10-Q 1 avlr-10q_20190630.htm 10-Q avlr-10q_20190630.htm

 

 

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, 2019

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 July 30, 2019, the registrant had 75,493,231 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

1

 

Consolidated Balance Sheets (unaudited)

 

1

 

Consolidated Statements of Operations (unaudited)

 

2

 

Consolidated Statements of Comprehensive Loss (unaudited)

 

4

 

Consolidated Statements of Cash Flows (unaudited)

 

5

 

Notes to Consolidated Financial Statements (unaudited)

 

7

Item 2.

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

 

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

53

Item 4.

Controls and Procedures

 

54

PART II

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

55

Item 1A.

Risk Factors

 

55

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

Item 6.

Exhibits

 

56

Signatures

 

57

 

 

 

 

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 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; 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 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,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

441,584

 

 

$

142,322

 

Trade accounts receivable—net of allowance for doubtful accounts of $565 and

   $521, respectively

 

 

43,409

 

 

 

40,287

 

Deferred commissions

 

 

7,365

 

 

 

 

Prepaid expenses and other current assets

 

 

11,179

 

 

 

11,307

 

Total current assets before customer fund assets

 

 

503,537

 

 

 

193,916

 

Funds held from customers

 

 

24,278

 

 

 

13,113

 

Receivable from customers—net of allowance of $347 and $198, respectively

 

 

915

 

 

 

270

 

Total current assets

 

 

528,730

 

 

 

207,299

 

Noncurrent assets:

 

 

 

 

 

 

 

 

Property and equipment—net

 

 

34,148

 

 

 

33,373

 

Goodwill

 

 

78,981

 

 

 

61,300

 

Intangible assets—net

 

 

24,765

 

 

 

19,371

 

Deferred commissions

 

 

23,454

 

 

 

 

Other noncurrent assets

 

 

2,370

 

 

 

1,589

 

Total assets

 

$

692,448

 

 

$

322,932

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade payables

 

$

8,197

 

 

$

4,847

 

Accrued expenses

 

 

49,114

 

 

 

42,217

 

Deferred revenue

 

 

137,997

 

 

 

125,260

 

Total current liabilities before customer fund obligations

 

 

195,308

 

 

 

172,324

 

Customer fund obligations

 

 

25,245

 

 

 

13,349

 

Total current liabilities

 

 

220,553

 

 

 

185,673

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Deferred revenue

 

 

814

 

 

 

9,393

 

Deferred tax liability

 

 

638

 

 

 

560

 

Deferred rent

 

 

16,480

 

 

 

17,317

 

Other noncurrent liabilities

 

 

1,835

 

 

 

436

 

Total liabilities

 

 

240,320

 

 

 

213,379

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

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

   June 30, 2019 and December 31, 2018, and 20,000 shares authorized as of

   June 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.0001 par value– 75,445 and 66,769 shares issued and

   outstanding at June 30, 2019 and December 31, 2018, respectively, and

   600,000 shares authorized as of June 30, 2019 and December 31, 2018

 

 

8

 

 

 

7

 

Additional paid-in capital

 

 

937,047

 

 

 

599,493

 

Accumulated other comprehensive loss

 

 

(2,531

)

 

 

(2,345

)

Accumulated deficit

 

 

(482,396

)

 

 

(487,602

)

Total shareholders’ equity

 

 

452,128

 

 

 

109,553

 

Total liabilities and shareholders' equity

 

$

692,448

 

 

$

322,932

 

 

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

1


 

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

For the Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

85,008

 

 

$

59,845

 

Professional services

 

 

6,291

 

 

 

4,034

 

Total revenue

 

 

91,299

 

 

 

63,879

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

22,938

 

 

 

15,837

 

Professional services

 

 

4,397

 

 

 

2,795

 

Total cost of revenue

 

 

27,335

 

 

 

18,632

 

Gross profit

 

 

63,964

 

 

 

45,247

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

18,996

 

 

 

12,428

 

Sales and marketing

 

 

40,678

 

 

 

40,604

 

General and administrative

 

 

18,019

 

 

 

9,341

 

Total operating expenses

 

 

77,693

 

 

 

62,373

 

Operating loss

 

 

(13,729

)

 

 

(17,126

)

Other (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(1,282

)

 

 

(99

)

Interest expense

 

 

173

 

 

 

1,067

 

Other (income) expense, net

 

 

381

 

 

 

(442

)

Total other (income) expense, net

 

 

(728

)

 

 

526

 

Loss before income taxes

 

 

(13,001

)

 

 

(17,652

)

Provision for (benefit from) income taxes

 

 

172

 

 

 

114

 

Net loss

 

$

(13,173

)

 

$

(17,766

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(0.18

)

 

$

(1.24

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

71,568

 

 

 

14,383

 

 

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


2


 

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

163,239

 

 

$

117,715

 

Professional services

 

 

13,030

 

 

 

7,541

 

Total revenue

 

 

176,269

 

 

 

125,256

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

43,916

 

 

 

30,654

 

Professional services

 

 

8,726

 

 

 

5,487

 

Total cost of revenue

 

 

52,642

 

 

 

36,141

 

Gross profit

 

 

123,627

 

 

 

89,115

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

34,952

 

 

 

25,047

 

Sales and marketing

 

 

78,886

 

 

 

77,911

 

General and administrative

 

 

33,253

 

 

 

18,552

 

Total operating expenses

 

 

147,091

 

 

 

121,510

 

Operating loss

 

 

(23,464

)

 

 

(32,395

)

Other (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(2,049

)

 

 

(135

)

Interest expense

 

 

284

 

 

 

1,961

 

Other (income) expense, net

 

 

429

 

 

 

(472

)

Total other (income) expense, net

 

 

(1,336

)

 

 

1,354

 

Loss before income taxes

 

 

(22,128

)

 

 

(33,749

)

Provision for (benefit from) income taxes

 

 

288

 

 

 

(734

)

Net loss

 

$

(22,416

)

 

$

(33,015

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(0.32

)

 

$

(3.21

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

69,983

 

 

 

10,299

 

 

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

3


 

AVALARA, INC.

Consolidated Statements of Comprehensive Loss (unaudited)

(In thousands)

 

 

 

For the Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(13,173

)

 

$

(17,766

)

Other comprehensive income (loss)—Foreign currency translation

 

 

276

 

 

 

(3,048

)

Total comprehensive loss

 

$

(12,897

)

 

$

(20,814

)

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(22,416

)

 

$

(33,015

)

Other comprehensive income (loss)—Foreign currency translation

 

 

(186

)

 

 

(2,445

)

Total comprehensive loss

 

$

(22,602

)

 

$

(35,460

)

 

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

 

4


 

AVALARA, INC.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(22,416

)

 

$

(33,015

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,668

 

 

 

5,992

 

Stock-based compensation

 

 

15,984

 

 

 

7,074

 

Deferred tax expense (benefit)

 

 

78

 

 

 

(967

)

Amortization of deferred rent

 

 

(392

)

 

 

263

 

Non-cash change in earnout liability

 

 

476

 

 

 

(462

)

Non-cash bad debt (recovery) expense

 

 

450

 

 

 

(85

)

Other

 

 

195

 

 

 

241

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(3,728

)

 

 

(2,022

)

Prepaid expenses and other current assets

 

 

(596

)

 

 

(144

)

Deferred commissions

 

 

(11,552

)

 

 

 

Other noncurrent assets

 

 

(782

)

 

 

(16

)

Trade payables

 

 

2,468

 

 

 

(2,248

)

Accrued expenses

 

 

(3,401

)

 

 

(3,000

)

Deferred revenue

 

 

15,127

 

 

 

17,113

 

Net cash used in operating activities

 

 

(421

)

 

 

(11,276

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net increase in customer fund assets

 

 

(11,878

)

 

 

(4,585

)

Cash paid for acquired intangible assets

 

 

(131

)

 

 

(4,881

)

Cash paid for acquisitions of businesses

 

 

(17,310

)

 

 

 

Purchase of property and equipment

 

 

(4,950

)

 

 

(8,169

)

Net cash used in investing activities

 

 

(34,269

)

 

 

(17,635

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from common stock offering, net of underwriting discounts

 

 

274,705

 

 

 

192,510

 

Payments of deferred financing costs

 

 

(398

)

 

 

(622

)

Payments on credit facility

 

 

 

 

 

(33,000

)

Proceeds from credit facility

 

 

 

 

 

23,000

 

Repayment of note payable

 

 

 

 

 

(234

)

Net increase in customer fund obligations

 

 

11,797

 

 

 

4,585

 

Proceeds from exercise of stock options and common stock warrants

 

 

40,417

 

 

 

5,580

 

Proceeds from purchases of stock under employee stock purchase plan

 

 

7,664

 

 

 

 

Taxes paid related to net share settlement of stock-based awards

 

 

(93

)

 

 

(2,217

)

Repurchase of shares

 

 

 

 

 

(1,806

)

Net cash provided by financing activities

 

 

334,092

 

 

 

187,796

 

Foreign currency effect on cash and cash equivalents

 

 

(140

)

 

 

148

 

Net change in cash and cash equivalents

 

 

299,262

 

 

 

159,033

 

Cash and cash equivalents—Beginning of period

 

 

142,322

 

 

 

14,075

 

Cash and cash equivalents—End of period

 

$

441,584

 

 

$

173,108

 

 

(continued)

5


 

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest expense

 

$

122

 

 

$

1,787

 

Cash paid for income taxes

 

 

134

 

 

 

143

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued purchase price related to acquisitions

 

$

2,984

 

 

$

 

Accrued value of earnout related to acquisitions of businesses

 

 

5,952

 

 

 

 

Property and equipment purchased under tenant improvement allowance

 

 

 

 

 

976

 

Property and equipment additions in accounts payable and accrued expenses

 

 

652

 

 

 

3,376

 

Deferred financing costs in accounts payable and accrued expenses

 

 

156

 

 

 

1,527

 

Cashless exercises of options and warrants

 

 

5

 

 

 

8,985

 

Cashless redemptions of options and warrants

 

 

98

 

 

 

11,202

 

 

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

 

(Concluded)

 

 

 

6


 

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

1.

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, such as sales and use tax, value-added tax (VAT), excise tax, lodging tax, and communications 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 in the United Kingdom, Canada, Belgium, India, and Brazil that provide business development, software development, and support services.

2.

Significant Accounting Policies        

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, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019. The accompanying interim consolidated balance sheet as of June 30, 2019, the consolidated interim statements of operations for the three and six months ended June 30, 2019 and 2018, the consolidated statements of comprehensive loss for the three and six months ended June 30, 2019 and 2018, and the consolidated statements of cash flows for the six months ended June 30, 2019 and 2018, 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 six months ended June 30, 2019 are not necessarily indicative of the results expected for the full year ending December 31, 2019.

The Company adopted the new revenue recognition accounting standard, Accounting Standards Codification (“ASC”) 606, effective January 1, 2019 on a modified retrospective basis (see Recently Adopted Accounting Standards). Financial results for reporting periods during 2019 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to 2019 are presented in conformity with amounts previously disclosed under the prior revenue recognition standard ASC 605. These financial statements include additional information regarding the impacts from the adoption of the new revenue recognition standard on the financial results for the three and six months ended June 30, 2019. This includes the presentation of financial results during 2019 under ASC 605 for comparison to the prior year.

 

Principles of Consolidation

The accompanying consolidated financial statements include those of the Company and its subsidiaries 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.

7


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

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. Actual results could materially differ from those estimates.

Fair Value Measurements

The Company applies the fair value measurement and disclosure provisions of the Accounting Standards Codification. 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, trade accounts receivable, trade payables, and accrued expenses due to their short-term nature.

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 first half of 2019.

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 enacted tax rates expected to apply in the years 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 income taxes based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

The Company determines whether its uncertain tax positions are more likely than not to be sustained upon examination based on the technical merits of the position. For tax positions not meeting the more likely than not threshold, the tax amount recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority.

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option, common stock warrant, restricted stock unit (“RSU”), or purchase right issued under the employee stock purchase plan at the date of grant. The fair value of stock options, common stock warrants, and purchase rights issued under the employee stock purchase plan 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, warrant 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 is determined using the fair value of the Company’s underlying common stock on the date of grant.

8


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to current period presentation. Interest income on funds held from customers of $0.2 million in the second quarter of 2018 was reclassified from interest income within total other (income) expense, net to subscription and returns revenue in the accompanying consolidated statements of operations for the three and six months ended June 30, 2018.  

 

Revenue Recognition – ASC 606

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 services are provided in an amount that reflects the consideration expected to be entitled to in exchange for those services. The Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers.

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 to 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 exposures 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.

Revenue is recorded based on the transaction price excluding amounts collected on behalf of third parties, such as sales taxes, which are collected on behalf of, 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 determination and compliance management services, and fees paid for preparing and filing transaction tax returns on behalf of customers. Under the Company’s subscription agreements, 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 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.

9


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

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.

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 most of the Company’s customers are invoiced once at the beginning of the term, a 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 for 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 bills for professional service arrangements on a fixed fee, milestone, or time and materials basis. Professional services revenue includes fees from providing tax analysis, configurations, data migrations, integration, training, and other support services. 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 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.

The revenue recognition accounting policy for ASC 605 is included in the Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 28, 2019. The revenue recognition accounting policy for ASC 605 is applied to the disclosures in Note 6, which include amounts presented for 2019. There were no changes to the ASC 605 policy during the first half of 2019.

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.

10


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

Recently Adopted Accounting Standards

 

As an emerging growth company, or “EGC”, the Jumpstart Our Business Startups Act, or the JOBS Act, allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates applicable to private companies. As a result, the Company’s consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. The Company will no longer qualify as an EGC on December 31, 2019, and at that time will begin to adopt accounting pronouncements at dates applicable to public companies.

 

ASU No. 2014-09

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09 which, along with subsequent ASUs, amends the existing accounting standards for revenue recognition, and is codified as ASC 606. This guidance is based on principles that govern the recognition of revenue at the amount an entity expects to be entitled to receive as services are provided to customers. The Company adopted the new revenue recognition standard as of January 1, 2019 on a modified retrospective basis and applied the new revenue recognition standard only to contracts that were not completed contracts prior to January 1, 2019.

 

The cumulative effect of the changes made to the consolidated January 1, 2019 balance sheet resulting from the adoption of ASC 606 was as follows (in thousands):

 

 

 

Balance at

December 31,

2018

 

 

Adjustments

due to

ASC 606

 

 

Balance at

January 1,

2019

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

$

40,287

 

 

$

(805

)

 

$

39,482

 

Deferred commissions, current

 

 

 

 

 

4,464

 

 

 

4,464

 

Deferred commissions, noncurrent

 

 

 

 

 

14,803

 

 

 

14,803

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

42,217

 

 

 

2,090

 

 

 

44,307

 

Deferred revenue, current

 

 

125,260

 

 

 

(3,157

)

 

 

122,103

 

Deferred revenue, noncurrent

 

 

9,393

 

 

 

(8,093

)

 

 

1,300

 

Accumulated deficit

 

 

(487,602

)

 

 

27,622

 

 

 

(459,980

)

 

The adoption changed the revenue recognition for non-refundable upfront fees included with new or upgraded subscriptions. Prior to the adoption of the new revenue recognition standard, the Company recognized revenue for these fees over the expected term of the customer relationship. Under the new guidance, the transaction price is allocated to distinct performance obligations. Because upfront fees do not represent a distinct performance obligation, any such fees will be recognized over the period in which distinct performance obligations in the contract are satisfied, which is typically the subscription term. The new revenue recognition standard also changed the determination of the contract term associated with subscriptions that were upgraded during the subscription term. Prior to the adoption of the new revenue recognition standard, additional fees associated with an upgraded subscription for services already delivered were recognized upon upgrade. Under the new guidance, the fees related to the upgraded subscriptions are recognized prospectively over the contract term.

 

The adoption also changed the revenue recognition for contracts that include non-standard, extended customer cancellation provisions. Under the new guidance, a contract only exists for the period of time in which a contract cannot be cancelled, which generally corresponds to the termination notice period. Prior to the adoption of the new revenue recognition standard, non-standard, extended cancellation provisions were not a factor in determining the term of a contract. To the extent cash is received for a contract that includes a non-standard, extended cancellation provision, deferred revenue is recognized only for the amount for which the Company has an enforceable right. A separate contract liability is established for the remaining amount.

 

The new revenue recognition standard requires the Company to estimate variable consideration at contract inception as an increase or decrease to the transaction price. The total transaction price, inclusive of variable consideration, is allocated to performance obligations, or distinct service periods within a performance obligation, on a relative SSP basis and recognized as performance obligations are satisfied. Prior to the adoption of the new revenue recognition standard, overage fees, concessions, and cancellations allowed in the first 60 days of a standard subscription contract were recognized as they occurred.  

 

11


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The new revenue recognition standard requires capitalization of certain incremental costs of obtaining a contract, such as certain employee sales commissions and partner commissions, which impacts the period in which the expense is recorded. Prior to the adoption of the new revenue recognition standard, those commission costs were expensed as incurred. Under the new revenue recognition standard, the Company is required to capitalize incremental costs of obtaining a contract and amortize them over the expected period of benefit, which is generally six years.  This results in a deferral of sales commission and partner commission expense each period.

 

For further discussion regarding the impacts of adopting the new revenue recognition standard, see Note 6.

 

ASU No. 2016-15

 

In August 2016, the FASB issued ASU No. 2016-15, related to classification of certain cash receipts and payments. ASU No. 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU No. 2016-15 is required for annual reporting periods beginning after December 15, 2018 for business entities that are not public, with early adoption permitted. The Company adopted the guidance on January 1, 2019. The adoption had no impact on the consolidated financial statements.

 

ASU No. 2018-07

 

In June 2018, the FASB issued ASU No. 2018-07, related to stock compensation for nonemployee share-based awards. ASU No. 2018-07 expands the scope of Topic 718 – Compensation – Stock Compensation to include share-based payments issued to nonemployees, with certain exceptions, in order to align the accounting for employees and nonemployees. The guidance in ASU No. 2018-07 is required for annual reporting periods beginning after December 15, 2019 for business entities that are not public, with early adoption permitted. The Company early adopted the guidance on January 1, 2019. The adoption had an immaterial impact on the consolidated financial statements.

 

New Accounting Standards Not Yet Adopted

 

ASU No. 2016-02

 

In February 2016, the FASB issued ASU No. 2016-02, which is codified as ASC 842 (“ASC 842”) and requires lessees to generally recognize most operating leases on the balance sheets but record expenses on the income statements in a manner similar to current accounting standards. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements. The Company currently expects that most operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use assets upon adoption. While the Company has not yet quantified the impact, these adjustments will increase total assets and total liabilities relative to such amounts reported prior to adoption, and the Company expects these adjustments will be material. The Company is continuing to assess the impact of adoption, which may identify other impacts on the Company’s financial statements.

 

In July 2018, the FASB issued ASU 2018-11, “Targeted Improvements - Leases (Topic 842)”, which amended ASC 842 to provide companies an alternative transition method, which would not require adjusting comparative period financial information. The Company plans to utilize this alternative transition method. As an EGC, the Company has elected to use adoption dates applicable to private companies. The new standard is effective for private companies in 2020. However, the Company expects to lose its EGC status on December 31, 2019. Accordingly, the Company will adopt the guidance in ASC 842 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

ASU No. 2016-13

 

In June 2016, the FASB issued ASU No. 2016-13, related to credit losses, which amends the current accounting guidance and requires the measurements of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance in ASU No. 2016-13 is required for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public business entities. The Company will adopt this guidance on January 1, 2020. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

12


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

ASU No. 2018-15

 

In August 2018, the FASB issued ASU No. 2018-15, related to implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance in ASU No. 2018-15 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2019, for public business entities, with early adoption permitted. The Company will adopt this guidance on January 1, 2020. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

3.

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, 2019

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Money market funds

 

$

433,884

 

 

$

433,884

 

 

$

 

 

$

 

Earnout related to acquisitions

 

 

6,428

 

 

 

 

 

 

 

 

 

6,428

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

Fair

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

December 31, 2018

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Money market funds

 

$

138,483

 

 

$

138,483

 

 

$

 

 

$

 

Earnout related to acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnout Liability

 

In connection with an acquisition accounted for as a business combination under ASC 805, earnout liabilities are recorded at estimated fair value on a recurring basis. Acquisitions accounted for as business combinations that occurred during the first half of 2019 are discussed in Note 5.

 

The Company estimates the fair value of earnout liabilities for business combinations using the probability-weighted discounted cash flow and Monte Carlo simulations. As of June 30, 2019, the earnout liability associated with the 2019 acquisition of substantially all of the assets of Compli, Inc. (“Compli”) was valued utilizing a discount rate of 3.4%, and the earnout liability associated with the 2019 acquisition of substantially all of the assets of Indix Corporation (“Indix”) was valued utilizing discount rates ranging from 3.2% to 3.3%. Each 2019 acquisition was valued using a risk-free rate based on linear interpolated U.S. Treasury rates commensurate with the term of the earnout. In 2016, the Company acquired Gyori Eto Empreendimentos e Particpacoes (“Gyori”), a business that provides certain tax-related compliance solutions and content for the Brazilian market. As of June 30, 2019 and December 31, 2018, the earnout liability associated with the 2016 acquisition of Gyori was determined to be zero. The final earnout performance period for the Gyori acquisition ended on June 30, 2019.

 

Earnout liabilities 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 associated with business combinations are recorded as other (income) expense, net in the consolidated statements of operations.

13


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

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,

 

 

 

2019

 

 

2018

 

Earnout liability:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

5,952

 

 

$

230

 

Total unrealized (gains) losses included in other (income) expense, net

 

 

476

 

 

 

(230

)

Balance end of period

 

$

6,428

 

 

$

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Earnout liability:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

 

 

$

380

 

Fair value recorded at acquisition

 

 

5,952

 

 

 

 

Total unrealized (gains) losses included in other (income) expense, net

 

 

476

 

 

 

(380

)

Balance end of period

 

$

6,428

 

 

$

 

 

 

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, and long-lived assets, are not required to be measured at fair value on a recurring basis. There were no fair value measurements of these assets during the first half of 2019, except as discussed in Note 5.

 

 

4.

Balance Sheet Detail

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

 

 

 

Useful

 

June 30,

 

 

December 31,

 

 

 

Life (Years)

 

2019

 

 

2018

 

Computer equipment and software

 

3 to 5

 

$

14,547

 

 

$

12,904

 

Internally developed software

 

6

 

 

4,559

 

 

 

3,620

 

Furniture and fixtures

 

5

 

 

6,507

 

 

 

5,850

 

Office equipment

 

3 to 5

 

 

719

 

 

 

586

 

Leasehold improvements

 

1 to 10

 

 

27,719

 

 

 

26,788

 

 

 

 

 

 

54,051

 

 

 

49,748

 

Accumulated depreciation

 

 

 

 

(19,903

)

 

 

(16,375

)

Property and equipment—net

 

 

 

$

34,148

 

 

$

33,373

 

 

Depreciation expense was $2.2 million and $4.2 million for the three and six months ended June 30, 2019, respectively, and $1.6 million and $3.2 million for the three and six months ended June 30, 2018, respectively.

 

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Prepaid expenses

 

$

9,732

 

 

$

9,578

 

Accrued investment income

 

 

689

 

 

 

260

 

Deferred financing costs

 

 

 

 

 

643

 

Deposits

 

 

154

 

 

 

325

 

Other

 

 

604

 

 

 

501

 

Total

 

$

11,179

 

 

$

11,307

 

 

 

14


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Accrued expenses consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Accrued payroll and related taxes

 

$

3,610

 

 

$

3,800

 

Accrued federal, state, and local taxes

 

 

1,889

 

 

 

1,827

 

Accrued bonus

 

 

9,212

 

 

 

10,766

 

Employee stock purchase plan contributions

 

 

3,991

 

 

 

6,473

 

Accrued sales commissions

 

 

3,441

 

 

 

6,889

 

Accrued partner commissions

 

 

6,438

 

 

 

5,535

 

Accrued earnout liabilities

 

 

6,485

 

 

 

116

 

Contract liabilities

 

 

4,508

 

 

 

 

Accrued purchase price related to acquisitions

 

 

1,584

 

 

 

 

Other

 

 

7,956

 

 

 

6,811

 

Total

 

$

49,114

 

 

$

42,217

 

 

Contract liabilities represent amounts that are collected in advance of the satisfaction of performance obligations under the new revenue recognition standard. See Recently Adopted Accounting Standards in Note 2 and Contract Liabilities in Note 6.

 

 

5.

Acquisitions of Businesses

January 2019 Acquisition of Compli

On January 22, 2019, the Company completed the acquisition of substantially all the assets of Compli under an Asset Purchase Agreement (the “Compli Purchase”). Compli is a provider of compliance services, technology, and software to producers, distributors, and importers of alcoholic beverages in the United States. The Company accounted for the Compli Purchase as a business combination. As a result of the acquisition, the Company expanded its ability to provide transaction tax solutions and content for the alcoholic beverage industry. The transaction costs associated with the acquisition were not material.

The total consideration transferred related to this transaction was $17.1 million, consisting of $11.8 million paid in cash at closing, an additional $1.6 million of cash to be paid out after twelve months, and an earnout provision fair valued upon acquisition at $3.8 million. The earnout provision is for a one-time payment and has a maximum payout of $4.0 million based on revenue recognized by the Company from the acquired operating assets for the twelve-month period ending January 31, 2020. The earnout was originally recognized at fair value at the date of the business combination and is recorded as an accrued earnout liability in accrued expenses on the consolidated balance sheet as of June 30, 2019. The earnout is adjusted to fair value quarterly (see Note 3).

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

 

Assets acquired:

 

 

 

 

Current assets

 

$

505

 

Developed technology, customer relationships, and other intangibles

 

 

4,288

 

Goodwill

 

 

12,807

 

Total assets acquired

 

 

17,600

 

Liabilities assumed:

 

 

 

 

Current liabilities

 

 

482

 

Total liabilities assumed

 

 

482

 

Net assets acquired

 

$

17,118

 

 

15


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The estimated fair values are preliminary in nature and subject to adjustments, which are not expected to be material. The Company is currently in the process of finalizing the valuations related to the acquired intangible assets. The valuations will be finalized when certain information arranged to be obtained has been received and the Company’s review of that information has been completed.

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 Compli Purchase are provided in the below table (in thousands):

 

Intangible

 

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

 

Estimated Useful

Life

Customer relationships

 

$

3,250

 

 

Multi-period excess

earnings-income approach

 

 

13

%

 

6 years

Trademarks and trade names

 

 

32

 

 

Relief from royalty-

income approach

 

 

13

%

 

2 years

Developed technology and

   customer database

 

 

910

 

 

Relief from royalty-

income approach

 

 

13

%

 

6 years

Noncompetition agreements

 

 

96

 

 

With-and-without valuation-

income approach

 

 

13

%

 

3 years

 

The excess of the purchase price over the net identified tangible and intangible assets of $12.8 million 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.

For the period from the date of the Compli acquisition through June 30, 2019, revenue was $1.8 million and pre-tax loss was $0.3 million from the Compli business.

 

February 2019 Acquisition of Indix

On February 6, 2019, the Company completed the acquisition of substantially all the assets of Indix under an Asset Purchase Agreement (the “Indix Purchase”). Indix is an artificial intelligence company providing comprehensive product descriptions for more than one billion products sold and shipped worldwide. The Company accounted for the Indix Purchase as a business combination. As a result of the acquisition, the Company intends to use the Indix artificial intelligence to maintain and expand its tax content database. The transaction costs associated with the acquisition were not material.

The total consideration transferred related to this transaction was $9.1 million, consisting of $5.5 million paid in cash at closing, an additional $1.4 million cash to be paid after eighteen months, and an earnout provision valued upon acquisition at $2.2 million. The earnout provision has a maximum payout of $3.0 million based on the successful transition and achievement of development milestones established in the purchase agreement. The earnout provides for interim payments based on milestones to be evaluated as follows: $0.5 million within three months of closing, $0.65 million within seven months of closing, $0.65 million within eight months of closing, and $1.2 million within 12 months of closing. The earnout was originally recognized at fair value at the date of the business combination and is recorded in accrued expenses on the consolidated balance sheet. The earnout is adjusted to fair value quarterly (see Note 3). The first earnout milestone was achieved in the second quarter of 2019, and it was paid in July 2019.

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

 

Assets acquired:

 

 

 

 

Current assets

 

$

94

 

Developed technology

 

 

4,472

 

Goodwill

 

 

4,953

 

Total assets acquired

 

 

9,519

 

Liabilities assumed:

 

 

 

 

Current liabilities

 

 

392

 

Total liabilities assumed

 

 

392

 

Net assets acquired

 

$

9,127

 

 

16


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

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 Indix Purchase are provided in the below table (in thousands):

 

Intangible

 

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

Estimated Useful

Life

Developed technology

 

$

4,472

 

 

Relief from royalty-

income approach

 

24.5%

 

6 years

 

The excess of the purchase price over the net identified tangible and intangible assets of $5.0 million has been recorded as goodwill, which includes cost savings expected from the use of the acquired technology and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

For the period from the date of the Indix acquisition through June 30, 2019, pre-tax loss was $2.0 million from the Indix business.

 

6.

Revenue

 

The Company adopted the new revenue recognition accounting standard ASC 606 effective January 1, 2019 on a modified retrospective basis and applied the new standard only to contracts that were not completed contracts prior to January 1, 2019. See Note 2 for a description of the Company’s ASC 606 revenue recognition accounting policy. Financial results for reporting periods during 2019 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to 2019 have not been retroactively restated and are presented in conformity with amounts previously disclosed under ASC 605. This note includes additional information regarding the impacts from the adoption of the new revenue recognition standard on the financial results for the three and six months ended June 30, 2019. This includes the presentation of financial results during 2019 under ASC 605 for comparison to the prior year. The revenue recognition accounting policy for ASC 605 is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 28, 2019. There were no changes to the Company’s ASC 605 policy during the first half of 2019.

 

17


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Consolidated Balance Sheets – Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard

 

The following schedule summarizes the impacts from the adoption of the new revenue recognition standard on the consolidated balance sheet as of June 30, 2019 (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

441,584

 

 

$

 

 

$

441,584

 

 

$

142,322

 

Trade accounts receivable—net of allowance for doubtful

   accounts

 

 

43,409

 

 

 

963

 

 

 

44,372

 

 

 

40,287

 

Deferred commissions

 

 

7,365

 

 

 

(7,365

)

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

11,179

 

 

 

 

 

 

11,179

 

 

 

11,307

 

Total current assets before customer fund assets

 

 

503,537

 

 

 

(6,402

)

 

 

497,135

 

 

 

193,916

 

Funds held from customers

 

 

24,278

 

 

 

 

 

 

24,278

 

 

 

13,113

 

Receivable from customers—net of allowance for doubtful

   accounts

 

 

915

 

 

 

 

 

 

915

 

 

 

270

 

Total current assets

 

 

528,730

 

 

 

(6,402

)

 

 

522,328

 

 

 

207,299

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment—net

 

 

34,148

 

 

 

 

 

 

34,148

 

 

 

33,373

 

Goodwill

 

 

78,981

 

 

 

 

 

 

78,981

 

 

 

61,300

 

Intangible assets—net

 

 

24,765

 

 

 

 

 

 

24,765

 

 

 

19,371

 

Deferred commissions

 

 

23,454

 

 

 

(23,454

)

 

 

 

 

 

 

Other noncurrent assets

 

 

2,370

 

 

 

 

 

 

2,370

 

 

 

1,589

 

Total assets

 

$

692,448

 

 

$

(29,856

)

 

$

662,592

 

 

$

322,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade payables

 

$

8,197

 

 

$

 

 

$

8,197

 

 

$

4,847

 

Accrued expenses

 

 

49,114

 

 

 

(4,508

)

 

 

44,606

 

 

 

42,217

 

Deferred revenue

 

 

137,997

 

 

 

4,903

 

 

 

142,900

 

 

 

125,260

 

Total current liabilities before customer fund obligations

 

 

195,308

 

 

 

395

 

 

 

195,703

 

 

 

172,324

 

Customer fund obligations

 

 

25,245

 

 

 

 

 

 

25,245

 

 

 

13,349

 

Total current liabilities

 

 

220,553

 

 

 

395

 

 

 

220,948

 

 

 

185,673

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

 

814

 

 

 

8,405

 

 

 

9,219

 

 

 

9,393

 

Deferred tax liability

 

 

638

 

 

 

 

 

 

638

 

 

 

560

 

Deferred rent

 

 

16,480

 

 

 

 

 

 

16,480

 

 

 

17,317

 

Other noncurrent liabilities

 

 

1,835

 

 

 

 

 

 

1,835

 

 

 

436

 

Total liabilities

 

 

240,320

 

 

 

8,800

 

 

 

249,120

 

 

 

213,379

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

8

 

 

 

 

 

 

8

 

 

 

7

 

Additional paid-in capital

 

 

937,047

 

 

 

 

 

 

937,047

 

 

 

599,493

 

Accumulated other comprehensive income (loss)

 

 

(2,531

)

 

 

 

 

 

(2,531

)

 

 

(2,345

)

Accumulated deficit

 

 

(482,396

)

 

 

(38,656

)

 

 

(521,052

)

 

 

(487,602

)

Total shareholders’ equity

 

 

452,128

 

 

 

(38,656

)

 

 

413,472

 

 

 

109,553

 

Total liabilities and shareholders' equity

 

$

692,448

 

 

$

(29,856

)

 

$

662,592

 

 

$

322,932

 

 

18


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Consolidated Statements of Operations (Unaudited) – Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard

 

The following schedules summarize the impacts from the adoption of the new revenue recognition standard on the consolidated statement of operations for the three and six months ended June 30, 2019 (in thousands, except per share amounts):

 

 

 

For the Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

85,008

 

 

$

534

 

 

$

85,542

 

 

$

59,845

 

Professional services

 

 

6,291

 

 

 

(47

)

 

 

6,244

 

 

 

4,034

 

Total revenue

 

 

91,299

 

 

 

487

 

 

 

91,786

 

 

 

63,879

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

22,938

 

 

 

 

 

 

22,938

 

 

 

15,837

 

Professional services

 

 

4,397

 

 

 

 

 

 

4,397

 

 

 

2,795

 

Total cost of revenue

 

 

27,335

 

 

 

 

 

 

27,335

 

 

 

18,632

 

Gross profit

 

 

63,964

 

 

 

487

 

 

 

64,451

 

 

 

45,247

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

18,996

 

 

 

 

 

 

18,996

 

 

 

12,428

 

Sales and marketing

 

 

40,678

 

 

 

5,175

 

 

 

45,853

 

 

 

40,604

 

General and administrative

 

 

18,019

 

 

 

 

 

 

18,019

 

 

 

9,341

 

Total operating expenses

 

 

77,693

 

 

 

5,175

 

 

 

82,868

 

 

 

62,373

 

Operating loss

 

 

(13,729

)

 

 

(4,688

)

 

 

(18,417

)

 

 

(17,126

)

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(1,282

)

 

 

 

 

 

(1,282

)

 

 

(99

)

Interest expense

 

 

173

 

 

 

 

 

 

173

 

 

 

1,067

 

Other (income) expense, net

 

 

381

 

 

 

 

 

 

381

 

 

 

(442

)

Total other (income) expense, net

 

 

(728

)

 

 

 

 

 

(728

)

 

 

526

 

Loss before income taxes

 

 

(13,001

)

 

 

(4,688

)

 

 

(17,689

)

 

 

(17,652

)

Provision for (benefit from) income taxes

 

 

172

 

 

 

 

 

 

172

 

 

 

114

 

Net loss

 

$

(13,173

)

 

$

(4,688

)

 

$

(17,861

)

 

$

(17,766

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(0.18

)

 

$

(0.07

)

 

$

(0.25

)

 

$

(1.24

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

71,568

 

 

 

 

 

 

 

71,568

 

 

 

14,383

 

19


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

163,239

 

 

$

618

 

 

$

163,857

 

 

$

117,715

 

Professional services

 

 

13,030

 

 

 

(100

)

 

 

12,930

 

 

 

7,541

 

Total revenue

 

 

176,269

 

 

 

518

 

 

 

176,787

 

 

 

125,256

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

43,916

 

 

 

 

 

 

43,916

 

 

 

30,654

 

Professional services

 

 

8,726

 

 

 

 

 

 

8,726

 

 

 

5,487

 

Total cost of revenue

 

 

52,642

 

 

 

 

 

 

52,642

 

 

 

36,141

 

Gross profit

 

 

123,627

 

 

 

518

 

 

 

124,145

 

 

 

89,115

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

34,952

 

 

 

 

 

 

34,952

 

 

 

25,047

 

Sales and marketing

 

 

78,886

 

 

 

11,552

 

 

 

90,438

 

 

 

77,911

 

General and administrative

 

 

33,253

 

 

 

 

 

 

33,253

 

 

 

18,552

 

Total operating expenses

 

 

147,091

 

 

 

11,552

 

 

 

158,643

 

 

 

121,510

 

Operating loss

 

 

(23,464

)

 

 

(11,034

)

 

 

(34,498

)

 

 

(32,395

)

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(2,049

)

 

 

 

 

 

(2,049

)

 

 

(135

)

Interest expense

 

 

284

 

 

 

 

 

 

284

 

 

 

1,961

 

Other (income) expense, net

 

 

429

 

 

 

 

 

 

429

 

 

 

(472

)

Total other (income) expense, net

 

 

(1,336

)

 

 

 

 

 

(1,336

)

 

 

1,354

 

Loss before income taxes

 

 

(22,128

)

 

 

(11,034

)

 

 

(33,162

)

 

 

(33,749

)

Provision for (benefit from) income taxes

 

 

288

 

 

 

 

 

 

288

 

 

 

(734

)

Net loss

 

$

(22,416

)

 

$

(11,034

)

 

$

(33,450

)

 

$

(33,015

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(0.32

)

 

$

(0.16

)

 

$

(0.48

)

 

$

(3.21

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

69,983

 

 

 

 

 

 

 

69,983

 

 

 

10,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


20


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Consolidated Statements of Comprehensive Loss (Unaudited) – Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard

 

The following schedules summarize the impacts from the adoption of the new revenue recognition standard on the consolidated statement of comprehensive loss for the three and six months ended June 30, 2019 (in thousands):

 

 

 

For the Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Net loss

 

$

(13,173

)

 

$

(4,688

)

 

$

(17,861

)

 

$

(17,766

)

Other comprehensive income (loss)—Foreign currency translation

 

 

276

 

 

 

 

 

 

276

 

 

 

(3,048

)

Total comprehensive loss

 

$

(12,897

)

 

$

(4,688

)

 

$

(17,585

)

 

$

(20,814

)

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Net loss

 

$

(22,416

)

 

$

(11,034

)

 

$

(33,450

)

 

$

(33,015

)

Other comprehensive income (loss)—Foreign currency translation

 

 

(186

)

 

 

 

 

 

(186

)

 

 

(2,445

)

Total comprehensive loss

 

$

(22,602

)

 

$

(11,034

)

 

$

(33,636

)

 

$

(35,460

)

 

21


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Consolidated Statements of Cash Flows (Unaudited) – Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard

 

The following schedule summarizes the impacts from the adoption of the new revenue recognition standard on the consolidated statement of cash flows for the six months ended June 30, 2019 (in thousands):

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(22,416

)

 

$

(11,034

)

 

$

(33,450

)

 

$

(33,015

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,668

 

 

 

 

 

 

7,668

 

 

 

5,992

 

Stock-based compensation

 

 

15,984

 

 

 

 

 

 

15,984

 

 

 

7,074

 

Deferred tax expense (benefit)

 

 

78

 

 

 

 

 

 

78

 

 

 

(967

)

Amortization of deferred rent

 

 

(392

)

 

 

 

 

 

(392

)

 

 

263

 

Non-cash change in earnout liability

 

 

476

 

 

 

 

 

 

476

 

 

 

(462

)

Non-cash bad debt (recovery) expense

 

 

450

 

 

 

 

 

 

450

 

 

 

(85

)

Other

 

 

195

 

 

 

 

 

 

195

 

 

 

241

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(3,728

)

 

 

(158

)

 

 

(3,886

)

 

 

(2,022

)

Prepaid expenses and other current assets

 

 

(596

)

 

 

 

 

 

(596

)

 

 

(144

)

Deferred commissions

 

 

(11,552

)

 

 

11,552

 

 

 

 

 

 

 

Other noncurrent assets

 

 

(782

)

 

 

 

 

 

(782

)

 

 

(16

)

Trade payables

 

 

2,468

 

 

 

 

 

 

2,468

 

 

 

(2,248

)

Accrued expenses

 

 

(3,401

)

 

 

(2,418

)

 

 

(5,819

)

 

 

(3,000

)

Deferred revenue

 

 

15,127

 

 

 

2,058

 

 

 

17,185

 

 

 

17,113

 

Net cash used in operating activities

 

 

(421

)

 

 

 

 

 

(421

)

 

 

(11,276

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in customer fund assets

 

 

(11,878

)

 

 

 

 

 

(11,878

)

 

 

(4,585

)

Cash paid for acquired intangible assets

 

 

(131

)

 

 

 

 

 

(131

)

 

 

(4,881

)

Cash paid for acquisitions of businesses

 

 

(17,310

)

 

 

 

 

 

(17,310

)

 

 

 

Purchase of property and equipment

 

 

(4,950

)

 

 

 

 

 

(4,950

)

 

 

(8,169

)

Net cash used in investing activities

 

 

(34,269

)

 

 

 

 

 

(34,269

)

 

 

(17,635

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from common stock

   offering, net of underwriting discounts

 

 

274,705

 

 

 

 

 

 

 

274,705

 

 

 

192,510

 

Payments of deferred financing costs

 

 

(398

)

 

 

 

 

 

(398

)

 

 

(622

)

Payments on credit facility

 

 

 

 

 

 

 

 

 

 

 

(33,000

)

Proceeds from credit facility

 

 

 

 

 

 

 

 

 

 

 

23,000

 

Repayment of note payable

 

 

 

 

 

 

 

 

 

 

 

(234

)

Net increase in customer fund obligations

 

 

11,797

 

 

 

 

 

 

11,797

 

 

 

4,585

 

Proceeds from exercise of stock options and common stock

   warrants

 

 

40,417

 

 

 

 

 

 

40,417

 

 

 

5,580

 

Proceeds from purchases of stock under employee stock

   purchase plan

 

 

7,664

 

 

 

 

 

 

7,664

 

 

 

 

Taxes paid related to net share settlement of stock-based awards

 

 

(93

)

 

 

 

 

 

(93

)

 

 

(2,217

)

Repurchase of shares

 

 

 

 

 

 

 

 

 

 

 

(1,806

)

Net cash provided by financing activities

 

 

334,092

 

 

 

 

 

 

334,092

 

 

 

187,796

 

Foreign currency effect on cash and cash equivalents

 

 

(140

)

 

 

 

 

 

(140

)

 

 

148

 

Net change in cash and cash equivalents

 

 

299,262

 

 

 

 

 

 

299,262

 

 

 

159,033

 

Cash and cash equivalents—Beginning of period

 

 

142,322

 

 

 

 

 

 

142,322

 

 

 

14,075

 

Cash and cash equivalents—End of period

 

$

441,584

 

 

 

 

 

$

441,584

 

 

$

173,108

 

 

22


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

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,

 

 

 

2019

 

 

2018

 

Revenue (U.S.):

 

 

 

 

 

 

 

 

Subscription and returns

 

 

 

 

 

 

 

 

Tax determination

 

$

48,707

 

 

$

34,250

 

Tax returns and compliance management

 

 

30,686

 

 

 

22,334

 

Interest income on funds held for customers

 

 

812

 

 

 

169

 

Total subscription and returns

 

 

80,205

 

 

 

56,753

 

Professional services

 

 

5,663

 

 

 

3,181

 

Total revenue (U.S.)

 

 

85,868

 

 

 

59,934

 

Total revenue (non-U.S.)

 

 

5,431

 

 

 

3,945

 

Total revenue

 

$

91,299

 

 

$

63,879

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Revenue (U.S.):

 

 

 

 

 

 

 

 

Subscription and returns

 

 

 

 

 

 

 

 

Tax determination

 

$

93,938

 

 

$

67,400

 

Tax returns and compliance management

 

 

57,372

 

 

 

44,133

 

Interest income on funds held for customers

 

 

1,541

 

 

 

169

 

Total subscription and returns

 

 

152,851

 

 

 

111,702

 

Professional services

 

 

11,398

 

 

 

6,149

 

Total revenue (U.S.)

 

 

164,249

 

 

 

117,851

 

Total revenue (non-U.S.)

 

 

12,020

 

 

 

7,405

 

Total revenue

 

$

176,269

 

 

$

125,256

 

 

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, 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 six months ended June 30, 2019 is presented below (in thousands):

 

 

 

Contract Liabilities

 

Balance at December 31, 2018

 

$

 

Adoption of ASC 606

 

 

2,090

 

Contract liabilities transferred to deferred revenue

 

 

(2,394

)

Addition to contract liabilities

 

 

4,812

 

Balance at June 30, 2019

 

$

4,508

 

 

23


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

As of June 30, 2019, 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.

 

Deferred Revenue

 

A summary of the activity impacting deferred revenue balances during the six months ended June 30, 2019 is presented below (in thousands):

 

 

 

Deferred Revenue

 

Balance at December 31, 2018

 

$

134,653

 

Adoption of ASC 606

 

 

(11,250

)

Revenue recognized

 

 

(176,269

)

Additional amounts deferred

 

 

191,677

 

Balance at June 30, 2019

 

$

138,811

 

 

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 six months ended June 30, 2019 is presented below (in thousands):

 

 

 

Deferred Commissions

 

Balance at December 31, 2018

 

$

 

Adoption of ASC 606

 

 

19,267

 

Additional commissions deferred

 

 

14,615

 

Amortization of deferred commissions

 

 

(3,063

)

Balance at June 30, 2019

 

$

30,819

 

 

As of June 30, 2019, $7.4 million of deferred commissions are expected to be amortized within the next 12 months and therefore are included in current assets on the consolidated balance sheets. The remaining amount of deferred commissions are included in noncurrent assets. There were no impairments of assets related to deferred commissions during the six months ended June 30, 2019. There were no assets recognized related to the costs to fulfill contracts during the six months ended June 30, 2019 as these costs were not material.

 

Remaining Performance Obligations

 

Contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of June 30, 2019, amounts allocated to these additional contractual obligations are $33.1 million, of which $32.7 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.

24


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

7.

Intangible Assets

Finite-lived intangible assets

Finite-lived intangible assets consisted of the following (in thousands):

 

 

 

 

 

June 30, 2019

 

 

 

Average Useful Life

(Years)

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Customer relationships

 

3 to 10

 

$

18,669

 

 

$

(10,223

)

 

$

8,446

 

Developed technology

 

3 to 8

 

 

36,397

 

 

 

(20,205

)

 

 

16,192

 

Noncompete agreements

 

3 to 5

 

 

671

 

 

 

(569

)

 

 

102

 

Tradename and trademarks

 

1 to 4

 

 

452

 

 

 

(427

)

 

 

25

 

 

 

 

 

$

56,189

 

 

$

(31,424

)

 

$

24,765

 

 

 

 

 

 

December 31, 2018

 

 

 

Average Useful Life

(Years)

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Customer relationships

 

3 to 10

 

$

15,412

 

 

$

(9,202

)

 

$

6,210

 

Developed technology

 

3 to 8

 

 

30,935

 

 

 

(17,806

)

 

 

13,129

 

Noncompete agreements

 

3 to 5

 

 

574

 

 

 

(542

)

 

 

32

 

Tradename and trademarks

 

1 to 4

 

 

420

 

 

 

(420

)

 

 

 

 

 

 

 

$

47,341

 

 

$

(27,970

)

 

$

19,371

 

 

Finite-lived intangible assets are generally amortized on a straight-line basis over the remaining estimated useful life as management believes this reflects the expected benefit to be received from these assets. Finite-lived intangible assets amortization expense was $1.8 million and $3.5 million for the three and six months ended June 30, 2019, respectively, and $1.4 million and $2.8 million for the three and six months ended June 30, 2018, 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. In addition to cash paid at closing and shortly thereafter, the asset purchase agreement required the Company to issue shares of common stock as follows: 37,708 shares on November 29, 2018, 37,708 shares on May 29, 2019, and 37,706 shares on November 29, 2019.

 

Total consideration for the purchase also includes an earnout computed on future revenue and billings recognized by the Company over the six years following the acquisition, up to a maximum of $30.0 million. The earnout is payable in cash and common stock at the end of each six-month measurement period ending on June 30 or December 31 through 2023. The cash portion of the earnout is computed based on eligible billings in the measurement period. The number of shares of common stock to be issued for the earnout is computed based on the eligible revenue recognized in the measurement period divided by the average closing price of the Company’s common stock during the last ten days of the measurement period. As earnout payments become due, those costs will be capitalized as part of the developed technology asset and amortized over the remaining useful life. During the first half of 2019, the Company paid $0.1 million and issued 1,634 shares of common stock to the Sellers for the first earnout measurement period ended December 31, 2018 and accrued $0.1 million for cash and common stock payable to the Sellers for the earnout measurement period ended June 30, 2019.    

 

25


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Goodwill

 

Changes in the carrying amount of goodwill during the six months ended June 30, 2019 are summarized as follows (in thousands):

 

Balance—December 31, 2018

 

$

61,300

 

Acquisition of Compli

 

 

12,807

 

Acquisition of Indix

 

 

4,953

 

Cumulative translation adjustments

 

 

(79

)

Balance—June 30, 2019

 

$

78,981

 

 

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, 2019, the Brazilian reporting unit had no associated goodwill.

 

 

8.

Commitments and Contingencies

Leases

Rent expense was $3.1 million and $6.0 million for the three and six months ended June 30, 2019, respectively, and $2.6 million and $4.9 million for the three and six months ended June 30, 2018, respectively. Sublease income was $0.4 million and $0.7 million for the three and six months ended June 30, 2019, respectively, with no sublease income for the three and six months ended June 30, 2018.

 

Contingencies

Loss contingencies may arise in connection with the ordinary conduct of the Company’s business activities. The Company considers 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 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. Except as discussed below, it is not possible to reasonably estimate the potential loss under these indemnification arrangements.

 

26


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

While the Company has never paid a material claim related to these indemnification provisions, the Company believes that, as of June 30, 2019, there is a reasonable possibility that a loss may be incurred pursuant to certain of these arrangements and estimates a range of loss of up to $2.0 million. The Company has not recorded an accrual related to these arrangements as of June 30, 2019 because it has not determined that a loss is probable. The ultimate outcome of these potential obligations is unknown, and it is possible that the actual losses could be higher than the estimated range.

 

On October 22, 2018, PTP OneClick, LLC (“PTP”) filed a lawsuit against Avalara, Inc. in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges that making, using, offering to sell, and selling AvaTax, Avalara Returns, and TrustFile (the “Avalara Products”) infringe U.S. Patent No. 9,760,915 held by PTP and also alleges unspecified trade secret misappropriation, unfair competition, and breach of contract. PTP seeks judgments of willful patent infringement, willful trade secret misappropriation, unfair competition, and breach of contract. PTP requests preliminary and permanent injunctions to enjoin the Company from making, using, offering to sell, and selling the Avalara Products along with treble damages and attorneys’ fees. Based upon the Company’s review of the complaint and the specified patent, the Company believes that the Company has meritorious defenses to PTP’s claims. On November 7, 2018, the Company moved to dismiss the lawsuit and to have the patent held invalid, and also moved to transfer the matter to the United States District Court located in Seattle, Washington. On April 30, 2019, the United States District Court for the Eastern District of Wisconsin granted the Company’s motion to transfer, reserving resolution of the motion to dismiss for the United States District Court for the Western District of Washington. That district court has set the trial date for October 26, 2020. The Company intends to continue to vigorously defend against PTP’s allegations.

9.

Debt

 

Loan and Security Agreement

 

The Company had a loan and security agreement with Silicon Valley Bank and Ally Bank that consisted of a $50.0 million revolving credit facility (the “Credit Facility”). On June 25, 2019, the Company terminated the Credit Facility.

 

Prior to termination of the Credit Facility, the Company was required to pay a quarterly fee of 0.50% per annum on the undrawn portion available under the revolving credit facility plus the sum of outstanding letters of credit. Under the Credit Facility, the interest rate on the revolving credit facility was based on the greater of either 4.25% or the current prime rate, plus 1.75%.

 

10.

Convertible Preferred Stock and Shareholders’ Equity

Authorized Capital – Common Stock and Preferred Stock

On June 15, 2018, the Company completed an initial public offering (“IPO”) listing its common stock on the New York Stock Exchange. The Company is authorized to issue two classes of stock designated as common stock and preferred stock. In June 2018, immediately following the IPO, the Amended and Restated Articles of Incorporation became effective, which increased authorized capital stock to 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.

Public Offering of Common Stock

In June 2019, the Company completed a public offering, in which the Company sold 4,133,984 shares of its common stock, including the full exercise of the underwriters’ option to purchase 539,215 additional shares of common stock, at a price of $69.40 per share. The Company received net proceeds of $274.7 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable by the Company of $1.2 million. As of June 30, 2019, 75,444,551 shares of the Company’s common stock were outstanding.

27


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The changes to the Company’s shareholders’ equity during the six months ended June 30, 2019 is as follows (in thousands, except share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders’

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2019

 

 

 

 

 

 

 

66,768,563

 

 

$

7

 

 

$

599,493

 

 

$

(2,345

)

 

$

(487,602

)

 

$

109,553

 

Impact of adoption of new accounting

   pronouncements (see Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,622

 

 

 

27,622

 

Exercise of stock options

 

 

 

 

 

2,763,291

 

 

 

 

 

 

 

27,311

 

 

 

 

 

 

 

 

 

 

 

27,311

 

Shares tendered for cashless redemption of stock options

 

 

 

 

 

(2,805

)

 

 

 

 

 

 

(93

)

 

 

 

 

 

 

 

 

 

 

(93

)

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

6,571

 

 

 

 

 

 

 

 

 

 

 

6,571

 

Shares issued under employee stock purchase plan

 

 

 

 

 

372,764

 

 

 

 

 

 

 

7,664

 

 

 

 

 

 

 

 

 

 

 

7,664

 

Shares issued to purchase intangible assets

 

 

 

 

 

1,634

 

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

50

 

Loss on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(462

)

 

 

 

 

 

 

(462

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,243

)

 

 

(9,243

)

Balance at March 31, 2019

 

 

 

 

 

 

 

69,903,447

 

 

$

7

 

 

$

640,996

 

 

$

(2,807

)

 

$

(469,223

)

 

$

168,973

 

Proceeds from common stock

   offering, net of underwriting discounts

 

 

 

 

 

4,133,984

 

 

 

1

 

 

 

274,704

 

 

 

 

 

 

 

 

 

 

 

274,705

 

Public offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,198

)

 

 

 

 

 

 

 

 

 

 

(1,198

)

Exercise of stock options

 

 

 

 

 

1,368,510

 

 

 

 

 

 

 

13,106

 

 

 

 

 

 

 

 

 

 

 

13,106

 

Vesting of restricted stock units

 

 

 

 

 

902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

9,439

 

 

 

 

 

 

 

 

 

 

 

9,439

 

Shares issued to purchase intangible assets

 

 

 

 

 

37,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

276

 

 

 

 

 

 

 

276

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,173

)

 

 

(13,173

)

Balance at June 30, 2019

 

 

 

 

 

 

 

75,444,551

 

 

$

8

 

 

$

937,047

 

 

$

(2,531

)

 

$

(482,396

)

 

$

452,128

 

 

The changes to the Company’s convertible preferred stock and shareholders’ equity (deficit) for the six months ended June 30, 2018 is as follows (in thousands, except share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Deficit

 

Balance at January 1, 2018

 

 

101,786,205

 

 

$

370,921

 

 

 

 

5,992,293

 

 

$

1

 

 

$

18,121

 

 

$

338

 

 

$

(412,052

)

 

$

(393,592

)

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

785,991

 

 

 

 

 

 

 

6,025

 

 

 

 

 

 

 

 

 

 

 

6,025

 

Shares tendered for cashless

   redemption of stock options

 

 

 

 

 

 

 

 

 

 

 

(465,710

)

 

 

 

 

 

 

(7,715

)

 

 

 

 

 

 

 

 

 

 

(7,715

)

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,517

 

 

 

 

 

 

 

 

 

 

 

3,517

 

Repurchase of shares

 

 

(10,000

)

 

 

(67

)

 

 

 

(48,152

)

 

 

 

 

 

 

(752

)

 

 

 

 

 

 

 

 

 

 

(752

)

Gain on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

603

 

 

 

 

 

 

 

603

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,249

)

 

 

(15,249

)

Balance at March 31, 2018

 

 

101,776,205

 

 

$

370,854

 

 

 

 

6,264,422

 

 

$

1

 

 

$

19,196

 

 

$

941

 

 

$

(427,301

)

 

$

(407,163

)

Proceeds from common stock

   offering, net of underwriters' discounts

 

 

 

 

 

 

 

 

 

 

 

8,625,000

 

 

 

1

 

 

 

192,509

 

 

 

 

 

 

 

 

 

 

 

192,510

 

Initial public offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,425

)

 

 

 

 

 

 

 

 

 

 

(3,425

)

Conversion of preferred stock

   to common stock

 

 

(101,776,205

)

 

 

(370,854

)

 

 

 

50,888,014

 

 

 

5

 

 

 

370,849

 

 

 

 

 

 

 

 

 

 

 

370,854

 

Shares tendered for cashless

   redemption of stock options

 

 

 

 

 

 

 

 

 

 

 

(138,813

)

 

 

 

 

 

 

(3,483

)

 

 

 

 

 

 

 

 

 

 

(3,483

)

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

305,722

 

 

 

 

 

 

 

2,752

 

 

 

 

 

 

 

 

 

 

 

2,752

 

Exercise of warrants

 

 

 

 

 

 

 

 

 

 

 

570,000

 

 

 

 

 

 

 

5,783

 

 

 

 

 

 

 

 

 

 

 

5,783

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,571

 

 

 

 

 

 

 

 

 

 

 

3,571

 

Repurchase of shares

 

 

 

 

 

 

 

 

 

 

 

(56,695

)

 

 

 

 

 

 

(986

)

 

 

 

 

 

 

 

 

 

 

(986

)

Loss on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,048

)

 

 

 

 

 

 

(3,048

)

Shares issued to purchase intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,555

 

 

 

 

 

 

 

 

 

 

 

2,555

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,766

)

 

 

(17,766

)

Balance at June 30, 2018

 

 

 

 

$

 

 

 

 

66,457,650

 

 

$

7

 

 

$

589,321

 

 

$

(2,107

)

 

$

(445,067

)

 

$

142,154

 

 

28


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

During the six months ended June 30, 2018, the Company repurchased shares from employees and non-employee investors at fair value for $1.7 million.

All outstanding shares of convertible preferred stock were converted to common stock in connection with the Company’s IPO in June 2018.

Common Stock Warrants

Common stock warrants were previously granted to the Company’s Board of Directors for services provided. No common stock warrants were issued during the six months ended June 30, 2019. During the six months ended June 30, 2018, the Company issued 80,000 common stock warrants with a weighted average exercise price of $16.60 per share. The warrants granted to the Company’s Board of Directors in the first quarter of 2018 had a grant date fair value of $0.5 million, which was recorded as general and administrative expense. During 2018 and prior to the completion of the IPO, 363,000 common stock warrants were exercised for total proceeds of $3.7 million. Immediately prior to the completion of the IPO, the remaining common stock warrants then outstanding were automatically net exercised into 144,945 shares of the Company’s common stock. As of June 30, 2019, there were no common stock warrants outstanding.

 

11.

Equity Incentive Plans

The Company has stock-based compensation plans that provide for the award of equity incentives, including stock options, stock awards, restricted stock units (“RSUs”), and purchase rights. As of June 30, 2019, the Company had stock options outstanding under the 2018 Equity Incentive Plan (the “2018 Plan”) and the 2006 Equity Incentive Plan (the “2006 Plan”), had RSUs outstanding under the 2018 Plan, and had purchase rights issued under the 2018 Employee Stock Purchase Plan (“ESPP”).

In April 2018, the 2018 Plan became effective in connection with the Company’s IPO. The 2018 Plan allows the Company to grant equity incentives to employees, directors, advisors, and consultants providing services to the Company. The total number of shares of common stock reserved for issuance under the 2018 Plan is equal to (1) 5,315,780 shares plus (2) any shares subject to outstanding awards under the 2006 Plan as of June 14, 2018 that subsequently cease to be subject to such awards. The available shares automatically increase each January 1, beginning January 1, 2019, by the lesser of (i) 5% of the aggregate number of shares of common stock outstanding on December 31st of the immediately preceding calendar year (rounded up to the nearest whole share) and (ii) an amount determined by the Company’s Board of Directors. As of June 30, 2019, 2,479,421 shares were subject to outstanding awards and 6,484,394 shares were available for issuance under the 2018 Plan. The 2018 Plan provides that on the occurrence of certain strategic events, such as a change in control in which options and RSUs are not assumed or substituted, such outstanding options and RSUs will become fully vested and exercisable or payable.

Prior to the 2018 Plan, the Company awarded stock options under the 2006 Plan. The 2006 Plan was terminated in connection with the Company’s IPO. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan. As of June 30, 2019, there were 6,607,681 shares 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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Stock-based compensation cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

$

 

 

$

 

 

$

 

 

$

512

 

Stock options

 

 

4,196

 

 

 

3,571

 

 

 

8,113

 

 

 

6,576

 

Restricted stock units

 

 

4,551

 

 

 

 

 

 

6,249

 

 

 

 

Employee stock purchase plan

 

 

692

 

 

 

 

 

 

1,648

 

 

 

 

Total stock-based compensation cost

 

$

9,439

 

 

$

3,571

 

 

$

16,010

 

 

$

7,088

 

 

A small portion of stock-based compensation cost above is capitalized in accordance with the accounting guidance for internal-use software. The Company uses the straight-line attribution method for recognizing stock-based compensation expense.

 

29


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Stock Options

The following table summarizes stock option activity for the Company’s stock-based compensation plans for the six months ended June 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

Aggregate

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Intrinsic

 

 

 

 

 

 

 

Exercise

 

 

Contractual

 

 

Value

 

 

 

Shares

 

 

Price

 

 

Life (Years)

 

 

(in thousands)

 

Options outstanding as of December 31, 2018

 

 

11,094,070

 

 

$

12.17

 

 

 

6.81

 

 

$

210,523

 

Options granted

 

 

944,966

 

 

 

43.95

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(4,131,801

)

 

 

9.78

 

 

 

 

 

 

 

 

 

Options cancelled or expired

 

 

(167,688

)

 

 

15.92

 

 

 

 

 

 

 

 

 

Options outstanding as of June 30, 2019

 

 

7,739,547

 

 

 

17.25

 

 

 

7.17

 

 

 

425,303

 

Options exercisable as of June 30, 2019

 

 

3,889,576

 

 

$

10.53

 

 

 

5.81

 

 

$

239,873

 

 

A summary of options outstanding and vested as of June 30, 2019 is as follows:

 

 

 

Options Outstanding

 

 

Options Vested and Exercisable

 

Exercise

 

Number

 

 

Weighted Average

 

 

Number Vested

 

 

Weighted Average

 

Prices

 

Outstanding

 

 

Life (in Years)

 

 

and Exercisable

 

 

Life (in Years)

 

$0.96 to $1.90

 

 

324,670

 

 

 

1.7

 

 

 

324,670

 

 

 

1.7

 

2.86 to 6.40

 

 

717,673

 

 

 

3.8

 

 

 

717,673

 

 

 

3.8

 

8.04 to 11.72

 

 

592,039

 

 

 

4.7

 

 

 

592,039

 

 

 

4.7

 

12.20 to 15.06

 

 

2,914,296

 

 

 

7.2

 

 

 

1,740,997

 

 

 

6.9

 

16.06 to 24.00

 

 

2,059,003

 

 

 

8.6

 

 

 

500,623

 

 

 

8.6

 

31.99 to 42.21

 

 

905,451

 

 

 

9.5

 

 

 

7,332

 

 

 

9.3

 

55.10 to 72.67

 

 

226,415

 

 

 

9.8

 

 

 

6,242

 

 

 

9.8

 

 

 

 

7,739,547

 

 

 

 

 

 

 

3,889,576

 

 

 

 

 

 

The total intrinsic value of options exercised during the six months ended June 30, 2019 and 2018 was $192.4 million and $9.9 million, respectively.

 

The weighted average grant date fair value of options granted during the six months ended June 30, 2019 and 2018 was $18.93 and $8.09 per share, respectively. During the six months ended June 30, 2019, 1,288,099 options vested. There were 3,849,971 options unvested as of June 30, 2019.

As of June 30, 2019, $37.6 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 2.7 years.

All stock-based payments to participants, including employees and non-employee directors, are measured based on the grant date fair value of the awards and recognized in the consolidated statements of operations over the vesting period during which the participant is required to perform services in exchange for the award. The vesting period is generally four years for employees and one year for non-employee directors. For the options granted during the periods presented, the fair value of options was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Fair market value of common stock

 

$39.76 - 72.67

 

 

$16.86 - 24.00

 

Volatility

 

40%

 

 

40%

 

Expected term

 

5-6 years

 

 

6 years

 

Expected dividend yield

 

n/a

 

 

n/a

 

Risk-free interest rate

 

1.77% - 2.65%

 

 

2.55% - 2.97%

 

 

30


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The Board of Directors intends all options granted to be exercisable at a price per share not less than the per share fair market value of the Company’s common stock underlying those options on the date of grant. Following the closing of the IPO, the fair market value per share of the Company’s common stock for purposes of determining stock-based compensation is the closing price of the Company’s common stock as reported on the applicable grant date.

 

Prior to the IPO, the fair value of the common stock underlying stock options and common stock warrants was estimated by the Board of Directors, with input from management and third-party valuation firms. The enterprise value utilized in determining the fair value of common stock for financial reporting purposes was estimated using the market approach and the income approach. Under the market approach, the Company used the guideline public company method, which estimates the fair value of the business enterprise based on market prices of stock of guideline public companies and the option pricing method. Indications of value were estimated by utilizing revenue multiples to measure enterprise value. The guideline merged and acquired company method was not utilized in the valuation, as the Company regarded the method as less reliable as management believed it did not directly reflect the Company’s future prospects. The income approach estimated the enterprise value based on the present value of the Company’s future estimated cash flows and the residual value beyond the forecast period. The residual value was based on an exit (or terminal) multiple observed in the comparable company method analysis. The future cash flows and residual value were discounted to their present value to reflect the risks inherent in the Company achieving these estimated cash flows. The discount rate was based on venture capital rates of return for companies nearing an initial public offering. The discount rate was applied using the mid-year convention. The mid-year convention assumes that cash flows are generated evenly throughout the year, as opposed to in a lump sum at the end of the year.

 

The Company lacks sufficient historical data on the volatility of its stock price. Selected volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term.

The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. Given the Company’s relative inexperience of significant exercise activity, the expected term assumptions were determined based on application of the simplified method of expected term calculation by averaging the contractual life of option grants and the vesting period of such grants. This application, when coupled with the contractual life of ten years and average vesting term of four years for employees and one year for non-employee directors, creates an expected term of six years and five years, respectively.

The Company has not paid and does not expect to pay dividends.

The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the option grant at the date nearest the option grant date.

Restricted Stock Units

The following table summarizes RSU activity for the Company’s stock-based compensation plans for the six months ended June 30, 2019:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

 

Restricted Stock Units

 

 

Value Per Share

 

RSUs outstanding as of December 31, 2018

 

 

74,424

 

 

$

32.69

 

RSUs granted

 

 

1,317,667

 

 

 

47.83

 

RSUs vested

 

 

(902

)

 

 

72.67

 

RSUs cancelled

 

 

(43,634

)

 

 

43.03

 

RSUs outstanding as of June 30, 2019

 

 

1,347,555

 

 

$

47.14

 

 

Stock-based compensation cost is recorded on a straight-line basis over the vesting term of each RSU grant, which is generally four years for employees and one year for non-employee directors, based on the fair value of the Company’s underlying common stock on the date of grant. As of June 30, 2019, $57.2 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 3.5 years.

31


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Employee Stock Purchase Plan

 

The ESPP became effective on June 15, 2018, the first trading day of the Company’s common stock. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. Purchases are accomplished through participation in discrete offering periods. The first offering period began on June 15, 2018 and ended on January 31, 2019. Subsequent offering periods begin on August 1 and February 1 (or such other date determined by our Board of Directors or our Compensation and Leadership Development Committee).

 

Eligible employees can select a rate of payroll deduction for purchases under the ESPP of between 1% and 15% of their eligible compensation. The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company’s common stock on (i) the first day of the applicable offering period or (ii) the last day of the purchase period in the applicable offering period.

 

The Company initially reserved 996,709 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP increases automatically on each January 1, beginning January 1, 2019, by the number of shares equal to the least of (i) 1,000,000 shares of common stock, (ii) 1% of the aggregate number of shares of common stock outstanding on December 31st of the immediately preceding calendar year (rounded to the nearest whole share), and (iii) an amount determined by the Board of Directors. No more than an aggregate of 10,102,525 shares of common stock may be issued over the ten-year term of the ESPP. As of June 30, 2019, 1,291,631 shares of common stock are reserved for sale under the ESPP.

 

There were no stock purchases under the ESPP during the three months ended June 30, 2019. During the six months ended June 30, 2019, 372,764 shares of common stock were purchased under the ESPP.

 

As of June 30, 2019, there was approximately $0.2 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, 2019 and ended on July 31, 2019.

 

The Black-Scholes option-pricing model was used to value ESPP purchase rights issued during the six months ended June 30, 2019 using the following assumptions:

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

Fair market value of common stock at grant date

 

40.60

 

Volatility

 

40%

 

Expected term

 

0.5 years

 

Expected dividend yield

 

n/a

 

Risk-free interest rate

 

2.59%

 

 

 

12.

Income Taxes

The Company used an annual effective tax rate approach to calculate income taxes for the six months ended June 30, 2019 and 2018. The annual effective tax rate differs from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets. Income taxes for international operations were not material for the six months ended June 30, 2019 and 2018.

The effective income tax rate was an expense of 1.3% for the six months ended June 30, 2019, and a benefit of 2.2% for the six months ended June 30, 2018. For the six months ended June 30, 2019, the income tax expense related primarily to foreign tax jurisdictions. The income tax benefit for the six months ended June 30, 2018 was due primarily to the determination that indefinite lived goodwill would provide a source of income to realize indefinite lived deferred tax assets, resulting in a tax benefit of $0.9 million.

 

32


AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

13.

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. Prior to the IPO, the Company considered all series of convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common shareholders was not allocated to the convertible preferred stock as the holders of convertible preferred stock did not have a contractual obligation to share in losses.

 

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. 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 amounts):

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(13,173

)

 

$

(17,766

)

 

$

(22,416

)

 

$

(33,015

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares

   outstanding-basic

 

 

71,568

 

 

 

14,383

 

 

 

69,983

 

 

 

10,299

 

Dilutive effect of share equivalents resulting from stock

   options, restricted stock units, common stock warrants,

   ESPP shares and convertible preferred shares (as

   converted)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares

   outstanding-diluted

 

 

71,568

 

 

 

14,383

 

 

 

69,983

 

 

 

10,299

 

Net loss per common share, basic and diluted

 

$

(0.18

)

 

$

(1.24

)

 

$

(0.32

)

 

$

(3.21

)

 

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Options to purchase common shares

 

 

8,458

 

 

 

11,151

 

 

 

9,343

 

 

 

11,218

 

Unvested restricted stock units

 

 

1,213

 

 

 

 

 

 

924

 

 

 

 

Employee stock purchase plan shares

 

 

82

 

 

 

 

 

 

48

 

 

 

 

Common stock warrants

 

 

 

 

 

401

 

 

 

 

 

 

475

 

Convertible preferred shares (as converted)

 

 

 

 

 

44,178

 

 

 

 

 

 

47,515

 

Total

 

 

9,753

 

 

 

55,730

 

 

 

10,315

 

 

 

59,208

 

 

 

14.

Subsequent Events

 

On July 31, 2019, the Company acquired substantially all the assets of Portway International Inc., a provider of Harmonized System classifications and outsourced customs brokerage services. Total cash consideration for the purchase was $15.0 million, including $2.0 million to be paid after eighteen months. The purchase agreement provides for additional consideration of up to $10.0 million, payable in the Company’s common stock, under an earnout provision. The earnout amount is based on specific revenue and operating metrics achieved through January 2021.

 

33


 

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 Annual Report on Form 10-K filed with the SEC on February 28, 2019. 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 Annual Report on Form 10-K. See “Special Note Regarding Forward-Looking Statements” above.

Overview

We provide a leading suite of cloud-based solutions that help businesses of all types and sizes comply with transaction tax requirements worldwide. Our Avalara Compliance Cloud offers a broad and growing suite of compliance solutions that enable businesses to address the complexity of transaction tax compliance, process transactions in real time, produce detailed records of transaction tax determinations, and reduce errors, audit exposure, and total transaction tax compliance costs.

We derive most of our revenue from subscriptions to our solutions. Subscriptions and returns revenue accounted for 93% and 94% of our total revenue during the six months ended June 30, 2019 and 2018, respectively. The initial term of our subscription contracts generally ranges from twelve to eighteen months, and renewal periods are typically one year in length. Subscription and returns revenue are primarily driven by the number of customers we have and the price plans they select for volumes of tax calculations, returns, and tax exemption certificates. We also derive revenue from providing professional services. During the first half of 2019, we generated approximately 93% of our revenue in North America and we are expanding our international presence to support transaction tax compliance in Europe, South America, and Asia.

We have been growing rapidly in recent periods. Our total revenue for the three months ended June 30, 2019 were $91.3 million compared to $63.9 million for the three months ended June 30, 2018. Our total revenues for the six months ended June 30, 2019 were $176.3 million compared to $125.3 million for the six months ended June 30, 2018. As a result of significant investments in growth, we have incurred net losses in all our prior reporting periods. Our net loss for the three months ended June 30, 2019 was $13.2 million compared to a net loss of $17.8 million for the three months ended June 30, 2018. Our net loss for the six months ended June 30, 2019 was $22.4 million compared to a net loss of $33.0 million for the six months ended June 30, 2018.

Key Business Metrics

We regularly review several metrics to evaluate growth trends, measure our performance, formulate financial projections, and make strategic decisions. We use certain non-GAAP measures and other key business metrics, which are discussed under “Use and Reconciliation of Non-GAAP Financial Measures” and below.

 

 

Jun 30,

2019

 

 

Mar 31,

2019

 

 

Dec 31,

2018

 

 

Sep 30,

2018

 

 

Jun 30,

2018

 

 

Mar 31,

2018

 

 

Dec 31,

2017

 

 

Sep 30,

2017

 

Number of core

   customers (as of end

   of period)

 

10,430

 

 

 

9,700

 

 

 

9,070

 

 

 

8,490

 

 

 

8,080

 

 

 

7,760

 

 

 

7,490

 

 

 

7,250

 

Net revenue retention

   rate

111%

 

 

107%

 

 

108%

 

 

105%

 

 

108%

 

 

109%

 

 

105%

 

 

107%

 

 

Number of Core Customers

We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The mid-market has been and remains our primary target market segment 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, 2019 and December 31, 2018, we had approximately 10,430 and 9,070 core customers, respectively, representing less than half of our total number of customers. In the first half of 2019, our core customers represented more than 80% of our total revenue.

We define a core customer as:

 

a unique account identifier in our billing system, or a billing account (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 last twelve months.

34


 

Currently, our core customer count 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, primarily related to the Compli acquisition in the first quarter of 2019 and past acquisitions that have not been integrated into our primary U.S. billing systems. 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 who do not meet the revenue threshold to be considered a core customer. Many of these customers are in the small business and self-serve 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.

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 revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total revenue in such corresponding quarter from those same billing accounts. This calculation includes changes for these 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 calculation 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, primarily related to past acquisitions. Our net revenue retention rate was 111% for the quarter ended June 30, 2019 and on average has been 108% over the last four quarters ended June 30, 2019.

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.  Subscription and returns revenue are driven primarily by the acquisition of customers, customer renewals, and additional service offerings purchased by existing customers.

Subscription and returns revenue primarily consist 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.

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 twelve to eighteen 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.

We adopted the new revenue recognition accounting standard ASC 606 effective January 1, 2019 on a modified retrospective basis. The new revenue recognition standard impacts the way we recognize subscription and returns revenues related to non-refundable upfront fees charges to new customers. See Note 2 to the accompanying notes to the consolidated financial statements for additional information related to our adoption of the new revenue recognition standard.

Subscription and returns revenue also include interest income generated on funds held for 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, configurations, data migrations, integration, training, and other support services. 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.

35


 

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. In addition, cost of revenue includes direct costs associated with information technology, such as data center and software hosting costs, and tax content maintenance. Cost of revenue also includes 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, and the cost of third-party developers and other independent contractors. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs. Research and development expenses also include allocated costs for certain information technology and facility expenses.

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. 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 databases from acquisitions.

We defer the portion of sales commissions that are considered a cost of obtaining a new contract with a customer in accordance with the new revenue recognition standard and amortize these deferred costs over the period of benefit, currently 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 for the full year. Sales commissions are generally earned based on achievement against these targets.  

We defer the portion of partner commissions costs that are considered a cost of obtaining a new contract with a customer in accordance with the new 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. In general, integration partners are 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. Because we began to defer a portion of the sales and commission costs in 2019, our sales and marketing expense will not be comparable to prior periods in which we expensed these costs.

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.

We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, integrate acquisitions, and incur costs as a public company. Specifically, we expect to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, SEC compliance, and internal control compliance.

36


 

Total Other (Income) Expense, Net    

Total other (income) expense, net consists of interest income on cash and cash equivalents, interest expense on outstanding borrowings, quarterly remeasurement of contingent consideration for acquisitions accounted for as business combinations, realized foreign currency changes, and other nonoperating gains and losses. Interest expense on our borrowings was based on a floating per annum rate at specified percentages above the prime rate.

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.

37


 

The comparability of periods covered by our financial statements is impacted by acquisitions and the impact of the adoption of new accounting standards. In May 2018, we acquired developed technology to facilitate cross-border transactions (e.g., tariffs and duties). In January 2019, we acquired substantially all the assets of Compli and in February 2019, we acquired substantially all the assets of Indix. We adopted the new revenue recognition standard ASC 606 effective January 1, 2019 on a modified retrospective basis. Our results of operations presented in the following tables include financial results for reporting periods during 2019, which are reported in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to 2019 have not been retroactively restated and are presented in conformity with amounts previously disclosed under the prior revenue recognition standard ASC 605. We have included additional information regarding the impacts from the adoption of the new revenue recognition standard for the three and six months ended June 30, 2019 and included financial results during 2019 under ASC 605 for comparison to the prior year. See Note 2 to the accompanying notes to the consolidated financial statements for additional information related to our adoption of the new revenue recognition standard.

 

 

 

For the Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

85,008

 

 

$

534

 

 

$

85,542

 

 

$

59,845

 

Professional services

 

 

6,291

 

 

 

(47

)

 

 

6,244

 

 

 

4,034

 

Total revenue

 

 

91,299

 

 

 

487

 

 

 

91,786

 

 

 

63,879

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

22,938

 

 

 

 

 

 

22,938

 

 

 

15,837

 

Professional services

 

 

4,397

 

 

 

 

 

 

4,397

 

 

 

2,795

 

Total cost of revenue(1)

 

 

27,335

 

 

 

 

 

 

27,335

 

 

 

18,632

 

Gross profit

 

 

63,964

 

 

 

487

 

 

 

64,451

 

 

 

45,247

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

18,996

 

 

 

 

 

 

18,996

 

 

 

12,428

 

Sales and marketing(1)

 

 

40,678

 

 

 

5,175

 

 

 

45,853

 

 

 

40,604

 

General and administrative(1)

 

 

18,019

 

 

 

 

 

 

18,019

 

 

 

9,341

 

Total operating expenses

 

 

77,693

 

 

 

5,175

 

 

 

82,868

 

 

 

62,373

 

Operating loss

 

 

(13,729

)

 

 

(4,688

)

 

 

(18,417

)

 

 

(17,126

)

Total other (income) expense, net

 

 

(728

)

 

 

 

 

 

(728

)

 

 

526

 

Loss before income taxes

 

 

(13,001

)

 

 

(4,688

)

 

 

(17,689

)

 

 

(17,652

)

Provision for (benefit from) income taxes

 

 

172

 

 

 

 

 

 

172

 

 

 

114

 

Net loss

 

$

(13,173

)

 

$

(4,688

)

 

$

(17,861

)

 

$

(17,766

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Cost of revenue

 

 

 

 

 

 

 

 

 

$

708

 

 

$

377

 

Research and development

 

 

 

 

 

 

 

 

 

 

1,627

 

 

 

784

 

Sales and marketing

 

 

 

 

 

 

 

 

 

 

2,107

 

 

 

1,040

 

General and administrative

 

 

 

 

 

 

 

 

 

 

4,982

 

 

 

1,363

 

Total stock-based compensation

 

 

 

 

 

 

 

 

 

$

9,424

 

 

$

3,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The amortization of acquired intangibles included above was as follows:

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Cost of revenue

 

 

 

 

 

 

 

 

 

$

1,230

 

 

$

887

 

Research and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

 

 

 

 

 

 

 

 

543

 

 

 

507

 

General and administrative

 

 

 

 

 

 

 

 

 

 

4

 

 

 

7

 

Total amortization of acquired intangibles

 

 

 

 

 

 

 

 

 

$

1,777

 

 

$

1,401

 

38


 

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

163,239

 

 

$

618

 

 

$

163,857

 

 

$

117,715

 

Professional services

 

 

13,030

 

 

$

(100

)

 

 

12,930

 

 

 

7,541

 

Total revenue

 

 

176,269

 

 

 

518

 

 

 

176,787

 

 

 

125,256

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

43,916

 

 

 

 

 

 

43,916

 

 

 

30,654

 

Professional services

 

 

8,726

 

 

 

 

 

 

8,726

 

 

 

5,487

 

Total cost of revenue(1)

 

 

52,642

 

 

 

 

 

 

52,642

 

 

 

36,141

 

Gross profit

 

 

123,627

 

 

 

518

 

 

 

124,145

 

 

 

89,115

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

34,952

 

 

 

 

 

 

34,952

 

 

 

25,047

 

Sales and marketing(1)

 

 

78,886

 

 

 

11,552

 

 

 

90,438

 

 

 

77,911

 

General and administrative(1)

 

 

33,253

 

 

 

 

 

 

33,253

 

 

 

18,552

 

Total operating expenses

 

 

147,091

 

 

 

11,552

 

 

 

158,643

 

 

 

121,510

 

Operating loss

 

 

(23,464

)

 

 

(11,034

)

 

 

(34,498

)

 

 

(32,395

)

Total other (income) expense, net

 

 

(1,336

)

 

 

 

 

 

(1,336

)

 

 

1,354

 

Loss before income taxes

 

 

(22,128

)

 

 

(11,034

)

 

 

(33,162

)

 

 

(33,749

)

Provision for (benefit from) income taxes

 

 

288

 

 

 

 

 

 

288

 

 

 

(734

)

Net loss

 

$

(22,416

)

 

$

(11,034

)

 

$

(33,450

)

 

$

(33,015

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Cost of revenue

 

 

 

 

 

 

 

 

 

$

1,449

 

 

$

673

 

Research and development

 

 

 

 

 

 

 

 

 

 

2,919

 

 

 

1,365

 

Sales and marketing

 

 

 

 

 

 

 

 

 

 

4,276

 

 

 

2,085

 

General and administrative

 

 

 

 

 

 

 

 

 

 

7,340

 

 

 

2,951

 

Total stock-based compensation

 

 

 

 

 

 

 

 

 

$

15,984

 

 

$

7,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The amortization of acquired intangibles included above was as follows:

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Cost of revenue

 

 

 

 

 

 

 

 

 

$

2,400

 

 

$

1,785

 

Research and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

 

 

 

 

 

 

 

 

1,048

 

 

 

1,009

 

General and administrative

 

 

 

 

 

 

 

 

 

 

7

 

 

 

17

 

Total amortization of acquired intangibles

 

 

 

 

 

 

 

 

 

$

3,455

 

 

$

2,811

 

 

39


 

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,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

93

%

 

 

93

%

 

 

94

%

Professional services

 

 

7

%

 

 

7

%

 

 

6

%

Total revenue

 

 

100

%

 

 

100

%

 

 

100

%

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

25

%

 

 

25

%

 

 

25

%

Professional services

 

 

5

%

 

 

5

%

 

 

4

%

Total cost of revenue

 

 

30

%

 

 

30

%

 

 

29

%

Gross profit

 

 

70

%

 

 

70

%

 

 

71

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

21

%

 

 

21

%

 

 

19

%

Sales and marketing

 

 

45

%

 

 

50

%

 

 

64

%

General and administrative

 

 

20

%

 

 

20

%

 

 

15

%

Total operating expenses

 

 

85

%

 

 

90

%

 

 

98

%

Operating loss

 

 

-15

%

 

 

-20

%

 

 

-27

%

Total other (income) expense, net

 

 

-1

%

 

 

-1

%

 

 

1

%

Loss before income taxes

 

 

-14

%

 

 

-19

%

 

 

-28

%

Provision for (benefit from) income taxes

 

 

0

%

 

 

0

%

 

 

0

%

Net loss

 

 

-14

%

 

 

-19

%

 

 

-28

%

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

93

%

 

 

93

%

 

 

94

%

Professional services

 

 

7

%

 

 

7

%

 

 

6

%

Total revenue

 

 

100

%

 

 

100

%

 

 

100

%

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

25

%

 

 

25

%

 

 

24

%

Professional services

 

 

5

%

 

 

5

%

 

 

4

%

Total cost of revenue

 

 

30

%

 

 

30

%

 

 

29

%

Gross profit

 

 

70

%

 

 

70

%

 

 

71

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

20

%

 

 

20

%

 

 

20

%

Sales and marketing

 

 

45

%

 

 

51

%

 

 

62

%

General and administrative

 

 

19

%

 

 

19

%

 

 

15

%

Total operating expenses

 

 

83

%

 

 

90

%

 

 

97

%

Operating loss

 

 

-13

%

 

 

-20

%

 

 

-26

%

Total other (income) expense, net

 

 

-1

%

 

 

-1

%

 

 

1

%

Loss before income taxes

 

 

-13

%

 

 

-19

%

 

 

-27

%

Provision for (benefit from) income taxes

 

 

0

%

 

 

0

%

 

 

-1

%

Net loss

 

 

-13

%

 

 

-19

%

 

 

-26

%

 

40


 

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

Revenue

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

85,008

 

 

$

534

 

 

$

85,542

 

 

$

59,845

 

 

 

42

%

 

 

43

%

Professional services

 

 

6,291

 

 

 

(47

)

 

 

6,244

 

 

 

4,034

 

 

 

56

%

 

 

55

%

Total revenue

 

$

91,299

 

 

$

487

 

 

$

91,786

 

 

$

63,879

 

 

 

43

%

 

 

44

%

 

ASC 606 total revenue for the three months ended June 30, 2019 increased by $27.4 million, or 43%, compared to the three months ended June 30, 2018. ASC 606 total revenue for the three months ended June 30, 2019 was $91.3 million compared to ASC 605 total revenue of $91.8 million for the same period. ASC 605 total revenue for the three months ended June 30, 2019 increased by $27.9 million, or 44%, compared to the three months ended June 30, 2018. ASC 605 subscription and returns revenue for the three months ended June 30, 2019 increased by $25.7 million, or 43%, compared to the three months ended June 30, 2018. ASC 605 professional services revenue for the three months ended June 30, 2019 increased by $2.2 million, or 55%, compared to the three months ended June 30, 2018.

 

Growth in total revenue was due primarily to increased demand for our services from new and existing customers. The increase in total ASC 605 revenue for the three months ended June 30, 2019 compared to the same period of 2018, was due primarily to $15.6 million from new U.S. customers, $6.9 million from existing U.S. customers, $2.3 million from Streamlined Sales Tax (“SST”) revenue, $1.5 million attributable to revenue growth in our international operations, $1.0 million from the Compli acquisition made during the first quarter of 2019, and $0.6 million from interest earned on funds held for customers. Currently a small component of our total revenue, we offer SST services to businesses that are registered to participate in the program. Because we generally provide SST services at no cost to the seller, we earn a fee from the participating state and local governments based on a percentage of sales tax reported and paid.

 

Cost of Revenue

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

22,938

 

 

$

 

 

$

22,938

 

 

$

15,837

 

 

 

45

%

 

 

45

%

Professional services

 

 

4,397

 

 

 

 

 

 

4,397

 

 

 

2,795

 

 

 

57

%

 

 

57

%

Total revenue

 

$

27,335

 

 

$

 

 

$

27,335

 

 

$

18,632

 

 

 

47

%

 

 

47

%

 

Cost of Revenue

 

Cost of revenue for the three months ended June 30, 2019 increased by $8.7 million, or 47%, compared to the three months ended June 30, 2018. The increase in cost of revenue in absolute dollars was due primarily to an increase of $4.1 million in employee-related costs from higher headcount, an increase of $1.3 million in outside services expenses, an increase of $1.3 million in software hosting costs, and an increase of $0.7 million in allocated overhead cost.

 

Our cost of revenue headcount increased approximately 42% from June 30, 2018 to June 30, 2019 due to our continued growth to support our solutions and expand content. Employee-related costs increased due primarily to a $3.3 million increase in salaries and benefits, $0.7 million increase in compensation expense related to our bonus plans and a $0.3 million increase in stock-based compensation expense. Outside services expenses increased due primarily to third-party costs associated with Avalara Licensing, a service we began providing in the third quarter of 2018 and, to a lesser extent, the use of third-party consulting firms to support service offerings in our international operations. Software hosting costs have increased due primarily to higher transaction volumes. Allocated overhead consists primarily of facility expenses and shared information technology expenses, both of which were higher compared to the prior period.     

 

41


 

Gross Profit

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

62,070

 

 

$

534

 

 

$

62,604

 

 

$

44,008

 

 

 

41

%

 

 

42

%

Professional services

 

 

1,894

 

 

 

(47

)

 

 

1,847

 

 

 

1,239

 

 

 

53

%

 

 

49

%

Total gross profit

 

$

63,964

 

 

$

487

 

 

$

64,451

 

 

$

45,247

 

 

 

41

%

 

 

42

%

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

73

%

 

 

 

 

 

 

73

%

 

 

74

%

 

 

 

 

 

 

 

 

Professional services

 

 

30

%

 

 

 

 

 

 

30

%

 

 

31

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

70

%

 

 

 

 

 

 

70

%

 

 

71

%

 

 

 

 

 

 

 

 

 

ASC 606 total gross profit for the three months ended June 30, 2019 increased $18.7 million, or 41%, compared to the three months ended June 30, 2018. ASC 605 total gross profit for the three months ended June 30, 2019 increased $19.2 million, or 42%, compared to the three months ended June 30, 2018. Total gross margin was 70% for the three months ended June 30, 2019 compared to 71% for the same period of 2018.

Research and Development

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Research and development

 

$

18,996

 

 

$

 

 

$

18,996

 

 

$

12,428

 

 

 

53

%

 

 

53

%

 

Research and development expenses for the three months ended June 30, 2019 increased $6.6 million, or 53%, compared to the three months ended June 30, 2018. The increase was due primarily to an increase of $5.6 million in employee-related costs from higher headcount, and an increase of $0.5 million in allocated overhead cost.

 

Research and development headcount increased approximately 37% from June 30, 2018 to June 30, 2019. Employee-related costs increased due primarily to a $3.2 million increase in salaries and benefits, a $0.8 million increase in stock-based compensation expense, and a $1.2 million increase in compensation expense related to our bonus plans.

Sales and Marketing

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

40,678

 

 

$

5,175

 

 

$

45,853

 

 

$

40,604

 

 

 

0

%

 

 

13

%

 

Sales and marketing expenses for the three months ended June 30, 2019 increased $0.1 million compared to the three months ended June 30, 2018. ASC 606 sales and marketing expenses for the three months ended June 30, 2019 was $40.7 million compared to ASC 605 sales and marketing expense of $45.9 million for the same period. The difference of $5.2 million relates to the deferral of sales commissions costs and partner commission costs under ASC 606. All our sales commissions and partner commission costs were expensed as incurred under ASC 605.

 

ASC 605 sales and marketing expenses for the three months ended June 30, 2019 increased $5.3 million, or 13%, compared to the three months ended June 30, 2018. The increase was due primarily to an increase of $4.9 million in employee-related costs, and an increase of $1.6 million for partner commission expense, partially offset by a decrease of $0.6 million in outside services expenses and a decrease of $0.6 million in marketing campaign expenses.

 

42


 

Sales and marketing headcount increased approximately 10% from June 30, 2018 to June 30, 2019. Employee-related costs increased due primarily to a $2.3 million increase in salaries and benefits, a $1.1 million increase in stock-based compensation expense, a $1.1 million increase in compensation expense related to our bonus plans, and a $0.8 million increase in sales commissions expense. Sales commissions expense increased due to strong sales-related activity. ASC 605 sales commission expense was $7.2 million for the three months ended June 30, 2019 compared to $6.4 million for the three months ended June 30, 2018. Partner commission expense increased due primarily to higher revenues. ASC 605 partner commission expense was $6.7 million for the three months ended June 30, 2019 compared to $5.1 million for the three months ended June 30, 2018. Outside services expenses and marketing campaign expenses decreased due to a reduction in our discretionary spending on advertising and marketing.

 

General and Administrative

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

General and administrative

 

$

18,019

 

 

$

 

 

$

18,019

 

 

$

9,341

 

 

 

93

%

 

 

93

%

 

General and administrative expenses for the three months ended June 30, 2019 increased $8.7 million, or 93%, compared to the three months ended June 30, 2018. The increase was due primarily to an increase of $6.7 million in employee-related costs, a $1.3 million increase in outside service expenses, and a $0.4 million increase in merchant fees.

 

General and administrative headcount increased 20% from June 30, 2018 to June 30, 2019. Employee-related costs increased due primarily to a $3.6 million increase in stock-based compensation expense, a $1.8 million increase in salaries and benefits, and a $1.0 million increase in compensation expense related to our bonus plans. Outside services expenses increased primarily as a result of being a public company. Merchant fees, which are credit card processing fees, increased due to increased payment activity from customers transitioning to our auto-payment program which uses credit cards for customer payment.

Total Other (Income) Expense, Net

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Other (income) expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

(1,282

)

 

$

 

 

$

(1,282

)

 

$

(99

)

 

$

(1,183

)

 

$

(1,183

)

Interest expense

 

 

173

 

 

 

 

 

 

173

 

 

 

1,067

 

 

 

(894

)

 

 

(894

)

Other (income) expense, net

 

 

381

 

 

 

 

 

 

381

 

 

 

(442

)

 

 

823

 

 

 

823

 

Total other (income) expense, net

 

$

(728

)

 

$

 

 

$

(728

)

 

$

526

 

 

$

(1,254

)

 

$

(1,254

)

 

Total other income for the three months ended June 30, 2019 was $0.7 million compared to $0.5 million of other expense for the three months ended June 30, 2018. Interest income increased due to interest earned on investing our public offering cash proceeds. Interest expense decreased due to having no outstanding borrowings during the second quarter of 2019. We discuss borrowings under “Liquidity and Capital Resources” below. Other (income) expense, net changed to $0.4 million of other expense in the second quarter of 2019 from $0.4 million of other income in the second quarter of 2018, primarily due to our earnout liabilities. We estimate the fair value of earnout liabilities related to business combinations quarterly. During the second quarter of 2019, the adjustments to fair value increased the carrying value of the earnout liabilities for our Compli and Indix acquisitions, resulting in other expense of $0.5 million. During the second quarter of 2018, the adjustments to fair value decreased the carrying value of the earnout liabilities for our Brazil and VAT Applications acquisitions, resulting in other income of $0.4 million.

 

Provision for (Benefit from) Income Taxes

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Provision for (benefit from) income taxes

 

$

172

 

 

$

 

 

$

172

 

 

$

114

 

 

 

51

%

 

 

51

%

 

43


 

The provision for income taxes for the three months ended June 30, 2019 was $0.2 million compared to a provision of $0.1 million for the three months ended June 30, 2018. The effective income tax rate was 1.3% for the three months ended June 30, 2019 compared to a rate of 0.6% for the three months ended June 30, 2018.

 

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

Revenue

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

163,239

 

 

$

618

 

 

$

163,857

 

 

$

117,715

 

 

 

39

%

 

 

39

%

Professional services

 

 

13,030

 

 

 

(100

)

 

 

12,930

 

 

 

7,541

 

 

 

73

%

 

 

71

%

Total revenue

 

$

176,269

 

 

$

518

 

 

$

176,787

 

 

$

125,256

 

 

 

41

%

 

 

41

%

 

ASC 606 total revenue for the six months ended June 30, 2019 increased $51.0 million, or 41%, compared to the six months ended June 30, 2018. ASC 606 total revenue for the six months ended June 30, 2019 was $176.3 million compared to ASC 605 total revenue of $176.8 million for the same period. ASC 605 total revenue for the six months ended June 30, 2019 increased by $51.5 million, or 41%, compared to the six months ended June 30, 2018. ASC 605 subscription and returns revenue for the six months ended June 30, 2019 increased by $46.1 million, or 39%, compared to the six months ended June 30, 2019. ASC 605 professional services revenue for the six months ended June 30, 2019 increased by $5.4 million, or 71%, compared to the six months ended June 30, 2018.

 

Growth in total revenue was due primarily to increased demand for our services from new and existing customers. The increase in total ASC 605 revenue for the six months ended June 30, 2019 compared to the same period of 2018, was due primarily to $26.0 million from new U.S. customers, $13.8 million from existing U.S. customers, $4.6 million attributable to revenue growth in our international operations, $3.9 million from SST revenue, $1.8 million from the Compli acquisition made during the first quarter of 2019, and $1.4 million from interest earned on funds held for customers.

 

Cost of Revenue

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

43,916

 

 

$

 

 

$

43,916

 

 

$

30,654

 

 

 

43

%

 

 

43

%

Professional services

 

 

8,726

 

 

 

 

 

 

8,726

 

 

 

5,487

 

 

 

59

%

 

 

59

%

Total revenue

 

$

52,642

 

 

$

 

 

$

52,642

 

 

$

36,141

 

 

 

46

%

 

 

46

%

 

Cost of Revenue

 

Cost of revenue for the six months ended June 30, 2019 increased by $16.5 million, or 46%, compared to the six months ended June 30, 2018. The increase in cost of revenue in absolute dollars was due primarily to an increase of $7.3 million in employee-related costs from higher headcount, an increase of $3.1 million in outside services expenses, an increase of $2.7 million in software hosting costs, an increase of $1.3 million in allocated overhead cost, and an increase of $0.6 million in amortization expense on acquired intangibles assets.

 

Our cost of revenue headcount increased approximately 42% from June 30, 2018 to June 30, 2019 due to our continued growth to support our solutions and expand content. Employee-related costs increased due primarily to a $5.7 million increase in salaries and benefits, a $1.0 million increase in compensation expense related to our bonus plans, and a $0.8 million increase in stock-based compensation expense. Outside services expenses increased due primarily to third-party costs associated with Avalara Licensing, a service we began providing in the third quarter of 2018 and, to a lesser extent, the use of third-party consulting firms to support service offerings in our international operations. Software hosting costs have increased due primarily to higher transaction volumes. Allocated overhead consists primarily of facility expenses and shared information technology expenses, both of which were higher compared to the prior period.

 

44


 

Gross Profit

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

119,323

 

 

$

618

 

 

$

119,941

 

 

$

87,061

 

 

 

37

%

 

 

38

%

Professional services

 

 

4,304

 

 

 

(100

)

 

 

4,204

 

 

 

2,054

 

 

 

110

%

 

 

105

%

Total gross profit

 

$

123,627

 

 

$

518

 

 

$

124,145

 

 

$

89,115

 

 

 

39

%

 

 

39

%

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

73

%

 

 

 

 

 

 

73

%

 

 

74

%

 

 

 

 

 

 

 

 

Professional services and other

 

 

33

%

 

 

 

 

 

 

33

%

 

 

27

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

70

%

 

 

 

 

 

 

70

%

 

 

71

%

 

 

 

 

 

 

 

 

 

ASC 606 total gross profit for the six months ended June 30, 2019 increased $34.5 million, or 39%, compared to the six months ended June 30, 2018. ASC 605 total gross profit for the six months ended June 30, 2019 increased $35.0 million, or 39%, compared to the six months ended June 30, 2018. Total gross margin was 70% for the six months ended June 30, 2019 compared to 71% for the same period of 2018.

Research and Development

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Research and development

 

$

34,952

 

 

$

 

 

$

34,952

 

 

$

25,047

 

 

 

40

%

 

 

40

%

 

Research and development expenses for the six months ended June 30, 2019 increased $9.9 million, or 40%, compared to the six months ended June 30, 2018. The increase was due primarily to an increase of $8.7 million in employee-related costs from higher headcount, and an increase of $0.9 million in allocated overhead cost.

 

Research and development headcount increased approximately 37% from June 30, 2018 to June 30, 2019. Employee-related costs increased due primarily to a $5.1 million increase in salaries and benefits, a $1.6 million increase in stock-based compensation expense, and a $1.4 million increase in compensation expense related to our bonus plans.

Sales and Marketing

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

78,886

 

 

$

11,552

 

 

$

90,438

 

 

$

77,911

 

 

 

1

%

 

 

16

%

 

Sales and marketing expenses for the six months ended June 30, 2019 increased $1.0 million, or 1%, compared to the six months ended June 30, 2018. ASC 606 sales and marketing expenses for the six months ended June 30, 2019 was $78.9 million compared to ASC 605 sales and marketing expense of $90.4 million for the same period. The difference of $11.6 million relates to the deferral of sales commissions costs and partner commission costs under ASC 606. All our sales commissions and partner commission costs were expensed as incurred under ASC 605.

 

ASC 605 sales and marketing expenses for the six months ended June 30, 2019 increased $12.5 million, or 16%, compared to the six months ended June 30, 2018. The increase was due primarily to an increase of $9.1 million in employee-related costs, an increase of $4.5 million for partner commission expense, and an increase of $0.5 million in allocated overhead cost, partially offset by a decrease in outside services expenses of $0.9 million and a decrease in marketing campaign expenses of $0.4 million.

 

45


 

Sales and marketing headcount increased approximately 10% from June 30, 2018 to June 30, 2019. Employee-related costs increased due primarily to a $4.7 million increase in salaries and benefits, a $2.2 million increase in stock-based compensation expense, a $1.8 million increase in sales commissions expense, and a $1.2 million increase in compensation expense related to our bonus plans, partially offset by a $0.8 million decrease in contract and temporary employee costs. Sales commissions expense increased due to strong sales-related activity. ASC 605 sales commission expense was $14.0 million for the six months ended June 30, 2019 compared to $12.2 million for the six months ended June 30, 2018. Partner commission expense increased due primarily to higher revenues and an increase in the proportion of sales eligible for partner commissions, including new sales which generally earn a higher commission rate compared to renewal sales. ASC 605 partner commission expense was $13.5 million for the six months ended June 30, 2019 compared to $9.0 million for the six months ended June 30, 2018. Outside services expenses and marketing campaign expenses decreased due to a reduction in our discretionary spending on advertising and marketing.

 

General and Administrative

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

33,253

 

 

$

 

 

$

33,253

 

 

$

18,552

 

 

 

79

%

 

 

79

%

 

General and administrative expenses for the six months ended June 30, 2019 increased $14.7 million, or 79%, compared to the six months ended June 30, 2018. The increase was due primarily to an increase of $10.5 million in employee-related costs, a $2.2 million increase in outside service expenses, a $0.7 million increase in merchant fees, and an increase of $0.6 million in insurance costs, partially offset by a $0.9 million decrease in allocated overhead cost.  

 

General and administrative headcount increased 20% from June 30, 2018 to June 30, 2019. Employee-related costs increased due primarily to a $4.4 million increase in stock-based compensation expense, a $3.9 million increase in salaries and benefits, and a $1.7 million increase in compensation expense related to our bonus plans. Outside services expenses increased primarily as a result of being a public company. Merchant fees, which are credit card processing fees, increased due to increased payment activity from customers transitioning to our auto-payment program which uses credit cards for customer payment. Insurance costs have increased from the prior period as a result of being a public company.    

Total Other (Income) Expense, Net

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Other (income) expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

(2,049

)

 

$

 

 

$

(2,049

)

 

$

(135

)

 

$

(1,914

)

 

$

(1,914

)

Interest expense

 

 

284

 

 

 

 

 

 

284

 

 

 

1,961

 

 

 

(1,677

)

 

 

(1,677

)

Other (income) expense, net

 

 

429

 

 

 

 

 

 

429

 

 

 

(472

)

 

 

901

 

 

 

901

 

Total other (income) expense, net

 

$

(1,336

)

 

$

 

 

$

(1,336

)

 

$

1,354

 

 

$

(2,690

)

 

$

(2,690

)

 

Total other income for the six months ended June 30, 2019 was $1.3 million compared to $1.4 million of other expense for the six months ended June 30, 2018. Interest income increased due to interest earned on investing our public offering cash proceeds. Interest expense decreased due to having no outstanding borrowings during the first half of 2019. We discuss borrowings under “Liquidity and Capital Resources” below. Other (income) expense, net changed to $0.4 million other expense in the first half of 2019 from $0.5 million of other income in the first half of 2018, primarily due to our earnout liabilities. We estimate the fair value of earnout liabilities related to business combinations quarterly. During the second half of 2019, the adjustments to fair value increased the carrying value of the earnout liabilities for our Compli and Indix acquisitions, resulting other expense of $0.5 million. During the second half of 2018, the adjustments to fair value decreased the carrying value of the earnout liabilities for our Brazil and VAT Applications acquisitions, resulting in other income of $0.5 million.

 

46


 

Provision for (Benefit from) Income Taxes

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

 

As Reported

 

 

Without Adoption

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Provision for (benefit from) income taxes

 

$

288

 

 

$

 

 

$

288

 

 

$

(734

)

 

 

-139

%

 

 

-139

%

 

The provision for income taxes for the six months ended June 30, 2019 was $0.3 million compared to a benefit from income taxes of $0.7 million for the six months ended June 30, 2018. The effective income tax rate was 1.3% for the six months ended June 30, 2019 compared to a benefit of 2.2% for the six months ended June 30, 2018. For the six months ended June 30, 2019, the income tax expense related primarily to foreign tax jurisdictions. The income tax benefit for the six months ended June 30, 2018 was due primarily to the determination that indefinite lived goodwill would provide a source of income to realize indefinite lived deferred tax assets, resulting in a tax benefit of $0.9 million.

 

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 U.S. tax losses, including in the first half of 2019. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development. We expect to maintain a full valuation allowance for the foreseeable future.

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, and working capital for our growth. To date, we have financed our operations primarily through cash received from customers for our solutions, private placements, public offerings of our common stock, and bank borrowings. In June 2019, we completed a public offering of our common stock, in which we sold 4,133,984 shares at a price of $69.40 per share, including the full exercise of the underwriters’ option to purchase 539,215 additional shares. We received net proceeds of $274.7 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable of $1.2 million. In June 2018, we completed an initial public offering (“IPO”) of our common stock, in which we sold 8,625,000 shares at $24.00 per share, including the full exercise of the underwriters’ option to purchase 1,125,000 additional shares. We received net proceeds of $192.5 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable of $3.4 million. As of June 30, 2019, we had $441.6 million of cash and cash equivalents, most of which was held in money market accounts.  

Borrowings

We had a loan and security agreement with Silicon Valley Bank and Ally Bank (the “Lenders”) that consisted of a $50.0 million revolving credit facility (the “Credit Facility”). On June 25, 2019, we terminated the Credit Facility. As of June 30, 2019, we had no credit facilities in place and had no borrowings outstanding.

Prior to the termination of the Credit Facility, we were required to pay a quarterly fee of 0.50% per annum on the undrawn portion available under the revolving credit facility plus the sum of outstanding letters of credit. Under the Credit Facility, the interest rate on the revolving credit facility was based on the greater of either 4.25% or the current prime rate, plus 1.75%.

Future Cash Requirements

As of June 30, 2019, our cash and cash equivalents included proceeds from our June 2019 and our June 2018 public offerings of common stock. We intend to continue to increase our operating expenses and capital expenditures to support the growth in our business and operations. We may also use our cash and cash equivalents to acquire complementary businesses, products, services, technologies, or other assets. We believe that our existing cash and cash equivalents of $441.6 million as of June 30, 2019, together with cash generated from operations, 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.

47


 

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,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Cash (used in) provided by:

 

 

 

 

 

 

 

 

Operating Activities

 

$

(421

)

 

$

(11,276

)

Investing Activities

 

 

(34,269

)

 

 

(17,635

)

Financing Activities

 

 

334,092

 

 

 

187,796

 

 

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, and facilities expenses. Cash used in operating activities is comprised of our net loss adjusted for certain non-cash items, including goodwill impairment, stock-based compensation, depreciation and amortization, other non-cash charges, and net changes in operating assets and liabilities.

For the six months ended June 30, 2019, cash used in operating activities was $0.4 million compared to $11.3 million for the six months ended June 30, 2018. The decrease in cash used of $10.9 million was due primarily to an increase in cash collected from customers as demand for our subscription services continued to grow, partially offset by increasing headcount to support this growth. Additionally, during the first six months of 2019, we earned and received interest income on a portion of the cash proceeds from our June 2018 IPO, while during the first six months of 2018, we accrued and paid interest expense on our outstanding borrowings.

Investing Activities

Our investing activities primarily include cash outflows related to purchases of property and equipment, changes in customer fund assets, and, from time-to-time, the cash paid for asset or business acquisitions.

For the six months ended June 30, 2019, cash used in investing activities was $34.3 million, compared to cash used of $17.6 million for the six months ended June 30, 2018. The increase in cash used of $16.6 million was due primarily to cash paid for acquisitions of $17.3 million, and a greater increase in customer fund assets of $7.3 million, partially offset by lower cash paid for purchases of intangible assets of $4.8 million and lower capital expenditures of $3.2 million. In the first half of 2019, we acquired substantially all the assets of Compli and Indix for total cash consideration of $17.3 million. In the first half of 2018, we acquired developed technology to facilitate cross-border transactions (e.g. duties and tariffs). Capital expenditures decreased due primarily to spending related to our new corporate headquarters in Seattle, Washington during the first half of 2018. Our new headquarters opened in the first quarter of 2018.

Financing Activities

Our financing activities primarily include cash inflows and outflows from issuance and repurchases of capital stock, our employee stock purchase plan, our Credit Facility, and changes in customer fund obligations.

For the six months ended June 30, 2019, cash provided by financing activities was $334.1 million compared to cash provided of $187.8 million for the six months ended June 30, 2018. This increase in cash provided of $146.3 million was due primarily to increased cash proceeds from offerings of our common stock of $82.2 million, a $34.8 million increase in cash proceeds from exercise of stock options, $7.7 million of cash proceeds from common stock purchased under our employee stock purchase plan, and a $7.2 million greater increase in customer fund obligations in the first half of 2019. We also had net repayments on our Credit Facility of $10.0 million in the first of half of 2018 with no comparable activity in 2019.          

Funds Held from Customers and Customer Fund Obligations

We maintain trust accounts with financial institutions, which allows our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held from customers represent cash and cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Funds held from customers are not commingled with our operating funds, but typically are deposited with funds also held on behalf of our other customers.

48


 

Customer fund obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer fund obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Cash flows related to the cash received from and paid on behalf of customers are reported as follows:

 

1)

changes in customer fund obligations liability are presented as cash flows from financing activities;

 

2)

changes in customer fund assets held and receivables from customers are presented as net cash flows from investing activities; and

 

3)

changes in customer fund assets account that relate to paying for the trust operations, such as banking fees, are presented as cash flows from operating activities.

Contractual Obligations and Commitments

There were no material changes to our contractual obligations as of June 30, 2019 as compared to December 31, 2018.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements in the six months ended June 30, 2019 or 2018.

 

Use and Reconciliation of Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we have calculated non-GAAP cost of 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 loss, non-GAAP net loss, free cash flow, and calculated billings, which are non-GAAP financial measures. We have provided tabular reconciliations of each of these non-GAAP financial measures to its most directly comparable GAAP financial measure.

 

We 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 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 loss as GAAP operating loss before stock-based compensation expense, amortization of acquired intangibles, and goodwill impairments. We calculate non-GAAP net 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 (used in) provided by operating activities less cash used for the purchases of property and equipment.

 

We define calculated billings as total revenue plus the changes in deferred revenue and contract liabilities in the period.

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. In addition, because we recognize subscription revenue ratably over the subscription term, management uses calculated billings to measure our subscription sales activity for a particular period, to compare subscription sales activity across particular periods, and as an indicator of future subscription revenue, the actual timing of which will be affected by several factors, including subscription start date and duration. 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 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.

49


 

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 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 loss, non-GAAP net loss, free cash flow, and calculated billings in conjunction with the related GAAP financial measure.

As a result of adoption of ASC 606 effective January 1, 2019, non-GAAP financial measures for the three and six months ended June 30, 2019, as computed in accordance with ASC 606, are not as comparable to non-GAAP financial measures for the three and six months ended June 30, 2018, which are computed in accordance with ASC 605. Except for calculated billings, the reconciliation of non-GAAP measures provided below includes additional information to reconcile the impacts of the adoption of ASC 606 on the non-GAAP financial measures for the three and six months ended June 30, 2019, including presentation of the non-GAAP measures for 2019 under ASC 605 for comparison to the prior year periods.

 

50


 

The following schedules reflect 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,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Reconciliation of Non-GAAP Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

27,335

 

 

$

 

 

$

27,335

 

 

$

18,632

 

Stock-based compensation expense

 

 

(708

)

 

 

 

 

 

(708

)

 

 

(377

)

Amortization of acquired intangibles

 

 

(1,230

)

 

 

 

 

 

(1,230

)

 

 

(887

)

Non-GAAP Cost of Revenue

 

$

25,397

 

 

$

 

 

$

25,397

 

 

$

17,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

63,964

 

 

$

487

 

 

$

64,451

 

 

$

45,247

 

Stock-based compensation expense

 

 

708

 

 

 

 

 

 

708

 

 

 

377

 

Amortization of acquired intangibles

 

 

1,230

 

 

 

 

 

 

1,230

 

 

 

887

 

Non-GAAP Gross Profit

 

$

65,902

 

 

$

487

 

 

$

66,389

 

 

$

46,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Gross Margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

70

%

 

 

0

%

 

 

70

%

 

 

71

%

Stock-based compensation expense as a percentage of revenue

 

 

1

%

 

 

0

%

 

 

1

%

 

 

1

%

Amortization of acquired intangibles as a percentage of revenue

 

 

1

%

 

 

0

%

 

 

1

%

 

 

1

%

Non-GAAP Gross Margin

 

 

72

%

 

 

0

%

 

 

72

%

 

 

73

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Research and Development Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

18,996

 

 

$

 

 

$

18,996

 

 

$

12,428

 

Stock-based compensation expense

 

 

(1,627

)

 

 

 

 

 

(1,627

)

 

 

(784

)

Amortization of acquired intangibles

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Research and Development Expense

 

$

17,369

 

 

$

 

 

$

17,369

 

 

$

11,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Sales and Marketing Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

40,678

 

 

$

5,175

 

 

$

45,853

 

 

$

40,604

 

Stock-based compensation expense

 

 

(2,107

)

 

 

 

 

 

(2,107

)

 

 

(1,040

)

Amortization of acquired intangibles

 

 

(543

)

 

 

 

 

 

(543

)

 

 

(507

)

Non-GAAP Sales and Marketing Expense

 

$

38,028

 

 

$

5,175

 

 

$

43,203

 

 

$

39,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP General and Administrative Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

18,019

 

 

$

 

 

$

18,019

 

 

$

9,341

 

Stock-based compensation expense

 

 

(4,982

)

 

 

 

 

 

(4,982

)

 

 

(1,363

)

Amortization of acquired intangibles

 

 

(4

)

 

 

 

 

 

(4

)

 

 

(7

)

Non-GAAP General and Administrative Expense

 

$

13,033

 

 

$

 

 

$

13,033

 

 

$

7,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Operating Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

$

(13,729

)

 

$

(4,688

)

 

$

(18,417

)

 

$

(17,126

)

Stock-based compensation expense

 

 

9,424

 

 

 

 

 

 

9,424

 

 

 

3,564

 

Amortization of acquired intangibles

 

 

1,777

 

 

 

 

 

 

1,777

 

 

 

1,401

 

Non-GAAP Operating Loss

 

$

(2,528

)

 

$

(4,688

)

 

$

(7,216

)

 

$

(12,161

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Net Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(13,173

)

 

$

(4,688

)

 

$

(17,861

)

 

$

(17,766

)

Stock-based compensation expense

 

 

9,424

 

 

 

 

 

 

9,424

 

 

 

3,564

 

Amortization of acquired intangibles

 

 

1,777

 

 

 

 

 

 

1,777

 

 

 

1,401

 

Non-GAAP Net Loss

 

$

(1,972

)

 

$

(4,688

)

 

$

(6,660

)

 

$

(12,801

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Free Cash Flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

10,000

 

 

$

 

 

$

10,000

 

 

$

2,099

 

Purchases of property and equipment

 

 

(2,836

)

 

 

 

 

 

(2,836

)

 

 

(4,544

)

Free Cash Flow

 

$

7,164

 

 

$

 

 

$

7,164

 

 

$

(2,445

)

51


 

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

As Reported

(ASC 606)

 

 

Impacts from

Adoption

 

 

Without

Adoption

(ASC 605)

 

 

As Reported

(ASC 605)

 

Reconciliation of Non-GAAP Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

52,642

 

 

$

 

 

$

52,642

 

 

$

36,141

 

Stock-based compensation expense

 

 

(1,449

)

 

 

 

 

 

(1,449

)

 

 

(673

)

Amortization of acquired intangibles

 

 

(2,400

)

 

 

 

 

 

(2,400

)

 

 

(1,785

)

Non-GAAP Cost of Revenue

 

$

48,793

 

 

$

 

 

$

48,793

 

 

$

33,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

123,627

 

 

$

518

 

 

$

124,145

 

 

$

89,115

 

Stock-based compensation expense

 

 

1,449

 

 

 

 

 

 

1,449

 

 

 

673

 

Amortization of acquired intangibles

 

 

2,400

 

 

 

 

 

 

2,400

 

 

 

1,785

 

Non-GAAP Gross Profit

 

$

127,476

 

 

$

518

 

 

$

127,994

 

 

$

91,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Gross Margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

70

%

 

 

 

 

 

 

70

%

 

 

71

%

Stock-based compensation expense as a percentage of revenue

 

 

1

%

 

 

 

 

 

 

1

%

 

 

1

%

Amortization of acquired intangibles as a percentage of revenue

 

 

1

%

 

 

 

 

 

 

1

%

 

 

1

%

Non-GAAP Gross Margin

 

 

72

%

 

 

 

 

 

 

72

%

 

 

73

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Research and Development Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

34,952

 

 

$

 

 

$

34,952

 

 

$

25,047

 

Stock-based compensation expense

 

 

(2,919

)

 

 

 

 

 

(2,919

)

 

 

(1,365

)

Amortization of acquired intangibles

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Research and Development Expense

 

$

32,033

 

 

$

 

 

$

32,033

 

 

$

23,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Sales and Marketing Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

78,886

 

 

$

11,552

 

 

$

90,438

 

 

$

77,911

 

Stock-based compensation expense

 

 

(4,276

)

 

 

 

 

 

(4,276

)

 

 

(2,085

)

Amortization of acquired intangibles

 

 

(1,048

)

 

 

 

 

 

(1,048

)

 

 

(1,009

)

Non-GAAP Sales and Marketing Expense

 

$

73,562

 

 

$

11,552

 

 

$

85,114

 

 

$

74,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP General and Administrative Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

33,253

 

 

$

 

 

$

33,253

 

 

$

18,552

 

Stock-based compensation expense

 

 

(7,340

)

 

 

 

 

 

(7,340

)

 

 

(2,951

)

Amortization of acquired intangibles

 

 

(7

)

 

 

 

 

 

(7

)

 

 

(17

)

Non-GAAP General and Administrative Expense

 

$

25,906

 

 

$

 

 

$

25,906

 

 

$

15,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Operating Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

$

(23,464

)

 

$

(11,034

)

 

$

(34,498

)

 

$

(32,395

)

Stock-based compensation expense

 

 

15,984

 

 

 

 

 

 

15,984

 

 

 

7,074

 

Amortization of acquired intangibles

 

 

3,455

 

 

 

 

 

 

3,455

 

 

 

2,811

 

Non-GAAP Operating Loss

 

$

(4,025

)

 

$

(11,034

)

 

$

(15,059

)

 

$

(22,510

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Net Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(22,416

)

 

$

(11,034

)

 

$

(33,450

)

 

$

(33,015

)

Stock-based compensation expense

 

 

15,984

 

 

 

 

 

 

15,984

 

 

 

7,074

 

Amortization of acquired intangibles

 

 

3,455

 

 

 

 

 

 

3,455

 

 

 

2,811

 

Non-GAAP Net Loss

 

$

(2,977

)

 

$

(11,034

)

 

$

(14,011

)

 

$

(23,130

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Free Cash Flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(421

)

 

$

 

 

$

(421

)

 

$

(11,276

)

Purchases of property and equipment

 

 

(4,950

)

 

 

 

 

 

(4,950

)

 

 

(8,169

)

Free Cash Flow

 

$

(5,371

)

 

$

 

 

$

(5,371

)

 

$

(19,445

)

 

52


 

The following table reflects calculated billings and reconciles to GAAP revenues. In addition to the defined reconciling items for calculated billings, the first quarter of 2019 also includes one-time reconciling adjustments related to the impact of adoption of ASC 606 as of January 1, 2019.

 

 

Three Months Ended

 

 

Jun 30,

2019

 

 

Mar 31,

2019

 

 

Dec 31,

2018

 

 

Sep 30,

2018

 

 

Jun 30,

2018

 

 

Mar 31,

2018

 

 

Dec 31,

2017

 

 

Sep 30,

2017

 

Total revenue

$

91,299

 

 

$

84,970

 

 

$

76,923

 

 

$

69,919

 

 

$

63,879

 

 

$

61,377

 

 

$

58,035

 

 

$

55,268

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue (end of

   period)

 

138,811

 

 

 

132,714

 

 

 

134,653

 

 

 

118,209

 

 

 

109,344

 

 

 

103,878

 

 

 

92,231

 

 

 

84,637

 

Contract liabilities (end of

   period)

 

4,508

 

 

 

4,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of adoption of ASC 606

   on deferred revenue

 

 

 

 

11,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue (beginning of

   period)

 

(132,714

)

 

 

(134,653

)

 

 

(118,209

)

 

 

(109,344

)

 

 

(103,878

)

 

 

(92,231

)

 

 

(84,637

)

 

 

(81,546

)

Contract liabilities (beginning

   of period)

 

(4,208

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of adoption of ASC 606

   on contract liabilities

 

 

 

 

(2,090

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Calculated billings

$

97,696

 

 

$

96,399

 

 

$

93,367

 

 

$

78,784

 

 

$

69,345

 

 

$

73,024

 

 

$

65,629

 

 

$

58,359

 

 

 

Critical Accounting Policies and Estimates

We adopted the new revenue recognition accounting standard ASC 606 effective January 1, 2019 on a modified retrospective basis. See Note 2 to the accompanying notes to the consolidated financial statements for additional information related to our adoption of the new revenue recognition standard. There were no other material changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 28, 2019.

Recent Accounting Pronouncements

For further information on recent accounting pronouncements, refer to Note 2 in the 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 $441.6 million and $142.3 million as of June 30, 2019 and December 31, 2018, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with financial institutions. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.

 

On June 25, 2019, we terminated our Credit Facility. At June 30, 2019, we had no credit facilities in place and had no borrowings outstanding. Any debt we incur in the future may bear interest at variable rates and may expose us to risk related to changes in interest rates.

 

Foreign Currency Exchange Risk

 

Our revenue and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the Euro, British Pound, and Brazilian Real. Decreases 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 three months ended June 30, 2019 and 2018, approximately 6% of our revenues were generated in currencies other than U.S. dollars. For the six months ended June 30, 2019 and 2018, approximately 7% and 6%, respectively, of our revenues were generated in currencies other than U.S. dollars.

 

53


 

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

 

We do not believe that inflation had a material effect on our business, financial condition, or results of operations in the last fiscal year or the first half of 2019. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.

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, 2019.

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 effective as of June 30, 2019.

Changes in Internal Control over Financial Reporting

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.

54


 

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be subject to legal proceedings arising in the ordinary course of business. In addition, from time to time, third parties may assert intellectual property infringement claims against us in the form of letters and other forms of communication. 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.

On October 22, 2018, PTP OneClick, LLC (“PTP”) filed a lawsuit against Avalara, Inc. in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges that making, using, offering to sell, and selling AvaTax, Avalara Returns, and TrustFile (the “Avalara Products”) infringe U.S. Patent No. 9,760,915 held by PTP and also alleges unspecified trade secret misappropriation, unfair competition, and breach of contract. PTP seeks judgments of willful patent infringement, willful trade secret misappropriation, unfair competition, and breach of contract. PTP requests preliminary and permanent injunctions to enjoin us from making, using, offering to sell, and selling the Avalara Products along with treble damages and attorneys’ fees. Based upon our review of the complaint and the specified patent, we believe we have meritorious defenses to PTP’s claims. On November 7, 2018, we moved to dismiss the lawsuit and to have the patent held invalid, and also have moved to transfer the matter to the United States District Court located in Seattle, Washington. On April 30, 2019, the United States District Court for the Eastern District of Wisconsin granted our motion to transfer, reserving resolution of the motion to dismiss for the United States District Court for the Western District of Washington. That district court has set the trial date for October 26, 2020. We intend to continue to vigorously defend against PTP’s allegations. For a description of the risks of this and similar litigation, see “Risk Factors—Our ability to protect our intellectual property is limited and our solutions are, and may in the future be, subject to claims of infringement by third parties” in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on February 28, 2019.

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 Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 28, 2019.

Because we recognize revenue from subscriptions for our solutions over the terms of the subscriptions and expense a portion of the commissions associated with sales of our solutions immediately upon execution of a subscription agreement with a customer, our financial results in any period may not be indicative of our financial health and future performance.

We generally recognize revenue from subscription fees paid by customers ratably over the terms of their subscription agreements. As a result, most of the subscription revenue we report in each quarter is the result of agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not be fully reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as subscription revenue from new customers must be recognized over the applicable subscription terms.

In contrast, we expense a portion of the commissions paid to our sales personnel and to our referral partners in the period in which we enter into an agreement for the sale of our solutions. Beginning January 1, 2019, 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 greater than one year. These deferred costs are amortized to expense over a period of benefit of generally six years. Although we believe increased sales is a positive indicator of the long-term health of our business, increased sales could increase our operating expenses and decrease earnings in any particular period. Thus, we may report poor results of operations due to higher sales or customer referral source commissions in a period in which we experience strong sales of our solutions. Alternatively, we may report better results of operations due to the reduction of sales or customer referral source commissions in a period in which we experience a slowdown in sales. Therefore, you should not rely on our financial results during any one quarter as an indication of our financial health and future performance.

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

On June 14, 2018, the SEC declared effective the Registration Statement on Form S-1 (File No. 333- 224850) for our IPO. Using a portion of the proceeds from the IPO, on August 15, 2018, we repaid all amounts outstanding under our term loan facility. Apart from the repayment of our term loan facility, there has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

 

55


 

Item 6. Exhibits.

 

Exhibit

Number

 

Description

 

 

 

    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

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed herewith.

+

Management contract or compensatory plan.

56


 

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, 2019

 

By:

/s/ William D. Ingram

 

 

 

William D. Ingram

 

 

 

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

57