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AVLR Avalara

Filed: 4 Nov 21, 8:00pm

 

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 September 30, 2021

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 October 29, 2021, the registrant had 86,915,885 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

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;

 

the potential effects on our business of events beyond our control such as the current novel coronavirus (“COVID-19”) pandemic; and

 

other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A. “Risk Factors” and in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”) 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)

 

 

 

September 30,

 

December 31,

 

 

 

2021

 

2020

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,536,422

 

$

673,593

 

Restricted cash

 

 

37,700

 

 

19,953

 

Trade accounts receivable—net of allowance for doubtful accounts of $5,394 and

   $3,983, respectively

 

 

96,305

 

 

75,857

 

Deferred commissions

 

 

15,735

 

 

12,245

 

Prepaid expenses and other current assets

 

 

31,102

 

 

20,098

 

Total current assets before customer fund assets

 

 

1,717,264

 

 

801,746

 

Funds held from customers

 

 

79,884

 

 

30,598

 

Receivable from customers—net of allowance of $912 and $593, respectively

 

 

1,280

 

 

563

 

Total current assets

 

 

1,798,428

 

 

832,907

 

Noncurrent assets:

 

 

 

 

 

 

 

Restricted cash

 

 

0

 

 

37,700

 

Deferred commissions

 

 

47,896

 

 

38,625

 

Operating lease right-of-use assets—net

 

 

46,798

 

 

52,320

 

Property and equipment—net

 

 

42,645

 

 

34,713

 

Intangible assets—net

 

 

88,417

 

 

86,513

 

Goodwill

 

 

603,768

 

 

513,234

 

Other noncurrent assets

 

 

10,323

 

 

6,321

 

Total assets

 

$

2,638,275

 

$

1,602,333

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade payables

 

$

18,741

 

$

20,280

 

Accrued expenses

 

 

91,978

 

 

84,532

 

Deferred revenue

 

 

256,182

 

 

208,026

 

Accrued purchase price related to acquisitions

 

 

48,869

 

 

22,473

 

Accrued earnout liabilities

 

 

29,456

 

 

749

 

Operating lease liabilities

 

 

11,839

 

 

11,339

 

Total current liabilities before customer fund obligations

 

 

457,065

 

 

347,399

 

Customer fund obligations

 

 

81,955

 

 

31,549

 

Total current liabilities

 

 

539,020

 

 

378,948

 

Noncurrent liabilities:

 

 

 

 

 

 

 

Convertible senior notes—net

 

 

960,373

 

 

0

 

Deferred revenue

 

 

1,701

 

 

1,664

 

Accrued purchase price related to acquisitions

 

 

3,889

 

 

49,057

 

Accrued earnout liabilities

 

 

46,416

 

 

34,468

 

Operating lease liabilities

 

 

48,416

 

 

56,625

 

Deferred tax liability

 

 

2,195

 

 

1,031

 

Other noncurrent liabilities

 

 

817

 

 

380

 

Total liabilities

 

 

1,602,827

 

 

522,173

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value – 0 shares issued and outstanding at

September 30, 2021 and December 31, 2020, and 20,000 shares authorized as of

   September 30, 2021 and December 31, 2020

 

 

0

 

 

0

 

Common stock, $0.0001 par value – 86,843 and 85,058 shares issued and

   outstanding at September 30, 2021 and December 31, 2020, respectively, and

   600,000 shares authorized as of September 30, 2021 and December 31, 2020

 

 

9

 

 

9

 

Additional paid-in capital

 

 

1,687,579

 

 

1,640,867

 

Accumulated other comprehensive loss

 

 

(2,579

)

 

(1,339

)

Accumulated deficit

 

 

(649,561

)

 

(559,377

)

Total shareholders’ equity

 

 

1,035,448

 

 

1,080,160

 

Total liabilities and shareholders' equity

 

$

2,638,275

 

$

1,602,333

 

 

 

 

 

 

 

 

 

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

3


 

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

164,237

 

 

$

119,193

 

Professional services

 

 

16,930

 

 

 

8,686

 

Total revenue

 

 

181,167

 

 

 

127,879

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

44,824

 

 

 

31,155

 

Professional services

 

 

8,216

 

 

 

3,777

 

Total cost of revenue

 

 

53,040

 

 

 

34,932

 

Gross profit

 

 

128,127

 

 

 

92,947

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

42,574

 

 

 

32,562

 

Sales and marketing

 

 

75,867

 

 

 

49,057

 

General and administrative

 

 

35,887

 

 

 

23,885

 

Total operating expenses

 

 

154,328

 

 

 

105,504

 

Operating loss

 

 

(26,201

)

 

 

(12,557

)

Other (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(28

)

 

 

(36

)

Interest expense

 

 

815

 

 

 

 

Other (income) expense, net

 

 

6,168

 

 

 

(185

)

Total other (income) expense, net

 

 

6,955

 

 

 

(221

)

Loss before income taxes

 

 

(33,156

)

 

 

(12,336

)

(Benefit from) provision for income taxes

 

 

(610

)

 

 

393

 

Net loss

 

$

(32,546

)

 

$

(12,729

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(0.38

)

 

$

(0.15

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

86,530

 

 

 

82,288

 

 

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

 

4


 

 

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

455,997

 

 

$

333,258

 

Professional services

 

 

47,838

 

 

 

22,551

 

Total revenue

 

 

503,835

 

 

 

355,809

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

123,970

 

 

 

89,451

 

Professional services

 

 

22,416

 

 

 

13,065

 

Total cost of revenue

 

 

146,386

 

 

 

102,516

 

Gross profit

 

 

357,449

 

 

 

253,293

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

121,841

 

 

 

85,253

 

Sales and marketing

 

 

212,068

 

 

 

144,731

 

General and administrative

 

 

101,982

 

 

 

65,595

 

Total operating expenses

 

 

435,891

 

 

 

295,579

 

Operating loss

 

 

(78,442

)

 

 

(42,286

)

Other (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(75

)

 

 

(1,646

)

Interest expense

 

 

815

 

 

 

 

Other (income) expense, net

 

 

9,403

 

 

 

(3,435

)

Total other (income) expense, net

 

 

10,143

 

 

 

(5,081

)

Loss before income taxes

 

 

(88,585

)

 

 

(37,205

)

Provision for income taxes

 

 

1,599

 

 

 

947

 

Net loss

 

$

(90,184

)

 

$

(38,152

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(1.05

)

 

$

(0.48

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

86,023

 

 

 

79,715

 

 

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

 

5


 

 

AVALARA, INC.

Consolidated Statements of Comprehensive Loss (unaudited)

(In thousands)

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Net loss

 

$

(32,546

)

 

$

(12,729

)

Other comprehensive loss — Foreign currency

   translation

 

 

(1,172

)

 

 

(225

)

Total comprehensive loss

 

$

(33,718

)

 

$

(12,954

)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Net loss

 

$

(90,184

)

 

$

(38,152

)

Other comprehensive (loss) income — Foreign currency translation

 

 

(1,240

)

 

 

835

 

Total comprehensive loss

 

$

(91,424

)

 

$

(37,317

)

 

 

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

 

6


 

 

AVALARA, INC.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(90,184

)

 

$

(38,152

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

65,330

 

 

 

34,799

 

Depreciation and amortization

 

 

25,732

 

 

 

11,923

 

Asset impairments

 

 

0

 

 

 

794

 

Amortization of debt issuance costs

 

 

482

 

 

 

0

 

Impairment of capitalized cloud computing costs

 

 

345

 

 

 

0

 

Deferred income tax (benefit) expense

 

 

(2,036

)

 

 

193

 

Non-cash operating lease costs

 

 

7,102

 

 

 

6,027

 

Non-cash change in earnout liabilities

 

 

8,711

 

 

 

(2,325

)

Non-cash bad debt expense

 

 

1,326

 

 

 

1,445

 

Other

 

 

(799

)

 

 

(221

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(18,713

)

 

 

(12,205

)

Prepaid expenses and other current assets

 

 

(13,721

)

 

 

(4,179

)

Deferred commissions

 

 

(12,761

)

 

 

(7,425

)

Other noncurrent assets

 

 

(3,719

)

 

 

(2,698

)

Trade payables

 

 

(2,327

)

 

 

4,683

 

Accrued expenses

 

 

5,981

 

 

 

6,247

 

Deferred revenue

 

 

46,876

 

 

 

19,397

 

Operating lease liabilities

 

 

(8,900

)

 

 

(7,243

)

Net cash provided by operating activities

 

 

8,725

 

 

 

11,060

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(4,463

)

 

 

(2,968

)

Capitalized software development costs

 

 

(9,608

)

 

 

(2,706

)

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

 

 

(33,555

)

 

 

0

 

Cash paid for acquired intangible assets

 

 

(1,500

)

 

 

0

 

Cash paid for purchases of customer fund available-for-sale securities

 

 

(381

)

 

 

0

 

Net cash used in investing activities

 

 

(49,507

)

 

 

(5,674

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from common stock offering, net of underwriting discounts

 

 

0

 

 

 

556,312

 

Payments of deferred financing costs

 

 

0

 

 

 

(300

)

Proceeds from convertible senior notes

 

 

977,500

 

 

 

0

 

Payments of debt issuance costs

 

 

(17,343

)

 

 

0

 

Purchase of capped calls

 

 

(75,268

)

 

 

0

 

Proceeds from exercise of stock options

 

 

18,146

 

 

 

30,717

 

Proceeds from purchases of stock under employee stock purchase plan

 

 

14,446

 

 

 

11,337

 

Acquisition-related post-closing payments

 

 

(20,821

)

 

 

(2,763

)

Payments related to business combination earnouts

 

 

(33

)

 

 

(3,760

)

Payments related to asset acquisition earnouts

 

 

(1,266

)

 

 

(65

)

Net increase in customer fund obligations

 

 

37,942

 

 

 

1,681

 

Net cash provided by financing activities

 

 

933,303

 

 

 

593,159

 

Foreign currency effect

 

 

(732

)

 

 

(504

)

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

 

 

891,789

 

 

 

598,041

 

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

 

 

761,844

 

 

 

491,333

 

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

 

$

1,653,633

 

 

$

1,089,374

 

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

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,536,422

 

 

$

1,064,077

 

Restricted cash

 

 

37,700

 

 

 

0

 

Restricted cash equivalents—funds held from customers

 

 

79,511

 

 

 

25,297

 

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

 

$

1,653,633

 

 

$

1,089,374

 

7


 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

2021

 

 

2020

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

 

Cash paid for operating lease liabilities

 

$

11,149

 

 

$

10,156

 

 

Cash paid for income taxes

 

 

936

 

 

 

865

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

Stock issued related to business combinations

 

$

22,971

 

 

$

7,500

 

 

Accrued purchase price related to acquisitions

 

 

3,366

 

 

 

0

 

 

Accrued value of earnout related to acquisitions of businesses

 

 

32,350

 

 

 

0

 

 

Customer fund obligations assumed in business combinations

 

 

12,464

 

 

 

0

 

 

Accrued purchase of intangible assets

 

 

870

 

 

 

433

 

 

Debt issuance costs in accounts payable and accrued expenses

 

 

265

 

 

 

0

 

 

Property and equipment additions in accounts payable and

   accrued expenses

 

 

1,453

 

 

 

981

 

 

Deferred financing costs in accounts payable and accrued

   expenses

 

 

0

 

 

 

401

 

 

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

 

 

1,579

 

 

 

7,818

 

 

Stock-based compensation costs capitalized to internally developed software

 

 

968

 

 

 

152

 

 

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

 

 

1,045

 

 

 

0

 

 

 

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

 

8


 

 

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 and other product-related taxes such as sales and use tax, value-added tax (“VAT”), fuel excise tax, beverage alcohol, cross-border taxes (including tariffs and duties), lodging tax, communications tax, and insurance premium tax. These solutions enable customers to automate the process of determining taxability, identifying applicable tax rates, determining and collecting taxes, preparing and filing returns, remitting taxes, maintaining tax records, and managing compliance documents. The Company, a Washington corporation, was originally incorporated in 1999 and is headquartered in Seattle, Washington.

 

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

 

 

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, 2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2021. The accompanying interim consolidated balance sheet as of September 30, 2021, the consolidated interim statements of operations and consolidated statements of comprehensive loss for the three and nine months ended September 30, 2021 and 2020, and the consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected for the full year ending December 31, 2021.

 

Prior Period Restatements and Adjustments 

 During the fourth quarter of 2020, management concluded there was an immaterial error in the Company’s presentation and classification of funds held from customers in the consolidated statements of cash flows for the first three quarters of 2020, impacting previously reported quarterly cash flows. The error related to the adoption of ASU 2016-18, which amends previous guidance to address the classification and presentation of changes in restricted cash and restricted cash equivalents in the consolidated statements of cash flows. Historically, the Company presented the change in funds held from customers as a separate caption within Investing Activities in the consolidated statements of cash flows. While not legally or otherwise contractually restricted, the Company has since concluded that funds held from customers are better classified as generally restricted under the accounting guidance and should be presented as restricted cash equivalents in the consolidated statement of cash flows.

To correct this classification error, amounts previously reported as investing activities for the changes in funds held from customers for the nine months ended September 30, 2020 are reported as restricted cash equivalents in the consolidated statement of cash flows. The correction resulted in a change of $0.8 million to net cash provided by operating activities and a change of $1.7 million to net cash used in investing activities for the nine months ended September 30, 2020. The correction had no impact on the consolidated balance sheets, consolidated statements of operations, or the consolidated statements of comprehensive loss. 

 

9


 

 

The following table presents the consolidated statements of cash flows line items after giving effect to the adoption of ASU 2016-18:

 

 

For the Nine Months Ended

 

 

September 30, 2020

 

 

As Previously Reported

 

 

ASU 2016-18

Adjustments

 

 

As Corrected

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Other

$

546

 

 

$

(767

)

 

$

(221

)

Net cash provided by operating activities

 

11,827

 

 

 

(767

)

 

 

11,060

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Net (increase) in customer fund assets

 

(1,681

)

 

 

1,681

 

 

 

Net cash used in investing activities

 

(7,355

)

 

 

1,681

 

 

 

(5,674

)

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

 

597,127

 

 

 

914

 

 

 

598,041

 

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

 

466,950

 

 

 

24,383

 

 

 

491,333

 

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

$

1,064,077

 

 

$

25,297

 

 

$

1,089,374

 

 

Reclassifications

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

 

Principles of Consolidation

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

 

Funds Held from Customers

 

The Company has established a Delaware statutory trust (the “Customer Trust”) and appointed a federally insured bank as trustee, and the Customer Trust holds certain funds provided by its customers pending remittance to tax authorities. The Company is the sole beneficial owner of the Customer Trust. The Customer Trust is intended to be a bankruptcy-remote legal entity and meets the criteria in Accounting Standards Codification (“ASC”) Topic 810, Consolidation to be characterized as a variable interest entity (“VIE”). The Customer Trust is included in the Company’s consolidated financial statements because the Company determined it has a controlling financial interest in the Customer Trust because it has both (1) the power to direct the activities that most significantly impact the economic performance of the Customer Trust (including the power to make investment decisions for the trust) and (2) the right to receive benefits in the form of investment returns that could potentially be significant to the Customer Trust.

 

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

 

10


 

 

The following table details funds held from customers and customer fund obligations held by the Company and by the Customer Trust as of September 30, 2021 and the December 31, 2020:

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Funds held from customers (current assets):

 

 

 

 

 

 

 

 

Restricted cash equivalents - Company

 

$

5,537

 

 

$

30,598

 

Restricted cash equivalents - Customer Trust

 

 

73,974

 

 

 

 

Available-for-sale securities - Customer Trust

 

 

373

 

 

 

 

Funds held from customers

 

$

79,884

 

 

$

30,598

 

Customer fund obligations (current liabilities):

 

 

 

 

 

 

 

 

Customer fund obligations - Company

 

$

81,955

 

 

$

31,549

 

Customer fund obligations

 

$

81,955

 

 

$

31,549

 

 

 

Segments

The Company operates its business as 1 operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

Use of Estimates

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

Fair Value Measurements

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

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

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

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

The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, restricted cash equivalents, trade accounts receivable, trade payables, and accrued expenses, due to their short-term nature. The Company has measured the fair value of money market funds and available-for-sale securities based on quoted prices in active markets for identical assets and liabilities.

Acquisitions and Goodwill

The Company’s identifiable assets acquired and liabilities assumed in a business combination are recorded at their acquisition date fair values, which may be considered preliminary and subject to adjustment during the measurement period, which is up to one year

11


 

from the acquisition date. The valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets. Critical estimates in valuing intangible assets include, but are not limited to:

 

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

 

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

 

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

 

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

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

Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which these costs are incurred. The results of operations of an acquired business are included in the consolidated financial statements beginning at the acquisition date. Goodwill is tested for impairment annually on October 31, or in the event of certain occurrences. There was 0 goodwill impairment recorded for the three and nine months ended September 30, 2021, respectively, or the year ended December 31, 2020.

The Company estimates the fair value of the earnout liabilities related to business combinations using various valuation approaches, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair value of the earnout is remeasured each reporting period, with any change in the value recorded as other income or expense. The Company recorded increases in the fair value of earnout liabilities related to business combinations of $6.2 million and $8.7 million for the three and nine months ended September 30, 2021, respectively. The Company recorded 0 changes in the fair value of earnout liabilities related to business combinations and decreases in the fair value of $2.3 million for the three and nine months ended September 30, 2020, respectively (see Note 3).

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. NaN impairment of long-lived assets occurred in the nine months ended September 30, 2021.  An impairment of the Company’s operating lease right-of-use assets and property and equipment of $0.8 million was recorded in the nine months ended September 30, 2020.

Acquired Intangible Assets

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

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

Income Taxes

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

12


 

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

Stock-Based Compensation

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

 

 

Revenue Recognition

The Company primarily generates revenue from fees paid for subscriptions to tax compliance solutions and fees paid for services performed in preparing and filing tax returns on behalf of its customers. Amounts that have been invoiced are recorded in trade accounts receivable and deferred revenue, contract liabilities, or revenue, depending upon whether the revenue recognition criteria have been met. Revenue is recognized once the customer is provisioned and services are provided in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. The Company’s revenue recognition policy follows guidance from Accounting Standards Codification (“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 which the Company expects to be entitled to in exchange for providing the promised services to the customer, and is comprised of both fixed and variable consideration. The transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when performance obligations are satisfied.

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

13


 

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

Subscription and Returns Revenue

Subscription and returns revenue primarily consist of contractually agreed upon fees paid for using the Company’s cloud-based solutions, which include tax calculation and compliance management services, preparing and filing transaction tax returns on behalf of customers, and tax content subscription services. Under most of 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. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer.

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

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

Professional Services Revenue

The Company generates professional services revenue from providing tax analysis and services, including tax registrations, voluntary disclosure agreements, nexus studies, and backfiling services. Additionally, the Company provides configurations, data migrations, integration, and training for its subscriptions and returns products. The 2020 acquisitions of Transaction Tax Resources, Inc. (“TTR”) and Business Licenses, LLC (“Business Licenses”) (see Note 5) expanded the scope of professional services to include business licenses and registration services and tax refund claims and recovery assistance. The Company invoices for professional service arrangements on a fixed fee, milestone, or time and materials basis. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.

Judgments and Estimates

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

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

14


 

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.

 

Leases

 

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

 

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

 

Recently Adopted Accounting Standards

 

ASU 2019-12

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends the existing guidance relating to the accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of U.S. GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted the guidance on January 1, 2021 and the adoption of this new guidance does not have a material effect on its consolidated financial statements.

 

ASU-2020-06

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which amends the accounting standards for convertible debt instruments that may be settled entirely or partially in cash upon conversion. ASU No. 2020-06 eliminates requirements to separately account for liability and equity components of such convertible debt instruments and eliminates the ability to use the treasury stock method for calculating diluted earnings per share for convertible instruments whose principal amount may be settled using shares. Instead, ASU No. 2020-06 requires (i) the entire amount of the security to be presented as a liability on the balance sheet and (ii) application of the “if-converted” method for calculating diluted earnings per share. The required use of the “if-converted” method will not impact the Company’s diluted earnings per share as long as the Company is in a net loss position.

The guidance in ASU No. 2020-06 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2021, for public business entities. Early adoption is permitted, but no earlier than annual reporting periods beginning after December 15, 2020, including interim periods within those annual reporting periods. The Company early adopted this guidance for the fiscal year beginning January 1, 2021, and did so on a modified retrospective basis, without requiring any adjustments. The adoption of ASU No. 2020-06 impacted the accounting for the offering of $977.5 million of 0.25% convertible senior notes due 2026 (the “2026 Notes”) issued by the Company in August 2021, see Note 10 for further discussion.  

15


 

 

 

New Accounting Standards Not Yet Adopted

 

ASU 2021-08

 

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

 

 

3.Investments and 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

 

September 30, 2021

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Money market funds

 

$

1,460,482

 

 

$

1,460,482

 

 

$

 

 

$

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    U.S. treasury securities

 

 

373

 

 

 

373

 

 

 

 

 

 

 

Earnouts related to business combinations

 

 

75,528

 

 

 

 

 

 

 

 

 

75,528

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

Fair

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

December 31, 2020

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Money market funds

 

$

649,603

 

 

$

649,603

 

 

$

 

 

$

 

Earnouts related to business combinations

 

 

34,501

 

 

 

 

 

 

 

 

 

34,501

 

 

 

 

Earnout Liability

 

Earnout liabilities recorded in connection with an acquisition accounted for as a business combination under ASC 805 are recorded at estimated fair value on a recurring basis. Business combinations are discussed in Note 5. Earnouts recorded in connection with asset acquisitions are recorded as earnout payments become known. As such, earnouts related to asset acquisitions, which are discussed in Note 7, are not included in these fair value disclosures.

 

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 are recorded in other (income) expense, net in the consolidated statements of operations.

 

The Company estimates the fair value of earnout liabilities for business combinations using either probability-weighted discounted cash flows and Monte Carlo simulations or a scenario-based approach. The earnout liability associated with the acquisition of Davo Technologies LLC (“Davo”) is based on the achievement of specific revenue growth thresholds through March 2023. As of September

16


 

30, 2021, the earnout liability associated with the acquisition of Davo was valued utilizing a discount rate of 7%. The Davo discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout based on the equity, asset and revenue betas, size premium, and the Company’s specific risk premium, as well as the market risk premium using a bottom-up approach. The earnout liability associated with the 2020 acquisition of TTR is based on the achievement of specific revenue growth thresholds through December 2022. As of September 30, 2021, the earnout liability associated with the acquisition of TTR was valued utilizing a discount rate of 13%. The TTR discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout based on the equity, asset and revenue betas, size premium, and the Company’s specific risk premium, as well as the market risk premium using a bottom-up approach. The earnout liability associated with the 2020 acquisition of Business Licenses is based on the achievement of certain performance metrics through November 2024. As of September 30, 2021, the earnout liability associated with the acquisition of Business Licenses was valued utilizing a discount rate of 4.5% based on the Company’s estimated pre-tax cost of debt. The Business Licenses earnout was assumed by management to have a high probability of achievement.

 

The earnout period for the 2019 acquisition of Portway International Inc. (“Portway”) ended as of January 31, 2021 and did not result in any additional earnout payments due to not meeting the revenue targets.

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):

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Earnout liabilities related to business combinations:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

67,454

 

 

$

33

 

Measurement period adjustment

 

 

1,927

 

 

 

0

 

Payments of earnout liabilities

 

 

(33

)

 

 

0

 

Total unrealized loss included in other (income) expense, net

 

 

6,180

 

 

 

0

 

Balance end of period

 

$

75,528

 

 

$

33

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Earnout liabilities related to business combinations:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

34,501

 

 

$

13,808

 

Fair value recorded at acquisition

 

 

28,620

 

 

 

0

 

Measurement period adjustment

 

 

3,729

 

 

 

0

 

Payments of earnout liabilities

 

 

(33

)

 

 

(11,450

)

Total unrealized net (gain) loss included in other (income) expense, net

 

 

8,711

 

 

 

(2,325

)

Balance end of period

 

$

75,528

 

 

$

33

 

 

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

 

The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, long-lived assets and deferred revenue, and the Company’s liabilities for the accrued purchase price related to acquisitions, are not required to be measured at fair value on a recurring basis. The estimation of fair value for these assets and liabilities requires the use of significant unobservable inputs, and as a result, the Company classifies these assets and liabilities as Level 3 within the fair value hierarchy. During the three and nine months ended September 30, 2021, assets acquired and liabilities assumed in business combinations, including trade accounts receivable, property and equipment, intangible assets, and deferred revenue, were measured at fair value on the date of the acquisition. In addition, certain operating lease right-of-use assets were measured at fair value on the date of acquisition or the date of lease commencement or modification, as applicable. There were no additional fair value measurements of these assets during the first nine months of 2021, except as discussed in Note 5.  

 

Fair Value of Other Financial Instruments

The Company has a principal amount of $977.5 million of 2026 Notes that are carried on the balance sheet at amortized cost. The estimated fair value of the 2026 Notes is $1.0 billion as of September 30, 2021. The estimated fair value of the 2026 Notes was determined through inputs that are observable in the market, and are classified as Level 2.

 

 

17


 

 

4.

Balance Sheet Detail

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

 

 

 

Useful

 

September 30,

 

 

December 31,

 

 

 

Life (Years)

 

2021

 

 

2020

 

Computer equipment and software

 

3 to 5

 

$

18,840

 

 

$

15,749

 

Internally developed software

 

3 to 6

 

 

22,043

 

 

 

10,438

 

Furniture and fixtures

 

5

 

 

6,487

 

 

 

6,651

 

Office equipment

 

3 to 5

 

 

1,096

 

 

 

1,006

 

Leasehold improvements

 

1 to 10

 

 

29,823

 

 

 

29,928

 

 

 

 

 

 

78,289

 

 

 

63,772

 

Accumulated depreciation

 

 

 

 

(35,644

)

 

 

(29,059

)

Property and equipment—net

 

 

 

$

42,645

 

 

$

34,713

 

 

Depreciation expense was $3.3 million. and $8.7 million for the three and nine months ended September 30, 2021, respectively, and $2.5 million and $7.0 million for the three and nine months ended September 30, 2020, respectively.

 

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Prepaid expenses

 

$

29,286

 

 

$

13,968

 

Deposits

 

 

205

 

 

 

2,557

 

Other

 

 

1,611

 

 

 

3,573

 

Total

 

$

31,102

 

 

$

20,098

 

 

 

Accrued expenses consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accrued payroll and related taxes

 

$

12,372

 

 

$

7,903

 

Accrued federal, state, local, and foreign taxes

 

 

7,343

 

 

 

4,338

 

Accrued bonus

 

 

31,874

 

 

 

29,518

 

Self-insurance reserves

 

 

1,725

 

 

 

1,563

 

Employee stock purchase plan contributions

 

 

2,944

 

 

 

5,927

 

Accrued sales commissions

 

 

4,924

 

 

 

5,563

 

Accrued partner commissions

 

 

10,224

 

 

 

9,173

 

Contract liabilities

 

 

8,597

 

 

 

10,134

 

Interest payable on convertible senior notes

 

 

333

 

 

 

0

 

Other

 

 

11,642

 

 

 

10,413

 

Total

 

$

91,978

 

 

$

84,532

 

 

Contract liabilities represent amounts that are collected in advance of the satisfaction of performance obligations. See Contract Liabilities in Note 6.

 

 

 

5.

Acquisitions of Businesses

Announced Acquisition of CrowdReason and CorrelationAdvisors

On October 18, 2021, the Company acquired substantially all the assets of CrowdReason LLC, a Texas limited liability company (“CrowdReason”), and CorrelationAdvisors LLC, a Texas limited liability company (“CorrelationAdvisors”) under an asset purchase agreement. At close, the Company paid $8.3 million in cash. The agreement includes an acquisition holdback of $2.0 million payable in 18 months or less subject to reductions for certain indemnifications and other potential obligations of CrowdReason and Correlation Advisors.  The agreement also contains a three-year earnout arrangement, based on certain revenue performance metrics, with total purchase price inclusive of earnouts not to exceed $40.0 million. CrowdReason is a technology services company that provides

18


 

software applications, solutions, and services for property tax compliance. CorrelationAdvisors provides consulting services related to property valuation and property tax compliance. The Company will account for the CrowdReason and CorrelationAdvisors acquisition as a business combination and plans to provide a preliminary asset valuation and other required acquisition-related disclosures in its annual report on Form 10-K for the year ending December 31, 2021.

Announced Acquisition of Track1099

On October 1, 2021, the Company acquired substantially all the assets of Track1099 LLC, a Delaware limited liability company (“Track1099”) under an asset purchase agreement. At close, the Company paid $35.0 million in cash. The agreement includes an acquisition holdback of $5 million payable in 27 months subject to reductions for certain indemnifications and other potential obligations of Track1099. The agreement also contains a two-year earnout arrangement, based on certain billing performance metrics, not to exceed $12.5 million. Track1099 provides online software and services for cost-effectively managing, e-filing, and e-delivering Internal Revenue Service forms, including Forms 1099, W-2, and W-9. The Company will account for the Track1099 acquisition as a business combination and plans to provide a preliminary asset valuation and other required acquisition-related disclosures in its annual report on Form 10-K for the year ending December 31, 2021.

September 2021 Acquisition of 3CE Technologies, Inc

On September 7, 2021, the Company acquired substantially all the assets of 3CE Technologies, Inc. (“3CE”) under an Asset Purchase Agreement (the “3CE Purchase”). 3CE is a Canadian company that provides software and services for Harmonized Sales Tax (“HS”) code classifications and verifications, primarily to government entities and logistics services providers. The acquisition will expand and improve Avalara’s HS classification content and provide a new self-service model to sell to the Company’s customers. The Company accounted for the 3CE Purchase as a business combination. The acquisition has been included in the Company’s consolidated results of operations since the acquisition date; however, the effect of the business combination is not material to the consolidated results of operations.

The total consideration related to this transaction is $11.2 million, consisting of $9.9 million cash paid at close and an acquisition holdback with a fair value upon acquisition of $1.3 million.

 

Preliminary estimated fair values of the assets acquired and the liabilities assumed in the 3CE Purchase as of the acquisition date include intangible assets of $2.5 million primarily attributable to developed technology and customer relationships and goodwill of $8.3 million. The estimated fair values for acquired accounts receivable, deferred revenue, and intangible assets are preliminary in nature and subject to adjustment when the necessary information is available to complete the valuation.

 

April 2021 Acquisition of Inposia

On April 1, 2021, the Company acquired the outstanding equity of Inposia Solutions, GmbH (“Inposia”) under a Share Purchase Agreement (the “Inposia Purchase”). Inposia is a German software company that delivers e-invoicing, digital tax reporting, and system and data integration to support digital transformation efforts and address real-time compliance requirements for businesses. Inposia will build upon Avalara’s existing e-invoicing capabilities in Brazil and India to support customers worldwide with real-time compliance. The Company accounted for the Inposia Purchase as a business combination. Acquisition-related costs of $1.4 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense, of which $1.0 million was incurred in the second half of 2020 and $0.4 million was incurred in the first nine months of 2021.

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

19


 

Measurement period adjustments recognized in the third quarter of 2021 related primarily to updated estimated fair values for acquired intangible assets, deferred tax liabilities, and a net working capital adjustment. A reconciliation of preliminary total consideration as of June 30, 2021 and preliminary total consideration as of September 30, 2021 is presented below (in thousands):

 

 

Previously Reported

As of

June 30, 2021

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Cash paid at closing (net of amounts returned)

$

14,671

 

 

$

(188

)

 

$

14,483

 

Fair value of common stock issued at closing

 

22,971

 

 

 

 

 

 

22,971

 

Total consideration

$

37,642

 

 

$

(188

)

 

$

37,454

 

 

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

 

 

 

Previously Reported

As of

June 30, 2021

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,264

 

 

$

 

 

$

1,264

 

Trade accounts receivable

 

 

1,767

 

 

 

 

 

 

1,767

 

Other current assets

 

 

268

 

 

 

 

 

 

268

 

Operating lease right-of-use assets

 

 

928

 

 

 

 

 

 

928

 

Property and equipment

 

 

98

 

 

 

 

 

 

98

 

Developed technology, customer relationships, and other intangibles

 

 

12,684

 

 

 

1,820

 

 

 

14,504

 

Goodwill

 

 

27,702

 

 

 

(1,486

)

 

 

26,216

 

Other noncurrent assets

 

 

35

 

 

 

 

 

 

35

 

Total assets acquired

 

 

44,746

 

 

 

334

 

 

 

45,080

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

Trade payables and accrued expenses

 

 

1,340

 

 

 

 

 

 

1,340

 

Deferred revenue

 

 

811

 

 

 

(55

)

 

 

756

 

Other liabilities, noncurrent

 

 

106

 

 

 

 

 

 

106

 

Operating lease liabilities

 

 

928

 

 

 

 

 

 

928

 

Deferred tax liability

 

 

3,919

 

 

 

577

 

 

 

4,496

 

Total liabilities assumed

 

 

7,104

 

 

 

522

 

 

 

7,626

 

Net assets acquired

 

$

37,642

 

 

$

(188

)

 

$

37,454

 

 

The estimated fair values for acquired intangible assets, deferred revenue, and deferred tax liabilities are preliminary in nature and subject to adjustment when the necessary information is available to complete the valuation.

 

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

20


 

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

 

Intangible

 

Previously Reported Assigned Value

As of

June 30, 2021

 

Purchase Price Allocation

Measurement Period

Adjustment

 

As Reported

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

 

Estimated Useful

Life

Customer relationships

 

$

1,585

 

$

1,938

 

$

3,523

 

 

Multi-period excess earnings-income approach

 

 

18.5

%

 

8 years

Developed technology

 

 

9,572

 

 

 

 

9,572

 

 

Relief from royalty-income approach

 

 

18.5

%

 

6 years

Noncompetition agreements

 

 

1,292

 

 

(118

)

 

1,174

 

 

With-and-without valuation-income approach

 

 

21.0

%

 

3 years

Tradename

 

 

235

 

 

 

 

235

 

 

Relief from royalty-income approach

 

 

18.5

%

 

3 years

 

The excess of the purchase price over the net identified tangible and intangible assets is $26.2 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is not expected to be deductible for tax purposes.

For the period from the date of the Inposia Purchase through September 30, 2021, revenue was $4.0 million and pre-tax loss was $1.5 million from the Inposia business.  

 

April 2021 Acquisition of Davo

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

The total consideration transferred related to this transaction was $56.9 million, consisting of $23.5 million cash paid at close, a $0.3 million cash deposit paid in the first quarter of 2021, an acquisition holdback with a fair value upon acquisition of $2.6 million, and an earnout provision with a fair value upon acquisition of $30.5 million. The acquisition holdback represents an additional $2.6 million of cash to be paid Davo shareholders during the 18 months following the acquisition date, subject to reduction for certain indemnifications and other potential obligations of Davo shareholders. The acquisition holdback liability is recorded in accrued purchase price related to acquisitions, noncurrent portion on the consolidated balance sheet as of September 30, 2021. The earnout will be calculated as a multiple of certain performance metrics during the 12-month measurement periods ending March 31, 2022 and 2023, and there is not a stated minimum or maximum payment required under the earnout. Of the earnout liability recognized at the date of the business combination, $15.1 million is recorded in accrued earnout liabilities, current and $15.4 million is recorded in accrued earnout liabilities, noncurrent. The earnout liability is adjusted to fair value quarterly (see Note 3).

 

Measurement period adjustments recognized in the third quarter of 2021 related primarily to updated estimated fair values for acquired intangible assets, earnout liability, and a net working capital adjustment. A reconciliation of preliminary total consideration as of June 30, 2021 and preliminary total consideration as of September 30, 2021 is presented below (in thousands):

 

 

Previously Reported

As of

June 30, 2021

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Cash paid through closing

$

23,818

 

 

$

 

 

$

23,818

 

Fair value of earnout provision

 

28,620

 

 

 

1,927

 

 

 

30,547

 

Fair value of holdbacks

 

2,600

 

 

 

(9

)

 

 

2,591

 

Total consideration

$

55,038

 

 

$

1,918

 

 

$

56,956

 

 

21


 

 

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

 

 

 

Previously Reported

As of

June 30, 2021

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

198

 

 

$

 

 

$

198

 

Funds held from customers

 

 

12,464

 

 

 

 

 

 

12,464

 

Trade accounts receivable

 

 

119

 

 

 

 

 

 

119

 

Other current assets

 

 

58

 

 

 

 

 

 

58

 

Operating lease right-of-use assets

 

 

46

 

 

 

 

 

 

46

 

Developed technology, customer relationships, and other intangibles

 

 

6,427

 

 

 

414

 

 

 

6,841

 

Goodwill

 

 

48,426

 

 

 

1,505

 

 

 

49,931

 

Other noncurrent assets

 

 

2

 

 

 

(1

)

 

 

1

 

Total assets acquired

 

 

67,740

 

 

 

1,918

 

 

 

69,658

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

117

 

 

 

 

 

 

117

 

Deferred revenue

 

 

75

 

 

 

 

 

 

75

 

Operating lease liabilities

 

 

46

 

 

 

 

 

 

46

 

Customer fund obligations

 

 

12,464

 

 

 

 

 

 

12,464

 

Total liabilities assumed

 

 

12,702

 

 

 

 

 

 

12,702

 

Net assets acquired

 

$

55,038

 

 

$

1,918

 

 

$

56,956

 

 

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

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

The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Davo Purchase is 6.8 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Davo Purchase are provided in the below table (in thousands):

 

Intangible

 

Previously Reported

Assigned Value

As of

June 30, 2021

 

Purchase Price Allocation

Measurement Period

Adjustment

 

As Reported

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

 

Estimated Useful

Life

Customer relationships

 

$

4,350

 

$

(50

)

$

4,300

 

 

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

 

 

14.5

%

 

8 years

Developed technology

 

 

1,800

 

 

100

 

 

1,900

 

 

Relief from royalty-income approach

 

 

14.5

%

 

5 years

Noncompetition agreements

 

 

191

 

 

364

 

 

555

 

 

With-and-without valuation-income approach

 

 

16.5

%

 

5 years

Tradename

 

 

86

 

 

 

 

86

 

 

Relief from royalty-income approach

 

 

14.5

%

 

1 years

 

The excess of the purchase price over the net identified tangible and intangible assets is $49.9 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

 

For the period from the date of the Davo Purchase through September 30, 2021, revenue was $1.3 million and pre-tax loss was $1.2 million from the Davo business.

22


 

 

October 2020 Acquisition of Transaction Tax Resources

On October 5, 2020, the Company acquired the outstanding equity of TTR under a Merger Agreement (the “TTR Merger”). TTR is a leading provider of tax content, research, consulting, and automation tools in the U.S., with products that include software solutions for companies and governments. As a result of the acquisition, the Company expanded its tax content, added new product offerings, and reached new customer segments. The Company accounted for the TTR Merger as a business combination.

The total consideration related to this transaction was $370.1 million, consisting of $294.0 million in cash paid at closing, acquisition holdbacks with a fair value upon acquisition of $57.3 million, and an earnout provision with a fair value upon acquisition of $18.9 million. The acquisition holdbacks represent the present value of an additional $57.3 million of cash to be paid up to three years following the acquisition, subject to reduction for certain indemnifications and other potential obligations of the TTR shareholders, discounted utilizing a risk-free discount rate of 0.13%. The earnout is payable to TTR’s founder and shareholder no later than February 2023. The maximum earnout payment is $26.4 million and is based on the achievement of certain TTR revenue growth performance metrics during the 2021 and 2022 fiscal years. The potential amount of all future payments that could be required under the earnout is between $0 and $26.4 million. The earnout was recognized at fair value at the date of the business combination and is adjusted to fair value quarterly (see Note 3).

Measurement period adjustments recognized in the first quarter of 2021 related to the finalization of the estimated fair values for customer relationships, contract backlog, and earnout liability, and a net working capital adjustment. A reconciliation of preliminary total consideration as of December 31, 2020 and total consideration as of September 30, 2021 is presented below (in thousands):

 

 

Previously Reported

As of

December 31, 2020

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Cash paid at closing

$

294,017

 

 

$

 

 

$

294,017

 

Fair value of holdbacks

 

57,477

 

 

 

(217

)

 

 

57,260

 

Fair value of earnout provision

 

15,740

 

 

 

3,131

 

 

 

18,871

 

Total consideration

$

367,234

 

 

$

2,914

 

 

$

370,148

 

 

Estimated fair values of the assets acquired and the liabilities assumed in the TTR Merger as of the acquisition date and including measurement period adjustments are provided in the following table (in thousands): 

 

 

 

Previously Reported

As of

December 31, 2020

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,294

 

 

$

 

 

$

2,294

 

Trade accounts receivable

 

 

5,966

 

 

 

 

 

 

5,966

 

Other current assets

 

 

93

 

 

 

 

 

 

93

 

Operating lease right-of-use assets

 

 

1,760

 

 

 

 

 

 

1,760

 

Property and equipment

 

 

848

 

 

 

 

 

 

848

 

Developed technology, customer relationships, and other intangibles

 

 

49,000

 

 

 

(7,500

)

 

 

41,500

 

Goodwill

 

 

327,039

 

 

 

8,526

 

 

 

335,565

 

Total assets acquired

 

 

387,000

 

 

 

1,026

 

 

 

388,026

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

Trade payables and accrued expenses

 

 

731

 

 

 

 

 

 

731

 

Deferred revenue

 

 

8,500

 

 

 

 

 

 

8,500

 

Operating lease liabilities

 

 

1,760

 

 

 

 

 

 

1,760

 

Deferred tax liability

 

 

8,775

 

 

 

(1,888

)

 

 

6,887

 

Total liabilities assumed

 

 

19,766

 

 

 

(1,888

)

 

 

17,878

 

Net assets acquired

 

$

367,234

 

 

$

2,914

 

 

$

370,148

 

 

The carrying amount of trade accounts receivable acquired in the TTR Merger was $7.2 million and was recorded at $6.0 million on the date of acquisition to approximate the fair value. The fair value of deferred revenue was estimated using the income approach,

23


 

utilizing a bottom-up method that estimated the costs required to support the remaining obligations plus an assumed profit margin, and discounted to present value utilizing a risk-adjusted discount rate of 3.5%.

 

The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the TTR Merger is 4.7 years. The weighted-average amortization period for developed technology intangibles acquired in the TTR Merger is 4.0 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the TTR Merger are provided in the below table (in thousands):

 

Intangible

 

Previously Reported

Assigned Value

As of

December 31, 2020

 

Purchase Price Allocation

Measurement Period

Adjustment

 

As Reported

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

Estimated Useful

Life

Customer relationships

 

$

26,000

 

$

(5,000

)

$

21,000

 

 

Multi-period excess earnings-income approach

 

18%

 

6 years

Developed technology

 

 

9,600

 

 

 

 

9,600

 

 

Relief from royalty-income approach and replacement cost method-cost approach

 

17% to 18%

 

3 to 6 years

Tradename

 

 

5,800

 

 

 

 

5,800

 

 

Relief from royalty-income approach

 

17%

 

2 years

Contract backlog

 

 

5,800

 

 

(2,500

)

 

3,300

 

 

Multi-period excess earnings-income approach

 

17%

 

3 years

Noncompetition agreements

 

 

1,800

 

 

 

 

1,800

 

 

With-and-without valuation-income approach

 

19%

 

5 years

 

The excess of the purchase price over the net identified tangible and intangible assets is $335.6 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is not expected to be deductible for tax purposes.

The acquisition holdback liability is recorded in accrued purchase price related to acquisitions, with $37.8 million included in the current portion on the consolidated balance sheet as of September 30, 2021, and $19.9 million and $37.7 million included in the current and noncurrent portions, respectively, on the consolidated balance sheet as of December 31, 2020. A portion of the acquisition holdback liability in the amount of $19.9 million was settled in the first nine months of 2021, comprised of cash paid of $0.8 million in the first quarter, $18.8 million paid in the second quarter and 0 additional payments in the third quarter to sellers.

 

November 2020 Acquisition of Business Licenses

On November 5, 2020, the Company acquired substantially all of the assets of Business Licenses under an Asset Purchase Agreement (the “Business Licenses Purchase”). Business Licenses is a leading provider of license content, software, management, and services that automate and streamline business license compliance for companies of all sizes. As a result of the acquisition, the Company expanded its product offerings to include complementary compliance solutions beyond tax, such as business licenses and registrations. The Company accounted for the Business Licenses Purchase as a business combination.

The total consideration transferred related to this transaction was $93.3 million, consisting of $64.8 million paid in cash at closing, an acquisition holdback with a fair value upon acquisition of $11.1 million, and an earnout provision with a fair value upon acquisition of $17.4 million. The acquisition holdback represents the present value of an additional $11.1 million of cash to be paid after 18 months to Business Licenses’ shareholders, subject to reduction for certain indemnification obligations, discounted utilizing a risk-free discount rate of 0.13%. The maximum earnout payment of up to $20.7 million will be paid, in shares of the Company’s common stock, to Business Licenses’ shareholders following the achievement of certain Business Licenses operating performance metrics during the four years following the acquisition. The potential amount of all future payments that could be required under the earnout is between $0 and $20.7 million. The earnout was originally recognized at fair value at the date of the business combination is adjusted to fair value quarterly (see Note 3).

24


 

Measurement period adjustments recognized in the first quarter of 2021 related to the finalization of the estimated fair value of the earnout liability and a net working capital adjustment. A reconciliation of preliminary total consideration as of December 31, 2020 and total consideration as of September 30, 2021 is presented below (in thousands):

 

 

Previously Reported

As of

December 31, 2020

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Cash paid at closing

$

64,812

 

 

$

 

 

$

64,812

 

Fair value of holdbacks

 

11,415

 

 

 

(306

)

 

 

11,109

 

Fair value of earnout provision

 

18,728

 

 

 

(1,328

)

 

 

17,400

 

Total consideration

$

94,955

 

 

$

(1,634

)

 

$

93,321

 

 

Estimated fair values of the assets acquired and the liabilities assumed in the Business Licenses Purchase as of the acquisition date and including measurement period adjustments are provided in the following table (in thousands):

 

 

 

Previously Reported

As of

December 31, 2020

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

120

 

 

$

 

 

$

120

 

Trade accounts receivable

 

 

1,326

 

 

 

 

 

 

1,326

 

Customer fund assets

 

 

1,074

 

 

 

 

 

 

1,074

 

Other current assets

 

 

101

 

 

 

 

 

 

101

 

Operating lease right-of-use assets

 

 

1,644

 

 

 

 

 

 

1,644

 

Property and equipment

 

 

87

 

 

 

 

 

 

87

 

Developed technology, customer relationships, and other intangibles

 

 

19,525

 

 

 

 

 

 

19,525

 

Goodwill

 

 

73,775

 

 

 

(1,634

)

 

 

72,141

 

Other noncurrent assets

 

 

31

 

 

 

 

 

 

31

 

Total assets acquired

 

 

97,683

 

 

 

(1,634

)

 

 

96,049

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

56

 

 

 

 

 

 

56

 

Customer fund obligations

 

 

1,028

 

 

 

 

 

 

1,028

 

Operating lease liabilities

 

 

1,644

 

 

 

 

 

 

1,644

 

Total liabilities assumed

 

 

2,728

 

 

 

 

 

 

2,728

 

Net assets acquired

 

$

94,955

 

 

$

(1,634

)

 

$

93,321

 

 

The carrying amount of trade accounts receivable acquired in the Business Licenses Purchase approximate the fair value.

The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Business Licenses Purchase is 5.3 years. The weighted-average amortization period for developed technology intangibles acquired in the Business Licenses Purchase is 3.1 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Business Licenses Purchase are provided in the below table (in thousands):

 

Intangible

 

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

Estimated Useful

Life

Customer relationships

 

$

15,000

 

 

Multi-period excess earnings-income approach

 

19.5%

 

6 years

Developed technology

 

 

3,625

 

 

Relief from royalty-income approach and replacement cost method-cost approach

 

19.5%

 

1 to 5 years

Noncompetition agreements

 

 

500

 

 

With-and-without valuation-income approach

 

19.5%

 

5 years

Tradename

 

 

400

 

 

Relief from royalty-income approach

 

19.5%

 

1 year

 

25


 

 

The excess of the purchase price over the net identified tangible and intangible assets is $72.1 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

As of September 30, 2021, the acquisition holdback liability of $11.1 million is recorded in accrued purchase price related to acquisitions, current portion on the consolidated balance sheet. As of December 31, 2020 the acquisition holdback liability of $11.4 million is recorded in accrued purchase price related to acquisitions, noncurrent portion on the consolidated balance sheet.

December 2020 Acquisition of Impendulo

On December 1, 2020, the Company acquired the shares of Impendulo (the “Impendulo Purchase”). Impendulo is a London-based provider of insurance tax compliance solutions and offers insurance tax compliance management technology and services, specializing in support for multi-national insurance companies. With the acquisition of Impendulo, the Company expands its product offerings to include insurance premium tax compliance. The Company accounted for the Impendulo Purchase as a business combination.

The total consideration transferred related to this transaction was $14.0 million, consisting of $11.7 million paid in cash at closing, $1.2 million paid in the Company’s common stock, and an additional $1.1 million that was paid in the first quarter of 2021 based on final revenue metrics achieved up to the date of acquisition.

Measurement period adjustments recognized in the first quarter of 2021 relate to the finalization of the net working capital adjustment. A reconciliation of preliminary total consideration as of December 31, 2020 and total consideration as of September 30, 2021 is presented below (in thousands):

 

 

Previously Reported

As of

December 31, 2020

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Cash paid at closing

$

11,713

 

 

$

 

 

$

11,713

 

Common stock paid at close

 

1,190

 

 

 

 

 

 

1,190

 

Cash payable accrual

 

694

 

 

425

 

 

 

1,119

 

Total consideration

$

13,597

 

 

$

425

 

 

$

14,022

 

 

Estimated fair values of the assets acquired and the liabilities assumed in the Impendulo Purchase as of the acquisition date and including measurement period adjustments are provided in the following table (in thousands):

 

 

 

Previously Reported

As of

December 31, 2020

 

 

Purchase Price Allocation

Measurement Period

Adjustment

 

 

As

Adjusted

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,347

 

 

$

 

 

$

1,347

 

Trade accounts receivable

 

 

371

 

 

 

 

 

 

371

 

Other assets

 

 

147

 

 

 

 

 

 

147

 

Developed technology, customer relationships, and other intangibles

 

 

3,617

 

 

 

 

 

 

3,617

 

Goodwill

 

 

10,217

 

 

 

425

 

 

 

10,642

 

Total assets acquired

 

 

15,699

 

 

 

425

 

 

 

16,124

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

Trade payables and accrued expenses

 

 

663

 

 

 

 

 

 

663

 

Deferred revenue and contract liabilities

 

 

694

 

 

 

 

 

 

694

 

Deferred tax liability

 

 

745

 

 

 

 

 

 

745

 

Total liabilities assumed

 

 

2,102

 

 

 

 

 

 

2,102

 

Net assets acquired

 

$

13,597

 

 

$

425

 

 

$

14,022

 

 

26


 

 

The carrying amount of trade accounts receivable acquired in the Impendulo Purchase approximate the fair value. The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Impendulo Purchase is 5.9 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Impendulo Purchase are provided in the below table (in thousands):

 

Intangible

 

Assigned Value

 

 

Valuation Methodology

 

Discount Rate

 

Estimated Useful

Life

Customer relationship

 

$

2,964

 

 

Multi-period excess earnings-income approach

 

20%

 

6 years

Developed technology

 

 

616

 

 

Relief from royalty-income approach

 

20%

 

6 years

Tradename

 

 

37

 

 

Relief from royalty-income approach

 

20%

 

1 year

 

 

 

 

 

 

 

 

 

 

 

 

 

The excess of the purchase price over the net identified tangible and intangible assets is $10.6 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is not expected to be deductible for tax purposes.

 

Pro Forma Financial Information for the 2021 Acquisitions (Unaudited)

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Avalara, Inposia, and Davo (which are considered relevant for the purposes of unaudited pro forma financial information disclosure) as though the companies were combined as of January 1, 2020. The unaudited pro forma financial information presented also includes certain business combination accounting effects resulting from the acquisitions, including amortization charges from acquired intangible assets, but does not include the fair value adjustment for deferred revenue and contract liabilities. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had taken place as of January 1, 2020.

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Total revenue

 

$

511,837

 

 

$

362,729

 

Net loss

 

 

(92,837

)

 

 

(41,664

)

 

 

 

6.

Revenue

See Note 2 for a description of the Company’s revenue recognition accounting policy.

 

Disaggregation of Revenue

 

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

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Revenue (U.S.):

 

 

 

 

 

 

 

 

Subscription and returns

 

 

 

 

 

 

 

 

Tax calculations

 

$

91,539

 

 

$

65,312

 

Tax returns and compliance management

 

 

58,846

 

 

 

46,087

 

Interest income on funds held from customers

 

 

215

 

 

 

118

 

Total subscription and returns

 

 

150,600

 

 

 

111,517

 

Professional services

 

 

15,440

 

 

 

8,186

 

Total revenue (U.S.)

 

 

166,040

 

 

 

119,703

 

Total revenue (non-U.S.)

 

 

15,127

 

 

 

8,176

 

Total revenue

 

$

181,167

 

 

$

127,879

 

27


 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Revenue (U.S.):

 

 

 

 

 

 

 

 

Subscription and returns

 

 

 

 

 

 

 

 

Tax calculations

 

$

251,301

 

 

$

185,986

 

Tax returns and compliance management

 

 

168,445

 

 

 

126,384

 

Interest income on funds held from customers

 

 

557

 

 

 

701

 

Total subscription and returns

 

 

420,303

 

 

 

313,071

 

Professional services

 

 

43,299

 

 

 

20,978

 

Total revenue (U.S.)

 

 

463,602

 

 

 

334,049

 

Total revenue (non-U.S.)

 

 

40,233

 

 

 

21,760

 

Total revenue

 

$

503,835

 

 

$

355,809

 

 

Disclosures Related to Contracts with Customers

 

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

 

Contract Liabilities

 

A summary of the activity impacting the contract liabilities during the three and nine months ended September 30, 2021 and 2020 is presented below (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Contract liabilities:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

11,406

 

 

$

6,195

 

Contract liabilities transferred to deferred revenue

 

 

(6,420

)

 

 

(2,737

)

Addition to contract liabilities

 

 

3,611

 

 

 

4,215

 

Balance end of period

 

$

8,597

 

 

$

7,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Contract liabilities:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

10,134

 

 

$

5,197

 

Contract liabilities transferred to deferred revenue

 

 

(15,550

)

 

 

(7,992

)

Addition to contract liabilities

 

 

14,013

 

 

 

10,468

 

Balance end of period

 

$

8,597

 

 

$

7,673

 

 

As of September 30, 2021, 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.

 

28


 

 

Deferred Revenue

 

A summary of the activity impacting deferred revenue balances during the three and nine months ended September 30, 2021 and 2020 is presented below (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Deferred revenue:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

239,395

 

 

$

167,719

 

Revenue recognized

 

 

(181,167

)

 

 

(127,879

)

Additional amounts deferred

 

 

199,655

 

 

 

140,800

 

Balance end of period

 

$

257,883

 

 

$

180,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Deferred revenue:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

209,690

 

 

$

161,241

 

Revenue recognized

 

 

(503,835

)

 

 

(355,809

)

Additional amounts deferred

 

 

552,028

 

 

 

375,208

 

Balance end of period

 

$

257,883

 

 

$

180,640

 

 

As of September 30, 2021, $256.2 million of deferred revenue is expected to be recognized within the next 12 months and is included in current liabilities on the consolidated balance sheets. The remaining amount of deferred revenue is included in noncurrent liabilities and is expected to be recognized within the next 18 months.

 

Assets Recognized from the Costs to Obtain Contracts with Customers

 

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

 

A summary of the activity impacting the deferred commissions during the three and nine months ended September 30, 2021 and 2020 is presented below (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Deferred commissions:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

60,643

 

 

$

43,356

 

Additional commissions deferred

 

 

6,997

 

 

 

5,406

 

Amortization of deferred commissions

 

 

(4,009

)

 

 

(2,921

)

Balance end of period

 

$

63,631

 

 

$

45,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Deferred commissions:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

50,870

 

 

$

38,416

 

Additional commissions deferred

 

 

23,599

 

 

 

15,818

 

Amortization of deferred commissions

 

 

(10,838

)

 

 

(8,393

)

Balance end of period

 

$

63,631

 

 

$

45,841

 

 

As of September 30, 2021, $15.7 million of deferred commissions are expected to be amortized within the next 12 months and are included in current assets on the consolidated balance sheets. The remaining amount of deferred commissions is included in noncurrent assets. There were 0 impairments of assets related to deferred commissions during the nine months ended September 30, 2021 or 2020. There were 0 assets recognized related to the costs to fulfill contracts during the nine months ended September 30, 2021 or 2020 as these costs were not material.

29


 

 

Remaining Performance Obligations

 

Contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts include deferred revenue that has been invoiced and non-cancellable amounts that will be invoiced and recognized as revenue in future periods. As of September 30, 2021, the remaining performance obligations to which enforceable rights exist are $344.8 million, of which $322.1 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter. Of the remaining performance obligations as of September 30, 2021, $87.0 million relates to non-cancellable amounts that have not yet been invoiced, of which $66.0 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.

 

 

7.

Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

September 30, 2021

 

 

 

Average Useful Life

(Years)

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Backlog

 

3

 

$

3,300

 

 

$

(1,288

)

 

$

2,012

 

Customer relationships

 

3 to 10

 

 

68,506

 

 

 

(21,279

)

 

 

47,227

 

Developed technology (1)

 

3 to 8

 

 

66,882

 

 

 

(34,568

)

 

 

32,314

 

Noncompetition agreements

 

3 to 5

 

 

5,073

 

 

 

(1,404

)

 

 

3,669

 

Tradename and trademarks

 

1 to 4

 

 

7,023

 

 

 

(3,828

)

 

 

3,195

 

 

 

 

 

$

150,784

 

 

$

(62,367

)

 

$

88,417

 

(1) Developed technology intangible assets include IPR&D of $0.4 million as of September 30, 2021, which is not subject to amortization.

 

 

 

 

 

 

December 31, 2020

 

 

 

Average Useful Life

(Years)

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Backlog

 

3

 

$

5,800

 

 

$

(937

)

 

$

4,863

 

Customer relationships

 

3 to 10

 

 

64,302

 

 

 

(14,890

)

 

 

49,412

 

Developed technology (1)

 

3 to 8

 

 

52,144

 

 

 

(27,646

)

 

 

24,498

 

Noncompetition agreements

 

3 to 5

 

 

3,062

 

 

 

(766

)

 

 

2,296

 

Tradename and trademarks

 

1 to 4

 

 

6,679

 

 

 

(1,235

)

 

 

5,444

 

 

 

 

 

$

131,987

 

 

$

(45,474

)

 

$

86,513

 

(1) Developed technology intangible assets include IPR&D of $0.6 million as of December 31, 2020, which is not subject to amortization.

 

 

Finite-lived intangible assets are amortized over their estimated useful life. Finite-lived intangible assets amortization expense was $6.3 million and $17.0 million for the three and nine months ended September 30, 2021, respectively, and $1.5 million and $4.9 million for the three and nine months ended September 30, 2020, 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. Total consideration for the purchase includes an earnout computed on future billings recognized by the Company over the next six years, up to a maximum of $30.0 million. The earnout is payable in cash or common stock at the end of each six-month measurement period ending on June 30 or December 31 through 2023. Through September 30, 2021, the sellers have earned approximately $1.9 million under the earnout provision since the acquisition date. An earnout liability of $0.3 million was recorded within the current portion of accrued earnout liabilities as of September 30, 2021 for the earnout period ending December 31, 2021 and is expected to be paid in cash to the sellers in the first quarter of 2022.

 

30


 

 

Goodwill

 

Changes in the carrying amount of goodwill for the nine months ended September 30, 2021 are summarized as follows (in thousands):

 

Balance—December 31, 2020

 

$

513,234

 

Measurement period adjustment - 2020 acquisitions (1)

 

 

7,317

 

Acquisition of Davo

 

 

49,931

 

Acquisition of Inposia

 

 

26,216

 

Acquisition of 3CE

 

 

8,290

 

Cumulative translation adjustments

 

 

(1,220

)

Balance—September 30, 2021

 

$

603,768

 

(1) See Note 5 for measurement period adjustment details

 

 

Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, the Company will conclude that 0 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 3 reporting units for goodwill impairment testing consisting of its U.S., European, and Brazilian operations. As of September 30, 2021, the Brazilian reporting unit had 0 associated goodwill.

 

8.

Leases

 

Total lease cost, net of sublease income, was $4.1 million and $12.4 million for the three and nine months ended September 30, 2021, respectively, and $4.1 million and $11.8 million for the three and nine months ended September 30, 2020, respectively Sublease income was $0.4 million and $1.2 million for the three and nine months ended September 30, 2021, respectively and $0.4 million and $1.1 million for the three and nine months ended September 30, 2020, respectively. Leases that commenced in the first nine months of 2021 increased operating lease right-of-use assets by $1.8 million.

 

9.

Commitments and Contingencies

 

Contingencies

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

 

In its standard subscription agreements, the Company has agreed to indemnification provisions with respect to certain matters. Further, from time to time, the Company has also assumed indemnification obligations through its acquisition activity. These indemnification provisions can create a liability to the Company if its services do not appropriately calculate taxes due to tax jurisdictions, or if the Company is delinquent in the filing of returns on behalf of its customers. Although the Company’s agreements have disclaimers of warranties that limit its liability (beyond the amounts the Company agrees to pay pursuant to its indemnification obligations and guarantees, as applicable), a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold the Company liable for certain errors. Further, in some instances the Company has negotiated agreements with specific customers or assumed agreements in connection with the Company’s acquisitions that do not limit this liability or disclaim these warranties. It is not possible to reasonably estimate the potential loss under these indemnification arrangements.   

 

31


 

 

 

10.      Debt       

Convertible Senior Notes

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

The Company may not redeem the 2026 Notes prior to August 6, 2024. The Company may redeem all or any portion of the 2026 Notes, at the Company’s option, on or after August 6, 2024, through the 41st scheduled trading day immediately prior to the maturity date, if the common stock price is at least 130% of the conversion price then in effect for at least 20 of any 30 consecutive trading day period. The Company may redeem all or part of the 2026 Notes at a redemption price equal to the principal amount plus accrued and unpaid interest to, but excluding, the redemption date, with not less than 50 nor more than 60 scheduled trading days’ notice to holders.

The 2026 Notes are convertible at an initial conversion rate of 4.1940 shares of common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $238.44 per share of common stock. The conversion rate is subject to customary adjustments for certain events as described in the indenture governing the 2026 Notes. The Company may settle the conversion option obligation with cash, shares of the Company’s common stock, or any combination of cash and shares of the Company’s common stock. On or after February 1, 2026, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2026 Notes may convert their notes at their option. Prior to the close of business on the business day immediately preceding February 1, 2026, the 2026 Notes are convertible at the option of the holders of such notes only under the following circumstances:

 

during any calendar quarter commencing after the quarter ending on December 31, 2021 (and only during such calendar quarter), if the Company’s common stock price exceeds 130% of the conversion price for at least 20 trading days during the 30 consecutive trading days at the end of the prior calendar quarter;

 

during the five business days after any five consecutive trading days in which the trading price per $1,000 Notes was less than 98% of the product of the closing sale price of the Company’s common stock and the then current conversion rate;

 

upon the occurrence of specified corporate events; or

 

if the Company calls any or all 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the notes called for redemption.

Upon the occurrence of a make‑whole fundamental change or the exercise of the Company’s redemption option, the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its 2026 Notes. As of September 30, 2021, none of the conditions of the 2026 Notes to early convert have been met.

As discussed in Note 2, the Company early adopted ASU No. 2020‑06 as of January 1, 2021 and concluded that the 2026 Notes will be accounted for as debt, with no bifurcation of the embedded conversion feature. Debt issuance costs were recorded as a direct deduction from the related liability in the consolidated balance sheet and are amortized to interest expense over the term of the 2026 Notes. The effective interest rate for the 2026 Notes is 0.6%.

 The net carrying amount of the 2026 Notes was as follows:

 

 

September 30,

 

 

 

2021

 

 

 

(in thousands)

 

Principal

 

$

977,500

 

Unamortized debt issuance costs

 

 

(17,127

)

Net carrying amount

 

$

960,373

 

32


 

 

 

The following table sets forth the interest expense recognized related to the 2026 Notes:

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

 

(in thousands)

 

Contractual interest expense

 

$

333

 

Amortization of debt issuance costs

 

 

482

 

Total interest expense related to 2026 Notes

 

$

815

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

 

(in thousands)

 

Contractual interest expense

 

$

333

 

Amortization of debt issuance costs

 

 

482

 

Total interest expense related to 2026 Notes

 

$

815

 

 

Capped Call Transactions

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

 

The Company paid an aggregate amount of $75.3 million for the capped calls, covering approximately 4.1 million shares of the Company’s common stock. As the capped calls are both legally detachable and separately exercisable from the 2026 Notes, the Company accounts for the capped calls separately from the 2026 Notes. The capped calls are indexed to the Company’s own common stock and classified in stockholders’ equity. As such, the premiums paid for the capped calls have been included as a net reduction to additional paid-in capital in the consolidated balance sheet.

 

11.

Shareholders’ Equity

Authorized Capital—Common Stock and Preferred Stock

Under the Amended and Restated Articles of Incorporation, which became effective in June 2018, the Company is authorized to issue 2 classes of stock designated as common stock and preferred stock. The Company’s total authorized capital stock is 620,000,000 shares, consisting of 600,000,000 shares of common stock, $0.0001 par value per share, and 20,000,000 shares of undesignated preferred stock, $0.0001 par value per share.

 

33


 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2021

 

85,057,727

 

 

$

9

 

 

$

1,640,867

 

 

$

(1,339

)

 

$

(559,377

)

 

$

1,080,160

 

Exercise of stock options

 

296,226

 

 

 

 

 

 

 

5,529

 

 

 

 

 

 

 

 

 

 

 

5,529

 

Vesting of restricted stock units

 

346,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

19,047

 

 

 

 

 

 

 

 

 

 

 

19,047

 

Shares issued under employee stock

   purchase plan

 

60,064

 

 

 

 

 

 

 

7,088

 

 

 

 

 

 

 

 

 

 

 

7,088

 

Loss on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(390

)

 

 

 

 

 

 

(390

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,988

)

 

 

(29,988

)

Balance at March 31, 2021

 

85,760,025

 

 

$

9

 

 

$

1,672,531

 

 

$

(1,729

)

 

$

(589,365

)

 

$

1,081,446

 

Exercise of stock options

 

253,395

 

 

 

 

 

 

 

4,668

 

 

 

 

 

 

 

 

 

 

 

4,668

 

Vesting of restricted stock units

 

75,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

23,592

 

 

 

 

 

 

 

 

 

 

 

23,592

 

Shares issued for acquisitions of businesses

 

164,416

 

 

 

 

 

 

 

22,971

 

 

 

 

 

 

 

 

 

 

 

22,971

 

Gain on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

322

 

 

 

 

 

 

 

322

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,650

)

 

 

(27,650

)

Balance at June 30, 2021

 

86,253,407

 

 

$

9

 

 

$

1,723,762

 

 

$

(1,407

)

 

$

(617,015

)

 

$

1,105,349

 

Exercise of stock options

 

488,992

 

 

 

 

 

 

 

7,950

 

 

 

 

 

 

 

 

 

 

 

7,950

 

Vesting of restricted stock units

 

43,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

23,777

 

 

 

 

 

 

 

 

 

 

 

23,777

 

Shares issued under employee stock

   purchase plan

 

56,817

 

 

 

 

 

 

 

7,358

 

 

 

 

 

 

 

 

 

 

 

7,358

 

Purchase of capped calls

 

 

 

 

 

 

 

 

 

(75,268

)

 

 

 

 

 

 

 

 

 

 

(75,268

)

Loss on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,172

)

 

 

 

 

 

 

(1,172

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,546

)

 

 

(32,546

)

Balance at September 30, 2021

 

86,842,590

 

 

$

9

 

 

$

1,687,579

 

 

$

(2,579

)

 

$

(649,561

)

 

$

1,035,448

 

 

34


 

 

The changes to the Company’s shareholders’ equity for the nine months ended September 30, 2020 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, 2020

 

77,447,620

 

 

$

8

 

 

$

976,627

 

 

$

(2,719

)

 

$

(510,194

)

 

$

463,722

 

Exercise of stock options

 

532,848

 

 

 

 

 

 

 

7,928

 

 

 

 

 

 

 

 

 

 

 

7,928

 

Vesting of restricted stock units

 

186,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

9,749

 

 

 

 

 

 

 

 

 

 

 

9,749

 

Shares issued under employee stock

   purchase plan

 

81,894

 

 

 

 

 

 

 

5,716

 

 

 

 

 

 

 

 

 

 

 

5,716

 

Shares issued related to business

   combination earnouts

 

44,659

 

 

 

 

 

 

 

3,750

 

 

 

 

 

 

 

 

 

 

 

3,750

 

Shares issued to purchase intangible assets

 

1,191

 

 

 

 

 

 

 

87

 

 

 

 

 

 

 

 

 

 

 

87

 

Gain on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

625

 

 

 

 

 

 

 

625

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,283

)

 

 

(15,283

)

Balance at March 31, 2020

 

78,294,687

 

 

$

8

 

 

$

1,003,857

 

 

$

(2,094

)

 

$

(525,477

)

 

$

476,294

 

Exercise of stock options

 

1,117,805

 

 

 

 

 

 

 

17,495

 

 

 

 

 

 

 

 

 

 

 

17,495

 

Vesting of restricted stock units

 

57,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

12,368

 

 

 

 

 

 

 

 

 

 

 

12,368

 

Shares issued related to business combination earnouts

 

44,659

 

 

 

 

 

 

 

3,750

 

 

 

 

 

 

 

 

 

 

 

3,750

 

Gain on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

435

 

 

 

 

 

 

 

435

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,140

)

 

 

(10,140

)

Balance at June 30, 2020

 

79,514,983

 

 

$

8

 

 

$

1,037,470

 

 

$

(1,659

)

 

$

(535,617

)

 

$

500,202

 

Proceeds from common stock

   offering, net of underwriting discounts

 

4,527,558

 

 

 

 

 

 

 

556,312

 

 

 

 

 

 

 

 

 

 

 

556,312

 

Public offering costs

 

 

 

 

 

 

 

 

 

(701

)

 

 

 

 

 

 

 

 

 

 

(701

)

Exercise of stock options

 

333,977

 

 

 

 

 

 

 

5,294

 

 

 

 

 

 

 

 

 

 

 

5,294

 

Vesting of restricted stock units

 

19,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

 

12,916

 

 

 

 

 

 

 

 

 

 

 

12,916

 

Shares issued under employee stock

   purchase plan

 

75,811

 

 

 

 

 

 

 

5,621

 

 

 

 

 

 

 

 

 

 

 

5,621

 

Loss on translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(225

)

 

 

 

 

 

 

(225

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,729

)

 

 

(12,729

)

Balance at September 30, 2020

 

84,471,507

 

 

$

8

 

 

$

1,616,912

 

 

$

(1,884

)

 

$

(548,346

)

 

$

1,066,690

 

 

 

12.

Equity Incentive Plans

The Company has stock-based compensation plans that provide for the award of equity incentives, including stock options, stock awards, RSUs, PSUs, and purchase rights. As of September 30, 2021, the Company had stock options outstanding under the 2018 Plan and the 2006 Equity Incentive Plan (the “2006 Plan”), RSUs and PSUs outstanding under the 2018 Plan, and purchase rights issued under the ESPP. The 2018 Plan became effective in connection with the Company’s IPO at which time the 2006 Plan was terminated. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan.

As of September 30, 2021, 4,035,218 shares were subject to outstanding awards and 12,158,970 shares were available for issuance under the 2018 Plan. As of September 30, 2021, 1,348,505 shares were subject to outstanding stock options under the 2006 Plan.

35


 

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 September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Stock-based compensation cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$

2,913

 

 

$

3,749

 

 

$

9,210

 

 

$

11,757

 

Restricted stock units

 

 

14,993

 

 

 

8,052

 

 

 

41,618

 

 

 

20,472

 

Performance share units

 

 

4,683

 

 

 

0

 

 

 

12,148

 

 

 

0

 

Employee stock purchase plan

 

 

1,188

 

 

 

1,115

 

 

 

3,440

 

 

 

2,804

 

Total stock-based compensation cost

 

$

23,777

 

 

$

12,916

 

 

$

66,416

 

 

$

35,033

 

 

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.

 

Stock Options

The following table summarizes stock option activity for the Company’s stock-based compensation plans for the nine months ended September 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

Aggregate

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Intrinsic

 

 

 

 

 

 

 

Exercise

 

 

Contractual

 

 

Value

 

 

 

Shares

 

 

Price

 

 

Life (in Years)

 

 

(in thousands)

 

Options outstanding as of January 1, 2021

 

 

3,537,014

 

 

$

28.17

 

 

 

6.89

 

 

$

483,577

 

Options granted

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(1,038,613

)

 

$

17.47

 

 

 

 

 

 

 

 

 

Options cancelled or expired

 

 

(24,525

)

 

$

16.65

 

 

 

 

 

 

 

 

 

Options outstanding as of September 30, 2021

 

 

2,473,876

 

 

$

32.78

 

 

 

6.45

 

 

$

351,272

 

Options exercisable as of September 30, 2021

 

 

1,741,687

 

 

$

26.18

 

 

 

6.07

 

 

$

258,789

 

 

A summary of options outstanding and vested as of September 30, 2021 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)

 

$1.90 to $6.40

 

 

23,065

 

 

 

1.3

 

 

 

23,065

 

 

 

1.3

 

$8.04 to $11.72

 

 

79,506

 

 

 

2.5

 

 

 

79,506

 

 

 

2.5

 

$12.20 to $15.06

 

 

491,764

 

 

 

5.0

 

 

 

491,764

 

 

 

5.0

 

$16.06 to $24.00

 

 

754,170

 

 

 

6.3

 

 

 

578,159

 

 

 

6.3

 

$31.99 to $42.21

 

 

658,855

 

 

 

7.2

 

 

 

392,185

 

 

 

7.2

 

$55.10 to $99.65

 

 

424,361

 

 

 

8.0

 

 

 

167,684

 

 

 

7.8

 

$124.35 to $151.76

 

 

42,155

 

 

 

6.6

 

 

 

9,324

 

 

 

5.9

 

 

 

 

2,473,876

 

 

 

 

 

 

 

1,741,687

 

 

 

 

 

 

The total intrinsic value of options exercised during the nine months ended September 30, 2021 and 2020 was $148.4 million and $168.3 million, respectively.

 

There were 0 options granted during the nine months ended September 30, 2021. The weighted average grant date fair value of options granted during the nine months ended September 30, 2020 was $32.87 per share. During the nine months ended September 30, 2021, 1,080,356 options vested. There were 732,189 options unvested as of September 30, 2021.

As of September 30, 2021, $14.3 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 1.8 years.

36


 

All options granted 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 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 was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Fair market value of common stock

 

 

 

 

$124.35 - 130.82

 

 

 

 

 

$66.26 - 130.82

 

Volatility

 

 

 

 

43%

 

 

 

 

 

43%

 

Expected term

 

 

 

 

6 years

 

 

 

 

 

5-6 years

 

Expected dividend yield

 

 

0

 

 

n/a

 

 

 

0

 

 

n/a

 

Risk-free interest rate

 

 

 

 

0.44% - 0.51%

 

 

 

 

 

0.33% - 1.25%

 

 

Options are granted with an exercise price per share not less than the per share fair market value of the Company’s common stock on the grant date. 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.

 

Expected volatility for stock options is based on a combination of annualized daily historical volatility of the Company’s stock price and 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 life 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 nine months ended September 30, 2021:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

 

Restricted Stock Units

 

 

Value Per Share

 

RSUs outstanding as of January 1, 2021

 

 

2,359,063

 

 

$

70.17

 

RSUs granted

 

 

1,068,582

 

 

 

136.76

 

RSUs vested

 

 

(464,953

)

 

 

65.29

 

RSUs cancelled

 

 

(173,477

)

 

 

81.12

 

RSUs outstanding as of September 30, 2021

 

 

2,789,215

 

 

$

95.81

 

 

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

 

As of September 30, 2021, $231.6 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 2.9 years.

37


 

Performance Share Units

The following table summarizes PSU activity for the Company’s stock-based compensation plans for the nine months ended September 30, 2021:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Grant Date Fair

 

 

 

Performance Share Units

 

 

Value Per Share

 

PSUs outstanding as of January 1, 2021

 

 

 

 

$

 

PSUs granted

 

 

120,632

 

 

 

147.39

 

PSUs vested

 

 

 

 

 

 

PSUs cancelled

 

 

 

 

 

 

PSUs outstanding as of September 30, 2021

 

 

120,632

 

 

$

147.39

 

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

As of September 30, 2021, $25.6 million of total unrecognized compensation cost related to PSUs was expected to be recognized over a weighted average period of approximately 2.0 years.

Employee Stock Purchase Plan

 

During the nine months ended September 30, 2021, 116,881 shares of common stock were purchased under the ESPP.

 

As of September 30, 2021, there was approximately $1.6 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 August 1, 2021 and will end on January 31, 2022.

 

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

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

2020

Fair market value of common stock

 

$

166.84

 

 

$

138.83

 

 

$152.35 to $166.84

 

$87.23 to $138.83

Volatility

 

31%

 

 

49%

 

 

31% to 34%

 

32% to 49%

Expected term

 

0.5 years

 

 

0.5 years

 

 

0.5 years

 

0.5 years

Expected dividend yield

 

n/a

 

 

n/a

 

 

n/a

 

n/a

Risk-free interest rate

 

0.06%

 

 

0.11%

 

 

0.06% to 0.08%

 

0.11% to 1.54%

 

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.

 

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. The Company uses the if-converted method for calculating any potential dilutive effect of the convertible senior notes on diluted net loss per share. 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.

 

38


 

 

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

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(32,546

)

 

$

(12,729

)

 

$

(90,184

)

 

$

(38,152

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares

   outstanding-basic

 

 

86,530

 

 

 

82,288

 

 

 

86,023

 

 

 

79,715

 

Dilutive effect of share equivalents resulting from stock

   options, restricted stock units, performance share

   units, ESPP shares, and convertible senior notes

   (if converted)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Weighted-average common shares

   outstanding-diluted

 

 

86,530

 

 

 

82,288

 

 

 

86,023

 

 

 

79,715

 

Net loss per common share, basic and diluted

 

$

(0.38

)

 

$

(0.15

)

 

$

(1.05

)

 

$

(0.48

)

 

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 September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Options to purchase common shares

 

 

2,750

 

 

 

4,229

 

 

 

3,085

 

 

 

4,938

 

Unvested restricted stock units

 

 

2,748

 

 

 

2,267

 

 

 

2,586

 

 

 

2,009

 

Unvested performance share units

 

 

121

 

 

 

0

 

 

 

106

 

 

 

0

 

ESPP shares

 

 

4

 

 

 

5

 

 

 

4

 

 

 

2

 

Convertible senior notes (if converted)

 

 

2,184

 

 

 

0

 

 

 

736

 

 

 

0

 

Total

 

 

7,807

 

 

 

6,501

 

 

 

6,517

 

 

 

6,949

 

 

 

 

 

14.

Subsequent Events

 

On October 1, 2021, the Company acquired substantially all of the assets of Track1099 and on October 18, 2021, the Company acquired substantially all of the assets of CrowdReason and CorrelationAdvisors. See discussion in Note 5.

 

39


 

 

 

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 2020 Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q and our 2020 Annual Report. See “Special Note Regarding Forward-Looking Statements” above.

Overview

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

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

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

 

Our business is impacted by the COVID-19 pandemic, which began during the first quarter of 2020 and has resulted in authorities implementing numerous preventative measures to contain or mitigate the extent of the impact, including travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders. These measures have caused, and may continue to cause, business slowdowns or shutdowns in affected areas. Even though we have begun to re-open certain of our office locations, the vast majority of our employees continue to work from home and we expect these arrangements to continue for most of our workforce for the remainder of 2021. During the second quarter of 2021, some of the geographic areas we serve and work from began to loosen travel bans and restrictions, and, where it is safe to do so, we have resumed some in-person customer activities and events. However, we continue to host many customer activities and events virtually and continue to limit employee travel. As the COVID-19 pandemic continues to progress, the extent and timing of the broader impact of the pandemic on our results of operations, overall financial performance and operating cash flows remains uncertain, including the impact on our future revenue growth, the timing of the resumption of normal operating expenses, and the extent to which any incremental expenses associated with the preventative and precautionary measures will be necessary.  

 

40


 

 

Key Business Metrics

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

 

 

Sep 30,

2021

 

 

Jun 30,

2021

 

 

Mar 31,

2021

 

 

Dec 31,

2020

 

 

Sep 30,

2020

 

 

Jun 30,

2020

 

 

Mar 31,

2020

 

 

Dec 31,

2019 (3)

 

 

Number of core

   customers

   (as of end

   of period) - legacy

 

17,230

 

 

 

16,410

 

 

 

15,580

 

 

 

14,890

 

 

 

14,180

 

 

 

13,560

 

 

 

12,940

 

 

 

12,150

 

 

Number of core

   customers

   (as of end

   of period) - revised(1)

 

17,400

 

 

 

16,570

 

 

 

15,730

 

 

 

15,020

 

 

 

14,300

 

 

 

13,640

 

 

 

13,000

 

 

 

12,240

 

 

Net revenue

   retention rate - legacy

 

112

%

 

 

110

%

 

 

107

%

 

 

104

%

 

 

108

%

 

 

107

%

 

 

109

%

 

 

111

%

 

Net revenue

   retention rate - revised(2)

 

116

%

 

 

116

%

 

 

113

%

 

 

115

%

 

 

116

%

 

 

114

%

 

 

117

%

 

N/A

 

 

 

 

(1) During the second quarter of 2021, we revised the methodology for calculating core customers to include revenue from SST (see Number of Core Customers below for details). The table above includes the number of core customers using both the legacy and the revised methodologies.

(2) During the second quarter of 2021, we revised the methodology for calculating net revenue retention rate to include revenue from SST. In addition, professional services revenue is no longer included in the revised calculation methodology, as these services tend to be more one-time in nature (see Net Revenue Retention Rate below for details). The table above includes the net revenue retention rate using both the legacy and the revised methodologies.

(3) Net revenue retention rate - revised is not presented for the period ended December 31, 2019 due to certain prior period data needed to complete the calculation being unavailable.

 

Number of Core Customers

We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The small and mid-market customer segments have been and remain our primary target market segments for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our primary target market segment. During the second quarter of 2021, we revised our core customer calculation methodology to include revenue from our Streamlined Sales Tax solution (SST), which results in additional customers being included in reported core customers. Under the revised calculation methodology, we had as of September 30, 2021 and December 31, 2020, approximately 17,400 and 15,020 core customers, respectively.

We define a core customer as:

 

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

 

that is active as of the measurement date; and

 

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

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

As noted above, we revised our core customer calculation methodology during the second quarter of 2021. Under the prior methodology, revenue from SST was not included in our calculation of total revenue during the previous 12 months. This meant customers that would have otherwise met the definition of a core customer, with inclusion of attributable SST revenue, were excluded

41


 

from our core customer count as well as our disclosures on the percentage of total revenue attributable to core customers. The revised methodology for core customers includes revenue from SST.

We believe these changes improve the usefulness of this key business metric, which is to measure both the growth of existing customers into core customers and the acquisition of new customers of a certain size.

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

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

Net Revenue Retention Rate

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

Currently, our net revenue retention rate includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems that have not been integrated into our primary U.S. billing systems.

During the second quarter of 2021, we revised our net revenue retention rate calculation methodology. Under the prior methodology, revenue from our SST solution was not included in net revenue retention rate. This means that revenue expansion from existing customers adopting our SST solution was not included, while revenue contraction from customers replacing one or more of Avalara’s other solutions with SST was included. The revised calculation methodology for net revenue retention rate includes revenue from SST. In addition, professional services revenue is no longer included in the revised calculation methodology, as these services tend to be more one-time in nature. Under the revised calculation methodology, our net revenue retention rate was 116% for the quarter ended September 30, 2021 and on average has been 115% over the last four quarters ended September 30, 2021. Under the legacy calculation methodology, our net revenue retention rate was 112% for the quarter ended September 30, 2021 and on average has been 108% over the last four quarters ended September 30, 2021.

 

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 are driven primarily by the acquisition of customers, customer renewals, and additional service offerings purchased by existing customers. Revenue from subscription and returns comprised approximately 91% of our revenue for the nine months ended September 30, 2021 and 94% of our revenue for the nine months ended September 30, 2020.

Subscription and Returns Revenue. 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. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer.

42


 

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

Currently a small component of our total revenue, we offer SST services to businesses that are registered to participate in the program. We earn a fee (SST revenue) from participating state and local governments based on a percentage of the sales tax reported and paid, and as a result, we generally provide SST services at no cost to the seller. During the first quarter of 2021, we renewed our agreement with the SST Governing Board to provide SST services at a lower percentage rate than we previously earned.

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

Professional Services. We generate professional services revenue from providing tax analysis and services, including tax registrations, voluntary disclosure agreements, nexus studies, and back filing services. We also provide configurations, data migrations, integration, and training, for our subscriptions and returns products. Our 2020 acquisitions of TTR and Business Licenses expanded the scope of professional services we offer to include business licenses and registration services and tax refund claims and recovery assistance. We bill for service arrangements on a fixed fee, milestone, or time and materials basis, and we recognize the transaction price allocated to professional services performance obligations as revenue as services are performed and are collectable under the terms of the associated contracts.

Costs and Expenses

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

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

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

Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses for our sales and marketing staff, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, integration and referral partner commissions, costs of marketing and promotional events, corporate communications, online marketing, solution marketing, and other brand-building activities. As a result of the current COVID-19 pandemic, we suspended in-person promotional and customer events and converted many of these activities to virtual events, which temporarily reduced these types of marketing expenses. We have begun to resume limited in-person marketing activities in the second half of 2021 where it is safe to do so. Sales and marketing expenses include allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as customer relationships, customer lists, and backlog from acquisitions.

We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the 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,

43


 

deferred revenue is recorded when a sales order is invoiced, and the related revenue is recognized ratably over the subscription term. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the sale (new, renewal, or add-on service offering), the type of service or solution sold, and the sales channel. At the beginning of each year, we set group and individual sales targets and update targets during the year as appropriate. Sales commissions are generally earned based on achievement against these targets.

We defer the portion of partner commissions costs that are considered a cost of obtaining a contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit. The period of benefit is separately determined for each partner and is either six years or corresponds with the contract term. We expense the remaining partner commissions costs as incurred. Our partner commission expense has historically been, and will continue to be, impacted by many factors, including the proportion of new and renewal sales, the nature of the partner relationship, and the sales mix among partners during the period. 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.

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

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

Total Other (Income) Expense, Net  

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

44


 

Results of Operations

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

The comparability of periods covered by our financial statements is impacted by recent acquisitions. In the fourth quarter of 2020, we acquired the outstanding equity of TTR, substantially all the assets of Business Licenses, and the outstanding equity of Impendulo. During the second quarter of 2021, we acquired substantially all the assets of Davo and the outstanding equity of Inposia. During the third quarter of 2021, we acquired substantially all of the assets of 3CE Technologies (see Note 5 in the Notes to Consolidated Financial Statements).

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

164,237

 

 

$

119,193

 

Professional services

 

 

16,930

 

 

 

8,686

 

Total revenue

 

 

181,167

 

 

 

127,879

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

44,824

 

 

 

31,155

 

Professional services

 

 

8,216

 

 

 

3,777

 

Total cost of revenue(1)

 

 

53,040

 

 

 

34,932

 

Gross profit

 

 

128,127

 

 

 

92,947

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development(1)

 

 

42,574

 

 

 

32,562

 

Sales and marketing(1)

 

 

75,867

 

 

 

49,057

 

General and administrative(1)

 

 

35,887

 

 

 

23,885

 

Total operating expenses

 

 

154,328

 

 

 

105,504

 

Operating loss

 

 

(26,201

)

 

 

(12,557

)

Other (income) expense, net

 

 

6,955

 

 

 

(221

)

Loss before income taxes

 

 

(33,156

)

 

 

(12,336

)

(Benefit from) provision for income taxes

 

 

(610

)

 

 

393

 

Net loss

 

$

(32,546

)

 

$

(12,729

)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Cost of revenue

 

$

2,733

 

 

$

1,591

 

Research and development

 

 

6,234

 

 

 

3,781

 

Sales and marketing

 

 

5,448

 

 

 

3,157

 

General and administrative

 

 

8,903

 

 

 

4,292

 

Total stock-based compensation

 

$

23,318

 

 

$

12,821

 

 

 

 

 

 

 

 

 

 

The amortization of acquired intangibles included above was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Cost of revenue

 

$

2,314

 

 

$

1,007

 

Research and development

 

 

 

 

 

 

Sales and marketing

 

 

3,096

 

 

 

447

 

General and administrative

 

 

930

 

 

 

4

 

Total amortization of acquired intangibles

 

$

6,340

 

 

$

1,458

 

45


 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

455,997

 

 

$

333,258

 

Professional services

 

 

47,838

 

 

 

22,551

 

Total revenue

 

 

503,835

 

 

 

355,809

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

123,970

 

 

 

89,451

 

Professional services

 

 

22,416

 

 

 

13,065

 

Total cost of revenue(1)

 

 

146,386

 

 

 

102,516

 

Gross profit

 

 

357,449

 

 

 

253,293

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development(1)

 

 

121,841

 

 

 

85,253

 

Sales and marketing(1)

 

 

212,068

 

 

 

144,731

 

General and administrative(1)

 

 

101,982

 

 

 

65,595

 

Total operating expenses

 

 

435,891

 

 

 

295,579

 

Operating loss

 

 

(78,442

)

 

 

(42,286

)

Other (income) expense, net

 

 

10,143

 

 

 

(5,081

)

Loss before income taxes

 

 

(88,585

)

 

 

(37,205

)

Provision for income taxes

 

 

1,599

 

 

 

947

 

Net loss

 

$

(90,184

)

 

$

(38,152

)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Cost of revenue

 

$

7,384

 

 

$

4,264

 

Research and development

 

 

17,589

 

 

 

9,255

 

Sales and marketing

 

 

14,915

 

 

 

8,928

 

General and administrative

 

 

25,442

 

 

 

12,352

 

Total stock-based compensation

 

$

65,330

 

 

$

34,799

 

 

 

 

 

 

 

 

 

 

The amortization of acquired intangibles included above was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Cost of revenue

 

$

6,728

 

 

$

3,302

 

Research and development

 

 

 

 

 

 

Sales and marketing

 

 

7,541

 

 

 

1,603

 

General and administrative

 

 

2,685

 

 

 

12

 

Total amortization of acquired intangibles

 

$

16,954

 

 

$

4,917

 

 

46


 

 

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 September 30,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

91

%

 

 

93

%

Professional services

 

 

9

%

 

 

7

%

Total revenue

 

 

100

%

 

 

100

%

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

25

%

 

 

24

%

Professional services

 

 

5

%

 

 

3

%

Total cost of revenue

 

 

29

%

 

 

27

%

Gross profit

 

 

71

%

 

 

73

%

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

23

%

 

 

25

%

Sales and marketing

 

 

42

%

 

 

38

%

General and administrative

 

 

20

%

 

 

19

%

Total operating expenses

 

 

85

%

 

 

83

%

Operating loss

 

 

(14

)%

 

 

(10

)%

Other (income) expense, net

 

 

4

%

 

 

0

%

Loss before income taxes

 

 

(18

)%

 

 

(10

)%

(Benefit from) provision for income taxes

 

 

0

%

 

 

0

%

Net loss

 

 

(18

)%

 

 

(10

)%

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

91

%

 

 

94

%

Professional services

 

 

9

%

 

 

6

%

Total revenue

 

 

100

%

 

 

100

%

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

25

%

 

 

25

%

Professional services

 

 

4

%

 

 

4

%

Total cost of revenue

 

 

29

%

 

 

29

%

Gross profit

 

 

71

%

 

 

71

%

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

24

%

 

 

24

%

Sales and marketing

 

 

42

%

 

 

41

%

General and administrative

 

 

20

%

 

 

18

%

Total operating expenses

 

 

87

%

 

 

83

%

Operating loss

 

 

(16

)%

 

 

(12

)%

Other (income) expense, net

 

 

2

%

 

 

(1

)%

Loss before income taxes

 

 

(18

)%

 

 

(10

)%

Provision for income taxes

 

 

0

%

 

 

0

%

Net loss

 

 

(18

)%

 

 

(11

)%

 

 

47


 

 

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

Revenue

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

164,237

 

 

$

119,193

 

 

$

45,044

 

 

 

38

%

Professional services

 

 

16,930

 

 

 

8,686

 

 

 

8,244

 

 

 

95

%

Total revenue

 

$

181,167

 

 

$

127,879

 

 

$

53,288

 

 

 

42

%

 

Total revenue for the three months ended September 30, 2021 increased by $53.3 million, or 42%, compared to the three months ended September 30, 2020. Subscription and returns revenue for the three months ended September 30, 2021 increased by $45.0 million, or 38%, compared to the three months ended September 30, 2020. Professional services revenue for the three months ended September 30, 2021 increased by $8.2 million, or 95%, compared to the three months ended September 30, 2020.

 

Growth in total revenue was due primarily to increased demand for our services from new and existing customers and recent acquisitions. The increase in total revenue for the three months ended September 30, 2021 compared to the same period in 2020, was due primarily to $16.7 million from recent acquisitions, $15.6 million from new U.S. customers, $13.9 million from existing U.S. customers, $4.4 million from revenue growth in our international operations, and $2.7 million from SST revenue growth. Excluding recent acquisitions, total revenue for the three months ended September 30, 2021 increased by $36.6 million, or 29%, compared to the three months ended September 30, 2020. Of the growth from recent acquisitions, $9.7 million was generated from subscriptions and returns and $7.0 million from professional services. Despite lower transaction rates for the three months ended September 30, 2021, SST revenue increased from the prior period due to higher transaction volume.

 

Cost of Revenue

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

44,824

 

 

$

31,155

 

 

$

13,669

 

 

 

44

%

Professional services

 

 

8,216

 

 

 

3,777

 

 

 

4,439

 

 

 

118

%

Total cost of revenue

 

$

53,040

 

 

$

34,932

 

 

$

18,108

 

 

 

52

%

 

Cost of revenue for the three months ended September 30, 2021 increased by $18.1 million, or 52%, compared to the three months ended September 30, 2020. The increase in cost of revenue was due primarily to an increase of $11.3 million in employee-related costs from higher headcount, an increase of $2.1 million in software hosting costs, an increase of $1.6 million in allocated overhead cost, an increase of $1.3 million in amortization expense, and an increase of $1.1 million in depreciation expense.

 

Cost of revenue headcount increased approximately 51% from the third quarter of 2020 to the third quarter of 2021. Excluding the impact of recent acquisitions, cost of revenue headcount increased approximately 30% due to our continued growth to support our solutions. Employee-related costs increased due primarily to a $8.5 million increase in salaries and benefits (including $4.9 million from recent acquisitions), a $1.1 million increase in stock-based compensation expense, a $0.8 million increase in contract and temporary employee costs, and a $0.8 million increase in compensation expense related to our bonus plans.

 

Software hosting costs increased due primarily to higher transaction volumes and incremental investment in data management and reporting tools. Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2020 and the first half of 2021.

 

48


 

 

Gross Profit

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

119,413

 

 

$

88,038

 

 

$

31,375

 

 

 

36

%

Professional services

 

 

8,714

 

 

 

4,909

 

 

 

3,805

 

 

 

78

%

Total gross profit

 

$

128,127

 

 

$

92,947

 

 

$

35,180

 

 

 

38

%

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

73

%

 

 

74

%

 

 

 

 

 

 

 

 

Professional services

 

 

51

%

 

 

57

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

71

%

 

 

73

%

 

 

 

 

 

 

 

 

 

Total gross profit for the three months ended September 30, 2021 increased by $35.2 million, or 38%, compared to the three months ended September 30, 2020. Total gross margin was 71% for the three months ended September 30, 2021 compared to 73% for the same period of 2020. This decrease in total gross margin was due primarily to modestly lower gross margin from professional services combined with a small increase in gross profit from professional services as a percentage of total gross profit.

 

Research and Development

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Research and development

 

$

42,574

 

 

$

32,562

 

 

$

10,012

 

 

 

31

%

 

Research and development expenses for the three months ended September 30, 2021 increased by $10.0 million, or 31%, compared to the three months ended September 30, 2020. The increase was due primarily to an increase of $7.7 million in employee-related costs from higher headcount, an increase of $1.9 million in third-party purchased software costs, and an increase of $0.4 million in outside professional services expense.

 

Research and development headcount increased approximately 43% from the third quarter of 2020 to the third quarter of 2021. Excluding the impact of recent acquisitions, research and development headcount increased approximately 31%. Employee-related costs increased due primarily to a $5.0 million increase in salaries and benefits (including $2.7 million from recent acquisitions), a $2.5 million increase in stock-based compensation expense, including $0.8 million for PSU grants for executives in 2021, and a $0.6 million increase in compensation expense related to our bonus plans.

 

Software costs increased due primarily to additional investment in information technology security and reporting tools for product analysis, development, and testing activities. Outside professional services expense increased due primarily to an increase in third-party developer services for product integrations maintenance and support.

 

Sales and Marketing

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Sales and marketing

 

$

75,867

 

 

$

49,057

 

 

$

26,810

 

 

 

55

%

 

Sales and marketing expenses for the three months ended September 30, 2021 increased by $26.8 million, or 55%, compared to the three months ended September 30, 2020. The increase was due primarily to an increase of $16.3 million in employee-related costs, an increase of $3.2 million for partner commission expense, an increase of $2.7 million in amortization expense, an increase of $2.7 million in marketing campaign expenses, an increase of $1.3 million in allocated overhead cost, and an increase of $0.6 million in third-party purchased software costs.

 

Sales and marketing headcount increased approximately 50% from the third quarter of 2020 to the third quarter of 2021. Excluding the impact of recent acquisitions, sales and marketing headcount increased approximately 41%. Employee-related costs increased due

49


 

primarily to a $9.7 million increase in salaries and benefits (including $2.3 million from recent acquisitions), a $2.3 million increase in stock-based compensation expense, including $0.3 million for PSU grants for executives in 2021, a $1.5 million increase in sales commission expense, a $1.5 million increase in contract and temporary employee costs, a $0.8 million increase in compensation expense related to our bonus plans, and a $0.6 million increase in travel costs.

 

Partner commission expense increased due primarily to higher revenues. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions. Marketing campaign expenses increased due primarily to increased spending on online advertising, market research, brand awareness, and outbound direct mail advertising. Third-party purchased software costs increased due primarily to additional investment in lead generation technology.

 

General and Administrative

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

General and administrative

 

$

35,887

 

 

$

23,885

 

 

$

12,002

 

 

 

50

%

 

General and administrative expenses for the three months ended September 30, 2021 increased by $12.0 million, or 50%, compared to the three months ended September 30, 2020. The increase was due primarily to an increase of $8.8 million in employee-related costs, an increase of $0.9 million in amortization expense, an increase of $0.8 million in third-party purchased software costs, an increase of $0.6 million in outside professional services expense, an increase of $0.4 million in merchant fees, and an increase of $0.4 million in insurance, partially offset by a decrease of $0.8 million in impairment related to operating lease right-of-use assets and property and equipment impaired in the third quarter of 2020.

 

General and administrative headcount increased approximately 40% from the third quarter of 2020 to the third quarter of 2021. Excluding the impact of recent acquisitions, general and administrative headcount increased approximately 32%. Employee-related costs increased due primarily to a $3.5 million increase in salaries and benefits (including $0.6 million from recent acquisitions), a $4.6 million increase in stock-based compensation expense, including $3.4 million for PSU grants for executives in 2021, and a $0.4 million increase in contract and temporary employee costs.

 

Amortization increased due to acquired intangibles from our recent acquisitions. Software costs increased due primarily to an increase in the number of licenses purchased and higher subscription fees for key financial and human resources information system applications. Outside professional services expenses increased due primarily to increased investment in employee engagement, principally satisfaction surveys, recruiting services, and training programs, partially offset by higher acquisition related costs in the prior period. Merchant fees, which are credit card processing fees, increased due primarily to an increase in volume of credit card transactions. Insurance expenses increased due to higher insurance premiums in the current year. Operating lease right-of-use asset and property and equipment impairment decreased due to the closure during the third quarter of 2020 of four offices in the U.S. and Canada that had remaining lease terms extending beyond the date we vacated the leased office space, with no comparable impairment in the current period. 

 

Total Other (Income) Expense, Net

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

 

(dollars in thousands)

 

Other (income) expense, net

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

(28

)

 

$

(36

)

 

$

8

 

Interest expense

 

 

815

 

 

 

 

 

 

815

 

Other (income) expense, net

 

 

6,168

 

 

 

(185

)

 

 

6,353

 

Total other (income) expense, net

 

$

6,955

 

 

$

(221

)

 

$

7,176

 

 

50


 

 

Total other (income) expense, net for the three months ended September 30, 2021 was $7.0 million of expense compared to $0.2 million of income for the three months ended September 30, 2020. Interest expense was $0.8 million for the three months ended September 30, 2021 compared to zero for the three months ended September 30, 2020. Interest expense increased due to accrual of contractual interest and amortization of the issuance costs on our 2026 Notes issued in the third quarter of 2021. Other (income) expense, net was $6.2 million expense for the three months ended September 30, 2021 compared to $0.2 million other income for the three months ended September 30, 2020, due primarily to changes to our earnout liabilities. We estimate the fair value of earnout liabilities related to business combinations quarterly. During the three months ended September 30, 2021, the adjustments to fair value increased the carrying value of the earnout liability for our acquisitions of TTR, Davo, and Business Licenses resulting in expense of $6.2 million.

 

(Benefit from) provision for Income Taxes

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

 

(dollars in thousands)

 

(Benefit from) provision for income taxes

 

$

(610

)

 

$

393

 

 

$

(1,003

)

 

The benefit from income taxes for the three months ended September 30, 2021 was $0.6 million compared to a provision for income taxes of $0.4 million for the three months ended September 30, 2020. The effective income tax rate was 1.8% for the three months ended September 30, 2021 compared to (3.2)% for the three months ended September 30, 2020. The effective tax rate in both quarters differ from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets. The decrease in expense and increase in effective rate is due primarily to foreign tax jurisdictions.

 

We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating tax losses in the U.S., U.K., and Brazil, including in the first nine months of 2021. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards, and research and development tax credits. We expect to maintain a full valuation allowance for the foreseeable future.

 

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Revenue

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

455,997

 

 

$

333,258

 

 

$

122,739

 

 

 

37

%

Professional services

 

 

47,838

 

 

 

22,551

 

 

 

25,287

 

 

 

112

%

Total revenue

 

$

503,835

 

 

$

355,809

 

 

$

148,026

 

 

 

42

%

 

Total revenue for the nine months ended September 30, 2021 increased by $148.0 million, or 42%, compared to the nine months ended September 30, 2020. Subscription and returns revenue for the nine months ended September 30, 2021 increased by $122.7 million, or 37%, compared to the nine months ended September 30, 2020. Professional services revenue for the nine months ended September 30, 2021 increased by $25.3 million, or 112%, compared to the nine months ended September 30, 2020.

 

Growth in total revenue was due primarily to increased demand for our services from new and existing customers and recent acquisitions. The increase in total revenue for the nine months ended September 30, 2021 compared to the same period in 2020, was due primarily to $45.4 million from existing U.S. customers, $42.6 million from recent acquisitions, $34.0 million from new U.S. customers, $13.6 million from SST revenue growth, and $12.6 million attributable to revenue growth in our international operations. Excluding recent acquisitions, total revenue for the nine months ended September 30, 2021 increased by $105.4 million, or 30%, compared to the nine months ended September 30, 2020. Of the growth from recent acquisitions, $23.6 million was generated from subscriptions and returns and $19.0 million from professional services. Despite lower transaction rates for the nine months ended September 30, 2021, SST revenue increased from the prior period due to higher transaction volume.

 

51


 

 

Cost of Revenue

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

123,970

 

 

$

89,451

 

 

$

34,519

 

 

 

39

%

Professional services

 

 

22,416

 

 

 

13,065

 

 

 

9,351

 

 

 

72

%

Total cost of revenue

 

$

146,386

 

 

$

102,516

 

 

$

43,870

 

 

 

43

%

 

Cost of revenue for the nine months ended September 30, 2021 increased by $43.9 million, or 43%, compared to the nine months ended September 30, 2020. The increase in cost of revenue in absolute dollars was due primarily to an increase of $31.5 million in employee-related costs from higher headcount, an increase of $3.4 million in amortization expense, an increase of $3.4 million in allocated overhead cost, an increase of $2.9 million in software hosting costs, and an increase of $2.0 million in depreciation expense.

 

Cost of revenue headcount increased approximately 51% from the third quarter of 2020 to the third quarter of 2021. Excluding the impact of recent acquisitions, cost of revenue headcount increased approximately 30% due to continued growth to support our solutions. Employee-related costs increased due primarily to a $23.5 million increase in salaries and benefits (including $12.8 million from recent acquisitions), $3.2 million increase in compensation expense related to our bonus plans, a $3.1 million increase in stock-based compensation expense, and a $2.1 million increase in contract and temporary employee costs, partially offset by a $0.5 million decrease in travel costs. Travel costs decreased due primarily to cancelling all in-person customer meetings and events beginning in March of 2020 because of the COVID-19 pandemic.

 

Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions. Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Software hosting costs increased due primarily to higher transaction volumes and incremental investment in data management and reporting tools. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2020 and the first half of 2021.

 

Gross Profit

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

$

332,027

 

 

$

243,807

 

 

$

88,220

 

 

 

36

%

Professional services

 

 

25,422

 

 

 

9,486

 

 

 

15,936

 

 

 

168

%

Total gross profit

 

$

357,449

 

 

$

253,293

 

 

$

104,156

 

 

 

41

%

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and returns

 

 

73

%

 

 

73

%

 

 

 

 

 

 

 

 

Professional services

 

 

53

%

 

 

42

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

71

%

 

 

71

%

 

 

 

 

 

 

 

 

 

Total gross profit for the nine months ended September 30, 2021 increased $104.2 million, or 41% compared to the nine months ended September 30, 2020. Total gross margin was 71% for both the nine months ended September 30, 2021 and the same period of 2020.

Research and Development

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Research and development

 

$

121,841

 

 

$

85,253

 

 

$

36,588

 

 

 

43

%

52


 

 

 

Research and development expenses for the nine months ended September 30, 2021 increased by $36.6 million, or 43%, compared to the nine months ended September 30, 2020. The increase was due primarily to an increase of $30.0 million in employee-related costs from higher headcount, an increase of $5.3 million in third-party purchased software costs, and an increase of $1.3 million in outside professional services expense.

 

Research and development headcount increased approximately 43% from the third quarter of 2020 to the third quarter of 2021. Excluding the impact of recent acquisitions, research and development headcount increased approximately 31%. Employee-related costs increased due primarily to a $18.0 million increase in salaries and benefits (including $5.7 million from recent acquisitions), an $8.3 million increase in stock-based compensation expense, including $1.6 million for PSU grants for executives in 2021, and a $4.2 million increase in compensation expense related to our bonus plans, partially offset by a decrease of $0.4 million in travel costs and a decrease of $0.2 million in contract and temporary employee costs.

 

Software costs increased due primarily to additional investment in information technology security and reporting tools for product analysis, development, and testing activities. Outside professional services expense increased due primarily to an increase in third-party information technology security services and third-party developer services for product integrations maintenance and support.

 

 

Sales and Marketing

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

Sales and marketing

 

$

212,068

 

 

$

144,731

 

 

$

67,337

 

 

 

47

%

 

Sales and marketing expenses for the nine months ended September 30, 2021 increased by $67.3 million, or 47%, compared to the nine months ended September 30, 2020. The increase was due primarily to an increase of $39.2 million in employee-related costs, an increase of $9.3 million in marketing campaign expenses, an increase of $7.3 million for partner commission expense, an increase of $6.0 million in amortization expense, an increase of $3.2 million in allocated overhead cost, an increase of $1.4 million in third-party purchased software costs, and an increase of $1.0 million in outside professional services expense.

 

Sales and marketing headcount increased approximately 50% from the third quarter of 2020 to the third quarter of 2021. Excluding the impact of recent acquisitions, sales and marketing headcount increased approximately 41%. Employee-related costs increased due primarily to a $23.4 million increase in salaries and benefits (including $5.1 million from recent acquisitions), a $6.0 million increase in stock-based compensation expense, including $0.6 million for PSU grants for executives in 2021, a $5.4 million increase in sales commission expense, a $3.9 million increase in contract and temporary employee costs, and a $2.8 million increase in compensation expense related to our bonus plans, partially offset by a $2.3 million decrease in travel costs. Travel costs decreased due primarily to cancelling all in-person customer activities and events beginning in March of 2020 because of the COVID-19 pandemic. During the remainder of 2021, we expect to gradually resume in-person customer activities and events, where it is safe to do so, which will increase travel costs that were suspended during the COVID-19 pandemic.

 

Marketing campaign expenses increased due primarily to increased spending on market research, brand awareness, online advertising, and outbound direct mail advertising. Partner commission expense increased due primarily to higher revenues. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions. Third-party purchased software costs increased due primarily to increased investment in lead generation technology. Outside professional services expenses increased due primarily to increased third-party consulting services to improve the customer experience during onboarding, to develop prospective customer data, to produce brand recognition and positioning studies, and services to integrate websites of recent acquisitions.

 

General and Administrative

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percentage

 

 

 

(dollars in thousands)

 

General and administrative

 

$

101,982

 

 

$

65,595

 

 

$

36,387

 

 

 

55

%

 

General and administrative expenses for the nine months ended September 30, 2021 increased by $36.4 million, or 55%, compared to the nine months ended September 30, 2020. The increase was due primarily to an increase of $26.0 million in employee-related

53


 

costs, an increase of $4.2 million in outside professional services expense, an increase of $2.7 million in amortization expense, an increase of $1.7 million in third-party purchased software costs, an increase of $1.3 million in insurance, and an increase of $0.9 million in merchant fees, partially offset by a decrease of $1.0 million in non-income tax expense, a decrease of $0.8 million in impairment related to operating lease right-of-use assets and property and equipment, and a $0.7 million expense to settle a contract dispute in the prior year period.

 

General and administrative headcount increased approximately 40% from the third quarter of 2020 to the third quarter of 2021. Excluding the impact of recent acquisitions, general and administrative headcount increased approximately 32%. Employee-related costs increased due primarily to a $13.1 million increase in stock-based compensation expense, including $1.6 million for PSU grants for executives in 2021, a $9.9 million increase in salaries and benefits (including $2.5 million from recent acquisitions), a $2.5 million increase in compensation expense related to our bonus plans, and a $1.0 million increase in contract and temporary employee costs, partially offset by a $0.5 million decrease in travel costs.

 

Outside professional services expenses increased due primarily to increased investment in employee engagement, principally satisfaction surveys, support services, recruiting services, and training, partially offset by higher acquisition related costs in the prior period. Amortization increased due to acquired intangibles from our recent acquisitions. Software costs increased due primarily to an increase in the number of licenses purchased and higher subscription fees for key financial and human resources information system applications. Insurance expenses increased due to higher insurance premiums in the current year. Merchant fees, which are credit card processing fees, increased due primarily to an increase in volume of credit card transactions. Non-income tax expense decreased due primarily to lower state and foreign indirect taxes. Operating lease right-of-use asset and property and equipment impairment decreased due to the closure during the third quarter of 2020 of four offices in the U.S. and Canada that had remaining lease terms extending beyond the date we vacated the leased office space, with no comparable impairment in the current period. During the nine months ended September 30, 2020, we agreed to settle a contract dispute, with no comparable costs in the current period.

 

Total Other (Income) Expense, Net

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

 

(dollars in thousands)

 

Other (income) expense, net

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

(75

)

 

$

(1,646

)

 

$

1,571

 

Interest expense

 

 

815

 

 

 

 

 

 

815

 

Other (income) expense, net

 

 

9,403

 

 

 

(3,435

)

 

 

12,838

 

Total other (income) expense, net

 

$

10,143

 

 

$

(5,081

)

 

$

15,224

 

 

Total other income (expense), net for the nine months ended September 30, 2021 was $10.1 million of expense compared to $5.1 million of income for the nine months ended September 30, 2020. Interest income decreased due to a decline in the interest rate earned on our cash and cash equivalents. Interest expense was $0.8 million for the three months ended September 30, 2021 compared to zero for the three months ended September 30, 2020. Interest expense increased due to accrual of contractual interest and amortization of the issuance costs on our 2026 Notes issued in the third quarter of 2021. Other (income) expense, net was $9.4 million of expense for the nine months ended September 30, 2021 compared to $3.4 million of income for the nine months ended September 30, 2020, due primarily to changes to our earnout liabilities. We estimate the fair value of earnout liabilities related to business combinations quarterly. During the nine months ended September 30, 2021, the adjustments to fair value increased the carrying value of the earnout liability for our acquisitions of TTR, Davo, and Business Licenses, resulting in expense of $8.7 million. During the nine months ended September 30, 2020, the adjustments to fair value decreased the carrying value of the earnout liability for our acquisition of Portway, resulting in income of $2.3 million.

 

Provision for Income Taxes

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

 

(dollars in thousands)

 

Provision for income taxes

 

$

1,599

 

 

$

947

 

 

$

652

 

 

The provision for income taxes for the nine months ended September 30, 2021 was $1.6 million compared to a provision for income taxes of $0.9 million for the nine months ended September 30, 2020. The effective income tax rate was (1.8)% for the nine months ended September 30, 2021 compared to (2.5)% for the nine months ended September 30, 2020. The effective tax rate in both quarters differs from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets. The increase in tax expense is due primarily to measurement period adjustments related to the 2020 acquisition of TTR recorded during the first quarter of 2021 (see Note 5 in the Notes to Consolidated Financial Statements).

54


 

 

 

We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating tax losses in the U.S., U.K., and Brazil, including in the first nine months of 2021. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards, and research and development tax credits. We expect to maintain a full valuation allowance for the foreseeable future.

 

 

Liquidity and Capital Resources

 

We require cash to fund our operations, including outlays for infrastructure growth, acquisitions, geographic expansion, expanding our sales and marketing activities, research and development efforts, and working capital for our growth. We have financed our operations primarily through cash received from customers for our solutions, public offerings of our common stock, and a private offering of convertible senior notes. As of September 30, 2021, we had $1.5 billion of cash and cash equivalents, most of which was held in money market accounts.

Borrowings

In August 2021, we completed a private offering of $977.5 million of convertible senior notes. The convertible senior notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on February 1, 2022. The initial conversion price of the convertible senior notes represented a premium of 47.5% over the closing price of our common stock on August 10, 2021, the date the convertible senior notes offering was priced. The net proceeds from the sale of the convertible senior notes were $959.9 million after deducting the issuance costs. The convertible senior notes will mature on August 1, 2026, unless earlier converted, redeemed, or repurchased.

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

Future Cash Requirements

As of September 30, 2021, our cash and cash equivalents included proceeds from our previous public offerings of common stock and our private offering of convertible senior notes. We intend to continue to increase our operating expenses and capital expenditures to support the growth in our business and operations. We expect to also use our cash and cash equivalents to continue to acquire complementary businesses, products, services, technologies, or other assets. We believe that our existing cash and cash equivalents of $1.5 billion as of September 30, 2021 will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our financial position and liquidity are, and will be, influenced by a variety of factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing spending, the introduction of new and enhanced solutions, the cash paid for any acquisitions, and the continued market acceptance of our solutions.

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

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

Operating Activities

 

$

8,725

 

 

$

11,060

 

Investing Activities

 

 

(49,507

)

 

 

(5,674

)

Financing Activities

 

 

933,303

 

 

 

593,159

 

 

55


 

 

Operating Activities

 

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

For the nine months ended September 30, 2021, net cash provided by operating activities was $8.7 million compared to net cash provided of $11.1 million for the nine months ended September 30, 2020. Cash provided by operating activities was essentially flat as an increase in cash collected from customers (due to growing demand of our subscription services) was offset by increased cash expenditures to fund our continuing product and customer expansion efforts.

Investing Activities

Our investing activities primarily include cash outflows related to purchases of property and equipment, additions of capitalized software, and from time to-time, cash paid for asset and business acquisitions.

For the nine months ended September 30, 2021, cash used in investing activities was $49.5 million, compared to cash used of $5.7 million for the nine months ended September 30, 2020. The increase in cash used in investing activities of $43.8 million was due primarily to an increase in cash paid for acquisitions of businesses of $33.6 million, an increase in additions of capitalized software of $6.9 million, an increase in cash paid for acquired intangible assets of $1.5 million, an increase in capital expenditures of $1.5 million, and $0.4 million cash paid for purchases of available-for-sale securities in 2021. In the first nine months of 2021, we acquired Inposia, Davo, and 3CE for total cash consideration, net of cash acquired of $31.7 million and paid $1.9 million of additional purchase price to finalize net working capital and other adjustments related to the 2020 acquisitions of TTR and Impendulo.

Financing Activities

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

For the nine months ended September 30, 2021, cash provided by financing activities was $933.3 million compared to cash provided of $593.2 million for the nine months ended September 30, 2020. This increase in cash provided by financing activities of $340.1 million was due primarily to $977.5 million of proceeds from our private offering of convertible senior notes, a $36.3 million increase in net cash flows related to customer fund obligations in the first nine months of 2021 compared to the prior period, a $3.7 million decrease in deferred cash payments related to business combination earnouts, and a $3.1 million increase in cash proceeds from common stock purchased under our employee stock purchase plan. These cash inflows were partially offset by $556.3 million decrease in cash proceeds from offerings of our common stock, $75.3 million cash paid for purchases of capped calls and $17.3 million cash paid for debt issuance costs related to our private offering of convertible senior notes in 2021, $20.8 million cash paid in the first nine months of 2021 for purchase price holdbacks related to the 2020 acquisition of TTR and the 2019 acquisition of Portway International Inc. compared to $2.8 million cash paid in the first nine months of 2020 for purchase price holdbacks related to the 2019 acquisitions of Compli and Indix, a $12.6 million decrease in cash proceeds from exercise of stock options, and a $1.2 million increase in deferred cash payments related to asset acquisition earnouts. Cash inflows from customer fund obligations increased in the first nine months of 2021 due primarily to a state being unable to accept electronic tax remittance payments during August and September. This temporary interruption of payments resulted in approximately $37 million of additional funds held from customers as of September 30, 2021. During the fourth quarter, the state has resumed normal tax remittance payment activities.

Funds Held from Customers and Customer Fund Obligations

We maintain trust accounts with FDIC-insured 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 are not commingled with our operating funds but are typically deposited with funds also held on behalf of our other customers. Funds held from customers primarily represents restricted cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Changes in customer funds assets account that relate to activities paying for the trust operations, such as banking fees, are included as cash flows from operating activities.

 

56


 

 

Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Changes in customer funds obligations liability are presented as cash flows from financing activities.

Contractual Obligations and Commitments

 

In August 2021, we issued convertible senior notes (see Note 10 in the Notes to Consolidated Financial Statements). In addition, during the nine months ended September 30, 2021, our purchase commitments increased approximately $63.2 million compared to December 31, 2020, primarily related to software hosting and software license subscriptions that extend up to four years beyond September 30, 2021. There were no other material changes to our contractual obligations as of September 30, 2021 compared to December 31, 2020.

 

Use and Reconciliation of Non-GAAP Financial Measures

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

 

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

 

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

 

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

 

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

 

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

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

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

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

 

57


 

 

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

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Reconciliation of Non-GAAP Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

53,040

 

 

$

34,932

 

 

$

146,386

 

 

$

102,516

 

Stock-based compensation expense

 

 

(2,733

)

 

 

(1,591

)

 

 

(7,384

)

 

 

(4,264

)

Amortization of acquired intangibles

 

 

(2,314

)

 

 

(1,007

)

 

 

(6,728

)

 

 

(3,302

)

Non-GAAP Cost of Revenue

 

$

47,993

 

 

$

32,334

 

 

$

132,274

 

 

$

94,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

128,127

 

 

$

92,947

 

 

$

357,449

 

 

$

253,293

 

Stock-based compensation expense

 

 

2,733

 

 

 

1,591

 

 

 

7,384

 

 

 

4,264

 

Amortization of acquired intangibles

 

 

2,314

 

 

 

1,007

 

 

 

6,728

 

 

 

3,302

 

Non-GAAP Gross Profit

 

$

133,174

 

 

$

95,545

 

 

$

371,561

 

 

$

260,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Gross Margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

71

%

 

 

73

%

 

 

71

%

 

 

71

%

Stock-based compensation expense as a percentage of revenue

 

 

2

%

 

 

1

%

 

 

1

%

 

 

1

%

Amortization of acquired intangibles as a percentage of revenue

 

 

1

%

 

 

1

%

 

 

1

%

 

 

1

%

Non-GAAP Gross Margin

 

 

74

%

 

 

75

%

 

 

74

%

 

 

73

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Research and Development Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

42,574

 

 

$

32,562

 

 

$

121,841

 

 

$

85,253

 

Stock-based compensation expense

 

 

(6,234

)

 

 

(3,781

)

 

 

(17,589

)

 

 

(9,255

)

Amortization of acquired intangibles

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Research and Development Expense

 

$

36,340

 

 

$

28,781

 

 

$

104,252

 

 

$

75,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Sales and Marketing Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

75,867

 

 

$

49,057

 

 

$

212,068

 

 

$

144,731

 

Stock-based compensation expense

 

 

(5,448

)

 

 

(3,157

)

 

 

(14,915

)

 

 

(8,928

)

Amortization of acquired intangibles

 

 

(3,096

)

 

 

(447

)

 

 

(7,541

)

 

 

(1,603

)

Non-GAAP Sales and Marketing Expense

 

$

67,323

 

 

$

45,453

 

 

$

189,612

 

 

$

134,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP General and Administrative Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

35,887

 

 

$

23,885

 

 

$

101,982

 

 

$

65,595

 

Stock-based compensation expense

 

 

(8,903

)

 

 

(4,292

)

 

 

(25,442

)

 

 

(12,352

)

Amortization of acquired intangibles

 

 

(930

)

 

 

(4

)

 

 

(2,685

)

 

 

(12

)

Non-GAAP General and Administrative Expense

 

$

26,054

 

 

$

19,589

 

 

$

73,855

 

 

$

53,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Operating Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

$

(26,201

)

 

$

(12,557

)

 

$

(78,442

)

 

$

(42,286

)

Stock-based compensation expense

 

 

23,318

 

 

 

12,821

 

 

 

65,330

 

 

 

34,799

 

Amortization of acquired intangibles

 

 

6,340

 

 

 

1,458

 

 

 

16,954

 

 

 

4,917

 

Non-GAAP Operating Income (Loss)

 

$

3,457

 

 

$

1,722

 

 

$

3,842

 

 

$

(2,570

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Non-GAAP Net Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(32,546

)

 

$

(12,729

)

 

$

(90,184

)

 

$

(38,152

)

Stock-based compensation expense

 

 

23,318

 

 

 

12,821

 

 

 

65,330

 

 

 

34,799

 

Amortization of acquired intangibles

 

 

6,340

 

 

 

1,458

 

 

 

16,954

 

 

 

4,917

 

Non-GAAP Net Income (Loss)

 

$

(2,888

)

 

$

1,550

 

 

$

(7,900

)

 

$

1,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Free cash flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities(1)

 

$

11,422

 

 

$

28,034

 

 

$

8,725

 

 

$

11,060

 

Less: Purchases of property and equipment(2)

 

 

(1,393

)

 

 

(976

)

 

 

(4,463

)

 

 

(2,968

)

Less: Capitalized software development costs(2)

 

 

(3,655

)

 

 

(1,142

)

 

 

(9,608

)

 

 

(2,706

)

Free cash flow

 

$

6,374

 

 

$

25,916

 

 

$

(5,346

)

 

$

5,386

 

(1)We have presented corrected net cash used in operating activities for the three and nine months ended September 30, 2020. The correction to net cash used in operating activities resulted in a change of $0.1 million and $0.8 million for the three months and nine months ended September 30, 2020, respectively.

(2)Capitalized software development costs were previously included in purchases of property and equipment and does not impact previously reported free cash flow.

 

 

 

 

58


 

 

The following table reflects calculated billings and reconciles to GAAP revenues. In addition to the defined reconciling items for calculated billings, the second and third quarter of 2021 and the fourth quarter of 2020 include reconciling adjustments to exclude the acquisition-date fair value of deferred revenue assumed in business combinations.

 

 

Three Months Ended

 

 

Sep 30,

2021

 

 

Jun 30,

2021

 

 

Mar 31,

2021

 

 

Dec 31,

2020

 

 

Sep 30,

2020

 

 

Jun 30,

2020

 

 

Mar 31,

2020

 

 

Dec 31,

2019

 

 

(in thousands)

 

Total revenue

$

181,167

 

 

$

169,067

 

 

$

153,601

 

 

$

144,760

 

 

$

127,879

 

 

$

116,487

 

 

$

111,443

 

 

$

107,627

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

   (end of period)

 

257,883

 

 

 

239,395

 

 

 

225,531

 

 

 

209,690

 

 

 

180,640

 

 

 

167,719

 

 

 

165,369

 

 

 

161,241

 

Contract liabilities

   (end of period)

 

8,597

 

 

 

11,406

 

 

 

12,466

 

 

 

10,134

 

 

 

7,673

 

 

 

6,195

 

 

 

6,330

 

 

 

5,197

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

   (beginning of

   period)

 

(239,395

)

 

 

(225,531

)

 

 

(209,690

)

 

 

(180,640

)

 

 

(167,719

)

 

 

(165,369

)

 

 

(161,241

)

 

 

(148,466

)

Contract liabilities

   (beginning of

   period)

 

(11,406

)

 

 

(12,466

)

 

 

(10,134

)

 

 

(7,673

)

 

 

(6,195

)

 

 

(6,330

)

 

 

(5,197

)

 

 

(4,843

)

Deferred revenue

   assumed in

   business

   combinations

 

(430

)

 

 

(886

)

 

 

 

 

 

(9,194

)

 

 

 

 

 

 

 

 

 

 

 

 

Calculated billings

$

196,416

 

 

$

180,985

 

 

$

171,774

 

 

$

167,077

 

 

$

142,278

 

 

$

118,702

 

 

$

116,704

 

 

$

120,756

 

 

 

Critical Accounting Policies and Estimates

There have been no material updates or changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in our 2020 Annual Report.

Recent Accounting Pronouncements

For further information on recent accounting pronouncements, refer to Note 2 in the Notes to Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

 

We had cash and cash equivalents of $1,536.4 million and $673.6 million as of September 30, 2021 and December 31, 2020, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with financial institutions. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.

 

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

 

59


 

 

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 Brazilian Real, British Pound, Euro, and Indian Rupee. 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 and nine months ended September 30, 2021 and 2020, approximately 8% and 6% of our revenues, respectively, were generated in currencies other than U.S. dollars. We have experienced and will continue to experience fluctuations in our net loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We have not engaged in the hedging of our foreign currency transactions to date. We may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operations and our risk grows.

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 September 30, 2021.

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 at the reasonable assurance level as of September 30, 2021. 

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.

60


 

PART II—OTHER INFORMATION

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

Item 1A. Risk Factors.

There have been no material changes to the Company’s Risk Factors as disclosed in our 2020 Annual Report.

 

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

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

 

61


 

 

Item 6. Exhibits.

 

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

 

Exhibit

Number

 

Description

 

 

 

    2.1

 

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

 

 

 

    2.2

 

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

 

 

 

    3.1

 

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

 

 

 

    3.2

 

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

 

 

 

    4.1

 

Indenture, dated as of August 13, 2021, by and between Avalara, Inc. and The Bank of New York Mellon Trust Company, N.A., as indenture trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K, filed August 13, 2021 (File No. 001-38525)).

 

 

 

    4.2

 

Form of 0.25% Convertible Senior Note due 2026 (included in Exhibit 4.1)

 

 

 

  10.1

 

Form of Capped Call Confirmation (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed August 13, 2021 (File No. 001-38525)).

 

 

 

  31.1*