10-Q 1 avlr-10q_20180630.htm 10-Q avlr-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2018

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

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 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

 

  (Do not check if a small reporting company)

 

Small reporting company

 

 

  

Emerging growth company

 

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

 

 

 

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

As of July 31, 2018, the registrant had 66,472,251 shares of common stock, $0.0001 par value per share, outstanding.

 

 

i


 

Table of Contents

 

 

ii


 

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 forward­looking statements. In some cases you can identify forward-looking statements because they contain words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "likely," "plan," "potential," "predict," "project," "seek," "should," "target," ''will," "would," or similar expressions and the negatives of those terms. Forward-looking statements are based on information available to our management as of the date of this report and our management's good faith belief as of such date with respect to future events and are subject to a number of risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

our ability to expand our international reach; and

 

other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under Part II, Item 1A. Risk Factors.

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.

 

 

iii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AVALARA, INC.

Consolidated Balance Sheets

(In thousands, except for per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

173,108

 

 

$

14,075

 

Trade accounts receivable—net of allowance for doubtful accounts

   of $531 and $905, respectively

 

 

28,681

 

 

 

26,596

 

Prepaid expenses and other current assets

 

 

6,375

 

 

 

7,016

 

Total current assets before customer fund assets

 

 

208,164

 

 

 

47,687

 

Funds held from customers

 

 

17,910

 

 

 

13,082

 

Receivable from customers—net of allowance of $591 and $666,

   respectively

 

 

157

 

 

 

313

 

Total current assets

 

 

226,231

 

 

 

61,082

 

Property and equipment—Net

 

 

32,437

 

 

 

25,394

 

Other assets:

 

 

 

 

 

 

 

 

Goodwill

 

 

70,692

 

 

 

72,482

 

Intangible assets—net

 

 

22,559

 

 

 

19,074

 

Other noncurrent assets

 

 

796

 

 

 

780

 

Total other assets

 

 

94,047

 

 

 

92,336

 

Total assets

 

$

352,715

 

 

$

178,812

 

 

(Continued)

 

1


 

AVALARA, INC.
Consolidated Balance Sheets
(In thousands, except for per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

Liabilities and shareholders' equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accrued expenses and trade payables

 

$

36,351

 

 

$

38,164

 

Deferred revenue

 

 

100,664

 

 

 

83,778

 

Credit facility and notes payable

 

 

4,375

 

 

 

859

 

Total current liabilities before customer funds obligations

 

 

141,390

 

 

 

122,801

 

Customer funds obligations

 

 

18,502

 

 

 

14,061

 

Total current liabilities

 

 

159,892

 

 

 

136,862

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Deferred revenue

 

 

8,680

 

 

 

8,453

 

Deferred tax liability

 

 

887

 

 

 

1,854

 

Credit facility

 

 

25,218

 

 

 

38,840

 

Deferred rent

 

 

15,848

 

 

 

14,689

 

Other noncurrent liabilities

 

 

36

 

 

 

785

 

Total liabilities

 

 

210,561

 

 

 

201,483

 

Convertible preferred stock:

 

 

 

 

 

 

 

 

Series A convertible preferred stock, par value $0.0001 per share– no shares and 12,309 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 13,814 authorized as of

   December 31, 2017 (aggregate liquidation preference of $10,930)

 

 

-

 

 

 

12,715

 

Series A-1 convertible preferred stock, par value $0.0001 per share– no shares and 4,688 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 5,012 authorized as of

   December 31, 2017 (aggregate liquidation preference of $2,081)

 

 

-

 

 

 

2,081

 

Series A-2 convertible preferred stock, par value $0.0001 per share– no shares and 279 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 279 authorized as of

   December 31, 2017 (aggregate liquidation preference of $472)

 

 

-

 

 

 

303

 

Series B convertible preferred stock, par value $0.0001 per share– no shares and 1,793 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 2,133 authorized as of

   December 31, 2017 (aggregate liquidation preference of $1,685)

 

 

-

 

 

 

3,756

 

Series B-1 convertible preferred stock, par value $0.0001 per share– no shares and 21,518 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 21,600 authorized as of

   December 31, 2017 (aggregate liquidation preference of $23,670)

 

 

-

 

 

 

23,259

 

Series C convertible preferred stock, par value $0.0001 per share– no shares and 7,069 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 7,069 authorized as of

   December 31, 2017 (aggregate liquidation preference of $20,000)

 

 

-

 

 

 

19,782

 

Series C-1 convertible preferred stock, par value $0.0001 per share– no shares and 8,511 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 8,590 authorized as of

   December 31, 2017 (aggregate liquidation preference of $12,767)

 

 

-

 

 

 

27,961

 

Series D convertible preferred stock, par value $0.0001 per share– no shares and 8,566 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 10,172 authorized as of

   December 31, 2017 (aggregate liquidation preference of $44,972)

 

 

-

 

 

 

41,130

 

Series D-1 convertible preferred stock, par value $0.0001 per share– no shares and 22,808 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 22,862 authorized as of

   December 31, 2017 (aggregate liquidation preference of $144,147)

 

 

-

 

 

 

143,915

 

Series D-2 convertible preferred stock, par value $0.0001 per share– no shares and 14,245 shares issued

   and outstanding as of June 30, 2018 and December 31, 2017, respectively, 14,815 authorized as of

   December 31, 2017 (aggregate liquidation preference of $96,154)

 

 

-

 

 

 

96,019

 

Shareholders' equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value– no shares issued and outstanding at June 30, 2018 and December 31,

   2017, and 20,000 shares authorized as of June 30, 2018

 

 

-

 

 

 

-

 

Common stock, $0.0001 par value– 66,458 and 5,992 shares issuedand outstanding at June 30, 2018 and

   December 31, 2017, respectively, 600,000 and 153,945 shares authorized as of June 30, 2018 and

   December 31, 2017, respectively

 

 

7

 

 

 

1

 

Additional paid-in capital

 

 

589,321

 

 

 

18,121

 

Accumulated other comprehensive income (loss)

 

 

(2,107

)

 

 

338

 

Accumulated deficit

 

 

(445,067

)

 

 

(412,052

)

Total shareholders’ equity (deficit)

 

 

142,154

 

 

 

(393,592

)

Total liabilities and shareholders' equity (deficit)

 

$

352,715

 

 

$

178,812

 

 

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

 

(Concluded)

 

2


 

AVALARA, INC.

Consolidated Statements of Operations

(unaudited)

(In thousands, except per share data)

 

 

 

For the Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

59,675

 

 

$

48,309

 

Professional services and other

 

 

4,034

 

 

 

2,582

 

Total revenue

 

 

63,709

 

 

 

50,891

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

15,837

 

 

 

12,109

 

Professional services and other

 

 

2,795

 

 

 

2,258

 

Total cost of revenue

 

 

18,632

 

 

 

14,367

 

Gross profit

 

 

45,077

 

 

 

36,524

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

12,428

 

 

 

10,291

 

Sales and marketing

 

 

40,604

 

 

 

33,191

 

General and administrative

 

 

9,341

 

 

 

7,484

 

Total operating expenses

 

 

62,373

 

 

 

50,966

 

Operating loss

 

 

(17,296

)

 

 

(14,442

)

Other (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(269

)

 

 

(15

)

Interest expense

 

 

1,067

 

 

 

654

 

Other (income) expense, net

 

 

(442

)

 

 

509

 

Total other (income) expense, net

 

 

356

 

 

 

1,148

 

Loss before income taxes:

 

 

(17,652

)

 

 

(15,590

)

Provision for (benefit from) income taxes

 

 

114

 

 

 

(141

)

Net loss

 

$

(17,766

)

 

$

(15,449

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(1.24

)

 

$

(2.81

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

14,383

 

 

 

5,494

 

 

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 Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

117,545

 

 

$

94,157

 

Professional services and other

 

 

7,541

 

 

 

5,699

 

Total revenue

 

 

125,086

 

 

 

99,856

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

30,654

 

 

 

23,353

 

Professional services and other

 

 

5,487

 

 

 

4,577

 

Total cost of revenue

 

 

36,141

 

 

 

27,930

 

Gross profit

 

 

88,945

 

 

 

71,926

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

25,047

 

 

 

19,973

 

Sales and marketing

 

 

77,911

 

 

 

63,491

 

General and administrative

 

 

18,552

 

 

 

18,097

 

Total operating expenses

 

 

121,510

 

 

 

101,561

 

Operating loss

 

 

(32,565

)

 

 

(29,635

)

Other (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(305

)

 

 

(25

)

Interest expense

 

 

1,961

 

 

 

1,182

 

Other (income) expense, net

 

 

(472

)

 

 

945

 

Total other (income) expense, net

 

 

1,184

 

 

 

2,102

 

Loss before income taxes:

 

 

(33,749

)

 

 

(31,737

)

Provision for (benefit from) income taxes

 

 

(734

)

 

 

(290

)

Net loss

 

$

(33,015

)

 

$

(31,447

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(3.21

)

 

$

(5.78

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

10,299

 

 

 

5,442

 

 

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

4


 

AVALARA, INC.

Consolidated Statements of Comprehensive Loss

(unaudited)

(In thousands)

 

 

 

For the Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(17,766

)

 

$

(15,449

)

Other comprehensive income (loss)—Foreign currency translation

 

 

(3,048

)

 

 

(211

)

Total comprehensive loss

 

$

(20,814

)

 

$

(15,660

)

 

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(33,015

)

 

$

(31,447

)

Other comprehensive income (loss)—Foreign currency translation

 

 

(2,445

)

 

 

799

 

Total comprehensive loss

 

$

(35,460

)

 

$

(30,648

)

 

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

 

 

 

 

5


 

AVALARA, INC.

Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(33,015

)

 

$

(31,447

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,992

 

 

 

5,266

 

Stock-based compensation

 

 

7,074

 

 

 

5,814

 

Deferred tax expense

 

 

(967

)

 

 

(403

)

Amortization of deferred rent

 

 

263

 

 

 

(445

)

Non-cash change in earnout liability

 

 

(462

)

 

 

835

 

Non-cash bad debt (recovery) expense

 

 

(85

)

 

 

103

 

Other

 

 

241

 

 

 

166

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(2,022

)

 

 

1,559

 

Prepaid expenses and other current assets

 

 

(144

)

 

 

(230

)

Other long-term assets

 

 

(16

)

 

 

425

 

Trade payables

 

 

(2,248

)

 

 

(1,062

)

Accrued expenses and other current liabilities

 

 

(3,000

)

 

 

(652

)

Deferred rent (lease incentives)

 

 

-

 

 

 

4,126

 

Deferred revenue

 

 

17,113

 

 

 

9,066

 

Net cash used in operating activities

 

 

(11,276

)

 

 

(6,879

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net (increase) decrease in customer fund assets

 

 

(4,585

)

 

 

710

 

Cash paid for acquired intangible assets

 

 

(4,881

)

 

 

-

 

Purchase of property and equipment

 

 

(8,169

)

 

 

(6,115

)

Net cash used in investing activities

 

 

(17,635

)

 

 

(5,405

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of underwriting discounts

 

 

192,510

 

 

 

-

 

Payments on credit facility

 

 

(33,000

)

 

 

-

 

Proceeds from credit facility

 

 

23,000

 

 

 

5,000

 

Payments on capital leases

 

 

-

 

 

 

(14

)

Repurchase of shares

 

 

(1,806

)

 

 

-

 

Repayment of note payable

 

 

(234

)

 

 

-

 

Payments of deferred financing costs

 

 

(622

)

 

 

-

 

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

 

 

(2,217

)

 

 

(254

)

Net increase (decrease) in customer fund obligations

 

 

4,585

 

 

 

(710

)

Payment related to business combination earnouts

 

 

-

 

 

 

(83

)

Proceeds from exercise of stock options and common stock warrants

 

 

5,580

 

 

 

514

 

Net cash provided by financing activities

 

 

187,796

 

 

 

4,453

 

Foreign currency effect on cash and cash equivalents

 

 

148

 

 

 

(96

)

Net change in cash and cash equivalents

 

 

159,033

 

 

 

(7,927

)

Cash and cash equivalents—Beginning of year

 

 

14,075

 

 

 

20,230

 

Cash and cash equivalents—End of year

 

$

173,108

 

 

$

12,303

 

(continued)

6


 

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest expense

 

$

1,787

 

 

$

1,012

 

Cash paid for income taxes

 

 

143

 

 

 

102

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchased under tenant improvement allowance

 

 

976

 

 

 

-

 

Property and equipment additions in accounts payable and accrued expenses

 

 

3,376

 

 

 

145

 

Deferred financing costs, accrued not yet paid

 

 

1,527

 

 

 

767

 

Cashless exercises of options and warrants

 

 

8,985

 

 

 

1,267

 

Cashless redemptions of options and warrants

 

 

11,202

 

 

 

1,521

 

 

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

 

(Concluded)

 

 

 

7


 

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 tax requirements for transactions worldwide. The Company offers a broad and growing suite of compliance solutions for transaction taxes, such as sales and use tax, value-added tax (VAT), excise tax, lodging tax, and communications tax. These solutions enable customers to automate the process of determining taxability, identifying applicable tax rates, determining and collecting taxes, preparing and filing returns, remitting taxes, maintaining tax records, and managing compliance documents. The Company, a Washington corporation, was originally incorporated in 1999 and is headquartered in Seattle, Washington.

 

The Company has wholly owned subsidiaries in the United Kingdom, Belgium, India, and Brazil that provide business development, software development, and support services.

2.

Significant Accounting Policies

Initial Public Offering

In June 2018, the Company completed an initial public offering (“IPO”), in which the Company sold 8,625,000 shares of its common stock, including the full exercise of the underwriters’ option to purchase 1,125,000 additional shares of common stock, at the initial price to the public of $24.00 per share. The Company received net proceeds of $192.5 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable by the Company of $3.4 million. Immediately prior to the closing of the IPO, (1) all outstanding shares of preferred stock converted into shares of the Company’s common stock on a 2-to-1 basis, and (2) common stock warrants then outstanding were automatically net exercised into shares of the Company’s common stock. As of June 30, 2018, 66,457,650 shares of the Company’s common stock were outstanding.

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, 2017, included in our final prospectus related to our IPO dated June 14, 2018 (the “Prospectus”) filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended.  The accompanying interim consolidated balance sheet as of June 30, 2018, the consolidated interim statements of operations for the three and six months ended June 30, 2018 and 2017, the consolidated statements of comprehensive loss for the three and six months ended June 30, 2018 and 2017, and the consolidated statements of cash flows for the six months ended June 30, 2018 and 2017, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the six months ended June 30, 2018 are not necessarily indicative of the results expected for the full year ending December 31, 2018.

Other than those described under Recently Adopted Accounting Standards, there have been no significant changes in the accounting policies from those disclosed in the audited consolidated financial statements and the related notes in the Prospectus.

Reverse Stock Split

On May 10, 2018, the Company effected a 2-to-1 reverse stock split of outstanding common stock, including outstanding stock options and common stock warrants. The par value of our common stock was not adjusted as a result of the reverse stock split. As a result of this amendment, the applicable conversion price was increased for each series of outstanding Series Preferred Stock. The increased conversion price effectively resulted in a 2-to-1 conversion ratio of Series Preferred Stock to common stock. All authorized, issued and outstanding shares of common stock, warrants for common stock, options to purchase common stock and the related per share amounts contained in these consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

8


AVALARA, INC.

Notes to Consolidated Financial Statements

 

Principles of Consolidation

The accompanying consolidated financial statements include those of the Company and its subsidiaries after elimination of all intercompany accounts and transactions.

Segments

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

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

Fair Value of Financial Instruments

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

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

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

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

The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, trade accounts receivable, trade payables, and accrued expenses due to their short-term nature. The carrying amount of the Company’s term loan and revolving credit facility approximates fair value, considering the interest rates are based on the prime interest rate.

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 exceeds their fair value. If the carrying value exceeds the fair value, then an impairment test is performed to determine the implied fair value. No impairment of long-lived assets occurred in the first half of 2018.

Acquired Intangible Assets

Acquired intangible assets consist of developed technology, customer relationships, 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 on a straight-line basis.

9


AVALARA, INC.

Notes to Consolidated Financial Statements

 

Income Taxes

The Company’s deferred tax assets 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 based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

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

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option or common stock warrant at the date of grant 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, the expected volatility of its common stock, risk-free interest rates, and expected dividend yield of its common stock.

 

Recently Adopted Accounting Standards

 

As an “emerging growth company,” the Jumpstart Our Business Startups Act, or the JOBS Act, allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates applicable to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01 which clarifies the definition of a business. The guidance in ASU 2017-01 is required for annual reporting periods beginning after December 15, 2018 for business entities that are not public, with early adoption permitted. The Company early adopted ASU No. 2017-01 in conjunction with the asset acquisitions outlined in Note 5.

 

New Accounting Standards Not Yet Adopted

 

In May 2014, the FASB issued ASU No. 2014-09 which, along with subsequent ASUs, amends the existing accounting standards for revenue recognition. This guidance is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to receive when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period for public business entities, and for annual reporting periods beginning after December 15, 2018 for business entities that are not public. This guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Additionally, the new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The Company is evaluating the impact of the adoption on its consolidated financial statements. The Company believes that adoption will require capitalization of certain selling costs that are currently expensed, such as sales and partner commissions, and the Company expects these adjustments could be material. The Company is continuing to assess the impact of adoption, which may identify other impacts on the Company’s financial statements. The Company expects to adopt and implement the new revenue recognition guidance effective January 1, 2019 using the modified retrospective approach.

 

In February 2016, the FASB issued ASU No. 2016-02 which requires lessees to generally recognize most operating leases on the balance sheets but record expenses on the income statements in a manner similar to current accounting. The guidance is effective in 2020 for business entities that are not public with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements. The Company currently expects that most operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use assets upon adoption. While the Company has not yet quantified the impact, these adjustments will increase total assets and total liabilities relative to such amounts reported prior to adoption.

10


AVALARA, INC.

Notes to Consolidated Financial Statements

 

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

permitted. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

 

In November 2016, the FASB issued ASU, No. 2016-18, related to restricted cash, which is intended to add or clarify guidance on the classification and presentation of changes in restricted cash on the statement of cash flows and to eliminate the diversity in practice related to such classifications.  The guidance in ASU 2016-18 is required for annual reporting periods ending after December 15, 2018, for business entities that are not public, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

3.

Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis

The fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall on dates presented as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

 

Observable

 

Unobservable

 

 

Fair

 

 

Identical Assets

 

 

Inputs

 

Inputs

June 30, 2018

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

(Level 3)

Money market funds

 

$

166,426

 

 

$

166,426

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

Fair

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

December 31, 2017

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Money market funds

 

$

10,261

 

 

$

10,261

 

 

$

 

 

 

$

 

 

Earnout related to acquisitions

 

 

380

 

 

 

 

 

 

 

 

 

 

 

380

 

 

The Company uses the fair value hierarchy for financial assets and liabilities. The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be measured at fair value on a recurring basis.

 

Earnout Liability

 

The Company estimates the fair value of earnout liability using the probability-weighted discounted cash flow and Monte Carlo simulations. As of June 30, 2018 and December 31, 2017, the earnout liability associated with the 2016 acquisition of Gyori was valued utilizing a discount rate of 20% and 22%, respectively, and a risk-free rate based on linear interpolated U.S. Treasury rates commensurate with the term.

 

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

11


AVALARA, INC.

Notes to Consolidated Financial Statements

 

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, except for the earnout liability for VAT Applications, is as follows (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Earnout liability:

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

380

 

 

$

6,235

 

Payments of earnout liability

 

 

-

 

 

 

(2,101

)

Settlement of earnout liability

 

 

-

 

 

 

(3,051

)

Total unrealized (gains) losses included in other income

 

 

(380

)

 

 

(703

)

Balance end of period

 

$

-

 

 

$

380

 

 

 

 

 

 

 

 

 

 

Balance of earnout liability included in current liabilities (1)

 

$

2,969

 

 

$

3,061

 

Balance of earnout liability included in noncurrent liabilities

 

 

-

 

 

 

370

 

 

(1)

Balance at June 30, 2018 and December 31, 2017 includes $3.0 million and $3.1 million for the settlement of the VAT Applications earnout, respectively. The VAT Applications earnout will be settled for a fixed €2.5 million, and the change in the liability is due to currency fluctuation.

 

4.

Balance Sheet Detail

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

 

 

 

Useful

 

June 30,

 

 

December 31,

 

 

 

Life (Years)

 

2018

 

 

2017

 

Computer equipment and software

 

3

 

$

11,998

 

 

$

12,884

 

Internally developed software

 

6

 

 

3,105

 

 

 

2,512

 

Furniture and fixtures

 

5

 

 

5,852

 

 

 

4,459

 

Office equipment

 

5

 

 

599

 

 

 

622

 

Leasehold improvements

 

1 to 10

 

 

23,946

 

 

 

20,339

 

 

 

 

 

 

45,500

 

 

 

40,816

 

Accumulated depreciation

 

 

 

 

(13,063

)

 

 

(15,422

)

Property and equipment—net

 

 

 

$

32,437

 

 

$

25,394

 

 

Property and equipment assets are generally depreciated on a straight-line basis over the remaining estimated useful life of the asset or the lease term (for leasehold improvements), whichever is shorter. Depreciation expense was $1.6 million and $3.2 million for the three and six months ended June 30, 2018, respectively, and $1.2 million and $2.4 million for the three and six months ended June 30, 2017, respectively.

 

Prepaid expenses and other current assets (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Prepaid expenses

 

$

5,520

 

 

$

5,077

 

Deferred financing costs

 

 

 

 

 

1,575

 

Deposits

 

 

160

 

 

 

244

 

Other

 

 

695

 

 

 

120

 

Total

 

$

6,375

 

 

$

7,016

 

 

12


AVALARA, INC.

Notes to Consolidated Financial Statements

 

Accrued expenses and trade payables consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued payroll and related taxes

 

$

11,176

 

 

$

13,338

 

Accrued state, federal, and local taxes

 

 

915

 

 

 

1,044

 

Accrued referral source commissions

 

 

3,779

 

 

 

4,271

 

Trade payables

 

 

8,531

 

 

 

9,822

 

Earnout liabilities

 

 

2,969

 

 

 

3,061

 

Accrued financing costs

 

 

1,377

 

 

 

257

 

Accrued leasehold improvements

 

 

1,201

 

 

 

1,288

 

Other

 

 

6,403

 

 

 

5,083

 

Total

 

$

36,351

 

 

$

38,164

 

 

5.

Intangible Assets

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

 

 

 

 

 

June 30, 2018

 

 

 

Average Useful Life

(Years)

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Customer relationships

 

3 to 10

 

$

15,475

 

 

$

(8,276

)

 

$

7,199

 

Developed technology

 

3 to 8

 

 

30,882

 

 

 

(15,570

)

 

 

15,312

 

Noncompete agreements

 

3 to 5

 

 

574

 

 

 

(526

)

 

 

48

 

Tradename and trademarks

 

1 to 4

 

 

420

 

 

 

(420

)

 

 

-

 

 

 

 

 

$

47,351

 

 

$

(24,792

)

 

$

22,559

 

 

 

 

 

 

December 31, 2017

 

 

 

Average Useful Life

(Years)

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Customer relationships

 

3 to 10

 

$

15,270

 

 

$

(7,347

)

 

$

7,923

 

Developed technology

 

3 to 8

 

 

24,781

 

 

 

(13,785

)

 

 

10,996

 

Noncompete agreements

 

3 to 5

 

 

586

 

 

 

(446

)

 

 

140

 

Tradename and trademarks

 

1 to 4

 

 

419

 

 

 

(404

)

 

 

15

 

 

 

 

 

$

41,056

 

 

$

(21,982

)

 

$

19,074

 

 

Finite-lived intangible assets are generally amortized on a straight-line basis over the remaining estimated useful life as management believes that this reflects the expected benefit to be received from these assets. Finite-lived intangible assets amortization expense was $1.4 million and $2.8 million for the three and six months ended June 30, 2018, respectively, and $1.4 million and $2.8 million for the three and six months ended June 30, 2017, respectively.

 

Acquisitions of finite-lived intangible assets

 

In May 2018, the Company acquired certain intangible assets from Atlantax Systems, Inc (“Atlantax”) pursuant to a purchase arrangement structured to incent Atlantax to convert their existing customers to become Avalara customers. Total consideration for the purchase is based on an earnout computed on future revenue recognized by the Company over the next four years, up to a maximum of $1.9 million. At closing, the Company funded $0.4 million to Atlantax as a prepayment against future earnings. As of June 30, 2018, the total prepayment of $0.4 million was capitalized as a customer relationship intangible asset and will be amortized using an estimated useful life of five years. As future earnout payments become known, those costs will be capitalized as part of the customer relationship asset and amortized over the remaining useful life. The Company incurred immaterial legal costs related to the transaction that were capitalized as part of the customer relationship asset.

 

13


AVALARA, INC.

Notes to Consolidated Financial Statements

 

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 revenue and billings recognized by the Company over the next six years, up to a maximum of $30.0 million. The earnout will be payable in cash and common stock at the end of each six-month measurement period ending on June 30 or December 31 through 2023, with the first earnout period ending December 31, 2018. The cash portion of the earnout will be computed based on eligible billings in the measurement period. The number of shares of common stock to be issued will be computed based on the eligible revenue recognized in the measurement period divided by the average closing price of the Company’s common stock during the last ten days of the measurement period.

 

At closing, the Company made a $1.5 million cash payment to the Sellers and made an additional $2.5 million cash payment in June 2018. Under the asset purchase agreement, the Company is also required to issue 113,122 shares of common stock as follows: 37,708 shares on November 29, 2018, 37,708 shares on May 29, 2019, and 37,706 shares on November 29, 2019. While the initial cash payments totaling $4.0 million are non-refundable, they are a prepayment against future earnout payments and will reduce the future cash portion of the earnout. The earnout payments, initial cash payments and equity issuances described above are all subject to clawback or set-off, as applicable, in the event of certain claims for which the Company is indemnified by the Sellers and their shareholders.

 

The Company incurred approximately $0.1 million in legal costs related to the transaction that were capitalized as part of the developed technology asset. As of June 30, 2018, total consideration of $7.1 million, consisting of the cash paid, the fair value of the Company’s common stock on the date of the asset purchase, and the transaction costs incurred, was allocated to the acquired assets based on the relative fair value, consisting of a $6.6 million developed technology intangible asset that will be amortized using an estimated useful life of 6 years and a $0.5 million current other receivable for a refundable tax credit owed to the Company related to transfer taxes paid to the Sellers. As future earnout payments become due, those costs will be capitalized as part of the developed technology asset and amortized over the remaining useful life.

 

Goodwill

 

Changes in the carrying amount of goodwill through June 30, 2018 are summarized as follows (in thousands):

 

Balance—January 1, 2018