10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from to

Commission File Number: 001-38525

AVALARA, INC.

(Exact Name of Registrant as Specified in its Charter)

Washington	91-1995935
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
255 South King Street, Suite 1800 Seattle, WA	98104
(Address of principal executive offices)	(Zip Code)

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

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.0001 Per Share	AVLR	New York Stock Exchange

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Small reporting company	☐
		Emerging growth company	☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 31, 2019, the registrant had 76,941,547 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets (unaudited)	1
	Consolidated Statements of Operations (unaudited)	2
	Consolidated Statements of Comprehensive Loss (unaudited)	4
	Consolidated Statements of Cash Flows (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	56
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 6.	Exhibits	58
Signatures		59

i

Special Note Regarding Forward-Looking Statements

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

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

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

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

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

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

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

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

• our ability to expand our international reach; and

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

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

ii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AVALARA, INC.

Consolidated Balance Sheets

(In thousands, except for per share data)

	September 30,			December 31,
	2019			2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	446,563		$	142,322
Trade accounts receivable—net of allowance for doubtful accounts of $632 and    $521, respectively		49,124			40,287
Deferred commissions		8,402			—
Prepaid expenses and other current assets		13,856			11,307
Total current assets before customer fund assets		517,945			193,916
Funds held from customers		16,665			13,113
Receivable from customers—net of allowance of $293 and $198, respectively		690			270
Total current assets		535,300			207,299
Noncurrent assets:
Property and equipment—net		34,537			33,373
Goodwill		100,926			61,300
Intangible assets—net		24,543			19,371
Deferred commissions		27,206			—
Other noncurrent assets		2,420			1,589
Total assets	$	724,932		$	322,932
Liabilities and shareholders' equity
Current liabilities:
Trade payables	$	10,962		$	4,847
Accrued expenses		49,864			42,101
Accrued earnout liabilities		6,102			116
Deferred revenue		147,713			125,260
Total current liabilities before customer fund obligations		214,641			172,324
Customer fund obligations		17,306			13,349
Total current liabilities		231,947			185,673
Noncurrent liabilities:
Deferred revenue		753			9,393
Deferred tax liability		698			560
Deferred rent		15,905			17,317
Accrued earnout liabilities		9,399			—
Other noncurrent liabilities		2,361			436
Total liabilities		261,063			213,379
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.0001 par value– no shares issued and outstanding at    September 30, 2019 and December 31, 2018, and 20,000 shares authorized as of    September 30, 2019 and December 31, 2018		—			—
Common stock, $0.0001 par value– 76,889 and 66,769 shares issued and    outstanding at September 30, 2019 and December 31, 2018, respectively, and    600,000 shares authorized as of September 30, 2019 and December 31, 2018		8			7
Additional paid-in capital		961,733			599,493
Accumulated other comprehensive loss		(3,122	)		(2,345	)
Accumulated deficit		(494,750	)		(487,602	)
Total shareholders’ equity		463,869			109,553
Total liabilities and shareholders' equity	$	724,932		$	322,932

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

1

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

	For the Three Months Ended September 30,
	2019			2018
Revenue:
Subscription and returns	$	91,986		$	64,611
Professional services		6,539			5,308
Total revenue		98,525			69,919
Cost of revenue:
Subscription and returns		25,621			17,330
Professional services		4,157			2,906
Total cost of revenue		29,778			20,236
Gross profit		68,747			49,683
Operating expenses:
Research and development		21,871			13,285
Sales and marketing		40,313			41,276
General and administrative		20,511			10,235
Goodwill impairment		—			9,174
Total operating expenses		82,695			73,970
Operating loss		(13,948	)		(24,287	)
Other (income) expense:
Interest income		(2,202	)		(676	)
Interest expense		2			534
Other (income) expense, net		265			49
Total other (income) expense, net		(1,935	)		(93	)
Loss before income taxes		(12,013	)		(24,194	)
Provision for (benefit from) income taxes		341			(91	)
Net loss	$	(12,354	)	$	(24,103	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.16	)	$	(0.36	)
Weighted average shares of common stock outstanding,    basic and diluted		76,156			66,590

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

2

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

	For the Nine Months Ended September 30,
	2019			2018
Revenue:
Subscription and returns	$	255,225		$	182,326
Professional services		19,569			12,849
Total revenue		274,794			195,175
Cost of revenue:
Subscription and returns		69,537			47,984
Professional services		12,883			8,393
Total cost of revenue		82,420			56,377
Gross profit		192,374			138,798
Operating expenses:
Research and development		56,823			38,332
Sales and marketing		119,199			119,187
General and administrative		53,764			28,787
Goodwill impairment		—			9,174
Total operating expenses		229,786			195,480
Operating loss		(37,412	)		(56,682	)
Other (income) expense:
Interest income		(4,251	)		(811	)
Interest expense		286			2,495
Other (income) expense, net		694			(423	)
Total other (income) expense, net		(3,271	)		1,261
Loss before income taxes		(34,141	)		(57,943	)
Provision for (benefit from) income taxes		629			(825	)
Net loss	$	(34,770	)	$	(57,118	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.48	)	$	(1.95	)
Weighted average shares of common stock outstanding,    basic and diluted		72,064			29,269

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

3

AVALARA, INC.

Consolidated Statements of Comprehensive Loss (unaudited)

(In thousands)

	For the Three Months Ended September 30,
	2019			2018
Net loss	$	(12,354	)	$	(24,103	)
Other comprehensive loss—Foreign currency translation		(591	)		(242	)
Total comprehensive loss	$	(12,945	)	$	(24,345	)

	For the Nine Months Ended September 30,
	2019			2018
Net loss	$	(34,770	)	$	(57,118	)
Other comprehensive loss—Foreign currency translation		(777	)		(2,687	)
Total comprehensive loss	$	(35,547	)	$	(59,805	)

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

4

AVALARA, INC.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

	For the Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(34,770	)	$	(57,118	)
Adjustments to reconcile net loss to net cash (used in) provided by    operating activities:
Depreciation and amortization		11,684			9,390
Goodwill impairment		—			9,174
Stock-based compensation		25,906			11,411
Deferred tax expense (benefit)		138			(1,110	)
Amortization of deferred rent		(778	)		231
Non-cash change in earnout liability		610			(430	)
Non-cash bad debt expense (recovery)		602			(382	)
Other		227			526
Changes in operating assets and liabilities:
Trade accounts receivable		(9,648	)		(7,852	)
Prepaid expenses and other current assets		(3,274	)		(2,688	)
Deferred commissions		(16,340	)		—
Other noncurrent assets		(831	)		(549	)
Trade payables		4,818			(3,353	)
Accrued expenses		2,305			6,095
Deferred rent (lease incentives)		—			579
Deferred revenue		24,782			25,978
Net cash provided by (used in) operating activities		5,431			(10,098	)
Cash flows from investing activities:
Net (increase) decrease in customer fund assets		(3,986	)		2,053
Cash paid for acquired intangible assets		(139	)		(5,002	)
Cash paid for acquisitions of businesses		(30,310	)		—
Purchase of property and equipment		(7,196	)		(12,914	)
Net cash used in investing activities		(41,631	)		(15,863	)
Cash flows from financing activities:
Proceeds from common stock offering, net of underwriting discounts		274,705			192,510
Payments of deferred financing costs		(555	)		(2,084	)
Payments on credit facility		—			(63,000	)
Proceeds from credit facility		—			23,000
Repayment of note payable		—			(234	)
Net increase (decrease) in customer fund obligations		3,986			(2,053	)
Proceeds from exercise of stock options and common stock warrants		51,583			5,787
Proceeds from purchases of stock under employee stock purchase plan		12,293			—
Taxes paid related to net share settlement of stock-based awards		(1,183	)		(2,326	)
Repurchase of shares		—			(1,806	)
Payment related to business combination earnouts		(375	)		—
Net cash provided by financing activities		340,454			149,794
Foreign currency effect on cash and cash equivalents		(13	)		185
Net change in cash and cash equivalents		304,241			124,018
Cash and cash equivalents—Beginning of period		142,322			14,075
Cash and cash equivalents—End of period	$	446,563		$	138,093

(continued)

5

	For the Nine Months Ended September 30,
	2019		2018
Supplemental cash flow disclosures:
Cash paid for interest expense	$	122	$	2,367
Cash paid for income taxes		417		314
Non-cash investing and financing activities:
Accrued purchase price related to acquisitions	$	4,902	$	—
Accrued value of earnout related to acquisitions of businesses		15,351		—
Property and equipment purchased under tenant improvement allowance		—		1,062
Property and equipment additions in accounts payable and accrued expenses		914		607
Deferred financing costs in accounts payable and accrued expenses		—		298
Fair value of common stock issued or issuable to purchase intangible assets		98		2,555
Cashless exercises of options and warrants		5		9,214
Cashless redemptions of options and warrants		98		11,541

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

6

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

1. Nature of Operations

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

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

2. Significant Accounting Policies

Interim Financial Information

The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019. The accompanying interim consolidated balance sheet as of September 30, 2019, the consolidated interim statements of operations for the three and nine months ended September 30, 2019 and 2018, the consolidated statements of comprehensive loss for the three and nine months ended September 30, 2019 and 2018, and the consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full year ending December 31, 2019.

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

Principles of Consolidation

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

Segments

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

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.

7

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Fair Value Measurements

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

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

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

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

The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, trade accounts receivable, trade payables, and accrued expenses due to their short-term nature.

Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. An impairment is recognized in the event the carrying value of such assets is not recoverable. If the carrying value is not recoverable, the fair value is determined, and an impairment is recognized for the amount by which the carrying value exceeds the fair value. No impairment of long-lived assets occurred in the first nine months of 2019.

Self-Insurance

Beginning August 1, 2019, the Company established a self-insured healthcare plan for eligible U.S. employees. Under the plan, the Company pays healthcare claims and fees to the plan administrator. Total claim payments are limited by stop loss insurance policies. As there generally is a lag between the time a claim is incurred by a participant and the time the claim is submitted for payment, the Company has recorded a self-insurance reserve for estimated outstanding claims within accrued expenses in the consolidated balance sheets.

Income Taxes

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

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

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option, common stock warrant, restricted stock unit (“RSU”), or purchase right issued under the employee stock purchase plan at the date of grant. The fair value of stock options, common stock warrants, and purchase rights issued under the employee stock purchase plan is estimated by applying the Black-Scholes option-pricing model. This model uses the fair value of the Company’s underlying common stock at the measurement date, the expected or contractual term of the option, warrant or purchase right, the expected volatility of its common stock, risk-free interest rates, and expected dividend yield of its common stock. The fair value of an RSU is determined using the fair value of the Company’s underlying common stock on the date of grant.

8

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation. Interest income on funds held from customers of $0.4 million and $0.6 million for the three months and nine months ended September 30, 2018 were reclassified from interest income within total other (income) expense, net to subscription and returns revenue in the accompanying consolidated statements of operations.  

Revenue Recognition – ASC 606

The Company primarily generates revenue from fees paid for subscriptions to tax compliance solutions and fees paid for services performed in preparing and filing tax returns on behalf of its customers. Amounts that have been invoiced are recorded in trade accounts receivable and deferred revenue, contract liabilities, or revenue, depending upon whether the revenue recognition criteria have been met. Revenue is recognized once the customer is provisioned and services are provided in an amount that reflects the consideration expected to be entitled to in exchange for those services. The Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers.

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

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

•Identification of the performance obligations in the contract;

•Determination of the transaction price;

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

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

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

Contract payment terms are typically net 30 days. Collectability is assessed based on a number of factors including collection history and creditworthiness of the customer, and the Company may mitigate 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.

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

Subscription and Returns Revenue

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

9

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

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

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

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

Professional Services Revenue

The Company bills for professional service arrangements on a fixed fee, milestone, or time and materials basis. Professional services revenue includes fees from providing tax analysis, configurations, data migrations, integration, training, and other support services. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.

Judgments and Estimates

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

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. The Company allocates revenue to each performance obligation based on the relative SSP. The Company determines SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices, market conditions and entity-specific factors. This includes a review of historical data related to the services being sold and customer demographics. The Company uses a range of amounts to estimate SSP for performance obligations. There is typically more than one SSP for individual services due to the stratification of those services by information, such as size and type of customer.

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

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

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

10

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Recently Adopted Accounting Standards

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

ASU No. 2014-09

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

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

	Balance at December 31, 2018			Adjustments due to ASC 606			Balance at January 1, 2019
Assets
Trade accounts receivable	$	40,287		$	(805	)	$	39,482
Deferred commissions, current		—			4,464			4,464
Deferred commissions, noncurrent		—			14,803			14,803
Liabilities and shareholders' equity
Accrued expenses		42,101			2,090			44,191
Deferred revenue, current		125,260			(3,157	)		122,103
Deferred revenue, noncurrent		9,393			(8,093	)		1,300
Accumulated deficit		(487,602	)		27,622			(459,980	)

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

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

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

11

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

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

ASU No. 2016-15

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

ASU No. 2018-07

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

New Accounting Standards Not Yet Adopted

ASU No. 2016-02

In February 2016, the FASB issued ASU No. 2016-02, which was subsequently amended in July 2018 by ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Targeted Improvements - Leases (Topic 842)” which is codified as ASC 842 (“ASC 842”). ASC 842 requires lessees to generally recognize most operating leases on the balance sheets but record expenses on the income statements in a manner similar to current accounting standards.

The Company will adopt ASC 842 using the alternative transition method provided in ASU 2018-11, which does not require adjusting comparative period financial information. The Company expects to elect the package of practical expedients permitted under the transition guidance which allows the carry forward of the historical lease identification, lease classification and initial direct costs of existing leases. In addition, the Company expects to elect the practical expedient to not separate lease and nonlease components. Further, the Company made an accounting policy election to adopt the short-term lease exception, which allows the Company to not record leases with an initial term of 12 months or less on the balance sheet.

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. The Company expects the impact of adoption of ASC 842 will result in a material increase in noncurrent assets and noncurrent liabilities in the consolidated balance sheets.   

As an EGC, the Company has elected to use adoption dates applicable to private companies. The new standard is effective for private companies in 2020. However, the Company will lose its EGC status on December 31, 2019. Accordingly, the Company will adopt the guidance in ASC 842 as of January 1, 2019 in the Company’s Annual Report on Form 10-K for the year ending December 31, 2019.

12

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

ASU No. 2016-13

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

ASU No. 2018-15

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

3. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis

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

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
September 30, 2019	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	440,053	$	440,053	$	—	$	—
Earnout related to acquisitions		15,461		—		—		15,461

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
December 31, 2018	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	138,483	$	138,483	$	—	$	—
Earnout related to acquisitions		—		—		—		—

Earnout Liability

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

The Company estimates the fair value of earnout liabilities for business combinations using the probability-weighted discounted cash flow and Monte Carlo simulations. As of September 30, 2019, the earnout liability associated with the 2019 acquisition of Portway International, Inc. (“Portway”) was valued utilizing a discount rate of 9.51%. As of September 30, 2019, the earnout liability associated with the 2019 acquisition of Compli, Inc. (“Compli”) was valued utilizing a discount rate of 3.1%, and the earnout liability associated with the 2019 acquisition of Indix Corporation (“Indix”) was valued utilizing a discount rate of 3.1%. The Portway discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout. The Compli and Indix acquisitions were valued using a risk-free rate based on linear interpolated U.S. Treasury rates commensurate with the term of the earnout.

13

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

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

	Three Months Ended September 30,
	2019			2018
Earnout liability:
Balance beginning of period	$	6,428		$	—
Fair value recorded at acquisition		9,399			—
Payments of earnout liability		(500	)		—
Total unrealized (gains) losses included in other (income) expense, net		134			—
Balance end of period	$	15,461		$	—

	Nine Months Ended September 30,
	2019			2018
Earnout liability:
Balance beginning of period	$	—		$	380
Fair value recorded at acquisition		15,351			—
Payments of earnout liability		(500	)		—
Total unrealized (gains) losses included in other (income) expense, net		610			(380	)
Balance end of period	$	15,461		$	—

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

The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be measured at fair value on a recurring basis. There were no fair value measurements of these assets during the first nine months of 2019, except as discussed in Note 5.

4. Balance Sheet Detail

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

	Useful	September 30,			December 31,
	Life (Years)	2019			2018
Computer equipment and software	3 to 5	$	15,581		$	12,904
Internally developed software	6		5,205			3,620
Furniture and fixtures	5		6,770			5,850
Office equipment	3 to 5		858			586
Leasehold improvements	1 to 10		28,074			26,788
			56,488			49,748
Accumulated depreciation			(21,951	)		(16,375	)
Property and equipment—net		$	34,537		$	33,373

Depreciation expense was $2.2 million and $6.4 million for the three and nine months ended September 30, 2019, respectively, and $1.8 million and $5.0 million for the three and nine months ended September 30, 2018, respectively.

14

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

	September 30,		December 31,
	2019		2018
Prepaid expenses	$	11,194	$	9,578
Accrued investment income		687		260
Deferred financing costs		—		643
Deposits		298		325
Other		1,677		501
Total	$	13,856	$	11,307

Accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2019		2018
Accrued payroll and related taxes	$	4,184	$	3,800
Accrued federal, state, and local taxes		2,484		1,827
Accrued bonus		13,707		10,766
Self-insurance reserves		1,361		—
Employee stock purchase plan contributions		1,908		6,473
Accrued sales commissions		3,599		6,889
Accrued partner commissions		6,540		5,535
Contract liabilities		4,843		—
Accrued purchase price related to acquisitions		2,984		—
Other		8,254		6,811
Total	$	49,864	$	42,101

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

5. Acquisitions of Businesses

January 2019 Acquisition of Compli

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

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

15

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

Assets acquired:
Current assets	$	505
Developed technology, customer relationships, and other intangibles		4,288
Goodwill		12,807
Total assets acquired		17,600
Liabilities assumed:
Current liabilities		482
Total liabilities assumed		482
Net assets acquired	$	17,118

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

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	3,250	Multi-period excess earnings-income approach		13	%	6 years
Trademarks and trade names		32	Relief from royalty- income approach		13	%	2 years
Developed technology and    customer database		910	Relief from royalty- income approach		13	%	6 years
Noncompetition agreements		96	With-and-without valuation- income approach		13	%	3 years

The excess of the purchase price over the net identified tangible and intangible assets of $12.8 million has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

For the period from the date of the Compli acquisition through September 30, 2019, revenue was $2.8 million and pre-tax loss was $0.4 million from the Compli business.

February 2019 Acquisition of Indix

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

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

16

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

Assets acquired:
Current assets	$	94
Developed technology		4,472
Goodwill		4,953
Total assets acquired		9,519
Liabilities assumed:
Current liabilities		392
Total liabilities assumed		392
Net assets acquired	$	9,127

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate	Estimated Useful Life
Developed technology	$	4,472	Relief from royalty- income approach	24.5%	6 years

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

The Indix acquisition provided enhanced artificial intelligence technology and tax content, but did not result in additional revenues for the Company. For the period from the date of the Indix acquisition through September 30, 2019, the cumulative operating expenses and pre-tax loss was $3.3 million from the Indix business.

July 2019 Acquisition of Portway

On July 31, 2019, the Company completed the acquisition of substantially all the assets of Portway under an Asset Purchase Agreement (the “Portway Purchase”). Portway is a provider of Harmonized System classifications and outsourced customs brokerage services. The Company accounted for the Portway Purchase as a business combination. As a result of the acquisition, the Company expanded its cross-border solutions. Acquisition-related costs of $0.2 million for the nine months ended September 30, 2019 were primarily for legal fees.

The total consideration transferrable related to this transaction was $24.3 million, consisting of $13.0 million paid in cash at closing, an additional $2.0 million of cash to be paid after eighteen months with an acquisition date fair value of $1.9 million, and an earnout provision fair valued upon acquisition at $9.4 million. The earnout is payable in the Company’s common stock no later than February 2021. The maximum number of shares of common stock that could be earned and transferred to the seller is 119,090 shares, which was based on a maximum payout value of $10.0 million and a per share value of $83.97 under the terms of the Portway Purchase. The earnout is based on the achievement of specific revenue and operating metrics through January 2021, and the shares (which were issued at closing and are held in escrow) will be forfeited and cancelled if the metrics are not achieved. The earnout was originally recognized at fair value at the date of the business combination and is recorded in noncurrent accrued earnout liabilities on the consolidated balance sheet as of September 30, 2019. The earnout liability is adjusted to fair value quarterly (see Note 3).

17

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

Assets acquired:
Property and equipment	$	76
Customer relationships and other intangibles		1,865
Goodwill		22,376
Total assets acquired		24,317
Liabilities assumed:
Total liabilities assumed		—
Net assets acquired	$	24,317

The estimated fair values are preliminary in nature and subject to adjustments, which are not expected to be material.

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	1,759	Multi-period excess earnings-income approach		12	%	6 years
Noncompetition agreements		106	With-and-without valuation- income approach		12	%	4 years

The excess of the purchase price over the net identified tangible and intangible assets of $22.4 million has been recorded as goodwill, which includes synergies expected from the expanded cross-border product functionality and customs brokerage services 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 Portway acquisition through September 30, 2019, revenue was $0.4 million and pre-tax loss was $0.1 million from the Portway business.

6. Revenue

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

18

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

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

	September 30,									December 31,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
	(unaudited)			(unaudited)			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	446,563		$	—		$	446,563		$	142,322
Trade accounts receivable—net of allowance for doubtful    accounts		49,124			1,044			50,168			40,287
Deferred commissions		8,402			(8,402	)		—			—
Prepaid expenses and other current assets		13,856			—			13,856			11,307
Total current assets before customer fund assets		517,945			(7,358	)		510,587			193,916
Funds held from customers		16,665			—			16,665			13,113
Receivable from customers—net of allowance for doubtful    accounts		690			—			690			270
Total current assets		535,300			(7,358	)		527,942			207,299
Noncurrent assets:
Property and equipment—net		34,537			—			34,537			33,373
Goodwill		100,926			—			100,926			61,300
Intangible assets—net		24,543			—			24,543			19,371
Deferred commissions		27,206			(27,206	)		—			—
Other noncurrent assets		2,420			—			2,420			1,589
Total assets	$	724,932		$	(34,564	)	$	690,368		$	322,932
Liabilities and shareholders' equity
Current liabilities:
Trade payables	$	10,962		$	—		$	10,962		$	4,847
Accrued expenses		49,864			(4,843	)		45,021			42,101
Accrued earnout liabilities		6,102			—			6,102			116
Deferred revenue		147,713			5,349			153,062			125,260
Total current liabilities before customer fund obligations		214,641			506			215,147			172,324
Customer fund obligations		17,306			—			17,306			13,349
Total current liabilities		231,947			506			232,453			185,673
Noncurrent liabilities:
Deferred revenue		753			8,353			9,106			9,393
Deferred tax liability		698			—			698			560
Deferred rent		15,905			—			15,905			17,317
Accrued earnout liabilities		9,399			—			9,399			—
Other noncurrent liabilities		2,361			—			2,361			436
Total liabilities		261,063			8,859			269,922			213,379
Commitments and contingencies
Shareholders' equity:
Preferred stock		—			—			—			—
Common stock		8			—			8			7
Additional paid-in capital		961,733			—			961,733			599,493
Accumulated other comprehensive loss		(3,122	)		—			(3,122	)		(2,345	)
Accumulated deficit		(494,750	)		(43,423	)		(538,173	)		(487,602	)
Total shareholders’ equity		463,869			(43,423	)		420,446			109,553
Total liabilities and shareholders' equity	$	724,932		$	(34,564	)	$	690,368		$	322,932

19

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

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

	For the Three Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Subscription and returns	$	91,986		$	71		$	92,057		$	64,611
Professional services		6,539			(49	)		6,490			5,308
Total revenue		98,525			22			98,547			69,919
Cost of revenue:
Subscription and returns		25,621			—			25,621			17,330
Professional services		4,157			—			4,157			2,906
Total cost of revenue		29,778			—			29,778			20,236
Gross profit		68,747			22			68,769			49,683
Operating expenses:
Research and development		21,871			—			21,871			13,285
Sales and marketing		40,313			4,789			45,102			41,276
General and administrative		20,511			—			20,511			10,235
Goodwill impairment		—			—			—			9,174
Total operating expenses		82,695			4,789			87,484			73,970
Operating loss		(13,948	)		(4,767	)		(18,715	)		(24,287	)
Other (income) expense:
Interest income		(2,202	)		—			(2,202	)		(676	)
Interest expense		2			—			2			534
Other (income) expense, net		265			—			265			49
Total other (income) expense, net		(1,935	)		—			(1,935	)		(93	)
Loss before income taxes		(12,013	)		(4,767	)		(16,780	)		(24,194	)
Provision for (benefit from) income taxes		341			—			341			(91	)
Net loss	$	(12,354	)	$	(4,767	)	$	(17,121	)	$	(24,103	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.16	)	$	(0.06	)	$	(0.22	)	$	(0.36	)
Weighted average shares of common stock outstanding,    basic and diluted		76,156						76,156			66,590

20

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Subscription and returns	$	255,225		$	689		$	255,914		$	182,326
Professional services		19,569			(149	)		19,420			12,849
Total revenue		274,794			540			275,334			195,175
Cost of revenue:
Subscription and returns		69,537			—			69,537			47,984
Professional services		12,883			—			12,883			8,393
Total cost of revenue		82,420			—			82,420			56,377
Gross profit		192,374			540			192,914			138,798
Operating expenses:
Research and development		56,823			—			56,823			38,332
Sales and marketing		119,199			16,340			135,539			119,187
General and administrative		53,764			—			53,764			28,787
Goodwill impairment		—			—			—			9,174
Total operating expenses		229,786			16,340			246,126			195,480
Operating loss		(37,412	)		(15,800	)		(53,212	)		(56,682	)
Other (income) expense:
Interest income		(4,251	)		—			(4,251	)		(811	)
Interest expense		286			—			286			2,495
Other (income) expense, net		694			—			694			(423	)
Total other (income) expense, net		(3,271	)		—			(3,271	)		1,261
Loss before income taxes		(34,141	)		(15,800	)		(49,941	)		(57,943	)
Provision for (benefit from) income taxes		629			—			629			(825	)
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.48	)	$	(0.22	)	$	(0.70	)	$	(1.95	)
Weighted average shares of common stock outstanding,    basic and diluted		72,064						72,064			29,269

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

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

	For the Three Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Net loss	$	(12,354	)	$	(4,767	)	$	(17,121	)	$	(24,103	)
Other comprehensive loss—Foreign currency translation		(591	)		—			(591	)		(242	)
Total comprehensive loss	$	(12,945	)	$	(4,767	)	$	(17,712	)	$	(24,345	)

21

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Other comprehensive loss—Foreign currency translation		(777	)		—			(777	)		(2,687	)
Total comprehensive loss	$	(35,547	)	$	(15,800	)	$	(51,347	)	$	(59,805	)

22

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

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

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Cash flows from operating activities:
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Adjustments to reconcile net loss to net cash (used in) provided by    operating activities:
Depreciation and amortization		11,684			—			11,684			9,390
Goodwill impairment		—						—			9,174
Stock-based compensation		25,906			—			25,906			11,411
Deferred tax expense (benefit)		138			—			138			(1,110	)
Amortization of deferred rent		(778	)		—			(778	)		231
Non-cash change in earnout liability		610			—			610			(430	)
Non-cash bad debt expense (recovery)		602			—			602			(382	)
Other		227			—			227			526
Changes in operating assets and liabilities:
Trade accounts receivable		(9,648	)		(238	)		(9,886	)		(7,852	)
Prepaid expenses and other current assets		(3,274	)		—			(3,274	)		(2,688	)
Deferred commissions		(16,340	)		16,340			—			—
Other noncurrent assets		(831	)		—			(831	)		(549	)
Trade payables		4,818			—			4,818			(3,353	)
Accrued expenses		2,305			(2,753	)		(448	)		6,095
Deferred rent (lease incentives)		—			—			—			579
Deferred revenue		24,782			2,451			27,233			25,978
Net cash provided by (used in) operating activities		5,431			—			5,431			(10,098	)
Cash flows from investing activities:
Net (increase) decrease in customer fund assets		(3,986	)		—			(3,986	)		2,053
Cash paid for acquired intangible assets		(139	)		—			(139	)		(5,002	)
Cash paid for acquisitions of businesses		(30,310	)		—			(30,310	)		—
Purchase of property and equipment		(7,196	)		—			(7,196	)		(12,914	)
Net cash used in investing activities		(41,631	)		—			(41,631	)		(15,863	)
Cash flows from financing activities:
Proceeds from common stock    offering, net of underwriting discounts		274,705						274,705			192,510
Payments of deferred financing costs		(555	)		—			(555	)		(2,084	)
Payments on credit facility		—			—			—			(63,000	)
Proceeds from credit facility		—			—			—			23,000
Repayment of note payable		—			—			—			(234	)
Net increase (decrease) in customer fund obligations		3,986			—			3,986			(2,053	)
Proceeds from exercise of stock options and common stock    warrants		51,583			—			51,583			5,787
Proceeds from purchases of stock under employee stock    purchase plan		12,293			—			12,293			—
Taxes paid related to net share settlement of stock-based awards		(1,183	)		—			(1,183	)		(2,326	)
Repurchase of shares		—			—			—			(1,806	)
Payment related to business combination earnouts		(375	)		—			(375	)		—
Net cash provided by financing activities		340,454			—			340,454			149,794
Foreign currency effect on cash and cash equivalents		(13	)		—			(13	)		185
Net change in cash and cash equivalents		304,241			—			304,241			124,018
Cash and cash equivalents—Beginning of period		142,322			—			142,322			14,075
Cash and cash equivalents—End of period	$	446,563			—		$	446,563		$	138,093

23

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Disaggregation of Revenue

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

	For the Three Months Ended September 30,
	2019		2018
Revenue (U.S.):
Subscription and returns
Tax determination	$	52,722	$	37,931
Tax returns and compliance management		33,456		22,613
Interest income on funds held for customers		907		392
Total subscription and returns		87,085		60,936
Professional services		6,019		4,595
Total revenue (U.S.)		93,104		65,531
Total revenue (non-U.S.)		5,421		4,388
Total revenue	$	98,525	$	69,919

	For the Nine Months Ended September 30,
	2019		2018
Revenue (U.S.):
Subscription and returns
Tax determination	$	146,660	$	105,330
Tax returns and compliance management		90,829		66,747
Interest income on funds held for customers		2,448		562
Total subscription and returns		239,937		172,639
Professional services		17,416		10,743
Total revenue (U.S.)		257,353		183,382
Total revenue (non-U.S.)		17,441		11,793
Total revenue	$	274,794	$	195,175

Disclosures Related to Contracts with Customers

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

Contract Liabilities

A summary of the activity impacting the contract liabilities during the nine months ended September 30, 2019 is presented below (in thousands):

	Contract Liabilities
Balance at December 31, 2018	$	—
Adoption of ASC 606		2,090
Contract liabilities transferred to deferred revenue		(3,897	)
Addition to contract liabilities		6,650
Balance at September 30, 2019	$	4,843

24

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

As of September 30, 2019, contract liabilities are expected to be transferred to deferred revenue within the next 12 months and therefore are included in accrued expenses on the consolidated balance sheets.

Deferred Revenue

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

	Deferred Revenue
Balance at December 31, 2018	$	134,653
Adoption of ASC 606		(11,250	)
Revenue recognized		(274,794	)
Additional amounts deferred		299,857
Balance at September 30, 2019	$	148,466

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 nine months ended September 30, 2019 is presented below (in thousands):

	Deferred Commissions
Balance at December 31, 2018	$	—
Adoption of ASC 606		19,267
Additional commissions deferred		21,480
Amortization of deferred commissions		(5,139	)
Balance at September 30, 2019	$	35,608

As of September 30, 2019, $8.4 million of deferred commissions are expected to be amortized within the next 12 months and therefore are included in current assets on the consolidated balance sheets. The remaining amount of deferred commissions are included in noncurrent assets. There were no impairments of assets related to deferred commissions during the nine months ended September 30, 2019. There were no assets recognized related to the costs to fulfill contracts during the nine months ended September 30, 2019 as these costs were not material.

Remaining Performance Obligations

Contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of September 30, 2019, amounts allocated to these additional contractual obligations are $33.4 million, of which $33.1 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.

25

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

7. Intangible Assets

Finite-lived intangible assets

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

		September 30, 2019
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,360	$	(10,802	)	$	9,558
Developed technology	3 to 8		36,222		(21,440	)		14,782
Noncompete agreements	3 to 5		777		(595	)		182
Tradename and trademarks	1 to 4		452		(431	)		21
		$	57,811	$	(33,268	)	$	24,543

		December 31, 2018
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	15,412	$	(9,202	)	$	6,210
Developed technology	3 to 8		30,935		(17,806	)		13,129
Noncompete agreements	3 to 5		574		(542	)		32
Tradename and trademarks	1 to 4		420		(420	)		—
		$	47,341	$	(27,970	)	$	19,371

Finite-lived intangible assets are generally amortized on a straight-line basis over the remaining estimated useful life as management believes this reflects the expected benefit to be received from these assets. Finite-lived intangible assets amortization expense was $1.8 million and $5.3 million for the three and nine months ended September 30, 2019, respectively, and $1.6 million and $4.4 million for the three and nine months ended September 30, 2018, respectively.

Acquisitions of finite-lived intangible assets

In May 2018, the Company acquired developed technology to facilitate cross-border transactions (e.g., tariffs and duties), from Tradestream Technologies Inc. and Wise 24 Inc. (the “Sellers”) for cash and common stock. In addition to cash paid at closing and shortly thereafter, the asset purchase agreement required the Company to issue shares of common stock as follows: 37,708 shares on November 29, 2018, 37,708 shares on May 29, 2019, and 37,706 shares on November 29, 2019.

Total consideration for the purchase also includes an earnout computed on future revenue and billings recognized by the Company over the six years following the acquisition, up to a maximum of $30.0 million. The earnout is payable in cash and common stock at the end of each six-month measurement period ending on June 30 or December 31 through 2023. The cash portion of the earnout is computed based on eligible billings in the measurement period. The number of shares of common stock to be issued for the earnout is computed based on the eligible revenue recognized in the measurement period divided by the average closing price of the Company’s common stock during the last ten days of the measurement period. As earnout payments become due, those costs will be capitalized as part of the developed technology asset and amortized over the remaining useful life. During the first nine months of 2019, the Company paid $0.1 million and issued 2,310 shares of common stock to the Sellers for the earnout measurement periods ended December 31, 2018 and June 30, 2019, and accrued $0.1 million for cash and common stock payable to the Sellers for the earnout measurement period that will end December 31, 2019.    

26

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Goodwill

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

Balance—December 31, 2018	$	61,300
Acquisition of Compli		12,807
Acquisition of Indix		4,953
Acquisition of Portway		22,376
Cumulative translation adjustments		(510	)
Balance—September 30, 2019	$	100,926

Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, the Company will conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. The Company has three reporting units for goodwill impairment testing consisting of its U.S., European, and Brazilian operations. As of September 30, 2019, the Brazilian reporting unit had no associated goodwill.

8. Commitments and Contingencies

Leases

Rent expense was $3.3 million and $9.4 million for the three and nine months ended September 30, 2019, respectively, and $2.5 million and $7.4 million for the three and nine months ended September 30, 2018, respectively. Sublease income was $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively, with no sublease income for the three and nine months ended September 30, 2018.

Contingencies

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

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

27

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

On October 22, 2018, PTP OneClick, LLC (“PTP”) filed a lawsuit against Avalara, Inc. in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges that making, using, offering to sell, and selling AvaTax, Avalara Returns, and TrustFile (the “Avalara Products”) infringe U.S. Patent No. 9,760,915 held by PTP and also alleges unspecified trade secret misappropriation, unfair competition, and breach of contract. PTP seeks judgments of willful patent infringement, willful trade secret misappropriation, unfair competition, and breach of contract. PTP requests preliminary and permanent injunctions to enjoin the Company from making, using, offering to sell, and selling the Avalara Products along with treble damages and attorneys’ fees. Based upon the Company’s review of the complaint and the specified patent, the Company believes that the Company has meritorious defenses to PTP’s claims. On November 7, 2018, the Company moved to dismiss the lawsuit and to have the patent held invalid, and also moved to transfer the matter to the United States District Court located in Seattle, Washington. On April 30, 2019, the United States District Court for the Eastern District of Wisconsin granted the Company’s motion to transfer, reserving resolution of the motion to dismiss for the United States District Court for the Western District of Washington. On October 7, 2019, the United States District Court for the Western District of Washington invalidated the patent and dismissed the patent and unfair competition claims with prejudice but did not dismiss the trade secret misappropriation or breach of contract claims. The court has set the trial date for October 26, 2020. The Company intends to continue to vigorously defend against PTP’s allegations.

9. Debt

Loan and Security Agreement

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

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

10. Convertible Preferred Stock and Shareholders’ Equity

Authorized Capital – Common Stock and Preferred Stock

On June 15, 2018, the Company completed an initial public offering (“IPO”) listing its common stock on the New York Stock Exchange. The Company is authorized to issue two classes of stock designated as common stock and preferred stock. In June 2018, immediately following the IPO, the Amended and Restated Articles of Incorporation became effective, which increased authorized capital stock to 620,000,000 shares, consisting of 600,000,000 shares of common stock, $0.0001 par value per share, and 20,000,000 shares of undesignated preferred stock, $0.0001 par value per share.

Public Offering of Common Stock

In June 2019, the Company completed a public offering, in which the Company sold 4,133,984 shares of its common stock, including the full exercise of the underwriters’ option to purchase 539,215 additional shares of common stock, at a price of $69.40 per share. The Company received net proceeds of $274.7 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid by the Company of $1.2 million. As of September 30, 2019, 76,888,616 shares of the Company’s common stock were outstanding.

28

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

The changes to the Company’s shareholders’ equity duringthenine months September 30, 2019 is as follows (in thousands, exceptshare data):

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			Equity
Balance at January 1, 2019		66,768,563		$	7	$	599,493		$	(2,345	)	$	(487,602	)	$	109,553
Impact of adoption of new accounting    pronouncements (see Note 2)													27,622			27,622
Exercise of stock options		2,763,291					27,311									27,311
Shares tendered for cashless redemption of    stock options		(2,805	)				(93	)								(93	)
Stock-based compensation cost							6,571									6,571
Shares issued under employee stock    purchase plan		372,764					7,664									7,664
Shares issued to purchase intangible assets		1,634					50									50
Loss on translation adjustment										(462	)					(462	)
Net loss													(9,243	)		(9,243	)
Balance at March 31, 2019		69,903,447		$	7	$	640,996		$	(2,807	)	$	(469,223	)	$	168,973
Proceeds from common stock    offering, net of underwriting discounts		4,133,984			1		274,704									274,705
Public offering costs							(1,198	)								(1,198	)
Exercise of stock options		1,368,510					13,106									13,106
Vesting of restricted stock units		902														—
Stock-based compensation cost							9,439									9,439
Shares issued to purchase intangible assets		37,708														—
Gain on translation adjustment										276						276
Net loss													(13,173	)		(13,173	)
Balance at June 30, 2019		75,444,551			8		937,047			(2,531	)		(482,396	)		452,128
Exercise of stock options		1,286,357					11,166									11,166
Shares tendered for cashless redemption of    stock-based awards		(13,712	)				(1,090	)								(1,090	)
Vesting of restricted stock units		36,611														—
Stock-based compensation cost							9,933									9,933
Shares issued under employee stock    purchase plan		134,133					4,629									4,629
Shares issued to purchase intangible assets		676					48									48
Loss on translation adjustment										(591	)					(591	)
Net loss													(12,354	)		(12,354	)
Balance at September 30, 2019		76,888,616			8		961,733			(3,122	)		(494,750	)		463,869

29

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

															Accumulated
	Convertible											Additional			Other						Total
	Preferred Stock						Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount			Shares			Amount		Capital			Income (Loss)			Deficit			Deficit
Balance at January 1, 2018		101,786,205		$	370,921			5,992,293		$	1	$	18,121		$	338		$	(412,052	)	$	(393,592	)
Exercise of stock options								785,991					6,025									6,025
Shares tendered for cashless    redemption of stock options								(465,710	)				(7,715	)								(7,715	)
Stock-based compensation    cost													3,517									3,517
Repurchase of shares		(10,000	)		(67	)		(48,152	)				(752	)								(752	)
Gain on translation adjustment																603						603
Net loss																			(15,249	)		(15,249	)
Balance at March 31, 2018		101,776,205		$	370,854			6,264,422		$	1	$	19,196		$	941		$	(427,301	)	$	(407,163	)
Proceeds from common stock    offering, net of underwriters'    discounts								8,625,000			1		192,509									192,510
Initial public offering costs													(3,425	)								(3,425	)
Conversion of preferred stock    to common stock		(101,776,205	)		(370,854	)		50,888,014			5		370,849									370,854
Shares tendered for cashless    redemption of stock options								(138,813	)				(3,483	)								(3,483	)
Exercise of stock options								305,722					2,752									2,752
Exercise of warrants								570,000					5,783									5,783
Stock-based compensation    cost													3,571									3,571
Repurchase of shares								(56,695	)				(986	)								(986	)
Loss on translation adjustment																(3,048	)					(3,048	)
Shares issued to purchase    intangible assets													2,555									2,555
Net loss																			(17,766	)		(17,766	)
Balance at June 30, 2018		—		$	—			66,457,650		$	7	$	589,321		$	(2,107	)	$	(445,067	)	$	142,154
Exercise of stock options								40,003					439									439
Shares tendered for cashless    redemption of stock options								(7,497	)				(343	)								(343	)
Stock-based compensation    cost													4,344									4,344
Loss on translation adjustment																(242	)					(242	)
Net loss																			(24,103	)		(24,103	)
Balance at September 30, 2018		—		$	—			66,490,156		$	7	$	593,761		$	(2,349	)	$	(469,170	)	$	122,249

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

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

30

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Common Stock Warrants

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

11. Equity Incentive Plans

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

In April 2018, the 2018 Plan became effective in connection with the Company’s IPO. The 2018 Plan allows the Company to grant equity incentives to employees, directors, advisors, and consultants providing services to the Company. The total number of shares of common stock reserved for issuance under the 2018 Plan is equal to (1) 5,315,780shares plus (2) any shares subject to outstanding awards under the 2006 Plan as of June 14, 2018 that subsequently cease to be subject to such awards. The available shares automatically increase each January 1, beginning January 1, 2019, by the lesser of (i) 5% of the aggregate number of shares of common stock outstanding on December 31^st of the immediately preceding calendar year (rounded up to the nearest whole share) and (ii) an amount determined by the Company’s Board of Directors. As of September 30, 2019, 2,500,716 shares were subject to outstanding awards and 6,468,269 shares were available for issuance under the 2018 Plan. The 2018 Plan provides that on the occurrence of certain strategic events, such as a change in control in which options and RSUs are not assumed or substituted, such outstanding options and RSUs will become fully vested and exercisable or payable.

Prior to the 2018 Plan, the Company awarded stock options under the 2006 Plan. The 2006 Plan was terminated in connection with the Company’s IPO. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan. As of September 30, 2019, there were 5,293,255 shares subject to outstanding stock options under the 2006 Plan.

During the quarter ended September 30, 2019, the Company amended its Outside Director Compensation Policy to modify the vesting provisions for non-employee director awards in the event of certain terminations of service. The modification resulted in an acceleration of share-based compensation expense for non-employee director awards in the third quarter of 2019.

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,
	2019		2018		2019		2018
Stock-based compensation cost:
Common stock warrants	$	—	$	—	$	—	$	512
Stock options		4,436		3,387		12,549		9,963
Restricted stock units		4,705		2		10,954		2
Employee stock purchase plan		792		955		2,440		955
Total stock-based compensation cost	$	9,933	$	4,344	$	25,943	$	11,432

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.

31

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Stock Options

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

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Shares			Price		Life (Years)		(in thousands)
Options outstanding as of December 31, 2018		11,094,070		$	12.17		6.81	$	210,523
Options granted		944,966			43.95
Options exercised		(5,418,158	)		9.52
Options cancelled or expired		(211,101	)		16.35
Options outstanding as of September 30, 2019		6,409,777			18.96		7.33		309,772
Options exercisable as of September 30, 2019		3,055,619		$	12.52		6.19	$	167,363

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

	Options Outstanding				Options Vested and Exercisable
Exercise	Number		Weighted Average		Number Vested		Weighted Average
Prices	Outstanding		Life (in Years)		and Exercisable		Life (in Years)
$1.50 to $1.90		73,538		1.5		73,538		1.5
2.86 to 6.40		244,573		3.2		244,573		3.2
8.04 to 11.72		556,154		4.4		556,154		4.4
12.20 to 15.06		2,529,948		6.9		1,611,280		6.7
16.06 to 24.00		1,889,042		8.4		516,733		8.3
31.99 to 42.21		890,107		9.2		39,056		8.9
55.10 to 72.67		226,415		9.3		14,285		8.6
		6,409,777				3,055,619

The total intrinsic value of options exercised during the nine months ended September 30, 2019 and 2018 was $287.7 million and $11.2 million, respectively.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2019 and 2018 was $18.93 and $9.02per share, respectively. During the nine months ended September 30, 2019, 1,740,706 options vested. There were 3,354,158 options unvested as of September 30, 2019.

As of September 30, 2019, $33.0 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 2.6 years.

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

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2019		2018	2019	2018
Fair market value of common stock		—	$38.59 - 42.21	$39.76 - 72.67	$16.86 - 42.21
Volatility		—	40%	40%	40%
Expected term		—	6 years	5-6 years	6 years
Expected dividend yield		—	n/a	n/a	n/a
Risk-free interest rate		—	2.92% - 3.06%	1.77% - 2.65%	2.55% - 3.06%

32

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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

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

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

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

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

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

Restricted Stock Units

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

				Weighted
				Average
				Grant Date Fair
	Restricted Stock Units			Value Per Share
RSUs outstanding as of December 31, 2018		74,424		$	32.69
RSUs granted		1,412,806			49.62
RSUs vested		(37,513	)		72.30
RSUs cancelled		(65,523	)		43.05
RSUs outstanding as of September 30, 2019		1,384,194		$	48.41

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 date of grant. The vesting period of each RSU grant is generally four years for employees and one year for non-employee directors. As of September 30, 2019, $58.9 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 3.4 years.

33

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Employee Stock Purchase Plan

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

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

The Company initially reserved 996,709 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP increases automatically on each January 1, beginning January 1, 2019, by the number of shares equal to the least of (i) 1,000,000 shares of common stock, (ii) 1% of the aggregate number of shares of common stock outstanding on December 31^st of the immediately preceding calendar year (rounded up to the nearest whole share), and (iii) an amount determined by the Board of Directors. No more than an aggregate of 10,102,525 shares of common stock may be issued over the ten-year term of the ESPP. As of September 30, 2019, 1,157,498 shares of common stock are reserved for sale under the ESPP.

During the three and nine months ended September 30, 2019, 134,133 and 506,897 shares of common stock were purchased under the ESPP, respectively.

As of September 30, 2019, there was approximately $1.1 millionof 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, 2019 and will end on January 31, 2020.

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,
	2019	2018	2019	2018
Fair market value of common stock	$82.12	$38.18	$40.60 to $82.12	$24.00 to $38.18
Volatility	40%	40%	40%	40%
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	2.04%	2.96%	2.04% to 2.59%	2.90% to 2.96%

12. Income Taxes

The Company used an annual effective tax rate approach to calculate income taxes for the nine months ended September 30, 2019 and 2018. The annual effective tax rate differs from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets.

The effective income tax rate was an expense of 1.8% for the nine months ended September 30, 2019,and a benefit of 1.4% for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, the income tax expense related primarily to foreign tax jurisdictions. The income tax benefit for the nine months ended September 30, 2018 was due primarily to the determination that indefinite lived goodwill would provide a source of income to realize indefinite lived deferred tax assets, resulting in a tax benefit of $0.9 million.

34

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

13. Net Loss Per Share Attributable to Common Shareholders

The Company calculates basic and diluted net loss per share attributable to common shareholders in conformity with the two-class method required for companies with participating securities. Prior to the IPO, the Company considered all series of convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common shareholders was not allocated to the convertible preferred stock as the holders of convertible preferred stock did not have a contractual obligation to share in losses.

The diluted net loss per share attributable to common shareholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, all common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common shareholders as their effect is antidilutive. As a result, basic and diluted net loss per common share was the same for each period presented.

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator:
Net loss attributable to common shareholders	$	(12,354	)	$	(24,103	)	$	(34,770	)	$	(57,118	)
Denominator:
Weighted-average common shares    outstanding-basic		76,156			66,590			72,064			29,269
Dilutive effect of share equivalents resulting from stock    options, restricted stock units, common stock warrants,    ESPP shares and convertible preferred shares (as    converted)		—			—			—			—
Weighted-average common shares    outstanding-diluted		76,156			66,590			72,064			29,269
Net loss per common share, basic and diluted	$	(0.16	)	$	(0.36	)	$	(0.48	)	$	(1.95	)

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,
	2019		2018		2019		2018
Options to purchase common shares		7,149		11,350		8,603		11,263
Unvested restricted stock units		1,346		262		1,066		88
Employee stock purchase plan shares		7		63		2		21
Common stock warrants		—		—		—		315
Convertible preferred shares (as converted)		—		—		—		31,503
Total		8,502		11,675		9,671		43,190

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

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 28, 2019. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. See “Special Note Regarding Forward-Looking Statements” above.

Overview

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

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

We have been growing rapidly in recent periods. Our total revenues for the three months ended September 30, 2019 were $98.5 million compared to $69.9 million for the three months ended September 30, 2018. Our total revenues for the nine months ended September 30, 2019 were $274.8 million compared to $195.2 million for the nine months ended September 30, 2018. As a result of significant investments in growth, we have incurred net losses in all our prior reporting periods. Our net loss for the three months ended September 30, 2019 was $12.4million compared to a net loss of $24.1 million for the three months ended September 30, 2018. Our net loss for the nine months ended September 30, 2019 was $34.8million compared to a net loss of $57.1 million for the nine months ended September 30, 2018.

Key Business Metrics

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

	Sep 30, 2019		Jun 30, 2019		Mar 31, 2019		Dec 31, 2018		Sep 30, 2018		Jun 30, 2018		Mar 31, 2018		Dec 31, 2017
Number of core    customers (as of end    of period)		11,240		10,430		9,700		9,070		8,490		8,080		7,760		7,490
Net revenue retention    rate	113%		111%		107%		108%		105%		108%		109%		105%

Number of Core Customers

We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The mid-market has been and remains our primary target market segment for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our primary target market segment. As of September 30, 2019, and December 31, 2018, we had approximately 11,240 and 9,070 core customers, respectively, representing less than half of our total number of customers. In the first nine months of 2019, our core customers represented more than 80%of our total revenue.

We define a core customer as:

• a unique account identifier in our billing system, or a billing account (multiple companies or divisions within a single consolidated enterprise that each have a separate unique account identifier are each treated as separate customers);

• that is active as of the measurement date; and

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

36

Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems, primarily related to past acquisitions that have not been integrated into our primary U.S. billing systems. Aswe increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric.

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

Net Revenue Retention Rate

We believe that our net revenue retention rate provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it reflects the stability of our revenue base, which is one of our core competitive strengths. We calculate our net revenue retention rate by dividing (a) total revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total revenue in such corresponding quarter from those same billing accounts. This calculation includes changes for these billing accounts, such as additional solutions purchased, changes in pricing and transaction volume, and terminations, but does not reflect revenue for new billing accounts added during the one-year period. Currently, our net revenue retention rate calculation includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems, primarily related to past acquisitions. Our net revenue retention rate was 113% for the quarter ended September 30, 2019 and on average has been 110% over the last four quarters ended September 30, 2019.

Key Components of Consolidated Statements of Operations

Revenue

We generate revenue from two primary sources: (1) subscription and returns; and (2) professional services.

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

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

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

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

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

Professional Services.We generate professional services revenue from providing tax analysis, configurations, data migrations, integration, training, and other support services. We bill for service arrangements on a fixed fee, milestone, or time and materials basis, and we recognize the transaction price allocated to professional services performance obligations as revenue as services are performed and are collectable under the terms of the associated contracts.

37

Costs and Expenses

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

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

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

Sales and Marketing.Sales and marketing expenses consist primarily of employee-related expenses for our sales and marketing staff, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, integration and referral partner commissions, costs of marketing and promotional events, corporate communications, online marketing, solution marketing, and other brand-building activities. Sales and marketing expenses include allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as customer databases from acquisitions.

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

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

We intend to continue to invest in sales and marketing and expect spending in these areas to increase in absolute dollars as we continue to expand our business. We expect sales and marketing expenses to continue to be among the most significant components of our operating expenses. Because we began to defer a portion of the sales and commission costs in 2019, our sales and marketing expense will not be comparable to prior periods in which we expensed these costs.

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

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

38

Total Other (Income) Expense, Net    

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

Results of Operations

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

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

39

	For the Three Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
	(in thousands)
Revenue:
Subscription and returns	$	91,986		$	71		$	92,057		$	64,611
Professional services		6,539			(49	)		6,490			5,308
Total revenue		98,525			22			98,547			69,919
Cost of revenue:
Subscription and returns		25,621			—			25,621			17,330
Professional services		4,157			—			4,157			2,906
Total cost of revenue(1)		29,778			—			29,778			20,236
Gross profit		68,747			22			68,769			49,683
Operating expenses:
Research and development(1)		21,871			—			21,871			13,285
Sales and marketing(1)		40,313			4,789			45,102			41,276
General and administrative(1)		20,511			—			20,511			10,235
Goodwill impairment		—			—			—			9,174
Total operating expenses		82,695			4,789			87,484			73,970
Operating loss		(13,948	)		(4,767	)		(18,715	)		(24,287	)
Total other (income) expense, net		(1,935	)		—			(1,935	)		(93	)
Loss before income taxes		(12,013	)		(4,767	)		(16,780	)		(24,194	)
Provision for (benefit from) income taxes		341			—			341			(91	)
Net loss	$	(12,354	)	$	(4,767	)	$	(17,121	)	$	(24,103	)
(1) The stock-based compensation expense included above was as follows:
							For the Three Months Ended September 30,
							2019			2018
							(in thousands)
Cost of revenue							$	828		$	508
Research and development								1,781			906
Sales and marketing								2,135			1,589
General and administrative								5,178			1,334
Total stock-based compensation							$	9,922		$	4,337
The amortization of acquired intangibles included above was as follows:
							For the Three Months Ended September 30,
							2019			2018
							(in thousands)
Cost of revenue							$	1,235		$	1,121
Research and development								—			—
Sales and marketing								605			474
General and administrative								4			—
Total amortization of acquired intangibles							$	1,844		$	1,595

40

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
	(in thousands)
Revenue:
Subscription and returns	$	255,225		$	689		$	255,914		$	182,326
Professional services		19,569			(149	)		19,420			12,849
Total revenue		274,794			540			275,334			195,175
Cost of revenue:
Subscription and returns		69,537			—			69,537			47,984
Professional services		12,883			—			12,883			8,393
Total cost of revenue(1)		82,420			—			82,420			56,377
Gross profit		192,374			540			192,914			138,798
Operating expenses:
Research and development(1)		56,823			—			56,823			38,332
Sales and marketing(1)		119,199			16,340			135,539			119,187
General and administrative(1)		53,764			—			53,764			28,787
Goodwill impairment		—			—			—			9,174
Total operating expenses		229,786			16,340			246,126			195,480
Operating loss		(37,412	)		(15,800	)		(53,212	)		(56,682	)
Total other (income) expense, net		(3,271	)		—			(3,271	)		1,261
Loss before income taxes		(34,141	)		(15,800	)		(49,941	)		(57,943	)
Provision for (benefit from) income taxes		629			—			629			(825	)
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
(1) The stock-based compensation expense included above was as follows:
							For the Nine Months Ended September 30,
							2019			2018
							(in thousands)
Cost of revenue							$	2,277		$	1,181
Research and development								4,700			2,271
Sales and marketing								6,411			3,674
General and administrative								12,518			4,285
Total stock-based compensation							$	25,906		$	11,411
The amortization of acquired intangibles included above was as follows:
							For the Nine Months Ended September 30,
							2019			2018
							(in thousands)
Cost of revenue							$	3,635		$	2,906
Research and development								—			—
Sales and marketing								1,653			1,483
General and administrative								11			17
Total amortization of acquired intangibles							$	5,299		$	4,406

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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,
	2019						2018
	As Reported (ASC 606)			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Subscription and returns		93	%		93	%		92	%
Professional services		7	%		7	%		8	%
Total revenue		100	%		100	%		100	%
Cost of revenue:
Subscription and returns		26	%		26	%		25	%
Professional services		4	%		4	%		4	%
Total cost of revenue		30	%		30	%		29	%
Gross profit		70	%		70	%		71	%
Operating expenses:
Research and development		22	%		22	%		19	%
Sales and marketing		41	%		46	%		59	%
General and administrative		21	%		21	%		15	%
Goodwill impairment		0	%		0	%		13	%
Total operating expenses		84	%		89	%		106	%
Operating loss		-14	%		-19	%		-35	%
Total other (income) expense, net		-2	%		-2	%		0	%
Loss before income taxes		-12	%		-17	%		-35	%
Provision for (benefit from) income taxes		0	%		0	%		0	%
Net loss		-13	%		-17	%		-34	%

	For the Nine Months Ended September 30,
	2019						2018
	As Reported (ASC 606)			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Subscription and returns		93	%		93	%		93	%
Professional services		7	%		7	%		7	%
Total revenue		100	%		100	%		100	%
Cost of revenue:
Subscription and returns		25	%		25	%		25	%
Professional services		5	%		5	%		4	%
Total cost of revenue		30	%		30	%		29	%
Gross profit		70	%		70	%		71	%
Operating expenses:
Research and development		21	%		21	%		20	%
Sales and marketing		43	%		49	%		61	%
General and administrative		20	%		20	%		15	%
Goodwill impairment and restructuring charges		0	%		0	%		5	%
Total operating expenses		84	%		89	%		100	%
Operating loss		-14	%		-19	%		-29	%
Total other (income) expense, net		-1	%		-1	%		1	%
Loss before income taxes		-12	%		-18	%		-30	%
Provision for (benefit from) income taxes		0	%		0	%		0	%
Net loss		-13	%		-18	%		-29	%

42

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

Revenue

	For the Three Months Ended September 30,
	2019							2018		% Change
	As Reported (ASC 606)		Impacts from Adoption			Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
Revenue:
Subscription and returns	$	91,986	$	71		$	92,057	$	64,611		42	%		42	%
Professional services		6,539		(49	)		6,490		5,308		23	%		22	%
Total revenue	$	98,525	$	22		$	98,547	$	69,919		41	%		41	%

ASC 606 total revenue for the three months ended September 30, 2019 increased by $28.6 million, or 41%, compared to the three months ended September 30, 2018. ASC 606 and ASC 605 total revenue for the three months ended September 30, 2019 were $98.5 million. ASC 605 total revenue for the three months ended September 30, 2019 increased by $28.6 million, or 41%, compared to the three months ended September 30, 2018. ASC 605 subscription and returns revenue for the three months ended September 30, 2019 increased by $27.4million, or 42%, compared to the three months ended September 30, 2018. ASC 605 professional services revenue for the three months ended September 30, 2019 increased by $1.2 million, or 22%, compared to the three months ended September 30, 2018.

Growth in total revenue was due primarily to increased demand for our services from new and existing customers. The increase in total ASC 605 revenue for the three months ended September 30, 2019 compared to the same period of 2018, was due primarily to $14.7million from new U.S. customers, $8.2million from existing U.S. customers, $2.7 million from Streamlined Sales Tax (“SST”) revenue, $1.0 million attributable to revenue growth in our international operations, $1.5million from acquisitions made during 2019, and $0.5 million from interest earned on funds held for customers. Currently a small component of our total revenue, we offer SST services to businesses that are registered to participate in the program. Because we generally provide SST services at no cost to the seller, we earn a fee from the participating state and local governments based on a percentage of sales tax reported and paid.

Cost of Revenue

	For the Three Months Ended September 30,
	2019						2018		% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
Cost of revenue
Subscription and returns	$	25,621	$	—	$	25,621	$	17,330		48	%		48	%
Professional services		4,157		—		4,157		2,906		43	%		43	%
Total revenue	$	29,778	$	—	$	29,778	$	20,236		47	%		47	%

Cost of Revenue

Cost of revenue for the three months ended September 30, 2019 increased by $9.5 million, or 47%, compared to the three months ended September 30, 2018. The increase in cost of revenue in absolute dollars was due primarily to an increase of $5.4 million in employee-related costs from higher headcount, an increase of $1.6 million in software hosting costs, an increase of $1.3 million in allocated overhead cost, and an increase of $0.6 million in outside services expenses.

Excluding the impact of our Portway acquisition, cost of revenue headcount increased approximately 47% from September 30, 2018 to September 30, 2019 due to our continued growth to support our solutions and expand content. Employee-related costs increased due primarily to a $4.4 million increase in salaries and benefits, $0.6 million increase in compensation expense related to our bonus plans and a $0.3 million increase in stock-based compensation expense. Software hosting costs have increased due primarily to higher transaction volumes. Outside services expenses increased due primarily to third-party costs associated with Avalara Licensing, a service we began providing in the third quarter of 2018 and, to a lesser extent, the use of third-party consulting firms to support service offerings in our international operations. Allocated overhead consists primarily of facility expenses and shared information technology expenses, both of which were higher compared to the prior period.     

43

Gross Profit

	For the Three Months Ended September 30,
	2019									2018			% Change
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)			As Reported			Without Adoption
	(dollars in thousands)
Gross profit
Subscription and returns	$	66,365		$	71		$	66,436		$	47,281			40	%		41	%
Professional services		2,382			(49	)		2,333			2,402			-1	%		-3	%
Total gross profit	$	68,747		$	22		$	68,769		$	49,683			38	%		38	%
Gross margin
Subscription and returns		72	%					72	%		73	%
Professional services		36	%					36	%		45	%
Total gross margin		70	%					70	%		71	%

ASC 606 and ASC 605 total gross profit for the three months ended September 30, 2019 increased $19.1 million, or 38%, compared to the three months ended September 30, 2018. Total gross margin was 70% for the three months ended September 30, 2019 compared to 71% for the same period of 2018.

Research and Development

	For the Three Months Ended September 30,
	2019						2018		% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
Research and development	$	21,871	$	—	$	21,871	$	13,285		65	%		65	%

Research and development expenses for the three months ended September 30, 2019 increased $8.6million, or 65%, compared to the three months ended September 30, 2018. The increase was due primarily to an increase of $7.4 million in employee-related costs from higher headcount, and an increase of $0.9 million in allocated overhead cost.

Research and development headcount increased approximately 56% from September 30, 2018 to September 30, 2019. Employee-related costs increased due primarily to a $4.7 million increase in salaries and benefits, a $1.2 million increase in compensation expense related to our bonus plans, a $0.9 million increase in stock-based compensation expense, and a $0.5 million increase in contract and temporary employee costs.

Sales and Marketing

	For the Three Months Ended September 30,
	2019						2018		% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
Sales and marketing	$	40,313	$	4,789	$	45,102	$	41,276		-2	%		9	%

Sales and marketing expenses for the three months ended September 30, 2019 decreased $1.0 million compared to the three months ended September 30, 2018. ASC 606 sales and marketing expenses for the three months ended September 30, 2019 was $40.3 million compared to ASC 605 sales and marketing expense of $45.1 million for the same period. The difference of $4.8 million relates to the deferral of sales commissions costs and partner commission costs under ASC 606. All of our sales commissions and partner commission costs were expensed as incurred under ASC 605.

ASC 605 sales and marketing expenses for the three months ended September 30, 2019 increased $3.8 million, or 9%, compared to the three months ended September 30, 2018. The increase was due primarily to an increase of $1.2 million in employee-related costs, an increase of $1.4 million for partner commission expense, an increase of $0.7 million in marketing campaign expenses, and an increase of $0.6 million in allocated overhead cost.

44

Sales and marketing headcount increased approximately 17% from September 30, 2018 to September 30, 2019. Employee-related costs increased due primarily to a $2.0 million increase in salaries and benefits and a $0.5 million increase in stock-based compensation expense, partially offset by a $1.4 million decrease in sales commissions expense. Sales commissions expense decreased due to lower average commission ratescompared to the third quarter of 2018, which offset increases from strong sales-related activity. ASC 605 sales commission expense was $7.0 million for the three months ended September 30, 2019 compared to $8.4 million for the three months ended September 30, 2018. Partner commission expense increased due primarily to higher sales. ASC 605 partner commission expense was $7.5 million for the three months ended September 30, 2019 compared to $6.1 million for the three months ended September 30, 2018. Marketing campaign expenses increased due to an increase in our discretionary spending on customer events and lead generation activities.

General and Administrative

	For the Three Months Ended September 30,
	2019						2018		% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
General and administrative	$	20,511	$	—	$	20,511	$	10,235		100	%		100	%

General and administrative expenses for the three months ended September 30, 2019 increased $10.3 million, or 100%, compared to the three months ended September 30, 2018. The increase was due primarily to an increase of $7.9 million in employee-related costs, and a $2.6 million increase in outside service expenses.

General and administrative headcount increased 46% from September 30, 2018 to September 30, 2019. Employee-related costs increased due primarily to a $3.8 million increase in stock-based compensation expense, a $3.1 million increase in salaries and benefits, and a $0.7 million increase in compensation expense related to our bonus plans. Outside services expenses increased due primarily to increased legal costs related to defending a patent infringement lawsuit and higher audit and internal control compliance costs.

Total Other (Income) Expense, Net

	For the Three Months Ended September 30,
	2019								2018			$ Change
	As Reported (ASC 606)			Impacts from Adoption		Without Adoption (ASC 605)			As Reported (ASC 605)			As Reported			Without Adoption
	(dollars in thousands)
Other (income) expense, net
Interest income	$	(2,202	)	$	—	$	(2,202	)	$	(676	)	$	(1,526	)	$	(1,526	)
Interest expense		2			—		2			534			(532	)		(532	)
Other (income) expense, net		265			—		265			49			216			216
Total other (income) expense, net	$	(1,935	)	$	—	$	(1,935	)	$	(93	)	$	(1,842	)	$	(1,842	)

Total other income for the three months ended September 30, 2019 was $1.9 million compared to $0.1 million of other income for the three months ended September 30, 2018. Interest income increased due to interest earned on investing our public offering cash proceeds. Interest expense decreased due to having no outstanding borrowings during the third quarter of 2019. We discuss borrowings under “Liquidity and Capital Resources” below.

Provision for (Benefit from) Income Taxes

	For the Three Months Ended September 30,
	2019						2018			% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)			As Reported			Without Adoption
	(dollars in thousands)
Provision for (benefit from) income taxes	$	341	$	—	$	341	$	(91	)		-475	%		-475	%

The provision for income taxes for the three months ended September 30, 2019 was $0.3 million compared to a benefit from income taxes of $0.1 million for the three months ended September 30, 2018. The effective income tax rate was 2.8% for the three months ended September 30, 2019 compared to a benefit of 0.4% for the three months ended September 30, 2018.

45

Nine Months Ended September 30, 2019 Compared to NineMonths Ended September 30, 2018

Revenue

	For the Nine Months Ended September 30,
	2019							2018		% Change
	As Reported (ASC 606)		Impacts from Adoption			Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
Revenue:
Subscription and returns	$	255,225	$	689		$	255,914	$	182,326		40	%		40	%
Professional services		19,569		(149	)		19,420		12,849		52	%		51	%
Total revenue	$	274,794	$	540		$	275,334	$	195,175		41	%		41	%

ASC 606 total revenue for the nine months ended September 30, 2019 increased $79.6 million, or 41%, compared to the nine months ended September 30, 2018. ASC 606 total revenue for the nine months ended September 30, 2019 was $274.8 million compared to ASC 605 total revenue of $275.3 million for the same period. ASC 605 total revenue for the nine months ended September 30, 2019 increased by $80.2 million, or 41%, compared to the nine months ended September 30, 2018. ASC 605 subscription and returns revenue for the nine months ended September 30, 2019 increased by $73.6 million, or 40%, compared to the nine months ended September 30, 2018. ASC 605 professional services revenue for the nine months ended September 30, 2019 increased by $6.6 million, or 51%, compared to the nine months ended September 30, 2018.

Growth in total revenue was due primarily to increased demand for our services from new and existing customers. The increase in total ASC 605 revenue for the nine months ended September 30, 2019 compared to the same period of 2018, was due primarily to $30.9 million from new U.S. customers, $31.9 million from existing U.S. customers, $6.6 million from SST revenue, $5.7 million attributable to revenue growth in our international operations, $3.2 million from acquisitions made during 2019, and $1.9 million from interest earned on funds held for customers.

Cost of Revenue

	For the Nine Months Ended September 30,
	2019						2018		% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
Cost of revenue
Subscription and returns	$	69,537	$	—	$	69,537	$	47,984		45	%		45	%
Professional services		12,883		—		12,883		8,393		53	%		53	%
Total revenue	$	82,420	$	—	$	82,420	$	56,377		46	%		46	%

Cost of Revenue

Cost of revenue for the nine months ended September 30, 2019 increased by $26.0 million, or 46%, compared to the nine months ended September 30, 2018. The increase in cost of revenue in absolute dollars was due primarily to an increase of $12.7 million in employee-related costs from higher headcount, an increase of $3.6 million in outside services expenses, an increase of $4.3 million in software hosting costs, an increase of $2.5 million in allocated overhead cost, and an increase of $0.7 million in amortization expense from acquired intangible assets.

Excluding the impact of our Portway acquisition, cost of revenue headcount increased approximately 47% from September 30, 2018 to September 30, 2019 due to our continued growth to support our solutions and expand content. Employee-related costs increased due primarily to a $10.0 million increase in salaries and benefits, a $1.6 million increase in compensation expense related to our bonus plans, and a $1.1 million increase in stock-based compensation expense. Outside services expenses increased due primarily to third-party costs associated with Avalara Licensing, a service we began providing in the third quarter of 2018 and, to a lesser extent, the use of third-party consulting firms to support service offerings in our international operations. Software hosting costs have increased due primarily to higher transaction volumes. Allocated overhead consists primarily of facility expenses and shared information technology expenses, both of which were higher compared to the prior period.

46

Gross Profit

	For the Nine Months Ended September 30,
	2019									2018			% Change
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)			As Reported			Without Adoption
	(dollars in thousands)
Gross profit
Subscription and returns	$	185,688		$	689		$	186,377		$	134,342			38	%		39	%
Professional services		6,686			(149	)		6,537			4,456			50	%		47	%
Total gross profit	$	192,374		$	540		$	192,914		$	138,798			39	%		39	%
Gross margin
Subscription and returns		73	%					73	%		74	%
Professional services and other		34	%					34	%		35	%
Total gross margin		70	%					70	%		71	%

ASC 606 total gross profit for the nine months ended September 30, 2019 increased $53.6 million, or 39%, compared to the nine months ended September 30, 2018. ASC 605 total gross profit for the nine months ended September 30, 2019 increased $54.1 million, or 39%, compared to the nine months ended September 30, 2018. Total gross margin was 70% for the nine months ended September 30, 2019 compared to 71% for the same period of 2018.

Research and Development

	For the Nine Months Ended September 30,
	2019						2018		% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
Research and development	$	56,823	$	—	$	56,823	$	38,332		48	%		48	%

Research and development expenses for the nine months ended September 30, 2019 increased $18.5 million, or 48%, compared to the nine months ended September 30, 2018. The increase was due primarily to an increase of $16.0 million in employee-related costs from higher headcount, and an increase of $1.7 million in allocated overhead cost, and an increase of $0.7 million in third-party purchased software costs.

Research and development headcount increased approximately 56% from September 30, 2018 to September 30, 2019. Employee-related costs increased due primarily to a $9.7 million increase in salaries and benefits, a $2.6 million increase in compensation expense related to our bonus plans, a $2.4 million increase in stock-based compensation expense, and a $0.8 million increase in contract and temporary employee costs. Software costs increased due primarily to continued investment in security and data privacy tools.

Sales and Marketing

	For the Nine Months Ended September 30,
	2019						2018		% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
Sales and marketing	$	119,199	$	16,340	$	135,539	$	119,187		0	%		14	%

Sales and marketing expenses for the nine months ended September 30, 2019 were flat compared to the nine months ended September 30, 2018. ASC 606 sales and marketing expenses for the nine months ended September 30, 2019 was $119.2 million compared to ASC 605 sales and marketing expense of $135.5 million for the same period. The difference of $16.3 million relates to the deferral of sales commissions costs and partner commission costs under ASC 606. All of our sales commissions and partner commission costs were expensed as incurred under ASC 605.

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ASC 605 sales and marketing expenses for the nine months ended September 30, 2019 increased $16.4million, or 14%, compared to the nine months ended September 30, 2018. The increase was due primarily to an increase of $10.3 million in employee-related costs, an increase of $5.9 million for partner commission expense, and an increase of $1.1 million in allocated overhead cost, partially offset by a decrease in outside services expenses of $1.2 million.

Sales and marketing headcount increased approximately 17% from September 30, 2018 to September 30, 2019. Employee-related costs increased due primarily to a $6.6 million increase in salaries and benefits, a $2.7 million increase in stock-based compensation expense, a $1.3 million increase in compensation expense related to our bonus plans, and a $0.4 million increase in sales commissions expense, partially offset by a $1.0 million decrease in contract and temporary employee costs. Sales commissions expense increased due to strong sales-related activity. ASC 605 sales commission expense was $21.0 million for the nine months ended September 30, 2019 compared to $20.6 million for the nine months ended September 30, 2018. Partner commission expense increased due primarily to higher sales and an increase in the proportion of sales eligible for partner commissions, including new sales which generally earn a higher commission rate compared to renewal sales. ASC 605 partner commission expense was $21.0 million for the nine months ended September 30, 2019 compared to $15.1 million for the nine months ended September 30, 2018. Outside services expenses decreased due to a reduction in our discretionary spending with external advertising and marketing agencies.

General and Administrative

	For the Nine Months Ended September 30,
	2019						2018		% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported			Without Adoption
	(dollars in thousands)
General and administrative	$	53,764	$	—	$	53,764	$	28,787		87	%		87	%

General and administrative expenses for the nine months ended September 30, 2019 increased $25.0 million, or 87%, compared to the nine months ended September 30, 2018. The increase was due primarily to an increase of $18.4 million in employee-related costs, a $4.8 million increase in outside service expenses, a $1.0 million increase in merchant fees, and a $0.7 million increase in insurance costs.  

General and administrative headcount increased 46% from September 30, 2018 to September 30, 2019. Employee-related costs increased due primarily to a $8.2 million increase in stock-based compensation expense, a $6.9 million increase in salaries and benefits, a $2.4 million increase in compensation expense related to our bonus plans, and a $0.5 million increase in travel costs. Outside services expenses increased due primarily to increased legal costs related to defending a patent infringement lawsuit, as a result of being a public company, and due to higher audit and internal control compliance costs. Merchant fees, which are credit card processing fees, increased due to increased payment activity from customers transitioning to our auto-payment program. Insurance costs have increased from the prior period as a result of being a public company for all of 2019.

Total Other (Income) Expense, Net

	For the Nine Months Ended September 30,
	2019								2018			$ Change
	As Reported (ASC 606)			Impacts from Adoption		Without Adoption (ASC 605)			As Reported (ASC 605)			As Reported			Without Adoption
	(dollars in thousands)
Other (income) expense, net
Interest income	$	(4,251	)	$	—	$	(4,251	)	$	(811	)	$	(3,440	)	$	(3,440	)
Interest expense		286			—		286			2,495			(2,209	)		(2,209	)
Other (income) expense, net		694			—		694			(423	)		1,117			1,117
Total other (income) expense, net	$	(3,271	)	$	—	$	(3,271	)	$	1,261		$	(4,532	)	$	(4,532	)

Total other income for the nine months ended September 30, 2019 was $3.3 million compared to $1.3 million of other expense for the nine months ended September 30, 2018. Interest income increased due to interest earned on investing our public offering cash proceeds. Interest expense decreased due to having no outstanding borrowings during the first nine months of 2019. We discuss borrowings under “Liquidity and Capital Resources” below. Other (income) expense, net changed to $0.7 million other expense in the first nine months of 2019 from $0.4 million of other income in the first nine months of 2018, primarily due to our earnout liabilities. We estimate the fair value of earnout liabilities related to business combinations quarterly. During the first nine months of 2019, the adjustments to fair value increased the carrying value of the earnout liabilities for our Compli and Indix acquisitions, resulting in other expense of $0.6 million. During the first nine months of 2018, the adjustments to fair value decreased the carrying value of the earnout liabilities for prior acquisitions, resulting in other income of $0.4 million.

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Provision for (Benefit from) Income Taxes

	For the Nine Months Ended September 30,
	2019						2018			% Change
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)			As Reported			Without Adoption
	(dollars in thousands)
Provision for (benefit from) income taxes	$	629	$	—	$	629	$	(825	)		-176	%		-176	%

The provision for income taxes for the nine months ended September 30, 2019 was $0.6 million compared to a benefit from income taxes of $0.8 million for the nine months ended September 30, 2018. The effective income tax rate was 1.8% for the nine months ended September 30, 2019 compared to a benefit of 1.4% for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, the income tax expense related primarily to foreign tax jurisdictions. The income tax benefit for the nine months ended September 30, 2018 was due primarily to the determination that indefinite lived goodwill would provide a source of income to realize indefinite lived deferred tax assets, resulting in a tax benefit of $0.9 million.

We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating U.S. tax losses, including in the first nine months of 2019. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development. We expect to maintain a full valuation allowance for the foreseeable future.

Liquidity and Capital Resources

We require cash to fund our operations, including outlays for infrastructure growth, acquisitions, geographic expansion, expanding our sales and marketing activities, research and development efforts, and working capital for our growth. To date, we have financed our operations primarily through cash received from customers for our solutions, private placements, public offerings of our common stock, and bank borrowings. In June 2019, we completed a public offering of our common stock, in which we sold 4,133,984 shares at a price of $69.40 per share, including the full exercise of the underwriters’ option to purchase 539,215 additional shares. We received net proceeds of $274.7 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid of $1.2 million. In June 2018, we completed an initial public offering (“IPO”) of our common stock, in which we sold 8,625,000 shares at $24.00 per share, including the full exercise of the underwriters’ option to purchase 1,125,000 additional shares. We received net proceeds of $192.5 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid of $3.4 million. As of September 30, 2019, we had $446.6million of cash and cash equivalents, most of which was held in money market accounts.  

Borrowings

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

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

Future Cash Requirements

As of September 30, 2019, our cash and cash equivalents included proceeds from our June 2019 and our June 2018 public offerings of common stock. We intend to continue to increase our operating expenses and capital expenditures to support the growth in our business and operations. We may also use our cash and cash equivalents to acquire complementary businesses, products, services, technologies, or other assets. We believe that our existing cash and cash equivalents of $446.6 million as of September 30, 2019, together with cash generated from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our financial position and liquidity are, and will be, influenced by a variety of factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing spending, the introduction of new and enhanced solutions, the cash paid for any acquisitions, and the continued market acceptance of our solutions.

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

	For the Nine Months Ended September 30,
	2019			2018
	(in thousands)
Cash (used in) provided by:
Operating Activities	$	5,431		$	(10,098	)
Investing Activities		(41,631	)		(15,863	)
Financing Activities		340,454			149,794

Operating Activities

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

For the nine months ended September 30, 2019, cash provided by operating activities was $5.4 million compared to $10.1 million cash used for the nine months ended September 30, 2018. The improvement in cash from operations of $15.5 million was due primarily to an increase in cash collected from customers as demand for our subscription services continued to grow, partially offset by increasing costs to support this growth. Additionally, during the first nine months of 2019, we earned and received interest income on a portion of the cash proceeds from our June 2018 and our June 2019 public offerings of our common stock, while during the first nine months of 2018, we accrued and paid interest expense on our outstanding borrowings.

Investing Activities

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

For the nine months ended September 30, 2019, cash used in investing activities was $41.6 million, compared to cash used of $15.9 million for the nine months ended September 30, 2018. The increase in cash used of $25.8 million was due primarily to cash paid for acquisitions of $30.3 million, and an increase in customer fund assets of $4.0 million compared to a decrease of $2.0 million in the prior period, partially offset by lower cash paid for purchases of intangible assets of $4.9 million and lower capital expenditures of $5.7 million. In the first nine months of 2019, we acquired substantially all the assets of Compli, Indix, and Portway for total cash consideration of $30.3 million. In the first nine months of 2018, we acquired developed technology to facilitate cross-border transactions (e.g. duties and tariffs). Capital expenditures decreased due primarily to spending related to our new corporate headquarters in Seattle, Washington and our Durham, North Carolina office during the first nine months of 2018. Our Seattle headquarters opened in the first quarter of 2018.

Financing Activities

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

For the nine months ended September 30, 2019, cash provided by financing activities was $340.5 million compared to cash provided of $149.8 million for the nine months ended September 30, 2018. This increase in cash provided of $190.7 million was due primarily to increased cash proceeds from offerings of our common stock of $82.2 million, a $45.8 million increase in cash proceeds from exercise of stock options, $12.3 million of cash proceeds from common stock purchased under our employee stock purchase plan, and a $4.0 million increase in customer fund obligations in the first nine months of 2019 compared to a $2.0 million decrease in customer fund obligations in the prior period. We also had net repayments on our Credit Facility of $40.0 million in the first nine months of 2018 with no comparable activity in 2019.          

Funds Held from Customers and Customer Fund Obligations

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

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

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

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

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

Contractual Obligations and Commitments

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

Off-Balance Sheet Arrangements

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

Use and Reconciliation of Non-GAAP Financial Measures

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

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

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

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

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

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

Management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance and liquidity. In addition, because we recognize subscription revenue ratably over the subscription term, management uses calculated billings to measure our subscription sales activity for a particular period, to compare subscription sales activity across particular periods, and as an indicator of future subscription revenue, the actual timing of which will be affected by several factors, including subscription start date and duration. We believe that non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results, prospects, and liquidity period-over-period without the impact of certain items that do not directly correlate to our performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as comparing our financial results to those of other companies. Our definitions of these non-GAAP financial measures may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

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We encourage investors and others to review our financial information inits entirety, not to rely on any single financial measure and to view non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP sales and marketing expense, non-GAAP general and administrative expense,non-GAAP operating loss, non-GAAP net loss, freecash flow, and calculated billings in conjunction with the related GAAP financial measure.

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

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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,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Reconciliation of Non-GAAP Cost of Revenue:
Cost of revenue	$	29,778		$	—		$	29,778		$	20,236
Stock-based compensation expense		(828	)		—			(828	)		(508	)
Amortization of acquired intangibles		(1,235	)		—			(1,235	)		(1,121	)
Non-GAAP Cost of Revenue	$	27,715		$	—		$	27,715		$	18,607
Reconciliation of Non-GAAP Gross Profit:
Gross Profit	$	68,747		$	22		$	68,769		$	49,683
Stock-based compensation expense		828			—			828			508
Amortization of acquired intangibles		1,235			—			1,235			1,121
Non-GAAP Gross Profit	$	70,810		$	22		$	70,832		$	51,312
Reconciliation of Non-GAAP Gross Margin:
Gross margin		70	%		0	%		70	%		71	%
Stock-based compensation expense as a percentage of revenue		1	%		0	%		1	%		1	%
Amortization of acquired intangibles as a percentage of revenue		1	%		0	%		1	%		2	%
Non-GAAP Gross Margin		72	%		0	%		72	%		73	%
Reconciliation of Non-GAAP Research and Development Expense:
Research and development	$	21,871		$	—		$	21,871		$	13,285
Stock-based compensation expense		(1,781	)		—			(1,781	)		(906	)
Amortization of acquired intangibles		—			—			—			—
Non-GAAP Research and Development Expense	$	20,090		$	—		$	20,090		$	12,379
Reconciliation of Non-GAAP Sales and Marketing Expense:
Sales and marketing	$	40,313		$	4,789		$	45,102		$	41,276
Stock-based compensation expense		(2,135	)		—			(2,135	)		(1,589	)
Amortization of acquired intangibles		(605	)		—			(605	)		(474	)
Non-GAAP Sales and Marketing Expense	$	37,573		$	4,789		$	42,362		$	39,213
Reconciliation of Non-GAAP General and Administrative Expense:
General and administrative	$	20,511		$	—		$	20,511		$	10,235
Stock-based compensation expense		(5,178	)		—			(5,178	)		(1,334	)
Amortization of acquired intangibles		(4	)		—			(4	)		—
Non-GAAP General and Administrative Expense	$	15,329		$	—		$	15,329		$	8,901
Reconciliation of Non-GAAP Operating Loss:
Operating loss	$	(13,948	)	$	(4,767	)	$	(18,715	)	$	(24,287	)
Stock-based compensation expense		9,922			—			9,922			4,337
Amortization of acquired intangibles		1,844			—			1,844			1,595
Goodwill impairment		—			—			—			9,174
Non-GAAP Operating Loss	$	(2,182	)	$	(4,767	)	$	(6,949	)	$	(9,181	)
Reconciliation of Non-GAAP Net Loss:
Net loss	$	(12,354	)	$	(4,767	)	$	(17,121	)	$	(24,103	)
Stock-based compensation expense		9,922			—			9,922			4,337
Amortization of acquired intangibles		1,844			—			1,844			1,595
Goodwill impairment		—			—			—			9,174
Non-GAAP Net Loss	$	(588	)	$	(4,767	)	$	(5,355	)	$	(8,997	)
Free Cash Flow:
Net cash (used in) provided by operating activities	$	5,852		$	—		$	5,852		$	1,178
Purchases of property and equipment		(2,246	)		—			(2,246	)		(4,745	)
Free Cash Flow	$	3,606		$	—		$	3,606		$	(3,567	)

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	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Reconciliation of Non-GAAP Cost of Revenue:
Cost of revenue	$	82,420		$	—		$	82,420		$	56,377
Stock-based compensation expense		(2,277	)		—			(2,277	)		(1,181	)
Amortization of acquired intangibles		(3,635	)		—			(3,635	)		(2,906	)
Non-GAAP Cost of Revenue	$	76,508		$	—		$	76,508		$	52,290
Reconciliation of Non-GAAP Gross Profit:
Gross Profit	$	192,374		$	540		$	192,914		$	138,798
Stock-based compensation expense		2,277			—			2,277			1,181
Amortization of acquired intangibles		3,635			—			3,635			2,906
Non-GAAP Gross Profit	$	198,286		$	540		$	198,826		$	142,885
Reconciliation of Non-GAAP Gross Margin:
Gross margin		70	%		0	%		70	%		71	%
Stock-based compensation expense as a percentage of revenue		1	%		0	%		1	%		1	%
Amortization of acquired intangibles as a percentage of revenue		1	%		0	%		1	%		1	%
Non-GAAP Gross Margin		72	%		0	%		72	%		73	%
Reconciliation of Non-GAAP Research and Development Expense:
Research and development	$	56,823		$	—		$	56,823		$	38,332
Stock-based compensation expense		(4,700	)		—			(4,700	)		(2,271	)
Amortization of acquired intangibles		—			—			—			—
Non-GAAP Research and Development Expense	$	52,123		$	—		$	52,123		$	36,061
Reconciliation of Non-GAAP Sales and Marketing Expense:
Sales and marketing	$	119,199		$	16,340		$	135,539		$	119,187
Stock-based compensation expense		(6,411	)		—			(6,411	)		(3,674	)
Amortization of acquired intangibles		(1,653	)		—			(1,653	)		(1,483	)
Non-GAAP Sales and Marketing Expense	$	111,135		$	16,340		$	127,475		$	114,030
Reconciliation of Non-GAAP General and Administrative Expense:
General and administrative	$	53,764		$	—		$	53,764		$	28,787
Stock-based compensation expense		(12,518	)		—			(12,518	)		(4,285	)
Amortization of acquired intangibles		(11	)		—			(11	)		(17	)
Non-GAAP General and Administrative Expense	$	41,235		$	—		$	41,235		$	24,485
Reconciliation of Non-GAAP Operating Loss:
Operating loss	$	(37,412	)	$	(15,800	)	$	(53,212	)	$	(56,682	)
Stock-based compensation expense		25,906			—			25,906			11,411
Amortization of acquired intangibles		5,299			—			5,299			4,406
Goodwill impairment		—			—			—			9,174
Non-GAAP Operating Loss	$	(6,207	)	$	(15,800	)	$	(22,007	)	$	(31,691	)
Reconciliation of Non-GAAP Net Loss:
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Stock-based compensation expense		25,906			—			25,906			11,411
Amortization of acquired intangibles		5,299			—			5,299			4,406
Goodwill impairment		—			—			—			9,174
Non-GAAP Net Loss	$	(3,565	)	$	(15,800	)	$	(19,365	)	$	(32,127	)
Free Cash Flow:
Net cash (used in) provided by operating activities	$	5,431		$	—		$	5,431		$	(10,098	)
Purchases of property and equipment		(7,196	)		—			(7,196	)		(12,914	)
Free Cash Flow	$	(1,765	)	$	—		$	(1,765	)	$	(23,012	)

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

	Three Months Ended
	Sep 30, 2019			Jun 30, 2019			Mar 31, 2019			Dec 31, 2018			Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017
Total revenue	$	98,525		$	91,299		$	84,970		$	76,923		$	69,919		$	63,879		$	61,377		$	58,035
Add:
Deferred revenue (end of    period)		148,466			138,811			132,714			134,653			118,209			109,344			103,878			92,231
Contract liabilities (end of    period)		4,843			4,508			4,208			—			—			—			—			—
Impact of adoption of ASC 606    on deferred revenue		—			—			11,250			—			—			—			—			—
Less:
Deferred revenue (beginning of    period)		(138,811	)		(132,714	)		(134,653	)		(118,209	)		(109,344	)		(103,878	)		(92,231	)		(84,637	)
Contract liabilities (beginning    of period)		(4,508	)		(4,208	)		—			—			—			—			—			—
Impact of adoption of ASC 606    on contract liabilities		—			—			(2,090	)		—			—			—			—			—
Calculated billings	$	108,515		$	97,696		$	96,399		$	93,367		$	78,784		$	69,345		$	73,024		$	65,629

Critical Accounting Policies and Estimates

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

Recent Accounting Pronouncements

For further information on recent accounting pronouncements, refer to Note 2 in the consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We had cash and cash equivalents of $446.6 million and $142.3 million as of September 30, 2019 and December 31, 2018, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with financial institutions. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.

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

Foreign Currency Exchange Risk

Our revenue and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the Euro, British Pound, and Brazilian Real. Decreases in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenue and other operating results as expressed in U.S. dollars. For the three months ended September 30, 2019 and 2018, approximately 6% of our revenues were generated in currencies other than U.S. dollars. For the nine months ended September 30, 2019 and 2018, approximately 6% of our revenues were generated in currencies other than U.S. dollars.

55

We have experienced and will continue to experience fluctuations in our net loss as a result oftransaction gains or losses related to revaluing certain current asset and current liability balances thatare denominated in currencies other than the functional currency of the entities in which they arerecorded. We recognized immaterial amounts of foreign currency gains and losses in each of theperiods 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 theU.S. dollar as we expand our international operations and our riskgrows.

Inflation

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act as of September 30, 2019.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.

Changes in Internal Control over Financial Reporting

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

Inherent Limitations on Effectiveness of Controls

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

56

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be subject to legal proceedings arising in the ordinary course of business. In addition, from time to time, third parties may assert intellectual property infringement claims against us in the form of letters and other forms of communication. Regardless of the outcome of any existing or future litigation, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

On October 22, 2018, PTP OneClick, LLC (“PTP”) filed a lawsuit against Avalara, Inc. in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges that making, using, offering to sell, and selling AvaTax, Avalara Returns, and TrustFile (the “Avalara Products”) infringe U.S. Patent No. 9,760,915 held by PTP and also alleges unspecified trade secret misappropriation, unfair competition, and breach of contract. PTP seeks judgments of willful patent infringement, willful trade secret misappropriation, unfair competition, and breach of contract. PTP requests preliminary and permanent injunctions to enjoin us from making, using, offering to sell, and selling the Avalara Products along with treble damages and attorneys’ fees. Based upon our review of the complaint and the specified patent, we believe we have meritorious defenses to PTP’s claims. On November 7, 2018, we moved to dismiss the lawsuit and to have the patent held invalid, and also have moved to transfer the matter to the United States District Court located in Seattle, Washington. On April 30, 2019, the United States District Court for the Eastern District of Wisconsin granted our motion to transfer, reserving resolution of the motion to dismiss for the United States District Court for the Western District of Washington. On October 7, 2019, the United States District Court for the Western District of Washington invalidated the patent and dismissed the patent and unfair competition claims with prejudice but did not dismiss the trade secret misappropriation or breach of contract claims. The court has set the trial date for October 26, 2020. We intend to continue to vigorously defend against PTP’s allegations. For a description of the risks of this and similar litigation, see “Risk Factors—Our ability to protect our intellectual property is limited and our solutions are, and may in the future be, subject to claims of infringement by third parties” in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on February 28, 2019.

Item 1A. Risk Factors.

Other than the item discussed below, there have been no material changes to the Company’s Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 28, 2019.

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

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

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

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

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

57

Item 6. Exhibits.

Exhibit Number	Description
3.1	Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q, filed August 10, 2018 (File No. 001-38525)).
3.2	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-Q, filed August 10, 2018 (File No. 001-38525)).
10.1*+	Avalara, Inc. Outside Director Compensation Policy (amended and restated as of July 25, 2019).
31.1*	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

+ Management contract or compensatory plan.

58

SIGNATURES

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

	AVALARA, INC.
Date:  November 6, 2019	By:	/s/ William D. Ingram
		William D. Ingram
		Chief Financial Officer and Treasurer (Principal Financial Officer)

59

EX-10.1

Exhibit 10.1

AVALARA, INC.
OUTSIDE DIRECTOR COMPENSATION POLICY

(Amended and restated as of July 25, 2019)

Cash Compensation.  Under the outside director compensation policy of Avalara, Inc. (the “Company”), all non-employee directors will be entitled to receive the following cash compensation, which shall be paid in arrears in equal quarterly installments for services rendered during each quarter of the calendar year and shall be due and payable as soon as practicable after the first day of the quarter immediately following the quarter in which such services are rendered (i.e., as soon as practicable after January 1, April 1, July 1 and October 1) and pro-rated to reflect the actual number of days served during such quarter:

Retainer	Amount
Board of Directors	$ 32,000
Chair of Committee:
Audit	20,000
Compensation and Leadership Development	11,000
Nominating and Corporate Governance	7,500
Committee member:
Audit	7,500
Compensation and Leadership Development	5,000
Nominating and Corporate Governance	3,500
Lead independent director	15,000

Equity Compensation.  Under the outside director compensation policy, on the date of each annual meeting of the Company’s shareholders, beginning with the 2019 annual meeting of shareholders, each non‑employee director who is a continuing director following the meeting automatically will be granted an equity award having a value of $150,000 (the “annual award”).  

The annual award will be comprised of stock options and restricted stock units (“RSUs”) granted under the Company’s 2018 Equity Incentive Plan, as may be amended and restated from time to time (the “2018 Plan”), each having a grant date fair value of approximately 50% of the aggregate value of the annual award (with any resulting fractional shares rounded down to the nearest whole share). The grant date fair value of the stock options and RSUs will be calculated in accordance with ASC Topic 718 (based on the valuation methodology then used by the Company to value stock options and RSUs for financial reporting purposes). Each annual award will fully vest and become exercisable or payable, as applicable, upon the earlier of the one-year anniversary of the grant date or the day prior to the Company’s next annual meeting of shareholders occurring after the grant date (the “vesting date”), in each case subject to the individual’s continued service through the vesting date, except as permitted below. Each annual award will fully vest and become exercisable or payable, as applicable, upon a change in control, as defined in the 2018 Plan.

The per share exercise price for stock options will be equal to the closing price of the Company’s common stock on the grant date (or if the common stock is not trading on that date, the closing price on the last preceding date on which the common stock was traded). Each stock option will expire ten years from the grant date, subject to earlier termination as set forth in the 2018 Plan upon a termination of service.

For annual awards made on or after the 2019 annual meeting of shareholders, in the event a non‑employee director’s service terminates for any reason other than for cause, as defined in the 2018 Plan, prior to the vesting date of an annual award and the non-employee director has served less than five continuous years as a director, the annual award will become vested as to a pro rata portion based on the number of full months of service that has elapsed between the grant date of the annual award and the director’s termination date. In the event a non-employee director’s service terminates for any reason other than for cause on or after five years of continuous service, the annual award will become fully vested. In the event of such termination, the vested portion of the annual RSUs will be payable as soon as practicable on or following the vesting date for the annual awards that next follows the non-employee director’s termination (but in any event within 75 days of the vesting date). In the event of termination for cause, no portion of the annual award will accelerate in vesting.

In the event that a non‑employee director is initially elected or appointed on any date other than the date of an annual meeting of shareholders, the director will, instead, automatically receive the annual award on the date of initial election or appointment, except that the value of the award will be prorated to reflect the number of days that the director will serve based on a period of time commencing on the date of initial election or appointment and ending on the one-year anniversary of the previous annual meeting (the “prorated annual award”).  In all other respects, the terms and conditions of the prorated annual award, including the vesting schedule, will be the same as the annual award granted on the previous year’s annual meeting date.

-2-

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott McFarlane, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Avalara, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 6, 2019	By:	/s/ Scott McFarlane
		Scott McFarlane
		Chairman and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William D. Ingram, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Avalara, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 6, 2019	By:	/s/ William D. Ingram
		William D. Ingram Chief Financial Officer and Treasurer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Avalara, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 6, 2019	By:	/s/ Scott McFarlane
		Scott McFarlane Chairman and Chief Executive Officer
		(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Avalara, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 6, 2019	By:	/s/ William D. Ingram
		William D. Ingram Chief Financial Officer and Treasurer
		(Principal Financial Officer)

XML

Acquisitions of Businesses (Tables)

9 Months Ended

Sep. 30, 2019

Compli, Inc.

Business Acquisition [Line Items]

Schedule of Estimated Fair Value of Assets Acquired and Liabilities Assumed

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

Assets acquired:
Current assets	$	505
Developed technology, customer relationships, and other intangibles		4,288
Goodwill		12,807
Total assets acquired		17,600
Liabilities assumed:
Current liabilities		482
Total liabilities assumed		482
Net assets acquired	$	17,118

Summary of Valuation Methodologies, Significant Assumptions and Estimated Useful Lives

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	3,250	Multi-period excess earnings-income approach		13	%	6 years
Trademarks and trade names		32	Relief from royalty- income approach		13	%	2 years
Developed technology and    customer database		910	Relief from royalty- income approach		13	%	6 years
Noncompetition agreements		96	With-and-without valuation- income approach		13	%	3 years

Indix Corporation

Business Acquisition [Line Items]

Schedule of Estimated Fair Value of Assets Acquired and Liabilities Assumed

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

Assets acquired:
Current assets	$	94
Developed technology		4,472
Goodwill		4,953
Total assets acquired		9,519
Liabilities assumed:
Current liabilities		392
Total liabilities assumed		392
Net assets acquired	$	9,127

Summary of Valuation Methodologies, Significant Assumptions and Estimated Useful Lives

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate	Estimated Useful Life
Developed technology	$	4,472	Relief from royalty- income approach	24.5%	6 years

Portway International, Inc

Business Acquisition [Line Items]

Schedule of Estimated Fair Value of Assets Acquired and Liabilities Assumed

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

Assets acquired:
Property and equipment	$	76
Customer relationships and other intangibles		1,865
Goodwill		22,376
Total assets acquired		24,317
Liabilities assumed:
Total liabilities assumed		—
Net assets acquired	$	24,317

Summary of Valuation Methodologies, Significant Assumptions and Estimated Useful Lives

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	1,759	Multi-period excess earnings-income approach		12	%	6 years
Noncompetition agreements		106	With-and-without valuation- income approach		12	%	4 years

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Jan. 01, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 446,563				$ 142,322	$ 138,093			$ 14,075
Trade accounts receivable—net of allowance for doubtful accounts of $632 and $521, respectively	49,124			$ 39,482	40,287
Deferred commissions	8,402			4,464	0
Prepaid expenses and other current assets	13,856				11,307
Total current assets before customer fund assets	517,945				193,916
Funds held from customers	16,665				13,113
Receivable from customers—net of allowance of $293 and $198, respectively	690				270
Total current assets	535,300				207,299
Noncurrent assets:
Property and equipment—net	34,537				33,373
Goodwill	100,926				61,300
Intangible assets—net	24,543				19,371
Deferred commissions	27,206			14,803	0
Other noncurrent assets	2,420				1,589
Total assets	724,932				322,932
Current liabilities:
Trade payables	10,962				4,847
Accrued expenses	49,864			44,191	42,101
Accrued earnout liabilities	6,102				116
Deferred revenue	147,713			122,103	125,260
Total current liabilities before customer fund obligations	214,641				172,324
Customer fund obligations	17,306				13,349
Total current liabilities	231,947				185,673
Noncurrent liabilities:
Deferred revenue	753			1,300	9,393
Deferred tax liability	698				560
Deferred rent	15,905				17,317
Accrued earnout liabilities	9,399				0
Other noncurrent liabilities	2,361				436
Total liabilities	261,063				213,379
Commitments and contingencies	0				0
Shareholders' equity:
Preferred stock, $0.0001 par value– no shares issued and outstanding at September 30, 2019 and December 31, 2018, and 20,000 shares authorized as of September 30, 2019 and December 31, 2018	0				0
Common stock, $0.0001 par value– 76,889 and 66,769 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively, and 600,000 shares authorized as of September 30, 2019 and December 31, 2018	8				7
Additional paid-in capital	961,733				599,493
Accumulated other comprehensive loss	(3,122)				(2,345)
Accumulated deficit	(494,750)			$ (459,980)	(487,602)
Total shareholders’ equity	463,869	$ 452,128	$ 168,973		109,553	$ 122,249	$ 142,154	$ (407,163)	$ (393,592)
Total liabilities and shareholders' equity	$ 724,932				$ 322,932

XML

Consolidated Statements of Cash Flows - USD ($)	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities:
Net loss	$ (34,770,000)	$ (57,118,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	11,684,000	9,390,000
Goodwill impairment	0	9,174,000
Stock-based compensation	25,906,000	11,411,000
Deferred tax expense (benefit)	138,000	(1,110,000)
Amortization of deferred rent	(778,000)	231,000
Non-cash change in earnout liability	610,000	(430,000)
Non-cash bad debt expense (recovery)	602,000	(382,000)
Other	227,000	526,000
Changes in operating assets and liabilities:
Trade accounts receivable	(9,648,000)	(7,852,000)
Prepaid expenses and other current assets	(3,274,000)	(2,688,000)
Deferred commissions	(16,340,000)	0
Other noncurrent assets	(831,000)	(549,000)
Trade payables	4,818,000	(3,353,000)
Accrued expenses	2,305,000	6,095,000
Deferred rent (lease incentives)	0	579,000
Deferred revenue	24,782,000	25,978,000
Net cash provided by (used in) operating activities	5,431,000	(10,098,000)
Cash flows from investing activities:
Net (increase) decrease in customer fund assets	(3,986,000)	2,053,000
Cash paid for acquired intangible assets	(139,000)	(5,002,000)
Cash paid for acquisitions of businesses	(30,310,000)	0
Purchase of property and equipment	(7,196,000)	(12,914,000)
Net cash used in investing activities	(41,631,000)	(15,863,000)
Cash flows from financing activities:
Proceeds from common stock offering, net of underwriting discounts	274,705,000	192,510,000
Payments of deferred financing costs	(555,000)	(2,084,000)
Payments on credit facility	0	(63,000,000)
Proceeds from credit facility	0	23,000,000
Repayment of note payable	0	(234,000)
Net increase (decrease) in customer fund obligations	3,986,000	(2,053,000)
Proceeds from exercise of stock options and common stock warrants	51,583,000	5,787,000
Proceeds from purchases of stock under employee stock purchase plan	12,293,000	0
Taxes paid related to net share settlement of stock-based awards	(1,183,000)	(2,326,000)
Repurchase of shares	0	(1,806,000)
Payment related to business combination earnouts	(375,000)	0
Net cash provided by financing activities	340,454,000	149,794,000
Foreign currency effect on cash and cash equivalents	(13,000)	185,000
Net change in cash and cash equivalents	304,241,000	124,018,000
Cash and cash equivalents—Beginning of period	142,322,000	14,075,000
Cash and cash equivalents—End of period	446,563,000	138,093,000
Supplemental cash flow disclosures:
Cash paid for interest expense	122,000	2,367,000
Cash paid for income taxes	417,000	314,000
Non-cash investing and financing activities:
Accrued purchase price related to acquisitions	4,902,000	0
Accrued value of earnout related to acquisitions of businesses	15,351,000	0
Property and equipment purchased under tenant improvement allowance	0	1,062,000
Property and equipment additions in accounts payable and accrued expenses	914,000	607,000
Deferred financing costs in accounts payable and accrued expenses	0	298,000
Fair value of common stock issued or issuable to purchase intangible assets	98,000	2,555,000
Cashless exercises of options and warrants	5,000	9,214,000
Cashless redemptions of options and warrants	$ 98,000	$ 11,541,000

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Interim Financial Information

Interim Financial Information

The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019. The accompanying interim consolidated balance sheet as of September 30, 2019, the consolidated interim statements of operations for the three and nine months ended September 30, 2019 and 2018, the consolidated statements of comprehensive loss for the three and nine months ended September 30, 2019 and 2018, and the consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full year ending December 31, 2019.

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

Principles of Consolidation

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

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

Use of Estimates

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

Fair Value Measurements

Fair Value Measurements

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

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

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

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

The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, trade accounts receivable, trade payables, and accrued expenses due to their short-term nature.

Long-Lived Assets

Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. An impairment is recognized in the event the carrying value of such assets is not recoverable. If the carrying value is not recoverable, the fair value is determined, and an impairment is recognized for the amount by which the carrying value exceeds the fair value. No impairment of long-lived assets occurred in the first nine months of 2019.

Self-Insurance

Self-Insurance

Beginning August 1, 2019, the Company established a self-insured healthcare plan for eligible U.S. employees. Under the plan, the Company pays healthcare claims and fees to the plan administrator. Total claim payments are limited by stop loss insurance policies. As there generally is a lag between the time a claim is incurred by a participant and the time the claim is submitted for payment, the Company has recorded a self-insurance reserve for estimated outstanding claims within accrued expenses in the consolidated balance sheets.

Income Taxes

Income Taxes

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

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

Stock-Based Compensation

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option, common stock warrant, restricted stock unit (“RSU”), or purchase right issued under the employee stock purchase plan at the date of grant. The fair value of stock options, common stock warrants, and purchase rights issued under the employee stock purchase plan is estimated by applying the Black-Scholes option-pricing model. This model uses the fair value of the Company’s underlying common stock at the measurement date, the expected or contractual term of the option, warrant or purchase right, the expected volatility of its common stock, risk-free interest rates, and expected dividend yield of its common stock. The fair value of an RSU is determined using the fair value of the Company’s underlying common stock on the date of grant.

Reclassifications

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation. Interest income on funds held from customers of $0.4 million and $0.6 million for the three months and nine months ended September 30, 2018 were reclassified from interest income within total other (income) expense, net to subscription and returns revenue in the accompanying consolidated statements of operations.  

Revenue Recognition - ASC 606

Revenue Recognition – ASC 606

The Company primarily generates revenue from fees paid for subscriptions to tax compliance solutions and fees paid for services performed in preparing and filing tax returns on behalf of its customers. Amounts that have been invoiced are recorded in trade accounts receivable and deferred revenue, contract liabilities, or revenue, depending upon whether the revenue recognition criteria have been met. Revenue is recognized once the customer is provisioned and services are provided in an amount that reflects the consideration expected to be entitled to in exchange for those services. The Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers.

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

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

•Identification of the performance obligations in the contract;

•Determination of the transaction price;

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

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

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

Contract payment terms are typically net 30 days. Collectability is assessed based on a number of factors including collection history and creditworthiness of the customer, and the Company may mitigate 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.

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

Subscription and Returns Revenue

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

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

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

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

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

Professional Services Revenue

The Company bills for professional service arrangements on a fixed fee, milestone, or time and materials basis. Professional services revenue includes fees from providing tax analysis, configurations, data migrations, integration, training, and other support services. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.

Judgments and Estimates

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

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. The Company allocates revenue to each performance obligation based on the relative SSP. The Company determines SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices, market conditions and entity-specific factors. This includes a review of historical data related to the services being sold and customer demographics. The Company uses a range of amounts to estimate SSP for performance obligations. There is typically more than one SSP for individual services due to the stratification of those services by information, such as size and type of customer.

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

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

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

Recently Adopted Accounting Standard

Recently Adopted Accounting Standards

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

ASU No. 2014-09

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

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

	Balance at December 31, 2018			Adjustments due to ASC 606			Balance at January 1, 2019
Assets
Trade accounts receivable	$	40,287		$	(805	)	$	39,482
Deferred commissions, current		—			4,464			4,464
Deferred commissions, noncurrent		—			14,803			14,803
Liabilities and shareholders' equity
Accrued expenses		42,101			2,090			44,191
Deferred revenue, current		125,260			(3,157	)		122,103
Deferred revenue, noncurrent		9,393			(8,093	)		1,300
Accumulated deficit		(487,602	)		27,622			(459,980	)

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

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

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

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

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

ASU No. 2016-15

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

ASU No. 2018-07

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

New Accounting Standards Not Yet Adopted

New Accounting Standards Not Yet Adopted

ASU No. 2016-02

In February 2016, the FASB issued ASU No. 2016-02, which was subsequently amended in July 2018 by ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Targeted Improvements - Leases (Topic 842)” which is codified as ASC 842 (“ASC 842”). ASC 842 requires lessees to generally recognize most operating leases on the balance sheets but record expenses on the income statements in a manner similar to current accounting standards.

The Company will adopt ASC 842 using the alternative transition method provided in ASU 2018-11, which does not require adjusting comparative period financial information. The Company expects to elect the package of practical expedients permitted under the transition guidance which allows the carry forward of the historical lease identification, lease classification and initial direct costs of existing leases. In addition, the Company expects to elect the practical expedient to not separate lease and nonlease components. Further, the Company made an accounting policy election to adopt the short-term lease exception, which allows the Company to not record leases with an initial term of 12 months or less on the balance sheet.

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. The Company expects the impact of adoption of ASC 842 will result in a material increase in noncurrent assets and noncurrent liabilities in the consolidated balance sheets.   

As an EGC, the Company has elected to use adoption dates applicable to private companies. The new standard is effective for private companies in 2020. However, the Company will lose its EGC status on December 31, 2019. Accordingly, the Company will adopt the guidance in ASC 842 as of January 1, 2019 in the Company’s Annual Report on Form 10-K for the year ending December 31, 2019.

ASU No. 2016-13

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

ASU No. 2018-15

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

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Equity Incentive Plans (Tables)

9 Months Ended

Sep. 30, 2019

Summary of Stock-Based Compensation Expense Related to Equity Incentive Rewards

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,
	2019		2018		2019		2018
Stock-based compensation cost:
Common stock warrants	$	—	$	—	$	—	$	512
Stock options		4,436		3,387		12,549		9,963
Restricted stock units		4,705		2		10,954		2
Employee stock purchase plan		792		955		2,440		955
Total stock-based compensation cost	$	9,933	$	4,344	$	25,943	$	11,432

Summary of Stock Option Activity

Stock Options

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

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Shares			Price		Life (Years)		(in thousands)
Options outstanding as of December 31, 2018		11,094,070		$	12.17		6.81	$	210,523
Options granted		944,966			43.95
Options exercised		(5,418,158	)		9.52
Options cancelled or expired		(211,101	)		16.35
Options outstanding as of September 30, 2019		6,409,777			18.96		7.33		309,772
Options exercisable as of September 30, 2019		3,055,619		$	12.52		6.19	$	167,363

Summary of Options Outstanding and Vested by Range of Exercise Prices

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

	Options Outstanding				Options Vested and Exercisable
Exercise	Number		Weighted Average		Number Vested		Weighted Average
Prices	Outstanding		Life (in Years)		and Exercisable		Life (in Years)
$1.50 to $1.90		73,538		1.5		73,538		1.5
2.86 to 6.40		244,573		3.2		244,573		3.2
8.04 to 11.72		556,154		4.4		556,154		4.4
12.20 to 15.06		2,529,948		6.9		1,611,280		6.7
16.06 to 24.00		1,889,042		8.4		516,733		8.3
31.99 to 42.21		890,107		9.2		39,056		8.9
55.10 to 72.67		226,415		9.3		14,285		8.6
		6,409,777				3,055,619

Summary of Fair Value Estimated Using Black-Scholes Option Pricing Model Assumptions

For the options granted during the periods presented, the fair value of options was estimated using the Black-Scholes option-pricing model with the following assumptions:

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2019		2018	2019	2018
Fair market value of common stock		—	$38.59 - 42.21	$39.76 - 72.67	$16.86 - 42.21
Volatility		—	40%	40%	40%
Expected term		—	6 years	5-6 years	6 years
Expected dividend yield		—	n/a	n/a	n/a
Risk-free interest rate		—	2.92% - 3.06%	1.77% - 2.65%	2.55% - 3.06%

Summary of RSU Activity

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

				Weighted
				Average
				Grant Date Fair
	Restricted Stock Units			Value Per Share
RSUs outstanding as of December 31, 2018		74,424		$	32.69
RSUs granted		1,412,806			49.62
RSUs vested		(37,513	)		72.30
RSUs cancelled		(65,523	)		43.05
RSUs outstanding as of September 30, 2019		1,384,194		$	48.41

2018 Employee Stock Purchase Plan

Summary of Fair Value Estimated Using Black-Scholes Option Pricing Model Assumptions

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2019	2018	2019	2018
Fair market value of common stock	$82.12	$38.18	$40.60 to $82.12	$24.00 to $38.18
Volatility	40%	40%	40%	40%
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	2.04%	2.96%	2.04% to 2.59%	2.90% to 2.96%

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Revenue - Additional Information (Details) - USD ($)	9 Months Ended
	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Deferred commissions amortization expected period	6 years
Deferred contract costs, expected to be amortized within next 12 Months	$ 8,402,000	$ 4,464,000	$ 0
Impairments of deferred contract costs	0
Assets recognized related to costs to fulfill contracts	0
Additional contractual obligations	33,400,000
Prepaid Expenses and Other Current Assets
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Deferred contract costs, expected to be amortized within next 12 Months	$ 8,400,000

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Acquisitions of Businesses - Summary Of The Valuation Methodologies Significant Assumptions, And Estimated Useful Lives Of Acquired Intangible Assets (Details) - USD ($) $ in Thousands	Jul. 31, 2019	Feb. 06, 2019	Jan. 22, 2019
Compli, Inc.
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 4,288
Compli, Inc. | Customer Relationships
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 3,250
Valuation Methodology			Multi-period excess earnings-income approach
Discount Rate			13.00%
Intangible asset, useful life			6 years
Compli, Inc. | Tradename and Trademarks
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 32
Valuation Methodology			Relief from royalty- income approach
Discount Rate			13.00%
Intangible asset, useful life			2 years
Compli, Inc. | Developed Technology
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 910
Valuation Methodology			Relief from royalty- income approach
Discount Rate			13.00%
Intangible asset, useful life			6 years
Compli, Inc. | Noncompete Agreements
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 96
Valuation Methodology			With-and-without valuation- income approach
Discount Rate			13.00%
Intangible asset, useful life			3 years
Indix Corporation
Business Acquisition [Line Items]
Intangible assets Assigned value		$ 4,472
Indix Corporation | Developed Technology
Business Acquisition [Line Items]
Intangible assets Assigned value		$ 4,472
Valuation Methodology		Relief from royalty- income approach
Discount Rate		24.50%
Intangible asset, useful life		6 years
Portway International, Inc
Business Acquisition [Line Items]
Intangible assets Assigned value	$ 1,865
Portway International, Inc | Customer Relationships
Business Acquisition [Line Items]
Intangible assets Assigned value	$ 1,759
Valuation Methodology	Multi-period excess earnings-income approach
Discount Rate	12.00%
Intangible asset, useful life	6 years
Portway International, Inc | Noncompete Agreements
Business Acquisition [Line Items]
Intangible assets Assigned value	$ 106
Valuation Methodology	With-and-without valuation- income approach
Discount Rate	12.00%
Intangible asset, useful life	4 years

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Revenue - Consolidated Statements of Cash Flows (Details) - USD ($)		3 Months Ended						9 Months Ended
	Oct. 31, 2018	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities:
Net loss		$ (12,354,000)	$ (13,173,000)	$ (9,243,000)	$ (24,103,000)	$ (17,766,000)	$ (15,249,000)	$ (34,770,000)	$ (57,118,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization								11,684,000	9,390,000
Goodwill impairment	$ 0	0			9,174,000			0	9,174,000
Stock-based compensation								25,906,000	11,411,000
Deferred tax expense (benefit)								138,000	(1,110,000)
Amortization of deferred rent								(778,000)	231,000
Non-cash change in earnout liability								610,000	(430,000)
Non-cash bad debt expense (recovery)								602,000	(382,000)
Other								227,000	526,000
Changes in operating assets and liabilities:
Trade accounts receivable								(9,648,000)	(7,852,000)
Prepaid expenses and other current assets								(3,274,000)	(2,688,000)
Deferred commissions								(16,340,000)	0
Other noncurrent assets								(831,000)	(549,000)
Trade payables								4,818,000	(3,353,000)
Accrued expenses								2,305,000	6,095,000
Deferred rent (lease incentives)								0	579,000
Deferred revenue								24,782,000	25,978,000
Net cash provided by (used in) operating activities								5,431,000	(10,098,000)
Cash flows from investing activities:
Net (increase) decrease in customer fund assets								(3,986,000)	2,053,000
Cash paid for acquired intangible assets								(139,000)	(5,002,000)
Cash paid for acquisitions of businesses								(30,310,000)	0
Purchase of property and equipment								(7,196,000)	(12,914,000)
Net cash used in investing activities								(41,631,000)	(15,863,000)
Cash flows from financing activities:
Proceeds from common stock offering, net of underwriting discounts								274,705,000	192,510,000
Payments of deferred financing costs								(555,000)	(2,084,000)
Payments on credit facility								0	(63,000,000)
Proceeds from credit facility								0	23,000,000
Repayment of note payable								0	(234,000)
Net increase (decrease) in customer fund obligations								3,986,000	(2,053,000)
Proceeds from exercise of stock options and common stock warrants								51,583,000	5,787,000
Proceeds from purchases of stock under employee stock purchase plan								12,293,000	0
Taxes paid related to net share settlement of stock-based awards								(1,183,000)	(2,326,000)
Repurchase of shares								0	(1,806,000)
Payment related to business combination earnouts								(375,000)	0
Net cash provided by financing activities								340,454,000	149,794,000
Foreign currency effect on cash and cash equivalents								(13,000)	185,000
Net change in cash and cash equivalents								304,241,000	124,018,000
Cash and cash equivalents—Beginning of period				142,322,000			$ 14,075,000	142,322,000	14,075,000
Cash and cash equivalents—End of period		446,563,000			$ 138,093,000			446,563,000	$ 138,093,000
ASU 2014-09 | Difference between Revenue Guidance in Effect before and after Topic 606
Cash flows from operating activities:
Net loss		(4,767,000)						(15,800,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization								0
Goodwill impairment		0						0
Stock-based compensation								0
Deferred tax expense (benefit)								0
Amortization of deferred rent								0
Non-cash change in earnout liability								0
Non-cash bad debt expense (recovery)								0
Other								0
Changes in operating assets and liabilities:
Trade accounts receivable								(238,000)
Prepaid expenses and other current assets								0
Deferred commissions								16,340,000
Other noncurrent assets								0
Trade payables								0
Accrued expenses								(2,753,000)
Deferred rent (lease incentives)								0
Deferred revenue								2,451,000
Net cash provided by (used in) operating activities								0
Cash flows from investing activities:
Net (increase) decrease in customer fund assets								0
Cash paid for acquired intangible assets								0
Cash paid for acquisitions of businesses								0
Purchase of property and equipment								0
Net cash used in investing activities								0
Cash flows from financing activities:
Proceeds from common stock offering, net of underwriting discounts								0
Payments of deferred financing costs								0
Payments on credit facility								0
Proceeds from credit facility								0
Repayment of note payable								0
Net increase (decrease) in customer fund obligations								0
Proceeds from exercise of stock options and common stock warrants								0
Proceeds from purchases of stock under employee stock purchase plan								0
Taxes paid related to net share settlement of stock-based awards								0
Repurchase of shares								0
Payment related to business combination earnouts								0
Net cash provided by financing activities								0
Foreign currency effect on cash and cash equivalents								0
Net change in cash and cash equivalents								0
Cash and cash equivalents—Beginning of period				0				0
Cash and cash equivalents—End of period		0						0
ASU 2014-09 | Without Adoption (ASC 605)
Cash flows from operating activities:
Net loss		(17,121,000)						(50,570,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization								11,684,000
Goodwill impairment		0						0
Stock-based compensation								25,906,000
Deferred tax expense (benefit)								138,000
Amortization of deferred rent								(778,000)
Non-cash change in earnout liability								610,000
Non-cash bad debt expense (recovery)								602,000
Other								227,000
Changes in operating assets and liabilities:
Trade accounts receivable								(9,886,000)
Prepaid expenses and other current assets								(3,274,000)
Deferred commissions								0
Other noncurrent assets								(831,000)
Trade payables								4,818,000
Accrued expenses								(448,000)
Deferred rent (lease incentives)								0
Deferred revenue								27,233,000
Net cash provided by (used in) operating activities								5,431,000
Cash flows from investing activities:
Net (increase) decrease in customer fund assets								(3,986,000)
Cash paid for acquired intangible assets								(139,000)
Cash paid for acquisitions of businesses								(30,310,000)
Purchase of property and equipment								(7,196,000)
Net cash used in investing activities								(41,631,000)
Cash flows from financing activities:
Proceeds from common stock offering, net of underwriting discounts								274,705,000
Payments of deferred financing costs								(555,000)
Payments on credit facility								0
Proceeds from credit facility								0
Repayment of note payable								0
Net increase (decrease) in customer fund obligations								3,986,000
Proceeds from exercise of stock options and common stock warrants								51,583,000
Proceeds from purchases of stock under employee stock purchase plan								12,293,000
Taxes paid related to net share settlement of stock-based awards								(1,183,000)
Repurchase of shares								0
Payment related to business combination earnouts								(375,000)
Net cash provided by financing activities								340,454,000
Foreign currency effect on cash and cash equivalents								(13,000)
Net change in cash and cash equivalents								304,241,000
Cash and cash equivalents—Beginning of period				$ 142,322,000				142,322,000
Cash and cash equivalents—End of period		$ 446,563,000						$ 446,563,000

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Income Taxes - Additional Information (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Income Tax Disclosure [Abstract]
Percentage of effective income tax rate expense (benefit)	1.80%	(1.40%)
Deferred income tax benefit associated with goodwill		$ (0.9)

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Equity Incentive Plans - Summary of Options Outstanding and Vested (Details)	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Option Outstanding, Number Outstanding	6,409,777
Options Vested and Exercisable, Number Vested and Exercisable	3,055,619
Options Vested and Exercisable, Weighted Average Life (in Years)	6 years 2 months 8 days
$1.50 to $1.90
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 1.50
Exercise Prices, High | $ / shares	$ 1.90
Option Outstanding, Number Outstanding	73,538
Options Outstanding, Weighted Average Life (in Years)	1 year 6 months
Options Vested and Exercisable, Number Vested and Exercisable	73,538
Options Vested and Exercisable, Weighted Average Life (in Years)	1 year 6 months
2.86 to 6.40
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 2.86
Exercise Prices, High | $ / shares	$ 6.40
Option Outstanding, Number Outstanding	244,573
Options Outstanding, Weighted Average Life (in Years)	3 years 2 months 12 days
Options Vested and Exercisable, Number Vested and Exercisable	244,573
Options Vested and Exercisable, Weighted Average Life (in Years)	3 years 2 months 12 days
8.04 to 11.72
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 8.04
Exercise Prices, High | $ / shares	$ 11.72
Option Outstanding, Number Outstanding	556,154
Options Outstanding, Weighted Average Life (in Years)	4 years 4 months 24 days
Options Vested and Exercisable, Number Vested and Exercisable	556,154
Options Vested and Exercisable, Weighted Average Life (in Years)	4 years 4 months 24 days
12.20 to 15.06
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 12.20
Exercise Prices, High | $ / shares	$ 15.06
Option Outstanding, Number Outstanding	2,529,948
Options Outstanding, Weighted Average Life (in Years)	6 years 10 months 24 days
Options Vested and Exercisable, Number Vested and Exercisable	1,611,280
Options Vested and Exercisable, Weighted Average Life (in Years)	6 years 8 months 12 days
16.06 to 24.00
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 16.06
Exercise Prices, High | $ / shares	$ 24.00
Option Outstanding, Number Outstanding	1,889,042
Options Outstanding, Weighted Average Life (in Years)	8 years 4 months 24 days
Options Vested and Exercisable, Number Vested and Exercisable	516,733
Options Vested and Exercisable, Weighted Average Life (in Years)	8 years 3 months 18 days
31.99 to 42.21
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 31.99
Exercise Prices, High | $ / shares	$ 42.21
Option Outstanding, Number Outstanding	890,107
Options Outstanding, Weighted Average Life (in Years)	9 years 2 months 12 days
Options Vested and Exercisable, Number Vested and Exercisable	39,056
Options Vested and Exercisable, Weighted Average Life (in Years)	8 years 10 months 24 days
55.10 to 72.67
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 55.10
Exercise Prices, High | $ / shares	$ 72.67
Option Outstanding, Number Outstanding	226,415
Options Outstanding, Weighted Average Life (in Years)	9 years 3 months 18 days
Options Vested and Exercisable, Number Vested and Exercisable	14,285
Options Vested and Exercisable, Weighted Average Life (in Years)	8 years 7 months 6 days

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Intangible Assets - Schedule of Changes in Carrying Amount of Goodwill (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Goodwill [Line Items]
Balance—December 31, 2018	$ 61,300
Cumulative translation adjustments	(510)
Balance—September 30, 2019	100,926
Compli, Inc.
Goodwill [Line Items]
Goodwill acquired during period	12,807
Indix Corporation
Goodwill [Line Items]
Goodwill acquired during period	4,953
Portway International, Inc
Goodwill [Line Items]
Goodwill acquired during period	$ 22,376

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Revenue - Summary of Activity Impacting Deferred Commissions (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Jan. 01, 2019
ASU 2014-09
Capitalized Contract Cost [Line Items]
Adoption of ASC 606		$ 2,090
Deferred Commissions
Capitalized Contract Cost [Line Items]
Balance at December 31, 2018	$ 0
Additional commissions deferred	21,480
Amortization of deferred commissions	(5,139)
Balance at September 30, 2019	$ 35,608
Deferred Commissions | ASU 2014-09
Capitalized Contract Cost [Line Items]
Adoption of ASC 606		$ 19,267

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Convertible Preferred Stock and Shareholders' Equity - Summary of Changes of Convertible Preferred Stock and Shareholders' Equity (Deficit) (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended						9 Months Ended		12 Months Ended
	Jun. 30, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Class Of Stock [Line Items]
Beginning balance		$ 452,128	$ 168,973	$ 109,553	$ 142,154	$ (407,163)	$ (393,592)	$ 109,553	$ (393,592)	$ (393,592)
Impact of adoption of new accounting pronouncements (see Note 2)				27,622
Exercise of stock options		11,166	13,106	27,311	439	2,752	6,025
Exercise of stock options, Shares								5,418,158
Proceeds from common stock offering, net of underwriting discounts			274,705			192,510
Conversion of preferred stock to common stock						370,854
Shares tendered for cashless redemption of stock options		(1,090)		(93)	(343)	(3,483)	(7,715)
Exercise of warrants						5,783
Stock-based compensation cost		9,933	9,439	6,571	4,344	3,571	3,517
Shares issued under employee stock purchase plan		4,629		7,664
Shares issued to purchase intangible assets		48		50		2,555		$ 98	2,555
Repurchase of shares						(986)	(752)
Gain (Loss) on translation adjustment		(591)	276	(462)	(242)	(3,048)	603	(777)	(2,687)
Net loss		(12,354)	(13,173)	(9,243)	(24,103)	(17,766)	(15,249)	(34,770)	(57,118)
Ending balance	$ 452,128	463,869	452,128	168,973	122,249	142,154	$ (407,163)	463,869	$ 122,249	$ 109,553
Initial Public Offering
Class Of Stock [Line Items]
Public offering costs						$ (3,425)
Public offering
Class Of Stock [Line Items]
Public offering costs			(1,198)
Convertible Preferred Stock
Class Of Stock [Line Items]
Beginning balance, Shares						101,776,205	101,786,205		101,786,205	101,786,205
Beginning balance						$ 370,854	$ 370,921		$ 370,921	$ 370,921
Conversion of preferred stock to common stock						$ (370,854)
Conversion of preferred stock to common stock, Shares						(101,776,205)
Repurchase of shares, Shares							(10,000)
Repurchase of shares							$ (67)
Ending balance, Shares							101,776,205
Ending balance							$ 370,854
Common Stock
Class Of Stock [Line Items]
Beginning balance		$ 8	$ 7	$ 7	$ 7	$ 1	$ 1	$ 7	$ 1	$ 1
Beginning balance, Shares		75,444,551	69,903,447	66,768,563	66,457,650	6,264,422	5,992,293	66,768,563	5,992,293	5,992,293
Exercise of stock options, Shares		1,286,357	1,368,510	2,763,291	40,003	305,722	785,991
Proceeds from common stock offering, net of underwriting discounts			$ 1			$ 1
Proceeds from common stock offering,net of underwriting discounts,shares			4,133,984			8,625,000
Conversion of preferred stock to common stock						$ 5
Conversion of preferred stock to common stock, Shares						50,888,014
Shares tendered for cashless redemption of stock-based awards, Shares		(13,712)		(2,805)	(7,497)	(138,813)	(465,710)
Vested RSUs		36,611	902
Exercise of warrants, Shares						570,000
Shares issued under employee stock purchase plan, Shares		134,133		372,764
Shares issued to purchase intangible assets, Shares		676	37,708	1,634
Repurchase of shares, Shares						(56,695)	(48,152)
Ending balance	$ 8	$ 8	$ 8	$ 7	$ 7	$ 7	$ 1	$ 8	$ 7	$ 7
Ending balance, Shares	75,444,551	76,888,616	75,444,551	69,903,447	66,490,156	66,457,650	6,264,422	76,888,616	66,490,156	66,768,563
Common Stock | Public offering
Class Of Stock [Line Items]
Proceeds from common stock offering,net of underwriting discounts,shares	4,133,984
Public offering costs	$ (1,200)
Additional Paid-In Capital
Class Of Stock [Line Items]
Beginning balance		$ 937,047	$ 640,996	$ 599,493	$ 589,321	$ 19,196	$ 18,121	$ 599,493	$ 18,121	$ 18,121
Exercise of stock options		11,166	13,106	27,311	439	2,752	6,025
Proceeds from common stock offering, net of underwriting discounts			274,704			192,509
Conversion of preferred stock to common stock						370,849
Shares tendered for cashless redemption of stock options		(1,090)		(93)	(343)	(3,483)	(7,715)
Exercise of warrants						5,783
Stock-based compensation cost		9,933	9,439	6,571	4,344	3,571	3,517
Shares issued under employee stock purchase plan		4,629		7,664
Shares issued to purchase intangible assets		48		50		2,555
Repurchase of shares						(986)	(752)
Ending balance	937,047	961,733	937,047	640,996	593,761	589,321	19,196	961,733	593,761	599,493
Additional Paid-In Capital | Initial Public Offering
Class Of Stock [Line Items]
Public offering costs						(3,425)
Additional Paid-In Capital | Public offering
Class Of Stock [Line Items]
Public offering costs			(1,198)
Accumulated Other Comprehensive Income (Loss)
Class Of Stock [Line Items]
Beginning balance		(2,531)	(2,807)	(2,345)	(2,107)	941	338	(2,345)	338	338
Gain (Loss) on translation adjustment		(591)	276	(462)	(242)	(3,048)	603
Ending balance	(2,531)	(3,122)	(2,531)	(2,807)	(2,349)	(2,107)	941	(3,122)	(2,349)	(2,345)
Accumulated Deficit
Class Of Stock [Line Items]
Beginning balance		(482,396)	(469,223)	(487,602)	(445,067)	(427,301)	(412,052)	(487,602)	(412,052)	(412,052)
Impact of adoption of new accounting pronouncements (see Note 2)				27,622
Net loss		(12,354)	(13,173)	(9,243)	(24,103)	(17,766)	(15,249)
Ending balance	$ (482,396)	$ (494,750)	$ (482,396)	$ (469,223)	$ (469,170)	$ (445,067)	$ (427,301)	$ (494,750)	$ (469,170)	$ (487,602)

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Convertible Preferred Stock and Shareholders' Equity

9 Months Ended

Sep. 30, 2019

Stockholders Equity Note [Abstract]

Convertible Preferred Stock and Shareholders' Equity

10. Convertible Preferred Stock and Shareholders’ Equity

Authorized Capital – Common Stock and Preferred Stock

On June 15, 2018, the Company completed an initial public offering (“IPO”) listing its common stock on the New York Stock Exchange. The Company is authorized to issue two classes of stock designated as common stock and preferred stock. In June 2018, immediately following the IPO, the Amended and Restated Articles of Incorporation became effective, which increased authorized capital stock to 620,000,000 shares, consisting of 600,000,000 shares of common stock, $0.0001 par value per share, and 20,000,000 shares of undesignated preferred stock, $0.0001 par value per share.

Public Offering of Common Stock

In June 2019, the Company completed a public offering, in which the Company sold 4,133,984 shares of its common stock, including the full exercise of the underwriters’ option to purchase 539,215 additional shares of common stock, at a price of $69.40 per share. The Company received net proceeds of $274.7 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid by the Company of $1.2 million. As of September 30, 2019, 76,888,616 shares of the Company’s common stock were outstanding.

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

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			Equity
Balance at January 1, 2019		66,768,563		$	7	$	599,493		$	(2,345	)	$	(487,602	)	$	109,553
Impact of adoption of new accounting    pronouncements (see Note 2)													27,622			27,622
Exercise of stock options		2,763,291					27,311									27,311
Shares tendered for cashless redemption of    stock options		(2,805	)				(93	)								(93	)
Stock-based compensation cost							6,571									6,571
Shares issued under employee stock    purchase plan		372,764					7,664									7,664
Shares issued to purchase intangible assets		1,634					50									50
Loss on translation adjustment										(462	)					(462	)
Net loss													(9,243	)		(9,243	)
Balance at March 31, 2019		69,903,447		$	7	$	640,996		$	(2,807	)	$	(469,223	)	$	168,973
Proceeds from common stock    offering, net of underwriting discounts		4,133,984			1		274,704									274,705
Public offering costs							(1,198	)								(1,198	)
Exercise of stock options		1,368,510					13,106									13,106
Vesting of restricted stock units		902														—
Stock-based compensation cost							9,439									9,439
Shares issued to purchase intangible assets		37,708														—
Gain on translation adjustment										276						276
Net loss													(13,173	)		(13,173	)
Balance at June 30, 2019		75,444,551			8		937,047			(2,531	)		(482,396	)		452,128
Exercise of stock options		1,286,357					11,166									11,166
Shares tendered for cashless redemption of    stock-based awards		(13,712	)				(1,090	)								(1,090	)
Vesting of restricted stock units		36,611														—
Stock-based compensation cost							9,933									9,933
Shares issued under employee stock    purchase plan		134,133					4,629									4,629
Shares issued to purchase intangible assets		676					48									48
Loss on translation adjustment										(591	)					(591	)
Net loss													(12,354	)		(12,354	)
Balance at September 30, 2019		76,888,616			8		961,733			(3,122	)		(494,750	)		463,869

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

															Accumulated
	Convertible											Additional			Other						Total
	Preferred Stock						Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount			Shares			Amount		Capital			Income (Loss)			Deficit			Deficit
Balance at January 1, 2018		101,786,205		$	370,921			5,992,293		$	1	$	18,121		$	338		$	(412,052	)	$	(393,592	)
Exercise of stock options								785,991					6,025									6,025
Shares tendered for cashless    redemption of stock options								(465,710	)				(7,715	)								(7,715	)
Stock-based compensation    cost													3,517									3,517
Repurchase of shares		(10,000	)		(67	)		(48,152	)				(752	)								(752	)
Gain on translation adjustment																603						603
Net loss																			(15,249	)		(15,249	)
Balance at March 31, 2018		101,776,205		$	370,854			6,264,422		$	1	$	19,196		$	941		$	(427,301	)	$	(407,163	)
Proceeds from common stock    offering, net of underwriters'    discounts								8,625,000			1		192,509									192,510
Initial public offering costs													(3,425	)								(3,425	)
Conversion of preferred stock    to common stock		(101,776,205	)		(370,854	)		50,888,014			5		370,849									370,854
Shares tendered for cashless    redemption of stock options								(138,813	)				(3,483	)								(3,483	)
Exercise of stock options								305,722					2,752									2,752
Exercise of warrants								570,000					5,783									5,783
Stock-based compensation    cost													3,571									3,571
Repurchase of shares								(56,695	)				(986	)								(986	)
Loss on translation adjustment																(3,048	)					(3,048	)
Shares issued to purchase    intangible assets													2,555									2,555
Net loss																			(17,766	)		(17,766	)
Balance at June 30, 2018		—		$	—			66,457,650		$	7	$	589,321		$	(2,107	)	$	(445,067	)	$	142,154
Exercise of stock options								40,003					439									439
Shares tendered for cashless    redemption of stock options								(7,497	)				(343	)								(343	)
Stock-based compensation    cost													4,344									4,344
Loss on translation adjustment																(242	)					(242	)
Net loss																			(24,103	)		(24,103	)
Balance at September 30, 2018		—		$	—			66,490,156		$	7	$	593,761		$	(2,349	)	$	(469,170	)	$	122,249

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

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

Common Stock Warrants

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

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Revenue

9 Months Ended

Sep. 30, 2019

Revenue From Contract With Customer [Abstract]

Revenue

6. Revenue

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

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

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

	September 30,									December 31,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
	(unaudited)			(unaudited)			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	446,563		$	—		$	446,563		$	142,322
Trade accounts receivable—net of allowance for doubtful    accounts		49,124			1,044			50,168			40,287
Deferred commissions		8,402			(8,402	)		—			—
Prepaid expenses and other current assets		13,856			—			13,856			11,307
Total current assets before customer fund assets		517,945			(7,358	)		510,587			193,916
Funds held from customers		16,665			—			16,665			13,113
Receivable from customers—net of allowance for doubtful    accounts		690			—			690			270
Total current assets		535,300			(7,358	)		527,942			207,299
Noncurrent assets:
Property and equipment—net		34,537			—			34,537			33,373
Goodwill		100,926			—			100,926			61,300
Intangible assets—net		24,543			—			24,543			19,371
Deferred commissions		27,206			(27,206	)		—			—
Other noncurrent assets		2,420			—			2,420			1,589
Total assets	$	724,932		$	(34,564	)	$	690,368		$	322,932
Liabilities and shareholders' equity
Current liabilities:
Trade payables	$	10,962		$	—		$	10,962		$	4,847
Accrued expenses		49,864			(4,843	)		45,021			42,101
Accrued earnout liabilities		6,102			—			6,102			116
Deferred revenue		147,713			5,349			153,062			125,260
Total current liabilities before customer fund obligations		214,641			506			215,147			172,324
Customer fund obligations		17,306			—			17,306			13,349
Total current liabilities		231,947			506			232,453			185,673
Noncurrent liabilities:
Deferred revenue		753			8,353			9,106			9,393
Deferred tax liability		698			—			698			560
Deferred rent		15,905			—			15,905			17,317
Accrued earnout liabilities		9,399			—			9,399			—
Other noncurrent liabilities		2,361			—			2,361			436
Total liabilities		261,063			8,859			269,922			213,379
Commitments and contingencies
Shareholders' equity:
Preferred stock		—			—			—			—
Common stock		8			—			8			7
Additional paid-in capital		961,733			—			961,733			599,493
Accumulated other comprehensive loss		(3,122	)		—			(3,122	)		(2,345	)
Accumulated deficit		(494,750	)		(43,423	)		(538,173	)		(487,602	)
Total shareholders’ equity		463,869			(43,423	)		420,446			109,553
Total liabilities and shareholders' equity	$	724,932		$	(34,564	)	$	690,368		$	322,932

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

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

	For the Three Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Subscription and returns	$	91,986		$	71		$	92,057		$	64,611
Professional services		6,539			(49	)		6,490			5,308
Total revenue		98,525			22			98,547			69,919
Cost of revenue:
Subscription and returns		25,621			—			25,621			17,330
Professional services		4,157			—			4,157			2,906
Total cost of revenue		29,778			—			29,778			20,236
Gross profit		68,747			22			68,769			49,683
Operating expenses:
Research and development		21,871			—			21,871			13,285
Sales and marketing		40,313			4,789			45,102			41,276
General and administrative		20,511			—			20,511			10,235
Goodwill impairment		—			—			—			9,174
Total operating expenses		82,695			4,789			87,484			73,970
Operating loss		(13,948	)		(4,767	)		(18,715	)		(24,287	)
Other (income) expense:
Interest income		(2,202	)		—			(2,202	)		(676	)
Interest expense		2			—			2			534
Other (income) expense, net		265			—			265			49
Total other (income) expense, net		(1,935	)		—			(1,935	)		(93	)
Loss before income taxes		(12,013	)		(4,767	)		(16,780	)		(24,194	)
Provision for (benefit from) income taxes		341			—			341			(91	)
Net loss	$	(12,354	)	$	(4,767	)	$	(17,121	)	$	(24,103	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.16	)	$	(0.06	)	$	(0.22	)	$	(0.36	)
Weighted average shares of common stock outstanding,    basic and diluted		76,156						76,156			66,590

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Subscription and returns	$	255,225		$	689		$	255,914		$	182,326
Professional services		19,569			(149	)		19,420			12,849
Total revenue		274,794			540			275,334			195,175
Cost of revenue:
Subscription and returns		69,537			—			69,537			47,984
Professional services		12,883			—			12,883			8,393
Total cost of revenue		82,420			—			82,420			56,377
Gross profit		192,374			540			192,914			138,798
Operating expenses:
Research and development		56,823			—			56,823			38,332
Sales and marketing		119,199			16,340			135,539			119,187
General and administrative		53,764			—			53,764			28,787
Goodwill impairment		—			—			—			9,174
Total operating expenses		229,786			16,340			246,126			195,480
Operating loss		(37,412	)		(15,800	)		(53,212	)		(56,682	)
Other (income) expense:
Interest income		(4,251	)		—			(4,251	)		(811	)
Interest expense		286			—			286			2,495
Other (income) expense, net		694			—			694			(423	)
Total other (income) expense, net		(3,271	)		—			(3,271	)		1,261
Loss before income taxes		(34,141	)		(15,800	)		(49,941	)		(57,943	)
Provision for (benefit from) income taxes		629			—			629			(825	)
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.48	)	$	(0.22	)	$	(0.70	)	$	(1.95	)
Weighted average shares of common stock outstanding,    basic and diluted		72,064						72,064			29,269

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

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

	For the Three Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Net loss	$	(12,354	)	$	(4,767	)	$	(17,121	)	$	(24,103	)
Other comprehensive loss—Foreign currency translation		(591	)		—			(591	)		(242	)
Total comprehensive loss	$	(12,945	)	$	(4,767	)	$	(17,712	)	$	(24,345	)

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Other comprehensive loss—Foreign currency translation		(777	)		—			(777	)		(2,687	)
Total comprehensive loss	$	(35,547	)	$	(15,800	)	$	(51,347	)	$	(59,805	)

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

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

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Cash flows from operating activities:
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Adjustments to reconcile net loss to net cash (used in) provided by    operating activities:
Depreciation and amortization		11,684			—			11,684			9,390
Goodwill impairment		—						—			9,174
Stock-based compensation		25,906			—			25,906			11,411
Deferred tax expense (benefit)		138			—			138			(1,110	)
Amortization of deferred rent		(778	)		—			(778	)		231
Non-cash change in earnout liability		610			—			610			(430	)
Non-cash bad debt expense (recovery)		602			—			602			(382	)
Other		227			—			227			526
Changes in operating assets and liabilities:
Trade accounts receivable		(9,648	)		(238	)		(9,886	)		(7,852	)
Prepaid expenses and other current assets		(3,274	)		—			(3,274	)		(2,688	)
Deferred commissions		(16,340	)		16,340			—			—
Other noncurrent assets		(831	)		—			(831	)		(549	)
Trade payables		4,818			—			4,818			(3,353	)
Accrued expenses		2,305			(2,753	)		(448	)		6,095
Deferred rent (lease incentives)		—			—			—			579
Deferred revenue		24,782			2,451			27,233			25,978
Net cash provided by (used in) operating activities		5,431			—			5,431			(10,098	)
Cash flows from investing activities:
Net (increase) decrease in customer fund assets		(3,986	)		—			(3,986	)		2,053
Cash paid for acquired intangible assets		(139	)		—			(139	)		(5,002	)
Cash paid for acquisitions of businesses		(30,310	)		—			(30,310	)		—
Purchase of property and equipment		(7,196	)		—			(7,196	)		(12,914	)
Net cash used in investing activities		(41,631	)		—			(41,631	)		(15,863	)
Cash flows from financing activities:
Proceeds from common stock    offering, net of underwriting discounts		274,705						274,705			192,510
Payments of deferred financing costs		(555	)		—			(555	)		(2,084	)
Payments on credit facility		—			—			—			(63,000	)
Proceeds from credit facility		—			—			—			23,000
Repayment of note payable		—			—			—			(234	)
Net increase (decrease) in customer fund obligations		3,986			—			3,986			(2,053	)
Proceeds from exercise of stock options and common stock    warrants		51,583			—			51,583			5,787
Proceeds from purchases of stock under employee stock    purchase plan		12,293			—			12,293			—
Taxes paid related to net share settlement of stock-based awards		(1,183	)		—			(1,183	)		(2,326	)
Repurchase of shares		—			—			—			(1,806	)
Payment related to business combination earnouts		(375	)		—			(375	)		—
Net cash provided by financing activities		340,454			—			340,454			149,794
Foreign currency effect on cash and cash equivalents		(13	)		—			(13	)		185
Net change in cash and cash equivalents		304,241			—			304,241			124,018
Cash and cash equivalents—Beginning of period		142,322			—			142,322			14,075
Cash and cash equivalents—End of period	$	446,563			—		$	446,563		$	138,093

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,
	2019		2018
Revenue (U.S.):
Subscription and returns
Tax determination	$	52,722	$	37,931
Tax returns and compliance management		33,456		22,613
Interest income on funds held for customers		907		392
Total subscription and returns		87,085		60,936
Professional services		6,019		4,595
Total revenue (U.S.)		93,104		65,531
Total revenue (non-U.S.)		5,421		4,388
Total revenue	$	98,525	$	69,919

	For the Nine Months Ended September 30,
	2019		2018
Revenue (U.S.):
Subscription and returns
Tax determination	$	146,660	$	105,330
Tax returns and compliance management		90,829		66,747
Interest income on funds held for customers		2,448		562
Total subscription and returns		239,937		172,639
Professional services		17,416		10,743
Total revenue (U.S.)		257,353		183,382
Total revenue (non-U.S.)		17,441		11,793
Total revenue	$	274,794	$	195,175

Disclosures Related to Contracts with Customers

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

Contract Liabilities

A summary of the activity impacting the contract liabilities during the nine months ended September 30, 2019 is presented below (in thousands):

	Contract Liabilities
Balance at December 31, 2018	$	—
Adoption of ASC 606		2,090
Contract liabilities transferred to deferred revenue		(3,897	)
Addition to contract liabilities		6,650
Balance at September 30, 2019	$	4,843

As of September 30, 2019, contract liabilities are expected to be transferred to deferred revenue within the next 12 months and therefore are included in accrued expenses on the consolidated balance sheets.

Deferred Revenue

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

	Deferred Revenue
Balance at December 31, 2018	$	134,653
Adoption of ASC 606		(11,250	)
Revenue recognized		(274,794	)
Additional amounts deferred		299,857
Balance at September 30, 2019	$	148,466

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 nine months ended September 30, 2019 is presented below (in thousands):

	Deferred Commissions
Balance at December 31, 2018	$	—
Adoption of ASC 606		19,267
Additional commissions deferred		21,480
Amortization of deferred commissions		(5,139	)
Balance at September 30, 2019	$	35,608

As of September 30, 2019, $8.4 million of deferred commissions are expected to be amortized within the next 12 months and therefore are included in current assets on the consolidated balance sheets. The remaining amount of deferred commissions are included in noncurrent assets. There were no impairments of assets related to deferred commissions during the nine months ended September 30, 2019. There were no assets recognized related to the costs to fulfill contracts during the nine months ended September 30, 2019 as these costs were not material.

Remaining Performance Obligations

Contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of September 30, 2019, amounts allocated to these additional contractual obligations are $33.4 million, of which $33.1 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.

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Acquisitions of Businesses - Additional Information (Details) - USD ($) $ / shares in Units, $ in Thousands				2 Months Ended	3 Months Ended		8 Months Ended		9 Months Ended		12 Months Ended
	Jul. 31, 2019	Feb. 06, 2019	Jan. 22, 2019	Sep. 30, 2019	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2019	Sep. 30, 2019	Sep. 30, 2018	Jan. 22, 2020	Jan. 31, 2020	Dec. 31, 2018
Business Acquisition [Line Items]
Accrued value of earnout related to acquisition				$ 15,351	$ 15,351	$ 0	$ 15,351	$ 15,351	$ 15,351	$ 0
Goodwill				100,926	100,926		100,926	100,926	100,926				$ 61,300
Revenues					98,525	69,919			274,794	195,175
Loss before income taxes					$ (12,013)	$ (24,194)			(34,141)	$ (57,943)
Compli, Inc.
Business Acquisition [Line Items]
Total consideration transferred			$ 17,100
Consideration in cash			11,800
Accrued value of earnout related to acquisition			3,800
Goodwill			$ 12,807
Revenues							2,800
Loss before income taxes							$ (400)
Compli, Inc. | Scenario Forecast
Business Acquisition [Line Items]
Consideration in cash											$ 1,600
Maximum Annual Payout Earned												$ 4,000
Indix Corporation
Business Acquisition [Line Items]
Total consideration transferred		$ 9,100
Consideration in cash		5,500
Accrued value of earnout related to acquisition		2,200
Maximum Annual Payout Earned		3,000
Goodwill		4,953
Loss before income taxes								$ (3,300)
Additional cash to be paid, as consideration, after eighteen months		1,400
Acquisition-related costs									$ 200
Indix Corporation | Within Three Months from Closing Date of Acquisition
Business Acquisition [Line Items]
Maximum Annual Payout Earned		500
Indix Corporation | Within Seven Months from Closing Date of Acquisition
Business Acquisition [Line Items]
Maximum Annual Payout Earned		650
Indix Corporation | Within 8 Months from Closing Date of Acquisition
Business Acquisition [Line Items]
Maximum Annual Payout Earned		650
Indix Corporation | Within 12 Months from Closing Date of Acquisition
Business Acquisition [Line Items]
Maximum Annual Payout Earned		$ 1,200
Portway International, Inc
Business Acquisition [Line Items]
Total consideration transferred	$ 24,300
Consideration in cash	13,000
Accrued value of earnout related to acquisition	9,400
Maximum Annual Payout Earned	10,000
Goodwill	22,376
Revenues				400
Loss before income taxes				$ (100)
Additional cash to be paid, as consideration, after eighteen months	2,000
Acquisition date fair value of cash consideration	$ 1,900
Share price of common shares that could be earned and transferred to seller	$ 83.97
Portway International, Inc | Maximum | Common Stock
Business Acquisition [Line Items]
Number of common shares that could be earned and transferred to seller	119,090

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Significant Accounting Policies - Summary of the Cumulative Effect of Adoption of ASC 606 within the Consolidated Balance Sheets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Assets
Trade accounts receivable	$ 49,124	$ 39,482	$ 40,287
Deferred commissions, current	8,402	4,464	0
Deferred commissions, noncurrent	27,206	14,803	0
Liabilities and shareholders' equity
Accrued expenses	49,864	44,191	42,101
Deferred revenue, current	147,713	122,103	125,260
Deferred revenue, noncurrent	753	1,300	9,393
Accumulated deficit	(494,750)	(459,980)	$ (487,602)
ASC 606 | Difference between Revenue Guidance in Effect before and after Topic 606
Assets
Trade accounts receivable	1,044	(805)
Deferred commissions, current	(8,402)	4,464
Deferred commissions, noncurrent	(27,206)	14,803
Liabilities and shareholders' equity
Accrued expenses	(4,843)	2,090
Deferred revenue, current	5,349	(3,157)
Deferred revenue, noncurrent	8,353	(8,093)
Accumulated deficit	$ (43,423)	$ 27,622

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Balance Sheet Detail - Property and Equipment, Net (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 56,488	$ 49,748
Accumulated depreciation	(21,951)	(16,375)
Property and equipment—net	34,537	33,373
Computer Equipment and Software
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 15,581	12,904
Computer Equipment and Software | Minimum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	3 years
Computer Equipment and Software | Maximum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	5 years
Internally Developed Software
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 5,205	3,620
Property and equipment, Useful Life	6 years
Furniture and Fixtures
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 6,770	5,850
Property and equipment, Useful Life	5 years
Office Equipment
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 858	586
Office Equipment | Minimum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	3 years
Office Equipment | Maximum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	5 years
Leasehold Improvements
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 28,074	$ 26,788
Leasehold Improvements | Minimum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	1 year
Leasehold Improvements | Maximum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	10 years

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Equity Incentive Plans - Additional Information (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares subject to outstanding awards	6,409,777		6,409,777		11,094,070
Total intrinsic value of options exercised			$ 287.7	$ 11.2
Weighted average grant date fair value of options granted			$ 18.93	$ 9.02
Number of shares, vested			1,740,706
Number of options unvested	3,354,158		3,354,158
Contractual life			10 years
Expected term		6 years		6 years
Minimum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expected term			5 years
Maximum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expected term			6 years
Employees
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options, average vesting term			4 years
Expected term			6 years
Non Employee Directors
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options, average vesting term			1 year
Expected term			5 years
Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total unrecognized compensation expense related to stock options	$ 33.0		$ 33.0
Unrecognized compensation expense expected to be recognized over weighted average period			2 years 7 months 6 days
Stock Options | Employees
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options vesting period			4 years
Stock Options | Non Employee Directors
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options vesting period			1 year
Restricted Stock Units (RSUs)
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized compensation expense expected to be recognized over weighted average period			3 years 4 months 24 days
Total unrecognized compensation expense expected to be recognized	$ 58.9		$ 58.9
Restricted Stock Units (RSUs) | Employees
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options vesting period			4 years
Restricted Stock Units (RSUs) | Non Employee Directors
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options vesting period			1 year
2018 Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock reserved for issuance	5,315,780		5,315,780
Automatically increase percentage of aggregate number of shares of common stock outstanding			5.00%
Shares subject to outstanding awards	2,500,716		2,500,716
Shares available for future issuance	6,468,269		6,468,269
Number of shares of common stock reserved for issuance	5,315,780		5,315,780
2006 Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares subject to outstanding awards	5,293,255		5,293,255
2018 Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock reserved for issuance	996,709		996,709
Total unrecognized compensation expense related to stock options	$ 1.1		$ 1.1
Contractual life			10 years
Expected term	6 months	6 months	6 months	6 months
Initial offering period			June 15, 2018
Description of offering period for ESPP			The first offering period began on June 15, 2018 and ended on January 31, 2019. Subsequent offering periods begin on August 1 and February 1 (or such other date determined by our Board of Directors or our Compensation and Leadership Development Committee).
Description of purchase price for shares of common stock purchased under ESPP			The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company’s common stock on (i) the first day of the applicable offering period or (ii) the last day of the purchase period in the applicable offering period.
Percentage of purchase price for shares of common stock under fair value market			85.00%
Number of shares of common stock reserved for issuance	996,709		996,709
Employee stock purchase plan number of shares initially authorized			10,102,525
2018 Employee Stock Purchase Plan | Minimum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Automatically increase percentage of aggregate number of shares of common stock outstanding			1.00%
Percentage of payroll deduction on eligible compensation			1.00%
Increase of common stock capital shares reserved for future issuance in each of calendar year			1,000,000
2018 Employee Stock Purchase Plan | Maximum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Percentage of payroll deduction on eligible compensation			15.00%
Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock reserved for issuance	1,157,498		1,157,498
Number of shares of common stock reserved for issuance	1,157,498		1,157,498
Common stock, shares purchased	134,133		506,897

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Commitments and Contingencies - Additional Information (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Loss Contingencies [Line Items]
Rent expense	$ 3,300,000	$ 2,500,000	$ 9,400,000	$ 7,400,000
Sublease income	400,000	$ 0	$ 1,100,000	$ 0
Loss contingency, inestimable loss			The Company has not recorded an accrual related to these arrangements as of September 30, 2019 because it has not determined that a loss is probable.
Maximum
Loss Contingencies [Line Items]
Estimated range of loss	$ 2,000,000		$ 2,000,000

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Revenue - Additional Information (Details 1) $ in Millions	Sep. 30, 2019 USD ($)
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Additional contractual obligations	$ 33.4
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2019-10-01
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Additional contractual obligations	$ 33.1
Revenue expected to be recognized with remaining amount	12 months

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Equity Incentive Plans

9 Months Ended

Sep. 30, 2019

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Equity Incentive Plans

11. Equity Incentive Plans

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

In April 2018, the 2018 Plan became effective in connection with the Company’s IPO. The 2018 Plan allows the Company to grant equity incentives to employees, directors, advisors, and consultants providing services to the Company. The total number of shares of common stock reserved for issuance under the 2018 Plan is equal to (1) 5,315,780shares plus (2) any shares subject to outstanding awards under the 2006 Plan as of June 14, 2018 that subsequently cease to be subject to such awards. The available shares automatically increase each January 1, beginning January 1, 2019, by the lesser of (i) 5% of the aggregate number of shares of common stock outstanding on December 31^st of the immediately preceding calendar year (rounded up to the nearest whole share) and (ii) an amount determined by the Company’s Board of Directors. As of September 30, 2019, 2,500,716 shares were subject to outstanding awards and 6,468,269 shares were available for issuance under the 2018 Plan. The 2018 Plan provides that on the occurrence of certain strategic events, such as a change in control in which options and RSUs are not assumed or substituted, such outstanding options and RSUs will become fully vested and exercisable or payable.

Prior to the 2018 Plan, the Company awarded stock options under the 2006 Plan. The 2006 Plan was terminated in connection with the Company’s IPO. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan. As of September 30, 2019, there were 5,293,255 shares subject to outstanding stock options under the 2006 Plan.

During the quarter ended September 30, 2019, the Company amended its Outside Director Compensation Policy to modify the vesting provisions for non-employee director awards in the event of certain terminations of service. The modification resulted in an acceleration of share-based compensation expense for non-employee director awards in the third quarter of 2019.

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,
	2019		2018		2019		2018
Stock-based compensation cost:
Common stock warrants	$	—	$	—	$	—	$	512
Stock options		4,436		3,387		12,549		9,963
Restricted stock units		4,705		2		10,954		2
Employee stock purchase plan		792		955		2,440		955
Total stock-based compensation cost	$	9,933	$	4,344	$	25,943	$	11,432

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, 2019:

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Shares			Price		Life (Years)		(in thousands)
Options outstanding as of December 31, 2018		11,094,070		$	12.17		6.81	$	210,523
Options granted		944,966			43.95
Options exercised		(5,418,158	)		9.52
Options cancelled or expired		(211,101	)		16.35
Options outstanding as of September 30, 2019		6,409,777			18.96		7.33		309,772
Options exercisable as of September 30, 2019		3,055,619		$	12.52		6.19	$	167,363

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

	Options Outstanding				Options Vested and Exercisable
Exercise	Number		Weighted Average		Number Vested		Weighted Average
Prices	Outstanding		Life (in Years)		and Exercisable		Life (in Years)
$1.50 to $1.90		73,538		1.5		73,538		1.5
2.86 to 6.40		244,573		3.2		244,573		3.2
8.04 to 11.72		556,154		4.4		556,154		4.4
12.20 to 15.06		2,529,948		6.9		1,611,280		6.7
16.06 to 24.00		1,889,042		8.4		516,733		8.3
31.99 to 42.21		890,107		9.2		39,056		8.9
55.10 to 72.67		226,415		9.3		14,285		8.6
		6,409,777				3,055,619

The total intrinsic value of options exercised during the nine months ended September 30, 2019 and 2018 was $287.7 million and $11.2 million, respectively.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2019 and 2018 was $18.93 and $9.02per share, respectively. During the nine months ended September 30, 2019, 1,740,706 options vested. There were 3,354,158 options unvested as of September 30, 2019.

As of September 30, 2019, $33.0 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 2.6 years.

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

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2019		2018	2019	2018
Fair market value of common stock		—	$38.59 - 42.21	$39.76 - 72.67	$16.86 - 42.21
Volatility		—	40%	40%	40%
Expected term		—	6 years	5-6 years	6 years
Expected dividend yield		—	n/a	n/a	n/a
Risk-free interest rate		—	2.92% - 3.06%	1.77% - 2.65%	2.55% - 3.06%

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

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

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

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

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

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

Restricted Stock Units

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

				Weighted
				Average
				Grant Date Fair
	Restricted Stock Units			Value Per Share
RSUs outstanding as of December 31, 2018		74,424		$	32.69
RSUs granted		1,412,806			49.62
RSUs vested		(37,513	)		72.30
RSUs cancelled		(65,523	)		43.05
RSUs outstanding as of September 30, 2019		1,384,194		$	48.41

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 date of grant. The vesting period of each RSU grant is generally four years for employees and one year for non-employee directors. As of September 30, 2019, $58.9 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 3.4 years.

Employee Stock Purchase Plan

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

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

The Company initially reserved 996,709 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP increases automatically on each January 1, beginning January 1, 2019, by the number of shares equal to the least of (i) 1,000,000 shares of common stock, (ii) 1% of the aggregate number of shares of common stock outstanding on December 31^st of the immediately preceding calendar year (rounded up to the nearest whole share), and (iii) an amount determined by the Board of Directors. No more than an aggregate of 10,102,525 shares of common stock may be issued over the ten-year term of the ESPP. As of September 30, 2019, 1,157,498 shares of common stock are reserved for sale under the ESPP.

During the three and nine months ended September 30, 2019, 134,133 and 506,897 shares of common stock were purchased under the ESPP, respectively.

As of September 30, 2019, there was approximately $1.1 millionof 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, 2019 and will end on January 31, 2020.

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,
	2019	2018	2019	2018
Fair market value of common stock	$82.12	$38.18	$40.60 to $82.12	$24.00 to $38.18
Volatility	40%	40%	40%	40%
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	2.04%	2.96%	2.04% to 2.59%	2.90% to 2.96%

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Intangible Assets

9 Months Ended

Sep. 30, 2019

Goodwill And Intangible Assets Disclosure [Abstract]

Intangible Assets

7. Intangible Assets

Finite-lived intangible assets

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

		September 30, 2019
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,360	$	(10,802	)	$	9,558
Developed technology	3 to 8		36,222		(21,440	)		14,782
Noncompete agreements	3 to 5		777		(595	)		182
Tradename and trademarks	1 to 4		452		(431	)		21
		$	57,811	$	(33,268	)	$	24,543

		December 31, 2018
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	15,412	$	(9,202	)	$	6,210
Developed technology	3 to 8		30,935		(17,806	)		13,129
Noncompete agreements	3 to 5		574		(542	)		32
Tradename and trademarks	1 to 4		420		(420	)		—
		$	47,341	$	(27,970	)	$	19,371

Finite-lived intangible assets are generally amortized on a straight-line basis over the remaining estimated useful life as management believes this reflects the expected benefit to be received from these assets. Finite-lived intangible assets amortization expense was $1.8 million and $5.3 million for the three and nine months ended September 30, 2019, respectively, and $1.6 million and $4.4 million for the three and nine months ended September 30, 2018, respectively.

Acquisitions of finite-lived intangible assets

In May 2018, the Company acquired developed technology to facilitate cross-border transactions (e.g., tariffs and duties), from Tradestream Technologies Inc. and Wise 24 Inc. (the “Sellers”) for cash and common stock. In addition to cash paid at closing and shortly thereafter, the asset purchase agreement required the Company to issue shares of common stock as follows: 37,708 shares on November 29, 2018, 37,708 shares on May 29, 2019, and 37,706 shares on November 29, 2019.

Total consideration for the purchase also includes an earnout computed on future revenue and billings recognized by the Company over the six years following the acquisition, up to a maximum of $30.0 million. The earnout is payable in cash and common stock at the end of each six-month measurement period ending on June 30 or December 31 through 2023. The cash portion of the earnout is computed based on eligible billings in the measurement period. The number of shares of common stock to be issued for the earnout is computed based on the eligible revenue recognized in the measurement period divided by the average closing price of the Company’s common stock during the last ten days of the measurement period. As earnout payments become due, those costs will be capitalized as part of the developed technology asset and amortized over the remaining useful life. During the first nine months of 2019, the Company paid $0.1 million and issued 2,310 shares of common stock to the Sellers for the earnout measurement periods ended December 31, 2018 and June 30, 2019, and accrued $0.1 million for cash and common stock payable to the Sellers for the earnout measurement period that will end December 31, 2019.    

Goodwill

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

Balance—December 31, 2018	$	61,300
Acquisition of Compli		12,807
Acquisition of Indix		4,953
Acquisition of Portway		22,376
Cumulative translation adjustments		(510	)
Balance—September 30, 2019	$	100,926

Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, the Company will conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. The Company has three reporting units for goodwill impairment testing consisting of its U.S., European, and Brazilian operations. As of September 30, 2019, the Brazilian reporting unit had no associated goodwill.

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Significant Accounting Policies - Additional Information (Details)	3 Months Ended	9 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) Segment	Sep. 30, 2018 USD ($)
Accounting Policies [Line Items]
Number of operating segment | Segment		1
Impairment of long-lived assets		$ 0
Tax position likely of being realized upon ultimate settlement		greater than 50%
Percentage of likelihood of realization of tax position upon ultimate settlement, minimum		50.00%
Interest income earned on funds held for customers	$ 400,000		$ 600,000
Contract payment net terms		30 days
Revenue recognition, contractual renewal period		1 year
Deferred commission amortized period		6 years
Concessions and cancellations period allowed for standard subscription contract prior to adoption		60 days
Minimum
Accounting Policies [Line Items]
Revenue recognition initial contractual term		12 months
Maximum
Accounting Policies [Line Items]
Revenue recognition initial contractual term		18 months
Amortization period of asset		1 year

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Fair Value Measurements - Summary of Reconciliation of Beginning and Ending Balances of Recurring Fair Value Measurements (Details) - Recurring Basis - Significant Unobservable Inputs (Level 3) - Earnout Related to Acquisitions - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnout liability:
Balance beginning of period	$ 6,428	$ 0	$ 0	$ 380
Fair value recorded at acquisition	9,399	0	15,351	0
Payments of earnout liability	(500)	0	(500)	0
Total unrealized (gains) losses included in other (income) expense, net	134	0	610	(380)
Balance end of period	$ 15,461	$ 0	$ 15,461	$ 0

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Balance Sheet Detail - Accrued Expenses (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Accrued Liabilities Current [Abstract]
Accrued payroll and related taxes	$ 4,184		$ 3,800
Accrued federal, state, and local taxes	2,484		1,827
Accrued bonus	13,707		10,766
Self-insurance reserves	1,361		0
Employee stock purchase plan contributions	1,908		6,473
Accrued sales commissions	3,599		6,889
Accrued partner commissions	6,540		5,535
Contract liabilities	4,843		0
Accrued purchase price related to acquisitions	2,984		0
Other	8,254		6,811
Total	$ 49,864	$ 44,191	$ 42,101

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Net Loss Per Share Attributable to Common Shareholders (Tables)

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Schedule of Computation of Basic and Diluted Net Loss Per Common Share

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator:
Net loss attributable to common shareholders	$	(12,354	)	$	(24,103	)	$	(34,770	)	$	(57,118	)
Denominator:
Weighted-average common shares    outstanding-basic		76,156			66,590			72,064			29,269
Dilutive effect of share equivalents resulting from stock    options, restricted stock units, common stock warrants,    ESPP shares and convertible preferred shares (as    converted)		—			—			—			—
Weighted-average common shares    outstanding-diluted		76,156			66,590			72,064			29,269
Net loss per common share, basic and diluted	$	(0.16	)	$	(0.36	)	$	(0.48	)	$	(1.95	)

Schedule of Potential Shares Not Included in the Computation of Diluted Earnings Per Share

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,
	2019		2018		2019		2018
Options to purchase common shares		7,149		11,350		8,603		11,263
Unvested restricted stock units		1,346		262		1,066		88
Employee stock purchase plan shares		7		63		2		21
Common stock warrants		—		—		—		315
Convertible preferred shares (as converted)		—		—		—		31,503
Total		8,502		11,675		9,671		43,190

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Revenue (Tables)

9 Months Ended

Sep. 30, 2019

Revenue From Contract With Customer [Abstract]

Summary of Impact From Adoption of New Revenue Recognition on Statements

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

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

	September 30,									December 31,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
	(unaudited)			(unaudited)			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	446,563		$	—		$	446,563		$	142,322
Trade accounts receivable—net of allowance for doubtful    accounts		49,124			1,044			50,168			40,287
Deferred commissions		8,402			(8,402	)		—			—
Prepaid expenses and other current assets		13,856			—			13,856			11,307
Total current assets before customer fund assets		517,945			(7,358	)		510,587			193,916
Funds held from customers		16,665			—			16,665			13,113
Receivable from customers—net of allowance for doubtful    accounts		690			—			690			270
Total current assets		535,300			(7,358	)		527,942			207,299
Noncurrent assets:
Property and equipment—net		34,537			—			34,537			33,373
Goodwill		100,926			—			100,926			61,300
Intangible assets—net		24,543			—			24,543			19,371
Deferred commissions		27,206			(27,206	)		—			—
Other noncurrent assets		2,420			—			2,420			1,589
Total assets	$	724,932		$	(34,564	)	$	690,368		$	322,932
Liabilities and shareholders' equity
Current liabilities:
Trade payables	$	10,962		$	—		$	10,962		$	4,847
Accrued expenses		49,864			(4,843	)		45,021			42,101
Accrued earnout liabilities		6,102			—			6,102			116
Deferred revenue		147,713			5,349			153,062			125,260
Total current liabilities before customer fund obligations		214,641			506			215,147			172,324
Customer fund obligations		17,306			—			17,306			13,349
Total current liabilities		231,947			506			232,453			185,673
Noncurrent liabilities:
Deferred revenue		753			8,353			9,106			9,393
Deferred tax liability		698			—			698			560
Deferred rent		15,905			—			15,905			17,317
Accrued earnout liabilities		9,399			—			9,399			—
Other noncurrent liabilities		2,361			—			2,361			436
Total liabilities		261,063			8,859			269,922			213,379
Commitments and contingencies
Shareholders' equity:
Preferred stock		—			—			—			—
Common stock		8			—			8			7
Additional paid-in capital		961,733			—			961,733			599,493
Accumulated other comprehensive loss		(3,122	)		—			(3,122	)		(2,345	)
Accumulated deficit		(494,750	)		(43,423	)		(538,173	)		(487,602	)
Total shareholders’ equity		463,869			(43,423	)		420,446			109,553
Total liabilities and shareholders' equity	$	724,932		$	(34,564	)	$	690,368		$	322,932

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

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

	For the Three Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Subscription and returns	$	91,986		$	71		$	92,057		$	64,611
Professional services		6,539			(49	)		6,490			5,308
Total revenue		98,525			22			98,547			69,919
Cost of revenue:
Subscription and returns		25,621			—			25,621			17,330
Professional services		4,157			—			4,157			2,906
Total cost of revenue		29,778			—			29,778			20,236
Gross profit		68,747			22			68,769			49,683
Operating expenses:
Research and development		21,871			—			21,871			13,285
Sales and marketing		40,313			4,789			45,102			41,276
General and administrative		20,511			—			20,511			10,235
Goodwill impairment		—			—			—			9,174
Total operating expenses		82,695			4,789			87,484			73,970
Operating loss		(13,948	)		(4,767	)		(18,715	)		(24,287	)
Other (income) expense:
Interest income		(2,202	)		—			(2,202	)		(676	)
Interest expense		2			—			2			534
Other (income) expense, net		265			—			265			49
Total other (income) expense, net		(1,935	)		—			(1,935	)		(93	)
Loss before income taxes		(12,013	)		(4,767	)		(16,780	)		(24,194	)
Provision for (benefit from) income taxes		341			—			341			(91	)
Net loss	$	(12,354	)	$	(4,767	)	$	(17,121	)	$	(24,103	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.16	)	$	(0.06	)	$	(0.22	)	$	(0.36	)
Weighted average shares of common stock outstanding,    basic and diluted		76,156						76,156			66,590

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Subscription and returns	$	255,225		$	689		$	255,914		$	182,326
Professional services		19,569			(149	)		19,420			12,849
Total revenue		274,794			540			275,334			195,175
Cost of revenue:
Subscription and returns		69,537			—			69,537			47,984
Professional services		12,883			—			12,883			8,393
Total cost of revenue		82,420			—			82,420			56,377
Gross profit		192,374			540			192,914			138,798
Operating expenses:
Research and development		56,823			—			56,823			38,332
Sales and marketing		119,199			16,340			135,539			119,187
General and administrative		53,764			—			53,764			28,787
Goodwill impairment		—			—			—			9,174
Total operating expenses		229,786			16,340			246,126			195,480
Operating loss		(37,412	)		(15,800	)		(53,212	)		(56,682	)
Other (income) expense:
Interest income		(4,251	)		—			(4,251	)		(811	)
Interest expense		286			—			286			2,495
Other (income) expense, net		694			—			694			(423	)
Total other (income) expense, net		(3,271	)		—			(3,271	)		1,261
Loss before income taxes		(34,141	)		(15,800	)		(49,941	)		(57,943	)
Provision for (benefit from) income taxes		629			—			629			(825	)
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.48	)	$	(0.22	)	$	(0.70	)	$	(1.95	)
Weighted average shares of common stock outstanding,    basic and diluted		72,064						72,064			29,269

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

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

	For the Three Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Net loss	$	(12,354	)	$	(4,767	)	$	(17,121	)	$	(24,103	)
Other comprehensive loss—Foreign currency translation		(591	)		—			(591	)		(242	)
Total comprehensive loss	$	(12,945	)	$	(4,767	)	$	(17,712	)	$	(24,345	)

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Other comprehensive loss—Foreign currency translation		(777	)		—			(777	)		(2,687	)
Total comprehensive loss	$	(35,547	)	$	(15,800	)	$	(51,347	)	$	(59,805	)

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

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

	For the Nine Months Ended September 30,
	2019									2018
	As Reported (ASC 606)			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Cash flows from operating activities:
Net loss	$	(34,770	)	$	(15,800	)	$	(50,570	)	$	(57,118	)
Adjustments to reconcile net loss to net cash (used in) provided by    operating activities:
Depreciation and amortization		11,684			—			11,684			9,390
Goodwill impairment		—						—			9,174
Stock-based compensation		25,906			—			25,906			11,411
Deferred tax expense (benefit)		138			—			138			(1,110	)
Amortization of deferred rent		(778	)		—			(778	)		231
Non-cash change in earnout liability		610			—			610			(430	)
Non-cash bad debt expense (recovery)		602			—			602			(382	)
Other		227			—			227			526
Changes in operating assets and liabilities:
Trade accounts receivable		(9,648	)		(238	)		(9,886	)		(7,852	)
Prepaid expenses and other current assets		(3,274	)		—			(3,274	)		(2,688	)
Deferred commissions		(16,340	)		16,340			—			—
Other noncurrent assets		(831	)		—			(831	)		(549	)
Trade payables		4,818			—			4,818			(3,353	)
Accrued expenses		2,305			(2,753	)		(448	)		6,095
Deferred rent (lease incentives)		—			—			—			579
Deferred revenue		24,782			2,451			27,233			25,978
Net cash provided by (used in) operating activities		5,431			—			5,431			(10,098	)
Cash flows from investing activities:
Net (increase) decrease in customer fund assets		(3,986	)		—			(3,986	)		2,053
Cash paid for acquired intangible assets		(139	)		—			(139	)		(5,002	)
Cash paid for acquisitions of businesses		(30,310	)		—			(30,310	)		—
Purchase of property and equipment		(7,196	)		—			(7,196	)		(12,914	)
Net cash used in investing activities		(41,631	)		—			(41,631	)		(15,863	)
Cash flows from financing activities:
Proceeds from common stock    offering, net of underwriting discounts		274,705						274,705			192,510
Payments of deferred financing costs		(555	)		—			(555	)		(2,084	)
Payments on credit facility		—			—			—			(63,000	)
Proceeds from credit facility		—			—			—			23,000
Repayment of note payable		—			—			—			(234	)
Net increase (decrease) in customer fund obligations		3,986			—			3,986			(2,053	)
Proceeds from exercise of stock options and common stock    warrants		51,583			—			51,583			5,787
Proceeds from purchases of stock under employee stock    purchase plan		12,293			—			12,293			—
Taxes paid related to net share settlement of stock-based awards		(1,183	)		—			(1,183	)		(2,326	)
Repurchase of shares		—			—			—			(1,806	)
Payment related to business combination earnouts		(375	)		—			(375	)		—
Net cash provided by financing activities		340,454			—			340,454			149,794
Foreign currency effect on cash and cash equivalents		(13	)		—			(13	)		185
Net change in cash and cash equivalents		304,241			—			304,241			124,018
Cash and cash equivalents—Beginning of period		142,322			—			142,322			14,075
Cash and cash equivalents—End of period	$	446,563			—		$	446,563		$	138,093

Summary of Total Revenues

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,
	2019		2018
Revenue (U.S.):
Subscription and returns
Tax determination	$	52,722	$	37,931
Tax returns and compliance management		33,456		22,613
Interest income on funds held for customers		907		392
Total subscription and returns		87,085		60,936
Professional services		6,019		4,595
Total revenue (U.S.)		93,104		65,531
Total revenue (non-U.S.)		5,421		4,388
Total revenue	$	98,525	$	69,919

	For the Nine Months Ended September 30,
	2019		2018
Revenue (U.S.):
Subscription and returns
Tax determination	$	146,660	$	105,330
Tax returns and compliance management		90,829		66,747
Interest income on funds held for customers		2,448		562
Total subscription and returns		239,937		172,639
Professional services		17,416		10,743
Total revenue (U.S.)		257,353		183,382
Total revenue (non-U.S.)		17,441		11,793
Total revenue	$	274,794	$	195,175

Summary of Activity Impacting Contract Liabilities

A summary of the activity impacting the contract liabilities during the nine months ended September 30, 2019 is presented below (in thousands):

	Contract Liabilities
Balance at December 31, 2018	$	—
Adoption of ASC 606		2,090
Contract liabilities transferred to deferred revenue		(3,897	)
Addition to contract liabilities		6,650
Balance at September 30, 2019	$	4,843

Summary of Activity Impacting Deferred Revenue

Deferred Revenue

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

	Deferred Revenue
Balance at December 31, 2018	$	134,653
Adoption of ASC 606		(11,250	)
Revenue recognized		(274,794	)
Additional amounts deferred		299,857
Balance at September 30, 2019	$	148,466

Summary of Activity Impacting Deferred Commissions

A summary of the activity impacting the deferred commissions during the nine months ended September 30, 2019 is presented below (in thousands):

	Deferred Commissions
Balance at December 31, 2018	$	—
Adoption of ASC 606		19,267
Additional commissions deferred		21,480
Amortization of deferred commissions		(5,139	)
Balance at September 30, 2019	$	35,608

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Statement Of Financial Position [Abstract]
Trade accounts receivable, allowance for doubtful accounts	$ 632	$ 521
Receivable from customers, allowance	$ 293	$ 198
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Preferred stock, shares authorized	20,000,000	20,000,000
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares, issued	76,889,000	66,769,000
Common stock, shares, outstanding	76,889,000	66,769,000
Common stock, shares authorized	600,000,000	600,000,000

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Nature of Operations

9 Months Ended

Sep. 30, 2019

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Nature of Operations

1. Nature of Operations

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

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

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Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Summary of the Cumulative Effect of Adoption of ASC 606 within the Consolidated Balance Sheets

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

	Balance at December 31, 2018			Adjustments due to ASC 606			Balance at January 1, 2019
Assets
Trade accounts receivable	$	40,287		$	(805	)	$	39,482
Deferred commissions, current		—			4,464			4,464
Deferred commissions, noncurrent		—			14,803			14,803
Liabilities and shareholders' equity
Accrued expenses		42,101			2,090			44,191
Deferred revenue, current		125,260			(3,157	)		122,103
Deferred revenue, noncurrent		9,393			(8,093	)		1,300
Accumulated deficit		(487,602	)		27,622			(459,980	)

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Acquisitions of Businesses - Schedule of Estimated Fair Value of Assets Acquired and Liabilities Assumed (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jul. 31, 2019	Feb. 06, 2019	Jan. 22, 2019	Dec. 31, 2018
Assets acquired:
Goodwill	$ 100,926				$ 61,300
Compli, Inc.
Assets acquired:
Current assets				$ 505
Developed technology, customer relationships, and other intangibles				4,288
Goodwill				12,807
Total assets acquired				17,600
Liabilities assumed:
Current liabilities				482
Total liabilities assumed				482
Net assets acquired				$ 17,118
Indix Corporation
Assets acquired:
Current assets			$ 94
Developed technology, customer relationships, and other intangibles			4,472
Goodwill			4,953
Total assets acquired			9,519
Liabilities assumed:
Current liabilities			392
Total liabilities assumed			392
Net assets acquired			$ 9,127
Portway International, Inc
Assets acquired:
Property and equipment		$ 76
Developed technology, customer relationships, and other intangibles		1,865
Goodwill		22,376
Total assets acquired		24,317
Liabilities assumed:
Net assets acquired		$ 24,317

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Revenue - Consolidated Statements of Comprehensive Loss (Details) - USD ($) $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Net loss	$ (12,354)	$ (13,173)	$ (9,243)	$ (24,103)	$ (17,766)	$ (15,249)	$ (34,770)	$ (57,118)
Other comprehensive income (loss)—Foreign currency translation	(591)	$ 276	$ (462)	(242)	$ (3,048)	$ 603	(777)	(2,687)
Total comprehensive loss	(12,945)			$ (24,345)			(35,547)	$ (59,805)
ASU 2014-09 | Difference between Revenue Guidance in Effect before and after Topic 606
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Net loss	(4,767)						(15,800)
Other comprehensive income (loss)—Foreign currency translation	0						0
Total comprehensive loss	(4,767)						(15,800)
ASU 2014-09 | Without Adoption (ASC 605)
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Net loss	(17,121)						(50,570)
Other comprehensive income (loss)—Foreign currency translation	(591)						(777)
Total comprehensive loss	$ (17,712)						$ (51,347)

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Revenue - Summary of Activity Impacting Deferred Revenue (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Jan. 01, 2019
ASU 2014-09
Deferred Revenue Rollforward
Adoption of ASC 606		$ 2,090
Deferred Revenue
Deferred Revenue Rollforward
Balance at December 31, 2018	$ 134,653
Revenue recognized	(274,794)
Additional amounts deferred	299,857
Balance at September 30, 2019	$ 148,466
Deferred Revenue | ASU 2014-09
Deferred Revenue Rollforward
Adoption of ASC 606		$ (11,250)

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Net Loss Per Share Attributable to Common Shareholders - Schedule of Computation of Basic and Diluted Net Loss Per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Numerator:
Net loss attributable to common shareholders	$ (12,354)	$ (13,173)	$ (9,243)	$ (24,103)	$ (17,766)	$ (15,249)	$ (34,770)	$ (57,118)
Denominator:
Weighted-average common shares outstanding-basic	76,156			66,590			72,064	29,269
Dilutive effect of share equivalents resulting from stock options, restricted stock units, common stock warrants, ESPP shares and convertible preferred shares (as converted)	0			0			0	0
Weighted-average common shares outstanding-diluted	76,156			66,590			72,064	29,269
Net loss per common share, basic and diluted	$ (0.16)			$ (0.36)			$ (0.48)	$ (1.95)

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Equity Incentive Plans - Summary of Fair Value Estimated Using Black-Scholes Option Pricing Model Assumptions (Details) - $ / shares	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Volatility		40.00%	40.00%	40.00%
Expected term		6 years		6 years
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Risk-free interest rate, minimum		2.92%	1.77%	2.55%
Risk-free interest rate, maximum		3.06%	2.65%	3.06%
Minimum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock		$ 38.59	$ 39.76	$ 16.86
Expected term			5 years
Maximum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock		$ 42.21	$ 72.67	$ 42.21
Expected term			6 years

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Convertible Preferred Stock and Shareholders' Equity - Additional Information (Details) $ / shares in Units, $ in Thousands		1 Months Ended	3 Months Ended					9 Months Ended
	Jun. 14, 2018 USD ($) shares	Jun. 30, 2019 USD ($) $ / shares shares	Sep. 30, 2019 USD ($) $ / shares shares	Jun. 30, 2019 USD ($) $ / shares shares	Sep. 30, 2018 USD ($) $ / shares	Jun. 30, 2018 USD ($) shares	Mar. 31, 2018 USD ($)	Sep. 30, 2019 USD ($) Class $ / shares shares	Sep. 30, 2018 USD ($) $ / shares shares	Dec. 31, 2018 $ / shares shares
Class Of Stock [Line Items]
Number of classes of stock | Class								2
Capital stock, authorized shares			620,000,000					620,000,000
Common stock, shares authorized			600,000,000					600,000,000		600,000,000
Common stock, par value | $ / shares			$ 0.0001					$ 0.0001		$ 0.0001
Preferred stock, shares authorized			20,000,000					20,000,000		20,000,000
Preferred stock, par value | $ / shares			$ 0.0001					$ 0.0001		$ 0.0001
Proceeds from common stock offering, net of underwriting discounts | $								$ 274,705	$ 192,510
Common stock, shares, outstanding			76,889,000					76,889,000		66,769,000
Fair value of shares repurchased | $						$ 986	$ 752
Stock-based compensation cost | $			$ 9,933		$ 4,344			$ 25,943	11,432
Employees and Non-Employee Investors
Class Of Stock [Line Items]
Fair value of shares repurchased | $									$ 1,700
Public Offering
Class Of Stock [Line Items]
Offering expenses paid | $				$ 1,198
Common Stock
Class Of Stock [Line Items]
Public offering				4,133,984		8,625,000
Common stock, shares, outstanding			76,888,616					76,888,616
Number of warrants net exercised to common stock			144,945					144,945
Common Stock | Public Offering
Class Of Stock [Line Items]
Public offering		4,133,984
Common stock price per share | $ / shares		$ 69.40		$ 69.40
Proceeds from common stock offering, net of underwriting discounts | $		$ 274,700
Offering expenses paid | $		$ 1,200
Common Stock | Underwriters
Class Of Stock [Line Items]
Public offering		539,215
Common Stock Warrants
Class Of Stock [Line Items]
Number of warrants exercised	363,000
Proceeds from exercise of warrants | $	$ 3,700
Number of warrants outstanding			0					0
Common Stock Warrants | Board of Directors
Class Of Stock [Line Items]
Number of common stock warrants issued								0	80,000
Common stock warrants, weighted average exercise price, per share | $ / shares					$ 16.60				$ 16.60
Common Stock Warrants | Board of Directors | General and Administrative
Class Of Stock [Line Items]
Stock-based compensation cost | $							$ 500

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Intangible Assets - Additional Information (Details) shares in Thousands					1 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	Nov. 29, 2019 shares	May 29, 2019 shares	Nov. 29, 2018 shares	Oct. 31, 2018 USD ($)	May 31, 2018 USD ($)	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) Unit	Sep. 30, 2018 USD ($)	Dec. 31, 2018 USD ($) shares
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, amortization expense						$ 1,800,000	$ 1,600,000	$ 5,300,000	$ 4,400,000
Cash payment to sellers								$ 139,000	5,002,000
Number of goodwill impairment reporting units | Unit								3
Goodwill impairment charge				$ 0		0	$ 9,174,000	$ 0	$ 9,174,000
Goodwill						100,926,000		100,926,000		$ 61,300,000
Brazilian Reporting Unit
Finite Lived Intangible Assets [Line Items]
Goodwill						0		0
Tradestream Technologies Inc. and Wise 24 Inc
Finite Lived Intangible Assets [Line Items]
Future revenue recognized period					6 years
Cash payment to sellers								100,000
Common stock Issue | shares		37,708	37,708							2,310
Accrued earnout for cash and common stock payable						$ 100,000		$ 100,000
Tradestream Technologies Inc. and Wise 24 Inc | Scenario Forecast
Finite Lived Intangible Assets [Line Items]
Common stock Issue | shares	37,706
Tradestream Technologies Inc. and Wise 24 Inc | Maximum
Finite Lived Intangible Assets [Line Items]
Total consideration					$ 30,000,000

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Fair Value Measurements - Additional Information (Details)	Sep. 30, 2019 USD ($)
Fair Value, Measurements, Non-Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value measurements on a non-recurring basis	$ 0
Discount Rate | Discounted Cash Flow and Monte Carlo Simulations | Portway International, Inc
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Discount rate utilized for valuation of earnout liability	9.51%
Discount Rate | Discounted Cash Flow and Monte Carlo Simulations | Compli, Inc.
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Discount rate utilized for valuation of earnout liability	3.10%
Discount Rate | Discounted Cash Flow and Monte Carlo Simulations | Indix Corporation
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Discount rate utilized for valuation of earnout liability	3.10%

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Balance Sheet Detail - Additional Information (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Balance Sheet Related Disclosures [Abstract]
Depreciation expense	$ 2.2	$ 1.8	$ 6.4	$ 5.0

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Debt

9 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Debt

9. Debt

Loan and Security Agreement

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

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

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Acquisitions of Businesses

9 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Acquisitions of Businesses

5. Acquisitions of Businesses

January 2019 Acquisition of Compli

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

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

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

Assets acquired:
Current assets	$	505
Developed technology, customer relationships, and other intangibles		4,288
Goodwill		12,807
Total assets acquired		17,600
Liabilities assumed:
Current liabilities		482
Total liabilities assumed		482
Net assets acquired	$	17,118

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

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	3,250	Multi-period excess earnings-income approach		13	%	6 years
Trademarks and trade names		32	Relief from royalty- income approach		13	%	2 years
Developed technology and    customer database		910	Relief from royalty- income approach		13	%	6 years
Noncompetition agreements		96	With-and-without valuation- income approach		13	%	3 years

The excess of the purchase price over the net identified tangible and intangible assets of $12.8 million has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

For the period from the date of the Compli acquisition through September 30, 2019, revenue was $2.8 million and pre-tax loss was $0.4 million from the Compli business.

February 2019 Acquisition of Indix

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

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

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

Assets acquired:
Current assets	$	94
Developed technology		4,472
Goodwill		4,953
Total assets acquired		9,519
Liabilities assumed:
Current liabilities		392
Total liabilities assumed		392
Net assets acquired	$	9,127

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate	Estimated Useful Life
Developed technology	$	4,472	Relief from royalty- income approach	24.5%	6 years

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

The Indix acquisition provided enhanced artificial intelligence technology and tax content, but did not result in additional revenues for the Company. For the period from the date of the Indix acquisition through September 30, 2019, the cumulative operating expenses and pre-tax loss was $3.3 million from the Indix business.

July 2019 Acquisition of Portway

On July 31, 2019, the Company completed the acquisition of substantially all the assets of Portway under an Asset Purchase Agreement (the “Portway Purchase”). Portway is a provider of Harmonized System classifications and outsourced customs brokerage services. The Company accounted for the Portway Purchase as a business combination. As a result of the acquisition, the Company expanded its cross-border solutions. Acquisition-related costs of $0.2 million for the nine months ended September 30, 2019 were primarily for legal fees.

The total consideration transferrable related to this transaction was $24.3 million, consisting of $13.0 million paid in cash at closing, an additional $2.0 million of cash to be paid after eighteen months with an acquisition date fair value of $1.9 million, and an earnout provision fair valued upon acquisition at $9.4 million. The earnout is payable in the Company’s common stock no later than February 2021. The maximum number of shares of common stock that could be earned and transferred to the seller is 119,090 shares, which was based on a maximum payout value of $10.0 million and a per share value of $83.97 under the terms of the Portway Purchase. The earnout is based on the achievement of specific revenue and operating metrics through January 2021, and the shares (which were issued at closing and are held in escrow) will be forfeited and cancelled if the metrics are not achieved. The earnout was originally recognized at fair value at the date of the business combination and is recorded in noncurrent accrued earnout liabilities on the consolidated balance sheet as of September 30, 2019. The earnout liability is adjusted to fair value quarterly (see Note 3).

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

Assets acquired:
Property and equipment	$	76
Customer relationships and other intangibles		1,865
Goodwill		22,376
Total assets acquired		24,317
Liabilities assumed:
Total liabilities assumed		—
Net assets acquired	$	24,317

The estimated fair values are preliminary in nature and subject to adjustments, which are not expected to be material.

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

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	1,759	Multi-period excess earnings-income approach		12	%	6 years
Noncompetition agreements		106	With-and-without valuation- income approach		12	%	4 years

The excess of the purchase price over the net identified tangible and intangible assets of $22.4 million has been recorded as goodwill, which includes synergies expected from the expanded cross-border product functionality and customs brokerage services 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 Portway acquisition through September 30, 2019, revenue was $0.4 million and pre-tax loss was $0.1 million from the Portway business.

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Net Loss Per Share Attributable to Common Shareholders

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Net Loss Per Share Attributable to Common Shareholders

13. Net Loss Per Share Attributable to Common Shareholders

The Company calculates basic and diluted net loss per share attributable to common shareholders in conformity with the two-class method required for companies with participating securities. Prior to the IPO, the Company considered all series of convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common shareholders was not allocated to the convertible preferred stock as the holders of convertible preferred stock did not have a contractual obligation to share in losses.

The diluted net loss per share attributable to common shareholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, all common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common shareholders as their effect is antidilutive. As a result, basic and diluted net loss per common share was the same for each period presented.

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator:
Net loss attributable to common shareholders	$	(12,354	)	$	(24,103	)	$	(34,770	)	$	(57,118	)
Denominator:
Weighted-average common shares    outstanding-basic		76,156			66,590			72,064			29,269
Dilutive effect of share equivalents resulting from stock    options, restricted stock units, common stock warrants,    ESPP shares and convertible preferred shares (as    converted)		—			—			—			—
Weighted-average common shares    outstanding-diluted		76,156			66,590			72,064			29,269
Net loss per common share, basic and diluted	$	(0.16	)	$	(0.36	)	$	(0.48	)	$	(1.95	)

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,
	2019		2018		2019		2018
Options to purchase common shares		7,149		11,350		8,603		11,263
Unvested restricted stock units		1,346		262		1,066		88
Employee stock purchase plan shares		7		63		2		21
Common stock warrants		—		—		—		315
Convertible preferred shares (as converted)		—		—		—		31,503
Total		8,502		11,675		9,671		43,190

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Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

3. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis

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

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
September 30, 2019	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	440,053	$	440,053	$	—	$	—
Earnout related to acquisitions		15,461		—		—		15,461

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
December 31, 2018	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	138,483	$	138,483	$	—	$	—
Earnout related to acquisitions		—		—		—		—

Earnout Liability

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

The Company estimates the fair value of earnout liabilities for business combinations using the probability-weighted discounted cash flow and Monte Carlo simulations. As of September 30, 2019, the earnout liability associated with the 2019 acquisition of Portway International, Inc. (“Portway”) was valued utilizing a discount rate of 9.51%. As of September 30, 2019, the earnout liability associated with the 2019 acquisition of Compli, Inc. (“Compli”) was valued utilizing a discount rate of 3.1%, and the earnout liability associated with the 2019 acquisition of Indix Corporation (“Indix”) was valued utilizing a discount rate of 3.1%. The Portway discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout. The Compli and Indix acquisitions were valued using a risk-free rate based on linear interpolated U.S. Treasury rates commensurate with the term of the earnout.

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

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

	Three Months Ended September 30,
	2019			2018
Earnout liability:
Balance beginning of period	$	6,428		$	—
Fair value recorded at acquisition		9,399			—
Payments of earnout liability		(500	)		—
Total unrealized (gains) losses included in other (income) expense, net		134			—
Balance end of period	$	15,461		$	—

	Nine Months Ended September 30,
	2019			2018
Earnout liability:
Balance beginning of period	$	—		$	380
Fair value recorded at acquisition		15,351			—
Payments of earnout liability		(500	)		—
Total unrealized (gains) losses included in other (income) expense, net		610			(380	)
Balance end of period	$	15,461		$	—

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

The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be measured at fair value on a recurring basis. There were no fair value measurements of these assets during the first nine months of 2019, except as discussed in Note 5.

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Convertible Preferred Stock and Shareholders' Equity (Tables)

9 Months Ended

Sep. 30, 2019

Stockholders Equity Note [Abstract]

Summary of Changes of Convertible Preferred Stock and Shareholders' Equity (Deficit)

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

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			Equity
Balance at January 1, 2019		66,768,563		$	7	$	599,493		$	(2,345	)	$	(487,602	)	$	109,553
Impact of adoption of new accounting    pronouncements (see Note 2)													27,622			27,622
Exercise of stock options		2,763,291					27,311									27,311
Shares tendered for cashless redemption of    stock options		(2,805	)				(93	)								(93	)
Stock-based compensation cost							6,571									6,571
Shares issued under employee stock    purchase plan		372,764					7,664									7,664
Shares issued to purchase intangible assets		1,634					50									50
Loss on translation adjustment										(462	)					(462	)
Net loss													(9,243	)		(9,243	)
Balance at March 31, 2019		69,903,447		$	7	$	640,996		$	(2,807	)	$	(469,223	)	$	168,973
Proceeds from common stock    offering, net of underwriting discounts		4,133,984			1		274,704									274,705
Public offering costs							(1,198	)								(1,198	)
Exercise of stock options		1,368,510					13,106									13,106
Vesting of restricted stock units		902														—
Stock-based compensation cost							9,439									9,439
Shares issued to purchase intangible assets		37,708														—
Gain on translation adjustment										276						276
Net loss													(13,173	)		(13,173	)
Balance at June 30, 2019		75,444,551			8		937,047			(2,531	)		(482,396	)		452,128
Exercise of stock options		1,286,357					11,166									11,166
Shares tendered for cashless redemption of    stock-based awards		(13,712	)				(1,090	)								(1,090	)
Vesting of restricted stock units		36,611														—
Stock-based compensation cost							9,933									9,933
Shares issued under employee stock    purchase plan		134,133					4,629									4,629
Shares issued to purchase intangible assets		676					48									48
Loss on translation adjustment										(591	)					(591	)
Net loss													(12,354	)		(12,354	)
Balance at September 30, 2019		76,888,616			8		961,733			(3,122	)		(494,750	)		463,869

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

															Accumulated
	Convertible											Additional			Other						Total
	Preferred Stock						Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount			Shares			Amount		Capital			Income (Loss)			Deficit			Deficit
Balance at January 1, 2018		101,786,205		$	370,921			5,992,293		$	1	$	18,121		$	338		$	(412,052	)	$	(393,592	)
Exercise of stock options								785,991					6,025									6,025
Shares tendered for cashless    redemption of stock options								(465,710	)				(7,715	)								(7,715	)
Stock-based compensation    cost													3,517									3,517
Repurchase of shares		(10,000	)		(67	)		(48,152	)				(752	)								(752	)
Gain on translation adjustment																603						603
Net loss																			(15,249	)		(15,249	)
Balance at March 31, 2018		101,776,205		$	370,854			6,264,422		$	1	$	19,196		$	941		$	(427,301	)	$	(407,163	)
Proceeds from common stock    offering, net of underwriters'    discounts								8,625,000			1		192,509									192,510
Initial public offering costs													(3,425	)								(3,425	)
Conversion of preferred stock    to common stock		(101,776,205	)		(370,854	)		50,888,014			5		370,849									370,854
Shares tendered for cashless    redemption of stock options								(138,813	)				(3,483	)								(3,483	)
Exercise of stock options								305,722					2,752									2,752
Exercise of warrants								570,000					5,783									5,783
Stock-based compensation    cost													3,571									3,571
Repurchase of shares								(56,695	)				(986	)								(986	)
Loss on translation adjustment																(3,048	)					(3,048	)
Shares issued to purchase    intangible assets													2,555									2,555
Net loss																			(17,766	)		(17,766	)
Balance at June 30, 2018		—		$	—			66,457,650		$	7	$	589,321		$	(2,107	)	$	(445,067	)	$	142,154
Exercise of stock options								40,003					439									439
Shares tendered for cashless    redemption of stock options								(7,497	)				(343	)								(343	)
Stock-based compensation    cost													4,344									4,344
Loss on translation adjustment																(242	)					(242	)
Net loss																			(24,103	)		(24,103	)
Balance at September 30, 2018		—		$	—			66,490,156		$	7	$	593,761		$	(2,349	)	$	(469,170	)	$	122,249

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Oct. 31, 2019
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Trading Symbol	AVLR
Entity Registrant Name	AVALARA, INC.
Entity Central Index Key	0001348036
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Common Stock, Shares Outstanding		76,941,547
Entity Current Reporting Status	Yes
Entity Shell Company	false
Entity File Number	001-38525
Entity Tax Identification Number	91-1995935
Entity Address, Address Line One	255 South King Street
Entity Address, Address Line Two	Suite 1800
Entity Address, City or Town	Seattle
Entity Address, State or Province	WA
Entity Address, Postal Zip Code	98104
City Area Code	206
Local Phone Number	826-4900
Entity Interactive Data Current	Yes
Title of 12(b) Security	Common Stock, Par Value $0.0001 Per Share
Security Exchange Name	NYSE
Entity Incorporation, State or Country Code	WA
Document Quarterly Report	true
Document Transition Report	false

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Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Statement Of Income And Comprehensive Income [Abstract]
Net loss	$ (12,354)	$ (13,173)	$ (9,243)	$ (24,103)	$ (17,766)	$ (15,249)	$ (34,770)	$ (57,118)
Other comprehensive income (loss)—Foreign currency translation	(591)	$ 276	$ (462)	(242)	$ (3,048)	$ 603	(777)	(2,687)
Total comprehensive loss	$ (12,945)			$ (24,345)			$ (35,547)	$ (59,805)

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Balance Sheet Detail (Tables)

9 Months Ended

Sep. 30, 2019

Balance Sheet Related Disclosures [Abstract]

Schedule of Property and Equipment, Net

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

	Useful	September 30,			December 31,
	Life (Years)	2019			2018
Computer equipment and software	3 to 5	$	15,581		$	12,904
Internally developed software	6		5,205			3,620
Furniture and fixtures	5		6,770			5,850
Office equipment	3 to 5		858			586
Leasehold improvements	1 to 10		28,074			26,788
			56,488			49,748
Accumulated depreciation			(21,951	)		(16,375	)
Property and equipment—net		$	34,537		$	33,373

Schedule of Prepaid Expense And Other Current Assets

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

	September 30,		December 31,
	2019		2018
Prepaid expenses	$	11,194	$	9,578
Accrued investment income		687		260
Deferred financing costs		—		643
Deposits		298		325
Other		1,677		501
Total	$	13,856	$	11,307

Schedule of Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2019		2018
Accrued payroll and related taxes	$	4,184	$	3,800
Accrued federal, state, and local taxes		2,484		1,827
Accrued bonus		13,707		10,766
Self-insurance reserves		1,361		—
Employee stock purchase plan contributions		1,908		6,473
Accrued sales commissions		3,599		6,889
Accrued partner commissions		6,540		5,535
Contract liabilities		4,843		—
Accrued purchase price related to acquisitions		2,984		—
Other		8,254		6,811
Total	$	49,864	$	42,101

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Equity Incentive Plans - Summary of Fair Value of ESPP Purchase Rights Was Estimated Using Black-Scholes Option-pricing Model (Details) - $ / shares	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Volatility		40.00%	40.00%	40.00%
Expected term		6 years		6 years
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Risk-free interest rate, minimum		2.92%	1.77%	2.55%
Risk-free interest rate, maximum		3.06%	2.65%	3.06%
Minimum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock		$ 38.59	$ 39.76	$ 16.86
Expected term			5 years
Maximum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock		42.21	$ 72.67	$ 42.21
Expected term			6 years
2018 Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock	$ 82.12	$ 38.18
Volatility	40.00%	40.00%	40.00%	40.00%
Expected term	6 months	6 months	6 months	6 months
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Risk-free interest rate	2.04%	2.96%
Risk-free interest rate, minimum			2.04%	2.90%
Risk-free interest rate, maximum			2.59%	2.96%
2018 Employee Stock Purchase Plan | Minimum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock			$ 40.60	$ 24.00
2018 Employee Stock Purchase Plan | Maximum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock			$ 82.12	$ 38.18

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Equity Incentive Plans - Summary of Stock Option Activity (Details) $ / shares in Units, $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019 USD ($) $ / shares shares	Dec. 31, 2018 USD ($) $ / shares shares
Shares
Options outstanding beginning balance | shares	11,094,070
Options granted | shares	944,966
Options exercised | shares	(5,418,158)
Options cancelled or expired | shares	(211,101)
Options outstanding ending balance | shares	6,409,777	11,094,070
Options exercisable | shares	3,055,619
Weighted Average Exercise Price
Options outstanding beginning balance | $ / shares	$ 12.17
Options granted | $ / shares	43.95
Options exercised | $ / shares	9.52
Options cancelled or expired | $ / shares	16.35
Options outstanding ending balance | $ / shares	18.96	$ 12.17
Options exercisable | $ / shares	$ 12.52
Weighted Average Remaining Contractual Life (Years)
Options outstanding	7 years 3 months 29 days	6 years 9 months 21 days
Options exercisable	6 years 2 months 8 days
Aggregate Intrinsic Value
Options outstanding | $	$ 309,772	$ 210,523
Options exercisable | $	$ 167,363

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Revenue - Consolidated Balance Sheets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Jan. 01, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 446,563				$ 142,322	$ 138,093			$ 14,075
Trade accounts receivable—net of allowance for doubtful accounts	49,124			$ 39,482	40,287
Deferred commissions	8,402			4,464	0
Prepaid expenses and other current assets	13,856				11,307
Total current assets before customer fund assets	517,945				193,916
Funds held from customers	16,665				13,113
Receivable from customers—net of allowance for doubtful accounts	690				270
Total current assets	535,300				207,299
Noncurrent assets:
Property and equipment—net	34,537				33,373
Goodwill	100,926				61,300
Intangible assets—net	24,543				19,371
Deferred commissions	27,206			14,803	0
Other noncurrent assets	2,420				1,589
Total assets	724,932				322,932
Current liabilities:
Trade payables	10,962				4,847
Accrued expenses	49,864			44,191	42,101
Accrued earnout liabilities	6,102				116
Deferred revenue	147,713			122,103	125,260
Total current liabilities before customer fund obligations	214,641				172,324
Customer fund obligations	17,306				13,349
Total current liabilities	231,947				185,673
Noncurrent liabilities:
Deferred revenue	753			1,300	9,393
Deferred tax liability	698				560
Deferred rent	15,905				17,317
Accrued earnout liabilities	9,399				0
Other noncurrent liabilities	2,361				436
Total liabilities	261,063				213,379
Commitments and contingencies	0				0
Shareholders' equity:
Preferred stock	0				0
Common stock	8				7
Additional paid-in capital	961,733				599,493
Accumulated other comprehensive loss	(3,122)				(2,345)
Accumulated deficit	(494,750)			(459,980)	(487,602)
Total shareholders’ equity	463,869	$ 452,128	$ 168,973		109,553	$ 122,249	$ 142,154	$ (407,163)	$ (393,592)
Total liabilities and shareholders' equity	724,932				322,932
ASU 2014-09 | Difference between Revenue Guidance in Effect before and after Topic 606
Current assets:
Cash and cash equivalents	0				0
Trade accounts receivable—net of allowance for doubtful accounts	1,044			(805)
Deferred commissions	(8,402)			4,464
Prepaid expenses and other current assets	0
Total current assets before customer fund assets	(7,358)
Funds held from customers	0
Receivable from customers—net of allowance for doubtful accounts	0
Total current assets	(7,358)
Noncurrent assets:
Property and equipment—net	0
Goodwill	0
Intangible assets—net	0
Deferred commissions	(27,206)			14,803
Other noncurrent assets	0
Total assets	(34,564)
Current liabilities:
Trade payables	0
Accrued expenses	(4,843)			2,090
Accrued earnout liabilities	0
Deferred revenue	5,349			(3,157)
Total current liabilities before customer fund obligations	506
Customer fund obligations	0
Total current liabilities	506
Noncurrent liabilities:
Deferred revenue	8,353			(8,093)
Deferred tax liability	0
Deferred rent	0
Accrued earnout liabilities	0
Other noncurrent liabilities	0
Total liabilities	8,859
Commitments and contingencies	0
Shareholders' equity:
Preferred stock	0
Common stock	0
Additional paid-in capital	0
Accumulated other comprehensive loss	0
Accumulated deficit	(43,423)			$ 27,622
Total shareholders’ equity	(43,423)
Total liabilities and shareholders' equity	(34,564)
ASU 2014-09 | Without Adoption (ASC 605)
Current assets:
Cash and cash equivalents	446,563				$ 142,322
Trade accounts receivable—net of allowance for doubtful accounts	50,168
Deferred commissions	0
Prepaid expenses and other current assets	13,856
Total current assets before customer fund assets	510,587
Funds held from customers	16,665
Receivable from customers—net of allowance for doubtful accounts	690
Total current assets	527,942
Noncurrent assets:
Property and equipment—net	34,537
Goodwill	100,926
Intangible assets—net	24,543
Deferred commissions	0
Other noncurrent assets	2,420
Total assets	690,368
Current liabilities:
Trade payables	10,962
Accrued expenses	45,021
Accrued earnout liabilities	6,102
Deferred revenue	153,062
Total current liabilities before customer fund obligations	215,147
Customer fund obligations	17,306
Total current liabilities	232,453
Noncurrent liabilities:
Deferred revenue	9,106
Deferred tax liability	698
Deferred rent	15,905
Accrued earnout liabilities	9,399
Other noncurrent liabilities	2,361
Total liabilities	269,922
Commitments and contingencies	0
Shareholders' equity:
Preferred stock	0
Common stock	8
Additional paid-in capital	961,733
Accumulated other comprehensive loss	(3,122)
Accumulated deficit	(538,173)
Total shareholders’ equity	420,446
Total liabilities and shareholders' equity	$ 690,368

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Revenue - Summary of Total Revenues (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Disaggregation Of Revenue [Line Items]
Revenues	$ 98,525	$ 69,919	$ 274,794	$ 195,175
U.S.
Disaggregation Of Revenue [Line Items]
Revenues	93,104	65,531	257,353	183,382
Non-U.S.
Disaggregation Of Revenue [Line Items]
Revenues	5,421	4,388	17,441	11,793
Subscription and Returns, Tax Determination | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	52,722	37,931	146,660	105,330
Subscription and Returns, Tax Returns and Compliance Management | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	33,456	22,613	90,829	66,747
Subscription and Returns,Interest Income on Funds Held for Customers | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	907	392	2,448	562
Subscription and Returns
Disaggregation Of Revenue [Line Items]
Revenues	91,986	64,611	255,225	182,326
Subscription and Returns | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	87,085	60,936	239,937	172,639
Professional Services
Disaggregation Of Revenue [Line Items]
Revenues	6,539	5,308	19,569	12,849
Professional Services | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	$ 6,019	$ 4,595	$ 17,416	$ 10,743

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Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2019

Goodwill And Intangible Assets Disclosure [Abstract]

Schedule of Finite-lived Intangible Assets

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

		September 30, 2019
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,360	$	(10,802	)	$	9,558
Developed technology	3 to 8		36,222		(21,440	)		14,782
Noncompete agreements	3 to 5		777		(595	)		182
Tradename and trademarks	1 to 4		452		(431	)		21
		$	57,811	$	(33,268	)	$	24,543

		December 31, 2018
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	15,412	$	(9,202	)	$	6,210
Developed technology	3 to 8		30,935		(17,806	)		13,129
Noncompete agreements	3 to 5		574		(542	)		32
Tradename and trademarks	1 to 4		420		(420	)		—
		$	47,341	$	(27,970	)	$	19,371

Schedule of Changes in Carrying Amount of Goodwill

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

Balance—December 31, 2018	$	61,300
Acquisition of Compli		12,807
Acquisition of Indix		4,953
Acquisition of Portway		22,376
Cumulative translation adjustments		(510	)
Balance—September 30, 2019	$	100,926

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Consolidated Statements of Operations - USD ($) shares in Thousands		3 Months Ended						9 Months Ended
	Oct. 31, 2018	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue:
Revenues		$ 98,525,000			$ 69,919,000			$ 274,794,000	$ 195,175,000
Cost of revenue:
Cost of revenues		29,778,000			20,236,000			82,420,000	56,377,000
Gross profit		68,747,000			49,683,000			192,374,000	138,798,000
Operating expenses:
Research and development		21,871,000			13,285,000			56,823,000	38,332,000
Sales and marketing		40,313,000			41,276,000			119,199,000	119,187,000
General and administrative		20,511,000			10,235,000			53,764,000	28,787,000
Goodwill impairment	$ 0	0			9,174,000			0	9,174,000
Total operating expenses		82,695,000			73,970,000			229,786,000	195,480,000
Operating loss		(13,948,000)			(24,287,000)			(37,412,000)	(56,682,000)
Other (income) expense:
Interest income		(2,202,000)			(676,000)			(4,251,000)	(811,000)
Interest expense		2,000			534,000			286,000	2,495,000
Other (income) expense, net		265,000			49,000			694,000	(423,000)
Total other (income) expense, net		(1,935,000)			(93,000)			(3,271,000)	1,261,000
Loss before income taxes		(12,013,000)			(24,194,000)			(34,141,000)	(57,943,000)
Provision for (benefit from) income taxes		341,000			(91,000)			629,000	(825,000)
Net loss		$ (12,354,000)	$ (13,173,000)	$ (9,243,000)	$ (24,103,000)	$ (17,766,000)	$ (15,249,000)	$ (34,770,000)	$ (57,118,000)
Net loss per share attributable to common shareholders, basic and diluted		$ (0.16)			$ (0.36)			$ (0.48)	$ (1.95)
Weighted average shares of common stock outstanding, basic and diluted		76,156			66,590			72,064	29,269
Subscription and Returns
Revenue:
Revenues		$ 91,986,000			$ 64,611,000			$ 255,225,000	$ 182,326,000
Cost of revenue:
Cost of revenues		25,621,000			17,330,000			69,537,000	47,984,000
Professional Services
Revenue:
Revenues		6,539,000			5,308,000			19,569,000	12,849,000
Cost of revenue:
Cost of revenues		$ 4,157,000			$ 2,906,000			$ 12,883,000	$ 8,393,000

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Schedule of Assets and Liabilities Measured at Fair Value on 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, 2019	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	440,053	$	440,053	$	—	$	—
Earnout related to acquisitions		15,461		—		—		15,461

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
December 31, 2018	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	138,483	$	138,483	$	—	$	—
Earnout related to acquisitions		—		—		—		—

Summary of Reconciliation of Beginning and Ending Balances of Recurring Fair Value Measurements

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

	Three Months Ended September 30,
	2019			2018
Earnout liability:
Balance beginning of period	$	6,428		$	—
Fair value recorded at acquisition		9,399			—
Payments of earnout liability		(500	)		—
Total unrealized (gains) losses included in other (income) expense, net		134			—
Balance end of period	$	15,461		$	—

	Nine Months Ended September 30,
	2019			2018
Earnout liability:
Balance beginning of period	$	—		$	380
Fair value recorded at acquisition		15,351			—
Payments of earnout liability		(500	)		—
Total unrealized (gains) losses included in other (income) expense, net		610			(380	)
Balance end of period	$	15,461		$	—

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Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Significant Accounting Policies

2. Significant Accounting Policies

Interim Financial Information

The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019. The accompanying interim consolidated balance sheet as of September 30, 2019, the consolidated interim statements of operations for the three and nine months ended September 30, 2019 and 2018, the consolidated statements of comprehensive loss for the three and nine months ended September 30, 2019 and 2018, and the consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full year ending December 31, 2019.

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

Principles of Consolidation

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

Segments

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

Use of Estimates

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

Fair Value Measurements

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

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

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

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

The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, trade accounts receivable, trade payables, and accrued expenses due to their short-term nature.

Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. An impairment is recognized in the event the carrying value of such assets is not recoverable. If the carrying value is not recoverable, the fair value is determined, and an impairment is recognized for the amount by which the carrying value exceeds the fair value. No impairment of long-lived assets occurred in the first nine months of 2019.

Self-Insurance

Beginning August 1, 2019, the Company established a self-insured healthcare plan for eligible U.S. employees. Under the plan, the Company pays healthcare claims and fees to the plan administrator. Total claim payments are limited by stop loss insurance policies. As there generally is a lag between the time a claim is incurred by a participant and the time the claim is submitted for payment, the Company has recorded a self-insurance reserve for estimated outstanding claims within accrued expenses in the consolidated balance sheets.

Income Taxes

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

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

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option, common stock warrant, restricted stock unit (“RSU”), or purchase right issued under the employee stock purchase plan at the date of grant. The fair value of stock options, common stock warrants, and purchase rights issued under the employee stock purchase plan is estimated by applying the Black-Scholes option-pricing model. This model uses the fair value of the Company’s underlying common stock at the measurement date, the expected or contractual term of the option, warrant or purchase right, the expected volatility of its common stock, risk-free interest rates, and expected dividend yield of its common stock. The fair value of an RSU is determined using the fair value of the Company’s underlying common stock on the date of grant.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation. Interest income on funds held from customers of $0.4 million and $0.6 million for the three months and nine months ended September 30, 2018 were reclassified from interest income within total other (income) expense, net to subscription and returns revenue in the accompanying consolidated statements of operations.  

Revenue Recognition – ASC 606

The Company primarily generates revenue from fees paid for subscriptions to tax compliance solutions and fees paid for services performed in preparing and filing tax returns on behalf of its customers. Amounts that have been invoiced are recorded in trade accounts receivable and deferred revenue, contract liabilities, or revenue, depending upon whether the revenue recognition criteria have been met. Revenue is recognized once the customer is provisioned and services are provided in an amount that reflects the consideration expected to be entitled to in exchange for those services. The Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers.

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

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

•Identification of the performance obligations in the contract;

•Determination of the transaction price;

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

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

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

Contract payment terms are typically net 30 days. Collectability is assessed based on a number of factors including collection history and creditworthiness of the customer, and the Company may mitigate 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.

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

Subscription and Returns Revenue

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

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

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

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

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

Professional Services Revenue

The Company bills for professional service arrangements on a fixed fee, milestone, or time and materials basis. Professional services revenue includes fees from providing tax analysis, configurations, data migrations, integration, training, and other support services. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.

Judgments and Estimates

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

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. The Company allocates revenue to each performance obligation based on the relative SSP. The Company determines SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices, market conditions and entity-specific factors. This includes a review of historical data related to the services being sold and customer demographics. The Company uses a range of amounts to estimate SSP for performance obligations. There is typically more than one SSP for individual services due to the stratification of those services by information, such as size and type of customer.

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

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

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

Recently Adopted Accounting Standards

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

ASU No. 2014-09

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

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

	Balance at December 31, 2018			Adjustments due to ASC 606			Balance at January 1, 2019
Assets
Trade accounts receivable	$	40,287		$	(805	)	$	39,482
Deferred commissions, current		—			4,464			4,464
Deferred commissions, noncurrent		—			14,803			14,803
Liabilities and shareholders' equity
Accrued expenses		42,101			2,090			44,191
Deferred revenue, current		125,260			(3,157	)		122,103
Deferred revenue, noncurrent		9,393			(8,093	)		1,300
Accumulated deficit		(487,602	)		27,622			(459,980	)

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

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

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

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

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

ASU No. 2016-15

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

ASU No. 2018-07

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

New Accounting Standards Not Yet Adopted

ASU No. 2016-02

In February 2016, the FASB issued ASU No. 2016-02, which was subsequently amended in July 2018 by ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Targeted Improvements - Leases (Topic 842)” which is codified as ASC 842 (“ASC 842”). ASC 842 requires lessees to generally recognize most operating leases on the balance sheets but record expenses on the income statements in a manner similar to current accounting standards.

The Company will adopt ASC 842 using the alternative transition method provided in ASU 2018-11, which does not require adjusting comparative period financial information. The Company expects to elect the package of practical expedients permitted under the transition guidance which allows the carry forward of the historical lease identification, lease classification and initial direct costs of existing leases. In addition, the Company expects to elect the practical expedient to not separate lease and nonlease components. Further, the Company made an accounting policy election to adopt the short-term lease exception, which allows the Company to not record leases with an initial term of 12 months or less on the balance sheet.

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. The Company expects the impact of adoption of ASC 842 will result in a material increase in noncurrent assets and noncurrent liabilities in the consolidated balance sheets.   

As an EGC, the Company has elected to use adoption dates applicable to private companies. The new standard is effective for private companies in 2020. However, the Company will lose its EGC status on December 31, 2019. Accordingly, the Company will adopt the guidance in ASC 842 as of January 1, 2019 in the Company’s Annual Report on Form 10-K for the year ending December 31, 2019.

ASU No. 2016-13

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

ASU No. 2018-15

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

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Net Loss Per Share Attributable to Common Shareholders - Schedule of Potential Shares Not Included in the Computation of Diluted Earnings Per Share (Details) - shares shares in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	8,502	11,675	9,671	43,190
Options To Purchase Common Stock
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	7,149	11,350	8,603	11,263
Unvested Restricted Stock Units
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	1,346	262	1,066	88
Employee Stock Purchase Plan Shares
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	7	63	2	21
Common Stock | Common Stock Warrants
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	0	0	0	315
Convertible Preferred Shares
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	0	0	0	31,503

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Equity Incentive Plans - Summary of RSU Activity (Details) - Restricted Stock Units (RSUs)	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
RSUs outstanding as of December 31, 2018, Shares | shares	74,424
RSUs granted, Shares | shares	1,412,806
RSUs vested, Shares | shares	(37,513)
RSUs cancelled, Shares | shares	(65,523)
RSUs outstanding as of June 31, 2019, Shares | shares	1,384,194
RSUs outstanding as of December 31, 2018, Weighted average grant date fair value per share | $ / shares	$ 32.69
RSUs granted, Weighted average grant date fair value per share | $ / shares	49.62
RSUs vested, Weighted average grant date fair value per share | $ / shares	72.30
RSUs cancelled, Weighted average grant date fair value per share | $ / shares	43.05
RSUs outstanding as of June 30, 2019, Weighted average grant date fair value per share | $ / shares	$ 48.41

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Equity Incentive Plans - Summary of Stock-Based Compensation Expense Related to Equity Incentive Rewards (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	$ 9,933	$ 4,344	$ 25,943	$ 11,432
Common Stock Warrants
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	0	0	0	512
Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	4,436	3,387	12,549	9,963
Restricted Stock Units (RSUs)
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	4,705	2	10,954	2
Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	$ 792	$ 955	$ 2,440	$ 955

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Revenue - Consolidated Statements of Operations (Details) - USD ($) $ / shares in Units, shares in Thousands		3 Months Ended						9 Months Ended
	Oct. 31, 2018	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue:
Revenues		$ 98,525,000			$ 69,919,000			$ 274,794,000	$ 195,175,000
Cost of revenue:
Cost of revenues		29,778,000			20,236,000			82,420,000	56,377,000
Gross profit		68,747,000			49,683,000			192,374,000	138,798,000
Operating expenses:
Research and development		21,871,000			13,285,000			56,823,000	38,332,000
Sales and marketing		40,313,000			41,276,000			119,199,000	119,187,000
General and administrative		20,511,000			10,235,000			53,764,000	28,787,000
Goodwill impairment	$ 0	0			9,174,000			0	9,174,000
Total operating expenses		82,695,000			73,970,000			229,786,000	195,480,000
Operating loss		(13,948,000)			(24,287,000)			(37,412,000)	(56,682,000)
Other (income) expense:
Interest income		(2,202,000)			(676,000)			(4,251,000)	(811,000)
Interest expense		2,000			534,000			286,000	2,495,000
Other (income) expense, net		265,000			49,000			694,000	(423,000)
Total other (income) expense, net		(1,935,000)			(93,000)			(3,271,000)	1,261,000
Loss before income taxes		(12,013,000)			(24,194,000)			(34,141,000)	(57,943,000)
Provision for (benefit from) income taxes		341,000			(91,000)			629,000	(825,000)
Net loss		$ (12,354,000)	$ (13,173,000)	$ (9,243,000)	$ (24,103,000)	$ (17,766,000)	$ (15,249,000)	$ (34,770,000)	$ (57,118,000)
Net loss per share attributable to common shareholders, basic and diluted		$ (0.16)			$ (0.36)			$ (0.48)	$ (1.95)
Weighted average shares of common stock outstanding, basic and diluted		76,156			66,590			72,064	29,269
Subscription and Returns
Revenue:
Revenues		$ 91,986,000			$ 64,611,000			$ 255,225,000	$ 182,326,000
Cost of revenue:
Cost of revenues		25,621,000			17,330,000			69,537,000	47,984,000
Professional Services
Revenue:
Revenues		6,539,000			5,308,000			19,569,000	12,849,000
Cost of revenue:
Cost of revenues		4,157,000			$ 2,906,000			12,883,000	$ 8,393,000
ASU 2014-09 | Difference between Revenue Guidance in Effect before and after Topic 606
Revenue:
Revenues		22,000						540,000
Cost of revenue:
Cost of revenues		0						0
Gross profit		22,000						540,000
Operating expenses:
Research and development		0						0
Sales and marketing		4,789,000						16,340,000
General and administrative		0						0
Goodwill impairment		0						0
Total operating expenses		4,789,000						16,340,000
Operating loss		(4,767,000)						(15,800,000)
Other (income) expense:
Interest income		0						0
Interest expense		0						0
Other (income) expense, net		0						0
Total other (income) expense, net		0						0
Loss before income taxes		(4,767,000)						(15,800,000)
Provision for (benefit from) income taxes		0						0
Net loss		$ (4,767,000)						$ (15,800,000)
Net loss per share attributable to common shareholders, basic and diluted		$ (0.06)						$ (0.22)
Weighted average shares of common stock outstanding, basic and diluted		0						0
ASU 2014-09 | Without Adoption (ASC 605)
Revenue:
Revenues		$ 98,547,000						$ 275,334,000
Cost of revenue:
Cost of revenues		29,778,000						82,420,000
Gross profit		68,769,000						192,914,000
Operating expenses:
Research and development		21,871,000						56,823,000
Sales and marketing		45,102,000						135,539,000
General and administrative		20,511,000						53,764,000
Goodwill impairment		0						0
Total operating expenses		87,484,000						246,126,000
Operating loss		(18,715,000)						(53,212,000)
Other (income) expense:
Interest income		(2,202,000)						(4,251,000)
Interest expense		2,000						286,000
Other (income) expense, net		265,000						694,000
Total other (income) expense, net		(1,935,000)						(3,271,000)
Loss before income taxes		(16,780,000)						(49,941,000)
Provision for (benefit from) income taxes		341,000						629,000
Net loss		$ (17,121,000)						$ (50,570,000)
Net loss per share attributable to common shareholders, basic and diluted		$ (0.22)						$ (0.70)
Weighted average shares of common stock outstanding, basic and diluted		76,156						72,064
ASU 2014-09 | Subscription and Returns | Difference between Revenue Guidance in Effect before and after Topic 606
Revenue:
Revenues		$ 71,000						$ 689,000
Cost of revenue:
Cost of revenues		0						0
ASU 2014-09 | Subscription and Returns | Without Adoption (ASC 605)
Revenue:
Revenues		92,057,000						255,914,000
Cost of revenue:
Cost of revenues		25,621,000						69,537,000
ASU 2014-09 | Professional Services | Difference between Revenue Guidance in Effect before and after Topic 606
Revenue:
Revenues		(49,000)						(149,000)
Cost of revenue:
Cost of revenues		0						0
ASU 2014-09 | Professional Services | Without Adoption (ASC 605)
Revenue:
Revenues		6,490,000						19,420,000
Cost of revenue:
Cost of revenues		$ 4,157,000						$ 12,883,000

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Revenue - Summary of Activity Impacting Contract Liabilities (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Jan. 01, 2019
Contract Liabilities [Rollforward]
Balance at December 31, 2018	$ 0
Contract liabilities transferred to deferred revenue	(3,897)
Addition to contract liabilities	6,650
Balance at September 30, 2019	$ 4,843
ASU 2014-09
Contract Liabilities [Rollforward]
Adoption of ASC 606		$ 2,090

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Debt - Additional Information (Details) - Revolving Credit Facility - Loan and Security Agreement - Silicon Valley Bank and Ally Bank - USD ($)		9 Months Ended
	Jun. 24, 2019	Sep. 30, 2019
Line Of Credit Facility [Line Items]
Credit facilities amount		$ 50,000,000
Credit facilities, repayment date		Jun. 25, 2019
Quarterly fee on undrawn portion available under credit facilities	0.50%
Maximum
Line Of Credit Facility [Line Items]
Credit facilities, interest rate	4.25%
Prime Rate | Maximum
Line Of Credit Facility [Line Items]
Credit facilities, variable rate	1.75%

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Intangible Assets - Schedule of Finite-lived Intangible Assets (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Finite Lived Intangible Assets [Line Items]
Gross	$ 57,811	$ 47,341
Accumulated Amortization	(33,268)	(27,970)
Net	24,543	19,371
Customer Relationships
Finite Lived Intangible Assets [Line Items]
Gross	20,360	15,412
Accumulated Amortization	(10,802)	(9,202)
Net	$ 9,558	$ 6,210
Customer Relationships | Minimum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	3 years	3 years
Customer Relationships | Maximum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	10 years	10 years
Developed Technology
Finite Lived Intangible Assets [Line Items]
Gross	$ 36,222	$ 30,935
Accumulated Amortization	(21,440)	(17,806)
Net	$ 14,782	$ 13,129
Developed Technology | Minimum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	3 years	3 years
Developed Technology | Maximum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	8 years	8 years
Noncompete Agreements
Finite Lived Intangible Assets [Line Items]
Gross	$ 777	$ 574
Accumulated Amortization	(595)	(542)
Net	$ 182	$ 32
Noncompete Agreements | Minimum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	3 years	3 years
Noncompete Agreements | Maximum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	5 years	5 years
Tradename and Trademarks
Finite Lived Intangible Assets [Line Items]
Gross	$ 452	$ 420
Accumulated Amortization	(431)	(420)
Net	$ 21	$ 0
Tradename and Trademarks | Minimum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	1 year	1 year
Tradename and Trademarks | Maximum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	4 years	4 years

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Fair Value Measurements - Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis (Details) - Recurring Basis - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Earnout Related to Acquisitions
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Liabilities	$ 15,461	$ 0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Earnout Related to Acquisitions
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Liabilities		0
Significant Other Observable Inputs (Level 2) | Earnout Related to Acquisitions
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Liabilities		0
Significant Unobservable Inputs (Level 3) | Earnout Related to Acquisitions
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Liabilities	15,461	0
Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Assets	440,053	138,483
Money Market Funds | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Assets	$ 440,053	$ 138,483

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Balance Sheet Detail - Prepaid Expenses and Other Current Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Prepaid Expense And Other Assets Current [Abstract]
Prepaid expenses	$ 11,194	$ 9,578
Accrued investment income	687	260
Deferred financing costs		643
Deposits	298	325
Other	1,677	501
Total	$ 13,856	$ 11,307

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Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

The Company used an annual effective tax rate approach to calculate income taxes for the nine months ended September 30, 2019 and 2018. The annual effective tax rate differs from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets.

The effective income tax rate was an expense of 1.8% for the nine months ended September 30, 2019,and a benefit of 1.4% for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, the income tax expense related primarily to foreign tax jurisdictions. The income tax benefit for the nine months ended September 30, 2018 was due primarily to the determination that indefinite lived goodwill would provide a source of income to realize indefinite lived deferred tax assets, resulting in a tax benefit of $0.9 million.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

8. Commitments and Contingencies

Leases

Rent expense was $3.3 million and $9.4 million for the three and nine months ended September 30, 2019, respectively, and $2.5 million and $7.4 million for the three and nine months ended September 30, 2018, respectively. Sublease income was $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively, with no sublease income for the three and nine months ended September 30, 2018.

Contingencies

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

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

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

On October 22, 2018, PTP OneClick, LLC (“PTP”) filed a lawsuit against Avalara, Inc. in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges that making, using, offering to sell, and selling AvaTax, Avalara Returns, and TrustFile (the “Avalara Products”) infringe U.S. Patent No. 9,760,915 held by PTP and also alleges unspecified trade secret misappropriation, unfair competition, and breach of contract. PTP seeks judgments of willful patent infringement, willful trade secret misappropriation, unfair competition, and breach of contract. PTP requests preliminary and permanent injunctions to enjoin the Company from making, using, offering to sell, and selling the Avalara Products along with treble damages and attorneys’ fees. Based upon the Company’s review of the complaint and the specified patent, the Company believes that the Company has meritorious defenses to PTP’s claims. On November 7, 2018, the Company moved to dismiss the lawsuit and to have the patent held invalid, and also moved to transfer the matter to the United States District Court located in Seattle, Washington. On April 30, 2019, the United States District Court for the Eastern District of Wisconsin granted the Company’s motion to transfer, reserving resolution of the motion to dismiss for the United States District Court for the Western District of Washington. On October 7, 2019, the United States District Court for the Western District of Washington invalidated the patent and dismissed the patent and unfair competition claims with prejudice but did not dismiss the trade secret misappropriation or breach of contract claims. The court has set the trial date for October 26, 2020. The Company intends to continue to vigorously defend against PTP’s allegations.

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Balance Sheet Detail

9 Months Ended

Sep. 30, 2019

Balance Sheet Related Disclosures [Abstract]

Balance Sheet Detail

4. Balance Sheet Detail

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

	Useful	September 30,			December 31,
	Life (Years)	2019			2018
Computer equipment and software	3 to 5	$	15,581		$	12,904
Internally developed software	6		5,205			3,620
Furniture and fixtures	5		6,770			5,850
Office equipment	3 to 5		858			586
Leasehold improvements	1 to 10		28,074			26,788
			56,488			49,748
Accumulated depreciation			(21,951	)		(16,375	)
Property and equipment—net		$	34,537		$	33,373

Depreciation expense was $2.2 million and $6.4 million for the three and nine months ended September 30, 2019, respectively, and $1.8 million and $5.0 million for the three and nine months ended September 30, 2018, respectively.

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

	September 30,		December 31,
	2019		2018
Prepaid expenses	$	11,194	$	9,578
Accrued investment income		687		260
Deferred financing costs		—		643
Deposits		298		325
Other		1,677		501
Total	$	13,856	$	11,307

Accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2019		2018
Accrued payroll and related taxes	$	4,184	$	3,800
Accrued federal, state, and local taxes		2,484		1,827
Accrued bonus		13,707		10,766
Self-insurance reserves		1,361		—
Employee stock purchase plan contributions		1,908		6,473
Accrued sales commissions		3,599		6,889
Accrued partner commissions		6,540		5,535
Contract liabilities		4,843		—
Accrued purchase price related to acquisitions		2,984		—
Other		8,254		6,811
Total	$	49,864	$	42,101

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