respectively at June 30, 2020.

The increase in customers included 135 customers and AARPC of approximately $28,900 from the Taxamo acquisition during the three months ended June 30, 2021.

Excluding Taxamo, our AARPC was approximately $82,300 at June 30, 2021 resulting from existing customers expanding their use of our software, as well as from adding 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.

Net Revenue Retention Rate

The 200 basis point decline in NRR to 106% at June 30, 2021 from 108% for the same period in 2020 was primarily attributable to a reduction in sales growth to existing customers as compared to the prior year related to delays in signing deals due to their focus shifting to working remotely, and economic uncertainty in connection with the impact of the COVID-19 pandemic on their businesses.

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.

Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period.

For purposes of comparison, our net income (loss) was $0.8 million and $(29.1) million for the three months ended June 30, 2021 and 2020, respectively, while our net income (loss) margin was 0.8% and (31.9)% over the same periods, respectively.

Additionally, our net income (loss) was $3.1 million and $(58.1) million for the six months ended June 30, 2021 and 2020, respectively, while our net income margin (loss) was 1.5% and (32.2)% over the same periods, respectively.

Three months ended

Six months ended

(Dollars in thousands)

Adjusted EBITDA:

Net income (loss)

Interest (income) expense, net

Income tax benefit

Depreciation and amortization - property and equipment

Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues

Amortization of acquired intangible assets - selling and marketing expense

Stock-based compensation expense

Severance expense

Transaction costs

Adjusted EBITDA

Adjusted EBITDA Margin:

Total revenues

Adjusted EBITDA margin

The decrease in Adjusted EBITDA for the three months ended June 30, 2021 of $2.3 million over the comparable period in 2020 is primarily driven by an increase in gross profit, offset by an increase in operating expenses including additional sales and marketing and research and development investments.

Adjusted EBITDA margin decreased to 18.3% for the three months ended June 30, 2021 compared to 23.6% for the comparable period in 2020.

The increase in Adjusted EBITDA for the six months ended June 30, 2021 of $0.6 million over the comparable period in 2020 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 declined 2.0% for the six months ended June 30, 2021 over the comparable period in 2020 primarily due to increased investments in sales and marketing and research and development activities in 2021.

Free Cash Flow and Free Cash Flow Margin.

We use 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.

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 in operating activities was $26.5 million and $20.8 million for the six months ended June 30, 2021 and 2020, respectively, while our operating cash flow margin was 13.0% and 11.5% over the same periods, respectively.

Three months ended

Six months ended

(Dollars in thousands)

Free Cash Flow:

Net cash provided by operating activities

Property and equipment additions

Capitalized software additions

Free cash flow

Free Cash Flow Margin:

Total revenues

Free cash flow margin

Free cash flow decreased by $1.8 million for the three months ended June 30, 2021 as compared to the same period in 2020.

This decrease was primarily driven by an increase of $4.8 million in investments in property and equipment additions to support our internal infrastructure investments.

Free cash flow margin decreased to 16.0% for the three months ended June 30, 2021, compared to 20.5% for the same period in 2020.

Free cash flow increased by $2.5 million for the six months ended June 30, 2021 as compared to the same period in 2020.

This increase was primarily driven by an increase in net cash provided by operating activities of $5.7 million, primarily due to an $5.3 million increase in cash provided by changes in operating assets and liabilities.

This amount was offset by an increase of $5.3 million in investments in property and equipment additions to support our internal infrastructure investments.

Free cash flow margin increased to 2.7% for the six months ended June 30, 2021, compared to 1.6% for the same period in 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 selling and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income, non-GAAP net income, Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin, which are each non-GAAP financial measures.

In addition to our results determined in accordance with GAAP, we have calculated Adjusted EBITDA, Adjusted EBITDA margin, free cash flow, free cash flow margin, non-GAAP cost of revenues, non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP selling and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income, and non-GAAP net income, 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.

We use 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.

We use 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.

We use non-GAAP financial measures of free cash flow and free cash flow margin to evaluate liquiditiy.

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 operating performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as comparing our financial results to those of other companies.

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In addition, other companies may not publish these or similar metrics.

Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, the financial information prepared in accordance with GAAP financial measures, and should be read in conjunction with the consolidated financial statements included in this Quarterly Report on Form 10-Q.

We calculate these non-GAAP financial measures as follows:

● Non-GAAP cost of revenues, software subscriptions is determined by adding back to GAAP cost of revenues, software subscriptions, the stock-based compensation expense, and depreciation and amortization of capitalized software costs and acquired intangible assets included in cost of revenues for the respective periods.

Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, the financial information prepared in accordance with GAAP financial measures, and should be read in conjunction with the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Additional Non-GAAP Financial Measures

In addition to Adjusted EBITDA, Adjusted EBITDA margin, free cash flow, and free cash flow margin calculated and discussed in “Key Business Metrics,” the following additional non-GAAP financial measures are calculated and presented further below:

● Non-GAAP cost of revenues, software subscriptions is determined by adding back to GAAP cost of revenues, software subscriptions, the stock-based compensation expense, and depreciation and amortization of capitalized software and acquired intangible assets included in cost of revenues for the respective periods.

● Non-GAAP cost of revenues, services is determined by adding back to GAAP cost of revenues, services, the stock-based compensation expense included in cost of revenues for the respective periods.

● Non-GAAP gross profit is determined by adding back to GAAP gross profit the stock-based compensation expense, and depreciation and amortization of capitalized software costs and acquired intangible assets included in cost of revenues 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 and acquired intangible assets included in cost of revenues as a percentage of revenues for the respective periods.

● Non-GAAP gross profit is determined by adding back to GAAP gross profit the stock-based compensation expense, and depreciation and amortization of capitalized software and acquired intangible assets included in cost of revenues 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 and acquired intangible assets included in cost of revenues as a percentage of revenues for the respective periods.

● Non-GAAP research and development expense and non-GAAP general and administrative expenses are determined by adding back to GAAP research and development 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 selling and marketing expense is determined by adding back to GAAP selling and marketing expense the stock-based compensation expense and the amortization of acquired intangible assets included in selling and marketing expense for the respective periods.

● Non-GAAP operating income is determined by adding back to GAAP operating income or loss the stock-based compensation expense, depreciation and amortization of capitalized software costs and acquired intangible assets, and severance expense included in GAAP operating income or loss for the respective periods.

● Non-GAAP net income is determined by adding back to GAAP income or loss before income taxes the stock-based compensation expense, depreciation and amortization of capitalized software costs and acquired intangible assets – cost of subscription revenues, amortization of acquired intangible assets – selling and marketing expense, and severance expense included in GAAP income or loss before income taxes for the respective periods to determine non-GAAP income or loss before income taxes.

Non-GAAP income or loss before income taxes is then adjusted for income taxes calculated using the respective statutory tax rates for applicable jurisdictions, which for purposes of this determination were assumed to be 25.5% and 2.0% for the 2021 and 2020 periods, respectively.

● Adjusted EBITDA is determined by adding back to GAAP net income or loss the net interest income or expense, income taxes, depreciation and amortization of property and equipment, depreciation and amortization of capitalized software costs and acquired intangible assets – cost of subscription revenues, amortization of acquired intangible assets – selling and marketing expense, asset impairments, stock-based compensation expense, severance expense and transaction costs included in GAAP net income or loss 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 net cash provided by (used in) operating activities 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.

● Non-GAAP operating income is determined by adding back to GAAP income or loss from operations the stock-based compensation expense, depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues, amortization of acquired intangible assets – selling and marketing expense, severance expense and transaction costs included in GAAP income or loss from operations for the respective periods.

● Non-GAAP net income is determined by adding back to GAAP net income or loss the income tax benefit or expense, stock-based compensation expense, depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues, amortization of acquired intangible assets – selling and marketing expense, severance expense and transaction costs included in GAAP net income or loss for the respective periods to determine non-GAAP income or loss before income taxes.

Non-GAAP income before income taxes is then adjusted for income taxes calculated using the respective statutory tax rates for applicable jurisdictions, which for purposes of this determination were assumed to be 25.5%.

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 and Results of Operations - Key Business Metrics” for further discussion and reconciliation of Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and free cash flow margin to the related GAAP financial measures.

The following schedules reflect our additional non-GAAP financial measures and reconcile our additional non-GAAP financial measures to the related GAAP financial measures.

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Non-GAAP net income 2

1 The six month period ended June 30, 2021 includes $150 of transaction costs previously presented as a component of general and administrative expenses that was reclassified to other operating expense, net, in the condensed consolidated statement of comprehensive loss.

2 2020 Non-GAAP net income presentation adjusted to conform to 2021 presentation.

The presentation was modified in the fourth quarter 2020 to tax effect, at the statutory income tax rate, the related non-GAAP adjustments to GAAP net income or loss.

Thus, the income tax benefit for 2020 was removed and a statutory tax rate applied to Non-GAAP income after the non-GAAP adjustments.

This reduced Non-GAAP net income before income taxes by $5,562 and $8,336 for the three and six months ended June 30, 2020, respectively.

This will also reduce Non-GAAP net income by $8,229 and $16,565 for the three and nine months ended September 30, 2020, respectively.

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Non-GAAP Gross Margin:

Stock-based compensation expense as a percentage of revenues

Depreciation and amortization of capitalized software and acquired intangible assets – cost of subscription revenues as a percentage of revenues

Total revenues

Non-GAAP gross margin

3 unchanged sentences

Non-GAAP research and development expense

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Non-GAAP Selling and Marketing Expense:

7 unchanged sentences

Severance expense

Transaction costs

Non-GAAP general and administrative expense

8 unchanged sentences

Non-GAAP Net Income:

Income (loss) before income taxes

Net income (loss)

Income tax benefit

Stock-based compensation expense

6 unchanged sentences

Non-GAAP net income

2 2020 Non-GAAP net income presentation adjusted to conform to 2021 presentation.

The presentation was modified in the fourth quarter 2020 to tax effect, at the statutory income tax rate, the related non-GAAP adjustments to GAAP net income or loss.

Thus, the income tax benefit for 2020 was removed and a statutory tax rate applied to Non-GAAP income after the non-GAAP adjustments.

This reduced Non-GAAP net income before income taxes by $5,562 and $8,336 for the three and six months ended June 30 2020, respectively.

This will also reduce Non-GAAP net income by $8,229 and $16,565 for the three and nine months ended September 30, 2020, respectively.

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.

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” to the Condensed Consolidated Financial Statements.

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 Annual Report on Form 10-K for the period ended December 31, 2020.

Recent Accounting Pronouncements

For further information on recent accounting pronouncements, refer to Note 1 in the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q

For further information on recent accounting pronouncements, refer to Note 1, “Summary of Significant Accounting Policies” to the Condensed Consolidated Financial Statements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis