EDGAR 10-K Filing

Company CIK: 1806837
Filing Year: 2022
Filename: 1806837_10-K_2022_0001558370-22-003777.json

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ITEM 1. BUSINESS
Item 1.Business
Overview
Vertex is a leading provider of enterprise tax technology solutions. Our vision is to accelerate global commerce, one transaction at a time. Companies with complex tax operations rely on Vertex to automate their end-to-end indirect tax processes. Our software, content and services address the increasing complexities of global commerce and compliance by reducing friction, enhancing transparency, and enabling greater confidence in meeting indirect tax obligations. As a result, our software is ubiquitous within our customers' business systems, touching nearly every line item of every transaction that an enterprise can conduct.
The rapid changes taking place in today's global business, technology and regulatory environments are having a compounding effect on the complexity of indirect tax management. As companies expand their business models through eCommerce and other digital transformation, enter new geographies, and extend their distribution channels, they widen the aperture of their indirect tax obligations. Additionally, as they expand their core offerings to incorporate new digital products and services, they are increasingly impacted by new tax regulations being pursued by jurisdictions. This complexity demands intelligent solutions that enable businesses to satisfy tax obligations and support growth opportunities.
We have pioneered tax technology for over 40 years. Today, we have over 4,200 customers, including over half of the Fortune 500, and provide our customers with tax support in over 130 countries. Today, our software enables tax determination, compliance and reporting, tax data management and document management and analytics and insights with powerful pre-built integrations to core business applications used by most companies, particularly those applications that have a significant impact on global commerce transactions. Our software is fueled by over 500 million data-driven effective tax rules and supports indirect tax compliance in more than 19,000 jurisdictions worldwide. Our solutions can be deployed in the cloud, on-premise environments, or at the network edge, all with implementation services available to enable optimal customer outcomes and satisfy unique business requirements.
Our Solutions
Our Vertex solutions can automate the end-to-end indirect tax processes for all companies with complex tax operations and audit risk. Our software includes tax determination, compliance and reporting, tax data management and document management tools, analytics and insights, as well as pre-built integrations to major business applications. Customers can utilize these solutions individually or as part of a broader suite and can choose the delivery model that best aligns to their enterprise technology environments.
● Tax Determination. Our tax determination solutions enable real-time calculation of indirect taxes and applicable fees for sale and purchase transactions. This solution includes a powerful indirect tax calculation engine that applies rules-based logic from our proprietary content database to determine taxability, identify precise taxing jurisdictions, and consistently apply the appropriate amount of tax to each transaction in real-time. Our solution supports determination for sales tax, consumer and seller use tax, VAT, communications tax, leasing tax, payroll tax and lodging and occupancy tax.
● Compliance and Reporting. Our compliance and reporting solutions enable the automation of signature-ready returns and remittance of indirect tax to appropriate jurisdictions. Companies use these solutions leverage tax data files imported from Vertex or third-party applications to establish visible audit trails of tax determinations and user-made adjustments. Our solutions also include workflow management tools, such as calendar and document management, and role-based security and event logging, which supports our customers' internal control over financial reporting and compliance with the Sarbanes-Oxley Act. We support e-filing and print formats for returns, schedules, worksheets, tax reports and payment requests, and provide archiving and retrieval of all filings.
● Tax Data Management. Our tax data management tools enable enterprises to unify transaction data from multiple business applications and sources. These solutions enable tax teams to view detailed transaction-level tax data, identify anomalies or errors, and establish necessary rules to address gaps in data and audit logs for any adjustments or corrections that have been made.
● Document Management. Our document management solutions automate the validation of, storage of, and tax audit support for sales tax exemptions and reseller certificates, enabling enterprises to manage large quantities of documents, such as tax exemption certificates.
● Analytics and Insights. Our analytics and insights tools improve data quality and provide data intelligence to optimize the end-to-end tax process and improve business outcomes.
● Pre-Built Integrations. Our solutions are supported by a suite of powerful, pre-built integrations that enable real-time coordination between our solutions and major business applications, such as Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Workday and Zuora, among many others. Much more than traditional application programming interfaces, our integrations include mapping data fields, business logic and configurations to improve the processing of transactions to and from our solutions. The majority of our integrations are designed, tested and supported by us. We also allow for partner-developed integrations as part of a rigorous certification program.
● Industry-Specific Solutions. We offer a range of solutions that support certain industries that have specific indirect tax needs, such as retail, communications, and leasing. For example, our retail solution supports omnichannel transactions spanning store kiosks, eCommerce websites, catalog sales and mobile device transactions. Our communications solution supports the determination of taxes, surcharges and fees affecting United States of America (“U.S.”) providers of communication services, including wireless, voice-over-IP, satellite, internet and video and audio streaming services. We have pre-built integrations specific to the leading providers of business applications used by these industries.
● Technology Specific Solutions - Chain Flow Accelerator, LCR. We offer a number of technology solutions that offer tools and enhancements to certain eco systems, like SAP or Oracle, that are deeply integrated into their technology stack. For example, our Chain Flow Accelerator tool allows configuration of tax specific flows within the SAP stack. In addition, through the acquisition of LCR Dixon in 2021, we acquired an SAP specific tool set that provides customers the ability to maintain, analyze and validate tax data in procure-to-pay as well as sales and billing systems that enhance its usefulness for indirect taxes as well as other business applications.
● Implementation Services. Due to the ubiquitous nature of our software in our customers' technology environments, we also offer implementation services to enable our customers to realize the full benefit of our solution at initial deployment. These software implementation services include configuration, data migration and implementation, and premium support and training.
● Managed Services. Customers can also license indirect tax returns outsourcing as a managed service for compliance in the U.S. and Canada. These managed services include indirect tax return preparation, filing and tax payment and notice management.
Our Tax Content
All our software and solutions are underpinned by our proprietary content database, which currently supports over 500 million effective tax rules. Our content quality and accuracy are a key component to our software subscriptions revenue and customer value. Its quality and accuracy are critical to the longevity of our customer subscriptions. On a monthly basis, our content team combines legislative research, analysis, technical logic, and automation to embed updated rules into our software. Unlike many enterprise software solutions where maintenance and support are focused solely on periodic technology upgrades, our monthly updates are a critical element of allowing our customers to ensure that they are utilizing the latest tax changes to accurately calculate their indirect taxes.
Our Technology
Our software and solutions are built upon a robust set of technology capabilities designed for the flexibility, configurability, speed, and scale to handle complex tax scenarios and processing volumes and interoperability to core business applications.
● Real-Time Engine. Our real-time engine determines the appropriate tax rules to apply to a line item in a transaction through a sequence of real-time processes that combine tax algorithms and tax content with transaction line-item level detail. Combining tax content stored as structured data with sequencing and decision tree logic results in one or more individual tax rules that are applied to each line item in a transaction. This is built within memory and cached for performance. The in-memory processes of the core calculation engine are tuned to accommodate high-volume and complex transactions at speed and scale.
● Configuration. Our solutions are built to be highly configurable. Through our graphical user interfaces, users can configure and map their taxability to ensure the correct tax rules are executed. Our flexibility in configuration also extends to users who can create their own taxability rules, as appropriate. These user-defined taxability rules act as an override, providing flexibility to ensure that non-standard tax scenarios and processes can be addressed. Additionally, users can augment transactions entering and exiting the engine by building their own logic through our drag-and-drop experience. This logic is saved to then execute within the engine.
● Tax Geography. Accuracy in determining the appropriate taxation of a transaction depends on many factors, including detailed location information for where a transaction is occurring. We designed and created a proprietary solution for tax jurisdiction identification that leverages industry geographic information system tools and geospatial data. With our proprietary technology we are able to create and map multiple tax jurisdictions for a particular location and assign a unique identifier to each location so that it can be used by the engine to allow for higher accuracy. This technology is highly relevant to emerging economic shifts, such as the sharing economy, where the physical nexus of transactions is unclear, such as ride-sharing services.
● Security. Our application security framework allows our customers to define how users can interact with sensitive enterprise data and how they are authorized to use certain aspects of our software. Users are mapped to a set of predefined roles, and we provide our customers with the ability to create user-defined roles. User-defined role-based access can be defined on a screen-by-screen level and further refined with read and/or write privileges.
● Cloud Solutions. We provide cloud services from six geographically separate data centers located on two continents: North America and Europe. The data centers are paired for failover of operations to an alternate, geographically separate production facility in case any single data center becomes unavailable. All data centers are operated by leading vendors providing physical security, internet access, environmental controls, and data retention services.
Our Customers
Today, we serve a large, diverse, and growing global customer base. Our market leadership in key industries can be demonstrated by our relationships with many of the largest and most well-known companies in retail trade, wholesale trade, and manufacturing. Our customers include the majority of the Fortune 500, as well as a majority of the top 10 companies by revenue in multiple industries such as retail, technology, and manufacturing, in addition to leading marketplaces. We have significant expansion opportunities with these customers driven by our growing product portfolio and geographic coverage.
A distinct and growing subset of our customer base includes marketplaces and various professional service providers, including accounting firms and outsourcing firms. Our robust technology and deep tax content differentiate us in our ability to serve the indirect tax needs of 7 of the top 10 marketplace providers in North America by revenue. These customers support tens of thousands of merchants who rely on their platform for their eCommerce transaction processing. We also support service providers such as outsourcing and accounting firms who use our technology to calculate tax and file tax returns for their end-customers. While we include these marketplaces and service providers in our customer counts, the tens of thousands of their end-user customers are not included in our customer counts.
As of December 31, 2021, we had 4,272 customers and our Annual Recurring Revenue (“ARR”) per customer was over $86,700. While most of our revenue is currently generated by customers domiciled in the U.S., many of our customers are multinational organizations with global business operations. We also provide tax software solutions outside the U.S., primarily in Europe. No single customer represented more than 10% of our total revenue for the years ended December 31, 2021, 2020 or 2019.
Our Growth Strategies
We believe today's global commerce environment provides durable growth opportunities for our business. Our growth strategies include:
● Retention and expansion of revenues from existing customers. The breadth of our solutions allows us to continually meet our customer needs, even as their needs expand in scope. For example, customers initially investing in sales tax determination may need support for other tax types, jurisdictions, and capabilities to manage their indirect tax lifecycle over time. As businesses continue to evolve through acquisitions and expand products and services, enter new geographies, or expand their distribution channels, we believe they will need our software, services, and content. We plan to continue to invest in new innovations and enhance our solutions to support the ongoing retention and expansion of revenue from our existing customers. Our flexible, tiered transaction-based pricing model also results in our customers growing their spend with us as they grow and continue to use our solutions.
● Acquire new customers. Our solutions address the complexity of aligning commerce and compliance and we believe the market for our software and solutions is large and underpenetrated, both in the U.S. and globally. As enterprise and mid-market companies continue to expand their business operations and their tax complexity grows, we expect demand for our solutions to increase among new customers and partners. We also expect these companies to adopt our solutions much earlier in their corporate lifecycle. This adoption is driven by advances in cloud computing and digital commerce, which enable more companies to accelerate new product delivery and scale their business through online marketplaces and emerging commerce platforms. These increases in business complexity necessitate advanced tax solutions for a broader number of companies. We plan to continue to invest in our direct sales, indirect sales and our partnerships’ marketing teams and our solution development in order to capture this demand increase and acquire new customers.
● Broaden and deepen our partner ecosystem. We integrate with key technology partners that span enterprise resource planning (“ERP”), customer relationship management (“CRM”), procurement, billing, point of sale (“POS”), and eCommerce platforms. Our partners enhance our go-to-market capacity and extend our brand leadership and reach. We leverage our partnerships to maximize the benefits of our solutions for our customers and to identify new growth opportunities. We believe expanding our strategic alliances with emerging participants who are fueling global commerce, such as payment and digital commerce platforms, will create new value for our customers and new sources of revenue. Future partnerships with large-scale digital payments players will allow us to develop additional customer-centric solutions and further expand our customer base.
● Extend global footprint. We have a significant opportunity to further expand internationally, in terms of our regional operations, content depth and go-to-market coverage. We expect to continue to invest in our software and solutions outside of the U.S., most notably in Latin America and Europe. These jurisdictions are among the most complex and the largest international markets for our customers. We have also made significant investments in our own operations in these regions. In Europe and Brazil, for example, we have tailored our go-to-market strategy and enhanced our country-specific content database and furthered our investment in our global compliance reporting solution. By extending our global footprint, we believe we will also expand account penetration of existing customers with operations around the globe.
● Sustained investment in new product innovation. With the pace of change in commerce and compliance, we believe it is important to continue innovating and extending the functionality and breadth of our software and solutions. Our approach to innovation is driven by our relationships with our customers and partners, with whom we create new solutions, align product roadmaps, and embed our software within their applications and platforms. We have also created and invested in an innovation lab where we design, test,
and incubate next generation tax solutions and adjacent market opportunities. Over time, we expect such investment will bring additional value to existing customers and help us acquire new customers.
Sales and Marketing
We license our software and solutions primarily through our direct and indirect sales organization, with a focus on enterprise and midmarket businesses that have complex tax operations. Our direct sales team is comprised of inside sales and field sales, supported by our technical pre-sales and services teams. Teams are organized by territory and company size. We also have customer success teams focused on onboarding, usage, retention, renewals, and cross-selling additional products.
Our direct sales force leverages our partnerships with technology providers such as Oracle, SAP, Microsoft, and Salesforce, and a growing network of system integrators to influence and drive growth opportunities. The partnerships can include certified integrations that drive ease of implementation and rapid time-to-value for our joint customers. We leverage our relationships with professional services firms such as Deloitte, PwC, Ernst and Young, and KPMG to drive tax software adoption in partnership with their tax advisory and tax technology practices.
We also utilize indirect sales to efficiently grow and scale our revenues. Our indirect sales team focuses on building relationships with leading system integrators who implement eCommerce and other platforms, and resellers who offer our software, services, and training to their customer networks. These partnerships allow us to extend our demand generation and market reach efforts. We also extend our reach efficiently through marketplaces and service providers who use our technology to calculate tax and/or file tax returns for their end-customers.
Our marketing investments are focused on establishing and expanding our brand recognition, creating sales leads and growing our customer relationships. We generate sales leads through online and offline marketing channels, including search engine marketing, outbound lead generation, technology events and conferences and digital marketing programs. Word-of-mouth referrals from our customers, technology partners and consulting firms further scale our market reach. We engage and grow our customer revenues through hosted events, customer advisory boards and user groups, and digital seminars. We extend brand awareness through advertising, press coverage and social media, as well as through sponsorships of industry associations such as Tax Executive Institute, Council on State Taxation, and CPA.com.
Partners
We believe the scale and quality of our ecosystem is unparalleled in the industry, and we are committed to growing it even further. Our partner ecosystem consists of multiple types of partners that provide us access to their customers and clients.
Our continued success is enabled by our seamless integration into customers' business applications, gathering high-quality new customer leads and collaborating with professional service providers to help our customers solve their specific tax needs. In addition to driving technological innovation and growing our range of solution offerings, expanding our partner ecosystem has been an essential part of our growth.
● Accounting & Consulting Partners. We collaborate with over 50 tax, accounting, and consulting firms, which not only complement our global, local, and industry-specific regulatory expertise but also point us towards specific commercial opportunities. Our wide range of offerings and sophisticated technology align with these firms' areas of specialization, enabling organizations to strengthen end-to-end delivery capabilities for a diverse array of clients.
● Technology Partners. Our pre-built integrations with key partners including Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Workday, and Zuora, among many others, are key differentiators that enable our customers to seamlessly connect our solutions into their business applications and processes. Our trusted brand reputation has allowed us to be the leading SAP and Oracle tax technology provider, with a relationship spanning many years with these vendors. Our technology software and solutions and highly scalable transaction volume throughput has earned the trust of world-class online marketplaces. These deep partnerships allow us to expand the frontier of tax technology innovation and market opportunity.
● Channel and Resellers. We continue to expand our indirect go-to-market reach to capitalize on the significant mid-market growth opportunities. These partners include value-added resellers, service providers and OEM relationships with technology firms, system integrators, tax consultants and industry groups such as Avanade, Acumatica and CPA.com. These investments enable certification, training, and enablement to deliver rapid time-to-value and scale.
Research and Development
Our research and development team consists of our architecture, software engineering, user experience, infrastructure DevOps automation and technical production support teams. This organization is responsible for the design, development, testing and delivery of new technologies, features and integrations of our tax software and solutions, as well as the continued improvement of our existing solutions. It is also responsible for operating and scaling our software and solutions and infrastructure that run in the cloud. We continue to invest in our research and development capabilities with significant focus on Emerging Technologies such as Edge Computing, Artificial Intelligence/Machine Learning, Data Fabric/Mesh platforms, Blockchain, Application Programming Interface/Microservices, and Containerization to extend our solutions further into the cloud and partner ecosystems to continuously deliver more value.
Competition
Our industry is highly competitive and fragmented. Businesses employ a mix of approaches to address their indirect tax obligations, including:
● in-house practices and spreadsheets that result in custom transaction-specific research, manual determination, static tax tables or rate calculator services, as well as manual filing and remittance activities;
● businesses utilizing native Enterprise Resource Planning (“ERP”) capabilities with rudimentary tax determination capabilities, which are typically not designed for complex tax support and lack tax rates, rules and complex calculation functionality and require the user to manually track, input, maintain and update all tax law changes that occur;
● outsourced transaction tax compliance services offered by accounting and specialized consulting firms; and
● tax-specific solutions from other vendors.
We believe customers consider the following factors when selecting indirect tax technologies:
● ability to minimize compliance risk exposure associated with inaccurate and/or inconsistent determination and remittance of taxes;
● ability to deliver real time tax determinations;
● ease of deployment and use;
● ease of integration with the customer's business applications, across multiple systems;
● ability to address multiple transaction tax compliance functions, from initial taxability and tax rate determination through compliance and remittance of funds;
● lower total cost of ownership; and
● continuously updated tax content applicable to the customer's business.
Depending on the importance and complexity associated with these factors for each customer we maintain varying competitive advantages. We monitor these factors and adjust our functionalities, service offerings, pricing structures and overall solution delivery approach to continually strengthen our position.
Intellectual Property
Our success has resulted in part from our proprietary methodologies, software, reusable knowledge capital and other intellectual property rights. We rely on a combination of copyright, trademark, and trade secret law, as well as contractual restrictions such as confidentiality and non-compete provisions to protect our intellectual property rights, including our brand, technology, and confidential information. We have policies related to security, privacy, confidentiality, ownership, and the use and protection of our intellectual property. We also enter into confidentiality and invention assignment/proprietary rights agreements with our consultants, employees and other third parties as appropriate that protect and control access to our intellectual property, and we enforce these agreements where necessary. We recognize the value of our intellectual property in the marketplace and vigorously identify, create, and protect it. We believe the innovation of our employees and our continued enhancement of the features and functionality of our solutions is the keystone of our success.
Human Capital
Our culture is the foundation of everything we do, guided by a common purpose to build trusted relationships at work, in business and in our communities. We strive to be a values-driven employer of choice who attracts, retains, and inspires talented professionals to achieve their full potential. We have been recognized as one of the best places to work in Philadelphia for the past seven years according to The Philadelphia Inquirer. We create and nurture an engaging work environment that embodies our core values of collaboration, performance, integrity, innovation, and fun, and we actively support our employees' participation in community service and philanthropy.
As of December 31, 2021, we had approximately 1,300 full-time employees. Of these employees, 95% were based in the U.S., 4% based in Europe and 1% in Latin America. We believe we have a strong relationship with our employees, and we have not experienced any work stoppages.
We have designed the following dashboards to power the business with human capital data to inform leaders on the development, attraction, and retention of personnel: Board Reporting, SEC Reporting and Program Management Reporting. These dashboards are maintained by our People and Culture and Recruiting teams. These dashboards present information regarding recruiting time to fill averages, retention of employees, workforce costs, diversity, employee engagement, training and development, culture initiatives, and workforce skills and capabilities.
Available Information
We file annual, quarterly, and current reports and other information with the Securities and Exchange Commission (“SEC”). The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC, including us. You may also access, free of charge, our reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K and any amendments to those forms) through the “Investors” portion of our website (https://www.vertexinc.com/). Reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. Our website is included in this Annual Report on Form 10-K as an inactive textual reference only. The information found on our website is not part of this or any other report filed with or furnished to the SEC.

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ITEM 1A. RISK FACTORS
Item 1A.Risk Factors
Our business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and they should be carefully considered. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors, in its entirety, in addition to other information contained in or incorporated by reference to this Annual Report on Form 10-K and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations. See "Special Note Regarding Forward-Looking Statements" elsewhere in this Annual Report on Form 10-K.
A large portion of our revenue depends on maintaining and growing our revenue from existing customers and adding new customers, and if we fail to add new customers, retain our customers, or expand their usage of our solutions, our business, results of operations, financial condition and cash flows would be harmed.
We currently derive a substantial portion of our revenue from subscriptions to our indirect tax software. We have added, and will continue to add, additional solutions to expand our offerings, but, at least in the near term, we expect to continue to derive the majority of our revenue from our indirect tax software. As such, the ability of our indirect tax software to meet our customers' requirements is critical to our success. Demand for our solutions is affected by a number of factors, many of which are beyond our control, such as continued market acceptance and continued employment of our solutions by existing and new customers, the timing of the development and release of upgraded or new solutions, the introduction or upgrading of products and services by our competitors, technological change and growth or contraction in our addressable market. If our indirect tax software does not continue to meet customer requirements, our business, results of operations, financial condition and growth prospects will suffer.
Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their subscription periods and our customers may not renew subscriptions for a similar mix of solutions. Our retention rates would decline as a result of a number of factors, including customer dissatisfaction, decreased customer spending levels, decreased customer transaction volumes, increased competition, changes in tax laws or rules, pricing changes or legislative changes affecting tax compliance providers. If our customers do not renew their subscriptions, or our customers reduce the solutions purchased under their subscriptions, our revenue would decline and our business may be harmed.
Our future success also depends in part on our ability to sell additional solutions to existing customers and on our customers' expanded use of our solutions. If our efforts to sell our additional solutions to our customers are not successful or if our customers do not expand their use of our solutions, it would decrease our revenue growth and harm our business, results of operations, financial condition and cash flows.
Our business and success depend in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships.
We depend in part on and anticipate that we will continue to depend in part on, various third-party relationships to sustain and grow our business. Our relationships with third-party publishers of software business applications, including accounting, ERP, eCommerce, POS, recurring billing and CRM systems, help drive our business because the integration of our solutions with their applications allows us to reach their sizeable customer bases. Our customers' user experience is dependent on our ability to connect easily to such third-party software applications. We may fail to retain and expand these integrations or relationships for many reasons, including due to failures by third parties to maintain, support or secure their technology platforms in general and our integrations in particular, or errors, bugs or defects in such third-party technology, or changes in our technology platform. Any such failure could harm our relationship with our customers, our reputation and brand and our business and results of operations.
In addition, integrating third-party technology can be complex, costly and time-consuming. Third parties may be unwilling to build integrations, and we may be required to devote additional resources to develop integrations for business applications on our own. Providers of business applications with which we have integrations may decide to compete with us or enter into arrangements with our competitors, resulting in such providers withdrawing support for our integrations. In addition, any failure of our solutions to operate effectively with business applications could reduce the demand for our solutions, resulting in customer dissatisfaction and harm to our business. If we are unable to respond to these changes or failures in a cost-effective manner, our solutions may become less marketable, less competitive or obsolete and our results of operations may be negatively impacted.
If we are unable to adapt to technological change by successfully introducing new and enhanced solutions and services, our business, results of operations, financial condition and cash flows would be adversely affected.
The market for our solutions is characterized by rapid technological change, frequent new product and service introductions and enhancements, changing customer demands and evolving industry standards. The introduction of software embodying new technologies can quickly make existing software obsolete and unmarketable. Software solutions are inherently complex, and it can take a long time and require significant research and development expenditures to develop and test new or enhanced solutions. The success of any enhancements or improvements to our software solutions or any new solutions and services depends on several factors, including timely completion, competitive pricing, adequate quality testing, integration with existing technologies and our platform and overall market acceptance. We cannot be sure that we will succeed in developing, marketing and delivering on a timely and cost-effective basis enhancements or improvements to our software or any new solutions and services that respond to technological change or new customer requirements, nor can we be sure that any enhancements or improvements to our software or any new solutions and services will be free of errors and defects or that they will achieve market acceptance. Moreover, even if we introduce new solutions, we would experience a decline in revenue of our existing solutions that is not offset by revenue from the new solutions. Customers may delay making purchases of new solutions to permit them to make a more thorough evaluation of these solutions or until industry and marketplace reviews become widely available. In addition, we may lose existing customers who choose a competitor's solutions rather than migrate to our new solutions. This could result in a temporary or permanent revenue shortfall and adversely affect our business.
Any failures in information technology or infrastructure could lead to disruptions of our software, loss of customer data or untimely remittance of taxes, any of which could adversely affect our reputation and financial condition.
Our software depends on uninterrupted, high-speed access to the internet in order to provide real-time tax determinations and processing of indirect tax data. Failures in our or our customers' and partners' information technology and infrastructure, or service outages at third-party internet providers, could lead to disruptions to our software. Such failures may be caused by numerous factors, including mechanical failure, power outage, human error, physical or electronic security breaches, war, terrorism, fire, earthquake, hurricane, flood and other natural disasters, sabotage and vandalism. Disruptions to our software could cause customers to lose sensitive or confidential information and could also lead to our or our customers' inability to timely remit taxes to the appropriate authorities. Any of these outcomes could lead customers to switch to our competitors or avoid using our solutions, which would negatively impact our revenue and harm our opportunities for growth.
Incorrect or improper implementation, integration or use of our solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition and cash flows.
Our customers may need training or education in the proper use of, and the variety of benefits that can be derived from, our solutions to maximize their potential benefits. If our solutions are not implemented or used correctly or as intended, inadequate performance may result. Because our customers rely on our solutions to manage a wide range of tax compliance operations, the incorrect or improper implementation or use of our solutions, or our failure to provide adequate support to our customers, may result in negative publicity or legal claims against us, which could harm our business, results of operations, financial condition and cash flows. Also, as we continue to expand our customer base, any failure by us to properly provide training and support will likely result in lost opportunities for additional subscriptions for our solutions. In addition, the upfront costs of our solutions can limit our sales to businesses using manual processes.
If we fail to attract and retain qualified technical and tax-content personnel, our business could be harmed.
Our technology is complex and our success depends in large part on our ability to attract and retain highly qualified personnel, particularly tax-content specialists, software developers, technical support and research and development personnel. Competition for skilled personnel is intense and we may not be successful in attracting, motivating and retaining needed personnel. We have recently experienced efforts by a significant competitor to solicit our employees, and other competitors may take similar actions in the future. We also may be unable to attract or integrate into our operations qualified personnel on the schedule we desire. Any inability to attract, integrate, motivate and retain the necessary personnel could harm our business. Dealing with the loss of the services of our executive officers or key personnel and the process to replace any of our executive officers or key personnel may involve significant time and expense, take longer than anticipated, and significantly delay or prevent the achievement of our business objectives, which would harm our financial condition, results of operations, and business.
We face competitive pressures from other tax software and services providers, as well as the challenge of convincing businesses using native ERP functions to switch to our software.
We face significant competitive challenges from other tax-specific software vendors and from outsourced transaction tax compliance services offered by accounting and specialized consulting firms. There are a number of competing tax-specific software vendors, some of which have substantially greater revenue, personnel and other resources than we do. Corporate competitors, as well as the state and local tax services offered by accounting firms, have historically targeted our customer base of large enterprise companies. In addition, our competitors who currently focus their tax compliance services on small- to medium-sized businesses may be better positioned to increase their market share with small- to medium-sized businesses and may choose to enter our markets, whether competing based on price, service or otherwise. We also face a growing number of competing private transaction tax compliance businesses focused primarily on eCommerce. Increased competition may impact our ability to add new customers and to retain and expand revenues from existing customers. It is also possible that large enterprises with substantial resources that operate in adjacent compliance, finance or eCommerce verticals may decide to pursue transaction tax compliance automation and become immediate, significant competitors. Our failure to successfully and effectively compete with current or future competitors could lead to lost business and negatively affect our revenue.
Our recent success may not be indicative of our future results of operations.
We cannot predict with certainty our customers' future usage or retention given the diversity of our customer base across industries, geographies, customer size and other factors. Accordingly, we may be unable to accurately forecast our revenues notwithstanding our substantial investments in sales and marketing, tax content infrastructure and research and development in anticipation of continued growth in our business. If we do not realize returns on these investments in our growth, our results of operations could differ materially from our prior results, which could cause our stock price to decline.
Changes to customers' and partners' software systems may impact our ability to offer a specific software deployment method to existing customers, which could cause a termination of customer contracts utilizing that deployment method, or otherwise affect our results of operations, financial condition and cash flow.
Our solutions are integrated with the software systems and complex workflows of our customers and partners. In the event that such software systems are modified or updated in a way that is incompatible with our software, we may be unable to continue to support the operations of our customers and partners. If our customers are unable to implement our solutions successfully or in a timely manner, or if our partners are unable to integrate with our solutions through our integrations, customer perceptions of our solutions may be impaired, our reputation and brand may suffer and customers may choose not to renew or expand the use of our solutions. In addition, if we fail to anticipate technological changes that our customers and partners may look to adopt, our solutions may be perceived as being less effective or obsolete. Any of these changes could have a material adverse effect on our results of operations and financial condition.
We need to continue making significant investments in software development and equipment to improve our business.
To improve the scalability, security and efficiency of our solutions, and to support the expansion of our software into other tax types, we will need to continue making significant capital expenditures and also invest in additional software and infrastructure development. If we experience increasing demand in subscriptions, we may not be able to augment our infrastructure quickly enough to accommodate such increasing demand. In the event of decreases in subscription sales, certain of our fixed costs, such as for capital expenditures, may make it difficult for us to quickly adjust our expenses downward. Additionally, we are continually updating our software and content, which increases expenses for us. We may also need to review or revise our software architecture as we grow, which may require significant resources and investments. As a result, although we may have significant research and development expenditures, which may be incurred and certain of which may be capitalized, there is no guarantee our solutions will be accepted by the market. This could result in increased costs or an impairment of capitalized development costs with no resulting future revenue benefit.
If we fail to effectively manage our growth, our business, results of operations, financial condition and cash flows will be harmed.
We have experienced, and may continue to experience, growth in our headcount and operations, both domestically and internationally, which has placed, and may continue to place, significant demands on our management and our administrative, operational and financial reporting resources. We have also experienced significant growth in the number
of customers, number of transactions and the amount of tax content that our platform and solutions support. Our growth will require us to hire additional employees and make significant expenditures, particularly in sales and marketing but also in our technology, professional services, finance and administration teams, as well as in our facilities and infrastructure. Our ability to effectively manage our growth will also require the allocation of valuable management and employee resources and improvements to our operational and financial controls and our reporting procedures and systems. In addition, as we seek to continue to expand internationally, we will likely encounter unexpected challenges and expenses due to unfamiliarity with local requirements, practices and markets. Our expenses may increase more than we plan, and we may fail to hire qualified personnel, expand our customer base, enhance our existing software, expand our tax content, develop new solutions, integrate any acquisitions, satisfy the requirements of our existing customers, respond to competitive challenges or otherwise execute our strategies. If we are unable to effectively manage our growth, our business, results of operations, financial condition and cash flows would likely be harmed.
Future acquisitions of, and investments in, other businesses, software, tax content or technologies may not yield expected benefits, and our inability to successfully integrate acquisitions may negatively impact our business, results of operations, financial condition and cash flows.
We may in the future seek to grow our operations by pursuing acquisitions of businesses, software and technologies. We may not realize the anticipated benefits, or any benefits, from future acquisitions. In addition, if we finance acquisitions by incurring debt or by issuing equity or convertible or debt securities, our existing stockholders may be diluted or we could face constraints related to covenants in the agreements governing the indebtedness, which could affect the market value of our capital stock. To the extent that the acquisition consideration is paid in the form of an earnout on future financial results, the success of such acquisition will not be fully realized by us for a period of time as it is shared with the sellers. Further, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed, and the value of your investment may decline. For us to realize the benefits of future acquisitions, we must successfully integrate the acquired businesses, software or technologies with ours. This may take time and divert management's attention from our day-to-day operations, which could negatively impact our business, results of operations, financial condition and cash flows.
Our quarterly and annual results of operations will fluctuate in future periods.
We will experience quarterly or annual fluctuations in our results of operations due to a number of factors, many of which are outside of our control. This makes our future results difficult to predict and could cause our results of operations to fall below expectations or our predictions. Factors that might cause quarterly or annual fluctuations in our results of operations include:
● our ability to attract new customers and retain and grow revenue from existing customers;
● our ability to maintain, expand, train and achieve an acceptable level of production from our sales and marketing teams;
● our ability to find and nurture successful sales opportunities;
● the timing of our introduction of new solutions or updates to existing solutions;
● our ability to grow and maintain our relationships with our ecosystem of third-party partners, including integration partners and referral partners;
● the success of our customers' businesses;
● the timing of large subscriptions and customer renewal rates;
● new government regulations;
● changes in our pricing policies or those of our competitors;
● the amount and timing of our expenses related to the expansion of our business, operations and infrastructure;
● any impairment of our intangible assets, capitalized software, long-lived assets and goodwill;
● any seasonality in connection with new customer agreements, as well as renewal and upgrade agreements, each of which have historically occurred at a higher rate in the fourth quarter of each year;
● future costs related to acquisitions of content, technologies or businesses and their integration; and
● general economic conditions.
Any one of the factors above, or the cumulative effect of some or all of the factors referred to above, may result in significant fluctuations in our quarterly and annual results of operations. This variability and unpredictability could result in our failure to meet or exceed our internal operating plan. In addition, a percentage of our operating expenses is fixed in nature and is based on forecasted financial performance. In the event of revenue shortfalls, we may not be able to mitigate the negative impact on our results of operations quickly enough to avoid short-term impacts.
We generally recognize revenue from subscription fees paid by customers ratably over the subscription term. As a result, most of the subscription revenue we report in each quarter is the result of agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not be fully reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as subscription revenue from new customers is generally recognized over the applicable subscription terms.
Operating globally involves challenges that may adversely affect our ability to grow.
We plan to continue expanding our business operations globally and to enter new markets where we have limited or no experience in marketing, selling and deploying our solutions. If we fail to deploy or manage our operations in international markets successfully, our business may suffer. In the future, as our international operations increase, or more of our expenses are denominated in currencies other than the U.S. dollar, our results of operations may become more sensitive to fluctuations in the exchange rates of the currencies in which we do business. In addition, we are subject to a variety of risks inherent in doing business internationally, including:
● political, social and economic instability;
● risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to privacy, localization and content laws as well as unexpected changes in laws, regulatory requirements and enforcement due to the wide discretion given to some local lawmakers and regulators regarding the enactment, interpretation and implementation of local regulations;
● potential damage to our brand and reputation due to compliance with local laws, including potential censorship and requirements to provide user information to local authorities;
● fluctuations in currency exchange rates;
● higher levels of credit risk and payment fraud;
● complying with the tax laws and regulations of multiple tax jurisdictions;
● enhanced difficulties of integrating any foreign acquisitions;
● complying with a variety of foreign laws, including certain employment laws requiring national collective bargaining agreements that set minimum salaries, benefits, working conditions and termination requirements;
● reduced protection for intellectual property rights in some countries;
● difficulties in staffing and managing global operations and the increased travel, infrastructure and compliance costs associated with multiple international locations;
● regulations that might add difficulties in repatriating cash earned outside our core markets and otherwise prevent us from freely moving cash;
● import and export restrictions and changes in trade regulation;
● complying with statutory equity requirements;
● complying with the U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act and similar laws in other jurisdictions; and
● complying with export controls and economic sanctions administered by the relevant local authorities, including in the U.S. and European Union, in our international business.
If we are unable to expand internationally and manage the complexity of our global operations successfully, our business could be seriously harmed.
We hold significant amounts of money that we remit to taxing authorities on behalf of our customers, and this may expose us to liability from errors, delays, fraud or system failures, which may not be covered by insurance.
We handle significant amounts of our customers' money so that we can remit those amounts to various taxing jurisdictions on their behalf. If we make mistakes in the determination or remittance of tax payments to the appropriate jurisdictions, our reputation and results of operations could suffer. Moreover, if our banks' or our own internal compliance procedures regarding cash management fail, are hacked or sabotaged, there is a communication error of taxing jurisdiction remittance instructions between the banks’ and our systems, or if our banks or we are the subject of fraudulent behavior by personnel or third parties, we could face significant financial losses. Our efforts to remit tax payments to applicable taxing jurisdictions after receiving the corresponding funds from our customers may fail, which would expose us to the financial risk of collecting from our customers after we have remitted funds on their behalf.
Additionally, we are subject to risk from concentration of cash and cash equivalent accounts, including cash from our customers that is to be remitted to taxing jurisdictions, with financial institutions where deposits routinely exceed federal insurance limits. If the financial institutions in which we deposit our customers' cash were to experience insolvency or other financial difficulty, our access to cash deposits could be limited, any deposit insurance may not be adequate, we could lose our cash deposits entirely and we could be exposed to liability to our customers. Any of these events would negatively impact our liquidity, results of operations and our reputation.
If we are unable to successfully adapt to organizational changes and effectively implement strategic initiatives, our reputation and results of operations could be impacted.
We have a dynamic organization and routinely implement changes to our priorities and workforce in order to keep up with the constantly evolving market in which we operate. We expect these types of changes to continue for the foreseeable future. Our success is dependent on identifying, developing and retaining key employees to provide uninterrupted leadership and direction for our business. This includes developing organizational capabilities in key growth markets where the depth of skilled employees is limited and competition for these resources is intense. Further, business and organizational changes may result in more reliance on third parties for various services, and that reliance may increase reputational, operational and compliance risks.
Errors in our customers' transaction tax determinations and reporting functions, or delays in the remittance of their tax payments, could harm our reputation, results of operations and growth prospects.
The tax determinations functions that our customers have to perform are complicated from a data management standpoint, time-sensitive and dependent on the accuracy of the database of tax content underlying our solutions. Some of our processes are not fully automated, such as our process for monitoring updates to tax rates and rules, and even to the extent our processes are automated, our solutions are not proven to be without any possibility of errors. If errors are made in our customers' tax determinations and reporting functions, or delays occur in the remittance of their tax payments, our customers may be assessed interest and penalties. Although our agreements generally have disclaimers of warranties and limit our liability, a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold us liable for these errors. Additionally, erroneous tax determinations could result in overpayments to taxing authorities that are difficult to reclaim from the applicable taxing authorities or underpayments that could result in penalties. Any history of erroneous tax determinations for our customers could also harm our reputation, could result in negative publicity, loss of or delay in market acceptance of our solutions, loss of customer renewals and loss of competitive position. In addition, our insurance coverage may not cover all amounts claimed against us if such errors or failures occur. The financial and reputational costs associated with any erroneous tax determinations may be substantial and could harm our results of operations.
Changes in tax laws and regulations, or their interpretation or enforcement, may cause us to invest substantial amounts to modify our software, cause us to change our business model or draw new competitors to the market.
Changes in tax laws or regulations or interpretations of existing taxation requirements in the U.S. or in other countries may require us to change the manner in which we conduct some aspects of our business and could harm our ability to attract and retain customers. For example, a material portion of our revenue is generated by performing what can be complex transaction tax determinations and the corresponding preparation of tax returns and remittance of taxes. Changes in tax laws or regulations that reduce complexity or decrease the frequency of tax filings could negatively impact our revenue. In addition, there is considerable uncertainty as to if, when and how tax laws and regulations might change. As a result, we may need to invest substantial funds to modify our solutions to adapt to new tax laws or regulations. If our software solutions are not flexible enough to adapt to changes in tax laws and regulations, our financial condition and results of operations may suffer.
A number of states have considered or adopted laws that attempt to require out-of-state retailers to collect sales taxes on their behalf or to provide the jurisdiction with information enabling it to more easily collect use tax. On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair, Inc., upholding South Dakota's economic nexus law, which requires certain out-of-state retailers to collect and remit sales taxes on sales into South Dakota. Following the Supreme Court's decision, certain states with pre-existing economic nexus provisions announced that they would begin enforcing these provisions on out-of-state retailers and additional states have proceeded with similar efforts. There also has been consideration of federal legislation related to taxation of interstate sales, which, if enacted into law, would place guidelines or restrictions on states' authority to require online and other out of state merchants to collect and remit indirect tax on products and services that they may sell. Similar issues exist outside of the U.S., where the application of value-added taxes or other indirect taxes on online retailers is uncertain and evolving. The effect of changes in tax laws and regulations is uncertain and dependent on a number of factors. Depending on the content of any indirect tax legislation, the role of third-party compliance vendors may change, we may need to invest substantial amounts to modify our solutions or our business model, we could see a decrease in demand, we could see new competitors enter the market, or we could be negatively impacted by such legislation in a way not yet known.
We are exposed to cybersecurity and data privacy risks that, if realized, could expose us to legal liability, damage our reputation and harm our business.
We face risks of cyber-attacks, computer hacks, theft, viruses, malicious software, phishing, employee error, denial-of-service attacks and other security breaches that could jeopardize the performance of our software and expose us to financial and reputational harm. Any of these occurrences could create liability for us, put our reputation in jeopardy and harm our business. Such harm could be in the form of theft of our or our customers' confidential information, the inability of our customers to access our systems or the improper re-routing of customer funds through fraudulent transactions or other frauds perpetrated to obtain inappropriate payments. In some cases, we rely on the safeguards put in place by third parties to protect against security threats. These third parties, including vendors that provide products and services for our operations, could also be a source of security risk to us in the event of a failure or a security incident affecting their own security systems and infrastructure. Our network of ecosystem partners could also be a source of vulnerability to the extent their applications interface with ours, whether unintentionally or through a malicious backdoor. We do not review the software code included in third-party integrations in all instances. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we or these third parties may be unable to anticipate these techniques or to implement adequate preventative measures. We have internal controls designed to prevent cyber-related frauds related to authorizing the transfer of funds, but such internal controls may not be adequate. With the increasing frequency of cyber-related frauds to obtain inappropriate payments and other threats related to cyber-attacks, we may find it necessary to expend resources to remediate cyber-related incidents or to enhance and strengthen our cybersecurity. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service. Although we have insurance coverage for losses associated with cyber-attacks, as with all insurance policies, there are coverage exclusions and limitations, and our coverage may not be sufficient to cover all possible claims, and we may still suffer losses that could have a material adverse effect on our reputation and business.
Our customers provide us with information that our solutions store, some of which may be confidential information about them or their financial transactions. In addition, we store personal information about our employees and, to a lesser extent, those who purchase products or services from our customers. We have security systems and information technology infrastructure designed to protect against unauthorized access to such information. The security systems and infrastructure
we maintain may not be successful in protecting against all security breaches and cyber-attacks, social-engineering attacks, computer break-ins, theft and other improper activity. Threats to our information technology security can take various forms, including viruses, worms and other malicious software programs that attempt to attack our solutions or platform or to gain access to the data of our customers or their customers. Like other companies, we have on occasion and will continue to experience threats to our data and systems. Any significant data breach could result in the loss of business, litigation and regulatory investigations, loss of customers and fines and penalties that could damage our reputation and brand and adversely affect the growth of our business.
We may become involved in material legal proceedings and audits, the outcomes which could adversely affect our business, results of operations, financial condition and cash flows.
From time to time, we are involved in claims, suits, investigations, audits and proceedings arising in the ordinary course of our business, and we may in the future become involved in legal proceedings and audits that could have a material adverse effect on our business, results of operations, financial condition and cash flows. Claims, suits, investigations, audits and proceedings are inherently difficult to predict and their results are subject to significant uncertainties, many of which are outside of our control. Regardless of the outcome, such legal proceedings could have a negative impact on us due to legal costs, diversion of management resources and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in reputational harm, substantial settlements, judgments, fines or penalties, criminal sanctions, consent decrees or orders preventing us from offering certain features, functionalities, products or services, requiring us to change our development process or other business practices.
There is also inherent uncertainty in determining reserves for these matters. There is significant judgment required in the analysis of these matters, including assessing the probability of potential outcomes and determining whether a potential exposure can be reasonably estimated. Further, it may take time to develop factors on which reasonable judgments and estimates can be based. If we fail to establish appropriate reserves, our business could be negatively impacted.
Undetected errors, bugs or defects in our software could harm our reputation or decrease market acceptance of our software, which would harm our business and results of operations.
Our software may contain undetected errors, bugs or defects. We have experienced these errors, bugs or defects in the past in connection with new software and software upgrades and we expect that errors, bugs or defects may be found from time to time in the future in new or enhanced software after their commercial release. Our software is often used in connection with large-scale computing environments with different operating systems, system management software, equipment and networking configurations, which may cause or reveal errors or failures in our software or in the computing environments in which they are deployed. Despite testing by us, errors, bugs or defects may not be found in our software until they are used by our customers. In the past, we have discovered errors, bugs and defects in our software after they have been deployed to customers.
Any errors, bugs, defects, disruptions in service or other performance problems with our software may damage our customers' businesses and could hurt our reputation, brand and business. We may also be required, or may choose, for customer relations or other reasons, to expend additional resources to correct actual or perceived errors, bugs or defects in our software. If errors, bugs or defects are detected or perceived to exist in our software, we may experience negative publicity, loss of competitive position or diversion of the attention of our key personnel, our customers may delay or withhold payment to us or elect not to renew their subscriptions, or other significant customer relations problems may arise. We may also be subject to liability claims for damages related to errors, bugs or defects in our software. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our software may harm our business and results of operations.
Our software utilizes open-source software, and any defects or security vulnerabilities in the open-source software could negatively affect our business.
Certain of our software employs open-source software and we expect to use open-source software in the future. To the extent that our software depends upon the successful operation of open-source software, any undetected errors or defects in this open-source software could prevent the deployment or impair the functionality of our software, delay the introduction of new solutions, result in a failure of our software, and injure our reputation. For example, undetected errors or defects in open-source software could render it vulnerable to breaches or security attacks, and, in conjunction, make our systems more vulnerable to data breaches.
In addition, the terms of various open-source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market certain of our software solutions. Some open-source licenses might require us to make our source code available for no cost, to make publicly available source code for modifications or derivative works that we create based upon, incorporating or using the open-source software, and/or to license such modifications or derivative works under the terms of the particular open-source license. While we try to insulate our proprietary code from the effects of such open-source license provisions, we cannot guarantee we will be successful. In addition to risks related to open-source license requirements, usage of open-source software can lead to greater risks than use of third-party commercial software, as open-source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open-source software cannot be eliminated and could negatively affect our business, financial condition and results of operations.
We rely on third-party data centers, systems and technologies to operate our business, and interruptions or performance problems with these third-party providers may adversely affect our business and results of operations.
We rely on data centers and other technologies and services provided by third parties in order to operate our business. If any of these services becomes unavailable or otherwise is unable to serve our requirements, there could be interruptions to our software and provision of services to our customers. Our business depends on our ability to protect the growing amount of information stored in data centers and related systems, offices and hosting facilities against damage from earthquakes, floods, fires, other extreme weather conditions, power loss, telecommunications failures, hardware failures, viruses, terrorist attacks, acts of war, unauthorized electronic or physical intrusion, overload conditions and other events. If our data centers or related systems fail to operate properly or become disabled even for a brief period of time, we could suffer financial loss, a disruption of our business, liability to customers or damage to our reputation. Our response to any type of disaster may not be successful in preventing the loss of customer data, service interruptions, disruptions to our operations or damage to our important facilities. Our data center providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all, and it is possible that we will not be able to switch our operations to another provider in a timely and cost-effective manner should the need arise. If we are unable to renew our agreements with these providers on commercially reasonable terms, or if in the future we add additional data center facility providers, we may face additional costs or expenses or downtime, which could harm our business.
We also rely on computer hardware purchased or leased from, software licensed from, content licensed from and services provided by a variety of third parties, which include database, operating system, virtualization software, tax requirement content and geolocation content and services. Any errors, bugs or defects in such third-party hardware, software, content or services could result in errors or a failure of our solutions, which could harm our business. In the future, we might need to license other hardware, software, content or services to enhance our solutions and meet evolving customer requirements. Any inability to license or otherwise obtain such hardware or software could result in a reduction in functionality, or errors or failures of our products, until equivalent technology is either developed by us or, if available, is identified, obtained through purchase or license, and integrated into our solutions, any of which may reduce demand for our solutions and increase our expenses. In addition, third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs, all of which may increase our expenses and harm our results of operations.
If we fail to effectively protect, maintain and enhance our brand, our business may suffer.
As a leader in our industry for over 40 years, our brand is one of our most valuable assets, and any failure to protect our brand could cause our business to suffer. In addition, the promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive and as we expand into new regions. The demand for and cost of online and traditional advertising have been increasing and may continue to increase. Our brand promotion efforts will require investment not just in our indirect tax solutions, but also in our full suite of software and services. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors and we could lose customers or fail to attract potential new customers, all of which would adversely affect our business, results of operations, financial condition and cash flows.
Changes in the application, scope, interpretation or enforcement of laws and regulations pertaining to our operations may harm our business or results of operations, subject us to liabilities and require us to implement new compliance programs or business methods.
We perform a number of critical business functions for our customers, including remittance of the taxes our customers owe to taxing authorities. Our electronic payment of customers' taxes may be subject to federal or state laws or regulations relating to money transmission. The Federal Bank Secrecy Act requires that financial institutions, of which money transmitters are a subset, register with the U.S. Department of Treasury's Financial Crimes Enforcement Network and maintain policies and procedures reasonably designed to monitor, identify, report and, where possible, avoid money laundering and criminal or terrorist financing by customers. Most U.S. states also have laws that apply to money transmitters, and impose various licensure, examination and bonding requirements on them. We believe these federal and state laws and regulations were not intended to cover the business activity of remitting transaction taxes that taxpayers owe to the various states and localities. However, if federal or state regulators were to apply these laws and regulations to this business activity, whether through expansion of enforcement activities, new interpretations of the scope of certain of these laws or regulations or of available exemptions, or if our activities are held by a court to be covered by such laws or regulations, we could be required to expend time, money and other resources to deal with enforcement actions and any penalties that might be asserted, to institute and maintain a compliance program specific to money transmission laws, and possibly to change aspects of how we conduct our business to achieve compliance or minimize regulation. Application of these laws to our business could also make it more difficult or costly for us to maintain our banking relationships. Financial institutions may also be unwilling to provide banking services to us due to concerns about the large dollar volume moving in and out of our accounts on behalf of our customers in the ordinary course of our business. As we continue to expand the solutions we offer and the jurisdictions in which we offer them, we could become subject to other licensing, examination or regulatory requirements relating to financial services.
Determining the taxes owed by our customers involves providing solutions tailored to the types and prices of products our customers sell, as well as information regarding addresses that products are shipped from and delivered to. Numerous federal, state and local laws and regulations govern the collection, dissemination, use and safeguarding of personal information and other data, the scope of which is changing, subject to differing interpretations, and which may be costly to comply with, inconsistent between jurisdictions or conflicting with other rules. We may be subject to these laws in certain circumstances. Most states have also adopted laws that require notice be given to affected consumers in the event of a security breach. In the event of a security breach, our compliance with these laws may subject us to costs associated with notice and remediation, as well as potential investigations from federal regulatory agencies and state attorneys general. A failure on our part to safeguard consumer data adequately or to destroy data securely may subject us, depending on the personal information in question, to costs associated with notice and remediation, as well as to potential regulatory investigations or enforcement actions, and possibly to civil liability, under federal or state data security or unfair practices or consumer protection laws. If federal or state regulators were to expand their enforcement activities or change their interpretation of the applicability of these laws, or if new laws regarding privacy and protection of consumer data were to be adopted, the burdens and costs of complying with them could increase significantly, negatively affecting our results of operations and possibly the manner in which we conduct our business. For example, the European Union's General Data Protection Regulation requires certain operational changes for companies that receive or process personal data of residents of the EU and includes significant penalties for noncompliance. In addition, other governmental authorities around the world are considering implementing similar types of legislative and regulatory proposals concerning data protection. We may incur significant costs to comply with these mandatory privacy and security standards.
If economic conditions worsen, it may negatively affect our business and financial performance.
Our financial performance depends, in part, on the state of the economy, both in the U.S. and globally. Declining levels of economic activity may lead to declines in spending and customer revenue, which may result in decreased revenue for us. Concern about the strength of the economy may slow the rate at which businesses of all sizes are willing to hire an outside vendor to perform the determination and remittance of their transaction taxes and filing of related returns. If our customers and potential customers experience financial hardship as a result of a weak economy, industry consolidation or other factors, the overall demand for our solutions could decrease. If economic conditions worsen, our business, results of operations, financial condition and cash flows could be harmed.
Natural disasters, epidemic outbreaks, terrorist acts and political events could disrupt business and result in lower sales and otherwise have a material adverse effect on our business, financial performance and results of operations.
The occurrence of one or more major natural disasters, unusual weather conditions, epidemic outbreaks, terrorist attacks or disruptive political events, each of which is out of our control, may result in reduced consumer and supplier spending and transactions, which in turn could cause our revenues to decline and our business to suffer. Natural disasters including tornados, hurricanes, floods and earthquakes may damage the facilities of our customers or those of their suppliers or retailers or their other operations, which could lead to reduced revenue for our customers and thus could result in declines in our revenue that is aligned with customer transaction volume. In addition, a global epidemic outbreak may have a material adverse effect on global economic conditions, consumer spending and the stability of global financial markets. For example, in December 2019, a novel strain of coronavirus ("COVID-19") appeared. The COVID-19 pandemic is continuing to have widespread, ongoing 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, substantial modifications were made to employee travel policies, our offices were closed and employees advised to work-from-home and conferences and other marketing events were cancelled or shifted to virtual-only. These protective actions remain in place to date. The COVID-19 pandemic has impacted and may continue to adversely impact our operations, including our employees, customers and partners, and there continues to be substantial uncertainty in the nature and degree of its continued effects over time. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors that cannot reliably be predicted, including (i) the duration and scope of the pandemic; (ii) governmental, business, and individuals’ actions in response to the pandemic; (iii) the global availability and efficacy of a COVID-19 vaccine; and (iv) the impact on economic activity, including the ongoing 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. Similarly, terrorist attacks or disruptive political events, such as the imposition of retaliatory tariffs or governmental trade or price manipulation, could cause our customers, or their customers, to defer spending plans or otherwise reduce their economic activity. If any of the foregoing risks were to be realized, it could have a material adverse effect on or business, financial performance and results of operations.
We are subject to anti-corruption, anti-bribery and similar laws and noncompliance with such laws can subject us to criminal penalties or significant fines and harm our business and reputation.
We are subject to requirements under the U.S. Treasury Department's Office of Foreign Assets Control, anti-corruption, anti-bribery and similar laws, such as the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act 2010, and other anti-corruption, anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly and prohibit companies and their employees and agents from promising, authorizing, making, offering or providing anything of value to a "foreign official" for the purposes of influencing official decisions or obtaining or retaining business, or otherwise obtaining favorable treatment. As we increase our international operations, our risks under these laws may increase. Non-compliance with these laws could subject us to investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, adverse media coverage and other consequences. Any investigations, actions or sanctions could harm our business, results of operations, financial condition and cash flows.
In addition, in the future we may use third parties to sell access to our software and conduct business on our behalf abroad. We or such future third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities, and we can be held liable for the corrupt or other illegal activities of such future third-party intermediaries, and our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities. We cannot provide assurance that our internal controls and compliance systems will always protect us from liability for acts committed by employees, agents or business partners of ours (or of businesses we acquire or partner with) that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks, false claims, pricing, sales and marketing practices, conflicts of interest, competition, employment practices and workplace behavior, export and import compliance, economic and trade sanctions, money laundering, data privacy and other related laws. Any such improper actions or allegations of such acts could subject us to significant sanctions, including civil or criminal fines and penalties, disgorgement of profits,
injunctions and debarment from government contracts, as well as related stockholder lawsuits and other remedial measures, all of which could adversely affect our reputation, business, results of operations and financial condition.
Any violation of economic and trade sanction laws, export and import laws, the FCPA or other applicable anti-corruption laws or anti-money laundering laws could also result in whistleblower complaints, adverse media coverage, investigations and severe criminal or civil sanctions, any of which could have a materially adverse effect on our reputation, business, results of operations and prospects.
Our ability to protect our intellectual property is limited, and we may be subject to claims of infringement by third parties.
Our success depends, in part, upon our proprietary technology, processes, trade secrets, and other proprietary information and our ability to protect this information from unauthorized disclosure and use. We primarily rely upon a combination of copyright, trademark and trade secret laws, as well as confidentiality procedures, contractual provisions and other similar measures to protect our proprietary or confidential information and intellectual property. Our trademarks and service marks include VERTEX™ and O Series™, which is our flagship indirect tax solution. Despite our efforts to protect our proprietary rights and intellectual property, unauthorized parties may attempt to copy aspects of our solutions or to obtain and use information that we regard as proprietary, and third parties may attempt to independently develop similar technology, policing unauthorized use of our technology and intellectual property rights may be difficult and may not be effective.
In addition, third parties may claim infringement by us with respect to current or future solutions or other intellectual property rights. The software and technology industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any claims and lawsuits to enforce our intellectual property rights or to defend ourselves against claims of infringement of third-party intellectual property rights, and the disposition of such claims and lawsuits, whether through settlement or licensing discussions, or litigation, could be time-consuming and expensive to resolve, divert management attention from executing our strategies, result in efforts to enjoin our activities, lead to attempts on the part of other parties to pursue similar claims, and, in the case of intellectual property claims, require us to change our technology, change our business practices, pay monetary damages, or enter into short- or long-term royalty or licensing agreements. Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our solutions to others, could be material to our financial condition or cash flows, or both, or could otherwise harm our results of operations.
Our ability to obtain additional capital on commercially reasonable terms may be limited.
We intend to continue to make investments to support our business growth and may require additional funds, beyond those generated by our initial public offering or available under our existing credit facility, to respond to business challenges, including to better support and serve our customers, develop new software or enhance our existing solutions, expand our tax content, improve our operating and technology infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in public or private equity, equity-linked or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, including the ability to pay dividends. This may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and respond to business challenges could be significantly impaired, and our business and prospects could be adversely affected.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, or fail to remediate any material weaknesses in our internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The rapid growth of our operations and our recent transition to a publicly traded company has created a need for additional resources within the accounting and finance functions due to the increasing need to produce timely financial information and to ensure a level of segregation of duties customary for a U.S. public company. We continue to reassess the sufficiency of finance personnel in response to these increasing demands and expectations.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.
We previously identified and disclosed certain material weaknesses in our internal control over financial reporting in our Annual Report on Form 10-K for the year ended December 31, 2020. These material weaknesses have since been remediated, but additional material weaknesses or significant deficiencies may be discovered in the future. If we identify additional material weaknesses in our internal control over financial reporting, our management will be unable to assert that our disclosure controls and procedures and our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by NASDAQ, the SEC, or other regulatory authorities, which could require additional financial and management resources.
The price of our Class A common stock may fluctuate significantly, and you could lose all or part of your investment.
The market price of our Class A common stock is likely to be volatile and could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
● actual or anticipated fluctuations in our results of operations and financial condition;
● variance in our financial performance from expectations of securities analysts;
● changes in our software subscription revenue;
● changes in our projected operating and financial results;
● changes in tax laws or regulations;
● announcements by us or our competitors of significant business developments, acquisitions or new offerings;
● our involvement in any litigation;
● our sale of our Class A common stock or other securities in the future;
● changes in senior management or key personnel;
● the trading volume of our Class A common stock;
● changes in the anticipated future size and growth rate of our market; and
● general economic, regulatory and market conditions.
The stock markets have historically experienced price and volume fluctuations that at times have been extreme and have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have
often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our Class A common stock. If the market price of our Class A common stock falls below your investment price, you may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management's attention.
We are a "controlled company" within the meaning of the NASDAQ Rules and, as a result, expect to qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Our current principal stockholders beneficially own a majority of the combined voting power of all classes of our outstanding voting stock; thus, we are a controlled company within the meaning of the NASDAQ Rules, which state a company with more than 50% of the voting power held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:
● a majority of the board of directors consist of independent directors as defined under the rules of the NASDAQ Global Market;
● the nominating and governance committee be composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and
● the compensation committee be composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities.
These requirements will not apply to us as long as we remain a controlled company. We have elected to take advantage of the exemption from the requirement that a majority of our board of directors consist of independent directors and that our nominating and corporate governance committee consist entirely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ Global Market.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties
Our corporate headquarters, which includes our operations and innovation lab, is located in King of Prussia, Pennsylvania, and consists of approximately 189,500 square feet of space under a lease that expires on September 30, 2028.
We also lease offices in Naperville, Illinois; London, United Kingdom; Amsterdam, The Netherlands; Frankfurt, Germany; Sao Paulo, Brazil; Chennai, India; Killorglin, Ireland, and Cork, Ireland.
We believe our facilities are adequate for our current and presently foreseeable needs.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
On January 25, 2022, we filed a complaint (subsequently amended on February 9, 2022) against Avalara, Inc. (“Avalara”) in the United States District Court for the Eastern District of Pennsylvania. The complaint alleges claims of unfair competition, intentional interference with contractual relations, and trade secret misappropriation against Avalara. We are seeking a permanent injunction to prevent Avalara from further interfering in our contractual relations and to prohibit them from using or disclosing in any way our confidential, proprietary, and/or trade secret information. We are also seeking monetary damages, including punitive damages, and attorneys’ fees. On February 7, 2022, Avalara filed a motion to dismiss the complaint for lack of personal jurisdiction. Avalara withdrew that motion on February 17, 2022, and filed a renewed motion to dismiss the amended complaint for lack of personal matter jurisdiction on March 2, 2022. Vertex’s opposition to the motion to dismiss is due on March 23, 2022. We believe that the allegations in the complaint, once proven, are sufficient to prevail in this matter. However, the eventual outcome of the case is subject to a number of uncertainties, and therefore we cannot offer any assurance as to the ultimate impact of this case on our business and operations.
In addition to the foregoing matter, from time to time, we may be involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our Class A common stock has been listed on the NASDAQ exchange, under the symbol “VERX” since July 28, 2020. Prior to that date, there was no public trading market for our common stock.
Our Class B common stock is not listed on any stock exchange nor traded on any public market.
Holders
As of December 31, 2021, we had 2 holders of record of our Class A common stock. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.
As of December 31, 2021, there were 28 stockholders of record of our Class B common stock.
Dividend Policy
We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.
Stock Performance Graph
The graph below(1) compares the cumulative total return on our Class A common stock with that of the S&P 500 Index(2) and the NASDAQ U.S. Benchmark Software TR Index(3). The period shown commences on July 28, 2020, and ends on December 31, 2021, the end of our most recent fiscal year. The graph assumes an investment of $100 in each of the aforementioned on the close of market on July 28, 2020. The stock price performance graph is not necessarily indicative of future price performance.
1 Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2022.
2 S&P 500 Index Data: Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved.
3 NASDAQ Index Data: Copyright NASDAQ OMX, Inc. Used with permission. All rights reserved.
Base Date
Company / Index
7/28/2020
9/30/2020
12/31/2020
3/31/2021
6/30/2021
9/30/2021
12/31/2021
Vertex, Inc.
$
100.00
$
96.11
$
145.63
$
91.85
$
91.68
$
80.32
$
66.32
S&P 500
$
100.00
$
103.54
$
116.12
$
123.29
$
133.83
$
134.61
$
149.46
NASDAQ U.S. Benchmark Software TR
$
100.00
$
105.29
$
114.08
$
115.33
$
132.90
$
136.71
$
149.28
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this Annual Report on Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
Vertex is a leading global provider of indirect tax software and solutions. Our mission is to deliver the most trusted tax technology enabling global businesses to transact, comply and grow with confidence. Vertex provides cloud-based and on-premise solutions that can be tailored to specific industries for every major line of indirect tax, including sales and consumer use, value-added and payroll. Headquartered in North America, and with offices in South America and Europe, Vertex employs over 1,300 professionals and serves companies across the globe.
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.
Our customers include a majority of the Fortune 500, as well as a majority of the top 10 companies by revenue in multiple industries such as retail, technology and manufacturing, in addition to leading marketplaces. As our customers expand geographically and pursue omnichannel business models, their tax determination and compliance requirements increase and become more complex, providing sustainable organic growth opportunities for our business. Our flexible, tiered transaction-based pricing model also results in our customers growing their spend with us as they grow and continue to use our solutions. We principally price our solutions based on a customer’s revenue base, in addition to a number of other factors.
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 toward 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 35.4% and 27.5% of software subscription revenues from cloud-based subscriptions in 2021 and 2020, respectively. While our on-premise software subscription revenues comprise 64.6% of our software subscription revenues in 2021, it continues to decrease as a percentage of total software subscriptions revenues as cloud-based subscriptions grow.
We license our solutions primarily through our direct sales force, which focuses on selling to qualified leads provided by our marketing efforts, and through our network of referral partners. We also utilize indirect sales to a lesser extent to efficiently grow and scale our enterprise and mid-market revenues.
Our partner ecosystem is a differentiating, competitive strength in both our software development and our sales and marketing activities. We integrate with key technology partners that span ERP, CRM, procurement, billing, POS and eCommerce. These partners include Adobe/Magento, Coupa, Microsoft Dynamics, NetSuite, Oracle, Salesforce, SAP, SAP Ariba, Workday and Zuora. We also collaborate with numerous accounting firms who have built implementation practices around our software to serve their customer base.
We believe that global commerce and the compliance environment provides durable and accelerating growth opportunities for our business. We generated revenues of $425.5 million and $374.7 million in 2021 and 2020, respectively. We had a net (loss) of $(1.5) million and $(75.1) million in 2021 and 2020, respectively. These amounts are presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”).
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 $78.0 million and $78.4 million in 2021 and 2020, respectively. Adjusted EBITDA is a non-GAAP financial measure. 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.
Key Factors Affecting Performance
The growth of our business and our future success depends on many factors, including our ability to retain and expand our revenues from existing customers, acquire new customers, broaden and deepen our partner ecosystem, continually innovate our software, invest in growth and scale our business and manage customer migrations to cloud solutions. While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We anticipate that we will continue to expand our operations and headcount. The expected addition of new personnel and the investments that we anticipate will be necessary to manage our anticipated growth may make it more difficult for us to achieve or maintain profitability. Many of these investments will occur in advance of experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently.
Retention and expansion of revenues from existing customers. Given the breadth of our customer base and their own internal growth, the majority of our revenues and revenue growth comes from existing customers. This revenue growth is comprised of the acquisition of new licenses for additional products, increases in subscription fees due to expanded usage of currently licensed software and price increases. We plan to continue to invest in new innovations and offerings and in our sales and marketing teams in order to support the ongoing strong retention and expansion of revenues with our existing customers. We monitor our net revenue retention rate (“NRR”) in order to understand our ability to retain and grow revenues from our customers. Our NRR was 108% and 106% in 2021 and 2020, respectively. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Business Metrics - Net Revenue Retention Rate” for further discussion.
Acquire new customers. Our solutions address the complexity of aligning commerce and compliance, and we believe the market for our software and solutions is large and underpenetrated, both in the U.S. and globally. As enterprise and mid-market companies continue to expand their business operations-both through their product and service offerings and their global footprint-we expect demand for our tax solutions to increase due to the fact that legacy solutions such as spreadsheets, manual processes, native ERP functionality or home-built solutions are error prone, inefficient and cannot scale. We plan to continue to invest in our sales and marketing teams and our solution development in order to address this increased demand from new customers. This increased investment will result in increases in expenses in advance of revenues attributable to these investments.
Broaden and deepen our partner ecosystem. We have an extensive network of partners that spans ERP, CRM, procurement, billing, POS and eCommerce platforms. Our partners enhance the coverage and adoption of our solutions and promote our thought leadership. We leverage our partnerships to maximize the benefits of our solutions for our customers and to identify new customer opportunities. By forming additional strategic alliances with participants in the global digital transformation, such as payments and eCommerce platforms, we can continue to expand our exposure to all transactions, both business-to-consumer (“B2C”) and business-to-business (“B2B”). Future partnerships with large-scale digital payments companies will allow us to develop additional customer-centric solutions and further expand our customer base.
Continued innovation of our software. With the pace of change in commerce and compliance, we believe it is important to continue innovating and extending the functionality and breadth of our software. We plan on investing to further enhance our content and the speed and usability of our software. Historically such innovation has been accomplished through internal development efforts. However, we may pursue acquisitions, development arrangements with partners or similar activities to accelerate these investments. We believe continuing to enhance our existing software
and expanding our tax content will increase our ability to generate revenues by broadening the appeal of our software to new customers as well as increasing our engagement with existing customers. See Note 3, Business Combinations to our consolidated financial statements beginning on page of this Annual Report on Form 10-K for a discussion of our acquisitions.
Investing in growth and scaling our business. We believe that our market opportunity is large, and we will continue to invest significantly in scaling across organizational functions in order to support the anticipated growth in our operations both domestically and internationally. Any investments we make in our research and development and our sales and marketing organization will occur in advance of experiencing the benefits from such investments; therefore, it may be difficult for us to determine if we are efficiently allocating resources in those areas. The company may pursue acquisitions or partner arrangements to accelerate its growth initiatives. See Note 3, Business Combinations to our consolidated financial statements beginning on page of this Annual Report on Form 10-K for a discussion of our acquisitions.
Customer migration to cloud solutions. Over time, we expect a continued shift to our cloud solutions from existing and newly acquired customers. When existing customers migrate from on-premise to cloud-based solutions, this generally has a favorable impact on our long-term ARR due to price structures and opportunities to promote additional license sales. Over the past three years, cloud sales to new customers have grown at a significantly faster rate than sales of on-premise solutions, which is a trend that we expect to continue over time. We generated 35.4% and 27.5% of software subscription revenues from cloud-based subscriptions in 2021 and 2020, respectively. We recognize revenue from the sale of cloud-based subscriptions ratably over the life of the contract, whereas for on-premise subscriptions, the first year pricing includes a premium that is not included in future renewal pricing. The premium is recognized ratably over the estimated period of benefit to the customer, which is generally three years. Therefore, as more of our sales shift to cloud-based subscriptions, our revenue growth rate may increase. We provide hosting for our cloud-based subscriptions. To the extent that revenues from our cloud offerings increase as a percentage of total revenues, our gross margin may decrease due to the associated hosting costs of those offerings.
Recent Developments
Impact of COVID-19
The COVID-19 pandemic had minimal impact on our revenues and results of operations in 2020 and 2021 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 or 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 flows. During 2020 and 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 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, nor 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 2020 and 2021 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 2022 as the resurgence of COVID-19 globally 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. Given that customers cannot forgo our monthly content updates, which are necessary to remain compliant with the most current regulations, we believe customers will continue to pay our renewal invoices in a timely, even if slightly elongated, manner. We believe that we currently have ample liquidity and capital resources to continue to meet our operating needs, and our ability to continue to service our debt or other financial
obligations is not currently impaired. For a further description of our liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors that cannot reliably be predicted, including the duration and scope of the pandemic; governmental, business, and individuals’ actions in response to the pandemic; and the impact on global 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, estimated useful lives and potential impairment of long-lived assets and intangible assets, and potential impairment of goodwill.
Components of Our Results of Operations
Revenues
We generate revenues from software subscriptions and services.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. We enter into contracts that include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers that are subsequently remitted to governmental authorities.
Software Subscriptions
Licenses for on-premise software subscriptions, which are generally one year, provide the customer with a right to use the software as it exists when made available to the customer. Customers purchase a subscription to these licenses, which includes the related software and tax content updates and product support. The updates and support, which are part 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. Certain 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 on past experience, current information and forward-looking economic considerations.
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%. In addition, our managed services offering has continued to experience increased revenues associated with returns processing volume increases attributable to regulatory changes, as customers expanded their tax filings into more jurisdictions.
Cost of 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 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 expect growth in our business will result in an increase in cost of revenue in absolute dollars.
Services
Cost of services revenue consists of direct costs of software subscription-related services and our managed services offering. These costs include personnel and related expenses, including salaries, benefits, bonuses, stock-based compensation and the cost of third-party contractors and other direct expenses. We plan to continue to expand our infrastructure and personnel as necessary to support our future growth and related increases in our service revenue. We expect growth in our business will result in an increase in the cost of services revenue in absolute dollars but may decrease as a percentage of revenues as we scale our operations.
Research and Development
Research and development expenses consist primarily of personnel and related expenses for our research and development activities, including salaries, benefits, bonuses and stock-based compensation, and the cost of third-party developers and other contractors. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred.
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 certain acquired intangible assets. We intend to continue to invest in our sales and marketing capabilities in the future to continue to increase our brand awareness and expect these costs to increase on an absolute dollar basis as we grow our business and continue to expand our market and partner ecosystem penetration. Sales and marketing expense in absolute dollars and as a percentage of total 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. 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 historical levels experienced pre-COVID-19.
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, including the design, implementation and testing of increasingly formalized systems of internal control over financial reporting.
Depreciation and Amortization
Depreciation and amortization expense consists of the allocation of purchased and developed asset costs over the future periods benefitted by the use of these assets. These assets include leasehold improvements for our facilities, computers and equipment needed to support our customers and our internal infrastructure and capitalized internal-use software associated with our internal infrastructure and tools. Depreciation and amortization will fluctuate in correlation with our ongoing investment in internal infrastructure costs to support our growth.
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 fluctuations 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 net amount of interest expense and interest income over the same period.
Interest expense consists primarily of interest incurred related to borrowings, bank credit facility and leases. Interest expense includes amortization of deferred financing fees over the term of the credit facility or write-downs of such 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 Sistemas Fiscais Limited (“Systax”) acquisition and amortization of
the discount on deferred purchase consideration associated with the LCR-Dixon Corporation “(LCR-Dixon”) acquisition will be recorded as interest expense.
Interest income reflects earnings on investments of our cash on hand and on funds held for customers related to our managed outsourcing services. Interest income will vary as a result of fluctuations in the future level of funds available for investment and the rate of return available in the market on such funds.
Provision for Income Taxes
Prior to July 27, 2020, Vertex was taxed as an S-Corporation for U.S. federal and certain state income tax purposes. As a result, net income or loss prior to this date has been allocated to and included on the income tax returns of the S-Corporation stockholders. Vertex was taxed at the corporate level in certain states where the S-Corporation status was not recognized or where the state imposed a tax on S-Corporations. 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, and the income tax provision or benefit is based on taxable income sourced to these foreign jurisdictions.
Effective July 27, 2020, Vertex converted to a C-Corporation, and our results are subsequently taxed at the corporate level. As such, our statutory income tax rate has increased since we are now subject to U.S. federal and state corporate income taxes.
Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto beginning on page of this Annual Report on Form 10-K. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. The following table sets forth our consolidated statements of comprehensive income (loss) for the periods indicated.
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Revenues:
Software subscriptions
$
358,415
$
316,763
$
41,652
13.1
%
Services
67,133
57,902
9,231
15.9
%
Total revenues
425,548
374,665
50,883
13.6
%
Cost of revenues:
Software subscriptions(1)
116,194
105,676
10,518
10.0
%
Services(1)
45,698
59,711
(14,013)
(23.5)
%
Total cost of revenues
161,892
165,387
(3,495)
(2.1)
%
Gross profit
263,656
209,278
54,378
26.0
%
Operating expenses:
Research and development(1)
44,018
54,340
(10,322)
(19.0)
%
Selling and marketing(1)
99,005
99,418
(413)
(0.4)
%
General and administrative(1)
107,009
149,057
(42,048)
(28.2)
%
Depreciation and amortization
11,678
11,018
6.0
%
Other operating expense, net
4,888
4,685
2,307.9
%
Total operating expenses
266,598
314,036
(47,438)
(15.1)
%
Loss from operations
(2,942)
(104,758)
101,816
(97.2)
%
Interest expense, net
3,111
(2,127)
(68.4)
%
Loss before income taxes
(3,926)
(107,869)
103,943
(96.4)
%
Income tax benefit (2)
(2,447)
(32,788)
30,341
(92.5)
%
Net loss (2)
(1,479)
(75,081)
73,602
(98.0)
%
Other comprehensive loss from foreign currency translations, net of tax
14,370
2,636
11,734
445.1
%
Total comprehensive loss (2)
$
(15,849)
$
(77,717)
$
61,868
(79.6)
%
1 Includes stock-based compensation expenses as follows in the table below. For more details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Trends.”
2 We have revised the previously reported amounts for the year ended December 31, 2020. See Note 1, Summary of Significant Accounting Policies under the section Revision of Previously Issued Financial Statements to our consolidated financial statements beginning on page of this Annual Report on Form 10-K for additional information.
For the Year Ended
December 31,
(In thousands)
Stock-based compensation expense:
Cost of revenues, software subscriptions
$
2,336
$
14,663
Cost of revenues, services
2,648
21,472
Research and development
2,620
14,694
Selling and marketing
6,371
29,551
General and administrative
12,185
67,524
Total stock-based compensation expense
$
26,160
$
147,904
The following table sets forth our results of operations as a percentage of our total revenues for the periods presented.
For the Year Ended
December 31
Revenues:
Software subscriptions
84.2
%
84.5
%
Services
15.8
%
15.5
%
Total revenues
100.0
%
100.0
%
Cost of Revenues:
Software subscriptions
27.3
%
28.2
%
Services
10.7
%
15.9
%
Total cost of revenues
38.0
%
44.1
%
Gross profit
62.0
%
55.9
%
Operating expenses:
Research and development
10.3
%
14.5
%
Selling and marketing
23.3
%
26.5
%
General and administrative
25.1
%
39.8
%
Depreciation and amortization
2.7
%
2.9
%
Other operating expense, net
1.1
%
0.1
%
Total operating expenses
62.5
%
83.8
%
Loss from operations
(0.5)
%
(27.9)
%
Interest expense, net
0.3
%
0.8
%
Loss before income taxes
(0.8)
%
(28.7)
%
Income tax benefit
(0.6)
%
(8.8)
%
Net loss
(0.2)
%
(19.9)
%
Other comprehensive loss from foreign currency translations, net of tax
3.4
%
0.7
%
Total comprehensive loss
(3.6)
%
(20.6)
%
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenues
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Revenues:
Software subscriptions
$
358,415
$
316,763
$
41,652
13.1
%
Services
67,133
57,902
9,231
15.9
%
Total revenues
$
425,548
$
374,665
$
50,883
13.6
%
Revenues increased $50.9 million, or 13.6%, to $425.5 million in 2021 compared to $374.7 million in 2020. The increase in software subscriptions revenues of $41.7 million, or 13.1%, was primarily driven by an increase of $35.7 million in revenues derived from our existing customers and a year-over-year increase of $6.0 million in revenues derived from new customers. Software subscriptions revenues derived from new customers averaged 8.6% and 7.9% of total software subscriptions revenues in 2021 and 2020, respectively.
The $9.2 million increase in services revenues is primarily driven by an increase of $5.3 million in software subscription-related services associated with the growth in subscription revenues, which includes new customers implementing our solutions and upgrading existing customers to newer versions of our solutions. In addition, our managed services offering experienced a $3.9 million increase in recurring services revenues over the prior year due to returns processing volume increases related to regulatory changes as customers expanded their tax filings into more jurisdictions.
Cost of Software Subscriptions Revenues
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Cost of software subscriptions revenues
$
116,194
$
105,676
$
10,518
10.0
%
Cost of software subscriptions revenues increased $10.5 million, or 10.0%, to $116.2 million in 2021 compared to $105.7 million in 2020. This included a $10.5 million increase in costs of personnel supporting period over period growth of sales and customers and ongoing hosting and 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 $12.3 million associated with our ongoing investments in internal-use software for cloud-based subscription solutions, 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 $12.3 million decrease in stock-based compensation in 2021 compared to the same period in 2020.
As a percentage of software subscriptions revenues, the cost of software subscriptions revenues decreased to 32.4% in 2021 compared to 33.4% in 2020. After excluding stock-based compensation expense, as a percentage of software subscriptions revenues, cost of software subscriptions revenues increased to 31.8% in 2021 compared to 28.7% in 2020.
Cost of Services Revenues
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Cost of services revenues
$
45,698
$
59,711
$
(14,013)
(23.5)
%
Cost of services revenues decreased $14.0 million, or 23.5%, to $45.7 million in 2021 compared to $59.7 million in 2020. This decline was primarily driven by a stock-based compensation decrease of $18.8 million in 2021 compared to the same period in 2020. After adjusting for the decline in stock-based compensation expense, cost of services revenues increased $4.8 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 services revenues, cost of services revenues decreased to 68.1% in 2021 compared to 103.1% for the same period in 2020. After excluding stock-based compensation expense, as a percentage of services revenues, cost of services revenues decreased to 64.1% in 2021 compared to 66.0% for the same period in 2020.
Research and Development
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Research and development
$
44,018
$
54,340
$
(10,322)
(19.0)
%
Research and development expenses decreased $10.3 million, or 19.0%, to $44.0 million in 2021 compared to $54.3 million in 2020. This decline was primarily driven by a stock-based compensation decrease of $12.1 million in 2021 compared to the same period in 2020. After adjusting for the decline in stock-based compensation expense, research and development expenses decreased $1.8 million, primarily driven by an increase in development work capitalized associated with 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 10.3% in 2021 compared to 14.5% in 2020. After excluding stock-based compensation, research and development expenses as a percentage of total revenue would have been 9.7% in 2021 compared to 10.6% in 2020.
Selling and Marketing
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Selling and marketing
$
99,005
$
99,418
$
(413)
(0.4)
%
Selling and marketing expenses decreased $0.4 million, or 0.4%, to $99.0 million in 2021 compared to $99.4 million in 2020. However, this decline was driven by a stock-based compensation decrease of $23.2 million in 2021 over the same period in 2020. After adjusting for the decline in stock-based compensation expense, selling and marketing expenses increased $22.8 million primarily driven by an $8.2 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 $9.3 million in advertising and promotional spending, and expanded brand awareness efforts.
As a percentage of total revenues, selling and marketing expenses decreased to 23.3% in 2021 compared to 26.5% for the same period in 2020. After excluding stock-based compensation expense, as a percentage of total revenues, selling and marketing expenses increased to 21.8% in 2021 compared to 18.6% in 2020.
General and Administrative
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
General and administrative
$
107,009
$
149,057
$
(42,048)
(28.2)
%
General and administrative expenses decreased $42.0 million, or 28.2%, to $107.0 million in 2021 compared to $149.1 million in 2020. However, this decline was driven by a stock-based compensation decrease of $55.3 million in 2021 over the same period in 2020. After adjusting for the decline in stock-based compensation expense, general and administrative expenses increased $13.3 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, systems and resources in support of our growth and public company reporting and compliance activities.
Due to these factors, as a percentage of total revenues, general and administrative expenses were 25.1% in 2021 compared to 39.8% in 2020. After excluding stock-based compensation expense, as a percentage of total revenues general and administrative expenses would have been 22.3% in 2021 compared to 21.8% in 2020.
Depreciation and Amortization
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Depreciation and amortization
$
11,678
$
11,018
$
6.0
%
Depreciation and amortization increased $0.7 million, or 6.0%, to $11.7 million in 2021 compared to $11.0 million in 2020. The increase was primarily due to the impact of infrastructure and technology purchases placed in service in late 2020 and 2021 and other capitalized infrastructure costs to support our growth. As a percentage of revenues, depreciation expense was relatively consistent at 2.7% in 2021 compared to 2.9% for the same period in 2020.
Other Operating Expense, Net
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Other operating expense, net
$
4,888
$
$
4,685
2,307.9
%
Other operating expense, net, increased $4.7 million, or 2,307.9%, to $4.9 million of expense in 2021 compared to $0.2 million of expense for the same period in 2020. This increase was primarily comprised of $4.7 million of transaction costs associated with acquisitions in 2021. As a percentage of total revenues, other operating expense, net increased to 1.1% in 2021 compared to 0.1% in 2020.
Interest Expense, Net
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Interest expense, net
$
$
3,111
$
(2,127)
(68.4)
%
Interest expense, net decreased $2.1 million, or 68.4%, to $1.0 million in 2021 compared to $3.1 million of expense for the same period in 2020. This change was primarily attributable to the write-down of $1.2 million in deferred financing costs in 2020 and a decrease in term loan interest expense of $2.0 million from 2021 due to the term loan repayment in July 2020. Offsetting these reductions was an increase of $0.9 million in interest expense related to the value of foreign currency contracts and a reduction of $0.5 million in interest income due to lower investment yields.
Provision for Taxes
For the Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Income tax benefit
$
(2,447)
$
(32,788)
$
30,341
(92.5)
%
Income tax benefit decreased $30.3 million, or 92.5%, to $2.4 million in 2021 compared to $32.8 million for the same period in 2020. This decrease was primarily due to a pre-tax loss resulting from an increase in stock-based compensation in 2020. The income tax benefit in 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) and acquisition costs.
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the periods presented, as well as the percentage of total revenues that each line item represented for each quarter. In management’s opinion, the data below have been prepared on the same basis as the audited consolidated financial statements beginning on page of this Annual Report on Form 10-K and reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results to be expected for a full year or any future period. Historical periods are also impacted by acquisitions. The following quarterly financial data should be read in conjunction with our consolidated financial statements and related notes beginning on page of this Annual Report on Form 10-K.
For the Three Months Ended (Unaudited)
Mar 31,
Jun 30,
Sept 30,
Dec 31,
Mar 31,
Jun 30,
Sep 30,
Dec 31,
(In thousands)
Revenues:
Software subscriptions
$
75,760
$
77,306
$
79,778
$
83,919
$
83,280
$
89,604
$
92,276
$
93,255
Services
13,485
13,965
14,827
15,625
14,956
15,334
18,442
18,401
Total revenues
89,245
91,271
94,605
99,544
98,236
104,938
110,718
111,656
Cost of revenues:
Software subscriptions(1)
24,684
26,001
29,161
25,830
25,590
26,829
32,000
31,775
Services(1)
14,778
15,744
18,807
10,382
11,343
10,550
11,938
11,867
Total cost of revenues
39,462
41,745
47,968
36,212
36,933
37,379
43,938
43,642
Gross profit
49,783
49,526
46,637
63,332
61,303
67,559
66,780
68,014
Operating expenses:
Research and development(1)
13,079
13,617
16,501
11,143
11,459
11,926
9,879
10,754
Selling and marketing(1)
24,333
24,544
29,423
21,118
20,150
24,865
25,658
28,332
General and administrative(1)
37,636
37,758
48,043
25,620
24,852
24,865
31,237
26,055
Depreciation and amortization
2,869
2,505
2,735
2,909
2,827
2,878
3,082
2,891
Other operating expense (income), net
(60)
(129)
4,483
(4)
Total operating expenses
78,028
78,527
96,642
60,839
59,159
69,017
70,394
68,028
Income (loss) from operations
(28,245)
(29,001)
(50,005)
2,493
2,144
(1,458)
(3,614)
(14)
Interest expense (income), net
1,059
1,796
(313)
(385)
Income (loss) before income taxes
(28,814)
(30,060)
(51,801)
2,806
1,609
(1,073)
(4,135)
(327)
Income tax expense (benefit)(2)
(985)
(34,629)
2,576
(679)
(1,881)
(187)
Net income (loss)(2)
(29,064)
(29,075)
(17,172)
2,288
(3,948)
(627)
Other comprehensive (income) loss from foreign currency translations, net of tax
2,998
(876)
3,359
5,704
4,330
Total comprehensive income (loss)(2)
$
(32,062)
$
(29,351)
$
(17,410)
$
1,106
$
1,311
$
(2,551)
$
(9,652)
$
(4,957)
(1) Includes stock-based compensation expenses as follows in the table below. For more details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Trends.”
(2) We have revised the previously reported amounts for the quarter ended September 30, 2020. See Note 1, Summary of Significant Accounting Policies under the section Revision of Previously Issued Financial Statements to our consolidated financial statements beginning on page of this Annual Report on Form 10-K for additional information.
For the Three Months Ended (Unaudited)
Mar 31,
Jun 30,
Sept 30,
Dec 31,
Mar 31,
Jun 30,
Sep 30,
Dec 31,
(In thousands)
Stock-based compensation expense:
Cost of revenues, software subscriptions
$
3,492
$
4,168
$
6,342
$
$
$
$
$
Cost of revenues, services
5,238
6,251
9,230
Research and development
3,492
4,168
6,340
Selling and marketing
6,984
8,335
12,821
1,411
1,287
1,433
2,157
1,494
General and administrative
15,714
18,754
29,561
3,495
3,541
3,087
2,973
2,584
Total stock-based compensation expense
$
34,920
$
41,676
$
64,294
$
7,014
$
6,543
$
6,285
$
7,422
$
5,910
The following table sets forth our results of operations as a percentage of our total revenues for the periods presented.
For the Three Months Ended (Unaudited)
Mar 31,
Jun 30,
Sep 30,
Dec 31,
Mar 31,
Jun 30,
Sep 30,
Dec 31,
Revenues:
Software subscriptions
84.9
%
84.7
%
84.3
%
84.3
%
84.8
%
85.4
%
83.3
%
83.5
%
Services
15.1
%
15.3
%
15.7
%
15.7
%
15.2
%
14.6
%
16.7
%
16.5
%
Total revenues
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Cost of revenues:
Software subscriptions
27.7
%
28.5
%
30.8
%
25.9
%
26.0
%
25.6
%
28.9
%
28.5
%
Services
16.6
%
17.2
%
19.9
%
10.4
%
11.5
%
10.1
%
10.8
%
10.6
%
Total cost of revenues
44.3
%
45.7
%
50.7
%
36.3
%
37.5
%
35.7
%
39.7
%
39.1
%
Gross profit
55.7
%
54.3
%
49.3
%
63.7
%
62.5
%
64.3
%
60.3
%
60.9
%
Operating expenses:
Research and development
14.7
%
14.9
%
17.4
%
11.2
%
11.7
%
11.4
%
8.9
%
9.6
%
Selling and marketing
27.3
%
26.9
%
31.1
%
21.2
%
20.5
%
23.7
%
23.2
%
25.4
%
General and administrative
42.2
%
41.4
%
50.8
%
25.7
%
25.3
%
23.7
%
28.2
%
23.3
%
Depreciation and amortization
3.2
%
2.7
%
2.9
%
2.9
%
2.9
%
2.7
%
2.8
%
2.6
%
Other operating expense (income), net
0.1
%
0.1
%
(0.1)
%
-
%
(0.1)
%
4.3
%
0.5
%
-
%
Total operating expenses
87.5
%
86.0
%
102.1
%
61.0
%
60.3
%
65.8
%
63.6
%
60.9
%
Income (loss) from operations
(31.8)
%
(31.7)
%
(52.8)
%
2.7
%
2.2
%
(1.5)
%
(3.3)
%
-
%
Interest expense (income), net
0.6
%
1.2
%
1.9
%
(0.3)
%
0.5
%
(0.4)
%
0.5
%
0.3
%
Income (loss) before income taxes
(32.4)
%
(32.9)
%
(54.7)
%
3.0
%
1.7
%
(1.1)
%
(3.8)
%
(0.3)
%
Income tax (benefit) expense
0.3
%
(1.1)
%
(36.6)
%
2.6
%
(0.7)
%
(1.8)
%
(0.2)
%
0.3
%
Net income (loss)
(32.7)
%
(31.8)
%
(18.1)
%
0.4
%
2.4
%
0.7
%
(3.6)
%
(0.6)
%
Other comprehensive (income) loss from foreign currency translations, net of tax
3.4
%
0.3
%
0.3
%
(0.9)
%
1.0
%
3.2
%
5.2
%
3.9
%
Total comprehensive income (loss)
(36.1)
%
(32.1)
%
(18.4)
%
1.3
%
1.4
%
(2.5)
%
(8.8)
%
(4.5)
%
The following table sets forth our quarterly earnings per share information for the periods presented.
For the Three Months Ended (Unaudited)
Mar 31,
Jun 30,
Sept 30,
Dec 31,
Mar 31,
Jun 30,
Sep 30,
Dec 31,
(In thousands, except per share data)
Earnings Per Share Data:
Net income (loss) attributable to Class A stockholders, basic(1)
$
-
$
(32)
$
(2,246)
$
$
$
$
(1,070)
$
(174)
Net income (loss) per Class A share, basic(1)
$
-
$
(0.24)
$
(0.12)
$
0.00
$
0.02
$
0.01
$
(0.03)
$
(0.00)
Weighted average Class A common stock, basic
-
18,124
25,888
26,458
34,726
40,141
41,263
Net income (loss) attributable to Class A stockholders, diluted(1)
$
-
$
(32)
$
(2,246)
$
$
$
$
(1,070)
$
(174)
Net income (loss) per Class A share, diluted(1)
$
-
$
(0.24)
$
(0.12)
$
0.00
$
0.01
$
0.01
$
(0.03)
$
(0.00)
Weighted average Class A common stock, diluted
-
18,124
37,654
38,003
44,711
40,141
41,263
Net income (loss) attributable to Class B stockholders, basic(1)
$
(29,064)
$
(29,043)
$
(14,926)
$
$
1,875
$
$
(2,878)
$
(453)
Net income (loss) per Class B share, basic(1)
$
(0.24)
$
(0.24)
$
(0.12)
$
0.00
$
0.02
$
0.01
$
(0.03)
$
(0.00)
Weighted average Class B common stock, basic
120,417
120,417
120,417
120,411
120,117
112,804
108,017
107,596
Net income (loss) attributable to Class B stockholders, diluted(1)
$
(29,064)
$
(29,043)
$
(14,926)
$
$
1,738
$
$
(2,878)
$
(453)
Net income (loss) per Class B share, diluted(1)
$
(0.24)
$
(0.24)
$
(0.12)
$
0.00
$
0.01
$
0.01
$
(0.03)
$
(0.00)
Weighted average Class B common stock, diluted
120,417
120,417
120,417
120,411
120,117
112,804
108,017
107,596
(1) We have revised the previously reported amounts for the quarter ended September 30, 2020. See Note 1, Summary of Significant Accounting Policies under the section Revision of Previously Issued Financial Statements to our consolidated financial statements beginning on page of this Annual Report on Form 10-K for additional information.
Seasonality and Quarterly Trends
We have historically signed a higher percentage of software subscription agreements with new and existing customers in the fourth quarter of each year. This can be attributed to buying patterns typical in the software industry. Since most of our customer agreement terms are annual, agreements initially entered into in the fourth quarter will generally come up for renewal at that same time in subsequent years. As a result, customer agreement cancellations may have a higher concentration during the end of the year. This seasonality is reflected in our revenues, though the impact to overall annual or quarterly revenues is typically minimal since we recognize subscription revenue ratably over the term of the customer contract. Additionally, this seasonality is reflected in commission expenses to our sales personnel and our partners.
Our quarterly revenues have generally increased over the last two years primarily due to new sales to existing customers and sales to new customers. However, the pace of our revenue growth has not been consistent. Many of our customers are enterprise and large corporations and their purchase patterns can be sensitive to timing of budget decisions. Depending on such timing, these decisions can create volatility in the amount of business transacted by our salesforce and the amount of revenues recorded in each quarter. As such, certain periods may be less comparable due to the timing of our customers purchase patterns. In addition, acquisitions that occurred in the second and third quarters of 2021 have resulted in increases in revenues in the second, third and fourth quarters above historical experience.
Our operating expenses generally have decreased over the two-year period due primarily to a decrease in stock-based compensation. Quarterly fluctuations in our costs and expenses overall primarily reflect changes in our headcount, and other costs related to certain technology development projects and the development and scaling of our cloud solutions. In particular, research and development expenses have fluctuated based on the timing of personnel additions, capitalized costs and related spending on product development. Increases in our selling and marketing expenses primarily reflect expansion of go-to-market and partner and channel management personnel and various promotion and branding activities, the timing of which may fluctuate from quarter to quarter. We have also actively invested in acquisitions and product innovation to expand our product portfolio. We anticipate our operating expenses will increase in future periods as we invest in the long-term growth of our business.
We have used and will continue to use stock-based compensation programs as a component of our overall talent strategy to attract and retain key talent. Stock-based compensation aggregated $147.9 million and $26.2 million in 2020 and 2021, respectively. Our 2020 stock-based compensation expense was primarily related to the significant appreciation in value of our common stock leading up to our initial public offering (the “Offering”) and due to the value of stock awards issued in 2020 in connection with the Offering. We expect that our stock-based compensation expense will continue to be meaningful in connection with the need to attract and retain key talent to support our continued growth and expansion. As a result of the varying talent demands and fluctuations in our grant date common stock value of awards when issued which cannot be predicted, stock-based compensation is expected to vary for the foreseeable future, and as a result, historical financial information is not necessarily indicative of our future results.
Historical patterns should not be considered a reliable indicator of our future performance.
Liquidity and Capital Resources
As of December 31, 2021, we had unrestricted cash and cash equivalents of $73.3 million and retained earnings of $24.8 million. Our primary sources of capital to date have been from sales of our solutions, proceeds from bank lending facilities and the Offering of our Class A common stock in July 2020. We have no outstanding bank debt at December 31, 2021.
On September 22, 2021, we executed a stock purchase agreement with LCR-Dixon. The purchase price was $98.7 million as of the acquisition date consisting of (i) $59.7 million in cash, partially offset by $1.9 million in cash received in the acquisition resulting in $57.8 million of net cash paid at closing, and (ii) the non-interest-bearing deferred purchase consideration aggregating $40.0 million before consideration of related discount on this amount of $1.0 million. Cash consideration was funded through cash on hand.
On May 12, 2021, we used approximately $190.2 million of our cash and cash equivalents to acquire EVAT Solutions Ltd. and its subsidiaries (“Taxamo”). 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 the remaining 5% of outstanding equity (the “Taxamo Option”) for $10.0 million. The Taxamo Option was exercised on August 20, 2021 for $10.0 million funded through cash on hand.
On March 8, 2022, we amended our existing $100 million credit facility with a $250 million facility consisting of a $50 million term loan and a $200 million line of credit. The proceeds will be used for working capital, capital expenditures, permitted acquisitions and general corporate purposes.
We believe that our existing cash resources and our bank line of credit, as amended, 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 were to 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.
Historical Cash Flows
Years Ended December 31, 2021 and 2020
The following table presents a summary of our cash flows for the periods indicated:
Year Ended
December 31,
(Dollars in thousands)
Year-Over-Year Change
Net cash provided by operating activities
$
91,969
$
59,543
$
32,426
54.5
%
Net cash used in investing activities
(296,458)
(44,375)
(252,083)
568.1
%
Net cash provided by (used in) financing activities
(9,099)
213,632
(222,731)
(104.3)
%
Effect of foreign exchange rate changes
(479)
(22)
(457)
2,077.3
%
Net increase in cash, cash equivalents and restricted cash
$
(214,067)
$
228,778
$
(442,845)
(193.6)
%
Operating Activities. Net cash provided by operating activities was $92.0 million in 2021 compared to $59.5 million in 2020, an increase of $32.4 million. The increase in cash provided by operating activities in 2021 was driven primarily by the $22.9 million nonrecurring payment in 2020 for redemption of converted stock appreciation rights (“Converted SARs”) in connection with the Offering, combined with a year-over-year net increase in changes in operating assets and liabilities of $11.7 million.
Investing Activities. Net cash used in investing activities was $296.4 million in 2021 compared to $44.4 million in 2020, an increase in use of funds for investing activities of $252.1 million. This increase was primarily due to a net increase in cash paid for acquisitions of $239.8 million in 2021 over 2020. In 2021 we acquired Taxamo for approximately $187.5 million in net cash, LCR-Dixon for approximately $57.8 million in net cash, and Tellutax, LLC (“Tellutax”) for cash paid of $6.1 million. In 2020, we acquired a controlling interest in Systax for approximately $12.3 million in cash. For additional information on acquisitions, see Note 3, “Business Combinations” to our consolidated financial statements.
Financing Activities. Net cash used in financing activities was $(9.1) million in 2021 compared to net cash provided by financing activities of $213.6 million in 2020, a decrease in cash provided by financing activities of $222.7 million. Net cash used in financing activities of $(9.1) million in 2021 was primarily driven by (i) $12.8 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, payments for acquisition purchase commitment liabilities of $10.8 million and $2.7 million in payments made under tax sharing agreements, partially offset by (ii) an increase in customer funds obligations of $14.2 million due primarily to timing differences between receipt of funds from customers and taxing jurisdiction withdrawals of these funds and proceeds of $4.0 million from exercises of stock options and participant contributions with respect to the employee stock purchase plan (the “ESPP”). The net cash provided by financing activities in 2020 of $213.6 million was primarily driven by the (i) $417.2 million in proceeds from the Offering net of Offering costs, $172.6 million in proceeds from bank debt net of borrowing costs, and proceeds of $9.8 million from exercises of stock options and participant contributions with respect to the ESPP, offset by the payoff of bank debt aggregating $226.3 million, distributions to stockholders prior to the Offering of $146.1 million, and $14.8 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.
Indebtedness
As of December 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 December 31, 2021) or the London Interbank Offered Rate (“LIBOR”) plus an applicable margin (2.00% as of December 31, 2021). We have no outstanding bank debt at December 31, 2021.
The line of credit is collateralized by certain assets of the Company and contains financial and operating covenants with which we are in compliance as of December 31, 2021.
For more information on our indebtedness see Notes 9 and 16 to our consolidated financial statements beginning on page of this Annual Report on Form 10-K.
Deferred Purchase Consideration
On September 22, 2021, the Company acquired LCR-Dixon for $98.7 million. In connection with this acquisition, the Company deferred $40.0 million of the purchase price to be paid in four equal installments of $10.0 million every six-months beginning March 2022 and ending September 2023 (the “deferred purchase consideration”). See Note 3 to our consolidated financial statements beginning on page of this Annual Report on Form 10-K.
Funds Held for Customers and Customer Funds Obligations
We maintain trust accounts with financial institutions, to accumulate cash from our customers that outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held for customers represent cash and cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Funds held for customers are not commingled with our operating funds.
Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on our consolidated balance sheets as the obligations are expected to be settled within one year. Cash flows related to changes in customer funds obligations are presented as cash flows from financing activities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of December 31, 2021 are summarized in the table below:
Payments Due by Year
(In thousands)
Total
Less Than 1 year
1-3 Years
3-5 Years
More Than 5 Years
Long-term debt
$
-
$
-
$
-
$
-
$
-
Financing lease liabilities
-
-
Operating lease liabilities
30,429
4,593
8,923
8,859
8,054
Deferred purchase consideration (1)
40,000
20,000
20,000
-
-
Purchase commitment liability (2)
11,297
10,829
-
-
Purchase obligations
15,785
8,701
6,253
-
Total
$
97,869
$
34,051
$
46,074
$
9,690
$
8,054
(1) The Company has a deferred purchase consideration obligation related to its acquisition of LCR-Dixon. See Note 3 to our consolidated financial statements beginning on page of this Annual Report on Form 10-K.
(2) The Company has contractual purchase commitment liabilities related to certain acquisitions, primarily its acquisition of Systax in which the Company is required to acquire the remaining 35% equity interest incrementally between 2023 through 2024. See Note 3 to our consolidated financial statements beginning on page of this Annual Report on Form 10-K.
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. 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.
We also calculate AARPC, which is determined by dividing ARR by the number of software subscription customers as of the end of the respective period.
For the Year Ended
December 31,
(Dollars in millions)
Year-Over-Year Change
Annual Recurring Revenue
$
370.2
$
316.4
$
53.8
17.0
%
ARR increased by $53.8 million or 17.0% in 2021 as compared to 2020. The increase was primarily driven by $28.0 million of growth in revenues from subscriptions of our tax solutions to new customers, including acquisitions, and $25.8 million of growth in revenues from existing customers through their expanded use of our solutions as well as price increases. Of the $28.0 million from new customers, $6.0 million was related to 2021 acquisitions.
The number of customers and AARPC increased to 4,272 customers and approximately $86,700, respectively, at December 31, 2021, from 4,017 and approximately $78,700, respectively, at December 31, 2020. The increase in customers and AARPC was due to expansion of usage by existing customers, adding new customers through organic growth, and acquisitions.
Net Revenue Retention Rate.
We believe that our NRR provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it demonstrates to investors our ability to expand existing customer revenues, which is one of our key growth strategies. Our NRR refers to the ARR expansion during the 12 months of a reporting period for all customers who were part of our customer base at the beginning of the reporting period. Our NRR calculation takes into account any revenue lost from departing customers or customers who have downgraded or reduced usage, as well as any revenue expansion from migrations, new licenses for additional products or contractual and usage-based price changes.
For the Year Ended
December 31,
Net Revenue Retention Rate
%
%
The 200 basis point increase in NRR to 108% at December 31, 2021 from 106% for the same period in 2020 was primarily attributable to an increase in sales growth to existing customers as compared to the prior year.
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 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, stock-based compensation expense, severance expense and transaction costs. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues for the same period. For purposes of comparison, our net loss was $(1.5) million and $(75.1) million in 2021 and 2020, respectively, while our net loss margin was (0.0)% and (20.0)% over the same periods, respectively. The following schedules reconcile Adjusted EBITDA and Adjusted EBITDA margin to net loss, the most closely directly comparable GAAP financial measure.
For the Year Ended
December 31,
(Dollars in thousands)
Adjusted EBITDA:
Net loss
$
(1,479)
$
(75,081)
Interest expense, net
3,111
Income tax benefit
(2,447)
(32,788)
Depreciation and amortization - property and equipment
11,678
11,018
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues
32,291
21,021
Amortization of acquired intangible assets - selling and marketing expense
Stock-based compensation expense
26,160
147,904
Severance expense
5,232
3,031
Transaction costs
4,748
-
Adjusted EBITDA
$
77,980
$
78,392
Adjusted EBITDA Margin:
Total revenues
$
425,548
$
374,665
Adjusted EBITDA margin
18.3
%
20.9
%
The decrease in Adjusted EBITDA of $(0.4) million in 2021 is primarily driven by an increase of $34.5 million in non-GAAP gross profit, offset by increases in various non-GAAP operating expense categories including $22.1 million in non-GAAP selling and marketing expense, $11.1 million in non-GAAP general and administrative expense, and $1.8 million in non-GAAP research and development expense. Growth in these operating expense categories is driven primarily by our ongoing investment in our research and development, sales and marketing teams, and technology infrastructure to support current and future growth.
Adjusted EBITDA margin decreased in 2021 and 2020 by 260 basis points and 20 basis points, respectively, in comparison to the immediately preceding period, primarily because operating expenses increased at a higher rate than our increases in revenues, driven by our previously noted investments to enable future growth.
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 add back of cash used for the Converted SARs redeemed 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 $92.0 million and $59.5 million in 2021 and 2020, respectively, while our operating cash flow margin was 11.0% and 13.2% over the same periods, respectively. The following schedule reconciles free cash flow and free cash flow margin to net cash provided by operating activities, the most closely directly comparable GAAP financial measure.
For the Year Ended
December 31,
(Dollars in thousands)
Free Cash Flow:
Cash provided by operating activities
$
91,969
$
59,543
Redemption of Converted SARs
-
22,889
Property and equipment additions
(33,386)
(20,955)
Capitalized software additions
(11,660)
(11,850)
Free cash flow
$
46,923
$
49,627
Free Cash Flow Margin:
Total revenues
$
425,548
$
374,665
Free cash flow margin
11.0
%
13.2
%
Free cash flow decreased by $2.7 million in 2021 compared to 2020, driven primarily by a net increase of $9.5 million in cash provided by operating activities, after reflecting the addback in 2020 of $22.9 million in cash consumed by the redemption of the Converted SARs, which was partially offset by a year-over-year increase in cash consumed by investments in internal-use software developed of $12.4 million reflected as increases in property and equipment additions. Property and equipment additions includes $19.8 million of costs capitalized associated with our cloud-based customer solutions and $11.5 million for internal system modernization investments. Free cash flow margin decreased in 2021 by 220 basis points compared to 2020, primarily due to the increase in cash consumed by our investments in cloud-based customer solutions and internal system modernization efforts, partially offset by the increase in cash from operations noted above during a period of expansion of total revenues of $50.9 million.
Use and Reconciliation of 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. We use non-GAAP financial measures of free cash flow and free cash flow margin to evaluate 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 operating performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as comparing our financial results to those of other companies. Our definitions of these non-GAAP financial measures may differ from similarly titled measures presented by other companies, and therefore, comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, the financial information prepared in accordance with GAAP financial measures, and should be read in conjunction with the consolidated financial statements included in this Annual Report on Form 10-K.
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 subscription 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, services 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 subscription revenues for the respective periods.
● Non-GAAP gross margin is determined by dividing non-GAAP gross profit by total revenues for the respective periods.
● Non-GAAP research and development expense is determined by adding back to GAAP research and development expense the stock-based compensation expense included in research and development expense 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 general and administrative expense is determined by adding back to GAAP general and administrative expense the stock-based compensation expense and severance expense included in general and administrative expense 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 additional non-GAAP financial measures and reconcile our additional non-GAAP financial measures to the related GAAP financial measures.
For the Year Ended
December 31,
(Dollars in thousands)
Non-GAAP cost of revenues, software subscriptions
$
81,567
$
69,992
Non-GAAP cost of revenues, services
$
43,050
$
38,239
Non-GAAP gross profit
$
300,931
$
266,434
Non-GAAP gross margin
70.7
%
71.1
%
Non-GAAP research and development expense
$
41,398
$
39,646
Non-GAAP selling and marketing expense
$
91,821
$
69,691
Non-GAAP general and administrative expense
$
89,592
$
78,502
Non-GAAP operating income
$
66,302
$
67,374
Non-GAAP net income
$
48,662
$
47,876
For the Year Ended
December 31,
(Dollars in thousands)
Non-GAAP Cost of Revenues, Software Subscriptions:
Cost of revenues, software subscriptions
$
116,194
$
105,676
Stock-based compensation expense
(2,336)
(14,663)
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues
(32,291)
(21,021)
Non-GAAP cost of revenues, software subscriptions
$
81,567
$
69,992
Non-GAAP Cost of Revenues, Services:
Cost of revenues, services
$
45,698
$
59,711
Stock-based compensation expense
(2,648)
(21,472)
Non-GAAP cost of revenues, services
$
43,050
$
38,239
Non-GAAP Gross Profit:
Gross profit
$
263,656
$
209,278
Stock-based compensation expense
4,984
36,135
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues
32,291
21,021
Non-GAAP gross profit
$
300,931
$
266,434
Non-GAAP Gross Margin:
Total revenues
$
425,548
$
374,665
Non-GAAP gross margin
70.7
%
71.1
%
Non-GAAP Research and Development Expense:
Research and development expense
$
44,018
$
54,340
Stock-based compensation expense
(2,620)
(14,694)
Non-GAAP research and development expense
$
41,398
$
39,646
Non-GAAP Selling and Marketing Expense:
Selling and marketing expense
$
99,005
$
99,418
Stock-based compensation expense
(6,371)
(29,551)
Amortization of acquired intangible assets - selling and marketing expense
(813)
(176)
Non-GAAP selling and marketing expense
$
91,821
$
69,691
Non-GAAP General and Administrative Expense:
General and administrative expense
$
107,009
$
149,057
Stock-based compensation expense
(12,185)
(67,524)
Severance expense
(5,232)
(3,031)
Non-GAAP general and administrative expense
$
89,592
$
78,502
Non-GAAP Operating Income:
Loss from operations
$
(2,942)
$
(104,758)
Stock-based compensation expense
26,160
147,904
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues
32,291
21,021
Amortization of acquired intangible assets - selling and marketing expense
Severance expense
5,232
3,031
Transaction costs
4,748
-
Non-GAAP operating income
$
66,302
$
67,374
Non-GAAP Net Income:
Net loss(1)
$
(1,479)
$
(75,081)
Income tax benefit(1)
(2,447)
(32,788)
Stock-based compensation expense
26,160
147,904
Depreciation and amortization of capitalized software and acquired intangible assets - cost of subscription revenues
32,291
21,021
Amortization of acquired intangible assets - selling and marketing expense
Severance expense
5,232
3,031
Transaction costs
4,748
-
Non-GAAP income before income taxes
65,318
64,263
Income tax adjustment at statutory rate
16,656
16,387
Non-GAAP net income
$
48,662
$
47,876
(1) We have revised the previously reported amounts for the year ended December 31, 2020. See Note 1, Summary of Significant Accounting Policies under the section Revision of Previously Issued Financial Statements to our consolidated financial statements beginning on page of this Annual Report on Form 10-K for additional information.
Critical Accounting Estimates
The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our consolidated financial statements cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could materially differ from those estimates.
The estimates discussed below are considered by management to be critical to an understanding of our consolidated financial statements because their application places the most significant demands on management’s judgment. Specific risks for these critical accounting estimates are described in the following sections. For all of these estimates, we caution that future events rarely develop exactly as forecast, and such estimates routinely require adjustment. We have reviewed these critical accounting estimates and related disclosures with our Audit Committee.
Our discussion of critical accounting estimates is intended to supplement, not duplicate, our summary of significant accounting policies so that readers will have greater insight into the uncertainties involved in applying our critical accounting policies and estimates. For a summary of our significant accounting policies, see Note 1 to our consolidated financial statements beginning on page of this Annual Report on Form 10-K.
Revenue Recognition
We account for our revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which requires judgment and the use of estimates. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. We recognized revenue of $425.5 million and $374.7 million in 2021 and 2020, respectively.
Identification of the Performance Obligations
We enter into contracts with customers that may include promises to transfer various combinations of software subscriptions and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Software subscriptions include the related software, consisting of both on-premise and cloud-based software, 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 that the software, updates and support should be combined into a single performance obligation.
Determination of the Transaction Price
The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to the customer. We recognize revenue net of allowance for subscription and non-renewal cancellations. 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. Therefore, the transaction price is adjusted for our estimate of the amount of such cancellations and non-renewals based on past experience, current information and forward-looking economic considerations.
Allocation of Transaction Price to the Performance Obligations
If the contract with the customer contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. If the contract with the customer contains multiple performance obligations, we allocate the transaction price to each performance obligation based on a relative standalone selling price.
Recognition of Revenue
We satisfy performance obligations either over time or at a point in time. Revenue is recognized as the related performance obligation is satisfied with the transfer of control of a promised good or service to a customer. On-premise software revenue associated with the combined performance obligation is recognized ratably over the license term as these subscription services are provided for the duration of the license term. Revenue recognition begins on the later of the beginning of the subscription period or the date the software is made available to the customer to download. Cloud-based subscriptions allow customers to use Company-hosted software over the contract period without taking possession of the software. Revenue from cloud-based subscriptions, including subscriptions that include related updates and support, is recognized ratably over the license term as the performance obligation is satisfied.
Our on-premise software subscription prices in the initial subscription year are higher than standard renewal prices. The excess initial year price over the renewal price ("new sale premium") is considered to be a material right. We recognize revenue associated with the material right ratably over the estimated period of benefit to the customer, generally three years. Accordingly, on-premise software revenue is recognized ratably over the license term as the performance obligation is satisfied.
Revenue from deliverable-based services is recognized as services are delivered. Revenue from fixed fee services is recognized as services are performed using the percentage of completion input method.
We have elected the "right to invoice" practical expedient for revenue related to services that are billed on an hourly basis, which enables revenue to be recognized as the services are performed.
Costs Capitalized to Obtain Revenue Contracts
Costs capitalized related to obtaining revenue contracts include deferred sales commissions earned by our sales force and certain sales incentive programs and vendor referral agreements. These contract costs are amortized on a straight-line basis over a period consistent with the transfer of the associated product and services to the customer, which is generally
three years. We periodically review these contract assets to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these assets. There were no contract asset impairment losses recorded for the periods presented.
Business Combination Fair Value Estimates
The results of a business acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in tangible and intangible assets acquired, liabilities assumed, consideration transferred, and amounts attributed to noncontrolling interests of an acquired business being recorded at their estimated fair values on the acquisition date, which may be considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date (the “Measurement Period”). Any excess consideration over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of these amounts requires significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, royalty rates, and selection of comparable companies. We continue to collect information and reevaluate these estimates and assumptions periodically and record any adjustments to preliminary estimates to goodwill, provided we are within the Measurement Period, with any adjustments to amortization of new or previously recorded assets and identifiable intangibles being recorded to the consolidated statements of comprehensive income (loss) in the period in which they arise. In addition, if outside of the Measurement Period, any subsequent adjustments to the acquisition date fair values are reflected in the consolidated statements of comprehensive income (loss) in the period in which they arise.
We use our best estimates, information and assumptions available at the acquisition date to assign preliminary fair values to the assets acquired, liabilities assumed, consideration transferred, and amounts attributed to noncontrolling interests. We engage the assistance of third-party valuation specialists to perform valuations of these amounts and to assist us in concluding on these fair value measurements. The resulting fair values and useful lives assigned to acquisition-related assets impact the amount and timing of future amortization expense.
These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the respective acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates, and if such events occur, we may be required to record a charge against the value ascribed to an acquired asset, an increase in the amounts recorded for assumed liabilities, or an impairment of some or all of the goodwill.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. We evaluate goodwill for impairment annually at October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred.
The Company has determined that its business comprises one reporting unit. We have the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, in which case a quantitative impairment test is not required.
As provided for by ASU 2017-04, Simplifying the Test for Goodwill Impairment, the quantitative goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired. An impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the fair value up to the amount of goodwill allocated to the reporting unit. Income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit are considered when measuring the goodwill impairment loss, if applicable.
Stock-Based Compensation
We apply the provisions of ASC 718, Compensation-Stock Compensation, for the award of equity-based instruments. The provisions of ASC 718 require a company to measure the fair value of stock-based compensation as of the grant date of the award. Stock-based compensation expense reflects the cost of employee services received in exchange for the awards. We recognized stock-based compensation cost of $26.2 million and $147.9 million in 2021 and 2020, respectively.
On the effective date of the Offering, the Company adopted the 2020 Incentive Award Plan (the “2020 Plan”) and the ESPP, which provides for the award of stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights (“SARs”) and other cash compensation as well as the grant of rights to purchase shares of our Class A common stock at the ESPP discount.
Stock-based compensation expense for RSAs and RSUs is measured based on the grant date fair value of our common stock. Stock-based compensation expense for stock options issued under the 2020 Plan is measured based on the grant date fair value of the award and is estimated using the Black-Scholes model. Stock-based compensation expense for the ESPP is measured based on the fair value of the ESPP award at the start of the ESPP offering period and is estimated using the Black-Scholes model. Compensation cost is recognized on a straight-line basis over the requisite service or performance period associated with the stock-based award. The Company has elected to recognize award forfeitures as they occur.
The use of the Black-Scholes model to estimate compensation cost for stock options granted under the 2020 Plan and the ESPP requires the input of certain assumptions including the fair value of our stock, expected term, volatility, risk-free interest rate, and dividend yield. The fair value of our common stock is based on quoted market prices on the NASDAQ exchange. The expected term is based on our analysis of the facts and circumstances underlying the stock-based award. The volatility is based on our estimate of the expected future volatility of our common stock over the expected term using the implied volatility of comparable publicly traded companies. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximating the stock-based awards’ expected term. The dividend yield is zero based on our assumption that we will not pay any dividends over the expected term.
Prior to the Offering, the fair value of the common stock underlying the SAR Awards was determined by the board of directors with assistance from management and an independent third-party valuation firm. The determination of value used the market and income approaches, with an adjustment for marketability discount pertinent to private company entities in arriving at the per share fair value (the “valuation methodology”). Under the market approach, the guideline public company method is used, which estimates the fair value of the Company based on market prices of stock of guideline public companies. The income approach involves projecting the future benefits of owning an asset and estimating the present value of those future benefits by discounting them based upon the time value of money and the investment risks associated with ownership. At the end of 2019, due to the consideration by the board of directors of pursuing the Offering, the valuation methodology began to consider the impact of such an event on the value of the Company’s common stock underlying the awards. As the Company approached the Offering effective date, this resulted in increases in the value of the SAR Awards which resulted in corresponding increases to compensation expense for the year ended December 31, 2020 which exceeded historical results. See Note 12 to our consolidated financial statements beginning on page of this Annual Report on Form 10-K for further information. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Trends.”
Software Development Costs
Internal-Use Software
We follow ASC 350-40, Goodwill and Other, Internal-Use Software, to account for development costs incurred for the costs of computer software developed or obtained for internal use. ASC 350-40 requires such costs to be capitalized once certain criteria are met. Capitalized internal-use software costs are primarily comprised of direct labor, related expenses and initial software licenses. Costs are capitalized once the project is defined, funding is committed and it is confirmed the software will be used for its intended purpose. Capitalization of these costs concludes once the project is substantially complete and the software is ready for its intended use.
We review the carrying value of internal-use software, for impairment whenever events or changes in circumstances indicate that the carrying amount of such software may not be fully recoverable. Whenever such events or circumstances are present, an impairment loss equal to the excess of the asset carrying value over its fair value, if any, is recorded.
Software Developed for Sale
The costs incurred for the development of computer software to be sold, leased or otherwise marketed are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed, when technological feasibility has
been established. Technological feasibility generally occurs when all planning, design, coding and testing activities are completed that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements. The establishment of technological feasibility is an ongoing assessment of judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in technology.
Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on a product-by-product basis using the straight-line method over periods between three to five years. Unamortized capitalized software development costs determined to be in excess of the net realizable value of the product are expensed immediately.
Capitalized software costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies at least annually and whenever events or circumstances make it more likely than not that impairment may have occurred. In the event of impairment, unamortized capitalized software costs are compared to the net realizable value of the related product and the carrying value of the related assets are written down to the net realizable value to the extent the unamortized capitalized costs exceed such value. The net realizable value is the estimated future gross revenues from the related product reduced by the estimated future costs of completing and disposing of such product, including the costs of providing related maintenance and customer support.
Income taxes
On July 27, 2020, the Company’s S-Corporation election (the “S Election”) was revoked by the Company’s stockholders in connection with the Offering. As a result, the Company is now taxed at the corporate level as a C-Corporation for U.S federal and state income tax purposes. Prior to July 27, 2020, as the Company was taxed as an S-Corporation for U.S. federal income tax purposes and for most states, net income or loss was allocated to the stockholders and included on their income tax returns. In certain states, the Company was taxed at the corporate level. Accordingly, the income tax provision or benefit was based on taxable income allocated to these states. In certain foreign jurisdictions, the Company was taxed at the corporate level. Similar to states, the income tax provision or benefit was based on taxable income sourced to these foreign jurisdictions.
Certain foreign subsidiaries in which we own greater than 50% of the equity by measure of vote or value are treated as controlled foreign companies (“CFCs”) for U.S. federal income tax and most states purposes. In conjunction with the termination of the S Election, certain direct and indirect wholly owned foreign subsidiaries that were previously treated as disregarded entities for U.S. federal income tax purposes and most states under the Internal Revenue Service (“IRS”) “check-the-box” regulations, “unchecked-the-box” to become regarded entities and as a result, became CFCs. Prior to these elections, the income and loss from these entities was reported on the Company’s U.S. federal and most state income tax returns in addition to being reported on a foreign jurisdiction tax return regardless of whether or not the earnings were repatriated.
We record deferred income taxes using the liability method. We recognize deferred tax assets and liabilities for future tax consequences of events that have been previously recognized in the consolidated financial statements and tax returns. The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The effects of future changes in tax laws or rates are not anticipated. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.
We record uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process whereby: (i) management determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (ii) for those tax positions that meet the more likely than not recognition threshold, management recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The impact as a result of the application of ASC 740 is reflected in the consolidated financial statements. The Company assesses its income tax positions and records tax benefits or expense based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in Note 1 to our consolidated financial statements beginning on page of this Annual Report on Form 10-K.
JOBS Act
As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include:
● not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
● reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and
● exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of our Offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
We have elected to take advantage of certain of the reduced disclosure obligations in this Annual Report on Form 10-K and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different from what you might receive from other public reporting companies in which you hold equity interests.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We had unrestricted cash and cash equivalents of $73.3 million and $303.1 million as of December 31, 2021 and 2020, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with financial institutions. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.
The Company has no outstanding bank debt at December 31, 2021. Any debt we incur in the future may bear interest at variable rates.
Foreign Currency Exchange Rate Risk
Our revenues and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the Canadian Dollar, Euro, British Pound, Swedish Krona, Indian Rupee and Brazilian Real. Decreases in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenues and other operating results as expressed in U.S. dollars. For the years ended December 31, 2021, 2020 and 2019, approximately 4%, 2% and 1% of our revenues were generated in currencies other than U.S. dollars in each respective period.
We have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We have historically recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operations and our risk grows. For example, our acquisition of the controlling interest in Systax in January 2020 and the future purchase commitments associated with this acquisition are expected to increase our exposure to fluctuations of the Brazilian Real over time. In May 2020, we entered into a series of foreign currency forward contracts to hedge a portion of our exposure to adverse fluctuations in the Brazilian Real associated with these future purchase commitments. Fluctuations in the value of these forward contracts are reflected in interest expense, net in the consolidated statements of comprehensive income (loss). At December 31, 2021, outstanding foreign currency forward contracts provide a hedge of approximately 50% of our future purchase commitment liability.
Inflation
In the past three years, we do not believe that inflation had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The information required by this item is presented at the end of this report beginning on page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of December 31, 2021.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include those designed to ensure that such information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on the evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective at a reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework and criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2021, our internal control over financial reporting was effective.
On May 12, 2021, we acquired EVAT Solutions Limited and its wholly owned subsidiaries and on September 22, 2021, we acquired LCR-Dixon Corporation. As permitted by the U.S. Securities and Exchange Commission staff interpretative guidance on newly acquired businesses, we excluded these acquisitions from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021. Total assets excluded from this assessment were $7.2 million, representing 1% of the Company’s consolidated total assets as of December 31, 2021; total liabilities excluded from this assessment were $7.7 million, representing 2% of the Company’s consolidated total liabilities as of December 31, 2021; and total revenue excluded from this assessment was $5.2 million, representing 1% of the Company’s total revenues for the year ended December 31, 2021.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting due to an exemption established by the JOBS Act for emerging growth companies.
Remediation of Previously Reported Material Weaknesses
We previously identified a material weakness in our internal control over financial reporting as of December 31, 2020 due to an insufficient process for the provision and governance of user access to financially significant systems that resulted in a lack of segregation of duties related to journal entries and cash disbursements.
Due to the actions taken to implement new controls and procedures, we have concluded that the material weakness related to the insufficient process for the provision and governance of user access to financially significant systems that resulted in a lack of segregation of duties related to journal entries and cash disbursements was remediated as of December 31, 2021. To remediate this material weakness, we have:
● Implemented changes to our user access governance practices to prevent individuals from having the ability to create and post journal entries and to create a vendor and prepare checks;
● Performed a review and evaluated appropriate segregation of duties; and
● Implemented a periodic review cycle for user access.
Changes in Internal Control over Financial Reporting
Other than changes described above regarding enhancements associated with our remediation efforts, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the relevant information from our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the fiscal year ended December 31, 2021.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of the Annual Report on Form 10-K:
(1) Consolidated Financial Statements
The financial statements filed as part of this Annual Report on Form 10-K are listed in the “Index to Consolidated Financial Statements” beginning on page of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
All schedules are omitted because the information required to be set forth therein is not applicable or is presented in the consolidated financial statements or notes thereto beginning on page of this Annual Report on Form 10-K.
(3) Exhibits
The documents listed in the Index to Exhibits beginning on page E-1 of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).