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AVALARA, INC. - Quarter Report: 2022 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38525

 

AVALARA, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Washington

 

 

91-1995935

(State or other jurisdiction of

incorporation or organization)

 

 

(I.R.S. Employer

Identification No.)

 

 

 

 

255 South King Street, Suite 1800

Seattle, WA

 

 

98104

(Address of principal executive offices)

 

 

(Zip Code)

 

Registrant’s telephone number, including area code: (206) 826-4900

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.0001 Per Share

AVLR

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

  

Accelerated filer

 

Non-accelerated filer

 

  

 

Small reporting company

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

As of August 3, 2022, the registrant had 88,265,657 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

3

Item 1.

Financial Statements

 

3

 

Consolidated Balance Sheets (unaudited)

 

3

 

Consolidated Statements of Operations (unaudited)

 

4

 

Consolidated Statements of Comprehensive Loss (unaudited)

 

6

 

Consolidated Statements of Cash Flows (unaudited)

 

7

 

Notes to Consolidated Financial Statements (unaudited)

 

9

Item 2.

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

 

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

55

Item 4.

Controls and Procedures

 

56

PART II

OTHER INFORMATION

 

58

Item 1.

Legal Proceedings

 

58

Item 1A.

Risk Factors

 

58

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

Item 6.

Exhibits

 

59

Signatures

 

60

 

 

 

 

i


 

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our expectations regarding the proposed transaction with affiliates of Vista Equity Partners and other future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management, are forward-looking statements. In some cases you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements are based on information available to our management as of the date of this report and our management's good faith belief as of such date with respect to future events and are subject to a number of risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

our ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth;

 

our ability to attract new customers on a cost-effective basis and the extent to which existing customers renew and upgrade their subscriptions;

 

the timing of our introduction of new solutions or updates to existing solutions;

 

our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content;

 

our ability to maintain and expand our strategic relationships with third parties;

 

our ability to deliver our solutions to customers without disruption or delay;

 

our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance;

 

our ability to expand our international reach;

 

the risk that the proposed transaction with Vista Equity Partners will not be consummated or will not be consummated in a timely manner;

 

the effect of the announcement of the proposed transaction on our ability to retain and hire key personnel and maintain relationships with our key business partners and customers, and others with whom we do business, or on our operating results and businesses generally;

 

risks associated with the disruption of management’s attention from ongoing business operations due to the proposed transaction;

 

significant costs associated with the proposed transaction;

 

potential litigation relating to the proposed transaction;

 

restrictions during the pendency of the proposed transaction that may impact our ability to pursue certain business opportunities; and

 

other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A. “Risk Factors” and in our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by the Form 10-K/A for the year ended December 31, 2021 filed on May 5, 2022 under Part I, Item 1A, “Risk Factors.”

You should not place undue reliance on our forward-looking statements and you should not rely on forward-looking statements as predictions of future events. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this report. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

 

ii


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AVALARA, INC.

Consolidated Balance Sheets

(In thousands, except for per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2022

 

2021

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,460,594

 

$

1,514,064

 

Restricted cash

 

 

 

 

37,700

 

Trade accounts receivable—net of allowance for doubtful accounts of $5,560 and

   $5,803, respectively

 

 

115,523

 

 

114,248

 

Deferred commissions

 

 

18,629

 

 

16,364

 

Prepaid expenses and other current assets

 

 

43,244

 

 

29,267

 

Total current assets before customer fund assets

 

 

1,637,990

 

 

1,711,643

 

Funds held from customers

 

 

72,957

 

 

62,509

 

Receivable from customers—net of allowance of $533 and $439, respectively

 

 

1,889

 

 

1,472

 

Total current assets

 

 

1,712,836

 

 

1,775,624

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred commissions

 

 

56,946

 

 

52,155

 

Operating lease right-of-use assets—net

 

 

44,874

 

 

44,385

 

Property and equipment—net

 

 

52,765

 

 

46,464

 

Intangible assets—net

 

 

86,986

 

 

96,818

 

Goodwill

 

 

677,496

 

 

672,381

 

Other noncurrent assets

 

 

12,565

 

 

10,704

 

Total assets

 

$

2,644,468

 

$

2,698,531

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade payables

 

$

19,188

 

$

16,683

 

Accrued expenses

 

 

80,897

 

 

109,792

 

Deferred revenue

 

 

306,834

 

 

280,816

 

Accrued purchase price related to acquisitions

 

 

5,597

 

 

51,476

 

Accrued earnout liabilities

 

 

38,135

 

 

33,151

 

Operating lease liabilities

 

 

12,076

 

 

11,453

 

Total current liabilities before customer fund obligations

 

 

462,727

 

 

503,371

 

Customer fund obligations

 

 

75,399

 

 

64,302

 

Total current liabilities

 

 

538,126

 

 

567,673

 

Noncurrent liabilities:

 

 

 

 

 

 

 

Convertible senior notes—net

 

 

963,029

 

 

961,259

 

Deferred revenue

 

 

859

 

 

2,139

 

Accrued purchase price related to acquisitions

 

 

6,720

 

 

7,988

 

Accrued earnout liabilities

 

 

59,424

 

 

81,485

 

Operating lease liabilities

 

 

43,620

 

 

45,614

 

Deferred tax liability

 

 

5,863

 

 

5,158

 

Other noncurrent liabilities

 

 

487

 

 

761

 

Total liabilities

 

$

1,618,128

 

 

1,672,077

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value – no shares issued and outstanding at

  June 30, 2022, and December 31, 2021, and 20,000 shares authorized as of

  June 30, 2022, and December 31, 2021

 

 

 

 

 

Common stock, $0.0001 par value – 88,123 and 87,087 shares issued and

   outstanding at June 30, 2022, and December 31, 2021, respectively, and

   600,000 shares authorized as of June 30, 2022, and December 31, 2021

 

 

9

 

 

9

 

Additional paid-in capital

 

 

1,825,991

 

 

1,732,742

 

Accumulated other comprehensive loss

 

 

(8,386

)

 

(3,428

)

Accumulated deficit

 

 

(791,274

)

 

(702,869

)

Total shareholders’ equity

 

 

1,026,340

 

 

1,026,454

 

Total liabilities and shareholders' equity

 

$

2,644,468

 

$

2,698,531

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

189,764

 

 

$

152,442

 

Professional services

 

 

18,829

 

 

 

16,625

 

Total revenue

 

 

208,593

 

 

 

169,067

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

51,036

 

 

 

41,477

 

Professional services

 

 

11,036

 

 

 

7,836

 

Total cost of revenue

 

 

62,072

 

 

 

49,313

 

Gross profit

 

 

146,521

 

 

 

119,754

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

56,647

 

 

 

41,234

 

Sales and marketing

 

 

101,242

 

 

 

72,651

 

General and administrative

 

 

44,592

 

 

 

36,113

 

Total operating expenses

 

 

202,481

 

 

 

149,998

 

Operating loss

 

 

(55,960

)

 

 

(30,244

)

Other income (expense):

 

 

 

 

 

 

 

 

Fair value changes in earnout liabilities

 

 

117

 

 

 

(1,181

)

Interest income

 

 

1,859

 

 

 

23

 

Interest expense

 

 

(1,497

)

 

 

 

Other income (expense), net

 

 

528

 

 

 

220

 

Total other income (expense), net

 

 

1,007

 

 

 

(938

)

Loss before income taxes

 

 

(54,953

)

 

 

(31,182

)

(Provision for) benefit from income taxes

 

 

(895

)

 

 

148

 

Net loss

 

$

(55,848

)

 

$

(31,034

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(0.63

)

 

$

(0.36

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

87,989

 

 

 

86,090

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

376,630

 

 

$

291,760

 

Professional services

 

 

36,493

 

 

 

30,908

 

Total revenue

 

 

413,123

 

 

 

322,668

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

101,113

 

 

 

79,510

 

Professional services

 

 

21,085

 

 

 

14,299

 

Total cost of revenue

 

 

122,198

 

 

 

93,809

 

Gross profit

 

 

290,925

 

 

 

228,859

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

107,499

 

 

 

80,508

 

Sales and marketing

 

 

187,689

 

 

 

136,744

 

General and administrative

 

 

86,786

 

 

 

67,312

 

Total operating expenses

 

 

381,974

 

 

 

284,564

 

Operating loss

 

 

(91,049

)

 

 

(55,705

)

Other income (expense):

 

 

 

 

 

 

 

 

Fair value changes in earnout liabilities

 

 

4,118

 

 

 

(2,531

)

Interest income

 

 

2,045

 

 

 

47

 

Interest expense

 

 

(2,993

)

 

 

 

Other income (expense), net

 

 

654

 

 

 

(704

)

Total other income (expense), net

 

 

3,824

 

 

 

(3,188

)

Loss before income taxes

 

 

(87,225

)

 

 

(58,893

)

Provision for income taxes

 

 

(1,180

)

 

 

(2,209

)

Net loss

 

$

(88,405

)

 

$

(61,102

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(1.01

)

 

$

(0.71

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

87,728

 

 

 

85,765

 

 

 

5


 

 

AVALARA, INC.

Consolidated Statements of Comprehensive Loss (unaudited)

(In thousands)

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Net loss

 

$

(55,848

)

 

$

(31,034

)

Other comprehensive (loss) income — Foreign currency translation

 

 

(3,611

)

 

 

322

 

Total comprehensive loss

 

$

(59,459

)

 

$

(30,712

)

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Net loss

 

$

(88,405

)

 

$

(61,102

)

Other comprehensive loss — Foreign currency translation

 

 

(4,958

)

 

 

(68

)

Total comprehensive loss

 

$

(93,363

)

 

$

(61,170

)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


 

 

AVALARA, INC.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(88,405

)

 

$

(61,102

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

79,350

 

 

 

45,476

 

Depreciation and amortization

 

 

22,726

 

 

 

16,101

 

Amortization of debt issuance costs

 

 

1,771

 

 

 

 

Impairment of capitalized cloud computing costs

 

 

136

 

 

 

345

 

Deferred income tax expense

 

 

660

 

 

 

2,279

 

Non-cash operating lease costs

 

 

5,141

 

 

 

4,708

 

Fair value changes in earnout liabilities

 

 

(4,118

)

 

 

2,531

 

Bad debt expense

 

 

1,309

 

 

 

976

 

Other

 

 

388

 

 

 

(122

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(2,357

)

 

 

(8,412

)

Prepaid expenses and other current assets

 

 

(14,096

)

 

 

(10,563

)

Deferred commissions

 

 

(7,056

)

 

 

(9,773

)

Other noncurrent assets

 

 

(1,996

)

 

 

(1,597

)

Trade payables

 

 

2,801

 

 

 

(2,890

)

Accrued expenses

 

 

(31,447

)

 

 

(3,532

)

Deferred revenue

 

 

24,610

 

 

 

28,819

 

Operating lease liabilities

 

 

(6,279

)

 

 

(5,941

)

Net cash used in operating activities

 

 

(16,862

)

 

 

(2,697

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(3,110

)

 

 

(3,070

)

Capitalized software development costs

 

 

(11,179

)

 

 

(5,953

)

Cash paid for acquisitions of businesses, net of cash and restricted cash equivalents acquired

 

 

(11,713

)

 

 

(24,009

)

Cash paid for acquired intangible assets

 

 

 

 

 

(1,500

)

Proceeds from maturity of customer fund available-for-sale securities

 

 

73

 

 

 

 

Net cash used in investing activities

 

 

(25,929

)

 

 

(34,532

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

4,097

 

 

 

10,197

 

Proceeds from purchases of stock under employee stock purchase plan

 

 

8,006

 

 

 

7,088

 

Acquisition-related post-closing payments

 

 

(48,736

)

 

 

(20,821

)

Payments related to business combination earnouts

 

 

(10,770

)

 

 

 

Payments related to asset acquisition earnouts

 

 

(636

)

 

 

(690

)

Payments on financed asset purchases

 

 

(125

)

 

 

 

Net increase in customer fund obligations

 

 

11,097

 

 

 

2,895

 

Net cash used in financing activities

 

 

(37,067

)

 

 

(1,331

)

Foreign currency effect

 

 

(777

)

 

 

(422

)

Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents

 

 

(80,635

)

 

 

(38,982

)

Cash, cash equivalents, restricted cash, and restricted cash equivalents—Beginning of period

 

 

1,613,903

 

 

 

761,844

 

Cash, cash equivalents, restricted cash, and restricted cash equivalents—End of period

 

$

1,533,268

 

 

$

722,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets, end of period:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,460,594

 

 

$

639,479

 

Restricted cash

 

 

 

 

 

37,803

 

Restricted cash equivalents—funds held from customers

 

 

72,674

 

 

 

45,580

 

Total cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period

 

$

1,533,268

 

 

$

722,862

 

 

7


 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest expense

 

$

1,140

 

 

$

 

Cash paid for operating lease liabilities

 

 

8,181

 

 

 

7,226

 

Cash paid for income taxes

 

 

1,023

 

 

 

437

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Stock issued related to business combinations

 

$

 

 

$

22,971

 

Accrued purchase price related to acquisitions

 

 

1,728

 

 

 

2,600

 

Accrued value of earnout related to acquisitions of businesses

 

 

 

 

 

26,818

 

Accrued purchase of intangible assets

 

 

895

 

 

 

475

 

Customer fund obligations assumed in business combinations

 

 

 

 

 

12,464

 

Property and equipment additions in accounts payable and

   accrued expenses

 

 

643

 

 

 

682

 

Capitalized internally developed software costs included in accounts payable and accrued expenses

 

 

965

 

 

 

 

Stock-based compensation costs capitalized to internally developed software

 

 

1,481

 

 

 

549

 

Operating lease right-of-use assets in exchange for lease obligations

 

 

5,629

 

 

 

1,549

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8


 

 

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

1.Summary of Significant Accounting Policies

Nature of Operations

 

Avalara, Inc. (the “Company”) provides software solutions that help businesses of all types and sizes comply with transaction tax requirements worldwide. The Company offers a broad and growing suite of compliance solutions for transaction taxes and other product-related taxes such as sales and use tax, value-added tax (“VAT”), fuel excise tax, beverage alcohol, cross-border taxes (including tariffs and duties), lodging tax, communications tax, and insurance premium tax. These solutions enable customers to automate the process of determining taxability, identifying applicable tax rates, determining and collecting taxes, preparing and filing returns, remitting taxes, maintaining tax records, and managing compliance documents. The Company, a Washington corporation, was originally incorporated in 1999 and is headquartered in Seattle, Washington.

 

The Company has wholly owned subsidiaries outside of the U.S. in Brazil, Canada, Europe, and India, which conduct sales and operations and provide business development, software development, and support services.

Interim Financial Information

The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as amended by the Form 10-K/A for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on May 5, 2022 (the “Amended 2021 Annual Report”). The accompanying interim consolidated balance sheet as of June 30, 2022, the consolidated interim statements of operations, consolidated statements of comprehensive loss, and the consolidated statements of cash flows for the three and six months ended June 30, 2022 and 2021, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results expected for the full year ending December 31, 2022.

Prior Period Restatements and Adjustments

While preparing the financial statements for the first quarter of 2022, the Company discovered an error in its recognition of stock-based compensation expense for restricted stock units (“RSUs”) impacting previously reported interim and annual consolidated financial statements. In the previously presented consolidated financial statements, the correction resulted in an increase of $18.3 million to additional paid-in capital and accumulated deficit on the consolidated balance sheet as of December 31, 2021, an increase of $3.4 million to stock-based compensation and net loss on the consolidated statement of operations for the three months ended June 30, 2021, and an increase of $3.5 million to stock-based compensation and net loss on the consolidated statement of operations and the consolidated statement of cash flows for the six months ended June 30, 2021. The correction increased net loss and total comprehensive loss by $3.4 million and $3.5 million on the consolidated statement of comprehensive loss for the three and six months ended June 30, 2021, respectively. The correction did not change total net cash used in operating activities on the consolidated statement of cash flows for the six months ended June 30, 2021. The correction increased additional paid-in capital and accumulated deficit by $7.9 million and $11.4 million on the consolidated statement of shareholders’ equity as of January 1, 2021 and June 30, 2021, respectively, with no change to total shareholders’ equity. An explanation of the impact on the consolidated financial statements is contained in “Note 15—Correction of Previously Issued Consolidated Financial Statements” to the accompanying consolidated financial statements included in the Amended 2021 Annual Report, and the impact to each quarterly period consolidated statement of operations is included in “Quarterly Results of Operations” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” also included in the Amended 2021 Annual Report.

9


 

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.

Principles of Consolidation

The accompanying consolidated financial statements include those of the Company, its subsidiaries, and a variable interest entity for which the Company is the primary beneficiary, after elimination of all intercompany accounts and transactions.

Segments

The Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

Use of Estimates

The preparation of financial statements 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 and the reported amounts of revenue and expenses during the reporting period. Significant estimates and judgments related to revenue are described below in the Revenue Recognition Accounting Policy. Significant estimates impacting expenses include: expected credit losses associated with the allowance for doubtful accounts; the measurement of fair values of stock-based compensation award grants; the expected payout level of performance share unit grants; the expected earnout obligations in connection with acquisitions; the expected term of the customer relationship for capitalized contract cost amortization; the valuation and useful lives of acquired intangible assets; the valuation of the fair value of reporting units for analyzing goodwill; the estimated business performance metrics as of the interim period for the annual bonus accrual; and the capitalization and useful life of capitalized software development costs. Actual results could materially differ from those estimates.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs are quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3: Inputs are unobservable inputs based on the Company’s assumptions and valuation techniques used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, restricted cash equivalents, trade accounts receivable, trade payables, and accrued expenses, due to their short-term nature. The Company has measured the fair value of money market funds and available-for-sale securities based on quoted prices in active markets for identical assets and liabilities. The Company carries its convertible senior notes at par value less unamortized debt issuance costs on its consolidated balance sheets and presents the fair value for disclosure purposes only.

Customer Funds Assets and Obligations

 

The Company has established a Delaware statutory trust (the “Customer Trust”) and appointed a federally insured bank as trustee, and the Customer Trust holds certain funds provided by its customers pending remittance to tax authorities. The Company is the sole beneficial owner of the Customer Trust. The Customer Trust is intended to be a bankruptcy-remote legal entity and meets the criteria in Accounting Standards Codification (“ASC”) Topic 810, Consolidation to be characterized as a variable interest entity (“VIE”). The Customer Trust is included in the Company’s consolidated financial statements because the Company determined it has a controlling

10


 

financial interest in the Customer Trust as it has both (1) the power to direct the activities that most significantly impact the economic performance of the Customer Trust (including the power to make investment decisions for the trust) and (2) the right to receive benefits in the form of investment returns that could potentially be significant to the Customer Trust.

 

In 2021, certain customers began to remit tax payments to the Customer Trust with almost all customer funds remitted to and held by the Customer Trust as of December 31, 2021. Funds held from customers represent restricted cash equivalents and available-for-sale securities that, based upon the Company’s intent, are restricted solely for satisfying the obligations to remit funds relating to the Company’s tax remittance services. Customer fund obligations represent the Company’s contractual obligations to remit funds to satisfy customers’ tax obligations and are recorded on the consolidated balance sheets at the time that the Company or the Customer Trust collects funds from customers.

 

The following table details funds held from customers and customer fund obligations held by the Company and by the Customer Trust as of June 30, 2022 and December 31, 2021:

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Funds held from customers (current assets):

 

 

 

 

 

 

 

 

Restricted cash equivalents – Company

 

$

151

 

 

$

13

 

Restricted cash equivalents – Customer Trust

 

 

72,523

 

 

 

62,126

 

Available-for-sale securities – Customer Trust

 

 

283

 

 

 

370

 

Funds held from customers

 

$

72,957

 

 

$

62,509

 

Customer fund obligations (current liabilities):

 

 

 

 

 

 

 

 

Customer fund obligations – Company

 

$

75,399

 

 

$

64,302

 

Customer fund obligations

 

$

75,399

 

 

$

64,302

 

 

Receivable from customers, net was $1.9 million and $1.5 million as of June 30, 2022, and December 31, 2021, respectively.

Business Combinations and Goodwill

 

The Company’s identifiable assets acquired and liabilities assumed in a business combination are recorded at their acquisition date fair values, which may be considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date. The valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to:

 

future expected cash flows from customer agreements, customer lists, distribution agreements, non-compete agreements, and proprietary content and technology;

 

assumptions about the length of time the brand will continue to be used in the Company’s suite of solutions;

 

royalty rates used to estimate the fees that could be charged to license the proprietary content and technology; and

 

discount rates used to determine the present value of recognized assets and liabilities.

The Company’s estimates of fair value are based upon assumptions it believes to be reasonable, but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which these costs are incurred. The results of operations of an acquired business are included in the consolidated financial statements beginning at the acquisition date. Goodwill is tested for impairment annually on October 31, or in the event of certain occurrences. There was no goodwill impairment recorded for the three and six months ended June 30, 2022, respectively or the year ended December 31, 2021.

The Company estimates the fair value of the earnout liabilities related to business combinations using various valuation approaches, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. Following final determination of the acquisition date fair value, the fair value of the earnout is remeasured each reporting period, with any change in the value recorded as fair value changes in earnout liabilities in the consolidated statements of operation.      

11


 

 

Acquired Intangible Assets

 

Acquired intangible assets consist of developed technology, including in-process research and development (“IPR&D”), customer relationships, backlog, database content, noncompetition agreements, and tradenames and trademarks, resulting from the Company’s acquisitions. Acquired intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives. IPR&D is initially capitalized at fair value as a developed technology intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, it is amortized over the asset’s estimated useful life.

The Company recognizes an earnout liability for acquisitions of intangible assets that are accounted for as an asset acquisition when the liability is earned and the amount is known. The earnout liability is capitalized as part of the cost of the assets acquired and amortized over the remaining useful life of the asset. Asset acquisition-related costs, primarily legal fees, are capitalized and included in the cost basis of the intangible asset when incurred.

Capitalized Software

Software development costs for internal-use software (i.e., cloud-based software solutions) are capitalized once the project is in the application development stage in accordance with the accounting guidance for internal-use software. These capitalized costs include external direct costs of services consumed in developing or obtaining the software and personnel expenses for employees who are directly associated with the development. Capitalization of these costs concludes once the project is substantially complete, and the software is ready for its intended purpose. Post-configuration training and maintenance costs are expensed as incurred. For the three and six months ended June 30, 2022, $6.9 million and $12.3 million of software development costs were capitalized, respectively. For the three and six months ended June 30, 2021, $4.0 million and $6.5 million of software development costs were capitalized, respectively. Capitalized software development costs are amortized on a straight-line basis over the estimated useful life, generally 3 to 6 years. Software development costs are tested for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

In circumstances where software is developed for both cloud-based software solutions and for the purpose of being sold, leased, or otherwise marketed (i.e., customer hosted software), capitalization of development costs occurs after technological feasibility of the software is established and continues until the product is available for general release to customers. Since the Company’s developed software is available for general release concurrent with the establishment of technological feasibility, development costs are not capitalized in these circumstances.

Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. An impairment is recognized in the event the carrying value of such assets is not recoverable. If the carrying value is not recoverable, the fair value is determined, and an impairment is recognized for the amount by which the carrying value exceeds the fair value. No impairment of long-lived assets occurred in the three and six months ended June 30, 2022, respectively or for the year ended December 31, 2021.

Leases

 

Leases arise from contracts which convey the right to control the use of identified property or equipment for a period of time in exchange for consideration. The Company’s leasing arrangements are primarily for office space used to conduct operations. The Company determines whether an arrangement is or contains a lease at the inception date, based on whether there is an identified asset and whether the Company controls the use of the identified asset throughout the period of use. Leases commence when the lessor makes the asset available for use.

 

Leases are classified at commencement as either operating or finance leases. All the Company’s leases are classified as operating leases. Rent expense for operating leases is recognized on the straight-line method over the term of the agreement beginning on the lease commencement date. Lease-related costs, which are variable rather than fixed, are expensed in the period incurred. Variable lease costs consist primarily of common area maintenance and utilities costs for the Company’s office spaces that are due based on the actual costs incurred by the landlord. Lease payments that depend on an index or a rate are measured using the index or rate at the commencement date and are included in operating lease costs. Subsequent increases to lease payments due to a change in the index or rate are expensed as a variable lease cost.

12


 

Convertible Senior Notes

In August 2021, the Company completed a private offering of $977.5 million principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are accounted for as debt, with no bifurcation of the embedded conversion feature. Debt issuance costs related to the Company’s issuance of the 2026 Notes consist primarily of purchaser’s discounts, commissions, and related costs. The debt issuance costs were recorded as a direct deduction from the liability associated with the 2026 Notes on the consolidated balance sheet and are amortized to interest expense over the term of the 2026 Notes.

 

In connection with the offering of the 2026 Notes, the Company purchased capped calls from certain financial institutions with respect to its common stock. As the capped calls are both legally detachable and separately exercisable from the 2026 Notes, the Company accounts for the capped calls separately from the 2026 Notes. The capped calls are indexed to the Company’s own common stock and classified in stockholder’s equity. As such, the premiums paid for the capped calls have been included as a net reduction to additional paid-in capital in the consolidated balance sheet as of June 30, 2022, and December 31, 2021.

Income Taxes

The Company’s deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and income tax basis of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company assesses its income tax positions and records a tax benefit or expense based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. The Company will recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact the consolidated financial statements.

Revenue Recognition

The Company primarily generates revenue from fees paid for subscriptions to tax compliance solutions and fees paid for services performed in preparing and filing tax returns on behalf of its customers. Amounts that have been invoiced are recorded in trade accounts receivable and deferred revenue, contract liabilities, or revenue, depending upon whether the revenue recognition criteria have been met. Revenue is recognized once the customer is provisioned and as services are provided in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

The Company determines revenue recognition through the following five-step framework:

 

Identification of the contract, or contracts, with a customer;

 

Identification of the performance obligations in the contract;

 

Determination of the transaction price;

 

Allocation of the transaction price to the performance obligations in the contract; and

 

Recognition of revenue when, or as, the Company satisfies a performance obligation.

The Company identifies performance obligations in its contracts with customers, which primarily include subscription services and professional services. The transaction price is determined based on the amount which the Company expects to be entitled to in exchange for providing the promised services to the customer. The transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when performance obligations are satisfied.

Contract payment terms are typically net 30 days. Collectability is assessed based on a number of factors including collection history and creditworthiness of the customer, and the Company may mitigate exposure to credit risk by requiring payments in advance. If collectability of substantially all consideration to which the Company is entitled under the contract is determined to be not probable, revenue is not recorded until collectability becomes probable at a later date.

13


 

Revenue is recorded based on the transaction price excluding amounts collected on behalf of third parties, such as sales taxes collected and remitted to governmental authorities.

Subscription and Returns Revenue

Subscription and returns revenue primarily consist of contractually agreed upon fees paid for using the Company’s cloud-based solutions, which include tax calculation, preparing and filing transaction tax returns, compliance document management, and tax content subscription services. Under the Company’s subscription agreements, customers select a price plan that includes an allotted maximum number of transactions or number of jurisdictions over the subscription term. Unused transactions are not carried over to the customer’s next subscription term, and customers are not entitled to refunds of fees paid or relief from fees due in the event they do not use the allotted number of transactions. If customers exceed the maximum transaction level within their price plan, the Company will generally upgrade the customer to a higher transaction price plan or, in some cases, charge overage fees on a per transaction basis. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer.

The Company’s subscription arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application services. The Company’s standard subscription contracts are non-cancelable except where contract terms provide rights to cancel in the first 60 days of the contract term. Cancellations under the Company’s standard subscription contracts are not material, and do not have a significant impact on revenue recognized. Tax returns processing services include collection of tax data and amounts, preparation of compliance forms, and submission to taxing authorities. Returns processing services are primarily charged on a subscription basis for an allotted number of returns to process within a given time period.

The Company earns Streamlined Sales Tax (“SST”) revenue from participating state and local governments based on a percentage of the sales tax reported and paid.

Revenue is recognized ratably over the contractual term of the arrangement, beginning on the date that the service is made available to the customer. The Company invoices its subscription customers for the initial term at contract signing and at each subscription renewal. Initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that are contractually billable and have been invoiced, or which have been collected as cash, are initially recorded as deferred revenue or contract liabilities. While historically most of the Company's customers are invoiced once at the beginning of the term, an increasing portion of customers are invoiced semi-annually, quarterly, or monthly.

Included in the total subscription fee for cloud-based solutions are non-refundable upfront fees that are typically charged to new customers. These fees are associated with work performed to set up a customer with the Company’s services, and do not represent a distinct good or service. Instead, the fees are included within the transaction price and allocated to the remaining performance obligations in the contract. The Company recognizes revenue for these fees in accordance with the revenue recognition for those performance obligations.

Also included in subscription and returns revenue is interest income on funds held from customers. The Company uses trust accounts at FDIC-insured institutions to provide tax remittance services to customers and collect funds from customers in advance of remittance to tax authorities. After collection and prior to remittance, the Company earns interest on these funds.

Professional Services Revenue

The Company generates professional services revenue from providing tax analysis and services, including business licenses and tax registrations, tax refund claims and recovery assistance, voluntary disclosure agreements, nexus studies, and back filing services. Additionally, the Company provides configurations, data migrations, integration, and training for its subscriptions and returns products. The Company invoices for professional service arrangements on a fixed fee, milestone, or time and materials basis. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.

Judgments and Estimates

The Company’s contracts with customers often include obligations to provide multiple services to a customer. Determining whether services are considered distinct performance obligations that should be accounted for separately from one another requires judgment. Subscription services and professional services are both distinct performance obligations that are accounted for separately.

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. The Company allocates revenue to each performance obligation based on the relative SSP. The Company determines SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices, market conditions and entity-specific factors. This includes a review of historical data related to the services being sold and customer demographics. The Company uses a

14


 

range of amounts to estimate SSP for performance obligations. There is typically more than one SSP for individual services due to the stratification of those services by information, such as size and type of customer.

Assets Recognized from the Costs to Obtain a Contract with a Customer

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain costs related to employee sales incentive programs (sales commissions) and partner commission programs represent incremental costs of obtaining a contract and therefore should be capitalized. Capitalized costs are included in deferred commissions on the consolidated balance sheets. These deferred commissions are amortized over an estimated period of benefit, generally six years. The Company determines the period of benefit by taking into consideration past experience with customers, the expected life of acquired technology that generates revenue, industry peers, and other available information. The period of benefit is generally longer than the term of the initial contract because of anticipated renewals. The Company elected to apply the practical expedient to recognize the incremental costs of obtaining a contract as an expense if the amortization period of the asset would have been one year or less.

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option, RSU, or performance share unit (“PSU”) issued under the 2018 Equity Incentive Plan (the “2018 Plan”), or purchase rights issued under the 2018 Employee Stock Purchase Plan (“ESPP”), at the grant date. The fair value of stock options and purchase rights is estimated by applying the Black-Scholes option-pricing model. This model uses the fair value of the Company’s underlying common stock at the measurement date, the expected or contractual term of the option or purchase right, the expected volatility of its common stock, risk-free interest rates, and expected dividend yield of its common stock. The fair value of an RSU or PSU is determined using the fair value of the Company’s underlying common stock on the grant date. The stock-based compensation expense recognized over the performance period for PSUs will equal the fair value of the PSU on the grant date multiplied by the number of PSUs that are earned. Furthermore, the quarterly expense recognized during the performance period for PSUs is based on an estimate of the Company’s future performance and the expected payout level. Changes to management’s estimate of future performance result in adjustments to the stock-based compensation expense for PSUs and are recognized prospectively over the remaining service period. The Company accounts for forfeitures of stock-based awards as they occur.

Recently Adopted Accounting Standards

 

There are no accounting standards that have been recently adopted.

New Accounting Standards Not Yet Adopted

 

ASU 2021-08

In October 2021, the Financial Accounting Standards Board issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. Under current GAAP, an entity generally recognizes assets and liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to businesses combinations occurring on or after the effective date of the amendment. Early adoption is permitted, including adoption in an interim period. The Company currently expects to adopt this new guidance in the first quarter of 2023 and is currently evaluating the impact of this new guidance on the consolidated financial statements.

 

15


 

 

2.Fair Value Measurements

 

Assets and liabilities measured at fair value on a recurring basis

The following financial assets and liabilities are measured at fair value on a recurring basis. The fair values recognized in the accompanying consolidated balance sheets and the level within the fair value hierarchy in which the fair value measurements fall is as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

Fair

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

June 30, 2022

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Money market funds

 

$

1,393,015

 

 

$

1,393,015

 

 

$

 

 

$

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    U.S. treasury securities

 

 

283

 

 

 

283

 

 

 

 

 

 

 

Earnouts related to business combinations

 

 

96,640

 

 

 

 

 

 

 

 

 

96,640

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

Fair

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

December 31, 2021

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Money market funds

 

$

1,439,522

 

 

$

1,439,522

 

 

$

 

 

$

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    U.S. treasury securities

 

 

370

 

 

 

370

 

 

 

 

 

 

 

Earnouts related to business combinations

 

 

113,978

 

 

 

 

 

 

 

 

 

113,978

 

 

 

 

Earnout Liability

 

Earnout liabilities recorded in connection with an acquisition accounted for as a business combination under ASC 805 are recorded at estimated fair value on a recurring basis. Business combinations included in the earnout liabilities table below are discussed in Note 4. Earnouts recorded in connection with asset acquisitions are recorded as earnout payments become known and are not remeasured on a recurring basis. As such, earnouts related to asset acquisitions, which are discussed in Note 6, are not included in these fair value disclosures.

 

Earnout liabilities related to business combinations are classified as Level 3 liabilities because the Company uses unobservable inputs to value them, reflecting its assessment of the assumptions market participants would use to value these liabilities. Changes in the fair value of earnout liabilities related to business combinations are recorded in fair value changes in earnout liabilities and included in total other income (expense), net in the consolidated statements of operations.

 

The Company estimates the fair value of earnout liabilities for business combinations using either probability-weighted discounted cash flows and Monte Carlo simulations or a scenario-based approach. 

16


 

 

The following table provides summary information of the assumptions used to calculate the estimated earnout liabilities related to 2021 and 2020 acquisitions (in thousands):

 

 

 

Year of

 

 

 

 

 

 

 

 

Discount Rate as of

 

Balance

as of

 

Balance

as of

 

 

Acquisition

 

Acquisition

 

 

Earnout Target

 

Method

 

Earnout Period

 

June 30, 2022

 

June 30, 2022

 

December 31, 2021

 

 

CrowdReason

 

 

2021

 

 

Specific revenue growth thresholds through October 2024, with a cap of $30.0 million; to be settled in cash.

 

Probability-weighted discounted cash flows and Monte Carlo simulation

 

October 2024

 

 

6.0

%

(a)

 

$

23,261

 

$

26,320

 

 

Track1099

 

 

2021

 

 

Specific revenue growth thresholds through April 2023, with a cap of $12.5 million; to be settled in cash.

 

Probability-weighted discounted cash flows and Monte Carlo simulation

 

April 2023

 

 

14.0

%

(a)

 

 

6,639

 

 

7,880

 

 

Davo

 

 

2021

 

 

Specific revenue growth thresholds through March 2023, with no cap; to be settled in cash.

 

Probability-weighted discounted cash flows and Monte Carlo simulation

 

March 2023

 

 

9.5

%

(a)

 

 

36,140

 

 

35,885

 

 

Transaction Tax Resources (“TTR”)

 

 

2020

 

 

Specific revenue growth thresholds through December 2022, with cap of $26.4 million; to be settled in cash. (c)

 

Probability-weighted discounted cash flows and Monte Carlo simulation

 

December 2022

 

 

16.0

%

(c)

 

 

12,200

 

 

24,830

 

 

Business Licenses

 

 

2020

 

 

Achievement of certain performance metrics through November 2024, with cap of $20.7 million; to be settled in common stock.

 

Scenario-based approach

 

November 2024

 

 

9.5

%

(b)

 

 

18,400

 

 

19,063

 

 

Balance end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

96,640

 

$

113,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)   The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout based on the equity, asset and revenue betas, size premium, and the Company’s specific risk premium, as well as the market risk premium using a bottom-up approach.

 

 

(b)   The discount rate was based on the Company's estimated credit yield. The Business Licenses earnout was assumed by management to have a high probability of achievement.

 

 

(c)   $13.2 million was paid on March 2, 2022 in satisfaction of the first earnout period for TTR. The second earnout period, if achieved, is payable in March 2023. The discount rate of 16% was only used for revenue that was non-contracted as of June 30, 2022. The discount rate of 16% was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout based on the equity, asset and revenue betas, size premium, and the Company’s specific risk premium, as well as the market risk premium using a bottom-up approach. For contracted revenue, no risk adjusted discount rate was assumed, other than the cost of debt, as it is not subject to forecasting uncertainty.

 

 

 

 

 

 

 

A reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs, is as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Earnout liabilities related to business combinations:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

96,757

 

 

$

37,653

 

Fair value recorded at acquisition

 

 

 

 

 

28,620

 

Fair value changes included in other (income) expense, net

 

 

(117

)

 

 

1,181

 

Balance end of period

 

$

96,640

 

 

$

67,454

 

17


 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Earnout liabilities related to business combinations:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

113,978

 

 

$

34,501

 

Fair value recorded at acquisition

 

 

 

 

 

28,620

 

Measurement period adjustments

 

 

 

 

 

1,802

 

Payments of earnout liabilities

 

 

(13,220

)

 

 

 

Fair value changes included in total other (income) expense, net

 

 

(4,118

)

 

 

2,531

 

Balance end of period

 

$

96,640

 

 

$

67,454

 

Assets and liabilities measured at fair value on a non-recurring basis

 

The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, long-lived assets and deferred revenue, and the Company’s liabilities for the accrued purchase price related to acquisitions, are not required to be measured at fair value on a recurring basis. The estimation of fair value for these assets and liabilities requires the use of significant unobservable inputs, and as a result, the Company classifies these assets and liabilities as Level 3 within the fair value hierarchy.  

Fair Value of Other Financial Instruments

The Company has $977.5 million in principal amount of the 2026 Notes. See Note 9 for further details. The Company carries the 2026 Notes at par value less unamortized debt issuance costs on its consolidated balance sheets as of June 30, 2022, and December 31, 2021, and presents the fair value for disclosure purposes only. The estimated fair value of the 2026 Notes, based on a market approach as of June 30, 2022, was approximately $767.4 million, which represents a Level 2 valuation estimate. The estimated fair value was determined based on the actual bids and offers of the 2026 Notes in an over-the-counter market on the last trading day of the quarter.

 

 

 

3.Balance Sheet Detail

Property and equipment, net consisted of the following (in thousands):

 

 

 

Useful

 

June 30,

 

 

December 31,

 

 

 

Life (Years)

 

2022

 

 

2021

 

Computer equipment and software

 

3 to 5

 

$

21,894

 

 

$

19,923

 

Internally developed software

 

3 to 6

 

 

38,562

 

 

 

27,099

 

Furniture and fixtures

 

5

 

 

6,623

 

 

 

6,425

 

Office equipment

 

2 to 5

 

 

1,358

 

 

 

1,275

 

Leasehold improvements

 

1 to 10

 

 

29,893

 

 

 

30,046

 

 

 

 

 

 

98,330

 

 

 

84,768

 

Accumulated depreciation

 

 

 

 

(45,565

)

 

 

(38,304

)

Property and equipment—net

 

 

 

$

52,765

 

 

$

46,464

 

 

Depreciation expense was $4.3 million and $8.3 million for the three and six months ended June 30, 2022, respectively, and $2.8 million and $5.4 million for the three and six months ended June 30, 2021, respectively.

 

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Licenses and subscriptions

 

$

23,591

 

 

$

14,511

 

Prepaid and other current taxes

 

 

2,470

 

 

 

3,132

 

Deposits

 

 

3,199

 

 

 

3,746

 

Prepaid employee related expenses

 

 

3,204

 

 

 

2,780

 

Capitalized cloud computing implementation costs

 

 

2,980

 

 

 

1,708

 

Prepaid insurance

 

 

2,640

 

 

 

 

Other

 

 

5,160

 

 

 

3,390

 

Total

 

$

43,244

 

 

$

29,267

 

 

 

18


 

 

Accrued expenses consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Accrued bonus

 

$

20,434

 

 

$

40,853

 

Accrued partner commissions

 

 

12,624

 

 

 

13,088

 

Accrued payroll and related taxes

 

 

14,523

 

 

 

10,208

 

Employee stock purchase plan contributions

 

 

6,231

 

 

 

7,113

 

Accrued sales commissions

 

 

6,649

 

 

 

7,007

 

Contract liabilities

 

 

643

 

 

 

6,918

 

Accrued federal, state, local, and foreign taxes

 

 

4,281

 

 

 

3,926

 

Self-insurance reserves

 

 

2,642

 

 

 

2,401

 

Accrued interest payable on convertible senior notes

 

 

1,025

 

 

 

944

 

Other

 

 

11,845

 

 

 

17,334

 

Total

 

$

80,897

 

 

$

109,792

 

 

 

4. Acquisitions of Businesses

2022 Acquisitions

 

On May 3, 2022, the Company acquired substantially all the assets of Paper Crane, Inc (“Paper Crane”) under an Asset Purchase Agreement (the “Paper Crane Purchase”). Paper Crane is a US-based company that provides geospatial software, services, content and automated analysis. The acquisition will help expand and improve Avalara’s property tax offerings. The Company accounted for the Paper Crane Purchase as a business combination. The total preliminary consideration related to this transaction is $10.5 million, consisting of $9.2 million cash paid at close and an acquisition holdback with a fair value upon acquisition of $1.3 million. The preliminary fair values of the assets acquired and the liabilities assumed in the Paper Crane Purchase as of the acquisition date include intangible assets of $3.2 million, primarily attributable to developed technology and goodwill of $7.3 million.

 

For the six months ended June 30, 2022, the Company completed one additional acquisition for consideration of $3.3 million. This entity has been included in our consolidated results of operations since its acquisition date.

 

April 2021 Acquisition of Inposia

On April 1, 2021, the Company acquired the outstanding equity of INPOSIA Solutions, GmbH (“Inposia”) under a Share Purchase Agreement (the “Inposia Purchase”). Inposia is a German software company that delivers e-invoicing, digital tax reporting, and system and data integration to support digital transformation efforts and address real-time compliance requirements for businesses. Inposia will build upon Avalara’s existing e-invoicing capabilities in Brazil and India to support customers worldwide with real-time compliance. The Company accounted for the Inposia Purchase as a business combination. Acquisition-related costs of $1.5 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense, of which $1.0 million was incurred in the second half of 2020 and $0.5 million was incurred in 2021.

The total consideration transferred related to this transaction was €31.8 million (or approximately $37.4 million using the exchange rate on April 1, 2021), consisting of net cash consideration of $14.5 million and 164,416 shares of the Company’s common stock paid at closing with an acquisition date fair value of $23.0 million. Net cash consideration consists of $12.2 million cash paid at closing, and a $2.4 million cash deposit paid in the fourth quarter of 2020, offset by $0.2 million cash received by the Company in the third quarter of 2021 as a result of net working capital adjustments. A portion of shares issued are held in escrow as of June 30, 2022, and will be released to the Inposia shareholders during the 18 months following the acquisition, subject to reduction for certain indemnification and other potential obligations of the Inposia shareholders. The shares held in escrow are considered issued and outstanding and are recorded in shareholders’ equity on the consolidated balance sheet as of December 31, 2021 and June 30, 2022.

Total consideration associated with this acquisition is presented below (in thousands):

 

 

 

Total Consideration

 

Cash paid at closing (net of amounts returned)

 

$

14,456

 

Fair value of common stock issued at closing

 

 

22,971

 

Total consideration

 

$

37,427

 

19


 

 

 

Fair values of the assets acquired and the liabilities assumed in the Inposia Purchase as of the acquisition date are provided in the following table (in thousands): 

 

 

 

Fair Value

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

1,264

 

Trade accounts receivable

 

 

1,767

 

Other current assets

 

 

268

 

Operating lease right-of-use assets

 

 

928

 

Property and equipment

 

 

98

 

Developed technology, customer relationships, and other intangibles

 

 

14,269

 

Goodwill

 

 

26,520

 

Other noncurrent assets

 

 

35

 

Total assets acquired

 

 

45,149

 

Liabilities assumed:

 

 

 

 

Trade payables and accrued expenses

 

 

1,478

 

Deferred revenue

 

 

810

 

Other liabilities, noncurrent

 

 

106

 

Operating lease liabilities

 

 

928

 

Deferred tax liability

 

 

4,400

 

Total liabilities assumed

 

 

7,722

 

Net assets acquired

 

$

37,427

 

 

The carrying amount of trade accounts receivable acquired in the Inposia Purchase approximates the fair value. The fair value of deferred revenue was estimated utilizing a discount rate of 4.0% based on the Company’s estimated pre-tax cost of debt.

The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Inposia Purchase is 6.2 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Inposia Purchase are provided in the below table (in thousands):

 

Intangible

 

Fair Value

 

 

Valuation Methodology

 

Discount Rate

 

 

Estimated Useful Life

Customer relationships

 

$

3,288

 

 

Multi-period excess earnings-income approach

 

18.5%

 

 

8 years

Developed technology

 

 

9,572

 

 

Relief from royalty-income approach

 

18.5%

 

 

6 years

Noncompetition agreements

 

 

1,174

 

 

With-and-without valuation-income approach

 

21.0%

 

 

3 years

Tradename

 

 

235

 

 

Relief from royalty-income approach

 

18.5%

 

 

3 years

 

The excess of the purchase price over the net identified tangible and intangible assets is $26.5 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is not expected to be deductible for tax purposes.

 

April 2021 Acquisition of Davo

On April 20, 2021, the Company acquired substantially all the assets of Davo Technologies LLC, a Delaware limited liability company (“Davo”) under an Asset Purchase Agreement (the “Davo Purchase”). Davo helps emerging small businesses automate the daily and ongoing requirements for sales tax. As a result of the acquisition, Davo extends Avalara’s ability to provide integrated sales tax compliance processes to alleviate the burden of compliance on small businesses. The Company accounted for the Davo Purchase as a business combination. Acquisition-related costs of $0.1 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense.

The total consideration transferred related to this transaction was $56.7 million, consisting of $23.5 million cash paid at close, a $0.3 million cash deposit paid in the first quarter of 2021, an acquisition holdback with a fair value upon acquisition of $2.6 million, and an earnout provision with a fair value upon acquisition of $30.3 million. The acquisition holdback represents an additional $2.6 million of cash to be paid Davo shareholders during the 18 months following the acquisition date, subject to reduction for certain indemnifications and other potential obligations of Davo shareholders. The earnout will be calculated as a multiple of certain

20


 

performance metrics during the 12-month measurement periods ending March 31, 2022, and 2023, and there is not a stated minimum or maximum payment required under the earnout.

 

Total consideration associated with this acquisition is presented below (in thousands):

 

 

 

Total Consideration

 

Cash paid through closing

 

$

23,818

 

Fair value of earnout provision

 

 

30,338

 

Fair value of holdbacks

 

 

2,591

 

Total consideration

 

$

56,747

 

 

Fair values of the assets acquired and the liabilities assumed in the Davo Purchase as of the acquisition date are provided in the following table (in thousands): 

 

 

 

Fair Value

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

198

 

Funds held from customers

 

 

12,464

 

Trade accounts receivable

 

 

119

 

Other current assets

 

 

58

 

Operating lease right-of-use assets

 

 

46

 

Developed technology, customer relationships, and other intangibles

 

 

4,651

 

Goodwill

 

 

51,911

 

Other noncurrent assets

 

 

2

 

Total assets acquired

 

 

69,449

 

Liabilities assumed:

 

 

 

 

Accrued expenses

 

 

117

 

Deferred revenue

 

 

75

 

Operating lease liabilities

 

 

46

 

Customer fund obligations

 

 

12,464

 

Total liabilities assumed

 

 

12,702

 

Net assets acquired

 

$

56,747

 

 

The carrying amount of trade accounts receivable and deferred revenue acquired in the Davo Purchase approximates the fair value.

The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Davo Purchase is 5.4 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Davo Purchase are provided in the below table (in thousands):

 

Intangible

 

Fair Value

 

 

Valuation Methodology

 

Discount Rate

 

 

Estimated Useful

Life

Customer relationships

 

$

2,050

 

 

Multi-period excess earnings-income approach and replacement cost method-cost approach

 

13.5%

 

 

6 years

Developed technology

 

 

1,950

 

 

Relief from royalty-income approach

 

13.5%

 

 

5 years

Noncompetition agreements

 

 

564

 

 

With-and-without valuation-income approach

 

15.5%

 

 

5 years

Tradename

 

 

87

 

 

Relief from royalty-income approach

 

13.5%

 

 

1 year

 

The excess of the purchase price over the net identified tangible and intangible assets is $51.9 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

 

21


 

 

September 2021 Acquisition of 3CE

On September 7, 2021, the Company acquired substantially all the assets of 3CE Technologies, Inc (“3CE”) under an Asset Purchase Agreement (the “3CE Purchase”). 3CE is a Canadian company that provides software and services for Harmonized System code classifications and verifications, primarily to government entities and logistics services providers. The acquisition will expand and improve Avalara’s Harmonized System classification content and provide a new self-service model to sell to the Company’s customers. The Company accounted for the 3CE purchase as a business combination. The total consideration related to this transaction is $11.2 million, consisting of $9.9 million cash paid at close and an acquisition holdback with a fair value upon acquisition of $1.3 million. The fair values of the assets acquired and the liabilities assumed in the 3CE Purchase as of the acquisition date include intangible assets of $3.7 million, primarily attributable to developed technology and customer relationships and goodwill of $7.1 million.

 

October 2021 Acquisition of Track1099

On October 1, 2021, the Company acquired substantially all the assets of Track1099 LLC, a Delaware limited liability company (“Track1099”) under an Asset Purchase Agreement (the “Track1099 Purchase”). Track1099 provides online software and services for cost-effectively managing, e-filing, and e-delivering Internal Revenue Service forms, including Forms 1099, W-2, and W-9. The Company accounted for the Track1099 Purchase as a business combination. Acquisition related costs of $0.1 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense.

The total consideration related to this transaction was $48.8 million, consisting of $35.0 million cash paid at close, an acquisition holdback with a fair value upon acquisition of $5.0 million, and an earnout provision with a fair value upon acquisition of $8.8 million. The acquisition holdback represents an additional $5.0 million of cash to be paid to the sellers 27 months following the acquisition date, subject to reduction for certain indemnifications and other potential obligations of the sellers. The earnout for Track1099 is calculated based on certain billing performance metrics during the 12-month measurement periods ending April 30, 2022 and April 30, 2023, not to exceed $12.5 million in total or $6.25 million in each earnout period.

 

Preliminary total consideration as of June 30, 2022, is presented below (in thousands):

 

 

 

Total Consideration (preliminary)

 

Cash paid through closing

 

$

35,000

 

Fair value of earnout provision

 

 

8,820

 

Fair value of holdbacks

 

 

4,984

 

Total consideration

 

$

48,804

 

 

Preliminary estimated fair values of the assets acquired and the liabilities assumed in the Track1099 Purchase as of the acquisition date are provided in the following table (in thousands): 

 

 

 

As of

June 30, 2022

 

Assets acquired:

 

 

 

 

Prepaid and other current assets

 

$

2

 

Developed technology, customer relationships, and other intangibles

 

 

5,850

 

Goodwill

 

 

42,962

 

Total assets acquired

 

 

48,814

 

Liabilities assumed:

 

 

 

 

Current liabilities

 

 

1

 

Deferred revenue

 

 

9

 

Total liabilities assumed

 

 

10

 

Net assets acquired

 

$

48,804

 

The estimated fair values for certain acquired intangibles, the earnout, and holdback are preliminary in nature and subject to adjustment when the necessary information is available to complete the valuation.

22


 

 

The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Track1099 Purchase are provided in the table below (in thousands):

 

Intangible

 

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

 

Estimated Useful

Life

Customer relationships

 

$

3,200

 

 

Multi-period excess earnings-income approach

 

28.0%

 

 

5 years

Developed technology

 

 

1,250

 

 

Relief from royalty-income approach

 

28.0%

 

 

2 years

Noncompetition agreement

 

 

1,300

 

 

With-and-without valuation-income approach

 

30.0%

 

 

5 years

Tradename

 

 

100

 

 

Relief from royalty-income approach

 

28.0%

 

 

2 years

The excess of the purchase price over the net identified tangible and intangible assets is $43.0 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

 

October 2021 Acquisition of CrowdReason and CorrelationAdvisors

On October 18, 2021, the Company acquired substantially all the assets of CrowdReason Limited Liability Company, a Texas limited liability company (“CrowdReason”) and CorrelationAdvisors, LLC, a Texas limited liability company (“CorrelationAdvisors”) under an Asset Purchase Agreement (the “CrowdReason Purchase”). CrowdReason is a technology services company that provides software applications, solutions, and services for property tax compliance. CorrelationAdvisors provides consulting services related to property valuation and property tax compliance. The Company accounted for the CrowdReason Purchase as a business combination. Acquisition-related costs of $0.2 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense.

The total consideration transferred related to this transaction was $36.4 million, consisting of $8.3 million cash paid at close, acquisition holdbacks with a fair value upon acquisition of $1.7 million, and an earnout provision with a fair value upon acquisition of $26.3 million. The acquisition holdback represents an additional $1.7 million of cash to be paid to the sellers during the 18 months following the acquisition date, subject to reduction for certain indemnifications and other potential obligations of the sellers. The earnout is calculated as a multiple of revenue growth thresholds during the 12-month measurement periods ending October 31, 2022, 2023, and 2024, with the total purchase price, inclusive of earnouts, not to exceed $40.0 million.

 

Preliminary total consideration as of June 30, 2022, is presented below (in thousands):

 

 

 

Total Consideration (preliminary)

 

Cash paid through closing

 

$

8,317

 

Fair value of earnout provision

 

 

26,320

 

Fair value of holdbacks

 

 

1,727

 

Total consideration

 

$

36,364

 

 

23


 

 

Preliminary estimated fair values of the assets acquired and the liabilities assumed in the CrowdReason Purchase as of the acquisition date are provided in the following table (in thousands): 

 

 

 

As of

June 30, 2022

 

Assets acquired:

 

 

 

 

Current assets

 

$

1,426

 

Developed technology, customer relationships, and other intangibles

 

 

10,300

 

Goodwill

 

 

25,415

 

Total assets acquired

 

 

37,141

 

Liabilities assumed:

 

 

 

 

Current liabilities

 

 

101

 

Deferred revenue & contract liabilities

 

 

676

 

Total liabilities assumed

 

 

777

 

Net assets acquired

 

$

36,364

 

 

The estimated fair values for certain acquired intangibles, the earnout, and holdback are preliminary in nature and subject to adjustment when the necessary information is available to complete the valuation.

The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the CrowdReason Purchase are provided in the table below (in thousands):

 

Intangible

 

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

 

Estimated Useful

Life

Customer relationships

 

$

5,700

 

 

Multi-period excess earnings-income approach

 

18.0%

 

 

5 to 8 years

Developed technology

 

 

3,900

 

 

Relief from royalty-income approach

 

18.0%

 

 

5 years

Backlog

 

 

450

 

 

Multi-period excess earnings-income approach

 

15.0%

 

 

1 year

Noncompetition agreements

 

 

100

 

 

With-and-without valuation-income approach

 

20.0%

 

 

5 years

Tradename

 

 

150

 

 

Relief from royalty-income approach

 

18.0%

 

 

2 years

 

The excess of the purchase price over the net identified tangible and intangible assets is $25.4 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

 

Activity Related to Prior Acquisitions

 

See Note 2 for activity related to accrued earnout liabilities. In addition, during the second quarter of 2022, the Company paid $48.8 million in post-closing payments for the settlement of accrued purchase price related to acquisitions of TTR and Business Licenses. The funds for payment of the $37.7 million TTR holdback were recorded as restricted cash – current and the liability was included in accrued purchase price related to acquisitions – current on the consolidated balance sheet as of December 31, 2021.

 

24


 

 

Pro Forma Financial Information (Unaudited)

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Avalara and all 2022 acquisitions as though the companies were combined as of January 1, 2021, and all 2021 acquisitions as though the companies were combined as of January 1, 2020. The unaudited pro forma financial information presented also includes certain business combination accounting effects resulting from the acquisitions, including amortization charges from acquired intangible assets. No adjustments were made for the fair value of deferred revenue and contract liabilities or fair value measurement adjustments for earnout liabilities. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had occurred on the dates indicated.

 

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Total revenue

 

$

208,637

 

 

$

171,198

 

Pre-tax loss

 

 

(54,941

)

 

 

(33,107

)

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Total revenue

 

$

413,326

 

 

$

334,591

 

Pre-tax loss

 

 

(87,490

)

 

 

(59,551

)

 

 

 

5.Revenue

See Note 1 for a description of the Company’s revenue recognition accounting policy.

 

Disaggregation of Revenue

 

The following table disaggregates revenue generated within the United States (“U.S.”) from revenue generated from customers outside of the U.S. Revenue for transaction tax compliance in the U.S. is further disaggregated based on the solutions or services purchased by customers. Total revenues consisted of the following (in thousands):

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Revenue (U.S.):

 

 

 

 

 

 

 

 

Subscription and returns

 

 

 

 

 

 

 

 

Tax calculations

 

$

106,453

 

 

$

83,366

 

Tax returns and compliance management

 

 

71,701

 

 

 

56,752

 

Interest income on funds held for customers

 

 

305

 

 

 

202

 

Total subscription and returns

 

 

178,459

 

 

 

140,320

 

Professional services

 

 

16,981

 

 

 

14,571

 

Total revenue (U.S.)

 

 

195,440

 

 

 

154,891

 

Total revenue (non-U.S.)

 

 

13,153

 

 

 

14,176

 

Total revenue

 

$

208,593

 

 

$

169,067

 

25


 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Revenue (U.S.):

 

 

 

 

 

 

 

 

Subscription and returns

 

 

 

 

 

 

 

 

Tax calculations

 

$

206,954

 

 

$

159,763

 

Tax returns and compliance management

 

 

145,428

 

 

 

109,599

 

Interest income on funds held from customers

 

 

512

 

 

 

342

 

Total subscription and returns

 

 

352,894

 

 

 

269,704

 

Professional services

 

 

33,022

 

 

 

27,859

 

Total revenue (U.S.)

 

 

385,916

 

 

 

297,563

 

Total revenue (non-U.S.)

 

 

27,207

 

 

 

25,105

 

Total revenue

 

$

413,123

 

 

$

322,668

 

 

Disclosures Related to Contracts with Customers

 

Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent a contract exists, as defined by ASC 606, these liabilities are classified as current and non-current deferred revenue. To the extent that a contract does not exist, as defined by ASC 606 (e.g., customer agreements with non-standard termination rights), these liabilities are classified as contract liabilities. Contract liabilities are transferred to deferred revenue at the point in time when the criteria that establish the existence of a contract are met.

 

Contract Liabilities

 

A summary of the activity impacting the contract liabilities during the three and six months ended June 30, 2022 and 2021 and 2021, is presented below (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Contract liabilities:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

897

 

 

$

12,466

 

Contract liabilities transferred to deferred revenue

 

 

(528

)

 

 

(5,265

)

Addition to contract liabilities

 

 

274

 

 

 

4,205

 

Balance end of period

 

$

643

 

 

$

11,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Contract liabilities:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

6,918

 

 

$

10,134

 

Contract liabilities transferred to deferred revenue

 

 

(6,992

)

 

 

(9,131

)

Addition to contract liabilities

 

 

717

 

 

 

10,403

 

Balance end of period

 

$

643

 

 

$

11,406

 

 

As of June 30, 2022, contract liabilities are expected to be transferred to deferred revenue within the next 12 months and therefore are included in accrued expenses on the consolidated balance sheets. As of December 31, 2021, the majority of the contract liability balance related to a single marketplace partner. During the first quarter of 2022, the agreement with this partner was amended such that amounts are no longer presented separately as contract liabilities.

 

26


 

 

Deferred Revenue

 

A summary of the activity impacting deferred revenue balances during the three and six months ended June 30, 2022 and 2021, is presented below (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Deferred revenue:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

303,610

 

 

$

225,531

 

Revenue recognized

 

 

(208,593

)

 

 

(169,067

)

Additional amounts deferred

 

 

212,676

 

 

 

182,931

 

Balance end of period

 

$

307,693

 

 

$

239,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Deferred revenue:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

282,955

 

 

$

209,690

 

Revenue recognized

 

 

(413,123

)

 

 

(322,668

)

Additional amounts deferred

 

 

437,861

 

 

 

352,373

 

Balance end of period

 

$

307,693

 

 

$

239,395

 

 

As of June 30, 2022, $306.8 million of deferred revenue is expected to be recognized within the next 12 months and is included in current liabilities on the consolidated balance sheets. The remaining amount of deferred revenue is included in noncurrent liabilities and is expected to be recognized within the next 18 months.

 

Assets Recognized from the Costs to Obtain Contracts with Customers

 

Assets are recognized for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred commissions are amortized over an expected period of benefit of generally six years.

 

A summary of the activity impacting the deferred commissions during the three and six months ended June 30, 2022 and 2021, is presented below (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Deferred commissions:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

70,767

 

 

$

53,230

 

Additional commissions deferred

 

 

9,611

 

 

 

10,907

 

Amortization of deferred commissions

 

 

(4,803

)

 

 

(3,494

)

Balance end of period

 

$

75,575

 

 

$

60,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Deferred commissions:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

68,519

 

 

$

50,870

 

Additional commissions deferred

 

 

16,443

 

 

 

16,602

 

Amortization of deferred commissions

 

 

(9,387

)

 

 

(6,829

)

Balance end of period

 

$

75,575

 

 

$

60,643

 

 

As of June 30, 2022, $18.6 million of deferred commissions are expected to be amortized within the next 12 months and are included in current assets on the consolidated balance sheets. The remaining amount of deferred commissions is included in noncurrent assets. There were no impairments of assets related to deferred commissions during the six months ended June 30, 2022 or 2021. There were no assets recognized related to the costs to fulfill contracts during the six months ended June 30, 2022, or 2021 as these costs were not material.

27


 

 

Remaining Performance Obligations

 

Contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts include deferred revenue that has been invoiced and non-cancellable amounts that will be invoiced and recognized as revenue in future periods. As of June 30, 2022, the remaining performance obligations to which enforceable rights exist are $394.3 million, of which $382.5 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter. Of the remaining performance obligations as of June 30, 2022, $86.6 million relates to non-cancellable amounts that have not yet been invoiced, of which $75.7 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.

 

 

6.Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

June 30, 2022

 

 

 

Useful Life

(Years)

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Backlog

 

1 to 7

 

$

4,500

 

 

$

(2,683

)

 

$

1,817

 

Customer relationships

 

4 to 10

 

 

74,993

 

 

 

(29,102

)

 

 

45,891

 

Developed technology

 

1 to 6

 

 

77,431

 

 

 

(43,300

)

 

 

34,131

 

Noncompetition agreements

 

3 to 5

 

 

6,479

 

 

 

(2,359

)

 

 

4,120

 

Tradename and trademarks

 

1 to 3

 

 

7,250

 

 

 

(6,223

)

 

 

1,027

 

 

 

 

 

$

170,653

 

 

$

(83,667

)

 

$

86,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

Useful Life

(Years)

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Backlog

 

3

 

$

4,500

 

 

$

(1,816

)

 

$

2,684

 

Customer relationships

 

3 to 10

 

 

75,188

 

 

 

(23,795

)

 

 

51,393

 

Developed technology (1)

 

3 to 8

 

 

72,723

 

 

 

(37,333

)

 

 

35,390

 

Noncompetition agreements

 

3 to 5

 

 

6,452

 

 

 

(1,725

)

 

 

4,727

 

Tradename and trademarks

 

1 to 4

 

 

7,267

 

 

 

(4,643

)

 

 

2,624

 

 

 

 

 

$

166,130

 

 

$

(69,312

)

 

$

96,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Developed technology intangible assets include IPR&D of $0.4 million as of December 31, 2021, which is not subject to amortization.

 

 

Finite-lived intangible assets are amortized over their estimated useful life. Finite-lived intangible assets amortization expense was $7.3 million and $14.5 million for the three and six months ended June 30, 2022, respectively, and $6.2 million and $10.6 million for the three and six months ended June 30, 2021, respectively.

 

Acquisitions of finite-lived intangible assets

 

In May 2018, the Company acquired developed technology to facilitate cross-border transactions (e.g., tariffs and duties), from Tradestream Technologies Inc. and Wise 24 Inc. (the “Sellers”) for cash and common stock. This acquisition was accounted for as an asset acquisition. Total consideration for the purchase will not exceed $30 million, inclusive of an earnout computed on future billings recognized by the Company over six years post acquisition.   The earnout is payable in cash or common stock at the end of each six-month measurement period ending on June 30 or December 31 through 2023. Through June 30, 2022, the sellers have earned approximately $3.2 million under the earnout provision since the acquisition date. An earnout liability of $0.9 million was recorded within the current portion of accrued earnout liabilities as of June 30, 2022, for the earnout period ending June 30, 2022, and is expected to be paid in cash to the sellers in the third quarter of 2022.

 

28


 

 

Goodwill

 

Changes in the carrying amount of goodwill for the six months ended June 30, 2022, are summarized as follows (in thousands):

 

Balance—December 31, 2021

 

$

672,381

 

Additions - 2022 acquisitions (1)

 

 

8,972

 

Cumulative translation adjustments

 

 

(3,857

)

Balance—June 30, 2022

 

$

677,496

 

               (1) See Note 4 for additions details

 

Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, the Company will conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. The Company has three reporting units for goodwill impairment testing consisting of its U.S., European, and Brazilian operations. As of June 30, 2022, the Brazilian reporting unit had no associated goodwill.

 

During the second quarter of 2022, the Company observed a decline in the market valuation of the Company’s common shares along with a decline in the macroeconomic environment. As a result, the Company evaluated whether such events would indicate the fair values of its reporting units were below their respective carrying values. Management did not identify any factors that would indicate the fair values of the Company’s reporting units were below their respective carrying values. However, the Company continues to monitor the key inputs to the fair value of its European reporting unit, which includes significant revenue growth from a single marketplace partner. A further decline in market capitalization of the Company, macroeconomic conditions, or internal cashflow forecasts could result in an impairment of some or all of the goodwill associated with the European reporting unit in future periods. The carrying value of goodwill for the European reporting unit as of June 30, 2022 is approximately $44.3 million.

 

 

7.Leases

 

Total lease cost, net of sublease income, was $4.1 million and $7.9 million for the three and six months ended June 30, 2022, respectively, and $4.4 million and $8.3 million for the three and six months ended June 30, 2021, respectively. Sublease income was $0.5 million and $0.9 million for the three and six months ended June 30, 2022, respectively and $0.4 million and $0.8 million for the three and six months ended June 30, 2021, respectively. Leases that commenced in the first half of 2022 increased operating lease right-of-use assets by $5.6 million.

 

8.Commitments and Contingencies

 

Contingencies

Loss contingencies may arise in connection with the ordinary conduct of the Company’s business activities. The Company considers all loss contingencies on a quarterly basis and based on known facts assesses whether potential losses are considered reasonably possible, probable, and estimable. The Company establishes an accrual for loss contingencies when the loss is both probable and reasonably estimable. If the estimated loss is a range of potential outcomes and there is no better estimate within the range, management accrues the amount at the low end of the range. These accruals represent management’s estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. Significant judgment is required to determine both likelihood of there being a probable loss and the estimated amount of a loss. If a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrual, but will evaluate other disclosure requirements and continue to monitor the matter for developments that would make the loss contingency both probable and reasonably estimable. The ultimate outcome of any litigation relating to a loss contingency is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of management resources and other factors.

 

In its standard subscription agreements, the Company has agreed to indemnification provisions with respect to certain matters. Further, from time to time, the Company has also assumed indemnification obligations through its acquisition activity. These indemnification provisions can create a liability to the Company if its services do not appropriately calculate taxes due to tax jurisdictions, or if the Company is delinquent in the filing of returns on behalf of its customers. Although the Company’s agreements have disclaimers of warranties that limit its liability (beyond the amounts the Company agrees to pay pursuant to its indemnification

29


 

obligations and guarantees, as applicable), a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold the Company liable for certain errors. Further, in some instances the Company has negotiated agreements with specific customers or assumed agreements in connection with the Company’s acquisitions that do not limit this liability or disclaim these warranties. It is not possible to reasonably estimate the potential loss under these indemnification arrangements.  

 

 

9.Debt

Convertible Senior Notes

In August 2021, the Company completed a private offering of $977.5 million principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on February 1, 2022. The 2026 Notes will mature on August 1, 2026, unless earlier converted, redeemed, or repurchased. The Company incurred $17.6 million of debt issuance costs in connection with the 2026 Notes offering consisting of the initial purchasers’ commissions and legal, accounting, and other direct costs of the offering. The total proceeds from the offering, net of the debt issuance costs, were $959.9 million. The Company used $75.3 million of the net proceeds from the sale of the 2026 Notes to pay the premiums of the capped call options described further below.

As of June 30, 2022, none of the conversion conditions of the 2026 Notes described in the Amended 2021 Annual Report were met.

The net carrying amount of the 2026 Notes was as follows (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2022

 

2021

 

Principal

 

$

977,500

 

$

977,500

 

Unamortized debt issuance costs

 

 

(14,471

)

 

(16,241

)

Net carrying amount

 

$

963,029

 

$

961,259

 

 

The following table sets forth the interest expense recognized related to the 2026 Notes (in thousands):

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

Contractual interest expense

 

$

611

 

Amortization of debt issuance costs

 

 

886

 

Total interest expense related to 2026 Notes

 

$

1,497

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

Contractual interest expense

 

$

1,222

 

Amortization of debt issuance costs

 

 

1,771

 

Total interest expense related to 2026 Notes

 

$

2,993

 

 

Capped Call Transactions

In connection with the offering of the 2026 Notes, the Company purchased capped calls from certain financial institutions with respect to its common stock. The capped calls each have an initial strike price of $238.44 per share of the Company’s common stock, which corresponds to the initial conversion price of the 2026 Notes. The capped calls each have an initial cap price of $323.30 per share and expire in incremental components on each trading date beginning on June 4, 2026, and ending on July 30, 2026. The capped calls are intended to offset potential dilution to the Company’s common stock or offset any cash payments the Company is required to make in excess of the principal amount, as the case may be, with such reduction or offset subject to the cap price. The capped calls are subject to adjustments for certain corporate events and standard anti-dilution provisions.

 

The Company paid an aggregate amount of $75.3 million for the capped calls, covering approximately 4.1 million shares of the Company’s common stock. As the capped calls are both legally detachable and separately exercisable from the 2026 Notes, the Company accounts for the capped calls separately from the 2026 Notes. The capped calls are indexed to the Company’s own common

30


 

stock and classified in stockholders’ equity. As such, the premiums paid for the capped calls have been included as a net reduction to additional paid-in capital in the consolidated balance sheet.

 

10.Shareholders’ Equity

Authorized Capital—Common Stock and Preferred Stock

Under the Amended and Restated Articles of Incorporation, which became effective in June 2018, the Company is authorized to issue two classes of stock designated as common stock and preferred stock. The Company’s total authorized capital stock is 620,000,000 shares, consisting of 600,000,000 shares of common stock, $0.0001 par value per share, and 20,000,000 shares of undesignated preferred stock, $0.0001 par value per share.

 

The changes to the Company’s shareholders’ equity during the six months ended June 30, 2022, is as follows (in thousands, except share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2022

 

87,086,665

 

 

$

9

 

 

$

1,732,742

 

 

$

(3,428

)

 

$

(702,869

)

 

$

1,026,454

 

Exercise of stock options

 

107,623

 

 

 

 

 

 

 

2,281

 

 

 

 

 

 

 

 

 

 

 

2,281

 

Vesting of restricted stock units

 

466,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of performance share units

 

38,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

33,371

 

 

 

 

 

 

 

 

 

 

 

33,371

 

Shares issued under employee stock

   purchase plan

 

85,926

 

 

 

 

 

 

 

8,006

 

 

 

 

 

 

 

 

 

 

 

8,006

 

Loss on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,347

)

 

 

 

 

 

 

(1,347

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,557

)

 

 

(32,557

)

Balance at March 31, 2022

 

87,785,002

 

 

$

9

 

 

$

1,776,400

 

 

$

(4,775

)

 

$

(735,426

)

 

$

1,036,208

 

Exercise of stock options

 

110,997

 

 

 

 

 

 

 

1,816

 

 

 

 

 

 

 

 

 

 

 

1,816

 

Vesting of restricted stock units

 

227,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

47,775

 

 

 

 

 

 

 

 

 

 

 

47,775

 

Loss on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,611

)

 

 

 

 

 

 

(3,611

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(55,848

)

 

 

(55,848

)

Balance at June 30, 2022

 

88,123,428

 

 

$

9

 

 

$

1,825,991

 

 

$

(8,386

)

 

$

(791,274

)

 

$

1,026,340

 

31


 

 

 

The changes to the Company’s shareholders’ equity for the six months ended June 30, 2021, is as follows (in thousands, except share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2021

 

85,057,727

 

 

$

9

 

 

$

1,648,741

 

 

$

(1,339

)

 

$

(567,251

)

 

$

1,080,160

 

Exercise of stock options

 

296,226

 

 

 

 

 

 

 

5,529

 

 

 

 

 

 

 

 

 

 

 

5,529

 

Vesting of restricted stock units

 

346,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

19,127

 

 

 

 

 

 

 

 

 

 

 

19,127

 

Shares issued under employee stock

   purchase plan

 

60,064

 

 

 

 

 

 

 

7,088

 

 

 

 

 

 

 

 

 

 

 

7,088

 

Loss on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(390

)

 

 

 

 

 

 

(390

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,068

)

 

 

(30,068

)

Balance at March 31, 2021

 

85,760,025

 

 

$

9

 

 

$

1,680,485

 

 

$

(1,729

)

 

$

(597,319

)

 

$

1,081,446

 

Exercise of stock options

 

253,395

 

 

 

 

 

 

 

4,668

 

 

 

 

 

 

 

 

 

 

 

4,668

 

Vesting of restricted stock units

 

75,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

26,976

 

 

 

 

 

 

 

 

 

 

 

26,976

 

Shares issued for acquisitions of businesses

 

164,416

 

 

 

 

 

 

 

22,971

 

 

 

 

 

 

 

 

 

 

 

22,971

 

Gain on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

322

 

 

 

 

 

 

 

322

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,034

)

 

 

(31,034

)

Balance at June 30, 2021

 

86,253,407

 

 

$

9

 

 

$

1,735,100

 

 

$

(1,407

)

 

$

(628,353

)

 

$

1,105,349

 

 

 

 

11.Equity Incentive Plans

The Company has stock-based compensation plans that provide for the award of equity incentives, including stock options, stock awards, RSUs, PSUs, and purchase rights. As of June 30, 2022, the Company had stock options outstanding under the 2018 Plan and the 2006 Equity Incentive Plan (the “2006 Plan”), RSUs and PSUs outstanding under the 2018 Plan, and purchase rights issued under the ESPP. The 2018 Plan became effective in connection with the Company’s initial public offering at which time the 2006 Plan was terminated. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan.

As of June 30, 2022, 5,537,432 shares were subject to outstanding awards under the 2018 plan and 14,180,777 shares were available for issuance under the 2018 Plan. As of June 30, 2022, 983,868 shares were subject to outstanding stock options under the 2006 Plan.

Stock-Based Compensation

The Company recognized total stock-based compensation cost related to equity incentive awards as follows (in thousands):

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Stock-based compensation cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$

2,036

 

 

$

3,074

 

 

$

4,197

 

 

$

6,297

 

Restricted stock units

 

 

39,199

 

 

 

18,321

 

 

 

61,327

 

 

 

30,090

 

Performance share units

 

 

5,669

 

 

 

4,632

 

 

 

13,482

 

 

 

7,464

 

Employee stock purchase plan

 

 

871

 

 

 

949

 

 

 

2,140

 

 

 

2,252

 

Total stock-based compensation cost

 

$

47,775

 

 

$

26,976

 

 

$

81,146

 

 

$

46,103

 

 

The amount of stock-based compensation cost above capitalized to internally developed software and cloud computing arrangements in accordance with the accounting guidance for internal-use software was $1.2 million and $1.8 million for the three and six months ended June 30, 2022, respectively, and $0.4 million and $0.6 million for the three and six months ended June 30, 2021, respectively. The Company uses the straight-line attribution method for recognizing stock-based compensation expense.

 

32


 

 

Stock Options

The following table summarizes stock option activity for the Company’s stock-based compensation plans for the six months ended June 30, 2022:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

Aggregate

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Intrinsic

 

 

 

 

 

 

 

Exercise

 

 

Contractual

 

 

Value

 

 

 

Shares

 

 

Price

 

 

Life (in Years)

 

 

(in thousands)

 

Options outstanding as of January 1, 2022

 

 

2,278,789

 

 

$

33.52

 

 

 

6.30

 

 

$

217,824

 

Options granted

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(218,620

)

 

$

18.74

 

 

 

 

 

 

 

 

 

Options cancelled or expired

 

 

(4,824

)

 

$

101.44

 

 

 

 

 

 

 

 

 

Options outstanding as of June 30, 2022

 

 

2,055,345

 

 

$

34.94

 

 

 

5.87

 

 

$

73,302

 

Options exercisable as of June 30, 2022

 

 

1,770,387

 

 

$

30.74

 

 

 

5.66

 

 

$

70,574

 

 

The total intrinsic value of options exercised during the six months ended June 30, 2022 and 2021 was $15.1 million and $70.7 million, respectively. As of June 30, 2022, $6.9 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 1.3 years.

Restricted Stock Units

The following table summarizes RSU activity for the Company’s stock-based compensation plans for the six months ended June 30, 2022:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

 

Restricted Stock Units

 

 

Value Per Share

 

RSUs outstanding as of January 1, 2022

 

 

2,861,963

 

 

$

99.41

 

RSUs granted

 

 

2,222,991

 

 

 

94.95

 

RSUs vested

 

 

(693,926

)

 

 

86.66

 

RSUs cancelled

 

 

(225,035

)

 

 

97.14

 

RSUs outstanding as of June 30, 2022

 

 

4,165,993

 

 

$

99.28

 

 

Stock-based compensation cost for RSUs is recognized on a straight-line basis in the consolidated statements of operations over the period during which the participant is required to perform services in exchange for the award, based on the fair value of the Company’s underlying common stock on the grant date. The vesting period of each RSU grant is generally three or four years for employees and one year for non-employee directors.

 

As of June 30, 2022, $348.4 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 2.7 years.

Performance Share Units

The following table summarizes PSU activity for the Company’s stock-based compensation plans for the six months ended June 30, 2022:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

 

Performance Share Units

 

 

Value Per Share

 

PSUs outstanding as of January 1, 2022

 

 

114,890

 

 

$

147.26

 

PSUs granted

 

 

223,363

 

 

 

98.90

 

PSUs vested

 

 

(38,291

)

 

 

147.26

 

PSUs cancelled

 

 

 

 

 

 

PSUs outstanding as of June 30, 2022

 

 

299,962

 

 

$

111.25

 

33


 

 

 

Stock-based compensation cost for PSUs is recognized on a graded vesting basis in the consolidated statements of operations over the period during which the participant is required to perform services in exchange for the award, based on the fair value of the Company’s underlying common stock on the grant date and the number of PSUs expected to be earned over the service period. Each PSU grant will vest in annual tranches over a three-year service period. Total PSUs earned for grants made in 2022 and 2021 may vary between 0% and 250% of the PSUs granted based on the attainment of company-specific performance targets during the related three-year period and continued service. The performance targets are established by the Compensation and Leadership Development Committee of the Board of Directors. All of the PSUs earned will be settled through the issuance of an equivalent number of shares of the Company’s common stock based on the payout level achieved.

As of June 30, 2022, $40.3 million of total unrecognized compensation cost related to PSUs was expected to be recognized over a weighted average period of approximately 1.7 years.

Employee Stock Purchase Plan

 

During the six months ended June 30, 2022, 85,926 shares of common stock were purchased under the ESPP.

 

As of June 30, 2022, there was approximately $0.3 million of unrecognized stock-based compensation cost related to the ESPP that is expected to be recognized over the remaining term of the offering period that began on February 1, 2022 and will end on July 31, 2022.

 

For the periods presented, the fair value of ESPP purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Fair market value of common stock

 

$111.00

 

 

$152.35

 

Volatility

 

33%

 

 

34%

 

Expected term

 

0.5 years

 

 

0.5 years

 

Expected dividend yield

 

n/a

 

 

n/a

 

Risk-free interest rate

 

0.48%

 

 

0.08%

 

 

12.Net Loss Per Share Attributable to Common Shareholders

 

The Company calculates basic and diluted net loss per share attributable to common shareholders in conformity with the two-class method required for companies with participating securities.

 

The diluted net loss per share attributable to common shareholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. This includes using the if-converted method for calculating any potential dilutive effect of the convertible senior notes. For purposes of this calculation, all common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common shareholders as their effect is antidilutive. As a result, basic and diluted net loss per common share was the same for each period presented.

 

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share data):

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(55,848

)

 

$

(31,034

)

 

$

(88,405

)

 

$

(61,102

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares

   outstanding-basic

 

 

87,989

 

 

 

86,090

 

 

 

87,728

 

 

 

85,765

 

Dilutive effect of share equivalents resulting from

   stock options, RSUs, PSUs, ESPP shares, and

   convertible senior notes (if converted)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares

   outstanding-diluted

 

 

87,989

 

 

 

86,090

 

 

 

87,728

 

 

 

85,765

 

Net loss per common share, basic and diluted

 

$

(0.63

)

 

$

(0.36

)

 

$

(1.01

)

 

$

(0.71

)

34


 

 

 

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common shareholders for the periods presented because the impact of including them would have been antidilutive (in thousands):

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Options to purchase common shares

 

 

2,109

 

 

 

3,115

 

 

 

2,172

 

 

 

3,255

 

Unvested RSUs

 

 

4,087

 

 

 

2,746

 

 

 

3,474

 

 

 

2,504

 

Unvested PSUs

 

 

300

 

 

 

121

 

 

 

272

 

 

 

98

 

ESPP shares

 

 

50

 

 

 

38

 

 

 

30

 

 

 

22

 

Convertible senior notes (if converted)

 

 

4,100

 

 

 

 

 

 

4,100

 

 

 

 

Total

 

 

10,646

 

 

 

6,020

 

 

 

10,048

 

 

 

5,879

 

 

 

13.Subsequent Events

 

On July 25, 2022, the Company paid $18.2 million to the sellers of Davo in connection with the first earnout period of the Davo Purchase. The liability was included in accrued earnout liabilities, current on the consolidated balance sheet as of June 30, 2022.

  On August 8, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lava Intermediate, Inc., a Delaware corporation (“Parent”), and Lava Merger Sub, Inc., a Washington corporation and a wholly owned subsidiary of Parent (“Merger Sub”).  Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”).  The Merger Agreement provides, among other things, that on the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), and as a result of the Merger, each share of common stock of the Company that is issued and outstanding immediately prior to the Effective Date (subject to certain exceptions) will be converted into the right to receive $93.50 in cash. 

The Company and Parent have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants that: (i) the Company will conduct its and its subsidiaries’ business in the ordinary course of business during the interim period between the execution of the Merger Agreement and the Effective Time, (ii) the Company will not engage in certain types of transactions or take certain actions outside the ordinary course during such period without the prior consent of Parent, (iii) the Company will cause a meeting of the Company’s shareholders to be held to consider approval of the Merger Agreement, and (iv) subject to certain customary exceptions, the board of directors of the Company will recommend adoption of the Merger Agreement by the shareholders of the Company. The Company has also made certain additional customary covenants, including, among others, covenants not to: (i) solicit or knowingly encourage any inquiries with respect to certain alternative business combination transactions or (ii) subject to certain exceptions designed to allow the board of directors of the Company to fulfill its fiduciary duties to the Company’s shareholders, engage in any discussions concerning, or provide any confidential information to, any person relating to certain alternative business combination transactions.

Subject to certain limitations, if the Merger is not consummated by February 8, 2023 (the “End Date”), each of the Company and Parent may terminate the Merger Agreement. The right to terminate the Merger Agreement at the End Date will not be available to a party if the failure of the Merger to have been consummated on or before such date was primarily caused by the failure of such party to perform any of its obligations under the Merger Agreement.

The Merger Agreement contains certain customary termination rights for the Company and Parent, including the Company’s right to terminate the Merger Agreement to accept a superior proposal subject to compliance with certain procedures specified in the Merger Agreement. Upon termination of the Merger Agreement under certain specified circumstances, the Company will be required to pay Parent a termination fee of $242.329 million.  The Merger Agreement provides that Parent will be required to pay the Company a termination fee of $484.659 million (the “Parent Termination Fee”) under certain circumstances if the Merger Agreement is terminated by the Company because certain conditions to closing have been satisfied, the Company indicates in writing that it is ready and willing to close, and Parent and Merger Sub fail to consummate the Merger within three business days during which time the Company stood ready, willing and able to consummate the Merger.

In connection with the Merger, the Company expects to incur significant expenses, such as transaction, professional services, and other costs.  An estimate of these expenses cannot be made at this time. The consummation of the Merger is subject to certain customary conditions, including, but not limited to, the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s common stock and the receipt of regulatory approval.  The Merger is expected to close during the second half of 2022.

 

35


 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Amended 2021 Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q and our Amended 2021 Annual Report. See “Special Note Regarding Forward-Looking Statements” above.

Overview

We are a leading provider of tax compliance automation for businesses of all sizes. The Avalara Compliance Cloud includes calculation, returns, compliance document management, licensing and registration, fiscal representation, and tax content and insight solutions. We sell our solutions primarily on a subscription basis through our sales force, which focuses on selling to qualified leads provided by our marketing efforts and by partner referrals.

We focus on maintaining and expanding our partner network, which has been and will continue to be an essential part of our growth. We continue to increase the available number of partner integrations, which are designed to link the Avalara Compliance Cloud to a wide variety of business applications, including accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM systems. Through marketing activities, we generate awareness from many businesses, both large and small, and enhance communications with our existing customers.

We make substantial investments by increasing headcount, investing in better software tools and technologies, and making strategic acquisitions to continuously improve the Avalara Compliance Cloud. With these investments, we will continue scaling our platform for continued growth, adding new features and functionality, supporting new products and content types, and improving the user experience. We have made multiple acquisitions in the last few years to augment our tax content, serve the needs of customers in different geographies or industries, and improve additional aspects of tax compliance solutions. We expect to continue to make significant investments, both organically and through acquisitions, to gain new and relevant content, technology, and expertise that best serve the transaction tax needs of our customers.

During the second quarter of 2022, most of our office locations were open as many of the preventative measures to contain or mitigate the COVID-19 pandemic have been lifted. Some of our employees have begun to return to offices at least one day per week, but most have continued work-from-home arrangements. We expect more employees to return to our offices over the course of this year, but it is uncertain as to how many employees will ultimately do so and how often they will work in our offices. Our return-to-office approach may vary among locations depending on applicable health protocols and may change at any time in response to new developments in the COVID-19 pandemic. We continue to host many employee and customer activities and events virtually, and, where it is safe to do so, we have resumed some in-person activities and events. As health and safety conditions allow, we expect to continue to increase in-person activities and events in 2022, which will increase marketing and travel costs from prior year levels.

During the second quarter of 2022, we experienced some impacts from recent macroeconomic factors, including the tightening labor market, geopolitical developments in Europe, and increasing inflation rates. Specifically, we experienced lower productive sales capacity due to longer hiring times combined with higher attrition for our sales and marketing personnel. We also experienced softness in lead-generation and sales execution with new prospects, along with a lower percentage of existing customers that expanded their services during the quarter. In our European business, which benefited in previous periods from regulatory changes enacted over the last few years, we experienced only mild impacts from recent geopolitical developments in Europe.

The extent and timing of the broader impact of macroeconomic factors and the COVID-19 pandemic on our results of operations, overall financial performance and operating cash flows remains uncertain, including the impact on our future revenue growth and the timing of the resumption of normal operating expenses. Although we did not identify any factors that would indicate the fair values of our reporting units were below their respective carrying values, further macroeconomic impacts could result in an impairment of some or all of the goodwill associated with our European reporting unit in future periods. In addition, we continue to utilize our leased office space in our operations, albeit well below capacity levels, but as our utilization stabilizes and our intention for the use of those spaces becomes clear, this could result in long-lived asset impairments in future periods.

 

36


 

 

Recent Events (Proposed Merger Transaction)

On August 8, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lava Intermediate, Inc., a Delaware corporation (“Parent”), and Lava Merger Sub, Inc., a Washington corporation and a wholly owned subsidiary of Parent (“Merger Sub”).  Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”).  The Merger Agreement provides, among other things, that on the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), and as a result of the Merger, each share of common stock of the Company that is issued and outstanding immediately prior to the Effective Date (subject to certain exceptions) will be converted into the right to receive $93.50 in cash. 

The consummation of the Merger is subject to certain customary conditions, including, but not limited to, the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s common stock and the receipt of regulatory approval.  The Merger is expected to close during the second half of 2022. See Note 13 in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

 

 

Key Business Metrics

We regularly review several metrics to evaluate growth trends, measure our performance, formulate financial projections, and make strategic decisions. We discuss revenue and the components of operating results under the section of this report titled, “Key Components of Consolidated Statements of Operations,” and we discuss other key business metrics below.

 

 

Jun 30,

2022

 

 

Mar 31,

2022

 

 

Dec 31,

2021

 

 

Sep 30,

2021

 

 

Jun 30,

2021

 

 

Mar 31,

2021

 

 

Dec 31,

2020

 

 

Sep 30,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of core

   customers

   (as of end

   of period)

 

20,110

 

 

 

19,160

 

 

 

18,270

 

 

 

17,400

 

 

 

16,570

 

 

 

15,730

 

 

 

15,020

 

 

 

14,300

 

 

Net revenue

   retention rate

 

113

%

 

 

115

%

 

 

116

%

 

 

116

%

 

 

116

%

 

 

113

%

 

 

115

%

 

 

116

%

 

 

Number of Core Customers

We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The small and mid-market customer segments have been and remain our primary target market segments for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our primary target market segment. As of June 30, 2022 and December 31, 2021, we had approximately 20,110 and 18,270 core customers, respectively.

We define a core customer as:

 

a unique account identifier in our primary U.S. billing systems (multiple companies or divisions within a single consolidated enterprise that each have a separate unique account identifier are each treated as separate customers);

 

that is active as of the measurement date; and

 

for which we have recognized, as of the measurement date, greater than $3,000 in total revenue during the previous 12 months.

Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers that subscribe to our solutions through our international subsidiaries and certain legacy and acquired billing systems that have not yet been integrated into our primary U.S. billing systems (e.g., recent acquisitions and our lodging tax compliance solution). As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric.

We also have a substantial number of customers of various sizes that do not meet the revenue threshold to be considered a core customer. Many of these customers are in the emerging and small business segment of the marketplace, which represents strategic value and a growth opportunity for us. Customers who do not meet the revenue threshold to be considered a core customer provide us with market share and awareness, and we anticipate that some may grow into core customers. In addition, we have numerous enterprise-level

37


 

customers that only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers.

In addition to customers with whom we have a direct relationship, some of our customers are business application publishers (including ecommerce platforms) that include automated tax determination powered by Avalara. While those platform providers may be core customers to Avalara, their end-user customers generally are not.

Net Revenue Retention Rate

We believe that our net revenue retention rate 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 reflects the stability of our revenue base, which is one of our core competitive strengths. We calculate our net revenue retention rate by dividing (a) total subscription and returns revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total subscription and returns revenue in such corresponding quarter from those same billing accounts. This calculation includes changes during the period for such billing accounts, such as additional solutions purchased, changes in pricing and transaction volume, and terminations, but does not reflect revenue for new billing accounts added during the one-year period.

Currently, our net revenue retention rate includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems that have not been integrated into our primary U.S. billing systems. Our net revenue retention rate was 113% for the quarter ended June 30, 2022, and on average has been 115% over the last four quarters ended June 30, 2022.

 

Key Components of Consolidated Statements of Operations

Revenue

We generate revenue from two primary sources: (1) subscription and returns; and (2) professional services. Subscription and returns revenue is driven primarily by the acquisition of customers, customer renewals, and additional service offerings purchased by existing customers. Revenue from subscription and returns comprised approximately 91% of our revenue for the six months ended June 30, 2022 and 90% of our revenue for the six months ended June 30, 2021.

Subscription and Returns Revenue. Subscription and returns revenue primarily consists of fees paid by customers to use our solutions. Subscription plan customers select a price plan that includes an allotted maximum number of transactions over the subscription term. Unused transactions are not carried over to the customer’s next subscription term, and our customers are not entitled to any refund of fees paid or relief from fees due if they do not use the allotted number of transactions. If a subscription plan customer exceeds the selected maximum transaction level, we will generally upgrade the customer to a higher tier or, in some cases, charge overage fees on a per transaction or return basis. Customers purchase tax return preparation on a subscription basis for an allotted number of returns. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer.

Our standard subscription contracts are generally non-cancelable after the first 60 days of the contract term. Cancellations under our standard subscription contracts are not material, and do not have a significant impact on revenue recognized. We generally invoice our subscription customers for the initial term at contract signing and upon renewal. Our initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term.

Currently a small component of our total revenue, we offer SST services to businesses that are registered to participate in the program. We earn a fee (SST revenue) from participating state and local governments based on a percentage of the sales tax reported and paid, and as a result, we generally provide SST services at no cost to the seller.

Subscription and returns revenue also includes interest income generated on funds held from customers. In order to provide tax remittance services to customers, we hold funds from customers in advance of remittance to tax authorities. These funds are held in trust accounts at FDIC-insured institutions. Prior to remittance, we earn interest on these funds.

Professional Services. We generate professional services revenue from providing tax analysis and services, including business licenses and tax registrations, tax refund claims and recovery assistance, voluntary disclosure agreements, nexus studies, and back filing services. We also provide configurations, data migrations, integration, and training for our subscriptions and returns products.

38


 

We bill for service arrangements on a fixed fee, milestone, or time and materials basis, and we recognize the transaction price allocated to professional services performance obligations as revenue as services are performed and are collectable under the terms of the associated contracts.

Costs and Expenses

Cost of Revenue. Cost of revenue consists of costs related to providing the Avalara Compliance Cloud and supporting our customers and includes employee-related expenses, including salaries, benefits, bonuses, and stock-based compensation and the amortization of capitalized software development costs. In addition, cost of revenue includes direct costs associated with information technology, such as software hosting costs, tax content maintenance, and certain services provided by third parties. Cost of revenue also includes allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as acquired technology from acquisitions. We plan to continue to significantly expand our infrastructure and personnel to support our future growth, including through acquisitions, which we expect to result in higher cost of revenue in absolute dollars.

Research and Development. Research and development expenses consist primarily of employee-related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, software hosting costs for research and product development activities, and the cost of third-party developers. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Capitalized software development costs, which consist primarily of employee-related costs, are amortized as cost of subscription and returns revenue. Research and development expenses also include allocated costs for certain information technology and facility expenses, along with depreciation of equipment.

We devote substantial resources to enhancing and maintaining the Avalara Compliance Cloud, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology. We expect research and development expenses to increase in absolute dollars.

Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses for our sales and marketing staff, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, integration and referral partner commissions, costs of marketing and promotional events, corporate communications, online marketing, solution marketing, and other brand-building activities. As a result of the current COVID-19 pandemic, we suspended in-person promotional and customer events and converted many of these activities to virtual events, which temporarily reduced these types of marketing expenses. We began to gradually resume limited in-person marketing activities in the second half of 2021 where it was safe to do so. During 2022, we expect to continue to increase in-person marketing activities as conditions allow, although we do not expect these events to return to pre-pandemic levels in the near term. Sales and marketing expenses include allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as customer relationships, customer lists, and backlog from acquisitions.

We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the estimated period of benefit, generally six years. We expense the remaining sales commissions as incurred. Sales commissions are earned when a sales order is completed. For most sales orders, deferred revenue is recorded when a sales order is invoiced, and the related revenue is recognized ratably over the subscription term. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the sale (new, renewal, or add-on service offering), the type of service or solution sold, and the sales channel. At the beginning of each year, we set group and individual sales targets and update targets during the year as appropriate. Sales commissions are generally earned based on achievement against these targets.

We defer the portion of partner commissions that are considered a cost of obtaining a contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit. The period of benefit is separately determined for each partner and is either six years or corresponds with the contract term. We expense the remaining partner commissions costs as incurred. Our partner commission expense has historically been, and will continue to be, impacted by many factors, including the proportion of new and renewal sales, the nature of the partner relationship, and the sales mix among partners during the period. Integration partners may be paid a higher commission for the initial sale to a new customer and a lower commission for renewal sales. Additionally, we have several types of partners (e.g., integration and referral) that each earn different commission rates.

We intend to continue to invest in sales and marketing and expect spending in these areas to increase in absolute dollars as we continue to expand our business. We expect sales and marketing expenses to continue to be among the most significant components of our operating expenses.

39


 

General and Administrative. General and administrative expenses consist primarily of employee-related expenses for administrative, finance, information technology, legal, and human resources staff, including salaries, benefits, bonuses, and stock-based compensation, professional fees, insurance premiums, and other corporate expenses that are not allocated to the above expense categories. General and administrative expenses include amortization of intangibles such as tradenames and noncompetition agreements from acquisitions.

We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations (in the U.S. and internationally), hire and train additional personnel, evaluate and integrate acquisitions, and incur costs as a public company. Specifically, we expect to continue to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, acquisition evaluation and execution, SEC compliance, and internal control compliance.

Total Other Income (Expense), Net  

Total other income (expense), net consists of quarterly remeasurement of earnout liabilities for acquisitions accounted for as business combinations, interest income on cash and cash equivalents, interest expense related to our 2026 Notes, foreign currency gains and losses, and other non-operating gains and losses.

40


 

Results of Operations

The following sets forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

The comparability of periods covered by our financial statements is impacted by recent acquisitions. In the first half of 2022, we acquired substantially all the assets of Paper Crane and the outstanding equity of one additional acquisition. During the second quarter of 2021, we acquired substantially all the assets of Davo and the outstanding equity of Inposia. During the third quarter of 2021, we acquired substantially all the assets of 3CE Technologies. During the fourth quarter of 2021, we acquired substantially all the assets of Track1099 LLC and of CrowdReason Limited Liability Company and CorrelationAdvisors LLC (see Note 4 in the Notes to Consolidated Financial Statements).

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

189,764

 

 

$

152,442

 

Professional services

 

 

18,829

 

 

 

16,625

 

Total revenue

 

 

208,593

 

 

 

169,067

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

51,036

 

 

 

41,477

 

Professional services

 

 

11,036

 

 

 

7,836

 

Total cost of revenue(1)

 

 

62,072

 

 

 

49,313

 

Gross profit

 

 

146,521

 

 

 

119,754

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development(1)

 

 

56,647

 

 

 

41,234

 

Sales and marketing(1)

 

 

101,242

 

 

 

72,651

 

General and administrative(1)

 

 

44,592

 

 

 

36,113

 

Total operating expenses

 

 

202,481

 

 

 

149,998

 

Operating loss

 

 

(55,960

)

 

 

(30,244

)

Other income (expense), net

 

 

1,007

 

 

 

(938

)

Loss before income taxes

 

 

(54,953

)

 

 

(31,182

)

(Provision for) benefit from income taxes

 

 

(895

)

 

 

148

 

Net loss

 

$

(55,848

)

 

$

(31,034

)

 

 

 

 

 

 

 

 

 

(1) The stock-based compensation expense included above was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Cost of revenue

 

$

6,200

 

 

$

3,082

 

Research and development

 

 

14,641

 

 

 

7,192

 

Sales and marketing

 

 

11,905

 

 

 

5,955

 

General and administrative

 

 

13,954

 

 

 

10,390

 

Total stock-based compensation

 

$

46,700

 

 

$

26,619

 

 

 

 

 

 

 

 

 

 

The amortization of acquired intangibles included above was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Cost of revenue

 

$

2,851

 

 

$

2,394

 

Research and development

 

 

 

 

 

 

Sales and marketing

 

 

3,603

 

 

 

2,905

 

General and administrative

 

 

839

 

 

 

894

 

Total amortization of acquired intangibles

 

$

7,293

 

 

$

6,193

 

 

41


 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

376,630

 

 

$

291,760

 

Professional services

 

 

36,493

 

 

 

30,908

 

Total revenue

 

 

413,123

 

 

 

322,668

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

101,113

 

 

 

79,510

 

Professional services

 

 

21,085

 

 

 

14,299

 

Total cost of revenue(1)

 

 

122,198

 

 

 

93,809

 

Gross profit

 

 

290,925

 

 

 

228,859

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development(1)

 

 

107,499

 

 

 

80,508

 

Sales and marketing(1)

 

 

187,689

 

 

 

136,744

 

General and administrative(1)

 

 

86,786

 

 

 

67,312

 

Total operating expenses

 

 

381,974

 

 

 

284,564

 

Operating loss

 

 

(91,049

)

 

 

(55,705

)

Other income (expense), net

 

 

3,824

 

 

 

(3,188

)

Loss before income taxes

 

 

(87,225

)

 

 

(58,893

)

Provision for income taxes

 

 

(1,180

)

 

 

(2,209

)

Net loss

 

$

(88,405

)

 

$

(61,102

)

 

 

 

 

 

 

 

 

 

(1) The stock-based compensation expense included above was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Cost of revenue

 

$

9,959

 

 

$

5,114

 

Research and development

 

 

24,104

 

 

 

12,596

 

Sales and marketing

 

 

18,616

 

 

 

10,010

 

General and administrative

 

 

26,671

 

 

 

17,756

 

Total stock-based compensation

 

$

79,350

 

 

$

45,476

 

 

 

 

 

 

 

 

 

 

The amortization of acquired intangibles included above was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Cost of revenue

 

$

5,496

 

 

$

4,414

 

Research and development

 

 

 

 

 

 

Sales and marketing

 

 

7,209

 

 

 

4,445

 

General and administrative

 

 

1,693

 

 

 

1,755

 

Total amortization of acquired intangibles

 

$

14,398

 

 

$

10,614

 

 

42


 

 

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

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

91

%

 

 

90

%

Professional services

 

 

9

%

 

 

10

%

Total revenue

 

 

100

%

 

 

100

%

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

24

%

 

 

25

%

Professional services

 

 

5

%

 

 

5

%

Total cost of revenue

 

 

30

%

 

 

29

%

Gross profit

 

 

70

%

 

 

71

%

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

27

%

 

 

24

%

Sales and marketing

 

 

49

%

 

 

43

%

General and administrative

 

 

21

%

 

 

21

%

Total operating expenses

 

 

97

%

 

 

89

%

Operating loss

 

 

(27

)%

 

 

(18

)%

Other income (expense), net

 

 

0

%

 

 

(1

)%

Loss before income taxes

 

 

(26

)%

 

 

(18

)%

(Provision for) benefit from income taxes

 

 

0

%

 

 

0

%

Net loss

 

 

(27

)%

 

 

(18

)%

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

91

%

 

 

90

%

Professional services

 

 

9

%

 

 

10

%

Total revenue

 

 

100

%

 

 

100

%

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

24

%

 

 

25

%

Professional services

 

 

5

%

 

 

4

%

Total cost of revenue

 

 

30

%

 

 

29

%

Gross profit

 

 

70

%

 

 

71

%

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

26

%

 

 

25

%

Sales and marketing

 

 

45

%

 

 

42

%

General and administrative

 

 

21

%

 

 

21

%

Total operating expenses

 

 

92

%

 

 

88

%

Operating loss

 

 

(22

)%

 

 

(17

)%

Other income (expense), net

 

 

1

%

 

 

(1

)%

Loss before income taxes

 

 

(21

)%

 

 

(18

)%

Provision for income taxes

 

 

0

%

 

 

(1

)%

Net loss

 

 

(21

)%

 

 

(19

)%

 

 

43


 

 

Three Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021

Revenue

 

 

 

For the Three Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

189,764

 

 

$

152,442

 

 

$

37,322

 

 

 

24

%

Professional services

 

 

18,829

 

 

 

16,625

 

 

 

2,204

 

 

 

13

%

Total revenue

 

$

208,593

 

 

$

169,067

 

 

$

39,526

 

 

 

23

%

 

Total revenue for the three months ended June 30, 2022, increased by $39.5 million, or 23%, compared to the three months ended June 30, 2021. Subscription and returns revenue for the three months ended June 30, 2022, increased by $37.3 million, or 24%, compared to the three months ended June 30, 2021. Professional services revenue for the three months ended June 30, 2022, increased by $2.2 million, or 13%, compared to the three months ended June 30, 2021.

 

Growth in total revenue was due primarily to increased demand for our services from new and existing customers. The increase in total revenue for the three months ended June 30, 2022, compared to the same period in 2021, was due primarily to $22.1 million from new U.S. customers, $13.0 million from existing U.S. customers, $3.6 million from SST revenue growth, and $1.5 million from recent acquisitions, partially offset by $0.8 million from a decline in revenue in our international operations. Excluding recent acquisitions, total revenue for the three months ended June 30, 2022, increased by $38.0 million, or 23%, compared to the three months ended June 30, 2021. Of the growth from recent acquisitions, $1.0 million was generated from subscriptions and returns and $0.5 million from professional services.

 

Cost of Revenue

 

 

 

For the Three Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

51,036

 

 

$

41,477

 

 

$

9,559

 

 

 

23

%

Professional services

 

 

11,036

 

 

 

7,836

 

 

 

3,200

 

 

 

41

%

Total cost of revenue

 

$

62,072

 

 

$

49,313

 

 

$

12,759

 

 

 

26

%

 

Cost of revenue for the three months ended June 30, 2022, increased by $12.8 million, or 26%, compared to the three months ended June 30, 2021. The increase in cost of revenue was due primarily to an increase of $9.0 million in employee-related costs from higher headcount, an increase of $1.5 million in allocated overhead cost, an increase of $1.4 million in depreciation expense, and an increase of $0.5 million in amortization expense.

 

Cost of revenue headcount increased approximately 14% from the second quarter of 2021 to the second quarter of 2022. Employee-related costs increased due primarily to a $6.4 million increase in salaries and benefits, and a $3.1 million increase in stock-based compensation expense, partially offset by a $0.5 million decrease in contract and temporary employee costs and a $0.2 million decrease in compensation expense related to our bonus plans.

 

Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2021 and 2022. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions.

 

44


 

 

Gross Profit

 

 

 

For the Three Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

138,728

 

 

$

110,965

 

 

$

27,763

 

 

 

25

%

Professional services

 

 

7,793

 

 

 

8,789

 

 

 

(996

)

 

 

-11

%

Total gross profit

 

$

146,521

 

 

$

119,754

 

 

$

26,767

 

 

 

22

%

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

73

%

 

 

73

%

 

 

 

 

 

 

 

 

Professional services

 

 

41

%

 

 

53

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

70

%

 

 

71

%

 

 

 

 

 

 

 

 

 

Total gross profit for the three months ended June 30, 2022, increased by $26.8 million, or 22% compared to the three months ended June 30, 2021. Total gross margin was 70% for the three months ended June 30, 2022, compared to 71% for the same period of 2021.

 

Research and Development

 

 

 

For the Three Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Research and development

 

$

56,647

 

 

$

41,234

 

 

$

15,413

 

 

 

37

%

 

Research and development expenses for the three months ended June 30, 2022, increased by $15.4 million, or 37%, compared to the three months ended June 30, 2021. The increase was due primarily to an increase of $14.6 million in employee-related costs from higher headcount, and an increase of $0.7 million in allocated overhead cost.

 

Research and development headcount increased approximately 27% from the second quarter of 2021 to the second quarter of 2022. Employee-related costs increased due primarily to a $7.7 million increase in salaries and benefits and a $7.4 million increase in stock-based compensation expense, partially offset by a $0.9 million decrease in compensation expense related to our bonus plans.

 

Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations.

 

Sales and Marketing

 

 

 

For the Three Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Sales and marketing

 

$

101,242

 

 

$

72,651

 

 

$

28,591

 

 

 

39

%

 

Sales and marketing expenses for the three months ended June 30, 2022, increased by $28.6 million, or 39%, compared to the three months ended June 30, 2021. The increase was due primarily to an increase of $19.6 million in employee-related costs, an increase of $3.2 million in marketing campaign expenses, an increase of $2.2 million for partner commission expense, an increase of $1.3 million in allocated overhead cost, an increase of $0.8 million in third-party purchased software costs, an increase of $0.7 million in amortization expense, and an increase of $0.5 million in outside professional services expense.

 

Sales and marketing headcount increased approximately 19% from the second quarter of 2021 to the second quarter of 2022. Employee-related costs increased due primarily to a $8.3 million increase in salaries and benefits, a $5.9 million increase in stock-based compensation expense, a $3.6 million increase in travel and event costs due to more in-person meetings and events, including $2.3 million related to a resumption of the in-person annual sales incentive meeting, a $0.8 million increase in sales commission expense, and a $0.7 million increase in contract and temporary employee costs. During 2022, we expect to continue to increase in-person marketing activities as conditions allow, which will increase travel costs.

45


 

 

Marketing campaign expenses increased due primarily to increased spending on media strategy and brand campaigns as well as online advertising (including pay-per-click advertising) on existing campaigns and new online advertising for recent acquisitions. Partner commission expense increased due primarily to higher revenues. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Third-party purchased software costs increased due primarily to additional investment in lead generation technology that improves information we use to target potential customers and increased spending for new marketing analytics tools. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions. Outside professional services expenses increased due primarily to increased investment in consulting services for campaign performance analytics and modeling.

 

General and Administrative

 

 

 

For the Three Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

General and administrative

 

$

44,592

 

 

$

36,113

 

 

$

8,479

 

 

 

23

%

 

General and administrative expenses for the three months ended June 30, 2022, increased by $8.5 million, or 23%, compared to the three months ended June 30, 2021. The increase was due primarily to an increase of $5.8 million in employee-related costs, an increase of $1.1 million in software hosting and third-party purchased software costs, an increase of $0.8 million in non-income tax expenses, an increase of $0.5 million in merchant fees, an increase of $0.5 million in bad debt expense, and an increase of $0.2 million in outside professional services expense.

 

General and administrative headcount increased approximately 24% from the second quarter of 2021 to the second quarter of 2022. Employee-related costs increased due primarily to a $3.6 million increase in stock-based compensation expense, a $2.9 million increase in salaries and benefits, a $0.3 million increase in contract and temporary employee costs, and a $0.2 million increase in travel costs, partially offset by a $1.1 million decrease in compensation expense related to our bonus plans.

 

Software hosting and third-party purchased software costs increased due primarily to an increase in the number of licenses purchased due to increased headcount, higher subscription fees, and increased investment in security systems. Non-income tax expenses increased due primarily to higher state indirect taxes. Merchant fees, which are credit card processing fees, increased due primarily to an increase in volume of credit card transactions. Bad debt expense increased due primarily to increases in write offs and aging customer receivables. Outside professional services expenses increased due primarily to increased investment in financial system enhancements and acquisition-related costs.

 

Total Other Income (Expense), Net

 

 

 

For the Three Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

 

(dollars in thousands)

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

Fair value changes in earnout liabilities

 

$

117

 

 

$

(1,181

)

 

$

1,298

 

Interest income

 

 

1,859

 

 

 

23

 

 

 

1,836

 

Interest expense

 

 

(1,497

)

 

 

 

 

 

(1,497

)

Other income (expense), net

 

 

528

 

 

 

220

 

 

 

308

 

Total other income (expense), net

 

$

1,007

 

 

$

(938

)

 

$

1,945

 

 

46


 

 

Total other income (expense), net for the three months ended June 30, 2022, was $1.0 million of income compared to $0.9 million of expense for the three months ended June 30, 2021. Fair value changes in earnout liabilities were $0.1 million of income for the three months ended June 30, 2022, compared to $1.2 million of expense for the same period in 2021. During the three months ended June 30, 2022, post-acquisition fair value adjustments to earnout liabilities related to our acquisitions of TTR, Business Licenses, Davo, CrowdReason, and Track1099 resulted in other income of $0.1 million. During the three months ended June 30, 2021, post-acquisition fair value adjustments to earnout liabilities related to our acquisitions of TTR and Business Licenses resulted in other expense of $1.2 million. Interest income was $1.9 million for the three months ended June 30, 2022, compared to less than $0.1 million for the three months ended June 30, 2021. Interest income increased due primarily to an increase in the interest rate earned on our cash and cash equivalents enhanced by higher average cash balances in the second quarter of 2022. Interest expense was $1.5 million for the three months ended June 30, 2022, compared to zero for the three months ended June 30, 2021. Interest expense increased due to accrual of contractual interest and amortization of the issuance costs on our 2026 Notes issued in the third quarter of 2021, for which there is no comparable expense for the three months ended June 30, 2021. Other income (expense), net was $0.5 million of income for the three months ended June 30, 2022, compared to $0.2 million of income for the three months ended June 30, 2021, due primarily to higher gains on foreign exchange rates in the current period compared to the prior period.

 

(Provision for) Benefit from Income Taxes

 

 

 

For the Three Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

 

(dollars in thousands)

 

(Provision for) benefit from income taxes

 

$

(895

)

 

$

148

 

 

$

(1,043

)

 

The provision for income taxes for the three months ended June 30, 2022, was $0.9 million compared to a benefit from income taxes of $0.1 million for the three months ended June 30, 2021. The effective income tax rate was an expense of 1.6% for the three months ended June 30, 2022, compared to a benefit of 0.5% for the three months ended June 30, 2021. The effective tax rate in both quarters differs from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets. The increase in expense and decrease in effective rate is due primarily to higher US state income tax expense and higher US tax expense related to indefinite-lived deferred tax liabilities for goodwill which cannot be used as a source of income when determining the deferred tax asset valuation allowance.

 

We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating tax losses in the U.S., U.K., and Brazil, including in the first quarter of 2022. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards, and research and development tax credits. We expect to maintain a full valuation allowance for the foreseeable future.

 

Six Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021

 

Revenue

 

 

 

For the Six Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

376,630

 

 

$

291,760

 

 

$

84,870

 

 

 

29

%

Professional services

 

 

36,493

 

 

 

30,908

 

 

 

5,585

 

 

 

18

%

Total revenue

 

$

413,123

 

 

$

322,668

 

 

$

90,455

 

 

 

28

%

 

Total revenue for the six months ended June 30, 2022, increased by $90.5 million, or 28%, compared to the six months ended June 30, 2021. Subscription and returns revenue for the six months ended June 30, 2022, increased by $84.9 million, or 29%, compared to the six months ended June 30, 2021. Professional services revenue for the six months ended June 30, 2022, increased by $5.6 million, or 18%, compared to the six months ended June 30, 2021.

 

Growth in total revenue was due primarily to increased demand for our services from new and existing customers. The increase in total revenue for the six months ended June 30, 2022, compared to the same period in 2021, was due primarily to $38.1 million from new U.S. customers, $35.3 million from existing U.S. customers, $9.7 million from recent acquisitions, $6.9 million from SST

47


 

revenue growth, and $0.3 million from revenue growth in our international operations. Excluding recent acquisitions, total revenue for the six months ended June 30, 2022, increased by $80.7 million, or 25%, compared to the six months ended June 30, 2021. Of the growth from recent acquisitions, $8.6 million was generated from subscriptions and returns and $1.2 million from professional services.

Cost of Revenue

 

 

 

For the Six Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

101,113

 

 

$

79,510

 

 

$

21,603

 

 

 

27

%

Professional services

 

 

21,085

 

 

 

14,299

 

 

 

6,786

 

 

 

47

%

Total cost of revenue

 

$

122,198

 

 

$

93,809

 

 

$

28,389

 

 

 

30

%

 

Cost of revenue for the six months ended June 30, 2022, increased by $28.4 million, or 30%, compared to the six months ended June 30, 2021. The increase in cost of revenue was due primarily to an increase of $17.3 million in employee-related costs from higher headcount, an increase of $3.3 million in allocated overhead cost, an increase of $2.7 million in depreciation expense, an increase of $2.6 million in software hosting and third-party purchased software costs, and an increase of $1.1 million in amortization expense.

 

Cost of revenue headcount increased approximately 14% from the second quarter of 2021 to the second quarter of 2022. Employee-related costs increased due primarily to a $12.7 million increase in salaries and benefits, a $4.8 million increase in stock-based compensation expense, and a $0.2 million increase in travel costs, partially offset by a $0.6 million decrease in contract and temporary employee costs.

 

Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2021 and 2022. Software hosting and third-party purchased software costs increased due primarily to higher transaction volumes, new contract rates and incremental investment in new data analytics and security software licenses. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions.

Gross Profit

 

 

 

For the Six Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

275,517

 

 

$

212,250

 

 

$

63,267

 

 

 

30

%

Professional services

 

 

15,408

 

 

 

16,609

 

 

 

(1,201

)

 

 

-7

%

Total gross profit

 

$

290,925

 

 

$

228,859

 

 

$

62,066

 

 

 

27

%

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

73

%

 

 

73

%

 

 

 

 

 

 

 

 

Professional services

 

 

42

%

 

 

54

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

70

%

 

 

71

%

 

 

 

 

 

 

 

 

Total gross profit for the six months ended June 30, 2022, increased by $62.1 million, or 27% compared to the six months ended June 30, 2021. Total gross margin was 70% for the six months ended June 30, 2022, compared to 71% for the same period of 2021.

Research and Development

 

 

 

For the Six Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Research and development

 

$

107,499

 

 

$

80,508

 

 

$

26,991

 

 

 

34

%

48


 

 

 

Research and development expenses for the six months ended June 30, 2022, increased by $27.0 million, or 34%, compared to the six months ended June 30, 2021. The increase was due primarily to an increase of $26.0 million in employee-related costs from higher headcount and an increase of $1.4 million in allocated overhead cost.

 

Research and development headcount increased approximately 27% from the second quarter of 2021 to the second quarter of 2022. Employee-related costs increased due primarily to a $14.1 million increase in salaries and benefits, and an $11.5 million increase in stock-based compensation expense.

Sales and Marketing

 

 

 

For the Six Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Sales and marketing

 

$

187,689

 

 

$

136,744

 

 

$

50,945

 

 

 

37

%

 

Sales and marketing expenses for the six months ended June 30, 2022, increased by $50.9 million, or 37%, compared to the six months ended June 30, 2021. The increase was due primarily to an increase of $31.5 million in employee-related costs, an increase of $6.1 million in marketing campaign expenses, an increase of $5.3 million for partner commission expense, an increase of $3.2 million in allocated overhead cost, an increase of $2.8 million in amortization expense, an increase of $1.4 million in hosting and third-party purchased software costs, and an increase of $0.5 million in outside professional services expenses.

 

Sales and marketing headcount increased approximately 19% from the second quarter of 2021 to the second quarter of 2022. Employee-related costs increased due primarily to a $14.9 million increase in salaries and benefits, a $8.6 million increase in stock-based compensation expense, a $4.2 million increase in travel and event costs due to more in-person meetings and events, including $2.3 million related to a resumption of the in-person annual sales incentive meeting, a $2.1 million increase in sales commission expense, a $1.2 million increase in contract and temporary employee costs, and a $0.5 million increase in compensation expense related to our bonus plans. During 2022, we expect to continue to increase in-person marketing activities as conditions allow, which will increase travel costs.

 

Marketing campaign expenses increased due primarily to increased spending on media strategy and brand campaigns as well as online advertising (including pay-per-click advertising) on existing campaigns and new online advertising for recent acquisitions. Partner commission expense increased due primarily to higher revenues. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions and fair value adjustments to acquired intangibles. Third-party purchased software costs increased due primarily to additional investment in lead generation technology that improves information we use to target potential customers and increased spending for new marketing analytics tools. Outside professional services expenses increased due primarily to increased investment in consulting services for campaign performance analytics and modeling.

General and Administrative

 

 

 

For the Six Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

General and administrative

 

$

86,786

 

 

$

67,312

 

 

$

19,474

 

 

 

29

%

 

General and administrative expenses for the six months ended June 30, 2022, increased by $19.5 million, or 29%, compared to the six months ended June 30, 2021. The increase was due primarily to an increase of $14.1 million in employee-related costs, an increase of $2.5 million in software hosting and third-party purchased software costs, an increase of $1.4 million in outside professional services expense, an increase of $1.0 million in merchant fees, an increase of $0.6 million in non-income tax expenses, and an increase of $0.5 million in bad debt expense.

 

General and administrative headcount increased approximately 24% from the second quarter of 2021 to the second quarter of 2022. Employee-related costs increased due primarily to a $8.9 million increase in stock-based compensation expense, a $5.6 million increase in salaries and benefits, a $0.7 million increase in contract and temporary employee costs, and a $0.4 million increase in travel costs, partially offset by a decrease of $1.5 million in compensation expense related to our bonus plans.

49


 

Software hosting and third-party purchased software costs increased due primarily to an increase in the number of licenses purchased due to increased headcount, higher subscription fees, and increased investment in security systems. Outside professional services expenses increased due primarily to increased investment in financial system enhancements and acquisition-related costs. Merchant fees, which are credit card processing fees, increased due primarily to an increase in volume of credit card transactions. Non-income tax expenses increased due primarily to higher state indirect taxes. Bad debt expense increased due to increases in write offs and aging customer receivables.

Total Other Income (Expense), Net

 

 

 

For the Six Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

 

(dollars in thousands)

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

Fair value changes in earnout liabilities

 

$

4,118

 

 

$

(2,531

)

 

$

6,649

 

Interest income

 

 

2,045

 

 

 

47

 

 

 

1,998

 

Interest expense

 

 

(2,993

)

 

 

 

 

 

(2,993

)

Other income (expense), net

 

 

654

 

 

 

(704

)

 

 

1,358

 

Total other income (expense), net

 

$

3,824

 

 

$

(3,188

)

 

$

7,012

 

Total other income (expense), net for the six months ended June 30, 2022, was $3.8 million of income compared to $3.2 million of expense for the six months ended June 30, 2021. Fair value changes in earnout liabilities were $4.1 million of income for the six months ended June 30, 2022, compared to $2.5 million of expense for the same period in 2021. During the six months ended June 30, 2022, post-acquisition fair value adjustments to earnout liabilities related to our acquisitions of TTR, Business Licenses, Davo, CrowdReason, and Track1099 resulted in other income of $4.1 million. During the six months ended June 30, 2021, post-acquisition fair value adjustments to earnout liabilities related to our acquisitions of TTR and Business Licenses resulted in other expense of $2.5 million. Interest income was $2.0 million for the six months ended June 30, 2022, compared to $0.1 million for the six months ended June 30, 2021. Interest income increased due primarily to an increase in the interest rate earned on our cash and cash equivalents enhanced by higher average cash balances in the first half of 2022. Interest expense was $3.0 million for the six months ended June 30, 2022, compared to zero for the six months ended June 30, 2021. Interest expense increased due to accrual of contractual interest and amortization of the issuance costs on our 2026 Notes issued in the third quarter of 2021, for which there is no comparable expense for the six months ended June 30, 2021. Other income (expense), net was $0.7 million income for the six months ended June 30, 2022, compared to $0.7 million expense for the six months ended June 30, 2021, due primarily to gains on foreign exchange rates in the current period compared to losses on foreign exchange rates in the prior period.

Provision for Income Taxes

 

 

 

For the Six Months Ended June 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Amount

 

 

 

(dollars in thousands)

 

Provision for income taxes

 

$

(1,180

)

 

$

(2,209

)

 

$

1,029

 

 

The provision for income taxes for the six months ended June 30, 2022, was $1.2 million compared to a provision for income taxes of $2.2 million for the six months ended June 30, 2021. The effective income tax rate was an expense of 1.4% for the six months ended June 30, 2022, compared to an expense of 3.8% for the six months ended June 30, 2021. The effective tax rate in both quarters differs from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets. The decrease in expense and increase in effective rate is due primarily to income tax expense recorded in the first quarter of 2021 related to TTR purchase accounting adjustments that was not repeated in the first quarter of 2022.

 

We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating tax losses in the U.S., U.K., and Brazil, including in the first quarter of 2022. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards, and research and development tax credits. We expect to maintain a full valuation allowance for the foreseeable future.

 

 

50


 

 

Liquidity and Capital Resources

 

We require cash to fund our operations, including outlays for infrastructure growth, acquisitions, geographic expansion, expanding our sales and marketing activities, research and development efforts, and working capital for our growth. We have financed our operations primarily through cash received from customers for our solutions, public offerings of our common stock, and a private offering of convertible senior notes. As of June 30, 2022, we had $1.5 billion of cash and cash equivalents, most of which was held in money market accounts.

Borrowings

In August 2021, we completed a private offering of the 2026 Notes. The 2026 Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on February 1, 2022. The initial conversion price of the 2026 Notes represented a premium of 47.5% over the closing price of our common stock on August 10, 2021, the date the 2026 Notes offering was priced. The net proceeds from the sale of the 2026 Notes were $959.9 million after deducting the issuance costs. The 2026 Notes will mature on August 1, 2026, unless earlier converted, redeemed, or repurchased.

We used $75.3 million of the net proceeds from the 2026 Notes offering to pay for the cost of the capped call transactions entered into with certain financial institutions. The capped call instruments are intended to offset potential dilution to our common stock or offset any cash payments we are required to make in excess of the principal amount, as the case may be, with such reduction or offset subject to a cap. The capped call instruments are subject to adjustments for certain corporate events and standard anti-dilution provisions.

Future Cash Requirements

As of June 30, 2022, our cash and cash equivalents included proceeds from our previous public offerings of common stock and our private offering of the 2026 Notes. We intend to continue to increase our operating expenses and capital expenditures to support the growth in our business and operations. We expect to also use our cash and cash equivalents to continue to acquire complementary businesses, products, services, technologies, or other assets. We believe that our existing cash and cash equivalents of $1.5 billion as of June 30, 2022, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our financial position and liquidity are, and will be, influenced by a variety of factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing spending, the introduction of new and enhanced solutions, the cash paid for any acquisitions, and the continued market acceptance of our solutions.

The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Cash used in:

 

 

 

 

 

 

 

 

Operating Activities

 

$

(16,862

)

 

$

(2,697

)

Investing Activities

 

 

(25,929

)

 

 

(34,532

)

Financing Activities

 

 

(37,067

)

 

 

(1,331

)

 

Operating Activities

 

Our largest source of operating cash is cash collections from our customers for subscriptions and returns services. Our primary uses of cash from operating activities are for employee-related expenditures, commissions paid to our partners, marketing expenses, technology costs such as software hosting costs and subscriptions to a wide variety of software-as-a-service platforms, and facilities expenses. Cash used in operating activities is comprised of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, other non-cash income and expense items, and net changes in operating assets and liabilities.

For the six months ended June 30, 2022, net cash used in operating activities was $16.9 million compared to net cash used of $2.7 million for the six months ended June 30, 2021. The increase in cash used in operations of $14.2 million was due primarily to a slowdown in cash collections from customers beginning in the second quarter of 2022 combined with higher spending on sales and marketing activities, such as customer events and our annual sales incentive meeting, compared to the prior year. In addition, the annual incentive bonus payments were higher compared to the prior year due primarily to higher headcount. We pay bonuses under our annual incentive plan each March for the previous year’s performance.

51


 

Investing Activities

Our investing activities primarily include cash outflows related to purchases of property and equipment, additions of capitalized software assets, and business acquisitions.

For the six months ended June 30, 2022, cash used in investing activities was $25.9 million compared to cash used of $34.5 million for the six months ended June 30, 2021. The decrease in cash used in investing activities of $8.6 million was due primarily to a decrease in cash paid for acquisitions of businesses of $12.3 million and a decrease in cash paid for acquired intangibles of $1.5 million, partially offset by an increase in cash paid for capitalized software development costs of $5.3 million. In the first half of 2022, we made two small acquisitions for total cash consideration, net of cash acquired of $11.7 million. In the first half of 2021, we acquired Inposia and Davo for total cash consideration, net of cash acquired of $22.1 million and paid $1.9 million of additional purchase price to finalize net working capital related to our 2020 acquisitions. In the first half of 2022, cash paid for additions of capitalized software increased $5.3 million.

Financing Activities

Our financing activities primarily include cash inflows and outflows from issuance of common stock, our private offering of convertible senior notes, our employee stock purchase plan, deferred cash payments made in connections with acquisitions of businesses, and changes in customer fund obligations.

For the six months ended June 30, 2022, cash used in financing activities was $37.1 million compared to cash used of $1.3 million for the six months ended June 30, 2021. This increase in cash used in financing activities of $35.7 million was due primarily to a $27.9 million increase in cash paid for purchase price holdbacks related to recent acquisitions, a $10.8 million increase in deferred cash payments related to business combination earnouts, and a $6.1 million decrease in cash proceeds from exercise of stock options, partially offset by a $8.2 million increase from the net change in customer fund obligations, and a $0.9 million increase in cash proceeds from common stock purchased under our employee stock purchase plan.

Funds Held from Customers and Customer Fund Obligations

 

We maintain trust accounts with FDIC-insured financial institutions, which allow our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held from customers are not commingled with our operating funds but are typically deposited with funds also held on behalf of our other customers. Funds held from customers primarily represent restricted cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Additionally, a portion of funds held from customers is invested in available-for-sale securities. The cash flows related to the purchases of available-for-sale securities with customer funds are presented on a gross basis in investing activities. Payments for the trust operations, such as banking fees, are included as cash flows from operating activities.

 

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 the consolidated balance sheets, as the obligations are expected to be settled within one year. Changes in customer funds obligations liability are presented as cash flows from financing activities.

Contractual Obligations and Commitments

 

During the first half of 2022, our purchase commitments increased approximately $108.7 million compared to December 31, 2021, primarily related to software hosting and software license subscriptions that extend up to four years beyond June 30, 2022. There were no other material changes to our contractual obligations as of June 30, 2022, compared to December 31, 2021.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements in the six months ended June 30, 2022 or 2021.

 

52


 

 

Use and Reconciliation of Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we have disclosed non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP sales and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income (loss), non-GAAP net income (loss), free cash flow, and calculated billings, which are all non-GAAP financial measures. We have provided tabular reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure.

 

We calculate non-GAAP cost of revenue, non-GAAP research and development expense, non-GAAP sales and marketing expense, and non-GAAP general and administrative expense as GAAP cost of revenue, GAAP research and development expense, GAAP sales and marketing expense, and GAAP general and administrative expense, respectively, before stock-based compensation expense and the amortization of acquired intangible assets included in each of the expense categories.

 

We calculate non-GAAP gross profit as GAAP gross profit before stock-based compensation expense and the amortization of acquired intangibles included in cost of revenue. We calculate non-GAAP gross margin as GAAP gross margin before the impact of stock-based compensation expense and the amortization of acquired intangibles included in cost of revenue as a percentage of revenue.

 

We calculate non-GAAP operating income (loss) as GAAP operating loss before stock-based compensation expense, amortization of acquired intangibles, and goodwill impairments. We calculate non-GAAP net income (loss) as GAAP net loss before stock-based compensation expense, amortization of acquired intangibles, and goodwill impairments.

 

We define free cash flow as net cash provided by (used in) operating activities less cash used for the purchases of property and equipment and capitalized software development costs.

 

We define calculated billings as total revenue plus the changes in deferred revenue and contract liabilities in the period, excluding the acquisition date impact of deferred revenue and contract liabilities assumed in a business combination. Because we generally recognize subscription revenue ratably over the subscription term, calculated billings can be used to measure our subscription sales activity for a particular period, to compare subscription sales activity across particular periods, and as a potential indicator of future subscription revenue, the actual timing of which will be affected by several factors, including subscription start date and duration.

Management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance and liquidity. We believe that non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results, prospects, and liquidity period-over-period without the impact of certain items that do not directly correlate to our performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as when comparing our financial results to those of other companies.

Our definitions of these non-GAAP financial measures may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non-GAAP financial measures in conjunction with the related GAAP financial measure.

 

53


 

 

The following schedule reflects our non-GAAP financial measures and reconciles our non-GAAP financial measures to the related GAAP financial measures:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

62,072

 

 

$

49,313

 

 

$

122,198

 

 

$

93,809

 

Stock-based compensation expense

 

 

(6,200

)

 

 

(3,082

)

 

 

(9,959

)

 

 

(5,114

)

Amortization of acquired intangibles

 

 

(2,851

)

 

 

(2,394

)

 

 

(5,496

)

 

 

(4,414

)

Non-GAAP Cost of Revenue

 

$

53,021

 

 

$

43,837

 

 

$

106,743

 

 

$

84,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

146,521

 

 

$

119,754

 

 

$

290,925

 

 

$

228,859

 

Stock-based compensation expense

 

 

6,200

 

 

 

3,082

 

 

 

9,959

 

 

 

5,114

 

Amortization of acquired intangibles

 

 

2,851

 

 

 

2,394

 

 

 

5,496

 

 

 

4,414

 

Non-GAAP Gross Profit

 

$

155,572

 

 

$

125,230

 

 

$

306,380

 

 

$

238,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Gross Margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

70

%

 

 

71

%

 

 

70

%

 

 

71

%

Stock-based compensation expense as a percentage of revenue

 

 

3

%

 

 

2

%

 

 

2

%

 

 

2

%

Amortization of acquired intangibles as a percentage of revenue

 

 

1

%

 

 

1

%

 

 

1

%

 

 

1

%

Non-GAAP Gross Margin

 

 

75

%

 

 

74

%

 

 

74

%

 

 

74

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Research and Development Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

56,647

 

 

$

41,234

 

 

$

107,499

 

 

$

80,508

 

Stock-based compensation expense

 

 

(14,641

)

 

 

(7,192

)

 

 

(24,104

)

 

 

(12,596

)

Amortization of acquired intangibles

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Research and Development Expense

 

$

42,006

 

 

$

34,042

 

 

$

83,395

 

 

$

67,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Sales and Marketing Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

101,242

 

 

$

72,651

 

 

$

187,689

 

 

$

136,744

 

Stock-based compensation expense

 

 

(11,905

)

 

 

(5,955

)

 

 

(18,616

)

 

 

(10,010

)

Amortization of acquired intangibles

 

 

(3,603

)

 

 

(2,905

)

 

 

(7,209

)

 

 

(4,445

)

Non-GAAP Sales and Marketing Expense

 

$

85,734

 

 

$

63,791

 

 

$

161,864

 

 

$

122,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP General and Administrative Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

44,592

 

 

$

36,113

 

 

$

86,786

 

 

$

67,312

 

Stock-based compensation expense

 

 

(13,954

)

 

 

(10,390

)

 

 

(26,671

)

 

 

(17,756

)

Amortization of acquired intangibles

 

 

(839

)

 

 

(894

)

 

 

(1,693

)

 

 

(1,755

)

Non-GAAP General and Administrative Expense

 

$

29,799

 

 

$

24,829

 

 

$

58,422

 

 

$

47,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Operating Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

$

(55,960

)

 

$

(30,244

)

 

$

(91,049

)

 

$

(55,705

)

Stock-based compensation expense

 

 

46,700

 

 

 

26,619

 

 

 

79,350

 

 

 

45,476

 

Amortization of acquired intangibles

 

 

7,293

 

 

 

6,193

 

 

 

14,398

 

 

 

10,614

 

Non-GAAP Operating Income (Loss)

 

$

(1,967

)

 

$

2,568

 

 

$

2,699

 

 

$

385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Net Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(55,848

)

 

$

(31,034

)

 

$

(88,405

)

 

$

(61,102

)

Stock-based compensation expense

 

 

46,700

 

 

 

26,619

 

 

 

79,350

 

 

 

45,476

 

Amortization of acquired intangibles

 

 

7,293

 

 

 

6,193

 

 

 

14,398

 

 

 

10,614

 

Non-GAAP Net Income (Loss)

 

$

(1,855

)

 

$

1,778

 

 

$

5,343

 

 

$

(5,012

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Free cash flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

6,204

 

 

$

25,550

 

 

$

(16,862

)

 

$

(2,697

)

Less: Purchases of property and equipment

 

 

(962

)

 

 

(1,704

)

 

 

(3,110

)

 

 

(3,070

)

Less: Capitalized software development costs

 

 

(5,274

)

 

 

(3,642

)

 

 

(11,179

)

 

 

(5,953

)

Free cash flow

 

$

(32

)

 

$

20,204

 

 

$

(31,151

)

 

$

(11,720

)

54


 

 

 

 

The following table reflects calculated billings and reconciles to GAAP revenues (in thousands):

 

 

 

 

 

 

Three Months Ended

 

 

Jun 30,

2022

 

 

Mar 31,

2022

 

 

Dec 31,

2021 (1)

 

 

Sep 30,

2021 (1)

 

 

Jun 30,

2021 (1)

 

 

Mar 31,

2021

 

 

Dec 31,

2020 (1)

 

 

Sep 30,

2020

 

Total revenue

$

208,593

 

 

$

204,530

 

 

$

195,142

 

 

$

181,167

 

 

$

169,067

 

 

$

153,601

 

 

$

144,760

 

 

$

127,879

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

   (end of period)

 

307,693

 

 

 

303,610

 

 

 

282,955

 

 

 

257,883

 

 

 

239,395

 

 

 

225,531

 

 

 

209,690

 

 

 

180,640

 

Contract liabilities

   (end of period)

 

643

 

 

 

897

 

 

 

6,918

 

 

 

8,597

 

 

 

11,406

 

 

 

12,466

 

 

 

10,134

 

 

 

7,673

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

   (beginning of

   period)

 

(303,610

)

 

 

(282,955

)

 

 

(257,883

)

 

 

(239,395

)

 

 

(225,531

)

 

 

(209,690

)

 

 

(180,640

)

 

 

(167,719

)

Contract liabilities

   (beginning of

   period)

 

(897

)

 

 

(6,918

)

 

 

(8,597

)

 

 

(11,406

)

 

 

(12,466

)

 

 

(10,134

)

 

 

(7,673

)

 

 

(6,195

)

Deferred revenue

   and contract

   liabilities assumed in

   business combinations

 

 

 

 

 

 

 

(747

)

 

 

(430

)

 

 

(886

)

 

 

 

 

 

(9,194

)

 

 

 

Calculated billings

$

212,422

 

 

$

219,164

 

 

$

217,788

 

 

$

196,416

 

 

$

180,985

 

 

$

171,774

 

 

$

167,077

 

 

$

142,278

 

(1) These quarters include reconciling adjustments to exclude the acquisition-date fair value of deferred revenue and contract liabilities assumed in business combinations.

 

 

Critical Accounting Policies and Estimates

There have been no material updates or changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in our Amended 2021 Annual Report other than as discussed below.

Business Combinations, including Intangible Assets, Earnout Liabilities, and Goodwill

Goodwill. During the second quarter of 2022, we observed a decline in the market valuation of our common shares along with a decline in the macroeconomic environment. As a result, we evaluated whether such events would indicate the fair values of our reporting units were below their respective carrying values. We did not identify any factors that would indicate the fair values of our reporting units were below their respective carrying values. However, we continue to monitor the key inputs to the fair value of our European reporting unit, which includes significant revenue growth from a single marketplace partner. A further decline in our market capitalization, macroeconomic conditions, or internal cashflow forecasts could result in an impairment of some or all of the goodwill associated with the European reporting unit in future periods. The carrying value of goodwill for the European reporting unit as of June 30, 2022 is approximately $44.3 million.

Recent Accounting Pronouncements

For further information on recent accounting pronouncements, refer to Note 1 in the Notes to Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

 

We had cash and cash equivalents of $1.5 billion as of both June 30, 2022, and December 31, 2021. 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 would reduce future interest income earned on cash and cash equivalents. 

 

55


 

 

We hold funds on behalf of our customers for remittance to regulatory authorities primarily in restricted cash equivalents. We held $73.0 million and $62.5 million of our customers funds as of June 30, 2022, and December 31, 2021, respectively. Declines in interest rates could reduce future interest income earned on both cash and cash equivalents. We also invest a portion of our funds held from customers in marketable securities consisting primarily of treasury securities, which are classified as available-for-sale securities as of June 30, 2022, and December 31, 2021. Declines in interest rates would reduce future interest income earned on marketable securities. If we are forced to sell some or all of these securities at lower market values, we may incur investment losses. However, because we classify all marketable securities as available-for-sale, no gains or losses are recognized due to changes in interest rates or other factors until such securities are sold or when decreases in fair value are deemed due to expected credit losses. We have not recorded credit impairment losses on our portfolio to date.

 

In August 2021, we completed a private offering of convertible senior notes. As of June 30, 2022, we had an outstanding principal balance on the 2026 Notes of $977.5 million. As the interest rate on the 2026 Notes is fixed, we do not have exposure to interest rate risk.

 

Foreign Currency Exchange Risk

 

Our revenue and expenses are primarily denominated in U.S. dollars. For our foreign operations, most of our revenues and expenses are denominated in other currencies, such as the Brazilian Real, British Pound, Euro, and Indian Rupee. Changes in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenue and other operating results as expressed in U.S. dollars. For the six months ended June 30, 2022 and 2021, approximately 7% and 8% of our revenues, respectively, were generated in currencies other than U.S. dollars. We have experienced and will continue to experience fluctuations in our net 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 recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We have not engaged in the hedging of our foreign currency transactions to date. 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.

 

Inflation Risk

Inflationary factors, such as increases in our operating expenses, may adversely affect our results of operations, as our customers typically purchase services from us on a subscription basis over a period of time. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a continuing period of current rates of inflation or a further increase in the rate of inflation in the future may have an adverse effect on our levels of operating expenses as a percentage of revenue if we are unable to increase the prices for our subscription-based solutions to keep pace with these increased expenses.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act as of June 30, 2022.

Disclosure controls and procedures are controls and other procedures that 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 controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective at the reasonable assurance level as of June 30, 2022, due to the material weakness related to a lack of adequate controls to correctly recognize stock-based compensation cost for RSUs identified as of March 31, 2022, and described in our Amended 2021 Annual Report. Management, under the direction and supervision of our Chief Executive Officer and Chief Financial Officer, has performed additional review and analyses and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the consolidated

56


 

financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Changes in Internal Control over Financial Reporting

Other than the material weakness described in our Amended 2021 Annual Report, there were no changes in our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Remediation Activities

The Company has taken steps to remediate the material weakness by providing additional training on use of the system-generated reports and has reviewed the parameters that are selected when generating such reports. Additionally, the Company has enhanced its review control to ensure verification of report parameters and has added a control to review report parameters for all new stock awards. The material weakness cannot be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively. Management intends to begin testing the design and operating effectiveness of the enhanced review control during the third quarter of 2022. Management will continue to monitor and evaluate the effectiveness of our internal control over financial reporting in the activities affected by the material weakness described above.

57


 

PART II—OTHER INFORMATION

From time to time, we may become involved in other legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of the outcome of any existing or future litigation, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 1A. Risk Factors.

Other than the item discussed below, there have been no material changes to the Company’s Risk Factors as disclosed in our Amended 2021 Annual Report.

There are various risks and uncertainties associated with the proposed transaction with affiliates of Vista Equity Partners.

On August 8, 2022, the Company entered into the Merger Agreement providing for the acquisition of the Company by Parent through a merger of Merger Sub with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Vista. The proposed Merger is subject to various risks and uncertainties, including the following:

 

the risk that the proposed transaction with Vista will not be consummated or will not be consummated in a timely manner;

 

the effect of the announcement of the proposed transaction on our ability to retain and hire key personnel and maintain relationships with our key business partners and customers, and others with whom we do business, or on our operating results and businesses generally;

 

risks associated with the disruption of management’s attention from ongoing business operations due to the proposed transaction;

 

significant costs associated with the proposed transaction;

 

potential litigation relating to the proposed transaction; and

 

restrictions during the pendency of the proposed transaction that may impact our ability to pursue certain business opportunities.

If the Merger is not consummated for any reason, our shareholders will not receive the consideration that Parent has agreed to pay upon the consummation of the Merger, and the price of our common stock may decline to the extent that its current market price reflects an assumption that the Merger will be consummated. Such decline could be significant.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There have been no recent sales of unregistered securities not previously disclosed in a Current Report on Form 8-K.

 

58


 

 

Item 6. Exhibits.

 

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreement. The agreements may contain representations and warranties that the parties made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the applicable agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of such agreement. In addition, such representations and warranties: (i) may not be accurate or complete as of any specified date; (ii) are modified and qualified in important part by the underlying disclosure schedules; (iii) may be subject to a contractual standard of materiality different from those generally applicable to investors; or (iv) may have been used for the purpose of allocating risk among the parties to the applicable agreement, rather than establishing matters as facts. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the applicable agreement, which subsequent information may or may not be fully reflected in Company’s public disclosures. For the foregoing reasons, the representations and warranties should not be relied upon as statements of factual information.

 

Exhibit

Number

 

Description

 

 

 

    2.1

 

Agreement and Plan of Merger, dated October 5, 2020, by and among Avalara, Inc., Tannin Merger Sub, Inc., Transaction Tax Resources, Inc., and Northwest Cloud Co. LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K, filed October 6, 2020 (File No. 001-38525)).

 

 

 

    2.2

 

Asset Purchase Agreement, dated November 5, 2020, by and among Avalara, Inc. and Business Licenses, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K, filed November 5, 2020 (File No. 001-38525)).

 

 

 

    3.1

 

Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q, filed August 10, 2018 (File No. 001-38525)).

 

 

 

    3.2

 

Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-Q, filed August 10, 2018 (File No. 001-38525)).

 

 

 

  31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1*

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2*

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

Inline XBRL Instance Document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*

Filed herewith.

59


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

AVALARA, INC.

 

 

 

 

Date:  August 8, 2022

 

By:

/s/ Ross Tennenbaum

 

 

 

Ross Tennenbaum

 

 

 

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

60