EDGAR 10-K Filing

Company CIK: 1348036
Filing Year: 2022
Filename: 1348036_10-K_2022_0001564590-22-006696.json

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ITEM 1. BUSINESS
Item 1. Business.
Overview
Avalara is a leading provider of tax compliance automation for businesses of all sizes. Every business, regardless of size, faces a bewildering and burdensome array of constantly shifting transaction tax collection, reporting and remittance obligations imposed by a patchwork of local, regional, state, and national taxing authorities. The rise of omnichannel commerce and international trade has increased this compliance burden. Avalara’s mission is to eliminate this burden and allow companies to focus on their core operations. We offer a leading suite of cloud-based solutions to assist companies with transaction tax and related compliance requirements. This multi-product platform - the Avalara Compliance Cloud - consists of calculation, returns, compliance document management, licensing and registration, fiscal representation, tax content, and insight solutions. Our vision is for the Avalara Compliance Cloud to be the leading, category-defining, global cloud compliance platform.
The changes in global economies and technology adoption are generational shifts in favor of Avalara’s compliance automation business. Increases in digital commerce and ongoing adoption of cloud technologies are behavior and productivity shifts that we expect to continue indefinitely. Alongside mounting regulatory change and government adoption of technology for fiscal transparency and efficiency, businesses around the world are looking for efficient, automated processes to mitigate risk and facilitate growth.
Transaction tax rules and regulations change frequently and are neither intuitive nor consistent across taxing jurisdictions, creating a massively complex compliance challenge. Determining the tax due on a particular sale depends not only on the precise geographic location of the transaction within relevant taxing jurisdictions and classifying the product or service into one of thousands of taxation categories, it also can vary based on the date of the transaction because of temporary tax incentives that change the tax rate for specific products, time periods, and transaction thresholds. Further complications to this multi-dimensional challenge arise from duties and taxes assessed on goods crossing national borders, and the thousands of rule changes enacted every year as taxing authorities amend their tax rates and taxability rules, modify jurisdictional boundaries, and implement other regulatory changes.
This complexity is often compounded by the necessity to perform transaction tax determination in real time, at the moment a transaction takes place or an invoice is created, and to determine and collect tax on numerous products or services in multiple jurisdictions. These circumstances are increasingly common with the rise of omnichannel commerce wherein businesses employ multiple channels to conduct sales, ranging from traditional in-store point of sale scenarios to multiple ecommerce platforms to digital marketplaces. Sales in these channels employ disparate transactional systems, each of which may contain their own transaction tax solutions ranging from third-party offerings like Avalara to rudimentary or homegrown capabilities. These basic tax calculation capabilities are often not sufficiently robust or current to provide accurate tax determinations for many businesses; more important, as each exists in a siloed channel, they do not offer businesses the ability to aggregate data across systems to enable efficient compliance. Data from those transactions and the associated taxes collected must be aggregated from each of the various systems to enable complete and accurate reporting, tax form preparation, filing, and remittance to the appropriate taxing jurisdictions. Traditional methods used by most businesses to aggregate and report transactions are burdensome, costly, and inadequate to the task. They involve manual aggregation and manipulation of data from disparate sources, reference to static tables in spreadsheet software, and reliance on internal staff to track relevant requirements and changes as well as to populate tax returns and ensure timely submission and payment.
Businesses relying on inadequate processes for transaction tax compliance risk miscalculations and incorrect collections on the front end, which can result in customer dissatisfaction, and inaccurate filings and payments to authorities on the back end, which can result in significant financial penalties.
The Avalara Compliance Cloud combines an advanced database of broad, deep, and up-to-date licensing, registration, and tax content with technology for executing compliance processes, including tax determination, aggregation of transaction data, tax document management, and tax return preparation, filing, and remittance. Our platform powers a suite of products that enables businesses to address the complexity of transaction tax compliance,
process transactions in real time, produce records of transaction tax determinations, and reduce errors, audit exposure, and total transaction tax compliance costs. Businesses that use our solutions can allocate fewer personnel to manage transaction tax compliance and focus their efforts on core business operations.
The Avalara Compliance Cloud is designed to integrate seamlessly with our customers’ business applications and be easy to administer and maintain. As transactions are executed in our customers’ business applications, the Avalara Compliance Cloud performs a series of operations to deliver tax compliance functionality. This functionality is enabled through an application programming interface (“API”), with customers and partners leveraging our pre-built integrations that connect to business applications used for accounting, enterprise resource planning (“ERP”), ecommerce, marketplaces, point of sale (“POS”), recurring billing, and customer relationship management (“CRM”) systems, or developing API calls directly into their systems. These integrations are designed to reduce the need for custom configurations and ongoing oversight by customers. Our cloud architecture ensures that our tax content updates are automatically applied to tax determinations when called by our customers’ applications. Our powerful and intuitive web-based console simplifies configuration and unifies administration, reporting, and returns processing across a customer’s multiple business applications.
Because our solutions are deeply embedded in our customers’ business processes and systems and provide an automated solution that is central to their ability to transact, we become critical business partners with our customers that foster substantial long-term relationships, as evidenced by our low revenue churn and high net revenue retention rate.
Businesses across industries and of all sizes, ranging from small companies to Fortune 100 enterprises, use our solutions. While mid-market and smaller customers, with 20 to 500 employees, have historically been our primary target segment for marketing and selling our solutions, we are focused on extending our customer reach through investments in product and go-to-market capabilities that address the enterprise and emerging small business market segments globally. We believe these markets represent significant long-term future growth opportunities to augment our large mid-market opportunity where we believe we remain minimally penetrated. We have been launching new compliance capabilities aimed at capturing larger shares of these market segments. These include calculating cross-border customs duties and import taxes as well as consumer use taxes, which are imposed by state governments on transactions in which sales tax was not collected correctly or at all. Additionally, we introduced new functionality into our tax calculation service that allows businesses with more complex tax scenarios to customize the rates and rules applied to specific transactions, and we have launched or acquired additional solutions that provide inroads to all market segments, from enterprise customers to emerging small businesses.
We sell our solutions primarily on a subscription basis. We target most prospects via cost-effective digital marketing strategies and initially qualify them using predictive analytics. The majority of our sales, to new and existing customers, are direct and conducted via telephone, requiring minimal in-person interaction. We expect, as we continue to expand our efforts upmarket to customers with larger and more complex needs, that we may need to resource for higher touch and in-person sales and support efforts. Our small business customers can subscribe to certain of our solutions via an automated, self-service ordering process, and we expect to continue to invest in a lower-touch sales and onboarding process. Our sales force also manages a network of business application providers and other customer referral sources that provide us with qualified leads and, in some cases, purchase functionality from us for use by their customers. We execute marketing programs targeting the ecosystems of these business application providers.
We also have acquired multiple businesses, primarily to augment the tax content of the Avalara Compliance Cloud, serve the needs of businesses in different geographies or industries, or improve our ability to serve additional aspects of transaction tax compliance. Substantial portions of our business, including our tax return preparation and filing and our compliance document management solutions, are based on acquired content and technology. Since 2018, we have acquired beverage alcohol tax, cross-border transaction (e.g., tariffs and duties) solutions, business licenses, insurance tax compliance solutions, and artificial intelligence technology and expertise. In 2021, we acquired INPOSIA Solutions GmbH (“Inposia”), as well as the operating assets of DAVO Technologies LLC (“Davo”), 3CE Technologies, Inc. (“3CE”), Track1099 LLC (“Track1099”), and CrowdReason Limited Liability Company and CorrelationAdvisors LLC (together, “CrowdReason”). Inposia is a German software company focused on e-invoicing, digital tax reporting, and business and data integration to address real-time compliance requirements for companies worldwide. Davo helps emerging small businesses automate the daily and ongoing
requirements for sales tax, supporting thousands of small businesses in the United States. 3CE provides software and services for Harmonized System classifications and verifications, primarily to government entities and logistics services providers. Track1099 provides online software and services for cost-effectively managing, e-filing, and e-delivering Internal Revenue Service forms, including Forms 1099, W-2, and W-9. CrowdReason is a developer of SaaS-based property tax compliance applications, with a related property valuation and advisory services business to help solve property tax compliance challenges. We intend to continue pursuing opportunities to broaden our suite of solutions, content, and international presence.
Industry and Competition
Transaction taxes are ubiquitous and complex, and compliance is increasingly difficult for businesses of all sizes. Businesses, regardless of size, industry, or location, are subject to transaction tax compliance requirements. These requirements can be burdensome, even for a business transacting in only a single location, and become exponentially more complex for companies doing business in multiple taxing jurisdictions and offering numerous products and services that are taxed in different ways.
Transaction tax exists at the intersection of commerce and government, and therefore political, economic, social, and technological changes may impact our business. Shifts happening in these areas today are driving complexity for businesses to manage tax, interest from governments in introducing and enforcing regulation, and businesses to apply technology to drive efficient results in compliance. Prior to the novel coronavirus (“COVID-19”) pandemic, the rise of ecommerce was an existing tailwind for our business. The pandemic accelerated adoption of online shopping, proving to be a generational shift that introduces tax complexity and drives the need for tax automation for more businesses. Global governments are responding to fiscal challenges by expanding tax requirements to capture more revenue from more businesses, and around the world more tax authorities are adding technological requirements such as live reporting for added transparency into revenue streams. Businesses of all sizes continue to put cloud technologies in place as the digital transformation of business continues, and the demand to facilitate distributed workforces continues. The availability of and trust in these technologies has furthered an emphasis on streamlining business processes to drive efficient growth. Macro trends such as these directly contribute to our value promise of delivering a more efficient technology solution to manage global compliance requirements.
These trends have accelerated or introduced new compliance challenges for businesses. The responsibility for accurately determining and collecting sales tax generally falls on the seller, who must go through a series of steps to determine the tax applicable to each transaction. When conducted manually, these steps are time consuming, involve complexities that are difficult to manage, and often prone to error. The volume and velocity of ecommerce transactions make manually calculating sales tax in real-time impossible.
Commerce across multiple jurisdictions increases the burden of transaction tax compliance as a result of the complexity arising from location-by-location, region-by-region, state-by-state, country-by-country, and product-by-product application of tax laws. Ecommerce, electronic marketplaces, globalization, and omnichannel retailing have facilitated cross-jurisdiction transactions for businesses of all sizes, increasing their transaction tax compliance burden and risk and the need for an automated compliance solution.
Due to the importance of tax revenue, taxing authorities continually seek ways to improve the efficiency, speed, and thoroughness of their collection and enforcement processes. New transaction tax requirements such as those imposed by many states following the U.S. Supreme Court decision in South Dakota v. Wayfair increase complexity for online merchants with geographically distributed customers. Globally, with the rise of online marketplaces, many tax authorities now require marketplace facilitators to consolidate tax reporting and payments for all sellers, adding meaningful complexity in data collection and reporting for the marketplaces and sellers alike. Commercial transaction reporting requirements also are changing, particularly in the international arena, as are registration and licensing obligations.
On the enforcement side, taxing authorities in the U.S. and worldwide have always conducted transaction tax audits to verify accurate and timely collection and payment. These audits can be time consuming and distracting to a business and are costly, including internal and external audit management costs, as well as payment of uncollected taxes, penalties, and interest. As tax revenue needs increase, pressure on collections increases as well. Automated tax compliance solutions improve business compliance efficiency as regulations continue to change, and businesses must adapt to more advanced techniques of identification and tax enforcement. Also, geopolitical changes such as the United Kingdom’s exit from the European Union (the “E.U.”) have meaningful implications for sellers around the world reaching large markets. New U.K. value-added tax (“VAT”) reporting requirements interrupt established paths and processes to reach these markets and can halt supply chain, fulfillment, and payment processes if not proactively addressed by businesses.
Many businesses attempt to handle transaction tax compliance processes manually, risking miscalculations and incorrect collections, which can result in customer dissatisfaction and/or financial penalties. Some businesses supplement their internal manual efforts with costly outsourced professional service firms to perform tax compliance functions. Many businesses process transactions using business applications such as accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM systems. These systems sometimes include rudimentary tax calculation capabilities, but they are usually not sufficiently robust or current to provide accurate tax determinations, and these systems often do not support other aspects of compliance including calculating cross-border and international taxes, use tax, returns filings, and managing exemptions and licensing.
The industry that provides support for transaction tax compliance is highly competitive and fragmented, but it is maturing. Rising complexity and increasing need for automated solutions have resulted in greater awareness of external solutions and there are now multiple public companies offering automated tax compliance solutions. Avalara believes that, in the age of digital commerce, it is inevitable that all businesses will adopt automated solutions to tax compliance over time. Until then, businesses will continue to employ a mix of approaches to address transaction tax compliance, including:
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tax-specific solutions from vendors, including Avalara, but also Sovos, TPS Unlimited, Inc. d/b/a TaxJar (a Stripe, Inc. company), Thomson Reuters, Vertex, Inc., and Wolters Kluwer NV;
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rudimentary tax calculator services and/or people-intensive, do-it-yourself approaches that rely on internal transaction-specific research and/or purchase of tax content information from third parties, manual determination, static tax tables, spreadsheet software, or rate calculator services, as well as manual filing and remittance activities; and
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outsourced transaction tax compliance services offered by accounting and specialized consulting firms.
We believe customers, including customers that are business applications providers, consider the following factors when selecting a transaction tax compliance solution:
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ability to improve overall transaction tax compliance;
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ability to deliver real-time tax determinations;
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ease of deployment and use;
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ease of integration with the customer’s business applications;
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ability to integrate with and aggregate data across multiple business applications to satisfy compliance for omnichannel commerce;
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ability to address multiple compliance functions from registration and licensing, initial taxability, and tax rate determination to procurement and management of compliance-related documents to preparation and filing of tax returns and remittance of funds;
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total cost of ownership; and
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tax content applicable to the customer’s business.
Although different customers will weigh each of these factors in different ways, we believe our cloud-based solutions compare favorably across all of them. While Avalara’s services historically were designed for mid-market and small businesses, recent enhancements to our product and service offerings, along with business acquisitions, have broadened our appeal to both the emerging small business and enterprise market segments. There is always room for further improvement and Avalara continues to pursue new functionalities, service offerings, pricing structures, and additional content and integrations to strengthen our competitive position.
Avalara Compliance Cloud
The Avalara Compliance Cloud enables customers to address the complexity of transaction tax and complementary compliance processes with advanced technologies and solutions. Key strengths of the Avalara Compliance Cloud include:
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Products and solutions for a broad array of compliance obligations. The Avalara Compliance Cloud includes a suite of compliance solutions for a wide and growing range of transaction taxes, such as sales and use, VAT, goods and services tax (“GST”), fuel and alcohol excise, insurance premium, cross-border tariffs and duties, lodging, and communications taxes. Our products manage transaction tax calculation; cross-border taxes like tariffs and duties; tax return preparation, filing, and remittance; exemption certificate and other compliance document storage and management; business license and tax registration procurement and management; and tax content research.
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Robust platform. The Avalara Compliance Cloud also includes a platform that simplifies the task of keeping up to date with the latest tax information and integrating with business systems. Our platform collects and structures content related to tax rules, rates, jurisdictions and tax codes and makes it easy to build integrations with accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM systems.
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Reliable delivery and infrastructure. Our cloud-based infrastructure allows our product suite to be delivered through flexible APIs and pre-built integrations for the business software our customers rely upon. Hosted on and delivered through industry-leading cloud services to ensure reliability, our products and underlying infrastructure scale as our customers grow.
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Easy to implement. Our solutions are designed to be easy to implement and deploy. To ease implementation, Avalara and our partners have invested in developing and maintaining an extensive set of pre-built integrations designed to connect our solutions to a broad range of leading business applications, including accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM systems. Our integrations are intended to enable fast and easy deployment and are designed to seamlessly embed into our customers’ business applications, reducing the need for costly custom implementations.
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Easy to use. Our solutions minimize day-to-day operating and maintenance tasks for our customers because tax determinations occur in real time within the customers’ business applications. Avalara solutions aggregate data from the systems processing the transactions and populate the necessary tax returns, helping ensure timely returns filing and remittances to required jurisdictions. Furthermore, our cloud architecture ensures that our tax content updates are automatically applied to tax determinations when called by our customers’ applications. Our solutions are managed via powerful and intuitive web-based consoles that simplify configuration and unify administration, reporting, and returns processing across a customer’s multiple business applications.
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Lower total cost of ownership. Compared to on-premises products, our comprehensive, integrated suite of automated, cloud-based compliance solutions require substantially less upfront deployment effort, hardware purchases, and ongoing maintenance and support costs. Our solutions reduce our customers’ need for manual research, and the related higher personnel costs, and eliminate the need for a patchwork of disparate products and services for separate transaction tax compliance functions.
Products and Solutions
We offer a broad suite of solutions for transaction tax and complementary compliance requirements. Our solutions can be purchased individually or as an integrated compliance suite. We organize our solutions in six product categories that represent the core requirements for achieving compliance.
Calculations. Avalara’s calculation products determine tax rates for transactions based on data and logic within our tax and product content database, which are then populated into our customers’ business applications. Certain Avalara calculations products are unique to a customer’s industry, including fuel and beverage alcohol excise, insurance premium, lodging, and communications taxes. Transaction tax calculation is also regionally specific, and we provide VAT and GST products for international customers and cross-border solutions for customs duties and import taxes. Calculation products are generally sold on an annual subscription basis and many times as part of an integrated solution with other products, including returns and compliance document management. Calculations are primarily delivered through cloud-based deployments but can also be deployed on-premises.
Returns and Reporting. Avalara’s tax returns and reporting products manage and automate the returns process, from form and data preparation to filing to remittance of funds to tax authorities. The products track filing calendars and deadlines, manage requirements for each of the customer’s required jurisdictions, and facilitate the payment process. For those customers that purchase calculations and returns products, Avalara’s integrated solution leverages stored transaction data from the calculation product to populate returns forms. Avalara offers returns products specialized for certain tax types, including sales and use, VAT, fuel and beverage alcohol excise, insurance premium, lodging, and communications taxes. For many of the returns types supported by Avalara, we also offer to execute the remittance of tax collections to the taxing authorities. Avalara is also a certified service provider in the Streamlined Sales Tax (“SST”) program, which is an initiative by certain U.S. state and local governments to simplify sales tax compliance for qualifying businesses. The capabilities required of a returns product can vary by business size or type, therefore Avalara offers additional returns solutions tailored for small businesses and accounting firms. Around the world, returns and reporting vary by region and the government’s adoption of technology within the reporting processes. Avalara is expanding solutions for businesses to comply with live reporting and e-invoicing requirements in Europe, India, and Brazil. Our returns products are available integrated and embedded with calculations products, offered on a standalone managed basis, or accessed online via a self-serve web tool. Returns products are generally sold on an annual subscription basis and can be purchased on a per filing basis.
Compliance Document Management. Avalara’s compliance document management products automate the creation, sending, receiving, storage, and management of a variety of documents required for compliance through a cloud-based solution. Businesses are required to collect and maintain numerous official forms, including tax exemption certificates, W-8 forms, W-9 forms, 1099 forms for contractors, power of attorney forms, and other tax-related forms for identification such as passports and drivers’ licenses. The solutions make tax documents available for easy retrieval and help our customers keep them up to date and validated. The solutions also limit our customers’ audit exposure by establishing an audit trail for tax exempt transactions and other audit scenarios. We offer a specific product for fuel excise document requirements, as well as a regional product for customers doing business in Brazil. Compliance document management products are sold as part of a compliance suite with calculation and returns products, or as a standalone product. These products are generally sold on an annual subscription basis with optional managed services to assist customers with collecting and validating documents.
Licensing and Registrations. Avalara’s licensing products and services support businesses of all sizes in the research, procurement, and maintenance of business licenses, registrations, and permits. These products also help customers acquire country, state, and local transaction tax registrations. For global businesses, Avalara offers a service to assist businesses selling internationally to obtain and maintain VAT registrations, a pre-requisite process to collecting, reporting, and remitting VAT payments in required jurisdictions. Licensing and registrations products and services can be purchased standalone on an as-needed basis, or as a subscription for ongoing management, maintenance, and storage of business licenses.
Fiscal Representation. To address the requirement of businesses to have a local fiscal representative in foreign jurisdictions when transacting outside of their home country, Avalara offers fiscal representation services,
acting as the responsible party and point of contact for local tax authorities in case of questions or audits. Avalara fiscal representative services are generally sold on a subscription basis.
Content, Data, and Insights. Avalara content, data, and insights products leverage Avalara’s tax and content databases to produce actionable, detailed insights, which tax and finance professionals use to make informed decisions about tax compliance and financial planning. Avalara offers tax content subscriptions that allow customers to research tax rates and taxability explanations, and also provide access to tax rate explanations and legal documentation that customers can use to plan or defend tax decisions. Through Avalara’s classification services, customers can identify and align their product databases to Avalara’s proprietary tax codes, harmonized system codes, universal product codes, and other tax classifications. By providing past transaction data, customers can leverage Avalara’s risk assessment tools to analyze where they may be obligated to collect and remit sales tax. Additionally, Avalara offers content generation products specialized for industry platforms such as point of sale systems for retailers. Content, data, and insight products are sold as subscriptions or on an as-needed basis.
In addition to our cloud solutions, a small percentage of our revenue is derived from a broad range of specialized tax compliance services that we deliver on a standalone basis or in conjunction with the sale or implementation of our cloud solutions. These services include such projects as nexus studies and analysis, voluntary compliance initiatives, complex tax registrations, reverse audits, audit defense, and specialized tax research.
Competitive Moats
Our competitive moats include:
Partner moat. We and our partners invest in developing and maintaining an extensive collection of pre-built integrations that are designed to connect our solutions to a broad range of leading business applications, including accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM systems. We believe these integrations provide a competitive advantage as they dramatically reduce implementation time, effort, and cost; enable our solutions to function seamlessly with the core applications our customers use to process and manage their transactions; and allow customers to easily and efficiently manage tax compliance across multiple business applications. We offer far more pre-built integrations with these applications than other tax software providers, and we plan to continue adding more. We have pre-built integrations with leading business application providers such as Magento, Intuit QuickBooks, Microsoft, Oracle NetSuite, Sage, Salesforce Commerce Cloud, and Epicor. In addition, we have relationships with ecommerce platform providers, including BigCommerce, Shopify, and others, that include our pre-built integrations in their platforms, allowing customers to easily choose our solutions to automate transaction tax calculations.
We have strategically built a broad ecosystem of relationships with our network of business application publishers (including ecommerce platforms) and their reseller channels, integration developers, implementation specialists, and accounting and financial advisors. These relationships provide us with an effective distribution channel, the majority of our pre-built integrations, a source of referral business, occasions for cross-selling, new opportunities for compliance automation, and early access to developing technologies.
Content moat. We have amassed, expanded, and integrated an extensive database of statutory tax content, including product classifications and taxability rules, exemption conditions, tax holidays, jurisdiction boundaries, tax rates, thresholds, licenses and registrations, and returns preparation and filing requirements, as well as millions of UPCs, linked to taxability rules. We employ a large group of tax research analysts and utilize artificial intelligence to continually update this library, which is processed by our calculation engine and delivered to our customers via our integrations. In addition to internal development, we have acquired multiple transaction tax-related businesses and acquired or licensed databases containing deep stores of knowledge to augment the tax content that supports our products. In 2020, we acquired TTR, whose core business is a sales tax content subscription service for tax professionals to determine and validate tax decisions and avoid costly mistakes. The content required for TTR’s subscription services extends our content database to include detailed research and documentation. We also have built and acquired a library of thousands of local, regional, state, and national tax return forms, tax exemption certificate forms, VAT and GST invoice templates, business license and registration forms, and other compliance documents. Our extensive tax content and forms databases enable us to serve the
compliance needs of an ever-expanding list of businesses in different size segments, geographies, and industries such as fuel, communications, beverage alcohol, and lodging.
Platform and technology moat. Our proprietary platform was born in the cloud and offers a comprehensive and integrated set of transaction tax compliance solutions that enable our customers to automate and more efficiently manage their compliance processes. Our platform combines an extensive proprietary database containing tax jurisdiction boundaries, tax rates, product- and date-specific taxability rules, and return preparation and filing requirements, with advanced algorithms for precise real-time address validation via geolocation technology, application of taxability rules, tax determination, tax return preparation and filing, tax remittance, and tax forms and records management. Our platform processes billions of tax determinations and millions of returns per year, with speed, reliability, and security capabilities designed to serve the needs of even the largest of enterprise customers.
On our platform, we provide a comprehensive and expanding suite of solutions to address a full range of transaction tax compliance burdens and use cases for tax determination and reporting compliance across multiple tax paradigms including sales tax, VAT, and GST; determination of cross-border customs duties and import taxes; determination of use tax obligations; and several other compliance requirements such as managing exemption certificates, and business licenses and registrations.
Our solutions can be configured and managed using our intuitive administrative consoles, which we regard as a differentiator from other transaction tax services because they facilitate fast and easy company-specific configuration, detailed transaction analysis, and access to detailed reports, worksheets, calendars, and other management functions. The consoles also provide a single point of management for various compliance solutions, scale as a customer’s needs grow or change, and automatically aggregate transactions from multiple business applications. We believe our comprehensive solutions enable us to provide added value to our customers, increase their loyalty and satisfaction, and raise their potential long-term value to us.
Growth Strategies
We plan to continue investing to provide our customers with best-in-class solutions and to expand our market opportunity. Our primary growth strategies include:
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Broaden our base of customers. We believe that the market for comprehensive, automated transaction tax compliance solutions is large and underserved, and therefore, we can significantly increase our customer base. Avalara will continue to focus on expanding our leadership and market share in the mid-market, and also will continue to introduce new solutions and tax content for the enterprise and emerging small business segments, globally. As businesses of all sizes expand their product and jurisdictional footprints, we believe the need for cost-effective transaction tax compliance solutions increases. We will continue to invest in our sales and marketing efforts, both domestically and internationally, and intend to expand into new markets to grow our customer base.
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Grow revenue from our existing customers. Many of our customers begin with a single solution, such as our AvaTax sales tax determination solution. This initial entry point establishes Avalara as a trusted part of a customer’s financial processes, and as a customer’s sales increase and the number of transactions processed grows, our volume-based subscription model generates more revenue. The initial entry point also provides us with significant cross-sell opportunities, including tax return preparation, filing and remittance, tax exemption certificate, tax research, and other compliance documents management, expanded determination solutions for use tax, cross-border trade and international VAT and GST tax regimes, and businesses licenses and registrations. These solutions work together to provide customers with a comprehensive automated solution for their global transaction tax compliance needs.
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Expand and deepen our partner ecosystem. We have an extensive network of business application providers and other customer referral sources that provides us with qualified leads and new customer opportunities. In some cases, providers purchase functionality from us for use by their customers. We intend to continue to expand our partner ecosystem by actively seeking new relationships that offer exposure to potential customers and integrations with more business applications. We also undertake
considerable effort to expand and maximize our relationships with key partners, providing new monetization opportunities and penetration into increasing percentages of each partner’s customer base.
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Expand international reach. We believe that we have a significant opportunity to expand our suite of solutions and serve more businesses operating outside of the United States. We currently support transaction tax compliance in Canada, Europe, South America, and Asia. In 2020, we launched new or enhanced products for cross-border customs duties and import taxes and advanced our solutions for VAT and GST. We plan to continue investing in these geographies, while also expanding our solutions and growing our sales force to expand into new regions.
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Broaden our content and suite of solutions. We devote substantial resources to continuously improve the Avalara Compliance Cloud, add innovative new features and functionalities, add content, build technology to support new content types, and improve the user experience for our solutions. We intend to continue to make significant investments organically and through acquisitions to build relevant content and expertise to best serve the transaction tax compliance needs of our customers. For example, in recent years we have acquired content and solutions for fuel and alcohol excise tax, European insurance premium tax, lodging tax, communications tax, European VAT, and Brazilian tax; cross-border transaction (e.g., tariffs and duties) solutions; business licensing and registrations; and artificial intelligence technology and expertise. These acquisitions accelerate the expansion of our tax content, solutions, customer base, cross-selling opportunities, and geographic reach. We intend to continue pursuing opportunities to build new capabilities internally and to acquire additional businesses and technologies that align with our strategic objectives.
Customers
Businesses across industries and of all sizes, ranging from small businesses to Fortune 100 companies, use our solutions. While mid-market and smaller customers, with 20 to 500 employees, have historically been our primary target market segment for marketing and selling our solutions, we are focused on increasing our market share and global customer reach through investments in product and go-to-market capabilities that address the enterprise and emerging small business market segments globally. We believe these markets represent significant long-term future growth opportunities to augment our large mid-market opportunity where we believe we remain minimally penetrated. In recent years, we have launched several new compliance capabilities aimed at capturing larger shares of these market segments, including cross-border customs duties and import taxes, consumer use taxes, and new functionality into our tax calculation service that allows larger businesses with more complex tax scenarios to customize the rates and rules applied to specific transactions. We also have introduced a new, simplified returns service specifically aimed at small businesses and another for use by accounting firms seeking to extend their transaction tax business and margins.
We monetize our solutions through direct sales to customers and via certain partners, such as ecommerce platform partners, that include some of our solutions in their offerings and pay us for usage by their end customers. These platform customers may be core customers to Avalara, and their end-user customers represent opportunities to upsell additional products and become direct customers of Avalara over time. We use core customers as the primary metric for our current customer count reporting. During the second quarter of 2021, we revised our core customer calculation methodology to include revenue from our Streamlined Sales Tax solution (“SST”), which results in additional customers being included in reported core customers. Under the revised calculation methodology, as of December 31, 2021, 2020, and 2019, we had approximately 18,270, 15,020 and 12,240 core customers, respectively.
We define a core customer as:
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a unique account identifier in our billing system (multiple companies or divisions within a single consolidated enterprise that each have a separate unique account identifier are each treated as separate customers);
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that is active as of the measurement date; and
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for which we have recognized, as of the measurement date, greater than $3,000 in total revenue during the previous twelve months.
Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers that subscribe to our solutions through our international subsidiaries or certain legacy and acquired billing systems that have not been integrated into our primary U.S. billing systems (e.g., recent acquisitions and our lodging tax compliance solution). While most of our revenue is currently generated by customers located in the United States, we support transaction tax compliance and registration in Canada, Europe, South America, and Asia, and we are continuing to expand our international presence. As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric.
As noted above, we revised our core customer calculation methodology during the second quarter of 2021. Under the prior methodology, revenue from SST was not included in our calculation of total revenue during the previous 12 months. This meant customers that would have otherwise met the definition of a core customer, with inclusion of attributable SST revenue, were excluded from our core customer count as well as our disclosures on the percentage of total revenue attributable to core customers. The revised methodology for core customers includes revenue from SST.
We believe these changes improve the usefulness of this key business metric, which is to measure both the growth of existing customers into core customers and the acquisition of new customers of a certain size.
We also have a substantial number of customers of various sizes that do not meet the revenue threshold to be considered a core customer. Many of these customers are in the emerging and small business segment of the marketplace, which represents strategic value and a growth opportunity for us. Customers who do not meet the revenue threshold to be considered a core customer provide us with market share and awareness, and we anticipate that some may grow into core customers. In addition, we have numerous enterprise-level customers that only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers. In addition to customers with whom we have a direct relationship, some of our customers are business application publishers (including ecommerce platforms) that include automated tax determination powered by Avalara. While those platform customers may be core customers to Avalara, their end-user customers generally are not.
A summary of our core customers and net revenue retention rate is as follows:
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Number of core
customers
(as of end
of period) - legacy
18,060
17,230
16,410
15,580
14,890
14,180
13,560
12,940
Number of core
customers
(as of end
of period) - revised(1)
18,270
17,400
16,570
15,730
15,020
14,300
13,640
13,000
Net revenue
retention rate - legacy
%
%
%
%
%
%
%
%
Net revenue
retention rate - revised(2)
%
%
%
%
%
%
%
%
(1) During the second quarter of 2021, we revised the methodology for calculating core customers to include revenue from SST (see Number of Core Customers below for details). The table above includes the number of core customers using both the legacy and the revised methodologies.
(2) During the second quarter of 2021, we revised the methodology for calculating net revenue retention rate to include revenue from SST. In addition, professional services revenue is no longer included in the revised calculation methodology, as these services tend to be more one-time in nature (see Net Revenue Retention Rate below for details). The table above includes the net revenue retention rate using both the legacy and the revised methodologies.
For additional information regarding these metrics, see section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Business Metrics.”
Sales and Marketing
We sell our solutions primarily on a subscription basis with volume-based pricing. Our solutions are capable of addressing the transaction tax compliance needs of businesses of all sizes, from the smallest sole proprietors to Fortune 100 enterprises. While Avalara started by selling primarily to mid-market and small businesses, growth opportunity and customer need has expanded our reach into enterprise and emerging small businesses. To grow in these areas and expand beyond the mid-market, Avalara invests in specialized go-to-market strategies for sales and marketing unique to each segment.
While we generally identify and engage directly with our prospective customers, we leverage the sales and referral resources of a broad ecosystem of partners across all market segments. These partners include technology partners, systems integrators, and accounting firms. This ecosystem provides us with qualified leads through a variety of incentive programs. In some cases, providers purchase functionality from us for use by their customers, and we market our additional services to those end users. Additionally, we actively conduct programs to engage with state regulators, tax and accounting firms, payroll vendors, and financial services providers. In some cases, we use customer data obtained from our products or tools to help our customers anticipate compliance requirements and trigger expanded product adoption, such as the procurement of new business licenses in new regions, or risk assessment tools for economic nexus.
The majority of our mid-market and small business sales are conducted via telephone, requiring few to no in-person interactions with customer prospects. We target prospects via an omnichannel marketing program, including paid and unpaid digital advertising, direct mail, event marketing, account-based marketing, content marketing, prospect database nurturing, and other digital marketing activities. We also engage in awareness advertising activities using traditional print and electronic media.
In addition to reaching highly targeted enterprise and mid-market prospects, our marketing investments and activities generate interest from large numbers of emerging and small businesses that also are burdened by transaction tax compliance requirements. Emerging and small business customers can purchase and configure smaller plans at lower price points through our self-service online marketplace without the involvement of our primary selling or customer onboarding teams. Additionally, we have established relationships with certain business application providers that target small businesses that have purchased our functionality for use by their customers and embedded our solutions into their offering. We believe serving small businesses is important because it expands our footprint and establishes customer relationships that may become more valuable to us over time as these customers grow, and also provides a potential barrier to entry from competitors that may seek to build market share by targeting the small business segment.
We reach each market segment, from emerging small business to enterprise, through channels and tactics that match their expectations for content, outreach, timeliness, and service level. This can require high touch service for some enterprise customers and a fully automated purchase path for the smallest companies. We hire and train both sales and marketing teams specialized for each segment.
Partners
Expanding and maintaining our partner ecosystem has been an essential part of our growth. We strive to be true and recognized instruments of our partners’ success, constantly engaging, investing in, and supporting them to
create mutually valuable relationships that best serve our mutual customers. We emulate our partners’ go-to-market strategies to ensure alignment with their business processes. These relationships, along with our pre-built integrations, form a powerful moat against our competitors. Our goal is to be tightly integrated into our partners’ offerings, facilitating fast, simple onboarding and an easy-to-use experience for our shared customers.
Our partner ecosystem is comprised of technology partners, such as software developers and publishers, independent software vendors, ecommerce platforms, and marketplaces; systems integrators, including value-added resellers, services firms, and ecommerce companies; and accounting firms, including CPAs and bookkeepers. Partners have multiple ways in which to engage with Avalara. All partners can refer Avalara products and earn commissions. Many partners choose to become certified to implement Avalara solutions for their customers. Our technology partners integrate Avalara solutions into their applications and receive commissions, and a subset of technology partners embed Avalara AvaTax into their platform as the default tax engine and offer their customers a bundled price.
Our partners range from globally known enterprises to startups and entrepreneurs who recognize the opportunity to add value to their customer relationships by leveraging our solutions. We offer these partners access to dedicated Avalara teams that provide sales and marketing assistance, as well as training and technical resources.
Research & Development and Tax Content Team
Our research and development organization is responsible for the design, development, security, testing, deployment, and maintenance of the Avalara Compliance Cloud. We devote substantial resources to continuously improve and scale our platform, add innovative new features and functionalities, build technology to support new products and content types, and improve the user experience for our platform and solutions.
Our global content teams are responsible for building and maintaining our propriety database of tax and product content required to calculate transaction tax for our customers. Tax analysts rely on advanced technologies to acquire and maintain tax content, keeping existing content up to date with changes and using teams of researchers and tax experts to edit, validate, and apply the changes to our database. This large team monitors, tests, and updates our tax content to incorporate new and revised tax rates, rules, taxing jurisdiction boundaries, and exemption conditions.
Intellectual Property
We primarily rely upon a combination of confidentiality procedures, contractual provisions, copyright, trademark, patent, and trade secret laws, and other similar measures to protect our proprietary information and intellectual property. Our trademarks and service marks include Avalara, the Avalara logo, AvaTax, the Avalara Compliance Cloud, “Tax compliance done right,” “The Power of Orange,” marks for our acquired businesses, and various marketing slogans. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our solutions or to obtain and use information that we regard as proprietary and may also attempt to develop similar technology independently. Our means of protecting our proprietary rights may not be adequate.
The software and internet industries are characterized by the existence of a large number of patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may claim that our current or future solutions infringe their intellectual property rights. We have in the past and may in the future have to defend ourselves against claims of intellectual property infringement, which could be expensive for us and harm our business and financial condition even if such claims are unsuccessful.
Government Regulation
Our business is subject to a range of complex laws and regulations, mostly relating to our involvement in our customers’ financial transactions. To be successful, we must promote and monitor compliance with these legal and regulatory requirements.
We perform critical business functions for our customers, including tax determination, returns preparation and filing, and tax remittance. The federal Bank Secrecy Act requires that financial institutions, of which money transmitters are a subset, register with the U.S. Department of Treasury’s Financial Crimes Enforcement Network and maintain policies and procedures reasonably designed to monitor, identify, report and, where possible, avoid money laundering and criminal or terrorist financing by customers. Most U.S. states also have laws that apply to money transmitters, and impose various licensure, examination, and bonding requirements on them. We believe these federal and state laws and regulations were not intended to cover the business activity of remitting transaction taxes that taxpayers owe to the various states. However, if federal or state regulators were to apply these laws and regulations to this business activity, whether through expansion of enforcement activities, new interpretations of the scope of certain of these laws and regulations or of available exemptions, or otherwise, or if our activities were held by a court to be covered by such laws or regulations, we could be required to expend time, money, and other resources to deal with enforcement actions and any penalties that might be asserted, to institute and maintain a compliance program specific to money transmission laws, and possibly to change aspects of how we conduct business to achieve compliance or minimize regulation. We have contractually agreed with certain states collecting sales tax that in determining and remitting taxes on behalf of certain customers, we will comply with various technical, filing, privacy, confidentiality, bonding, and trust account requirements.
In the course of selling products and services, retailers and other businesses often come into possession of credit card numbers and other personal information of consumers. Determining the transaction taxes owed by our customers involves providing our solutions with the types and prices of products they sell, as well as information regarding addresses that products are shipped from and delivered to. Our tax exemption certificate management solution also requires input of certain information regarding the purchasers who are entitled to tax exemptions. Our beverage alcohol business requires collection of personal information about certain individuals associated with each customer, as well as information regarding beverage alcohol product purchasers and recipients. Numerous local, regional, state, and national laws and regulations govern the collection, dissemination, use, and safeguarding of certain information that could be used to commit identity theft or fraud. Although most of the data that is provided to our solutions by our customers cannot be used to identify individual consumers, we may be subject to these laws in certain circumstances. Most states and many countries have also adopted data security breach laws that require notice to affected consumers of any security breach as to their personal information. In the event of a security breach, our compliance with these laws may subject us, depending on the personal information in question, to costs associated with notice and remediation, as well as potential investigations from federal regulatory agencies, state attorneys general, and other governmental authorities.
Failures to safeguard data adequately or to destroy data securely could subject us to regulatory investigations or enforcement actions under federal or state data security, unfair practices, or consumer protection laws. The scope and interpretation of these laws, and the burdens and costs of complying with them, could increase in the future.
Human Capital Management
We believe our corporate culture provides an advantage in recruiting new employees and retaining our best talent, as well as driving behaviors across our entire organization that help us succeed. This culture is characterized in the many employees who embody our nine success traits: optimism, passion, adaptability, humility, fun, ownership, curiosity, urgency, and simplicity. The rallying point of our culture is the color orange. Our employees wear this color with pride every day, and we have trademarked the slogan “The Power of Orange.” Our culture permeates our sales and marketing outreach, and the significance of the color orange has been featured in multiple news articles. As a result, we believe our customers, partners, and many prospects readily identify and appreciate our culture in their interactions with the Avalara team.
As of December 31, 2021, we had 4,465 full-time employees. Of these employees, 2,323 are based in the United States, 37 are based in Canada, 472 are in the United Kingdom and continental Europe, 1,434 are based in India, and 199 are based in Brazil. Our global workforce is highly educated, with most of our employees working in engineering, technical, or professional roles. With the exception of Brazil and certain countries in the E.U., where collective bargaining agreements are commonplace, none of our employees are covered by collective bargaining agreements. We believe our employee relations are good and we have not experienced any work stoppages.
We offer a competitive compensation package that is designed to attract new employees and retain, motivate, and reward current employees. Our compensation program includes base salaries, cash bonuses, and equity compensation for certain employees. In addition, we offer a range of benefits to our employees, including an employee stock purchase plan for U.S. employees, retirement plans, medical, dental, and vision insurance, health and dependent care flexible spending accounts, health savings accounts, basic and voluntary life and accidental death and dismemberment insurance, and disability insurance.
Beginning in 2019, we engaged a leading polling and analytics firm to measure our employee engagement performance and have invested in company-wide initiatives to support our engagement goals. We are committed to continuous improvement through our investments in coaching, mentorship, training, and other initiatives designed to support our employees. These initiatives include an employee assistance program, commuter benefits, professional training and development platforms and opportunities, tuition reimbursement for eligible employees, employee resource groups, virtual events such as trivia contests and a global talent show, and free and subsidized exercise and mindfulness programs.
We have a number of employee resource groups that enhance our inclusive and diverse culture, including Women of Avalara, Veterans of Avalara, Prism (LGBTQ+), and Ujima (African American/Black). We continue to recruit technical talent in diverse communities, including by engaging as a sponsor of the annual Grace Hopper Celebration (the world’s largest gathering of women technologists), AfroTech (a multicultural tech conference that brings leaders in technology and business together to exchange ideas and build a strong Black technology community), and Lesbians Who Tech. We require anti-harassment training as part of our new employee onboarding process and regularly for all employees, and we also conduct managing bias training for our leadership and executive teams.
Beginning in the first quarter of 2020, the COVID-19 pandemic had a significant impact on our workforce. Even though we have begun to re-open certain of our office locations, the vast majority of our employees continue to work remotely and likely will continue to work remotely for an undetermined portion of 2022. We have instituted safety protocols and procedures for the limited number of employees who continue to work on-site. During the pandemic we launched an employee resource group for remote workers. We also conducted employee surveys to help us understand how the company is doing as an employer and identify employee concerns specifically in the context of handling COVID-19 requirements for our office locations and the impact of the pandemic on our employees. Following the pandemic, many of our employees likely will work remotely on a permanent or semi-permanent basis and others may have a hybrid remote and on-site role.
Available Information
We maintain a website at investor.avalara.com, through which we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All such filings are available free of charge. The information on, or that can be accessed through, our website is not part of this report and the inclusion of our website address in this report is an inactive textual reference only.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making an investment decision. If any of the events or circumstances described in the following risk factors actually occurs, our business, operating results, financial condition, cash flows, and prospects could be materially and adversely affected.
Risks Relating to Our Business and Industry
We have incurred significant operating losses in the past and may never achieve or maintain profitability.
We have incurred significant operating losses since our inception, including net losses of $125.2 million, $49.2 million, and $50.2 million in 2021, 2020, and 2019, respectively. We had an accumulated deficit of $684.6 million as of December 31, 2021. We expect our operating expenses to continue to increase in future periods as we hire additional sales and other personnel, improve the Avalara Compliance Cloud, invest in sales and marketing initiatives, expand our international reach, and potentially acquire complementary technology and businesses. If our revenue does not increase to offset increases in our operating expenses, we may never achieve or maintain profitability. Revenue growth may slow, revenue may decline, or we may incur significant losses in the future for a number of possible reasons, including slowing demand for our solutions, increasing competition, a decrease or slowing in the growth of the markets in which we compete, or if we fail for any reason to capitalize on growth opportunities. If these losses exceed our expectations or if our revenue growth expectations are not met in future periods, our financial performance will be harmed.
Our revenue growth rate may not be sustainable.
Our revenue has grown rapidly, from $382.4 million in 2019, and $500.6 million in 2020 to $699.0 million in 2021. As our revenue base grows, we expect that our revenue growth rate will decline over time, and you should not rely on the revenue growth rate of any prior period as an indication of our future performance. This risk may increase with any future acquisition, particularly if the revenue growth rate of the acquired business has been lower than ours.
Our revenue growth rate depends on existing customers renewing and maintaining or upgrading their subscriptions, and if we fail to retain our customers at current or upgraded subscriptions, our business will be harmed.
Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their subscription periods. Our customers may not renew subscriptions for a similar mix of solutions or transaction volumes. Our renewal rates may decline because of a number of factors, including customer dissatisfaction, customers’ spending levels, decreased transaction volumes, increased competition, changes in tax laws or rules, pricing changes, or legislative changes affecting tax compliance providers. If our customers do not renew their subscriptions or reduce the solutions or transaction volumes purchased under their subscriptions, our revenue may decline and our business may be harmed. Our future success also depends in part on existing customers upgrading their subscriptions. If our efforts to sell upgrades to our customers are not successful, it may decrease our revenue growth rate.
If we are unable to attract new customers on a cost-effective basis, our business will be harmed.
To grow our business, we must continue to grow our customer base in a cost-effective manner. Increasing our customer base and achieving broader market acceptance of our solutions will depend, to a significant extent, on our ability to effectively expand our sales and marketing activities. We may not be able to recruit qualified personnel, train them to perform, and achieve an acceptable level of sales production from them on a timely basis or at all. In addition, the cost to attract new customers may increase as we market our existing and new solutions to different market segments and geographies. If we are unable to maintain effective sales and marketing activities and maintain and expand our partner network, our ability to attract new customers could be harmed, our sales and marketing expenses could increase substantially, and our business, results of operations, and financial condition may suffer.
If we fail to effectively manage our growth, our business, results of operations, and financial condition would likely be harmed.
We expect to continue to experience rapid growth in our headcount and operations, domestically and internationally, which will continue to place significant demands on our management and our administrative, operational, and financial reporting resources. We have experienced significant growth in the number of customers, number of transactions, and the amount of content we support. Our growth will require hiring additional employees
and making significant expenditures, particularly in sales and marketing but also in our technology, professional services, finance, and administration teams, as well as facilities and infrastructure. Our ability to effectively manage our growth will require the allocation of management and employee resources along with improvements to operational and financial controls and reporting procedures and systems. In addition, as we continue to expand internationally, we will encounter unexpected challenges and expenses due to unfamiliarity with local requirements, practices, and markets. Our expenses may increase more than we plan, and we may fail to hire qualified personnel, expand our customer base, enhance our existing solutions, develop new solutions, integrate any acquisitions, satisfy the requirements of our existing customers, respond to competitive challenges, or otherwise execute our strategies. If we are unable to effectively manage our growth, our business, results of operations, and financial condition would likely be harmed.
If we fail to attract and retain qualified personnel, our business could be harmed.
Our success depends in large part on our ability to attract, integrate, motivate, and retain highly qualified personnel at a reasonable cost on the terms we desire, particularly sales and marketing personnel, software developers, technical support, and research and development personnel. Competition for skilled personnel, particularly in the technology industry and in some countries and regions in which we operate, is intense and we may not be successful in attracting, motivating, and retaining needed personnel. We also may be unable to attract or integrate into our operations qualified personnel on the schedule we desire. We have from time to time experienced, and we expect to continue to experience, difficulty in attracting, integrating, motivating, and retaining highly qualified personnel, which could harm our business. In addition, dealing with the loss of the services of our executive officers, including our chief executive officer, or other key personnel and the process to replace any of our executive officers or key personnel may involve significant time and expense, take longer than anticipated, and significantly delay or prevent the achievement of our business objectives, which would harm our financial condition, results of operations, and business.
Revenue received as a certified provider in the Streamlined Sales Tax program is subject to price negotiations, and any decrease in payment rates or discontinuation of the program could adversely affect our business, results of operations, financial condition, and growth prospects.
We currently derive and, at least in the near term, expect to continue to derive significant revenue as a certified provider in the SST program. SST payment rates are subject to price negotiations with the SST Governing Board and its member states. For example, effective January 2021, SST payment rates decreased under a new contract with the SST Governing Board. If SST payment rates were to decrease further or if the SST program were to be discontinued, our business, results of operations, financial condition, and growth prospects will suffer.
We may not successfully develop or introduce new and enhanced solutions that achieve market acceptance, or successfully integrate acquired products, services, or content with our existing solutions, and our business could be harmed and our revenue could suffer as a result.
Our ability to attract new customers and increase revenue from existing customers will likely depend upon the successful development, introduction, and customer acceptance of new and enhanced versions of our solutions and on our ability to integrate any products, services, and content that we may acquire. Moreover, if we are unable to expand our solutions, our customers could migrate to competitors. Our business could be harmed if we fail to deliver new versions, upgrades, or other enhancements to our existing solutions to meet customer needs on a timely and cost-effective basis. Unexpected delays in releasing new or enhanced versions of our solutions, or errors following their release, could result in loss of sales, delay in market acceptance, or customer claims against us, any of which could harm our business. The success of any new solution depends on several factors, including timely completion, adequate quality testing, and market acceptance. We may not be able to develop new solutions successfully or to introduce and gain market acceptance of new solutions in a timely manner, or at all. Additionally, we must continually modify and enhance our solutions to keep pace with changes in hardware systems and software applications, database technology, and evolving technical standards and interfaces. As a result, uncertainties related to the timing and nature of business application providers, announcements or introductions of new solutions, or modifications by vendors of existing hardware systems or back-office or internet-related software applications, could harm our business and cause our revenue to decline.
Our business and success depend in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships.
We depend on, and anticipate we will continue to depend on, various third-party relationships to sustain and grow our business. We are highly dependent on relationships with third-party publishers of software business applications, particularly our largest partners, because the integration of our solutions with their applications allows us to reach their large customer bases. Our sales and our customers’ user experience are dependent on our ability to connect easily to such third-party software applications. We may fail to retain and expand these integrations or relationships for many reasons, including due to third parties’ failure to maintain, support, or secure their technology platforms in general and our integrations in particular. Any such failure could harm our relationship with our customers, our reputation and brand, and our business and results of operations.
As we seek to add different types of partners to our partner ecosystem, it is uncertain whether these third parties will be successful in building integrations, co-marketing our solutions to provide a significant volume and quality of lead referrals and orders, or continuing to work with us as their own products evolve. Identifying and negotiating new and expanded partner relationships requires significant resources. In addition, integrating third-party technology can be complex, costly, and time-consuming. Third parties may be unwilling to build integrations, and we may be required to devote additional resources to develop integrations for business applications on our own. The contracts applicable to third parties’ development tools may be unfavorable and add costs or risks to our business or may require us to push additional contract terms to our customers that affect our relationship with our customers. Providers of business applications with which we have integrations may decide to compete with us or enter into arrangements with our competitors, which may result in such providers offering multiple solutions on their applications or withdrawing support for our integrations. In addition, any failure of our solutions to operate effectively with business applications could reduce the demand for our solutions and harm to our business. If we are unable to respond to these changes or failures in a cost-effective manner, our solutions may become less marketable, less competitive, or obsolete, and our results of operations may be negatively impacted.
In addition, we leverage the sales and referral resources of our partners through a variety of incentive programs. In the event that we are unable to effectively utilize, maintain, and expand these relationships, our revenue growth would slow, we would need to devote additional resources to the development, sales, and marketing of our solutions, and our financial results and future growth prospects would be harmed. Additionally, our partners may demand, or demand greater, referral fees or commissions. Certain large partners may negotiate, and in the past have negotiated, lower fees that may be charged to their end customers.
Our acquisitions of, and investments in, other businesses, products, or technologies may not yield expected benefits and our inability to successfully integrate acquisitions may negatively impact our business, financial condition, and results of operations.
In the past, we have pursued acquisitions of content, technology, and expertise to enhance the transaction tax compliance products and services we offer. We anticipate that we will continue to make acquisitions of or investments in businesses, products, content, and technologies in the future. We may not realize the anticipated benefits, or any benefits, from our past or future acquisitions. In addition, if we finance acquisitions by incurring debt or by issuing equity or convertible or other debt securities, our existing shareholders may be diluted or we could face constraints related to the repayment of indebtedness. To the extent that the acquisition consideration is paid in the form of an earnout on future financial results, the success of such an acquisition will not be fully realized by us for a period of time as it is shared with the sellers. Further, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed and the value of your investment may decline. For us to realize the benefits of past and future acquisitions, we must successfully integrate the acquired businesses, products, or technologies with ours. Some of the challenges to successful integration of our acquisitions include:
•
unanticipated costs or liabilities resulting from our acquisitions;
•
retention of key employees from acquired businesses;
•
difficulties integrating acquired operations, personnel, technologies, products, or content, which may be more significant in the case of foreign acquisitions;
•
diversion of management attention from existing business operations and strategy;
•
diversion of resources that are needed in other parts of our business, including integration of other acquisitions;
•
potential write-offs of acquired assets;
•
inability to maintain relationships with customers and partners of the acquired business;
•
difficulty of transitioning acquired technology and related infrastructures onto our existing platform;
•
difficulty maintaining security and privacy standards of acquired technology consistent with our existing solutions;
•
potential financial and credit risks associated with the acquired business or customers;
•
the need to implement internal controls, procedures, and policies at the acquired company;
•
the need to comply with additional laws and regulations applicable to the acquired business; and
•
the income and indirect tax impacts of any such acquisitions.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments and negatively impact our business, financial condition, and results of operations.
If we fail to compete effectively, our revenue growth could be negatively affected.
We face significant competitive challenges from do-it-yourself approaches, outsourced transaction tax compliance services offered by accounting and specialized consulting firms, and other tax-specific software vendors. Many businesses using do-it-yourself approaches believe that manual processes are adequate and may be unwilling to pay the costs of our solutions, resulting in an inertia that can be difficult to overcome.
There are a number of competing tax-specific software vendors. Many of our competitors, as well as large accounting firms, have historically targeted primarily large enterprise customers, but also may market to small to medium-sized businesses. Other competitors who currently focus on small to medium-sized businesses may be better positioned than larger competitors to increase their market share with such businesses by competing on price, service, or otherwise. We also face competition from private transaction tax compliance businesses focused primarily on ecommerce. It is also possible that enterprises operating in adjacent compliance, financial services, or ecommerce verticals may decide to pursue transaction tax compliance and become significant competitors. Increased competition may impact our ability to add new customers at the rates we have historically achieved. Our failure to successfully and effectively compete with current or future competitors could lead to lost business and negatively affect our revenue growth.
We face significant risks in selling our solutions to enterprise customers, and if we do not manage these efforts effectively, our results of operations and ability to grow our customer base could be harmed.
Sales to enterprise customers typically involve higher customer acquisition costs and longer sales cycles. The historical sales cycle and conversion rate trends associated with our existing mid-market customers may not apply to larger enterprise businesses for whom purchasing decisions may require the approval of more technical personnel and management levels. Larger customers may demand more integration services and customization as well as different product features and ongoing service expectations. In addition, our standard pricing model may be less attractive to certain customers with very high volumes of transactions. As a result, sales opportunities to larger businesses may require us to devote greater research and development, sales, support, and professional services resources to individual prospective customers, resulting in increased acquisition costs and strains on our limited resources. Moreover, these larger transactions may require us to delay recognizing the associated revenue we derive from these prospective customers until all revenue requirements have been met.
Our quarterly and annual results of operations are likely to fluctuate in future periods.
We expect to experience quarterly or annual fluctuations in our results of operations due to a number of factors, many of which are outside of our control. This makes our future results difficult to predict and could cause our results of operations to fall below expectations or our predictions. The other risk factors discussed in this “Risk Factors” section may contribute to the variability of our quarterly and annual results. In addition, a percentage of our operating expenses is fixed in nature and is planned based on forecasted financial performance. In the event of revenue shortfalls, we may not be able to mitigate the negative impact on our results of operations quickly enough to avoid short-term impacts.
Because we recognize revenue from subscriptions for our solutions over the terms of the subscriptions, 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.
If we make errors in our customers’ transaction tax determinations or when completing our customers’ returns or remit their tax payments late or not at all, our reputation, results of operations, and growth prospects could suffer.
The tax determination functions we perform for customers are complicated, time-sensitive, and dependent on the accuracy of the database of tax content underlying our solutions. Some of our processes are not fully automated, such as our process for monitoring updates to tax rates and rules, and, even to the extent our processes are automated, our solutions are not proven to be without possibility of errors. If we make errors in our customers’ tax determinations or when completing our customers’ returns or remit their tax payments late or not at all, our customers may be assessed for underpayment of taxes, along with interest and penalties. In addition, as a certified provider in the SST program, in some circumstances we may become liable to member states in the event of delinquent payment of taxes and may be responsible for certain tax liabilities. For certain of our solutions, we guarantee the accuracy or timeliness of the results or output provided by those solutions and could be liable under such guarantee for up to 12 months’ service fees for those solutions in the event of an error that results in uncollected or unremitted taxes, penalties, or interest. Although our agreements have disclaimers of warranties and limit our liability (beyond the amounts we agree to pay pursuant to our guarantee, if applicable), a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold us liable for these errors. Further, in some instances we have negotiated agreements with specific customers or assumed agreements in connection with our acquisitions that do not limit this liability or disclaim these warranties. Additionally, erroneous tax determinations could result in overpayments to taxing authorities that may be difficult to reclaim from the applicable taxing authorities. Any history of erroneous tax determinations or returns or failures to timely remit tax payments for our customers could also cause our reputation to be harmed, could result in negative publicity, loss of or delay in market acceptance of our solutions, loss of customer renewals, and loss of competitive position. In addition, our errors and omissions insurance coverage may not cover all amounts claimed against us if such errors or failures occur. The financial and reputational costs associated with any erroneous tax determinations or failures to timely remit tax payments may be substantial and could harm our results of operations and financial condition.
Cybersecurity and data security breaches and ransomware attacks may create financial liabilities for us, damage our reputation, and harm our business.
Our customers provide us with information that our solutions store, some of which is confidential information about them or their financial transactions, as well as significant amounts of money for remittance to various taxing jurisdictions on their behalf. In addition, we store personal information about our employees and, to a lesser extent, those who purchase products or services from our customers. We have security systems and information technology infrastructure designed to protect against unauthorized access to such information and money, but we may not be successful in protecting against all security breaches and cyber-attacks. Threats to and breaches of our information technology security can take various forms, including viruses, worms, ransomware, and other malicious software
programs, or actions or omissions by an employee. Significant cybersecurity or data security breaches could result in the loss of business, litigation, regulatory investigations, loss of customers, and penalties that could damage our reputation and adversely affect the growth of our business.
In some cases, we must rely on the safeguards put in place by third parties to protect against security threats. These third parties, including vendors that provide products and services for our operations and our network of business application providers, could also be a source of security risk to us in the event of a failure of their own security systems and infrastructure, whether unintentionally or through a malicious backdoor. We do not review the software code included in third-party integrations in all instances.
Because the techniques used to obtain unauthorized access, sabotage systems, or otherwise access data and/or data backups change frequently and generally are not recognized until launched against a target, we or these third parties have been and, in the future, may be unable to anticipate these techniques or to implement adequate preventative measures. With the increasing frequency of cyber-related frauds to obtain inappropriate payments, we need to ensure our internal controls related to authorizing the transfer of funds are adequate. We may also be required to expend resources to remediate cyber-related incidents or to enhance and strengthen our cyber security. Any of these occurrences could create liability for us, put our reputation in jeopardy, and harm our business.
Our platform, solutions, and internal systems, as well as external internet infrastructure, may be subject to disruption that could harm our reputation and future sales or result in claims against us.
Because our operations involve delivering a suite of transaction tax compliance solutions to our customers through a cloud-based software platform, our continued growth depends in part on the ability of our platform and related computer equipment, third-party data centers, infrastructure, and systems to continue to support our solutions. In addition, in delivering our solutions to customers, we are reliant on internet infrastructure limitations. In the past, we have experienced temporary and limited platform disruptions, outages in our solutions, and degraded levels of performance due to human and software errors, file corruption, and first and third-party capacity constraints associated with the number of customers accessing our platform simultaneously. While our past experiences have not materially impacted us, in the future we may face more extensive disruptions, outages, or performance problems. In addition, malicious third parties may also conduct attacks designed to sabotage our platform, impede the performance of our solutions, or temporarily deny customers access to our solutions. If an actual or perceived disruption, outage, performance problem, or attack occurs, it could harm our reputation and the market perception of our solutions; divert the efforts of our technical and management personnel; impair our ability to operate our business; cause us to lose customer information; or harm our customers’ businesses. Any of these events may increase non-renewals, limit our ability to acquire new customers, result in delayed or withheld payments from customers, or result in claims against us.
Undetected defects in our solutions could harm our reputation or decrease market acceptance of our solutions, which would harm our business and results of operations.
Our solutions may contain undetected defects, such as errors or bugs. We have experienced such defects in the past in connection with new solutions and solution upgrades and we expect that such defects may be found from time to time in the future. Despite testing by us, defects may not be found in our solutions until they are deployed to or used by our customers. In the past, we have discovered software defects in our solutions after they have been deployed to customers.
Since our customers use our solutions for compliance reasons, any defects, disruptions in service, or other performance problems may damage our customers’ business and could hurt our reputation. We may also be required, or may choose, for customer relations or other reasons, to expend additional resources to correct actual or perceived defects in our solutions. If defects are detected or perceived to exist in our solutions, we may experience negative publicity, loss of competitive position, or diversion of the attention of our key personnel; our customers may delay or withhold payment to us or elect not to renew their subscriptions; other significant customer relations problems may arise; or we may be subject to liability claims for damages. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our solutions may harm our business and results of operations.
We rely on third-party computer hardware, software, content, and services for use in our solutions. Errors and defects, or failure to successfully integrate or license necessary third-party software, content, or services, could cause delays, errors, or failures of our solutions, increases in our expenses, and reductions in our sales, which could harm our results of operations.
We rely on computer hardware purchased or leased from, software licensed from, content licensed from, and services provided by a variety of third parties to offer our solutions, including database, operating system, virtualization software, tax requirement content, and geolocation content and services. Any defects in third-party hardware, software, content, or services could result in errors or a failure of our solutions, which could harm our business. For example, in the past, we experienced a period of higher than usual latency and outages that impacted some customers resulting from a third-party provider data center infrastructure failure. In the future, we might need to license other hardware, software, content, or services to enhance our solutions and meet evolving customer requirements. Any inability to use hardware or software could significantly increase our expenses and otherwise result in delays, a reduction in functionality, or errors or failures of our products until equivalent technology is either developed by us or, if available, is identified, obtained through purchase or license, and integrated into our solutions, any of which may reduce demand for our solutions. In addition, third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs, all of which may increase our expenses and harm our results of operations.
We rely upon data centers and other systems and technologies provided by third parties to operate our business, and interruptions or performance problems with these centers, systems, and technologies may adversely affect our business and operating results.
We rely on data centers and other technologies and services provided by third parties in order to operate our business. If such data centers fail to operate properly or become disabled even for a brief period of time, there could be a failover recovery latency, and we could suffer financial loss, a disruption of our business, liability to customers, or damage to our reputation. In addition, our response to any type of disaster may not be successful in preventing the loss of customer data, service interruptions, and disruptions to our operations, or damage to our important facilities.
Our current cloud service infrastructure is run on AWS, GCP, and other third-party co-location leased data centers, and neither AWS, GCP, nor our other data center providers are obligated to renew their agreements with us on commercially reasonable terms, or at all, and it is possible that we will not be able to switch our operations to another provider in a timely and cost-effective manner should the need arise. If we are unable to renew our agreements with any of our data center providers on commercially reasonable terms, or if in the future we add data center facility providers, we may face additional costs or expenses or downtime, which could harm our business.
Any unavailability of, or failure to meet our requirements by, third-party data centers, technologies, or services, could impede our ability to provide services to our customers, harm our reputation, subject us to potential liabilities, result in contract terminations, and adversely affect our customer relationships. Any of these circumstances could adversely affect our business and operating results.
Incorrect or improper implementation, integration, or use of our solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition, and growth prospects.
Our solutions are deployed in a wide variety of technology environments and integrated into a broad range of complex workflows and third-party software. If we or our customers are unable to implement our solutions successfully, are unable to do so in a timely manner, or our integration partners are unable to integrate with our solutions through our integrations, customer perceptions of our solutions may be impaired, our reputation and brand may suffer, and customers may choose not to renew or expand the use of our solutions.
If we fail to effectively maintain and enhance our brand, our business may suffer.
We believe that continuing to strengthen our brand will be critical to achieving widespread acceptance of our solutions and will require continued focus on active marketing efforts. Our brand awareness efforts will require continued investment across our business and particularly as we introduce new solutions that we develop or acquire and as we continue to expand in foreign markets. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses incurred in building our brand. If we fail to promote and maintain our brand, or if we incur substantial expense in an unsuccessful attempt to promote and maintain our brand, our business could suffer.
Economic conditions and regulatory changes resulting from the United Kingdom’s exit from the E.U. could adversely affect our business, financial condition, and results of operations.
On January 31, 2020, the United Kingdom (the “U.K.”) exited from the E.U., commonly referred to as “Brexit,” and immediately entered into a transition period during which all E.U. rules and trading agreements remained in effect through December 31, 2020. On December 24, 2020, the U.K. and E.U. announced they had entered into a post-Brexit deal on certain aspects of trade and other strategic and political issues. The impact of Brexit is uncertain, but it has the potential to significantly disrupt the free movement of goods, services, and people between the U.K., the E.U., and other nations, increase legal and regulatory complexities, increase costs of conducting business in Europe, and lead to global economic uncertainty. Because we have based our European operations in the U.K., any of these effects of Brexit, among others, could adversely affect our financial position, results of operations, or cash flows.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt, settle conversions of the notes in cash, repurchase the notes upon a fundamental change, and meet other future capital needs.
Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including our convertible senior notes due 2026 (the “2026 Notes”), depends on our future performance, which is subject to economic, industry, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Holders of the 2026 Notes have the right to require us to repurchase all or any portion of their notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered therefor or pay cash with respect to notes being converted. In addition, our ability to repurchase the notes or to pay cash upon conversions of the notes may be limited by law, by regulatory authority, or by agreements governing our current or future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by the indenture governing the notes or to pay any cash payable on future conversions of the notes as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our current or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes or make cash payments upon conversions thereof.
Our ability to use our net operating loss to offset future taxable income may be subject to certain limitations.
As of December 31, 2021, we had U.S. federal net operating loss carryforwards, or NOLs, of approximately $1.1 billion due to prior period losses. NOLs generated in 2017 and prior will begin to expire in 2025. NOLs generated after 2017 do not expire but are limited to 80% of taxable income when utilized. Furthermore, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes. Future changes in our stock ownership, the causes of which may be outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs may also be impaired under state laws. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of some or all our NOLs, whether or not we attain profitability in the U.S.
We need to continue making significant investments in software development and equipment to improve our business.
To improve the scalability, security, performance, efficiency, availability, and failover aspects of our solutions, and to support the expansion of our solutions into other tax types, such as international VAT, additional excise taxes, or additional lodging taxes, we will need to continue making significant capital equipment expenditures and also invest in additional software and infrastructure development. If we experience increasing demand in subscriptions, we may not be able to augment our infrastructure quickly enough to accommodate such increasing demand. In the event of decreases in subscription sales, certain of our fixed costs, such as for capital equipment, may make it difficult for us to adjust our expenses downward quickly. Additionally, we are continually updating our software and content, creating expenses for us. We may also need to review or revise our software architecture and user experience as we grow, which may require significant resources and investments.
If economic conditions worsen, it may negatively affect our business and financial performance.
Our financial performance depends, in part, on the state of the economy. Declining levels of economic activity may lead to declines in spending and fewer transactions for which transaction tax is due, which may result in decreased revenue for us. Concern about the strength of the economy may slow the rate at which businesses of all sizes are willing to hire an outside vendor to perform the determination and remittance of their transaction taxes and filing of related returns. If our customers and potential customers experience financial hardship as a result of a weak economy, industry consolidation, or other factors, the overall demand for our solutions could decrease. If economic conditions worsen, our business, results of operations, and financial condition could be harmed.
Beginning in the first quarter of 2020, the COVID-19 pandemic led to widespread disruptions across the world, including in the states and countries in which we operate. As a result of the COVID-19 pandemic, we experienced and, in the future, may experience decreased demand for our solutions from customers along with slower collections on accounts receivable. Because we recognize revenue over the subscription term, the effect of the pandemic may not be fully reflected in our operating results until future periods. While we have implemented risk mitigation plans, these measures may not be sufficient to prevent adverse impacts on our business and financial condition from COVID-19. The degree to which the COVID-19 pandemic may impact our results of operations and financial condition is unknown at this time and will depend on future developments, including the geographic spread of COVID-19, the emergence of new variants, the severity and the duration of the pandemic, the success of vaccines, and further actions that may be taken by governmental authorities or businesses.
Sales to customers or operations outside the United States may expose us to risks inherent in international sales and could negatively impact our business and results of operations.
Historically, transactions occurring outside of the United States have represented a small portion of our revenue. However, we intend to continue efforts to expand our international sales, including through our current sales operations in Europe, India, and Brazil, as well as other countries and regions identified for expansion.
Operating in international markets, particularly when entering new countries and regions, requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the United States, and our international expansion efforts may not be successful. As we expand our international operations, we currently do not have the breadth of partners like that which we have established in the U.S., making us more reliant on the initial partners that we have established to date. For example, a single partner accounts for a significant portion of our European revenue and any failure to retain or expand this relationship could harm our business and results of operations. Other potential risks and challenges associated with sales to customers and operations outside the United States include:
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compliance with multiple conflicting and changing governmental laws and regulations;
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different competitive pressures, including new and different sources of competition, laws and business practices favoring local competitors, different pricing environments, and longer sales cycles;
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localization of our solutions, including translation into foreign languages, obtaining and maintaining local content, and providing customer service in various native languages;
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treatment of revenue from international sources and changes to tax rules, including being subject to foreign tax laws and being liable for paying withholding of income or other taxes in foreign jurisdictions;
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fluctuation of foreign currency exchange rates;
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restrictions on the transfer of funds;
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difficulties in staffing and managing foreign operations;
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different or lesser protection of our intellectual property;
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natural disasters, acts of war, terrorism, pandemics, or security breaches;
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compliance with various anti-bribery and anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act; and
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regional or national economic and political conditions.
Any of these factors could negatively impact our business and results of operations.
Risks Relating to Legal, Compliance and Regulatory Matters
We hold significant amounts of money on behalf of our customers that we remit to taxing authorities, and this may expose us to liability from errors, delays, fraud, or system failures, which may not be covered by insurance.
We handle significant amounts of our customers’ money for remittance to various taxing jurisdictions on their behalf. If our banks’ or our own internal controls and compliance procedures regarding cash management of these funds fail, are hacked or sabotaged, or if our banks or we are the subject of fraudulent behavior by personnel or third parties, we could face significant cash financial losses, including but not limited to significant financial penalties imposed by taxing jurisdictions for late remittances calculated as a percentage of tax payment amounts due. Furthermore, our efforts to remit tax payments to applicable taxing jurisdictions only after receiving the related funds from our customers may fail, which would expose us to the financial risk of collecting from our customers after we have remitted funds on their behalf.
Additionally, we are subject to risk from concentration of cash and cash equivalent accounts, including cash from our customers that is to be remitted to taxing jurisdictions, with financial institutions where deposits routinely exceed federal insurance limits. If the financial institutions in which we deposit our customers’ cash were to experience insolvency or other financial difficulty, our access to cash deposits could be limited, any deposit insurance may not be adequate, we could lose our cash deposits entirely, and we could be exposed to liability to our customers. Any of these events would negatively impact our financial condition and liquidity, results of operations, and our reputation.
We also invest a portion of our funds held for customers in liquid, investment-grade marketable securities, money market securities, and other cash equivalents. Such investments are subject to general market, interest rate, credit, and liquidity risks. We follow an established investment policy to monitor and mitigate our exposure to liquidity and credit risks. These risks could be more significant, individually or together, during periods of unusual financial market volatility.
Changes in tax laws and regulations or their interpretation or enforcement may cause us to invest substantial amounts to modify our solutions, cause us to change our business model, or draw new competitors to the market.
Changes in tax laws or regulations or interpretations of existing taxation requirements in the United States or in other countries may require us to change the manner in which we conduct some aspects of our business and could harm our ability to attract and retain customers. If our platform and solutions are not flexible enough to adapt to changes in tax laws and regulations, our financial condition and results of operations may suffer. In addition, depending on the content of any sales tax legislation, the role of third-party compliance vendors may change and we may need to invest substantial amounts to modify our solutions or our business model. We also could see a decrease in demand, we could see new competitors enter the market, or we could be negatively impacted by such legislation in a way not yet known.
Changes in the application, scope, interpretation, or enforcement of laws and regulations pertaining to our business may harm our business or results of operations, subject us to liabilities, and require us to implement new compliance programs or business methods.
We perform a number of critical business functions for our customers, including remittance of the taxes our customers owe to taxing authorities. Our electronic payment of customers’ taxes may be subject to federal or state laws or regulations relating to money transmission. The federal Bank Secrecy Act requires that financial institutions, of which money transmitters are a subset, register with the U.S. Department of Treasury’s Financial Crimes Enforcement Network and maintain policies and procedures reasonably designed to monitor, identify, report and, where possible, avoid money laundering and criminal or terrorist financing by customers. Most U.S. states also have laws that apply to money transmitters, and impose various licensure, examination, and bonding requirements on them. We believe these federal and state laws and regulations were not intended to cover the business activity of remitting transaction taxes that taxpayers owe to the various taxing jurisdictions. However, if federal or state regulators were to apply these laws and regulations to this business activity or if our activities are held by a court to be covered by such laws or regulations, we could be required to expend significant time, money, and other resources to deal with enforcement actions and any penalties that might be asserted, to institute and maintain a compliance program specific to money transmission laws, and possibly to change aspects of how we conduct business to achieve compliance or minimize regulation. Application of these laws to our business could also make it more difficult or costly for us to maintain our banking relationships. Financial institutions may also be unwilling to provide banking services to us due to concerns about the large dollar volume moving into and out of our accounts on behalf of our customers in the ordinary course of our business. As we continue to expand the solutions we offer and the jurisdictions in which we offer them, we could become subject to other licensing, examination, or regulatory requirements relating to financial services.
Our solutions involve the collection, dissemination, and use of certain personal information, which are subject to numerous laws and regulations. For example, the California Consumer Privacy Act, which became effective on January 1, 2020, provides a private right of action for data breaches and requires companies that process information of California residents to make disclosures to consumers about their data collection, use, and sharing practices and allow consumers to opt out of certain data sharing with third parties. We also are subject to data security and privacy protection requirements in foreign jurisdictions. For example, in 2018 the E.U. adopted the General Data Protection Regulation, which imposes requirements on companies that receive or process personal data of European Economic Area residents and includes significant penalties for non-compliance. Other governments in the U.S. and internationally have adopted or are considering similar types of data protection laws and regulations. We may incur significant costs to comply with these laws and regulations. A security breach or other failure to safeguard consumer data could subject us to costs associated with notice and remediation, as well as potential regulatory investigations or enforcement actions, and possibly to civil liability. If governmental authorities were to expand their enforcement activities, or change their interpretation of the applicability of these laws, or if new laws were to be adopted, compliance burdens and costs could increase significantly, harming our results of operations and possibly the manner in which we conduct our business.
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.
Our success depends, in part, upon our proprietary technology, processes, trade secrets, and other proprietary information and our ability to protect this information from unauthorized disclosure and use. We primarily rely upon a combination of confidentiality procedures, contractual provisions, copyright, trademark, and trade secret laws, and other similar measures to protect our proprietary information and intellectual property. We also use patents, including those of our acquired businesses, to protect certain of our intellectual property. Our trademarks and service marks include Avalara, the Avalara logo, AvaTax, the Avalara Compliance Cloud, and “Tax compliance done right,” marks for our acquired businesses, and various marketing slogans. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our solutions or to obtain and use information that we regard as proprietary, and third parties may attempt to develop similar technology independently. In addition, if unauthorized disclosure of our source code occurs through security breach, cyber-attack, internal theft, or otherwise, we could lose future trade secret protection for that source code, which could make it easier for third parties to compete with our products. Our means of protecting our proprietary rights may not be adequate.
In addition, third parties have claimed, and may in the future claim, infringement by us with respect to current or future solutions or other intellectual property rights. See “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K for more information regarding recent litigation. The software and internet industries are characterized by the existence of a large number of patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any existing or future claims and lawsuits, and the disposition of such claims and lawsuits, whether through settlement or licensing discussions, or litigation, could be time-consuming and expensive to resolve, divert management attention from executing our strategies, result in efforts to enjoin our activities, lead to attempts on the part of other parties to pursue similar claims, and, in the case of intellectual property claims, require us to change our technology, change our business practices, pay monetary damages, or enter into short- or long-term royalty or licensing agreements. Any adverse determination related to any existing or future intellectual property claims or other litigation could prevent us from offering our solutions to others, could be material to our financial condition or cash flows, or both, or could otherwise harm our results of operations.
Indemnity provisions in our subscription agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
In many of our subscription agreements with our customers, we agree to indemnify our customers against any losses or costs incurred in connection with certain claims by a third party, including claims alleging that a customer’s use of our solutions infringes on the intellectual property rights of the third party. Customers facing infringement claims or other indemnifiable claims may in the future seek indemnification from us under the terms of our contracts. If such claims are successful, or if we are required to indemnify or defend our customers from these or other claims, these matters could be disruptive to our business and management and harm our business, results of operations, and financial condition.
We use open source software in our platform and solutions, which may subject us to litigation or other actions that could harm our business.
We use open source software in our platform and solutions, and we may use more open source software in the future. In the past, companies that have incorporated open source software into their products have faced claims challenging the ownership of open source software or compliance with open source license terms. Accordingly, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who incorporate open source software as part of their software or services to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. If applicable, such licenses could require us to release our proprietary source code, pay damages, re-engineer our applications, discontinue sales, or take other remedial action, any of which could harm our business. In addition, if the license terms for updated or enhanced versions of the open source software we utilize change, we may be forced to re-engineer our platform or solutions or incur additional costs.
Risks Relating to Ownership of Our Common Stock and Convertible Notes
Our stock price has been and likely will continue to be volatile and may decline regardless of our operating performance, resulting in substantial losses for investors in our common stock.
From June 15, 2018, the date that our common stock started trading on the New York Stock Exchange, through December 31, 2021, the trading price of our common stock has ranged from $28.09 per share to $191.67 per share. The market price and trading volume of our common stock may fluctuate significantly regardless of our operating performance, in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our operating and financial performance and prospects and the performance of other technology companies generally, or those in our industry in particular;
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the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
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failure of securities analysts to maintain coverage of our company, changes in securities analysts’ financial estimates or ratings, or our failure to meet these estimates or the expectations of investors;
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, results of operations, or capital commitments;
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changes in our Board of Directors (“Board”) or management;
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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sales of large blocks of our common stock by us or our shareholders;
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lawsuits threatened or filed against us;
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changes in laws or regulations applicable to our business;
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changes in our capital structure, such as future issuances of debt or equity securities;
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short sales, hedging, and other derivative transactions involving our capital stock;
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other events or factors, including those resulting from war, terrorism, or responses to these events; and
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the other factors described in these risk factors.
Future sales of our common stock or equity-linked securities in the public market could lower the market price for our common stock and adversely impact the trading price of the 2026 Notes.
In the future, we may sell additional shares of our common stock or equity-linked securities to raise capital. In addition, a substantial number of shares of our common stock is reserved for issuance upon the exercise of stock options, vesting of restricted stock units and performance stock units, and under our employee stock purchase plan. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock or equity-linked securities, or the perception that such issuances and sales may occur, could adversely affect the trading price of the notes and the market price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-linked securities.
The capped call transactions may affect the value of the 2026 Notes and our common stock.
In connection with the pricing of the 2026 Notes, we entered into capped call transactions with certain financial institutions (the “option counterparties”). The capped call transactions cover, subject to customary adjustments, the number of shares of our common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution as a result of conversion of the notes.
The option counterparties or their respective affiliates may modify the hedge positions they established in connection with entering into the capped call transactions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions (and are likely to do so on each exercise date of the capped call transactions, which are expected to occur during the 40 trading day period beginning on the 41st scheduled trading day prior to the maturity date of the notes, or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption, or early conversion of the notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the notes.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, a material weakness or weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, and could have a material and adverse effect on our business, results of operations and financial condition. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.
Provisions in our charter documents and under Washington law could make an acquisition of our company more difficult and limit attempts by our shareholders to replace or remove our current management.
Our Articles of Incorporation, our Bylaws, and Washington law include a number of provisions that may have the effect of deterring takeovers or delaying or preventing changes in control or changes in our management that a shareholder might deem to be in his or her best interest. In addition, because our Board is responsible for appointing our management, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our Board. These provisions include the following:
•
our Board may issue up to 20,000,000 shares of preferred stock, with any rights or preferences as it may designate;
•
our Board is divided into three classes with the directors in each class serving for three-year terms, and one class being elected each year;
•
a director may only be removed for cause by the affirmative vote of our shareholders;
•
vacancies on our Board may be filled only by the Board;
•
only the Board may change the size of our Board;
•
our shareholders may act by written consent only by obtaining unanimous written consent;
•
special meetings of shareholders may only be called by our Board, chairperson of our Board, chief executive officer, or president;
•
shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at a meeting of shareholders must provide timely advance written notice to us, and specify requirements as to the form and content of a shareholder’s notice;
•
prohibit cumulative voting in the election of directors;
•
our shareholders can amend or repeal the Bylaws only by the affirmative vote of the holders of at least two-thirds of the outstanding voting power of our capital stock entitled to vote generally in the election of directors, voting together as a single group; and
•
unless approved by a majority of our “continuing directors” specified provisions of our Articles may not be amended or repealed without the affirmative vote of the holders of at least two-thirds of the outstanding voting power of our capital stock entitled to vote on the action, voting together as a single group. In addition, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which prohibits certain business combinations between us and certain significant shareholders unless specified conditions are met.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our corporate headquarters are located in Seattle, Washington, where we occupy office space under a lease that expires in 2028. We maintain additional offices in the United States, Brazil, Europe, and India.
We lease all of our facilities, and we do not own any real property. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space would be available to us to lease on commercially reasonable terms if and when we need it.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
From time to time, we may become involved in other legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of the outcome of any existing or future litigation, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
On January 25, 2022, Vertex, Inc. (“Vertex”) filed a lawsuit against Avalara in the United States District Court for the Eastern District of Pennsylvania. The lawsuit alleges that Avalara engaged in unfair competition and intentional interference with contractual relations and trade secret misappropriation. Vertex requests a permanent injunction, unspecified general, special, actual, and/or statutory damages, punitive and exemplary damages, and attorneys’ fees. On February 7, 2022, the Company filed a motion to dismiss the complaint for lack of personal jurisdiction, which was subsequently withdrawn after Vertex filed an amended complaint on February 9, 2022. Based upon the Company’s review of the complaint, the Company believes it has meritorious defenses to Vertex’s claims, and the Company intends to vigorously defend against Vertex’s allegations. For a description of the risks of this and similar litigation, see Part I, Item 1A of this Annual Report on Form 10-K titled “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.”

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our common stock has been listed on the New York Stock Exchange, under the symbol “AVLR” since June 15, 2018. Prior to that date, there was no public trading market for our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our Board of Directors may deem relevant.
Holders
As of December 31, 2021, we had 87 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.
Stock Performance Graph
The graph below compares the cumulative total return on our common stock with that of the S&P 500 Index and the RDG Software Composite. The period shown commences on June 15, 2018, and ends on December 31, 2021, the end of our last fiscal year. The graph assumes an investment of $100 in each of the above on the close of market on June 15, 2018. The stock price performance graph is not necessarily indicative of future price performance.
Company/Index:
Base Period
6/15/2018
12/31/2018
12/31/2019
12/31/2020
12/31/2021
Avalara, Inc.
$
100.00
$
69.31
$
163.00
$
366.91
$
287.29
S&P 500
100.00
93.72
123.23
145.90
187.79
RDG Software Composite
100.00
99.76
142.12
218.58
280.98
Our common stock cumulative total return presented on the graph and table above is based on our closing stock price of $44.94 per share on June 15, 2018.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. 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 in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections of this report titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
Overview
We are a leading provider of tax compliance automation for businesses of all sizes. The Avalara Compliance Cloud includes calculation, returns, compliance document management, licensing and registration, fiscal representation, tax content, and insight solutions. We sell our solutions primarily on a subscription basis through our sales force, which focuses on selling to qualified leads provided by our marketing efforts and by partner referrals. Revenue from subscriptions and returns represented 91% of total revenue in 2021 and 93% of total revenue in 2020.
We focus on maintaining and expanding our partner network, which has been and will continue to be an essential part of our growth. We continue to increase the available number of partner integrations, which are designed to link the Avalara Compliance Cloud to a wide variety of business applications, including accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM systems. Through marketing activities, we generate awareness from many businesses, both large and small, and enhance communications with our existing customers.
We make substantial investments by increasing headcount, investing in better software tools and technologies, and making strategic acquisitions to continuously improve the Avalara Compliance Cloud. With these investments, we will continue scaling our platform for continued growth, adding new features and functionality, supporting new products and content types, and improving the user experience. We have made multiple acquisitions in the last few years to augment our tax content, serve the needs of customers in different geographies or industries, and improve additional aspects of tax compliance solutions. We expect to continue to make significant investments, both organically and through acquisitions, to gain new and relevant content, technology, and expertise that best serve the transaction tax needs of our customers.
Our business continued to be impacted by the COVID-19 pandemic during 2021, which over the last two years has resulted in authorities implementing numerous preventative measures to contain or mitigate the extent of the impact, including travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas. Even though we began to re-open certain of our office locations in 2021, the vast majority of our employees continue working from home. We expect these arrangements to continue for most of our workforce for an undetermined portion of 2022. During 2021, some of the geographic areas we serve and work from began to loosen travel bans and restrictions, and, where it is safe to do so, we have resumed some in-person customer activities and events. However, we continue to host many customer activities and events virtually and continue to limit employee travel. As the COVID-19 pandemic continues to progress, the extent and timing of the broader impact of the pandemic on our results of operations, overall financial performance and operating cash flows remains uncertain, including the impact on our future revenue growth, the timing of the resumption of normal operating expenses, and the extent to which any incremental expenses associated with the preventative and precautionary measures will be necessary.
Total revenue for 2021 was $699.0 million, an increase of 40% from $500.6 million in 2020. Excluding the $55.7 million of revenue growth from recent acquisitions, total revenue for 2021 increased by 29%. This compares to an increase in total revenue of 31% in 2020 from 2019, or an increase of 29% excluding acquisitions. Revenue growth from our international operations, excluding acquisitions, increased $15.9 million, an increase of 51% from 2020. While we intend to continue aggressively investing internationally to expand non-U.S. revenue, as base revenue increases for our international operations, we expect the pace of revenue growth to moderate.
Total revenue for 2021 and 2020 generated outside the U.S. was 8% and 6% of total revenue, respectively.
Under the revised calculation methodologies, we added approximately 3,250 core customers during 2021 and delivered a net revenue retention rate of 115% on average over the past four quarters. In 2021, our non-core customer revenue continued to grow faster than our revenue from core customers. We use net revenue retention rate to reflect the stability of our revenue base and to provide insight into our ability to grow existing customer revenues. See the section titled “Key Business Metrics” for more information.
We maintained a total gross margin of 71% in 2021, despite an increase in the proportion of revenue generated from professional services, which has a lower gross margin. Revenue from subscription and returns comprised approximately 91% of our revenue for 2021 compared to 93% of our revenue for 2020.
Operating expenses increased to $600.7 million in 2021 from $419.4 million in 2020, as we continued to make significant investments in our future growth. As a percentage of total revenue, operating expenses in 2021 were consistent with 2020. Sales and marketing expenses were $296.0 million in 2021, or 42% of total revenue, compared to $204.5 million in 2020, or 41% of total revenue reflecting our continued investments to grow and expand our business.
Our net loss was $125.2 million during 2021 compared to a net loss of $49.2 million during 2020. Operating loss was $106.6 million during 2021 compared to an operating loss of $62.0 million during 2020. Operating loss increased due primarily to a $39.9 million increase in stock-based compensation expense. Non-GAAP operating income was $5.5 million during 2021 compared to a non-GAAP operating loss of $3.1 million during 2020. For the year ended December 31, 2021, net cash provided by operating activities was $34.1 million compared to net cash provided of $42.6 million for the year ended December 31, 2020. During 2021, we generated free cash flow of $12.7 million compared to free cash flow of $34.0 million in 2020. See the section titled “Use and Reconciliation of Non-GAAP Financial Measures” for more information about our non-GAAP financial measures.
In August 2021, we completed a private offering of $977.5 million of convertible senior notes. The convertible senior notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually. The net proceeds from the sale of the convertible senior notes were $959.9 million after deducting the issuance costs. The convertible senior notes will mature on August 1, 2026, unless earlier converted, redeemed, or repurchased. We used $75.3 million of the net proceeds from the convertible senior notes offering to pay for the cost of the capped call transactions which are intended to offset potential dilution to our common stock or offset any cash payments we are required to make in excess of the principal amount.
As of December 31, 2021, we had $977.5 million in borrowings outstanding related to the convertible senior notes, with a net carrying value of $961.3 million. We ended the year with $1.5 billion of cash and cash equivalents. We believe our strong balance sheet positions us well to continue to make additional investments to grow and expand both our products and services, along with the customers we serve.
Key Business Metrics
We regularly review several metrics to evaluate growth trends, measure our performance, formulate financial projections, and make strategic decisions. We discuss revenue and the components of operating results under “Key Components of Consolidated Statements of Operations,” and we discuss other key business metrics below.
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Number of core
customers
(as of end
of period) - legacy
18,060
17,230
16,410
15,580
14,890
14,180
13,560
12,940
Number of core
customers
(as of end
of period) - revised(1)
18,270
17,400
16,570
15,730
15,020
14,300
13,640
13,000
Net revenue
retention rate - legacy
%
%
%
%
%
%
%
%
Net revenue
retention rate - revised(2)
%
%
%
%
%
%
%
%
(1) During the second quarter of 2021, we revised the methodology for calculating core customers to include revenue from SST (see Number of Core Customers below for details). The table above includes the number of core customers using both the legacy and the revised methodologies.
(2) During the second quarter of 2021, we revised the methodology for calculating net revenue retention rate to include revenue from SST. In addition, professional services revenue is no longer included in the revised calculation methodology, as these services tend to be more one-time in nature (see Net Revenue Retention Rate below for details). The table above includes the net revenue retention rate using both the legacy and the revised methodologies.
Number of Core Customers
We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The small and mid-market customer segments have been and remain our primary target market segments for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our primary target market segment. During the second quarter of 2021, we revised our core customer calculation methodology to include revenue from our Streamlined Sales Tax solution (“SST”), which results in additional customers being included in reported core customers. Under the revised calculation methodology, as of December 31, 2021, and 2020, we had approximately 18,270 and 15,020 core customers, respectively.
We define a core customer as:
•
a unique account identifier in our primary U.S. billing systems (multiple companies or divisions within a single consolidated enterprise that each have a separate unique account identifier are each treated as separate customers);
•
that is active as of the measurement date; and
•
for which we have recognized, as of the measurement date, greater than $3,000 in total revenue during the previous 12 months.
Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers that subscribe to our solutions through our international subsidiaries and certain legacy and acquired billing systems that have not yet been integrated into our primary U.S. billing systems (e.g., recent acquisitions and our lodging tax compliance solution). As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric.
As noted above, we revised our core customer calculation methodology during the second quarter of 2021. Under the prior methodology, revenue from SST was not included in our calculation of total revenue during the previous 12 months. This meant customers that would have otherwise met the definition of a core customer, with inclusion of attributable SST revenue, were excluded from our core customer count as well as our disclosures on the percentage of total revenue attributable to core customers. The revised methodology for core customers includes revenue from SST.
We believe these changes improve the usefulness of this key business metric, which is to measure both the growth of existing customers into core customers and the acquisition of new customers of a certain size.
We also have a substantial number of customers of various sizes that do not meet the revenue threshold to be considered a core customer. Many of these customers are in the emerging and small business segment of the marketplace, which represents strategic value and a growth opportunity for us. Customers who do not meet the revenue threshold to be considered a core customer provide us with market share and awareness, and we anticipate that some may grow into core customers. In addition, we have numerous enterprise-level customers that only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers.
In addition to customers with whom we have a direct relationship, some of our customers are business application publishers (including ecommerce platforms) that include automated tax determination powered by Avalara. While those platform providers may be core customers to Avalara, their end-user customers generally are not.
Net Revenue Retention Rate
We believe that our net revenue retention rate provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it reflects the stability of our revenue base, which is one of our core competitive strengths. We calculate our net revenue retention rate by dividing (a) total subscription and returns revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total subscription and returns revenue in such corresponding quarter from those same billing accounts. This calculation includes changes during the period for such billing accounts, such as additional solutions purchased, changes in pricing and transaction volume, and terminations, but does not reflect revenue for new billing accounts added during the one-year period.
Currently, our net revenue retention rate includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems that have not been integrated into our primary U.S. billing systems.
During the second quarter of 2021, we revised our net revenue retention rate calculation methodology. Under the prior methodology, revenue from our SST solution was not included in net revenue retention rate. This means that revenue expansion from existing customers adopting our SST solution was not included, while revenue contraction from customers replacing one or more of Avalara’s other solutions with SST was included. The revised calculation methodology for net revenue retention rate includes revenue from SST. In addition, professional services revenue is no longer included in the revised calculation methodology, as these services tend to be more one-time in nature. Under the revised calculation methodology, our net revenue retention rate was 116% for the quarter ended December 31, 2021, and on average has been 115% over the last four quarters ended December 31, 2021. Under the legacy calculation methodology, our net revenue retention rate was 113% for the quarter ended December 31, 2021, and on average has been 110% over the last four quarters ended December 31, 2021.
Strategic Acquisitions
We have pursued and expect to continue to pursue acquisitions that align with our strategic objectives to build relevant content, technology, and expertise to best serve the transaction tax compliance needs of our current and future customers. Accordingly, the comparability of periods covered by our financial statements are, and in the future may be, affected by the impact of these acquisitions.
2021 Acquisitions
Inposia. On April 1, 2021, we acquired the outstanding equity of INPOSIA Solutions, GmbH (“Inposia”), under a Share Purchase Agreement. Inposia is a German software company that delivers e-invoicing, digital tax reporting, and system and data integration to support digital transformation efforts and address real-time compliance requirements for businesses. Inposia will build upon Avalara’s existing e-invoicing capabilities in Brazil and India to support customers worldwide with real-time compliance. The total consideration transferred related to this transaction was €31.8 million (or approximately $37.4 million using the exchange rate on April 1, 2021), consisting of net cash consideration of $14.5 million and 164,416 shares of the Company’s common stock paid at closing with an acquisition date fair value of $23.0 million.
Davo. On April 20, 2021, we acquired substantially all the assets of DAVO Technologies LLC (“Davo”) under an Asset Purchase Agreement. Davo helps emerging small businesses automate the daily and ongoing requirements for sales tax. As a result of the acquisition, Davo extends Avalara’s ability to provide integrated sales tax compliance processes to alleviate the burden of compliance on small businesses. The total consideration transferred related to this transaction was $56.7 million, consisting of $23.5 million cash paid at close, a $0.3 million cash deposit paid in the first quarter of 2021, an acquisition holdback with a fair value upon acquisition of $2.6 million, and an earnout provision with a fair value upon acquisition of $30.3 million.
3CE. On September 7, 2021, we acquired substantially all the assets of 3CE Technologies, Inc. (“3CE”) under an Asset Purchase Agreement. 3CE is a Canadian company that provides software and services for Harmonized System code classifications and verifications, primarily to government entities and logistics services providers. The acquisition will expand and improve our Harmonized System code classification content and provide a new self-service model to sell to the Company’s customers. The total consideration related to this transaction is $11.2 million, consisting of $9.9 million cash paid at close and an acquisition holdback with a fair value upon acquisition of $1.3 million.
Track1099. On October 1, 2021, we acquired substantially all the assets of Track1099 LLC (“Track1099”) under an Asset Purchase Agreement. Track1099 provides online software and services for cost-effectively managing, e-filing, and e-delivering Internal Revenue Service forms, including Forms 1099, W-2, and W-9. The total consideration related to this transaction is $48.8 million, consisting of $35.0 million cash paid at close, an acquisition holdback with a fair value upon acquisition of $5.0 million, and an earnout provision with a fair value upon acquisition of $8.8 million.
CrowdReason. On October 18, 2021, we acquired substantially all the assets of CrowdReason Limited Liability Company, a Texas limited liability company, and CorrelationAdvisors LLC, a Texas limited liability company (together, “CrowdReason”) under an Asset Purchase Agreement. CrowdReason is a technology services company that provides software applications, solutions, and services for property tax compliance, along with consulting services related to property valuation and property tax compliance. The total consideration related to this transaction is $36.4 million, consisting of $8.3 million cash paid at close, an acquisition holdback with a fair value upon acquisition of $1.7 million, and an earnout provision with a fair value upon acquisition of $26.3 million.
2020 Acquisitions
Transaction Tax Resources. On October 5, 2020, we acquired all the outstanding equity of Transaction Tax Resources, Inc. (“TTR”), a leading provider of tax content, research, consulting, and automation tools in the U.S., with products that include software solutions for companies and governments. The total cash consideration related to this transaction was approximately $378.0 million. Approximately $57.6 million of the purchase price will be paid to TTR shareholders over the next three years. In addition, up to $26.4 million of the purchase price will be paid to TTR’s founder and shareholder if certain TTR performance metrics are achieved during the 2021 and 2022 fiscal years.
Business Licenses. On November 5, 2020, we acquired substantially all of the assets of Business Licenses, LLC (“Business Licenses”), a leading provider of business license and registration content, software, management, and services that automate and streamline license and registration compliance for companies of all sizes. The total consideration related to this transaction was approximately $97.0 million. Approximately $64.9 million of the purchase price was paid at the time of acquisition and approximately $11.4 million of the purchase price will be paid to Business Licenses’ shareholders after 18 months. Up to $20.7 million will be paid, in shares of our common stock, to Business Licenses’ shareholders if certain Business Licenses performance metrics are achieved during the next four years.
Impendulo. On December 1, 2020, the Company acquired the shares of Impendulo Limited (“Impendulo”), a London-based provider of insurance tax compliance software and services, specializing in support for multi-national insurance companies. The total consideration related to this transaction was $13.6 million, consisting of $11.7 million paid in cash at closing, $1.2 million paid in the Company’s common stock, and an additional $0.7 million that was accrued for cash payable to the sellers in the first quarter of 2021 based on final revenue metrics achieved up to the date of the acquisition.
2019 Acquisitions
Compli. On January 22, 2019, we acquired substantially all the assets of Compli, Inc. (“Compli”), a provider of compliance services, technology, and software to producers, distributors, and importers of beverage alcohol in the United States. Total consideration 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 12 months, and an earnout provision fair valued upon acquisition at $3.8 million.
Indix. On February 6, 2019, we acquired substantially all the assets of Indix Corporation (“Indix”), an artificial intelligence company providing comprehensive product descriptions for more than one billion products sold and shipped worldwide. Total consideration 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 18 months, and an earnout provision valued upon acquisition at $2.2 million.
Portway. On July 31, 2019, we acquired substantially all the assets of Portway International Inc. (“Portway”), a provider of Harmonized System code classifications and outsourced customs brokerage services. Total consideration 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 18 months with an acquisition date fair value of $1.9 million, and an earnout provision fair valued upon acquisition at $9.4 million.
Key Components of Consolidated Statements of Operations
Revenue
We generate revenue from two primary sources: (1) subscription and returns; and (2) professional services. Subscription and returns revenue is driven primarily by the acquisition of customers, customer renewals, and additional service offerings purchased by existing customers. Revenue from subscription and returns comprised approximately 91% of our revenue for 2021 and 93% of our revenue for 2020 and 2019.
Subscription and Returns Revenue. Subscription and returns revenue primarily consists of fees paid by customers to use our solutions. Subscription plan customers select a price plan that includes an allotted maximum number of transactions over the subscription term. Unused transactions are not carried over to the customer’s next subscription term, and our customers are not entitled to any refund of fees paid or relief from fees due if they do not use the allotted number of transactions. If a subscription plan customer exceeds the selected maximum transaction level, we will generally upgrade the customer to a higher tier or, in some cases, charge overage fees on a per transaction or return basis. Customers purchase tax return preparation on a subscription basis for an allotted number of returns. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer.
Our standard subscription contracts are generally non-cancelable after the first 60 days of the contract term. Cancellations under our standard subscription contracts are not material, and do not have a significant impact on revenue recognized. We generally invoice our subscription customers for the initial term at contract signing and upon renewal. Our initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term.
Currently a small component of our total revenue, we offer SST services to businesses that are registered to participate in the program. We earn a fee (SST revenue) from participating state and local governments based on a percentage of the sales tax reported and paid, and as a result, we generally provide SST services at no cost to the seller. During the first quarter of 2021, we renewed our agreement with the SST Governing Board to provide SST services at a lower percentage rate than we previously earned.
Subscription and returns revenue also includes interest income generated on funds held from customers. In order to provide tax remittance services to customers, we hold funds from customers in advance of remittance to tax authorities. These funds are held in trust accounts at FDIC-insured institutions. Prior to remittance, we earn interest on these funds.
Professional Services. We generate professional services revenue from providing tax analysis and services, including tax registrations, voluntary disclosure agreements, nexus studies, and back filing services. We also provide configurations, data migrations, integration, and training for our subscriptions and returns products. Our 2020 acquisitions of TTR and Business Licenses expanded the scope of professional services we offer to include business licenses and registration services and tax refund claims and recovery assistance. We bill for service arrangements on a fixed fee, milestone, or time and materials basis, and we recognize the transaction price allocated to professional services performance obligations as revenue as services are performed and are collectable under the terms of the associated contracts.
Costs and Expenses
Cost of Revenue. Cost of revenue consists of costs related to providing the Avalara Compliance Cloud and supporting our customers and includes employee-related expenses, including salaries, benefits, bonuses, and stock-based compensation and the amortization of capitalized software development costs. In addition, cost of revenue includes direct costs associated with information technology, such as software hosting costs, tax content maintenance, and certain services provided by third parties. Cost of revenue also includes allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as acquired technology from acquisitions. We plan to continue to significantly expand our infrastructure and personnel to support our future growth, including through acquisitions, which we expect to result in higher cost of revenue in absolute dollars.
Research and Development. Research and development expenses consist primarily of employee-related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, software hosting costs for research and product development activities, and the cost of third-party developers. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Capitalized software development costs, which consist primarily of employee-related costs, are amortized as cost of subscription and returns revenue. Research and development expenses also include allocated costs for certain information technology and facility expenses, along with depreciation of equipment.
We devote substantial resources to enhancing and maintaining the Avalara Compliance Cloud, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology. We expect research and development expenses to increase in absolute dollars.
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses for our sales and marketing staff, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, integration and referral partner commissions, costs of marketing and promotional events, corporate communications, online marketing, solution marketing, and other brand-building activities. As a result of the current COVID-19 pandemic, we suspended in-person promotional and customer events and converted many of these activities to virtual events, which temporarily reduced these types of marketing expenses. We began to gradually resume limited in-person marketing activities in the second half of 2021 where it was safe to do so. Sales and marketing expenses include allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as customer relationships, customer lists, and backlog from acquisitions. During 2022, we expect to continue to increase in-person marketing activities as conditions allow.
We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the estimated period of benefit, generally six years. We expense the remaining sales commissions as incurred. Sales commissions are earned when a sales order is completed. For most sales orders, deferred revenue is recorded when a sales order is invoiced, and the related revenue is recognized ratably over the subscription term. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the sale (new, renewal, or add-on service offering), the type of service or solution sold, and the sales channel. At the beginning of each year, we set group and individual sales targets and update targets during the year as appropriate. Sales commissions are generally earned based on achievement against these targets.
We defer the portion of partner commissions that are considered a cost of obtaining a contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit. The period of benefit is separately determined for each partner and is either six years or corresponds with the contract term. We expense the remaining partner commissions costs as incurred. Our partner commission expense has historically been, and will continue to be, impacted by many factors, including the proportion of new and renewal sales, the nature of the partner relationship, and the sales mix among partners during the period. Integration partners may be paid a higher commission for the initial sale to a new customer and a lower commission for renewal sales. Additionally, we have several types of partners (e.g., integration and referral) that each earn different commission rates.
We intend to continue to invest in sales and marketing and expect spending in these areas to increase in absolute dollars as we continue to expand our business. We expect sales and marketing expenses to continue to be among the most significant components of our operating expenses.
General and Administrative. General and administrative expenses consist primarily of employee-related expenses for administrative, finance, information technology, legal, and human resources staff, including salaries, benefits, bonuses, and stock-based compensation, professional fees, insurance premiums, and other corporate expenses that are not allocated to the above expense categories. General and administrative expenses include amortization of intangibles such as tradenames and noncompetition agreements from acquisitions.
We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations (in the U.S. and internationally), hire and train additional personnel, evaluate and integrate acquisitions, and incur costs as a public company. Specifically, we expect to continue to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, acquisition evaluation and execution, SEC compliance, and internal control compliance.
Total Other Income (Expense), Net
Total other income (expense), net consists of quarterly remeasurement of earnout liabilities for acquisitions accounted for as business combinations, interest income on cash and cash equivalents, interest expense related to our 2026 Notes, foreign currency gains and losses, and other non-operating gains and losses.
Results of Operations
The comparability of periods covered by our financial statements is impacted by acquisitions (see Strategic Acquisitions above). See our Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following sets forth our results of operations for the periods presented.
For the Year Ended December 31,
(in thousands)
Revenue:
Subscription and returns
$
633,091
$
465,825
$
355,181
Professional services
65,886
34,744
27,240
Total revenue
698,977
500,569
382,421
Cost of revenue:
Subscription and returns
173,414
124,333
97,824
Professional services
31,418
18,762
17,475
Total cost of revenue(1)
204,832
143,095
115,299
Gross profit
494,145
357,474
267,122
Operating expenses:
Research and development(1)
167,391
119,710
82,442
Sales and marketing(1)
296,006
204,490
168,634
General and administrative(1)
137,301
95,242
71,918
Total operating expenses
600,698
419,442
322,994
Operating loss
(106,553
)
(61,968
)
(55,872
)
Total other income (expense), net
(15,372
)
4,476
6,613
Loss before income taxes
(121,925
)
(57,492
)
(49,259
)
(Provision for) benefit from income taxes
(3,308
)
8,309
(955
)
Net loss
$
(125,233
)
$
(49,183
)
$
(50,214
)
(1)
The stock-based compensation expense included above was as follows:
For the Year Ended December 31,
(in thousands)
Cost of revenue
$
10,203
$
5,909
$
3,122
Research and development
24,343
13,226
6,666
Sales and marketing
20,301
12,147
8,736
General and administrative
33,250
16,888
15,825
Total stock-based compensation
$
88,097
$
48,170
$
34,349
The amortization of acquired intangibles included above was as follows:
For the Year Ended December 31,
(in thousands)
Cost of revenue
$
9,319
$
5,166
$
4,854
Research and development
-
-
-
Sales and marketing
11,082
4,664
2,271
General and administrative
3,574
Total amortization of acquired intangibles
$
23,975
$
10,649
$
7,140
The following sets forth our results of operations as a percentage of our total revenue for the periods presented.
For the Year Ended December 31,
Revenue:
Subscription and returns
%
%
%
Professional services
%
%
%
Total revenue
%
%
%
Cost of revenue:
Subscription and returns
%
%
%
Professional services
%
%
%
Total cost of revenue
%
%
%
Gross profit
%
%
%
Operating expenses:
Research and development
%
%
%
Sales and marketing
%
%
%
General and administrative
%
%
%
Total operating expenses
%
%
%
Operating loss
(15
)%
(12
)%
(15
)%
Total other income (expense), net
(2
)%
%
%
Loss before income taxes
(17
)%
(11
)%
(13
)%
(Provision for) benefit from income taxes
(1
)%
%
%
Net loss
(18
)%
(10
)%
(13
)%
Year Ended December 31, 2021, as compared to the Year Ended December 31, 2020
Revenue
For the Year Ended
December 31,
Change
Amount
Percentage
(dollars in thousands)
Revenue:
Subscription and returns
$
633,091
$
465,825
$
167,266
%
Professional services
65,886
34,744
31,142
%
Total revenue
$
698,977
$
500,569
$
198,408
%
Total revenue for the year ended December 31, 2021, increased by $198.4 million, or 40%, compared to the year ended December 31, 2020. Subscription and returns revenue for the year ended December 31, 2021, increased by $167.3 million, or 36%, compared to the year ended December 31, 2020. Professional services revenue for the year ended December 31, 2021, increased by $31.1 million, or 90%, compared to the year ended December 31, 2020.
Growth in total revenue was due primarily to increased demand for our services from new and existing customers. The increase in total revenue for the year ended December 31, 2021, compared to the same period in 2020, was due primarily to $76.2 million from existing U.S. customers, $55.7 million from recent acquisitions, $35.0 million from new U.S. customers, $15.9 million from revenue growth in our international operations, and $15.7 million from SST revenue growth. Of the growth from recent acquisitions, $31.6 million was generated from subscriptions and returns and $24.1 million from professional services. Despite lower transaction rates for the year ended December 31, 2021, SST revenue increased from the prior period due to higher transaction volume.
Cost of Revenue
For the Year Ended
December 31,
Change
Amount
Percentage
(dollars in thousands)
Cost of revenue
Subscription and returns
$
173,414
$
124,333
$
49,081
%
Professional services
31,418
18,762
12,656
%
Total cost of revenue
$
204,832
$
143,095
$
61,737
%
Cost of revenue for the year ended December 31, 2021, increased by $61.7 million, or 43%, compared to the year ended December 31, 2020. The increase in cost of revenue was due primarily to an increase of $40.4 million in employee-related costs from higher headcount, an increase of $8.0 million in software hosting costs, an increase of $6.0 million in allocated overhead cost, an increase of $4.2 million in amortization expense, and an increase of $3.0 million in depreciation expense.
Cost of revenue headcount increased approximately 31% from December 31, 2020, to December 31, 2021, due to our continued growth to support our solutions. Employee-related costs increased due primarily to a $31.1 million increase in salaries and benefits (including $18.4 million from recent acquisitions), a $4.3 million increase in stock-based compensation expense, a $3.0 million increase in compensation expense related to our bonus plans, and a $2.3 million increase in contract and temporary employee costs, partially offset by a $0.4 million decrease in travel costs. Travel costs decreased due primarily to cancelling all in-person customer meetings and events beginning in March of 2020 because of the COVID-19 pandemic.
Software hosting costs have increased due primarily to higher transaction volumes and incremental investment in data management and reporting tools. Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses were higher, compared to the prior period, due primarily to higher headcount throughout our operations. Amortization expense increased due primarily to acquired intangible assets from recent acquisitions. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2020 and 2021.
Gross Profit
For the Year Ended
December 31,
Change
Amount
Percentage
(dollars in thousands)
Gross profit
Subscription and returns
$
459,677
$
341,492
$
118,185
%
Professional services
34,468
15,982
18,486
%
Total gross profit
$
494,145
$
357,474
$
136,671
%
Gross margin
Subscription and returns
%
%
Professional services
%
%
Total gross margin
%
%
Total gross profit for the year ended December 31, 2021, increased by $136.7 million, or 38%, compared to the year ended December 31, 2020. Total gross margin was 71% for the year ended December 31, 2021, compared to 71% for the same period of 2020.
Research and Development
For the Year Ended
December 31,
Change
Amount
Percentage
(dollars in thousands)
Research and development
$
167,391
$
119,710
$
47,681
%
Research and development expenses for the year ended December 31, 2021, increased by $47.7 million, or 40%, compared to the year ended December 31, 2020. The increase was due primarily to an increase of $38.6 million in employee-related costs from higher headcount, an increase of $6.0 million in software hosting and third-party purchased software costs, an increase of $2.0 million in allocated overhead cost, and an increase of $2.0 million in outside professional fees.
Research and development headcount increased approximately 39% from December 31, 2020, to December 31, 2021. Employee-related costs increased due primarily to a $24.8 million increase in salaries and benefits (including $9.4 million from recent acquisitions), an $11.1 million increase in stock-based compensation expense, a $3.1 million increase in compensation expense related to our bonus plans, partially offset by a $0.4 million decrease in travel costs. Software hosting and third-party purchased software costs increased due primarily to additional investment in tools for product analysis, development and testing activities, and tools for information technology security and reporting. Outside professional services expense increased due primarily to an increase in third-party information technology security and third-party developer services for product integrations.
Sales and Marketing
For the Year Ended
December 31,
Change
Amount
Percentage
(dollars in thousands)
Sales and marketing
$
296,006
$
204,490
$
91,516
%
Sales and marketing expenses for the year ended December 31, 2021, increased by $91.5 million, or 45%, compared to the year ended December 31, 2020. The increase was due primarily to an increase of $55.4 million in employee-related costs, an increase of $11.2 million in marketing campaign expenses, an increase of $9.8 million for partner commission expense, an increase of $6.5 million in amortization expense, an increase of $5.6 million in allocated overhead cost, an increase of $2.0 million in third-party purchased software costs, and an increase of $1.1 million in outside professional services expense.
Sales and marketing headcount increased approximately 36% from December 31, 2020, to December 31, 2021. Employee-related costs increased due primarily to a $33.8 million increase in salaries and benefits (including $7.9 million from recent acquisitions), an $8.2 million increase in stock-based compensation expense, a $7.6 million increase in sales commissions due to sales growth, a $4.9 million increase in contract and temporary employee costs, and a $2.6 million increase in compensation expense related to our bonus plans, partially offset by a $1.7 million decrease in travel costs. Travel costs decreased due primarily to minimal in-person customer activities and events for all of 2021 as a result of the COVID-19 pandemic. During 2022, we expect to continue to increase in-person marketing activities as conditions allow, which will increase travel costs.
Marketing campaign expenses increased due primarily to increased spending on brand awareness, online advertising (including pay-per-click advertising), and outbound direct mail advertising. Partner commission expense increased due primarily to higher revenues. Amortization expense increased due primarily to acquired intangible assets from recent acquisitions. Third-party purchased software costs increased due primarily to additional investment in lead generation technology that improves information we use to target potential customers and increased spending for new marketing analytics tools. Outside professional services expenses increased due primarily to increased third-party consulting services to improve the customer experience during onboarding, to develop prospective customer data, and services to integrate websites of recent acquisitions.
General and Administrative
For the Year Ended
December 31,
Change
Amount
Percentage
(dollars in thousands)
General and administrative
$
137,301
$
95,242
$
42,059
%
General and administrative expenses for the year ended December 31, 2021, increased by $42.1 million, or 44%, compared to the year ended December 31, 2020. The increase was due primarily to an increase of $30.7 million in employee-related costs, an increase of $5.5 million in outside professional services expense, an increase of $2.8 million in amortization expense, an increase of $2.6 million in third-party purchased software costs, an increase of $1.6 million in insurance expense, an increase of $1.2 million in merchant fees, partially offset by a $2.4 million decrease in non-income tax, a decrease of $0.8 million in impairment related to operating lease right-of-use assets and property and equipment, and a $0.7 million expense to settle a contract dispute in the prior year period.
General and administrative headcount increased 31% from December 31, 2020, to December 31, 2021. Employee-related costs increased due primarily to a $16.4 million increase in stock-based compensation expense, $12.3 million increase in salaries and benefits (including $2.9 million from recent acquisitions), a $1.4 million increase in contract and temporary employees, and a $1.0 million increase in compensation expense related to our bonus plans, partially offset by a $0.4 million decrease in travel costs.
Outside professional services expenses increased due primarily to increased investment in employee engagement, principally satisfaction surveys, recruiting services, and training programs, partially offset by higher acquisition-related costs in the prior period. Amortization increased due to a full year of expense for acquired intangible assets from our 2020 acquisitions and amortization of acquired intangible assets from our 2021 acquisitions. Software costs increased due primarily to an increase in the number of licenses purchased and higher subscription fees for key financial and human resources information system applications. Insurance expenses have increased due to higher insurance premiums in the current year. Merchant fees, which are credit card processing fees, increased due primarily to an increase in volume of credit card transactions. Non-income tax expense
decreased due primarily to lower state indirect taxes. Operating lease right-of-use asset and property and equipment impairment decreased due to the closure during the third quarter of 2020 of four offices in the U.S. and Canada that had remaining lease terms extending beyond the date we vacated the leased office space, with no comparable impairment in the current period. During the year ended December 31, 2020, we agreed to settle a contract dispute, with no comparable costs in the current period.
Total Other Income (Expense), Net
For the Year Ended December 31,
Change
Amount
(dollars in thousands)
Other income (expense), net
Fair value changes in earnout liabilities
$
(12,231
)
$
2,325
$
(14,556
)
Interest income
1,678
(1,570
)
Interest expense
(2,311
)
-
(2,311
)
Other income (expense), net
(938
)
(1,411
)
Total other income (expense), net
$
(15,372
)
$
4,476
$
(19,848
)
Total other expense for the year ended December 31, 2021, was $15.4 million compared to $4.5 million of other income for the year ended December 31, 2020. Fair value changes in earnout liabilities was $12.2 million of expense for the year ended December 31, 2021, compared to $2.3 million of income for the same period in 2020. During the year ended December 31, 2021, post-acquisition fair value adjustments to earnout liabilities for our acquisitions of TTR, Business Licenses, Davo, and Track1099, resulted in other expense of $12.2 million. During the year ended December 31, 2020, the adjustments to fair value decreased the carrying value of the earnout liability for our acquisition of Portway, resulting in other income of $2.3 million. Interest income decreased due to a decline in the interest rate earned on our cash and cash equivalents, partially offset by higher average cash balances during 2021. Interest expense increased due to the August 2021 offering of the 2026 Notes, for which there is no comparable expense for the year ended December 31, 2020. Other income (expense), net was $0.9 million of expense for the year ended December 31, 2021, compared to $0.4 million of income for the same period in 2020. The variance is due primarily to losses on foreign exchange rates.
(Provision for) Benefit from Income Taxes
For the Year Ended December 31,
Change
Amount
(dollars in thousands)
(Provision for) benefit from income taxes
$
(3,308
)
$
8,309
$
(11,617
)
The provision for income taxes for the year ended December 31, 2021, was $3.3 million compared to a benefit from income taxes of $8.3 million for the year ended December 31, 2020. The effective income tax rate was an expense of 2.7% for the year ended December 31, 2021, compared to a benefit of 14.5% for the year ended December 31, 2020. The effective tax rate in both periods differs from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets. The increase in tax expense and decrease in effective rate is due primarily to the 2020 release of valuation allowance resulting from deferred tax liabilities recorded in purchase accounting for the TTR and Impendulo acquisitions.
We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating tax losses in the U.S., U.K., and Brazil, including in 2021. As a result, we have a full valuation allowance against our net deferred tax assets in these jurisdictions, including net operating loss carryforwards and research and development tax credits. We expect to maintain a full valuation allowance in these jurisdictions for the foreseeable future.
Liquidity and Capital Resources
We require cash to fund our operations, including outlays for infrastructure growth, acquisitions, geographic expansion, expanding our sales and marketing activities, research and development efforts, and working capital for our growth. We have financed our operations primarily through cash received from customers for our solutions, public offerings of our common stock, and a private offering of convertible senior notes. As of December 31, 2021, we had $1.5 billion of cash and cash equivalents, most of which was held in money market accounts.
Borrowings
In August 2021, we completed a private offering of the 2026 Notes. The 2026 Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on February 1, 2022. The initial conversion price of the 2026 Notes represented a premium of 47.5% over the closing price of our common stock on August 10, 2021, the date the 2026 Notes offering was priced. The net proceeds from the sale of the 2026 Notes were $959.9 million after deducting the issuance costs. The 2026 Notes will mature on August 1, 2026, unless earlier converted, redeemed, or repurchased.
We used $75.3 million of the net proceeds from the 2026 Notes offering to pay for the cost of the capped call transactions entered into with certain financial institutions. The capped call instruments are intended to offset potential dilution to our common stock or offset any cash payments we are required to make in excess of the principal amount, as the case may be, with such reduction or offset subject to a cap. The capped call instruments are subject to adjustments for certain corporate events and standard anti-dilution provisions.
Future Cash Requirements
As of December 31, 2021, our cash and cash equivalents included proceeds from our previous public offerings of common stock and our recent private offering of the 2026 Notes. We intend to continue to increase our operating expenses and capital expenditures to support the growth in our business and operations. We expect to also use our cash and cash equivalents to continue to acquire complementary businesses, products, services, technologies, or other assets. We believe that our existing cash and cash equivalents of $1.5 billion as of December 31, 2021, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our financial position and liquidity are, and will be, influenced by a variety of factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing spending, the introduction of new and enhanced solutions, the cash paid for any acquisitions, and the continued market acceptance of our solutions.
The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:
For the Year Ended December 31,
(in thousands)
Cash provided by (used in):
Operating Activities
$
34,118
$
42,618
$
22,150
Investing Activities
(100,350
)
(378,058
)
(40,629
)
Financing Activities
918,912
606,059
354,410
Operating Activities
Our largest source of operating cash is cash collections from our customers for subscriptions and returns services. Our primary uses of cash from operating activities are for employee-related expenditures, commissions paid to our partners, marketing expenses, technology costs such as software hosting costs and subscriptions to a wide variety of software-as-a-service platforms, and facilities expenses. Cash provided by operating activities is comprised of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, other non-cash income and expense items, and net changes in operating assets and liabilities.
For the year ended December 31, 2021, net cash provided by operating activities was $34.1 million compared to net cash provided of $42.6 million for the year ended December 31, 2020. The decrease in cash from operations of $8.5 million was due primarily to an increase in working capital, primarily accounts receivable and prepaid expenses. Notwithstanding the unfavorable impact of working capital changes on operating cash flows, cash collected from customers continues to increase, but is almost entirely offset by higher cash expenditures to fund our continuing product and customer expansion. The increase in cash collected from customers is due primarily to growing demand for our subscription and returns services.
Investing Activities
Our investing activities primarily include cash outflows related to purchases of property and equipment, additions of capitalized software assets and business acquisitions.
For the year ended December 31, 2021, cash used in investing activities was $100.4 million, compared to cash used of $378.1 million for the year ended December 31, 2020. The decrease in cash used of $277.7 million was due primarily to a decrease in cash paid for acquisitions of $291.5 million. In 2021, we acquired the outstanding equity of Inposia and substantially all the assets of Davo, 3CE, Track1099, and CrowdReason for total cash consideration, net of cash acquired of $76.6 million. In 2020, we acquired the outstanding shares of TTR and Impendulo and substantially all the assets of Business Licenses for total cash consideration, net of cash acquired of $368.2 million.
Financing Activities
Our financing activities primarily include cash inflows and outflows from issuance of common stock, our private offering of convertible senior notes, our employee stock purchase plan, deferred cash payments made in connections with acquisitions of businesses, and changes in customer fund obligations.
For the year ended December 31, 2021, cash provided by financing activities was $918.9 million compared to cash provided of $606.1 million for the year ended December 31, 2020. This increase in cash provided of $312.9 million was due primarily to $959.9 million of proceeds, net of issuance costs, from the 2026 Notes, a $14.6 million increase from the net change in customer fund obligations, a $2.5 million decrease in deferred payments related to acquisition earnouts, and a $3.1 million increase in proceeds from common stock purchased under our employee stock purchase plan. These cash inflows were partially offset by a $556.3 million decrease in proceeds from offerings of our common stock, $75.3 million cash paid for purchases of capped calls related to the 2026 Notes, an $18.2 million decrease in proceeds from exercise of stock options, and an $18.1 million increase in cash paid for purchase price holdbacks related to recent acquisitions.
Funds Held from Customers and Customer Funds Obligations
We maintain trust accounts with FDIC-insured financial institutions, which allows our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held from customers are not commingled with our operating funds but are typically deposited with funds also held on behalf of our other customers. Funds held from customers primarily represent restricted cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Additionally, a portion of funds held from customers is invested in available-for-sale securities. The cash flows related to the purchases of available-for-sale securities with customer funds are presented on a gross basis in investing activities. Changes in customer funds assets account that relate to activities paying for the trust operations, such as banking fees, are included as cash flows from operating activities.
Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Changes in customer funds obligations liability are presented as cash flows from financing activities.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2021:
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
(in thousands)
Principal payments on debt obligations(1)
$
977,500
$
-
$
-
$
977,500
$
-
Interest payments on debt obligations
12,151
2,369
4,888
4,894
-
Operating lease obligations
73,197
15,931
29,444
18,541
9,281
Purchase obligations(2)
114,399
45,572
58,185
10,642
-
Customer funds obligations(3)
64,302
64,302
-
-
-
Earnout obligations(4)
95,572
33,151
44,214
18,208
-
Holdback liabilities(5)
59,464
51,476
7,988
-
-
Total
$
1,396,585
$
212,801
$
144,718
$
1,029,785
$
9,281
(1)
The principal balance of $ 977.5 million of the 2026 Notes are reflected in the payment period in the table above based on the contractual maturity assuming no conversion or repurchase.
(2)
Purchase obligations are comprised primarily of network infrastructure, hosting services, and software licenses.
(3)
We maintain trust accounts with financial institution that are solely for satisfying the obligations to remit funds relating to our tax remittance services. Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. At December 31, 2021, we had $62.5 million of funds held from customers and $1.5 million of receivable from customers for a total of $64.0 million customer fund assets. Because of in-transit payments and changes in the amounts owed to us or to the taxing authority, the asset and liability amounts presented for any period will generally not completely offset.
(4)
Earnout obligations include the cash portion of earnout liabilities owed to Tradestream Technologies Inc. for the measurement periods ending through December 31, 2021, and the fair value of cash earnout liabilities owed to TTR, Davo, CrowdReason, and Track1099, estimated as of December 31, 2021. The fair value of the earnout liability owed to Business Licenses is excluded from the table above because it will be paid in shares of our common stock.
(5)
Holdback liabilities include cash payments owed to the sellers of TTR, Business Licenses, Davo, 3CE, CrowdReason, and Track1099.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements in the years ended December 31, 2021, or 2020.
Use and Reconciliation of Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we have disclosed non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP sales and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income (loss), non-GAAP net income (loss), free cash flow, and calculated billings, which are all non-GAAP financial measures. We have provided tabular reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure.
•
We calculate non-GAAP cost of revenue, non-GAAP research and development expense, non-GAAP sales and marketing expense, and non-GAAP general and administrative expense as GAAP cost of revenue, GAAP research and development expense, GAAP sales and marketing expense, and GAAP general and administrative expense before stock-based compensation expense and the amortization of acquired intangible assets included in each of the expense categories.
•
We calculate non-GAAP gross profit as GAAP gross profit before stock-based compensation expense and the amortization of acquired intangibles included in cost of revenue. We calculate non-GAAP gross margin as GAAP gross margin before the impact of stock-based compensation expense and the amortization of acquired intangibles included in cost of revenue as a percentage of revenue.
•
We calculate non-GAAP operating income (loss) as GAAP operating loss before stock-based compensation expense, amortization of acquired intangibles, and goodwill impairments. We calculate non-GAAP net income (loss) as GAAP net loss before stock-based compensation expense, amortization of acquired intangibles, and goodwill impairments.
•
We define free cash flow as net cash provided by operating activities less cash used for the purchases of property and equipment and capitalized software development costs.
•
We define calculated billings as total revenue plus the changes in deferred revenue and contract liabilities in the period, excluding the acquisition date impact of deferred revenue and contract liabilities assumed in a business combination. Because we generally recognize subscription revenue ratably over the subscription term, calculated billings can be used to measure our subscription sales activity for a particular period, to compare subscription sales activity across particular periods, and as a potential indicator of future subscription revenue, the actual timing of which will be affected by several factors, including subscription start date and duration.
Management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance and liquidity. We believe that non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results, prospects, and liquidity period-over-period without the impact of certain items that do not directly correlate to our performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as when comparing our financial results to those of other companies.
Our definitions of these non-GAAP financial measures may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.
We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non-GAAP financial measures in conjunction with the related GAAP financial measure.
The following schedule reflects our non-GAAP financial measures and reconciles our non-GAAP financial measures to the related GAAP financial measures:
For the Year Ended December 31,
(dollars in thousands)
Reconciliation of Non-GAAP Cost of Revenue:
Cost of revenue
$
204,832
$
143,095
$
115,299
Stock-based compensation expense
(10,203
)
(5,909
)
(3,122
)
Amortization of acquired intangibles
(9,319
)
(5,166
)
(4,854
)
Non-GAAP Cost of Revenue
$
185,310
$
132,020
$
107,323
Reconciliation of Non-GAAP Gross Profit:
Gross Profit
$
494,145
$
357,474
$
267,122
Stock-based compensation expense
10,203
5,909
3,122
Amortization of acquired intangibles
9,319
5,166
4,854
Non-GAAP Gross Profit
$
513,667
$
368,549
$
275,098
Reconciliation of Non-GAAP Gross Margin:
Gross margin
%
%
%
Stock-based compensation expense as a percentage of revenue
%
%
%
Amortization of acquired intangibles as a percentage of revenue
%
%
%
Non-GAAP Gross Margin
%
%
%
Reconciliation of Non-GAAP Research and Development Expense:
Research and development
$
167,391
$
119,710
$
82,442
Stock-based compensation expense
(24,343
)
(13,226
)
(6,666
)
Amortization of acquired intangibles
-
-
-
Non-GAAP Research and Development Expense
$
143,048
$
106,484
$
75,776
Reconciliation of Non-GAAP Sales and Marketing Expense:
Sales and marketing
$
296,006
$
204,490
$
168,634
Stock-based compensation expense
(20,301
)
(12,147
)
(8,736
)
Amortization of acquired intangibles
(11,082
)
(4,664
)
(2,271
)
Non-GAAP Sales and Marketing Expense
$
264,623
$
187,679
$
157,627
Reconciliation of Non-GAAP General and Administrative Expense:
General and administrative
$
137,301
$
95,242
$
71,918
Stock-based compensation expense
(33,250
)
(16,888
)
(15,825
)
Amortization of acquired intangibles
(3,574
)
(819
)
(15
)
Non-GAAP General and Administrative Expense
$
100,477
$
77,535
$
56,078
Reconciliation of Non-GAAP Operating Income (Loss):
Operating loss
$
(106,553
)
$
(61,968
)
$
(55,872
)
Stock-based compensation expense
88,097
48,170
34,349
Amortization of acquired intangibles
23,975
10,649
7,140
Non-GAAP Operating Income (Loss)
$
5,519
$
(3,149
)
$
(14,383
)
Reconciliation of Non-GAAP Net Income (Loss):
Net loss
$
(125,233
)
$
(49,183
)
$
(50,214
)
Stock-based compensation expense
88,097
48,170
34,349
Amortization of acquired intangibles
23,975
10,649
7,140
Non-GAAP Net Income (Loss)
$
(13,161
)
$
9,636
$
(8,725
)
Free cash flow:
Net cash provided by operating activities
$
34,118
$
42,618
$
22,150
Less: Purchases of property and equipment
(7,659
)
(4,501
)
(7,885
)
Less: Capitalized software development costs
(13,764
)
(4,159
)
(2,295
)
Free cash flow
$
12,695
$
33,958
$
11,970
The following table reflects calculated billings and reconciles to GAAP revenues.
Three Months Ended
Dec 31,
2021 (1)
Sep 30,
2021 (1)
Jun 30,
2021 (1)
Mar 31,
Dec 31,
2020 (1)
Sep 30,
Jun 30,
Mar 31,
(in thousands)
Total revenue
$
195,142
$
181,167
$
169,067
$
153,601
$
144,760
$
127,879
$
116,487
$
111,443
Add:
Deferred revenue
(end of period)
282,955
257,883
239,395
225,531
209,690
180,640
167,719
165,369
Contract liabilities
(end of period)
6,918
8,597
11,406
12,466
10,134
7,673
6,195
6,330
Less:
Deferred revenue
(beginning of
period)
(257,883
)
(239,395
)
(225,531
)
(209,690
)
(180,640
)
(167,719
)
(165,369
)
(161,241
)
Contract liabilities
(beginning of
period)
(8,597
)
(11,406
)
(12,466
)
(10,134
)
(7,673
)
(6,195
)
(6,330
)
(5,197
)
Deferred revenue
and contract
liabilities assumed in
business combinations
(747
)
(430
)
(886
)
-
(9,194
)
-
-
-
Calculated billings
$
217,788
$
196,416
$
180,985
$
171,774
$
167,077
$
142,278
$
118,702
$
116,704
(1)
These quarters include reconciling adjustments to exclude the acquisition-date fair value of deferred revenue and contract liabilities assumed in business combinations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of these financial statements in accordance with GAAP 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, as well as the revenue and expenses during the reporting periods. These estimates, assumptions, and judgments are necessary because future events and their effects on our consolidated financial statements cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could materially differ from those estimates.
We believe the following critical accounting policies require our most significant judgments and estimates used in preparation of our consolidated financial statements:
•
Revenue Recognition;
•
Assets Recognized from the Costs to Obtain a Contract with a Customer;
•
Stock-based Compensation; and
•
Business Combinations, including Intangible Assets, Earnout Liabilities and Goodwill.
Revenue Recognition
We primarily generate revenue from fees paid for subscriptions to tax compliance solutions and content and from fees paid for services performed in preparing and filing tax returns on behalf of our customers. Amounts that have been invoiced are recorded in trade accounts receivable and deferred revenue, contract liabilities, or revenue, depending upon whether the revenue recognition criteria have been met. Revenue is recognized once the customer is provisioned and as services are provided. Our revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers.
We determine 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, we satisfy a performance obligation.
We identify performance obligations in our contracts with customers, which primarily include subscription services and professional services. The transaction price is determined based on the amount we expect 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 we may mitigate exposure to credit risk by requiring payments in advance. If collectability of substantially all consideration to which we are entitled under the contract is determined to be not probable, revenue is not recorded until collectability becomes probable at a later date.
Subscription and Returns Revenue
Subscription and returns revenue primarily consist of contractually agreed upon fees paid for using the Company’s cloud-based solutions, which include tax calculation, preparing and filing transaction tax returns, compliance document management, and tax content subscription services. Under our subscription agreements, customers select a price plan that includes an allotted maximum number of transactions or number of jurisdictions over the subscription term. Unused transactions are not carried over to the customer’s next subscription term, and customers are not entitled to refunds of fees paid or relief from fees due in the event they do not use the allotted number of transactions. If customers exceed the maximum transaction level within their price plan, we will generally upgrade the customer to a higher transaction price plan or, in some cases, charge overage fees on a per transaction basis. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer.
Our subscription arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application services. Our 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 our 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. We earn SST revenue from participating state and local governments based on a percentage of the sales tax reported and paid.
Revenue is recognized ratably over the contractual term of the arrangement, beginning on the date that the service is made available to the customer. We invoice our 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 our 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 our services, and do not represent a distinct good or service. Instead, the fees are included within the transaction price and are allocated to the remaining performance obligations in the contract. We recognize revenue for these fees in accordance with the revenue recognition for those performance obligations.
Professional Services Revenue
We invoice for professional service arrangements on a fixed fee, milestone, or time and materials basis. Professional services revenue includes fees from providing tax analysis, configurations, registrations, 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
Our 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. We allocate revenue to each performance obligation based on the relative SSP. We determine 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. We use 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.
Assets Recognized from the Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have 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. Deferred commissions are amortized over an estimated period of benefit, generally six years. We determine 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. We 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. For 2021, 2020, and 2019 annual amortization of deferred commissions was $15.1 million, $11.5 million and $7.3 million, respectively. If the estimated period of benefit were changed from 6 years to 5 years, annual amortization of deferred commissions would have increased by $2.5 million. If the estimated period of benefit were changed from 6 years to 7 years, annual amortization of deferred commissions would have decreased by $1.7 million.
Stock-Based Compensation
Stock-based compensation expense is measured and recognized in our consolidated financial statements based on either the fair value at the grant date using the Black-Scholes option-pricing model or the fair value of our common stock underlying the stock-based awards. These awards include stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), and purchase rights issued under our 2018 Employee Stock Purchase
Plan (“ESPP”). PSUs were granted for the first time in 2021. The fair value of each award, excluding RSUs and PSUs, is estimated on the grant date using the Black-Scholes option-pricing model. The fair value of each RSU and PSU is determined using the fair value of the underlying common stock on the grant date. Stock-based compensation expense 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, which is generally four years for stock options and RSUs, three years for PSUs, and six months for purchase rights issued under the ESPP. Forfeitures are accounted for upon occurrence.
The stock-based compensation expense recognized over the performance period for PSUs will equal the fair value of the PSU on the grant date multiplied by the number of PSUs that are ultimately earned. However, the quarterly expense recognized during the performance period for PSUs is based on an estimate of the Company’s future performance and the expected payout level. Changes to management’s estimate of future performance result in adjustments to the stock-based compensation expense for PSUs and are recognized prospectively over the remaining service period. For the year ended December 31, 2021, PSU stock compensation expense was $16.0 million. If we applied a hypothetical increase to the future performance estimate to calculate the maximum possible payout, total PSU stock compensation expense recognized in 2021 would have increased by $2.1 million.
The determination of the grant date fair value of stock-based awards using the Black-Scholes option-pricing model is affected by management’s assumptions, including the expected term of the awards, our expected volatility over the expected term of the awards, expected dividend yield, and risk-free interest rates. The assumptions used in our option-pricing model require significant judgment and represent management’s best estimates. These assumptions and estimates are as follows:
•
Expected Term. The expected term of employee stock-based awards represents the weighted average period that the stock awards are expected to remain outstanding. To determine the expected term for stock options, we apply the simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award.
•
Expected Volatility. Expected volatility is based on a combination of annualized daily historical volatility of the Company’s stock price and the historical and implied volatility of comparable publicly traded companies over a similar expected term.
•
Expected Dividend Yield. We have never declared or paid cash dividends and do not presently intend to pay cash dividends in the foreseeable future. As a result, we used an expected dividend yield of zero.
•
Risk-Free Interest Rates. We based the risk-free interest rate on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected life of the stock award at the date nearest the stock award grant date.
If any assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation for future awards may differ materially compared to the awards granted previously. For 2021, 2020, and 2019, stock-based compensation expense was $88.1 million, $48.2 million, and $34.3 million, respectively. As of December 31, 2021, we had approximately $11.1 million of total unrecognized stock-based compensation expense related to stock options, $238.8 million of unrecognized stock-based compensation expense related to RSUs, $19.9 million of unrecognized stock-based compensation expense related to PSUs, and $0.4 million of unrecognized stock-based compensation expense related to the ESPP, which we expect to recognize over a period of approximately 1.6 years, 2.8 years, 1.9 years, and one month, respectively.
Business Combinations, including Intangible Assets, Earnout Liabilities, and Goodwill
The results of a business acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date, which may be considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
We perform valuations of assets acquired and liabilities assumed and allocate the purchase price to the respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, royalty rates, and selection of comparable companies. We engage the assistance of third-party valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination. The resulting fair values and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.
These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates, and if such events occur, we may be required to record a charge against the value ascribed to an acquired asset, an increase in the amounts recorded for assumed liabilities, or an impairment of some or all of the goodwill.
Goodwill recognized in connection with our 2021 acquisitions was $127.4 million and $26.5 million for our U.S. and European reporting units, respectively. We are integrating all these businesses into our existing operations and therefore, these businesses are included in our U.S. and European reporting units, as applicable, for purposes of analyzing goodwill.
For our U.S. operations, the largest identified intangible assets recognized were acquired pre-existing customer relationships. We determined a fair value of $12.8 million using an income approach, specifically the multi-period excess earnings method, with discount rates from 13.5% to 28%, and estimated useful lives of 5 - 8 years. For our European operations, the largest identifiable intangible asset recognized in the Inposia acquisition was for technology. We determined a fair value of $9.6 million (€8.2 million) using a relief from royalties approach, with a discount rate of 18.5% and an estimated useful life of 6 years.
Intangible Assets. We evaluate our intangible assets for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our intangible assets consist primarily of developed technology and customer relationships arising from business acquisitions. Factors that could trigger an impairment analysis include significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impaired, we assess the likelihood of recoverability of the net carrying value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the technology or customer relationships over its remaining useful life, we reduce the net carrying value of the related intangible asset to an estimated fair value.
Earnout Liabilities. Earnout liabilities arising from business combinations represent contingent consideration that may be payable in cash or our common stock and are recorded as a liability at fair value upon acquisition and re-measured at fair value in each subsequent reporting period. As of December 31, 2021, and 2020, our total earnout liability for business combinations was $114.0 million and $34.5 million, respectively. Changes in fair value are recorded in the consolidated statements of operations in fair value changes in earnout liabilities and included in total other income (expense), net. For 2021, we recorded $12.2 million of expense for subsequent period fair value measurements related to earnout liabilities. For 2020 and 2019, we recorded $2.3 million and $1.0 million, respectively, of income for subsequent period fair value measurements related to earnout liabilities.
Determining the fair value of contingent consideration requires us to make assumptions and judgments. We estimate the fair value of earnout liabilities using probability-weighted discounted cash flows and Monte Carlo simulations or scenario-based valuations, depending on the nature of the earnout and the performance metrics. These estimates involve inherent uncertainties and if different assumptions had been used, the fair value of earnout liabilities could have been materially different from the amounts recorded, including but not limited to forecast inputs, discount rate, and time to maturity. There is inherently more estimation and sensitivity to the model at acquisition as compared to the end of the earnout period for each earnout. In order to evaluate the sensitivity of the estimated fair value of earnout liabilities, we applied a hypothetical increase of 10% to the discount rates for earnouts that are valued using a Monte Carlo simulations or a scenario-based approach. Based on the results of the hypothetical increase in the discount rates, the fair value of earnout liabilities decreased by $3.7 million
Goodwill. Goodwill is assessed for impairment at the reporting unit level at least annually on October 31, or whenever circumstances occur indicating goodwill might be impaired. Applying the accounting standard to identify reporting units requires judgment. We have three reporting units for purposes of analyzing goodwill, consisting of our U.S., European, and Brazilian operations. Our impairment assessment involves comparing the fair value of each reporting unit to the carrying value, including goodwill. If the fair value exceeds the carrying value, we conclude that no goodwill impairment has occurred. The Company had no goodwill associated with the Brazilian reporting unit in 2021, 2020 and 2019.
In assessing goodwill for impairment, we first assess the qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying value. The next step in our assessment is to perform a quantitative analysis, if necessary, which involves determining the fair value of the reporting unit. We estimate the fair value of the reporting unit using both an income approach and a market approach, which are Level 3 measurements under the fair value hierarchy. The income approach uses discounted future cash flows derived from current internal forecasts, which include assumptions for long-term growth rates and a residual value (the hypothetical terminal value) for the reporting unit. Cash flows are discounted using the discount rate, which is risk-adjusted to reflect the specific risk profile of the reporting unit. The market approach identifies similar publicly traded companies to the reporting unit and develops a correlation, referred to as a multiple, to apply to the operating results of the reporting unit. The primary market multiple we compare to is revenue. The market approach also reflects a reasonable control premium to compute the fair value. These estimates involve inherent uncertainties and if different assumptions are used, the fair value of a reporting unit could be materially different from the amount we computed.
As part of our annual impairment test, a qualitative impairment test was performed for the Company’s U.S. reporting unit. We concluded it is more likely than not that the fair value of the reporting unit exceeds the carrying value.
A quantitative test was performed for the European reporting unit. The European reporting unit had a carrying value of $58.6 million as of October 31, 2021. From our quantitative assessment, we determined that the fair value of the European reporting unit was substantially in excess of the carrying value. Our internal cash flow forecast includes significant revenue growth attributable to a single marketplace partner. While this single marketplace partner is not currently significant to our consolidated results, it is expected to be significant to the European reporting unit representing assumed future revenues contributed in the near-term and long-term of approximately 50% of the total reporting unit revenue. If our revenue growth assumptions are not realized or our expectations with respect to future revenue growth are reduced, the fair value of the European reporting unit would be adversely impacted.
Significant estimates and assumptions used in the income approach for the European reporting unit included using a discount rate of 25% and a hypothetical terminal value of 1.50 times revenue. For the market approach, significant estimates and assumptions included our selection of an appropriate peer group, consisting of publicly traded U.S. and European companies, which allowed us to derive revenue multiples (e.g., trailing 12 months and next fiscal year) averaging approximately 1.45 times revenue and a selected control premium of 10%.
Recent Accounting Pronouncements
For further information on recent accounting pronouncements, refer to Note 2 in the accompanying notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We had cash and cash equivalents of $1.5 billion and $673.6 million as of December 31, 2021, and 2020, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with financial institutions. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.
We hold funds on behalf of our customers for remittance to regulatory authorities primarily in cash and cash equivalents. We held $62.5 million and $30.6 million of our customers funds as of December 31, 2021, and 2020, respectively. Declines in interest rates could reduce future interest income earned on both cash and cash equivalents. We also invest a portion of our funds held from customers in marketable securities consisting primarily of treasury securities, which are classified as available-for-sale securities as of December 31, 2021. Declines in interest rates would reduce future interest income earned on marketable securities. If we are forced to sell some or all of these securities at lower market values, we may incur investment losses. However, because we classify all marketable securities as available-for-sale, no gains or losses are recognized due to changes in interest rates or other factors until such securities are sold or when decreases in fair value are deemed due to expected credit losses. We have not recorded credit impairment losses on our portfolio to date.
In August 2021, we completed a private offering of convertible senior notes. As of December 31, 2021, we had an outstanding principal balance on the convertible senior notes of $977.5 million. As the interest rate on the convertible senior notes is fixed, we do not have exposure to interest rate risk.
Foreign Currency Exchange Risk
Our revenue and expenses are primarily denominated in U.S. dollars. For our foreign operations, most of our revenues and expenses are denominated in other currencies, such as the Brazilian Real, British Pound, Euro, and Indian Rupee. Changes in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenue and other operating results as expressed in U.S. dollars. In 2021, approximately 8% and for both 2020, and 2019, approximately 6% of our revenue was generated in currencies other than U.S. dollars. We have experienced and will continue to experience fluctuations in our net loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We have not engaged in the hedging of our foreign currency transactions to date. We may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operations, and our risk grows.
Inflation Risk
Inflationary factors, such as increases in our operating expenses, may adversely affect our results of operations, as our customers typically purchase services from us on a subscription basis over a period of time. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a continuing period of current rates of inflation or a further increase in the rate of inflation in the future may have an adverse effect on our levels of operating expenses as a percentage of revenue if we are unable to increase the prices for our subscription-based solutions to keep pace with these increased expenses.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements.
Index to Consolidated Financial Statements
The following financial statements are filed as part of this Annual Report on Form 10-K:
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Avalara, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Avalara, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Subscription and Returns Revenue- Refer to Note 2 and Note 6 to the financial statements
Critical Audit Matter Description
The Company primarily generates revenue from fees paid for subscriptions to tax compliance solutions. The Company’s subscription and returns revenue consists of a significant volume of transactions, sourced from multiple systems, databases, and other tools. The processing and recording of revenue, including interfaces between systems and databases, is both manual and automated, and therefore the Company uses a complex set of procedures and systems to generate complete and accurate data to process and record its revenue transactions. For the year ended December 31, 2021, subscription and returns revenue was $633.1 million.
We identified subscription and returns revenue as a critical audit matter as the Company has a significant volume of subscription and returns revenue transactions and a complex set of manual and automated procedures and systems to generate complete and accurate data to process and record revenue. This required an increased extent of effort and auditor judgment to audit the subscription and returns revenue transaction data and the need for us to involve professionals with expertise in data analytics.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s significant transaction volume and complex procedures and processing of subscription and returns revenue transactions included the following, among others:
•
With the assistance of our data analytics specialists, we performed a recalculation of subscription and returns revenue recorded through the Company’s relevant systems utilizing key attributes of subscription and returns revenue transaction data, including the transaction price, standalone selling price, and subscription and returns revenue recognition timing, among others. We compared our recalculation of expected subscription and returns revenue to the Company’s recorded subscription and returns revenue and evaluated significant differences.
•
For a sample of subscription and returns revenue transactions, we evaluated the accuracy of the data used in our recalculation of subscription and returns revenue by comparing key attributes utilized in our recalculation to source documents.
•
We tested the completeness of the subscription and returns revenue transaction data by selecting transactions from multiple independent sources and evaluated whether those transactions were included in the subscription and returns revenue transaction data.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 24, 2022
We have served as the Company's auditor since 2012.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Avalara, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Avalara, Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 24, 2022, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at INPOSIA Solutions, GmbH, DAVO Technologies LLC, 3CE Technologies, Inc., Track1099 LLC, CrowdReason Limited Liability Company and CorrelationAdvisors LLC, which were acquired in 2021, and whose financial statements constitute $37.6 million of total assets, which represent 1% of the Company’s consolidated total assets, $33.3 million of total liabilities, which represent 2% of the Company’s consolidated total liabilities, and $9.6 million of total revenue, which represent 1% of the Company’s total revenues, as of and for the year ended December 31, 2021. Accordingly, our audit did not include the internal control over financial reporting at INPOSIA Solutions, GmbH, DAVO Technologies LLC, 3CE Technologies, Inc., Track1099 LLC, CrowdReason Limited Liability Company and CorrelationAdvisors LLC.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 24, 2022
AVALARA, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
December 31,
December 31,
Assets
Current assets:
Cash and cash equivalents
$
1,514,064
$
673,593
Restricted cash
37,700
19,953
Trade accounts receivable-net of allowance for doubtful accounts of $5,803 and
$3,983, respectively
114,248
75,857
Deferred commissions
16,364
12,245
Prepaid expenses and other current assets
29,267
20,098
Total current assets before customer fund assets
1,711,643
801,746
Funds held from customers
62,509
30,598
Receivable from customers-net of allowance of $439 and $593, respectively
1,472
Total current assets
1,775,624
832,907
Noncurrent assets:
Restricted cash
-
37,700
Deferred commissions
52,155
38,625
Operating lease right-of-use assets-net
44,385
52,320
Property and equipment-net
46,464
34,713
Intangible assets-net
96,818
86,513
Goodwill
672,381
513,234
Other noncurrent assets
10,704
6,321
Total assets
$
2,698,531
$
1,602,333
Liabilities and shareholders' equity
Current liabilities:
Trade payables
$
16,683
$
20,280
Accrued expenses
109,792
84,532
Deferred revenue
280,816
208,026
Accrued purchase price related to acquisitions
51,476
22,473
Accrued earnout liabilities
33,151
Operating lease liabilities
11,453
11,339
Total current liabilities before customer fund obligations
503,371
347,399
Customer fund obligations
64,302
31,549
Total current liabilities
567,673
378,948
Noncurrent liabilities:
Convertible senior notes-net
961,259
-
Deferred revenue
2,139
1,664
Accrued purchase price related to acquisitions
7,988
49,057
Accrued earnout liabilities
81,485
34,468
Operating lease liabilities
45,614
56,625
Deferred tax liability
5,158
1,031
Other noncurrent liabilities
Total liabilities
1,672,077
522,173
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.0001 par value - no shares issued and outstanding at
December 31, 2021, and December 31, 2020, and 20,000 shares authorized as of
December 31, 2021, and December 31, 2020
-
-
Common stock, $0.0001 par value - 87,087 and 85,058 shares issued and
outstanding at December 31, 2021, and December 31, 2020, respectively, and
600,000 shares authorized as of December 31, 2021, and December 31, 2020
Additional paid-in capital
1,714,483
1,640,867
Accumulated other comprehensive loss
(3,428
)
(1,339
)
Accumulated deficit
(684,610
)
(559,377
)
Total shareholders’ equity
1,026,454
1,080,160
Total liabilities and shareholders' equity
$
2,698,531
$
1,602,333
The accompanying notes are an integral part of these consolidated financial statements.
AVALARA, INC.
Consolidated Statements of Operations
(In thousands, except per share data)
For the Year Ended December 31,
Revenue:
Subscription and returns
$
633,091
$
465,825
$
355,181
Professional services
65,886
34,744
27,240
Total revenue
698,977
500,569
382,421
Cost of revenue:
Subscription and returns
173,414
124,333
97,824
Professional services
31,418
18,762
17,475
Total cost of revenue
204,832
143,095
115,299
Gross profit
494,145
357,474
267,122
Operating expenses:
Research and development
167,391
119,710
82,442
Sales and marketing
296,006
204,490
168,634
General and administrative
137,301
95,242
71,918
Total operating expenses
600,698
419,442
322,994
Operating loss
(106,553
)
(61,968
)
(55,872
)
Other income (expense):
Fair value changes in earnout liabilities
(12,231
)
2,325
1,043
Interest income
1,678
6,037
Interest expense
(2,311
)
-
(289
)
Other income (expense), net
(938
)
(178
)
Total other income (expense), net
(15,372
)
4,476
6,613
Loss before income taxes
(121,925
)
(57,492
)
(49,259
)
(Provision for) benefit from income taxes
(3,308
)
8,309
(955
)
Net loss
$
(125,233
)
$
(49,183
)
$
(50,214
)
Net loss per share attributable to common shareholders,
basic and diluted
$
(1.45
)
$
(0.61
)
$
(0.68
)
Weighted average shares of common stock outstanding,
basic and diluted
86,263
80,985
73,345
The accompanying notes are an integral part of these consolidated financial statements.
AVALARA, INC.
Consolidated Statements of Comprehensive Loss
(In thousands)
For the Year Ended December 31,
Net loss
$
(125,233
)
$
(49,183
)
$
(50,214
)
Other comprehensive (loss) income - Foreign currency
translation
(2,089
)
1,380
(374
)
Total comprehensive loss
$
(127,322
)
$
(47,803
)
$
(50,588
)
The accompanying notes are an integral part of these consolidated financial statements.
AVALARA, INC.
Consolidated Statements of Shareholders’ Equity
(In thousands, except per share data)
Accumulated
Additional
Other
Total
Common Stock
Paid-In
Comprehensive
Accumulated
Shareholders’
Shares
Amount
Capital
Income (Loss)
Deficit
Equity
Balance at December 31, 2018
66,768,563
$
$
599,493
$
(2,345
)
$
(487,602
)
$
109,553
Proceeds from common stock offering, net of underwriting discounts
4,133,984
274,705
274,705
Public offering costs
(1,198
)
(1,198
)
Impact of adoption of new accounting pronouncements - ASC 606
27,622
27,622
Exercise of stock options
5,924,142
58,019
58,020
Shares tendered for cashless redemption of stock-based awards
(16,517
)
(1,183
)
(1,183
)
Vesting of restricted stock units
52,827
-
Stock-based compensation expense
34,400
34,400
Shares issued under employee stock purchase plan
506,897
12,293
12,293
Shares issued to purchase intangible assets
77,724
Loss on translation adjustment
(374
)
(374
)
Net loss
(50,214
)
(50,214
)
Balance at December 31, 2019
77,447,620
$
$
976,627
$
(2,719
)
$
(510,194
)
$
463,722
Proceeds from common stock offering, net of underwriting discounts
4,527,558
556,311
556,312
Public offering costs
(701
)
(701
)
Exercise of stock options
2,518,572
39,946
39,946
Vesting of restricted stock units
308,754
-
Stock-based compensation expense
48,570
48,570
Shares issued under employee stock purchase plan
157,705
11,337
11,337
Shares issued related to business combination earnouts
89,318
7,500
7,500
Shares issued to purchase intangible assets
1,191
Shares issued for acquisitions of businesses
7,009
1,190
1,190
Gain on translation adjustment
1,380
1,380
Net loss
(49,183
)
(49,183
)
Balance at December 31, 2020
85,057,727
$
1,640,867
$
(1,339
)
$
(559,377
)
$
1,080,160
Exercise of stock options
1,223,395
21,779
21,779
Vesting of restricted stock units
524,246
-
Stock-based compensation expense
89,688
89,688
Shares issued under employee stock purchase plan
116,881
14,446
14,446
Shares issued for acquisitions of businesses
164,416
22,971
22,971
Purchase of capped calls
(75,268
)
(75,268
)
Loss on translation adjustment
(2,089
)
(2,089
)
Net loss
(125,233
)
(125,233
)
Balance at December 31, 2021
87,086,665
$
1,714,483
$
(3,428
)
$
(684,610
)
$
1,026,454
The accompanying notes are an integral part of these consolidated financial statements.
AVALARA, INC.
Consolidated Statements of Cash Flows
(In thousands)
For the Year Ended December 31,
Cash flows from operating activities:
Net loss
$
(125,233
)
$
(49,183
)
$
(50,214
)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation
88,097
48,170
34,349
Depreciation and amortization
36,526
20,233
15,807
Amortization of debt issuance costs
1,367
-
-
Asset impairments
-
-
Impairment of capitalized cloud computing costs
-
-
Deferred income tax expense (benefit)
1,128
(9,419
)
(223
)
Non-cash operating lease costs
9,549
8,111
5,000
Fair value changes in earnout liabilities
12,231
(2,325
)
(1,043
)
Non-cash bad debt expense
1,801
2,063
1,367
Other
(783
)
(230
)
Changes in operating assets and liabilities:
Trade accounts receivable
(36,053
)
(17,921
)
(12,862
)
Prepaid expenses and other current assets
(10,986
)
(3,333
)
(3,544
)
Deferred commissions
(17,648
)
(12,454
)
(19,149
)
Other noncurrent assets
(4,362
)
(2,843
)
(1,265
)
Trade payables
(4,240
)
8,026
5,783
Accrued expenses
22,646
23,979
16,246
Deferred revenue
71,406
39,254
37,558
Operating lease liabilities
(11,995
)
(10,304
)
(5,764
)
Net cash provided by operating activities
34,118
42,618
22,150
Cash flows from investing activities:
Purchase of property and equipment
(7,659
)
(4,501
)
(7,885
)
Capitalized software development costs
(13,764
)
(4,159
)
(2,295
)
Cash paid for acquisitions of businesses, net of cash and restricted cash
equivalents acquired
(76,646
)
(368,198
)
(30,310
)
Cash paid for acquired intangible assets
(1,900
)
(1,200
)
(139
)
Cash paid for purchases of customer fund available-for-sale securities
(381
)
-
-
Net cash used in investing activities
(100,350
)
(378,058
)
(40,629
)
Cash flows from financing activities:
Proceeds from common stock offering, net of underwriting discounts
-
556,312
274,705
Payments of deferred financing costs
-
(686
)
(555
)
Proceeds from convertible senior notes
977,500
-
-
Payments of debt issuance costs
(17,609
)
-
-
Purchase of capped calls
(75,268
)
-
-
Proceeds from exercise of stock options
21,779
39,946
58,019
Proceeds from purchases of stock under employee stock purchase plan
14,446
11,337
12,293
Taxes paid related to net share settlement of stock-based awards
-
-
(1,183
)
Acquisition-related post-closing payments
(20,821
)
(2,763
)
-
Payments related to business combination earnouts
(33
)
(3,760
)
(375
)
Payments related to asset acquisition earnouts
(1,266
)
(65
)
-
Payments on financed asset purchases
(104
)
-
-
Net increase in customer fund obligations
20,288
5,738
11,506
Net cash provided by financing activities
918,912
606,059
354,410
Foreign currency effect
(621
)
(108
)
(33
)
Net change in cash, cash equivalents, restricted cash, and restricted cash
equivalents
852,059
270,511
335,898
Cash, cash equivalents, restricted cash, and restricted cash equivalents-Beginning
of period
761,844
491,333
155,435
Cash, cash equivalents, restricted cash, and restricted cash equivalents-End of
period
$
1,613,903
$
761,844
$
491,333
AVALARA, INC.
Consolidated Statements of Cash Flows
(In thousands)
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash
equivalents to the Consolidated Balance Sheets, end of period:
Cash and cash equivalents
$
1,514,064
$
673,593
$
466,950
Restricted cash
37,700
57,653
-
Restricted cash equivalents-funds held from customers
62,139
30,598
24,383
Total cash, cash equivalents, restricted cash, and restricted cash
equivalents, end of period
$
1,613,903
$
761,844
$
491,333
AVALARA, INC.
Consolidated Statements of Cash Flows
(In thousands)
For the Year Ended December 31,
Supplemental cash flow disclosures:
Cash paid for interest expense
$
-
$
-
$
Cash paid for operating lease liabilities
15,563
14,492
9,784
Cash paid for income taxes
1,582
1,155
1,121
Non-cash investing and financing activities:
Stock issued related to business combinations
$
22,971
$
8,690
$
-
Accrued purchase price related to acquisitions
10,055
69,600
4,902
Accrued value of earnout related to acquisitions of businesses
67,280
34,468
15,351
Accrued purchase of intangible assets
1,197
Fair value of common stock issued to purchase
intangible assets
-
Customer fund obligations assumed in business combinations
12,464
-
-
Property and equipment additions in accounts payable and
accrued expenses
1,011
Capitalized internally developed software costs included in accounts
payable and accrued expenses
1,449
-
-
Stock-based compensation costs capitalized to internally developed
software
1,397
Operating lease right-of-use assets in exchange for lease obligations
1,614
11,835
15,861
The accompanying notes are an integral part of these consolidated financial statements.
AVALARA, INC.
Notes to Consolidated Financial Statements
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 and other product-related taxes such as sales and use tax, value-added tax (“VAT”), fuel excise tax, beverage alcohol, cross-border taxes (including tariffs and duties), lodging tax, communications tax, and insurance premium tax. These solutions enable customers to automate the process of determining taxability, identifying applicable tax rates, determining and collecting taxes, preparing and filing returns, remitting taxes, maintaining tax records, and managing compliance documents. The Company, a Washington corporation, was originally incorporated in 1999 and is headquartered in Seattle, Washington.
The Company has wholly owned subsidiaries outside of the U.S. in Brazil, Canada, Europe, and India which conduct sales and operations and provide business development, software development, and support services.
2. Significant Accounting Policies
Accounting Principles
The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation.
Principles of Consolidation
The accompanying consolidated financial statements include those of the Company 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. In 2021, approximately 8%, and in each of 2020 and 2019, approximately 6%, of the Company’s revenue was generated outside of the United States, respectively. As of December 31, 2021, and 2020, approximately 25% and 27%, respectively, of the Company’s long-lived assets were held outside of the United States. As of December 31, 2021, and 2020, approximately 12% and 15% of the Company’s long-lived assets were held in India, respectively. As of both December 31, 2021, and 2020, approximately 9% of the Company’s long-lived assets were held in the United Kingdom.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and judgments related to revenue are described below in the Revenue Recognition Accounting Policy. Significant estimates impacting expenses include: expected credit losses associated with the allowance for doubtful accounts; the measurement of fair values of stock-based compensation award grants; the expected payout level of performance share unit grants; the expected earnout obligations in connection with acquisitions; the expected term of the customer relationship for capitalized contract cost amortization; the valuation and useful lives
of acquired intangible assets; the valuation of the fair value of reporting units for analyzing goodwill; and the capitalization and useful life of capitalized software development costs. Actual results could materially differ from those estimates.
Risks and Uncertainties
The Company has incurred significant operating losses since its inception, including net losses of $125.2 million, $49.2 million, and $50.2 million for the years ended December 31, 2021, 2020, and 2019, respectively. The Company had an accumulated deficit of $684.6 million and $559.4 million as of December 31, 2021, and 2020, respectively. The Company believes that its cash and cash equivalents of $1.5 billion as of December 31, 2021, is adequate to satisfy its current obligations.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The carrying value of our cash and cash equivalents approximates fair value given their short-term nature.
Restricted Cash
Restricted cash represents cash that is segregated from the Company’s operating funds and is held to satisfy holdback liabilities related to acquisitions (see Note 5).
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
•
Level 2: Inputs are quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•
Level 3: Inputs are unobservable inputs based on the Company’s assumptions and valuation techniques used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.
The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, restricted cash equivalents, trade accounts receivable, trade payables, and accrued expenses, due to their short-term nature. The Company has measured the fair value of money market funds and available-for-sale securities based on quoted prices in active markets for identical assets and liabilities. The Company carries its Convertible Senior Notes at par value less unamortized debt issuance costs on its consolidated balance sheets and presents the fair value for disclosure purposes only.
Trade Accounts Receivable
Trade accounts receivable represent amounts due from customers when the Company has invoiced the customer and has not yet received payment. An invoice is issued when the customer is contractually obligated to pay for software subscriptions and/or services. Trade accounts receivable are presented net of an allowance for doubtful accounts.
The allowance for doubtful accounts is the Company’s best estimate of the amount of expected credit losses in existing trade accounts receivable. The allowance for doubtful accounts is based on the assessment of collectability. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering several factors, including the age of each outstanding invoice, the collection history of customers, current economic conditions, and forecasted economic conditions. Additions to the allowance are charged to expense to the extent that revenue has been recognized for a contract. Amounts not yet recognized in revenue are charged to deferred revenue.
The table below details the allowance for doubtful accounts (in thousands):
December 31,
Balance at the beginning of the year
$
3,983
$
1,179
$
Additions
4,587
4,412
1,201
Write-offs
(2,767
)
(1,608
)
(543
)
Balance at the end of the year
$
5,803
$
3,983
$
1,179
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, restricted cash, accounts receivable, and funds held from customers. Cash, cash equivalents, restricted cash, and funds held from customers are held in financial institutions management believes have a high credit standing. To manage credit risk related to accounts receivable, the Company evaluates customers’ financial condition and generally collateral is not required.
As of December 31, 2021, and 2020, there were no customers that represented more than 10% of the Company’s net trade accounts receivable or more than 10% of the Company’s revenue in any of the periods presented.
Customer Funds Assets and Obligations
Funds Held from Customers
The Company has established a Delaware statutory trust (the “Customer Trust”) and appointed a federally insured bank as trustee, and the Customer Trust holds certain funds provided by its customers pending remittance to tax authorities. The Company is the sole beneficial owner of the Customer Trust. The Customer Trust is intended to be a bankruptcy-remote legal entity and meets the criteria in Accounting Standards Codification (“ASC”) Topic 810, Consolidation to be characterized as a variable interest entity (“VIE”). The Customer Trust is included in the Company’s consolidated financial statements because the Company determined it has a controlling financial interest in the Customer Trust as it has both (1) the power to direct the activities that most significantly impact the economic performance of the Customer Trust (including the power to make investment decisions for the trust) and (2) the right to receive benefits in the form of investment returns that could potentially be significant to the Customer Trust.
In 2021, the Company began having certain customers remit tax payments to the Customer Trust with the intention that all customer funds will eventually be held by the Customer Trust. Funds held from customers represent restricted cash equivalents and available-for-sale securities that, based upon the Company’s intent, are restricted solely for satisfying the obligations to remit funds relating to the Company’s tax remittance services. Customer fund obligations represent the Company’s contractual obligations to remit funds to satisfy customers’ tax obligations and are recorded on the consolidated balance sheets at the time that the Company or the Customer Trust collects funds from customers.
December 31,
December 31,
Funds held from customers (current assets):
Restricted cash equivalents - Company
$
$
30,598
Restricted cash equivalents - Customer Trust
62,126
-
Available-for-sale securities - Customer Trust
-
Funds held from customers
$
62,509
$
30,598
Customer fund obligations (current liabilities):
Customer fund obligations - Company
$
64,302
$
31,549
Customer fund obligations
$
64,302
$
31,549
Receivables from Customers
Occasionally, the Company will pay a tax obligation to taxing authorities on behalf of its customer, prior to receiving funds from the customer or prior to receiving the refund due to the customer from the taxing authority. Accounts receivable from customers represent amounts the customer is contractually obligated to repay to the Company. The future economic benefit to the Company is restricted solely for the repayment of customer funds and taxing authority obligations.
Receivables from customers deemed uncollectible are charged against a separate allowance for doubtful accounts. The allowance against receivables from customers is a result of the Company assuming credit risk associated with its customers’ tax remittance obligations. The table below details the allowance against receivables from customers (in thousands):
December 31,
Balance at the beginning of the year
$
$
$
Charged to expense
Write-offs
(444
)
(370
)
(94
)
Balance at the end of the year
$
$
$
Customer Funds Obligations
Customer funds obligations represent the Company’s contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Changes in customer funds obligations liability are presented as cash flows from financing activities.
Marketable Securities
The Company invests a portion of its funds held from customers in marketable securities classified as available-for-sale. Available-for-sale securities are recorded at fair value on the consolidated balance sheets. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and are reported as a component of accumulated other comprehensive loss on the consolidated balance sheets. Realized gains and losses from the sale of available-for-sale securities are included in other income (expense), net on the consolidated statements of operations.
If the fair value of an available-for-sale security is below its amortized cost, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery. If either of those two conditions is met, the Company would recognize a charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If the Company does not intend to sell a security or if it is more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive loss. The Company did not recognize any credit impairment losses during the year ended December 31, 2021, or 2020.
Cloud Computing Arrangements
Implementation costs incurred in a cloud computing arrangement that is a service contract are capitalized and recorded in prepaid expenses and other current assets and other noncurrent assets on the consolidated balance sheets. Capitalized implementation costs include external professional service costs and internal personnel costs related to technical development. Post-implementation training and maintenance costs are expensed as incurred. For the years ended December 31, 2021, and 2020, $4.2 million and $3.1 million of cloud computing implementation costs were capitalized, respectively. Capitalized cloud computing implementation costs are amortized on a straight-line basis over the expected term of the arrangement. Cloud computing arrangements are tested for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. During 2021, the Company recorded a $0.7 million impairment charge related to cloud computing arrangements that were abandoned. The impairment charge is recorded in general and administrative and research and development expenses in the consolidated statement of operations for the year ended December 31, 2021. No impairment of cloud computing arrangements occurred in 2020.
Capitalized Software
Software development costs for internal-use software (i.e., cloud-based software solutions) are capitalized once the project is in the application development stage in accordance with the accounting guidance for internal-use software. These capitalized costs include external direct costs of services consumed in developing or obtaining the software and personnel expenses for employees who are directly associated with the development. Capitalization of these costs concludes once the project is substantially complete, and the software is ready for its intended purpose. Post-configuration training and maintenance costs are expensed as incurred. For the years ended December 31, 2021, 2020, and 2019, $16.6 million, $4.2 million, and $2.3 million of software development costs were capitalized, respectively. Capitalized software development costs are amortized on a straight-line basis over the estimated useful life, generally 3 to 6 years. Software development costs are tested for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
In circumstances where software is developed for both cloud-based software solutions and for the purpose of being sold, leased, or otherwise marketed (i.e., customer hosted software), capitalization of development costs occurs after technological feasibility of the software is established and continues until the product is available for general release to customers. Since the Company’s developed software is available for general release concurrent with the establishment of technological feasibility, development costs are not capitalized in these circumstances.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment is computed on the straight-line method over the estimated useful life of the asset or the lease term (for leasehold improvements), whichever is shorter.
Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed, and any resulting gain or loss is recorded in the consolidated statements of operations. Maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense in the period incurred.
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. An impairment of the Company’s operating lease right-of-use assets and related property and equipment of $0.8 million was recorded in 2020 (see Note 3). The impairment charge is recorded in general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2020. No impairment of long-lived assets occurred in 2021.
Leases
Leases arise from contracts that convey the right to control the use of identified property or equipment for a period of time in exchange for consideration. The Company’s leasing arrangements are primarily for office space used to conduct operations. Additionally, the Company has leases for vehicles, office equipment and servers. The Company determines whether an arrangement is or contains a lease at the inception date, based on whether there is an identified asset and whether the Company controls the use of the identified asset throughout the period of use. Leases commence when the lessor makes the asset available for use.
Leases are classified at commencement as either operating or finance leases. All the Company’s leases are classified as operating leases. Rent expense for operating leases is recognized on the straight-line method over the term of the agreement beginning on the lease commencement date.
At commencement, the Company records an operating lease liability at the present value of future lease payments, net of any future lease incentives to be received. Lease agreements may include cancellable future periods subject to termination or extension options, which are not included in the future lease payments unless it is reasonably certain the Company will continue to utilize the asset for those periods. The discount rate used to determine the present value is the Company’s incremental borrowing rate (“IBR”) unless the interest rate implicit in the lease is readily determinable. Since the Company’s leases do not have an implicit interest rate that is readily determinable, the Company used the IBR as the discount rate for all leases. The IBR is an estimate of the Company’s collateralized borrowing rate and is estimated based on information available at the lease commencement date, including the lease term and the currency in which the arrangement is denominated. At commencement, a corresponding right-of-use asset is recorded, which is calculated based on the amount of the operating lease liability, adjusted for any advance lease payments paid, initial direct costs incurred, or lease incentives received prior to commencement. Right-of-use assets are subject to evaluation for impairment or disposal on a basis consistent with other long-lived assets (see Note 3).
The Company does not record right-of-use assets or operating lease liabilities for leases with initial terms of 12 months or less and does not separate nonlease components from the associated lease components for real estate leases. The primary impact of this policy election is that included in the calculation of operating lease liabilities are any fixed and noncancelable future payments due under the contract for items such as common area maintenance, utilities, parking, and other costs. Lease-related costs, which are variable rather than fixed, are expensed in the period incurred. Variable lease costs consist primarily of common area maintenance and utilities costs for the Company’s office spaces that are due based on the actual costs incurred by the landlord. Lease payments that depend on an index or a rate are measured using the index or rate at the commencement date and are included in operating
lease costs. Subsequent increases to lease payments due to a change in the index or rate are expensed as a variable lease cost.
The Company accounts for subleases from the perspective of a lessor and evaluates the duration of subleases based on the reasonable certainty of any sublessor termination and extension options, as well as the lease term for the underlying asset. The Company has one sublease classified as an operating lease. For subleases classified as operating leases, the Company records sublease income as a reduction of lease expense on the straight-line method over the term of the sublease.
Business Combinations and Goodwill
The Company’s identifiable assets acquired and liabilities assumed in a business combination are recorded at their acquisition date fair values, which may be considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date. The valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to:
•
future expected cash flows from customer agreements, customer lists, distribution agreements, non-compete agreements, and proprietary content and technology;
•
assumptions about the length of time the brand will continue to be used in the Company’s suite of solutions;
•
royalty rates used to estimate the fees that could be charged to license the proprietary content and technology; and
•
discount rates used to determine the present value of recognized assets and liabilities.
The Company’s estimates of fair value are based upon assumptions it believes to be reasonable, but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.
Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which these costs are incurred. The results of operations of an acquired business are included in the consolidated financial statements beginning at the acquisition date. Goodwill is tested for impairment annually on October 31, or in the event of certain occurrences. There was no goodwill impairment recorded for the years ended December 31, 2021, 2020 or 2019.
The Company estimates the fair value of the earnout liabilities related to business combinations using various valuation approaches, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. Following final determination of the acquisition date fair value, the fair value of the earnout is remeasured each reporting period, with any change in the value recorded as fair value changes in earnout liabilities in the consolidated statements of operation. The Company recorded $12.2 million of expense from increases in the fair value of earnout liabilities related to business combinations for the year ended December 31, 2021. The Company recorded income from decreases in the fair value of earnout liabilities related to business combinations of $2.3 million and $1.0 million for the years ended December 31, 2020, and 2019, respectively (see Note 3).
Acquired Intangible Assets
Acquired intangible assets consist of developed technology, including in-process research and development (“IPR&D”), customer relationships, backlog, database content, noncompetition agreements, and tradenames and trademarks, resulting from the Company’s acquisitions. Acquired intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives. IPR&D is initially capitalized at fair value as a developed technology intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, it is amortized over the asset’s estimated useful life.
The Company recognizes an earnout liability for acquisitions of intangible assets that are accounted for as an asset acquisition when the liability is earned and the amount is known. The earnout liability is capitalized as part of the cost of the assets acquired and amortized over the remaining useful life of the asset. Asset acquisition-related costs, primarily legal fees, are capitalized and included in the cost basis of the intangible asset when incurred.
Convertible Senior Notes
In August 2021, the Company completed a private offering of $977.5 million principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes”). As discussed below, the Company early adopted ASU No. 2020-06 as of January 1, 2021, and concluded that the 2026 Notes will be accounted for as debt, with no bifurcation of the embedded conversion feature. Debt issuance costs related to the Company’s issuance of the 2026 Notes consist primarily of purchaser’s discounts, commissions, and related costs. The debt issuance costs were recorded as a direct deduction from the liability associated with the 2026 Notes on the consolidated balance sheet and are amortized to interest expense over the term of the 2026 Notes.
In connection with the offering of the 2026 Notes, the Company purchased capped calls from certain financial institutions with respect to its common stock. As the capped calls are both legally detachable and separately exercisable from the 2026 Notes, the Company accounts for the capped calls separately from the 2026 Notes. The capped calls are indexed to the Company’s own common stock and classified in stockholder’s equity. As such, the premiums paid for the capped calls have been included as a net reduction to additional paid-in capital in the consolidated balance sheet as of December 31, 2021.
Income Taxes The Company’s deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and income tax basis of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company assesses its income tax positions and records tax benefits or expense based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. The Company will recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact the consolidated financial statements.
Revenue Recognition
The Company primarily generates revenue from fees paid for subscriptions to tax compliance solutions and fees paid for services performed in preparing and filing tax returns on behalf of its customers. Amounts that have been invoiced are recorded in trade accounts receivable and deferred revenue, contract liabilities, or revenue, depending upon whether the revenue recognition criteria have been met. Revenue is recognized once the customer is provisioned and as services are provided in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
The Company determines revenue recognition through the following five-step framework:
•
Identification of the contract, or contracts, with a customer;
•
Identification of the performance obligations in the contract;
•
Determination of the transaction price;
•
Allocation of the transaction price to the performance obligations in the contract; and
•
Recognition of revenue when, or as, the Company satisfies a performance obligation.
The Company identifies performance obligations in its contracts with customers, which primarily include subscription services and professional services. The transaction price is determined based on the amount which the Company expects to be entitled to in exchange for providing the promised services to the customer. The transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when performance obligations are satisfied.
Contract payment terms are typically net 30 days. Collectability is assessed based on a number of factors including collection history and creditworthiness of the customer, and the Company may mitigate exposure to credit risk by requiring payments in advance. If collectability of substantially all consideration to which the Company is entitled under the contract is determined to be not probable, revenue is not recorded until collectability becomes probable at a later date.
Revenue is recorded based on the transaction price excluding amounts collected on behalf of third parties, such as sales taxes collected and remitted to governmental authorities.
Subscription and Returns Revenue
Subscription and returns revenue primarily consist of contractually agreed upon fees paid for using the Company’s cloud-based solutions, which include tax calculation, preparing and filing transaction tax returns, compliance document management, and tax content subscription services. Under the Company’s subscription agreements, customers select a price plan that includes an allotted maximum number of transactions or number of jurisdictions over the subscription term. Unused transactions are not carried over to the customer’s next subscription term, and customers are not entitled to refunds of fees paid or relief from fees due in the event they do not use the allotted number of transactions. If customers exceed the maximum transaction level within their price plan, the Company will generally upgrade the customer to a higher transaction price plan or, in some cases, charge overage fees on a per transaction basis. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer.
The Company’s subscription arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application services. The Company’s standard subscription contracts are non-cancelable except where contract terms provide rights to cancel in the first 60 days of the contract term. Cancellations under the Company’s standard subscription contracts are not material, and do not have a significant impact on revenue recognized. Tax returns processing services include collection of tax data and amounts, preparation of compliance forms, and submission to taxing authorities. Returns processing services are primarily charged on a subscription basis for an allotted number of returns to process within a given time period. We earn SST revenue from participating state and local governments based on a percentage of the sales tax reported and paid.
Revenue is recognized ratably over the contractual term of the arrangement, beginning on the date that the service is made available to the customer. The Company invoices its subscription customers for the initial term at contract signing and at each subscription renewal. Initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that are contractually billable and have been invoiced, or which have been collected as cash, are initially recorded as deferred revenue or contract liabilities. While 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 generates professional services revenue from providing tax analysis and services, including tax registrations, voluntary disclosure agreements, nexus studies, and backfiling services. Additionally, the Company provides configurations, data migrations, integration, and training for its subscriptions and returns products. The 2020 acquisitions of TTR and Business Licenses (see Note 5) expanded the scope of professional services to include business licenses and tax refund claims and recovery assistance. The Company invoices for professional service arrangements on a fixed fee, milestone, or time and materials basis. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.
Judgments and Estimates
The Company’s contracts with customers often include obligations to provide multiple services to a customer. Determining whether services are considered distinct performance obligations that should be accounted for separately from one another requires judgment. Subscription services and professional services are both distinct performance obligations that are accounted for separately.
Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. The Company allocates revenue to each performance obligation based on the relative SSP. The Company determines SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices, market conditions and entity-specific factors. This includes a review of historical data related to the services being sold and customer demographics. The Company uses a range of amounts to estimate SSP for performance obligations. There is typically more than one SSP for individual services due to the stratification of those services by information, such as size and type of customer.
Deferred Revenue
Deferred revenue consists of customer billings and payments in advance of revenue being recognized from the Company’s contracts. The Company typically invoices its customers annually in advance for its subscription-based contracts. Deferred revenue and accounts receivable are recorded at the beginning of the new subscription term. For some customers, the Company invoices in monthly, quarterly, or multi-year installments and, therefore, the deferred revenue balance does not necessarily represent the total contract value of all non-cancelable subscription agreements. Deferred revenue anticipated to be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent deferred revenue.
Integration and Referral Partner Commissions
The Company utilizes independent partners to build and maintain integrations for a broad range of business applications, such as accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM systems. These integrations link the business application to the Company’s cloud-based software solutions. Integration partners are paid a commission based on a percentage of the sales that use the integration. In general, integration partners are paid a higher commission for the initial sale to a new customer and a lower commission for renewal sales.
Referral partners bring new customers to the Company and earn a commission that is based on a percentage of the first-year sales. Some of the Company’s integration partners also refer customers that have purchased the partner’s business application.
The Company recognizes commissions related to integration and referral partners when a binding customer order is placed. The Company defers the portion of partner commissions costs that are considered a cost of obtaining a new contract with a customer and amortizes 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. The Company expenses the remaining partner commissions as incurred. The Company classifies these costs as sales and marketing expenses. For 2021, 2020 and 2019, partner commission expense totaled $40.0 million, $30.2 million, and $22.0 million, respectively.
A portion of the Company’s revenue is generated from sales made directly by integration partners, rather than through the Company. For these transactions, the Company evaluates whether revenue should be presented on a gross basis, which is the amount that a customer pays for the Company’s solution, or on a net basis, which is the customer payment less partner commissions. The Company has determined that a gross presentation is appropriate for revenue generated through these integration partners, because the Company is the primary provider of services to the end customers and is the primary obligor in these relationships. In addition, the Company has customer credit risk for non-payment and the Company has latitude in establishing and negotiating prices on transactions from these sources.
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.
Cost of Revenue
Cost of revenue consists of personnel and related expenses for providing the Company’s solutions and supporting its customers, including salaries, benefits, bonuses, and stock-based compensation, tax content, depreciation of capitalized software development costs, amortization of acquired developed technology intangible assets, direct costs and allocated costs associated with information technology such as software hosting costs, tax content maintenance, and certain services provided by third parties. Cost of revenue also includes allocated rent and overhead.
Research and Development
Research and development expenses consist primarily of personnel and related expenses for the Company’s software engineering, product development, and quality assurance, including salaries, benefits, bonuses and stock-based compensation, third-party contractors, and allocated overhead for certain information technology and facility expenses, along with depreciation of equipment. Expenditures for research and development are expensed as incurred.
Advertising Costs
The Company expenses all advertising costs as incurred and classifies these costs as sales and marketing expenses. Advertising expenses were $35.5 million, $24.3 million, and $20.2 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Foreign Currency Translation
Assets and liabilities of each of the Company’s foreign subsidiaries are translated at the exchange rate in effect at each period-end. Consolidated statement of operations amounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from differing exchange rates from period to period are included in accumulated other comprehensive loss within shareholders’ equity.
Employee Benefit Plan
The Company offers a salary deferral 401(k) plan for its U.S. employees. The plan allows employees to contribute a percentage of their annual compensation, subject to limitations imposed by the Internal Revenue Service. The plan also allows the Company to make matching contributions, subject to certain limitations. The Company contributed $5.4 million, $3.6 million, and $3.8 million to the plan in 2021, 2020, and 2019, respectively.
Self-Insurance
The Company maintains 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.
Stock-Based Compensation
The Company accounts for stock-based compensation by calculating the fair value of each option, restricted stock unit (“RSU”) or performance share unit (“PSU”) issued under the 2018 Equity Incentive Plan (the “2018 Plan”), or purchase rights issued under the 2018 Employee Stock Purchase Plan (“ESPP”), at the grant date. The fair value of stock options and purchase rights is estimated by applying the Black-Scholes option-pricing model. This model uses the fair value of the Company’s underlying common stock at the measurement date, the expected or contractual term of the option or purchase right, the expected volatility of its common stock, risk-free interest rates, and expected dividend yield of its common stock. The fair value of an RSU or PSU is determined using the fair value of the Company’s underlying common stock on the grant date. The stock-based compensation expense recognized over the performance period for PSUs will equal the fair value of the PSU on the grant date multiplied by the number of PSUs that are earned. Furthermore, the quarterly expense recognized during the performance period for PSUs is based on an estimate of the Company’s future performance and the expected payout level. Changes to management’s estimate of future performance result in adjustments to the stock-based compensation expense for PSUs and are recognized prospectively over the remaining service period. The Company accounts for forfeitures of stock-based awards as they occur.
Deferred Financing Costs
Deferred financing costs, consisting primarily of legal, accounting, printing, and filing services, and other direct fees and costs related to public offerings of common stock, are capitalized. The deferred financing costs related to the Company’s public offerings of common stock were offset against proceeds from those offerings upon the closing of each offering.
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Standards
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends the existing guidance relating to the accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of U.S. GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning
after December 15, 2020, with early adoption permitted. The Company adopted the guidance on January 1, 2021, and the adoption of this new guidance does not have a material effect on its consolidated financial statements.
ASU 2020-06
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which amends the accounting standards for convertible debt instruments that may be settled entirely or partially in cash upon conversion. ASU No. 2020-06 eliminates requirements to separately account for liability and equity components of such convertible debt instruments and eliminates the ability to use the treasury stock method for calculating diluted earnings per share for convertible instruments whose principal amount may be settled using shares. Instead, ASU No. 2020-06 requires (i) the entire amount of the security to be presented as a liability on the balance sheet and (ii) application of the “if-converted” method for calculating diluted earnings per share. The required use of the “if-converted” method will not impact the Company’s diluted earnings per share as long as the Company is in a net loss position.
The guidance in ASU No. 2020-06 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2021, for public business entities. Early adoption is permitted, but no earlier than annual reporting periods beginning after December 15, 2020, including interim periods within those annual reporting periods. The Company early adopted this guidance for the fiscal year beginning January 1, 2021, and did so on a modified retrospective basis, without requiring any adjustments. The adoption of ASU No. 2020-06 impacted the accounting for the offering of the 2026 Notes issued by the Company in August 2021, see Note 10 for further discussion.
New Accounting Standards Not Yet Adopted
ASU 2021-08
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. Under current GAAP, an entity generally recognizes assets and liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to businesses combinations occurring on or after the effective date of the amendment. Early adoption is permitted, including adoption in an interim period. The Company plans to adopt this new guidance in the first quarter of 2023 and is currently evaluating the impact of this new guidance on the consolidated financial statements.
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
December 31, 2021
Value
(Level 1)
(Level 2)
(Level 3)
Money market funds
$
1,439,522
$
1,439,522
$
-
$
-
Available-for-sale securities:
U.S. treasury securities
-
-
Earnouts related to business combinations
113,978
-
-
113,978
Fair Value Measurements Using
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Fair
Identical Assets
Inputs
Inputs
December 31, 2020
Value
(Level 1)
(Level 2)
(Level 3)
Money market funds
$
649,603
$
649,603
$
-
$
-
Earnouts related to business combinations
34,501
-
-
34,501
Earnout Liability
Earnout liabilities recorded in connection with an acquisition accounted for as a business combination under ASC 805 are recorded at estimated fair value on a recurring basis. Business combinations included in the earnout liabilities table below are discussed in Note 5. Earnouts recorded in connection with asset acquisitions are recorded as earnout payments become known and are not remeasured on a recurring basis. As such, earnouts related to asset acquisitions, which are discussed in Note 7, are not included in these fair value disclosures.
Earnout liabilities related to business combinations are classified as Level 3 liabilities because the Company uses unobservable inputs to value them, reflecting its assessment of the assumptions market participants would use to value these liabilities. Changes in the fair value of earnout liabilities related to business combinations are recorded in fair value changes in earnout liabilities and included in total other income (expense), net in the consolidated statements of operations.
The Company estimates the fair value of earnout liabilities for business combinations using either probability-weighted discounted cash flows and Monte Carlo simulations or a scenario-based approach.
The following table provides summary information of our assumptions used to calculate the estimated earnout liabilities related to 2021 and 2020 acquisitions (in thousands):
Balance as of
Balance as of
Acquisition
Year of
Acquisition
Earnout Target
Method
Earnout
Period
Discount
Rate
December 31,
December 31,
CrowdReason
Specific revenue growth thresholds through October 2024, a cap of $30.0 million is available; to be settled in cash.
Probability-weighted discounted cash flows and Monte Carlo simulation
October 2024
3.5
%
(a)
$
26,320
$
-
Track1099
Specific revenue growth thresholds through April 2023, with a cap of $12.5 million; to be settled in cash.
Probability-weighted discounted cash flows and Monte Carlo simulation
April 2023
4.0
%
(a)
7,880
-
Davo
Specific revenue growth thresholds through March 2023, with no cap; to be settled in cash.
Probability-weighted discounted cash flows and Monte Carlo simulation
March 2023
7.0
%
(a)
35,885
-
TTR
Specific revenue growth thresholds through December 2022, with cap of $26.4 million; to be settled in cash.
Probability-weighted discounted cash flows and Monte Carlo simulation
December 2022
15.0
%
(a)
24,830
15,740
Business Licenses
Achievement of certain performance metrics through November 2024, with cap of $20.7 million; to be settled in common stock.
Scenario-based approach
November 2024
4.8
%
(b)
19,063
18,728
Balance end of
period
$
113,978
$
34,468
(a) The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout based on the equity, asset and revenue betas, size premium, and the Company’s specific risk premium, as well as the market risk premium using a bottom-up approach.
(b) The discount rate was based on the Company's estimated credit yield. The Business Licenses earnout was assumed by management to have a high probability of achievement.
The earnout liability as of December 31, 2020, also included a small balance related to 2019 acquisitions. The earnout period related to the acquisition of Indix ended in 2020 and the final payment was made in 2021. The earnout period associated with the acquisition of Portway International Inc. ended as of January 31, 2021, and did not result in any additional earnout payments due to not meeting the revenue targets. The Indix earnout liability is excluded from the balance as of December 31, 2020, in the table above.
A reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs, is as follows (in thousands):
For the Year Ended December 31,
Earnout liabilities related to business combinations:
Balance beginning of period
$
34,501
$
13,808
Fair value recorded at acquisition
64,486
34,468
Measurement period adjustments
2,793
-
Payments of earnout liabilities
(33
)
(11,450
)
Fair value changes included in other expense (income), net
12,231
(2,325
)
Balance end of period
$
113,978
$
34,501
Assets and liabilities measured at fair value on a non-recurring basis
The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, long-lived assets and deferred revenue, and the Company’s liabilities for the accrued purchase price related to acquisitions, are not required to be measured at fair value on a recurring basis. The estimation of fair value for these assets and liabilities requires the use of significant unobservable inputs, and as a result, the Company classifies these assets and liabilities as Level 3 within the fair value hierarchy. During the year ended December 31, 2021, assets acquired and liabilities assumed in business combinations, including trade accounts receivable, property and equipment, intangible assets, and deferred revenue, were measured at fair value on the date of the acquisition. In addition, certain operating lease right-of-use assets were measured at fair value on the date of acquisition or the date of lease commencement or modification, as applicable. There were no additional fair value measurements of these assets during 2021 or 2020, except as discussed in Note 5.
In 2020, the Company vacated certain leased offices in the U.S. and Canada and did not expect to derive future economic benefits from the operating lease right-of-use assets and associated property and equipment. The associated carrying value of the U.S. leases was reduced to zero in accordance with ASC 360, resulting in a combined $0.5 million impairment in the year ended December 31, 2020. The Company intended to sublease its office in Toronto, Canada and recognized an additional impairment charge of $0.3 million in the year ended December 31, 2020, to write the carrying value of the operating lease right-of-use asset and associated property and equipment down to an estimated fair value. The fair value of the operating lease right-of-use asset and associated property and equipment was estimated using an income approach to convert market expectations of future sublease cash inflows and outflows to a single present value, which is a Level 3 measurement. The discount rate applied to the estimated future cash flows for the Toronto, Canada lease was 8.0%. The impairment charges are included in general and administrative expenses in the consolidated statements of operations. The vacated U.S. office leases were terminated in 2020 and the Canada lease was terminated during the second quarter of 2021, with no additional charge for impairment.
Fair Value of Other Financial Instruments
The Company has $977.5 million in principal amount of the 2026 Notes. See Note 10 for further details. The Company carries the 2026 Notes at par value less unamortized debt issuance costs on its consolidated balance sheet as of December 31, 2021, and presents the fair value for disclosure purposes only. The estimated fair value of the 2026 Notes, based on a market approach as of December 31, 2021, was approximately $909 million, which represents a Level 2 valuation estimate. The estimated fair value was determined based on the actual bids and offers of the 2026 Notes in an over-the-counter market on the last trading day of the year.
4. Balance Sheet Detail
Property and equipment, net consisted of the following (in thousands):
Useful
December 31,
December 31,
Life (Years)
Computer equipment and software
3 to 5
$
19,923
$
15,749
Internally developed software
3 to 6
27,099
10,438
Furniture and fixtures
6,425
6,651
Office equipment
3 to 5
1,275
1,006
Leasehold improvements
1 to 10
30,046
29,928
84,768
63,772
Accumulated depreciation
(38,304
)
(29,059
)
Property and equipment-net
$
46,464
$
34,713
Depreciation expense was $12.4 million, $9.6 million, and $8.7 million, for the years ended December 31, 2021, 2020, and 2019, respectively.
Prepaid expenses and other current assets consisted of the following (in thousands):
December 31,
December 31,
Licenses and subscriptions
$
14,511
$
6,348
Prepaid and other current taxes
3,132
2,308
Deposits
3,746
4,570
Prepaid employee related expenses
2,780
1,516
Prepaid cloud computing implementation costs
1,708
Other
3,390
5,016
Total
$
29,267
$
20,098
Accrued expenses consisted of the following (in thousands):
December 31,
December 31,
Accrued bonus
$
40,853
$
29,518
Accrued partner commissions
13,088
9,173
Accrued payroll and related taxes
10,208
7,903
Employee stock purchase plan contributions
7,113
5,927
Accrued sales commissions
7,007
5,563
Contract liabilities
6,918
10,134
Accrued federal, state, local, and foreign taxes
3,926
4,338
Self-insurance reserves
2,401
1,563
Accrued interest payable
-
Other
17,334
10,413
Total
$
109,792
$
84,532
5. Acquisitions of Businesses
April 2021 Acquisition of Inposia
On April 1, 2021, the Company acquired the outstanding equity of Inposia under a Share Purchase Agreement (the “Inposia Purchase”). Inposia is a German software company that delivers e-invoicing, digital tax reporting, and system and data integration to support digital transformation efforts and address real-time compliance requirements for businesses. Inposia will build upon Avalara’s existing e-invoicing capabilities in Brazil and India to support customers worldwide with real-time compliance. The Company accounted for the Inposia Purchase as a business combination. Acquisition-related costs of $1.5 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense, of which $1.0 million was incurred in the second half of 2020 and $0.5 million was incurred in 2021.
The total consideration transferred related to this transaction was €31.8 million (or approximately $37.4 million using the exchange rate on April 1, 2021), consisting of net cash consideration of $14.5 million and 164,416 shares of the Company’s common stock paid at closing with an acquisition date fair value of $23.0 million. Net cash consideration consists of $12.2 million cash paid at closing, and a $2.4 million cash deposit paid in the fourth quarter of 2020, offset by $0.2 million cash received by the Company in the third quarter of 2021 as a result of net working capital adjustments. A portion of shares issued are held in escrow as of December 31, 2021, and will be released to the Inposia shareholders during the nine and 18 months following the acquisition, subject to reduction for certain indemnification and other potential obligations of the Inposia shareholders. The shares held in escrow are considered issued and outstanding and are recorded in shareholders’ equity on the consolidated balance sheet as of December 31, 2021.
Measurement period adjustments recognized during 2021 related primarily to updated estimated fair values for acquired intangible assets, deferred tax liabilities, and a net working capital adjustment. A reconciliation of preliminary total consideration as of June 30, 2021, and total consideration as of December 31, 2021, is presented below (in thousands):
As Reported
June 30, 2021
Measurement Period
Adjustment
As
Adjusted Value
Cash paid at closing (net of amounts returned)
$
14,671
$
(215
)
$
14,456
Fair value of common stock issued at closing
22,971
-
22,971
Total consideration
$
37,642
$
(215
)
$
37,427
Fair values of the assets acquired and the liabilities assumed in the Inposia Purchase as of the acquisition date are provided in the following table (in thousands):
As Reported
June 30, 2021
Measurement Period
Adjustment
As
Adjusted Value
Assets acquired:
Cash and cash equivalents
$
1,264
$
-
$
1,264
Trade accounts receivable
1,767
-
1,767
Other current assets
-
Operating lease right-of-use assets
-
Property and equipment
-
Developed technology, customer relationships, and other intangibles
12,684
1,585
14,269
Goodwill
27,702
(1,182
)
26,520
Other noncurrent assets
-
Total assets acquired
44,746
45,149
Liabilities assumed:
Trade payables and accrued expenses
1,340
1,478
Deferred revenue
(1
)
Other liabilities, noncurrent
-
Operating lease liabilities
-
Deferred tax liability
3,919
4,400
Total liabilities assumed
7,104
7,722
Net assets acquired
$
37,642
$
(215
)
$
37,427
The carrying amount of trade accounts receivable acquired in the Inposia Purchase approximates the fair value. The fair value of deferred revenue was estimated utilizing a discount rate of 4.0% based on the Company’s estimated pre-tax cost of debt.
The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Inposia Purchase is 6.2 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Inposia Purchase are provided in the table below (in thousands):
Intangible
As Reported
June 30, 2021
Measurement Period
Adjustment
As
Adjusted Value
Valuation Methodology
Discount Rate
Estimated Useful
Life
Customer relationships
$
1,585
$
1,703
$
3,288
Multi-period excess earnings-income approach
18.5
%
8 years
Developed technology
9,572
-
9,572
Relief from royalty-income approach
18.5
%
6 years
Noncompetition agreements
1,292
(118
)
1,174
With-and-without valuation-income approach
21.0
%
3 years
Tradename
-
Relief from royalty-income approach
18.5
%
3 years
The excess of the purchase price over the net identified tangible and intangible assets is $26.5 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is not expected to be deductible for tax purposes.
For the period from the date of the Inposia Purchase through December 31, 2021, revenue was $6.0 million and pre-tax loss was $2.4 million from the Inposia business.
April 2021 Acquisition of Davo
On April 20, 2021, the Company acquired substantially all the assets of Davo under an Asset Purchase Agreement (the “Davo Purchase”). Davo helps emerging small businesses automate the daily and ongoing requirements for sales tax. As a result of the acquisition, Davo extends Avalara’s ability to provide integrated sales tax compliance processes to alleviate the burden of compliance on small businesses. The Company accounted for the Davo Purchase as a business combination. Acquisition-related costs of $0.1 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense.
The total consideration transferred related to this transaction was $56.7 million, consisting of $23.5 million cash paid at close, a $0.3 million cash deposit paid in the first quarter of 2021, an acquisition holdback with a fair value upon acquisition of $2.6 million, and an earnout provision with a fair value upon acquisition of $30.3 million. The acquisition holdback represents an additional $2.6 million of cash to be paid Davo shareholders during the 18 months following the acquisition date, subject to reduction for certain indemnifications and other potential obligations of Davo shareholders. The earnout will be calculated as a multiple of certain performance metrics during the 12-month measurement periods ending March 31, 2022, and 2023, and there is not a stated minimum or maximum payment required under the earnout.
Measurement period adjustments recognized during 2021 related primarily to updated estimated fair values for acquired intangible assets, the earnout liability, and working capital adjustments. A reconciliation of preliminary total consideration as of June 30, 2021, and total consideration as of December 31, 2021, is presented below (in thousands):
As Reported
June 30, 2021
Measurement Period
Adjustment
As
Adjusted Value
Cash paid through closing
$
23,818
$
-
$
23,818
Fair value of earnout provision
28,620
1,718
30,338
Fair value of holdbacks
2,600
(9
)
2,591
Total consideration
$
55,038
$
1,709
$
56,747
Fair values of the assets acquired and the liabilities assumed in the Davo Purchase as of the acquisition date are provided in the following table (in thousands):
As Reported
June 30, 2021
Measurement Period
Adjustment
As
Adjusted Value
Assets acquired:
Cash and cash equivalents
$
$
-
$
Funds held from customers
12,464
-
12,464
Trade accounts receivable
-
Other current assets
-
Operating lease right-of-use assets
-
Developed technology, customer relationships, and other intangibles
6,427
(1,776
)
4,651
Goodwill
48,426
3,485
51,911
Other noncurrent assets
-
Total assets acquired
67,740
1,709
69,449
Liabilities assumed:
Accrued expenses
-
Deferred revenue
-
Operating lease liabilities
-
Customer fund obligations
12,464
-
12,464
Total liabilities assumed
12,702
-
12,702
Net assets acquired
$
55,038
$
1,709
$
56,747
The carrying amount of trade accounts receivable and deferred revenue acquired in the Davo Purchase approximates the fair value.
The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Davo Purchase is 5.4 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Davo Purchase are provided in the table below (in thousands):
Intangible
As Reported
June 30, 2021
Measurement Period
Adjustment
As
Adjusted Value
Valuation Methodology
Discount Rate
Estimated Useful
Life
Customer relationships
$
4,350
$
(2,300
)
$
2,050
Multi-period excess earnings-income approach and replacement cost method-cost approach
13.5
%
6 years
Developed technology
1,800
1,950
Relief from royalty-income approach
13.5
%
5 years
Noncompetition agreements
With-and-without valuation-income approach
15.5
%
5 years
Tradename
Relief from royalty-income approach
13.5
%
1 year
The excess of the purchase price over the net identified tangible and intangible assets is $51.9 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.
For the period from the date of the Davo Purchase through December 31, 2021, revenue was $2.2 million and pre-tax loss was $2.0 million from the Davo business.
September 2021 Acquisition of 3CE
On September 7, 2021, the company acquired substantially all the assets of 3CE under an Asset Purchase Agreement (the “3CE Purchase”). 3CE is a Canadian company that provides software and services for Harmonized System code classifications and verifications, primarily to government entities and logistics services providers. The acquisition will expand and improve Avalara’s Harmonized System classification content and provide a new self-service model to sell to the Company’s customers. The Company accounted for the 3CE purchase as a business combination. The total consideration related to this transaction is $11.2 million, consisting of $9.9 million cash paid at close and an acquisition holdback with a fair value upon acquisition of $1.3 million. The fair values of the assets acquired and the liabilities assumed in the 3CE Purchase as of the acquisition date include intangible assets of $3.7 million, primarily attributable to developed technology and customer relationships and goodwill of $7.1 million.
October 2021 Acquisition of Track1099
On October 1, 2021, the Company acquired substantially all the assets of Track1099 under an Asset Purchase Agreement (the “Track1099 Purchase”). Track1099 provides online software and services for cost-effectively managing, e-filing, and e-delivering Internal Revenue Service forms, including Forms 1099, W-2, and W-9. The Company accounted for the Track1099 Purchase as a business combination. Acquisition related costs of $0.1 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense.
The total consideration related to this transaction was $48.8 million, consisting of $35.0 million cash paid at close, an acquisition holdback with a fair value upon acquisition of $5.0 million, and an earnout provision with a fair value upon acquisition of $8.8 million. The acquisition holdback represents an additional $5.0 million of cash to be paid to the sellers 27 months following the acquisition date, subject to reduction for certain indemnifications and other potential obligations of the sellers. The earnout for Track1099 is calculated based on certain billing performance metrics during the 12-month measurement periods ending April 30, 2022 and April 30, 2023, not to exceed $12.5 million in total or $6.25 million in each earnout period.
Preliminary total consideration as of December 31, 2021, is presented below (in thousands):
As of
December 31, 2021
Cash paid through closing
$
35,000
Fair value of earnout provision
8,820
Fair value of holdbacks
4,984
Total consideration
$
48,804
Preliminary estimated fair values of the assets acquired and the liabilities assumed in the Track1099
Purchase as of the acquisition date are provided in the following table (in thousands):
As of
December 31, 2021
Assets acquired:
Prepaid and other current assets
$
Developed technology, customer relationships, and other intangibles
5,850
Goodwill
42,962
Total assets acquired
48,814
Liabilities assumed:
Current liabilities
Deferred revenue
Total liabilities assumed
Net assets acquired
$
48,804
The estimated fair values for acquired intangible assets are preliminary in nature. The estimated fair values for certain acquired intangibles, the earnout, and holdback are preliminary in nature and subject to adjustment when the necessary information is available to complete the valuation.
The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Track1099 Purchase are provided in the table below (in thousands):
Intangible
Assigned Value
Valuation Methodology
Discount Rate
Estimated Useful
Life
Customer relationships
$
3,200
Multi-period excess earnings-income approach
28.0
%
5 years
Developed technology
1,250
Relief from royalty-income approach
28.0
%
2 years
Noncompetition agreement
1,300
With-and-without valuation-income approach
30.0
%
5 years
Tradename
Relief from royalty-income approach
28.0
%
2 years
The excess of the purchase price over the net identified tangible and intangible assets is $43.0 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.
October 2021 Acquisition of CrowdReason and CorrelationAdvisors
On October 18, 2021, the Company acquired substantially all the assets of CrowdReason, Limited Liability Company and CorrelationAdvisors, LLC under an Asset Purchase Agreement (the “CrowdReason Purchase”). CrowdReason is a technology services company that provides software applications, solutions, and services for property tax compliance. CorrelationAdvisors provides consulting services related to property valuation and property tax compliance. The Company accounted for the CrowdReason Purchase as a business combination. Acquisition-related costs of $0.2 million were primarily for legal and due-diligence related fees and were recorded in general and administrative expense.
The total consideration transferred related to this transaction was $36.4 million, consisting of $8.3 million cash paid at close, acquisition holdbacks with a fair value upon acquisition of $1.7 million, and an earnout provision with a fair value upon acquisition of $26.3 million. The acquisition holdback represents an additional $1.7 million of cash to be paid to the sellers during the 18 months following the acquisition date, subject to reduction for certain indemnifications and other potential obligations of the sellers. The earnout is calculated as a multiple of revenue growth thresholds during the 12-month measurement periods ending October 31, 2022, 2023, and 2024, with the total purchase price, inclusive of earnouts, not to exceed $40.0 million.
Preliminary total consideration as of December 31, 2021, is presented below (in thousands):
As of
December 31, 2021
Cash paid through closing
$
8,317
Fair value of earnout provision
26,320
Fair value of holdbacks
1,727
Total consideration
$
36,364
Preliminary estimated fair values of the assets acquired and the liabilities assumed in the CrowdReason Purchase as of the acquisition date are provided in the following table (in thousands):
As of
December 31, 2021
Assets acquired:
Current assets
$
1,426
Developed technology, customer relationships, and other intangibles
10,300
Goodwill
25,415
Total assets acquired
37,141
Liabilities assumed:
Current liabilities
Deferred revenue and contract liabilities
Total liabilities assumed
Net assets acquired
$
36,364
The estimated fair values for acquired intangible assets are preliminary in nature. The estimated fair values for certain acquired intangibles, the earnout, and holdback are preliminary in nature and subject to adjustment when the necessary information is available to complete the valuation.
The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the CrowdReason Purchase are provided in the table below (in thousands):
Intangible
Assigned Value
Valuation Methodology
Discount Rate
Estimated Useful
Life
Customer relationships
$
5,700
Multi-period excess earnings-income approach
18.0
%
5 to 8 years
Developed technology
3,900
Relief from royalty-income approach
18.0
%
5 years
Backlog
Multi-period excess earnings-income approach
15.0
%
1 year
Noncompetition agreements
With-and-without valuation-income approach
20.0
%
5 years
Tradename
Relief from royalty-income approach
18.0
%
2 years
The excess of the purchase price over the net identified tangible and intangible assets is $25.4 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.
October 2020 Acquisition of Transaction Tax Resources
On October 5, 2020, the Company acquired the outstanding equity of TTR under a Merger Agreement (the “TTR Merger”). TTR is a leading provider of tax content, research, consulting, and automation tools in the U.S., with products that include software solutions for companies and governments. As a result of the acquisition, the Company expanded its tax content, added new product offerings, and reached new customer segments. The Company accounted for the TTR Merger as a business combination. Acquisition-related costs of $1.0 million for the year ended December 31, 2020, were primarily for legal and due-diligence related fees and were recorded in general and administrative expense.
The total consideration related to this transaction was $370.1 million, consisting of $294.0 million in cash paid at closing, acquisition holdbacks with a fair value upon acquisition of $57.3 million, and an earnout provision with a fair value upon acquisition of $18.9 million. The acquisition holdbacks represent the present value of an additional $57.3 million of cash to be paid up to three years following the acquisition, subject to reduction for certain indemnifications and other potential obligations of the TTR shareholders, discounted utilizing a risk-free discount rate of 0.13%. The earnout is payable to TTR’s founder and shareholder no later than February 2023. The maximum earnout payment is $26.4 million and is based on the achievement of certain TTR revenue growth performance metrics during the 2021 and 2022 fiscal years. The potential amount of all future payments that could be required under the earnout is between $0 and $26.4 million.
Measurement period adjustments recognized during 2021 related to the finalization of the estimated fair values for customer relationships, contract backlog, and earnout liability, and a net working capital adjustment. A reconciliation of preliminary total consideration as of December 31, 2020, and total consideration as of December 31, 2021, is presented below (in thousands):
As Reported
December 31, 2020
Measurement Period
Adjustment
As
Adjusted Value
Cash paid at closing
$
294,017
$
-
$
294,017
Fair value of holdbacks
57,477
(217
)
57,260
Fair value of earnout provision
15,740
3,131
18,871
Total consideration
$
367,234
$
2,914
$
370,148
Estimated fair values of the assets acquired and the liabilities assumed in the TTR Merger as of the acquisition date and including measurement period adjustments are provided in the following table (in thousands):
As Reported
December 31, 2020
Measurement Period
Adjustment
As
Adjusted Value
Assets acquired:
Cash and cash equivalents
$
2,294
$
-
$
2,294
Trade accounts receivable
5,966
-
5,966
Other current assets
-
Operating lease right-of-use assets
1,760
-
1,760
Property and equipment
-
Developed technology, customer relationships, and other intangibles
49,000
(7,500
)
41,500
Goodwill
327,039
8,526
335,565
Total assets acquired
387,000
1,026
388,026
Liabilities assumed:
Trade payables and accrued expenses
-
Deferred revenue
8,500
-
8,500
Operating lease liabilities
1,760
-
1,760
Deferred tax liability
8,775
(1,888
)
6,887
Total liabilities assumed
19,766
(1,888
)
17,878
Net assets acquired
$
367,234
$
2,914
$
370,148
The carrying amount of trade accounts receivable acquired in the TTR Merger was $7.2 million and was recorded at $6.0 million on the date of acquisition to approximate the fair value. The fair value of deferred revenue was estimated using the income approach, utilizing a bottom-up method that estimated the costs required to support the remaining obligations plus an assumed profit margin, and discounted to present value utilizing a risk-adjusted discount rate of 3.5%.
The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the TTR Merger is 4.7 years. The weighted-average amortization period for developed technology intangibles acquired in the TTR Merger is 4.0 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the TTR Merger are provided in the table below (in thousands):
Intangible
As Reported
December 31, 2020
Measurement Period
Adjustment
As
Adjusted Value
Valuation Methodology
Discount Rate
Estimated Useful
Life
Customer relationships
$
26,000
$
(5,000
)
$
21,000
Multi-period excess earnings-income approach
18%
6 years
Developed technology
9,600
-
9,600
Relief from royalty-income approach and replacement cost method-cost approach
17% to 18%
3 to 6 years
Tradename
5,800
-
5,800
Relief from royalty-income approach
17%
2 years
Contract backlog
5,800
(2,500
)
3,300
Multi-period excess earnings-income approach
17%
3 years
Noncompetition agreements
1,800
-
1,800
With-and-without valuation-income approach
19%
5 years
The excess of the purchase price over the net identified tangible and intangible assets is $335.6 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is not expected to be deductible for tax purposes.
A portion of the acquisition holdback liability in the amount of $19.9 million was settled in 2021, comprised of $0.8 million in the first quarter and $18.8 million paid in the second quarter.
For the period from the date of the TTR acquisition through December 31, 2020, revenue was $4.5 million and pre-tax loss was $3.2 million from the TTR business. The pre-tax loss includes $3.5 million of amortization expense from the intangible assets acquired. TTR business activity is included in the consolidated financial statements of Avalara and are immaterial to our operations.
November 2020 Acquisition of Business Licenses
On November 5, 2020, the Company acquired substantially all of the assets of Business Licenses under an Asset Purchase Agreement (“the Business Licenses Purchase”). Business Licenses is a leading provider of license content, software, management, and services that automate and streamline business license compliance for companies of all sizes. As a result of the acquisition, the Company expanded its product offerings to include complementary compliance solutions beyond tax, such as business licenses and registrations. The Company accounted for the Business Licenses Purchase as a business combination. Acquisition-related costs of $0.5 million for the year ended December 31, 2020, primarily for legal and due-diligence related fees, were recorded in general and administrative expense.
The total consideration transferred related to this transaction was $93.3 million, consisting of $64.8 million paid in cash at closing, an acquisition holdback with a fair value upon acquisition of $11.1 million, and an earnout provision with a fair value upon acquisition of $17.4 million. The acquisition holdback represents the present value of an additional $11.1 million of cash to be paid after 18 months to Business Licenses’ shareholders, subject to reduction for certain indemnification obligations, discounted utilizing a risk-free discount rate of 0.13%. The maximum earnout payment of up to $20.7 million will be paid, in shares of the Company’s common stock, to Business Licenses’ shareholders following the achievement of certain Business Licenses operating performance metrics during the four years following the acquisition. The potential amount of all future payments that could be required under the earnout is between $0 and $20.7 million. The earnout was originally recognized at fair value at the date of the business combination and is adjusted to fair value quarterly (see Note 3).
Measurement period adjustments recognized during 2021 related to the finalization of the estimated fair value of the earnout liability and a net working capital adjustment. A reconciliation of preliminary total consideration as of December 31, 2020, and total consideration as of December 31, 2021, is presented below (in thousands):
As Reported
December 31, 2020
Measurement Period
Adjustment
As
Adjusted Value
Cash paid at closing
$
64,812
$
-
$
64,812
Fair value of holdbacks
11,415
(306
)
11,109
Fair value of earnout provision
18,728
(1,328
)
17,400
Total consideration
$
94,955
$
(1,634
)
$
93,321
Estimated fair values of the assets acquired and the liabilities assumed in the Business Licenses Purchase as of the acquisition date are provided in the following table (in thousands):
As Reported
December 31, 2020
Measurement Period
Adjustment
As
Adjusted Value
Assets acquired:
Cash and cash equivalents
$
$
-
$
Trade accounts receivable
1,326
-
1,326
Customer fund assets
1,074
-
1,074
Other current assets
-
Operating lease right-of-use assets
1,644
-
1,644
Property and equipment
-
Developed technology, customer relationships, and other intangibles
19,525
-
19,525
Goodwill
73,775
(1,634
)
72,141
Other noncurrent assets
-
Total assets acquired
97,683
(1,634
)
96,049
Liabilities assumed:
Accrued expenses
-
Customer fund obligations
1,028
-
1,028
Operating lease liabilities
1,644
-
1,644
Total liabilities assumed
2,728
-
2,728
Net assets acquired
$
94,955
$
(1,634
)
$
93,321
The carrying amount of trade accounts receivable acquired in the Business Licenses Purchase approximates the fair value.
The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Business Licenses Purchase is 5.3 years. The weighted-average amortization period for developed technology intangibles acquired in the Business Licenses Purchase is 3.1 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Business Licenses Purchase are provided in the table below (in thousands):
Intangible
Assigned Value
Valuation Methodology
Discount Rate
Estimated Useful
Life
Customer relationships
$
15,000
Multi-period excess earnings-income approach
19.5%
6 years
Developed technology
3,625
Relief from royalty-income approach and replacement cost method-cost approach
19.5%
1 to 5 years
Noncompetition agreements
With-and-without valuation-income approach
19.5%
5 years
Tradename
Relief from royalty-income approach
19.5%
1 year
The excess of the purchase price over the net identified tangible and intangible assets is $72.1 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.
For the period from the date of the Business Licenses acquisition through December 31, 2020, revenue was $1.8 million and pre-tax loss was $0.6 million from the Business Licenses business. The pre-tax loss includes $0.7 million of amortization expense from the intangible assets acquired. Business Licenses business activity is included in the consolidated financial statements of Avalara and are immaterial to our operations.
December 2020 Acquisition of Impendulo
On December 1, 2020, the Company acquired the shares of Impendulo (“the Impendulo Purchase”). Impendulo is a London-based provider of insurance tax compliance solutions and offers insurance tax compliance management technology and services, specializing in support for multi-national insurance companies. With the acquisition of Impendulo, the Company expands its product offerings to include insurance premium tax compliance. The Company accounted for the Impendulo Purchase as a business combination. Acquisition-related costs of $0.6 million for the year ended December 31, 2020, were primarily for legal fees and were recorded in general and administrative expense.
The total consideration transferred related to this transaction was $14.0 million, consisting of $11.7 million paid in cash at closing, $1.2 million paid in the Company’s common stock, and an additional $1.1 million that was paid in the first quarter of 2021 based on final revenue metrics achieved up to the date of acquisition. Measurement period adjustments of $0.4 million were recognized in the first quarter of 2021 relate to the finalization of the net working capital adjustment.
Fair values of the assets acquired and the liabilities assumed in the Impendulo Purchase as of the acquisition date are provided in the following table (in thousands):
As Reported
December 31, 2020
Measurement Period
Adjustment
As
Adjusted Value
Assets acquired:
Cash and cash equivalents
$
1,347
$
-
$
1,347
Trade accounts receivable
-
Other assets
-
Developed technology, customer relationships, and other intangibles
3,617
-
3,617
Goodwill
10,217
10,642
Total assets acquired
15,699
16,124
Liabilities assumed:
Trade payables and accrued expenses
-
Deferred revenue and contract liabilities
-
Deferred tax liability
-
Total liabilities assumed
2,102
-
2,102
Net assets acquired
$
13,597
$
$
14,022
The carrying amount of trade accounts receivable acquired in the Impendulo Purchase approximates the fair value. The Company utilizes different valuation approaches and methodologies to determine the fair value of acquired intangible assets. The weighted-average amortization period for all intangibles acquired in the Impendulo Purchase is 5.9 years. A summary of the valuation methodologies, significant assumptions, and estimated useful lives of acquired intangible assets in the Impendulo Purchase are provided in the table below (in thousands):
Intangible
Assigned Value
Valuation Methodology
Discount Rate
Estimated Useful
Life
Customer relationship
$
2,964
Multi-period excess earnings-income approach
20%
6 years
Developed technology
Relief from royalty-income approach
20%
6 years
Tradename
Relief from royalty-income approach
20%
1 year
The excess of the purchase price over the net identified tangible and intangible assets is $10.6 million and has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is not expected to be deductible for tax purposes.
For the period from the date of the Impendulo acquisition through December 31, 2020, revenue was $0.2 million and pre-tax loss was $0.1 million from the Impendulo business. The pre-tax loss includes $0.1 million of amortization expense from the intangible assets acquired. Business Licenses business activity is included in the consolidated financial statements of Avalara and is immaterial to our operations.
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 12-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 12 month period ending January 31, 2020. The earnout was originally recognized at fair value at the date of the business combination and $4.0 million was paid in the first quarter of 2020.
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.
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 had 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 was adjusted to fair value quarterly. The first earnout milestone was achieved in the second quarter of 2019 and was paid in July 2019. The second milestone was not achieved. In January 2020, the Company determined the third milestone was partially achieved. In February 2020, the Company determined the fourth milestone was not achieved. The final earnout payment was made in 2021.
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.
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 year ended December 31, 2020, 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 was 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 is based, in part, on two operating metric targets with a maximum payout of $7.5 million. The remainder of the earnout is based on certain revenue targets with a maximum payout of $2.5 million. Pursuant to the Portway Purchase, the shares would be transferred to the seller if the criteria under each provision are satisfied. During the year ended December 31, 2020, 89,318 shares of common stock (with a $7.5 million value under the Portway Purchase) were transferred to the seller to settle both operating metric targets of the earnout. The earnout was originally recognized at fair value at the date of the business combination and is adjusted to fair value quarterly. The remaining earnout liability related to the revenue targets was determined to be zero as of December 31, 2020, and the remaining shares were forfeited and cancelled in the first quarter of 2021.
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.
Pro Forma Financial Information (Unaudited)
The unaudited pro forma financial information in the table below summarizes the combined results of operations for Avalara and all 2020 and 2021 acquisitions as though the companies were combined as of January 1, 2020, for the 2021 acquisitions and January 1, 2019, for the 2020 acquisitions. The unaudited pro forma financial information presented also includes certain business combination accounting effects resulting from the acquisitions, including amortization charges from acquired intangible assets. No adjustments were made for the fair value of deferred revenue and contract liabilities or fair value measurement adjustments for earnout liabilities. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had occurred on the dates indicated.
For the Year Ended December 31,
Total revenue
$
711,047
$
552,886
Pre-tax loss
(124,428
)
(64,320
)
6. Revenues
The Company’s revenue recognition accounting policy follows guidance from ASC 606, Revenue from Contracts with Customers (“ASC 606”), see Note 2 for further discussion.
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 Year Ended December 31,
Revenue (U.S.):
Subscription and returns
Tax calculations
$
349,430
$
257,680
$
203,584
Tax returns and compliance management
233,420
178,318
127,815
Interest income on funds held from customers
3,213
Total subscription and returns
583,619
436,827
334,612
Professional services
59,514
32,474
24,399
Total revenue (U.S.)
643,133
469,301
359,011
Total revenue (non-U.S.)
55,844
31,268
23,410
Total revenue
$
698,977
$
500,569
$
382,421
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 by the Company as current and non-current deferred revenue. To the extent that a contract does not exist, as defined by ASC 606 (e.g., customer agreements with non-standard termination rights), these liabilities are classified as contract liabilities. Contract liabilities are transferred to deferred revenue at the point in time when the criteria that establish the existence of a contract are met.
Contract Liabilities
A summary of the activity impacting the contract liabilities during the years ended December 31, 2021, and 2020 is presented below (in thousands):
For the Year Ended December 31,
Contract liabilities:
Balance beginning of period
$
10,134
$
5,197
Contract liabilities transferred to deferred revenue
(21,255
)
(11,151
)
Addition to contract liabilities
18,039
16,088
Balance end of period
$
6,918
$
10,134
As of December 31, 2021, contract liabilities are expected to be transferred to deferred revenue within the next 12 months and therefore are included in accrued expenses on the consolidated balance sheets.
Deferred Revenue
A summary of the activity impacting deferred revenue balances during the years ended December 31, 2021, and 2020 is presented below (in thousands):
For the Year Ended December 31,
Deferred revenue:
Balance beginning of period
$
209,690
$
161,241
Revenue recognized
(698,977
)
(500,569
)
Additional amounts deferred
772,242
549,018
Balance end of period
$
282,955
$
209,690
As of December 31, 2021, $280.8 million of deferred revenue is expected to be recognized within the next 12 months and is included in current liabilities on the consolidated balance sheets. The remaining amount of deferred revenue is included in noncurrent liabilities and is expected to be recognized within the next 18 months.
Assets Recognized from the Costs to Obtain Contracts with Customers
Assets are recognized for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred commissions are amortized over an expected period of benefit of generally six years.
A summary of the activity impacting the deferred commissions during the years ended December 31, 2021, and 2020 is presented below (in thousands):
For the Year Ended December 31,
Deferred commissions:
Balance beginning of period
$
50,870
$
38,416
Additional commissions deferred
32,721
23,935
Amortization of deferred commissions
(15,072
)
(11,481
)
Balance end of period
$
68,519
$
50,870
As of December 31, 2021, $16.4 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 year ended December 31, 2021, or 2020. There were no assets recognized related to the costs to fulfill contracts during the year ended December 31, 2021, or 2020 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 deferred revenue that has been invoiced and non-cancellable amounts that will be invoiced and recognized as revenue in future periods. As of December 31, 2021, the remaining performance obligations to which enforceable rights exist are $369.2 million, of which $348.4 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter. Of the remaining performance obligations as of December 31, 2021, $86.2 million relates to non-cancellable amounts that have not yet been invoiced, of which $67.6 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.
7. Intangible Assets
Intangible assets consisted of the following (in thousands):
December 31, 2021
Average Useful Life
(Years)
Gross
Accumulated
Amortization
Net
Backlog
$
4,500
$
(1,816
)
$
2,684
Customer relationships
3 to 10
75,188
(23,795
)
51,393
Developed technology (1)
3 to 8
72,723
(37,333
)
35,390
Noncompetition agreements
3 to 5
6,452
(1,725
)
4,727
Tradename and trademarks
1 to 4
7,267
(4,643
)
2,624
$
166,130
$
(69,312
)
$
96,818
(1) Developed technology intangible assets include IPR&D of $0.4M as of December 31, 2021, which is not subject to amortization.
December 31, 2020
Average Useful Life
(Years)
Gross
Accumulated
Amortization
Net
Backlog
$
5,800
$
(937
)
$
4,863
Customer relationships
3 to 10
64,302
(14,890
)
49,412
Developed technology (1)
3 to 8
52,144
(27,646
)
24,498
Noncompetition agreements
3 to 5
3,062
(766
)
2,296
Tradename and trademarks
1 to 4
6,679
(1,235
)
5,444
$
131,987
$
(45,474
)
$
86,513
(1) Developed technology intangible assets include IPR&D of $0.6M as of December 31, 2020, which is not subject to amortization.
Finite-lived intangible assets are amortized over their estimated useful life. Finite-lived intangible assets amortization expense was $24.1 million, $10.7 million, and $7.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. Future amortization expense as of December 31, 2021, related to these finite-lived intangible assets subject to amortization is expected to be as follows (in thousands):
Years Ending December 31
$
27,230
22,026
17,285
14,319
10,959
Thereafter
4,599
$
96,418
Acquisitions of finite-lived intangible assets
In May 2018, the Company acquired developed technology to facilitate cross-border transactions (e.g., tariffs and duties), from Tradestream Technologies Inc. and Wise 24 Inc. (the “Sellers”) for cash and common stock. This acquisition was accounted for as an asset acquisition. Total consideration for the purchase includes an earnout computed on future 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 or common stock, at the Company’s option, at the end of each six-month measurement period ending on June 30 or December 31 through 2023. Additional costs of the acquired intangible assets are capitalized as earnout amounts are accrued. Through December 31, 2021, the sellers have earned approximately $2.2 million under the earnout provision since the acquisition date. An earnout liability of $0.6 million was recorded within the current portion of accrued earnout liabilities as of December 31, 2021, for the earnout period ending December 31, 2021, and is expected to be paid in cash to the sellers in the first quarter of 2022.
Goodwill
Changes in the carrying amount of goodwill are summarized as follows (in thousands):
Balance-December 31, 2019
$
101,224
Additions - 2020 acquisitions (1)
411,031
Cumulative translation adjustments
Balance-December 31, 2020
513,234
Measurement period adjustment - 2020 acquisitions (1)
7,317
Additions - 2021 acquisitions (1)
153,876
Cumulative translation adjustments
(2,046
)
Balance-December 31, 2021
$
672,381
(1) See Note 5 for measurement period adjustment and additions details
Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds the 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 part of the Company’s annual impairment test, a qualitative impairment test was performed
for the Company’s U.S. reporting unit. The Company concluded it is more likely than not that the fair value of the reporting unit exceeds its carrying value.
A quantitative impairment test was performed for the Company’s European reporting unit. Upon completion, the fair value of the European reporting unit was in excess of the carrying value. When following a quantitative approach, the Company measures the fair value of its reporting units using a combination of a discounted cash flow approach and the market valuation approach using publicly traded company multiples in similar businesses, which are Level 3 measurements. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, determination of the Company’s discount rate, which is risk-adjusted to reflect the specific risk profile of the reporting unit being tested, and determination of revenue multiples, which are based on guideline public company multiples and adjusted for the specific size and risk profile of the reporting unit. The discount rate used in the Company’s most recent annual impairment test was 25%.
The Company had no goodwill associated with the Brazilian reporting unit in 2021, 2020, and 2019.
The Company had $17.6 million of accumulated goodwill impairment as of December 31, 2021, and 2020, which is associated with the Brazilian reporting unit and was recognized in the years ended December 31, 2017, and 2018.
8. Leases
The Company has non-cancelable operating leases primarily for office facilities in the United States, Brazil, Europe, and India that expire through 2029. The remaining operating leases are primarily comprised of leases of vehicles, office equipment, and servers. As of December 31, 2021, the leases have remaining terms of 0.2 to 7.8 years, some of which include options to extend for up to 10 years after the initial term, and some of which include options to terminate within 2 years after the commencement date. Options to extend or terminate a lease which are not reasonably certain to be exercised are not included in the lease term or in the lease payments for purposes of determining the operating lease right-of-use asset and operating lease liability. At the time of the TTR Merger, the Company was reasonably certain it would exercise its option to extend its lease in McMinnville, OR and as such, the extension was recognized as part of the operating lease right-of-use asset and operating lease liability for that lease. No other options to extend or terminate a lease were reasonably certain as of December 31, 2021, or 2020. The Company’s lease agreements do not contain material residual value guarantees, restrictions, or covenants. As of December 31, 2021, the Company does not have any finance leases.
An impairment of the Company’s operating lease right-of-use assets and property and equipment of $0.8 million was recorded in 2020 (see Note 3).
The following table presents future lease payments for long-term operating leases as of December 31, 2021 (in thousands):
Period
Operating Lease
Commitments
$
14,824
14,121
12,767
10,117
6,789
Thereafter
8,288
Total
66,906
Less: Imputed interest
(9,839
)
Total operating lease liabilities (1)
$
57,067
(1)
Future lease payments have not been reduced by future sublease receipts of $0.8 million due under noncancelable subleases.
As of December 31, 2021, the Company had two operating leases for additional office space that had not yet commenced. Future non-cancelable lease payments associated with these agreements total $6.3 million, beginning in the first quarter of 2022 and are payable over lease terms of 2.5 and 5.9 years.
The following table presents supplemental balance sheet information related to operating leases recorded as of December 31, 2021, and 2020:
December 31, 2021
December 31, 2020
Weighted average remaining lease term (in years)
5.0
5.8
Weighted average discount rate
6.5
%
6.6
%
The components of lease expense for the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands):
For the Year Ended December 31,
Operating lease costs
$
13,501
$
12,766
$
9,329
Variable lease costs
3,617
2,948
2,562
Short-term lease costs
1,722
1,065
Sublease income
(1,541
)
(1,534
)
(1,448
)
Total lease cost, net
$
16,423
$
15,902
$
11,508
9. Commitments and Contingencies
Commitments
The Company has purchase commitments primarily related to network infrastructure, hosting services, and software licenses that extend up to four years beyond December 31, 2021. The Company’s obligation for future payments under these contracts is $45.6 million, $32.2 million, $26.0 million, and $10.6 million for the years ending December 31, 2022, 2023, 2024, and 2025, respectively.
Contingencies
Loss contingencies may arise in connection with the ordinary conduct of the Company’s business activities. The Company considers all loss contingencies on a quarterly basis and based on known facts assesses whether potential losses are considered reasonably possible, probable, and estimable. The Company establishes an accrual for loss contingencies when the loss is both probable and reasonably estimable. If the estimated loss is a range of potential outcomes and there is no better estimate within the range, management accrues the amount at the low end of the range. These accruals represent management’s estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. Significant judgment is required to determine both likelihood of there being a probable loss and the estimated amount of a loss. If a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrual, but will evaluate other disclosure requirements and continue to monitor the matter for developments that would make the loss contingency both probable and reasonably estimable. The ultimate outcome of any litigation relating to a loss contingency is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of management resources and other factors.
In its standard subscription agreements, the Company has agreed to indemnification provisions with respect to certain matters. Further, from time to time, the Company has also assumed indemnification obligations through its acquisition activity. These indemnification provisions can create a liability to the Company if its services do not appropriately calculate taxes due to tax jurisdictions, or if the Company is delinquent in the filing of returns on behalf of its customers. Although the Company’s agreements have disclaimers of warranties that limit its liability (beyond the amounts the Company agrees to pay pursuant to its indemnification obligations and guarantees, as applicable), a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold the Company liable for certain errors. Further, in some instances the Company has negotiated agreements with specific customers or assumed agreements in connection with the Company’s acquisitions that do not limit this liability or disclaim these warranties. It is not possible to reasonably estimate the potential loss under these indemnification arrangements.
10. Debt
Convertible Senior Notes
In August 2021, the Company completed a private offering of $977.5 million principal amount of 0.25% convertible senior notes due 2026. The 2026 Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on February 1, 2022. The 2026 Notes will mature on August 1, 2026, unless earlier converted, redeemed, or repurchased. The Company incurred $17.6 million of debt issuance costs in connection with the offering of the 2026 Notes, consisting of the initial purchasers’ commissions and legal, accounting, and other direct costs of the offering. The total proceeds from the offering, net of the debt issuance costs, were $959.9 million. The Company used $75.3 million of the net proceeds from the sale of the 2026 Notes to pay the premiums of the capped call options described further below.
The Company may not redeem the 2026 Notes prior to August 6, 2024. The Company may redeem all or any portion of the 2026 Notes, at the Company’s option, on or after August 6, 2024, through the 41st scheduled trading day immediately prior to the maturity date, if the common stock price is at least 130% of the conversion price then in effect for at least 20 of any 30 consecutive trading day period. The Company may redeem all or part of the 2026 Notes at a redemption price equal to the principal amount plus accrued and unpaid interest to, but excluding, the redemption date, with not less than 50 nor more than 60 scheduled trading days’ notice to holders.
The 2026 Notes are convertible at an initial conversion rate of 4.1940 shares of common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $238.44 per share of common stock. The conversion rate is subject to customary adjustments for certain events as described in the indenture governing the 2026 Notes. The Company may settle the conversion option obligation with cash, shares of the Company’s common stock, or any combination of cash and shares of the Company’s common stock. On or after February 1, 2026, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2026 Notes may convert their notes at their option. Prior to the close of business on the business day immediately preceding February 1, 2026, the 2026 Notes are convertible at the option of the holders of such notes only under the following circumstances:
•
during any calendar quarter commencing after the quarter ending on December 31, 2021 (and only during such calendar quarter), if the Company’s common stock price exceeds 130% of the conversion price for at least 20 trading days during the 30 consecutive trading days at the end of the prior calendar quarter;
•
during the five business days after any five consecutive trading days in which the trading price per $1,000 Notes was less than 98% of the product of the closing sale price of the Company’s common stock and the then current conversion rate;
•
upon the occurrence of specified corporate events; or
•
if the Company calls any or all 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the notes called for redemption.
Upon the occurrence of a make-whole fundamental change or the exercise of the Company’s redemption option, the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its 2026 Notes. As of December 31, 2021, none of the conditions of the 2026 Notes to early convert have been met.
As discussed in Note 2, the Company early adopted ASU No. 2020-06 as of January 1, 2021, and concluded that the 2026 Notes will be accounted for as debt, with no bifurcation of the embedded conversion feature. Debt issuance costs were recorded as a direct deduction from the related liability in the consolidated balance sheet and are amortized to interest expense over the term of the 2026 Notes. The effective interest rate for the 2026 Notes is 0.62%.
The net carrying amount of the 2026 Notes was as follows:
December 31,
(in thousands)
Principal
$
977,500
Unamortized debt issuance costs
(16,241
)
Net carrying amount
$
961,259
The following table sets forth the interest expense recognized related to the 2026 Notes:
For the Year Ended
December 31,
(in thousands)
Contractual interest expense
$
Amortization of debt issuance costs
1,367
Total interest expense related to 2026 Notes
$
2,311
Capped Call Transactions
In connection with the offering of the 2026 Notes, the Company purchased capped calls from certain financial institutions with respect to its common stock. The capped calls each have an initial strike price of $238.44 per share of the Company’s common stock, which corresponds to the initial conversion price of the 2026 Notes. The capped calls each have an initial cap price of $323.30 per share and expire in incremental components on each trading date beginning on June 4, 2026, and ending on July 30, 2026. The capped calls are intended to offset potential dilution to the Company’s common stock or offset any cash payments the Company is required to make in excess of the principal amount, as the case may be, with such reduction or offset subject to the cap price. The capped calls are subject to adjustments for certain corporate events and standard anti-dilution provisions.
The Company paid an aggregate amount of $75.3 million for the capped calls, covering approximately 4.1 million shares of the Company’s common stock. As the capped calls are both legally detachable and separately exercisable from the 2026 Notes, the Company accounts for the capped calls separately from the 2026 Notes. The capped calls are indexed to the Company’s own common stock and classified in stockholders’ equity. As such, the premiums paid for the capped calls have been included as a net reduction to additional paid-in capital in the consolidated balance sheet.
11. Shareholders’ Equity
Authorized Capital-Common Stock and Preferred Stock
The Company is authorized to issue two classes of stock designated as common stock and preferred stock. The Company’s total authorized capital stock is 620,000,000 shares, consisting of 600,000,000 shares of common stock, $0.0001 par value per share, and 20,000,000 shares of undesignated preferred stock, $0.0001 par value per share.
In June 2018, the Company completed an initial public offering (“IPO”), in which the Company sold 8,625,000 shares of its common stock, including the full exercise of the underwriters’ option to purchase 1,125,000 additional shares of common stock, at the initial price to the public of $24.00 per share. The Company received net proceeds of $192.5 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable by the Company of $3.4 million.
In June 2019, the Company completed a public offering, in which the Company sold 4,133,984 shares of its common stock, including the full exercise of the underwriters’ option to purchase 539,215 additional shares of common stock, at a price of $69.40 per share. The Company received net proceeds of $274.7 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable by the Company of $1.2 million.
In August 2020, the Company completed a public offering, in which the Company sold 4,527,558 shares of its common stock, including the full exercise of the underwriters’ option to purchase 590,551 additional shares of common stock, at a price of $127.00 per share. The Company received net proceeds of $556.3 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable by the Company of $0.7 million.
12. Equity Incentive Plans
The Company has stock-based compensation plans that provide for the award of equity incentives, including stock options, stock awards, RSUs, PSUs, and purchase rights. As of December 31, 2021, the Company had stock options outstanding under the 2018 Equity Incentive Plan (the “2018 Plan”) and the 2006 Equity Incentive Plan (the “2006 Plan”), RSUs and PSUs outstanding under the 2018 Plan, and purchase rights issued under the ESPP.
The total number of shares of common stock reserved for issuance under the 2018 Plan is equal to (1) 5,315,780 shares plus (2) any shares subject to outstanding awards under the 2006 Plan as of June 14, 2018 that subsequently cease to be subject to such awards. The available shares automatically increase each January 1, beginning January 1, 2019, by the lesser of (i) 5% of the aggregate number of shares of common stock outstanding on December 31st of the immediately preceding calendar year (rounded up to the nearest whole share) and (ii) an amount determined by the Company’s Board of Directors. As of December 31, 2021, 4,077,218 shares were subject to outstanding awards and 12,042,976 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.
As of December 31, 2021, there were 1,178,424 shares subject to outstanding stock options under the 2006 Plan.
In 2019, the Company amended its Outside Director Compensation Policy to modify the vesting provisions for nonemployee director awards in the event of certain terminations of service. The modification resulted in an acceleration of share-based compensation expense for nonemployee 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 Year Ended December 31,
Stock-based compensation cost:
Stock options
$
11,966
$
15,402
$
16,489
Restricted stock units
57,116
29,181
14,585
Performance share units
16,011
-
-
Employee stock purchase plan
4,595
3,987
3,326
Total stock-based compensation cost
$
89,688
$
48,570
$
34,400
The amount of stock-based compensation cost above capitalized to internally developed software and cloud computing arrangements in accordance with the accounting guidance for internal-use software was $1.6 million, $0.4 million, and $0.1 million for the years ended December 31, 2021, 2020, and 2019 respectively. 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 2021:
Weighted
Weighted
Average
Aggregate
Average
Remaining
Intrinsic
Exercise
Contractual
Value
Shares
Price
Life (in Years)
(in thousands)
Options outstanding as of January 1, 2021
3,537,014
$
28.17
6.89
$
483,577
Options granted
-
$
-
Options exercised
(1,223,395
)
$
17.80
Options cancelled or expired
(34,830
)
$
42.24
Options outstanding as of December 31, 2021
2,278,789
$
33.52
6.30
$
217,824
Options exercisable as of December 31, 2021
1,753,067
$
27.80
5.97
$
177,609
A summary of options outstanding and vested as of December 31, 2021, is as follows:
Options Outstanding
Options Vested and Exercisable
Exercise
Number
Weighted
Average
Number Vested
Weighted
Average
Prices
Outstanding
Life (in Years)
and Exercisable
Life (in Years)
$1.90 to $6.40
18,612
1.1
18,612
1.1
$8.04 to $11.72
72,717
2.3
72,717
2.3
$12.20 to $15.06
380,304
4.7
380,304
4.7
$16.06 to $24.00
706,791
6.1
639,948
6.1
$31.99 to $42.21
655,237
7.0
441,953
7.0
$55.10 to $99.65
410,736
7.8
185,749
7.8
$124.35 to $151.76
34,392
7.8
13,784
6.5
2,278,789
1,753,067
The total intrinsic value of options exercised during 2021, 2020, and 2019 was $173.2 million, $243.8 million, and $318.5 million, respectively.
There were no options granted during the year ended December 31, 2021. The weighted average grant date fair value of options granted during the years ended December 31, 2020, and 2019 was $34.00 and $19.80 per share, respectively. During the year ended December 31, 2021, 1,051,226 options vested. There were 525,722 options unvested as of December 31, 2021.
As of December 31, 2021, $11.1 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 1.6 years.
All options granted to participants, including employees and non-employee directors, are measured based on the grant date fair value of the awards and recognized in the consolidated statements of operations over the period during which the participant is required to perform services in exchange for the award. The vesting period is generally four years for employees and one year for non-employee directors. For the options granted during the periods presented, the fair value was estimated using the Black-Scholes option-pricing model with the following assumptions:
For the Year Ended December 31,
Fair market value of common stock
-
$66.26 - $151.76
$39.76 - $79.25
Volatility
-
43% - 44%
40%
Expected term
-
5-6 years
5-6 years
Expected dividend yield
-
n/a
n/a
Risk-free interest rate
-
0.33% - 1.25%
1.68% - 2.65%
Options are granted with an exercise price per share not less than the per share fair market value of the Company’s common stock on the grant date. The fair market value per share of the Company’s common stock for purposes of determining stock-based compensation is the closing price of the Company’s common stock as reported on the applicable grant date.
Expected volatility for stock options is based on a combination of annualized daily historical volatility of the Company’s stock price and the historical and implied volatility of comparable publicly traded companies over a similar expected term.
The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. Given the Company’s relative inexperience of significant exercise activity, the expected term assumptions were determined based on application of the simplified method of expected term calculation by averaging the contractual life of option grants and the vesting period of such grants. This application, when coupled with the contractual life of ten years and average vesting term of four years for employees and one year for non-employee directors, creates an expected term of six years and five years, respectively.
The Company has not paid and does not expect to pay dividends.
The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected life of the option grant at the date nearest the option grant date.
Restricted Stock Units
The following table summarizes RSU activity for the Company’s stock-based compensation plans for 2021:
Weighted
Average
Grant Date Fair
Restricted Stock Units
Value Per Share
RSUs outstanding as of January 1, 2021
2,359,063
$
70.17
RSUs granted
1,282,177
$
138.79
RSUs vested
(524,246
)
$
68.36
RSUs cancelled
(255,031
)
$
90.66
RSUs outstanding as of December 31, 2021
2,861,963
$
99.41
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 grant date. The vesting period of each RSU grant is generally four years for employees and one year for non-employee directors. As of December 31, 2021, $238.8 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 2.8 years.
Performance Share Units
The following table summarizes PSU activity for the Company’s stock-based compensation plans for 2021:
Weighted
Average
Performance Share
Grant Date Fair
Units
Value Per Share
PSUs outstanding as of January 1, 2021
-
$
-
PSUs granted
120,632
$
147.39
PSUs vested
-
$
-
PSUs cancelled
(5,742
)
$
150.00
PSUs outstanding as of December 31, 2021
114,890
$
147.26
During the first quarter of 2021, PSUs were granted for the first time. Stock-based compensation cost for PSUs is recognized on a graded vesting basis in the consolidated statements of operations over the period during which the participant is required to perform services in exchange for the award, based on the fair value of the Company’s underlying common stock on the grant date and the number of PSUs expected to be earned over the service period. Each PSU grant will vest in annual tranches over a three-year service period. Total units earned for grants made in 2021 may vary between 0% and 250% of the units granted based on the attainment of company-specific performance targets during the related three-year period and continued service. The performance targets are established by the Compensation and Leadership Development Committee of the Board of Directors. All of the PSUs earned will be settled through the issuance of an equivalent number of shares of the Company’s common stock based on the payout level achieved.
As of December 31, 2021, $19.9 million of total unrecognized compensation cost related to PSUs was expected to be recognized over a weighted average period of approximately 1.9 years.
Employee Stock Purchase Plan
The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, employee purchases occur at the end of discrete offering periods. Offering periods begin on August 1 and February 1 each year (or such other date determined by our Board of Directors or our Compensation and Leadership Development Committee).
Under the ESPP, eligible employees can acquire shares of the Company’s common stock by accumulating funds through payroll deductions. Employees generally are eligible to participate in the ESPP if they are a U.S. employee and are employed for at least 20 hours per week. The Company may impose additional restrictions on eligibility. Eligible employees can select a rate of payroll deduction between 1% and 15% of their 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. An employee’s participation automatically ends upon termination of employment for any reason.
The Company initially reserved 996,709 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP increases automatically on each January 1, beginning January 1, 2019, by the number of shares equal to the least of (i) 1,000,000 shares of common stock, (ii) 1% of the aggregate number of shares of common stock outstanding on December 31st of the immediately preceding calendar year (rounded 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 December 31, 2021, 2,509,441 shares of common stock remain available for issuance under the ESPP.
As of December 31, 2021, there was approximately $0.4 million of unrecognized stock-based compensation cost related to the ESPP that is expected to be recognized over the remaining term of the offering period that began on August 1, 2021, and ended January 31, 2022.
For the years ended December 31, 2021, 2020, and 2019, the fair value of ESPP purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:
For the Year Ended December 31,
Fair market value of common stock
$152.35 to $166.84
$87.23 to $138.83
$40.60 to $82.12
Volatility
31% to 34%
32% to 49%
40%
Expected term
0.5 years
0.5 years
0.5 years
Expected dividend yield
n/a
n/a
n/a
Risk-free interest rate
0.06% to 0.08%
0.11% to 1.54%
2.04% to 2.59%
13. Income Taxes
Domestic and foreign components of loss before income tax are as follows (in thousands):
For the Year Ended December 31,
Domestic
$
(93,556
)
$
(34,483
)
$
(30,272
)
Foreign
(28,369
)
(23,009
)
(18,987
)
Total
$
(121,925
)
$
(57,492
)
$
(49,259
)
Major components of the income tax (provision) benefit are as follows (in thousands):
For the Year Ended December 31,
Current:
Federal
$
-
$
-
$
-
State
-
-
-
Foreign
(2,180
)
(1,110
)
(1,178
)
Total current income tax provision
(2,180
)
(1,110
)
(1,178
)
Deferred:
Federal
(1,746
)
6,790
(90
)
State
(526
)
1,657
(53
)
Foreign
1,144
Total deferred income tax (provision) benefit
(1,128
)
9,419
Total
$
(3,308
)
$
8,309
$
(955
)
In connection with the TTR and Impendulo acquisitions, the Company recorded net deferred tax liabilities which provide an additional source of taxable income to support the realization of pre-existing deferred tax assets. Accordingly, during the year ended December 31, 2020, the Company released $9.5 million of its valuation allowance resulting in a deferred tax benefit for the same amount. Measurement period adjustments made to TTR purchase price accounting during the year ended December 31, 2021, reduced the net deferred tax liabilities recorded to goodwill. As a result, during the year ended December 31, 2021, the Company increased its valuation allowance by $1.9 million resulting in a deferred tax expense for the same amount.
It is the Company’s intention to reinvest the earnings of non-U.S. subsidiaries in those operations. As of December 31, 2021, the Company has not made a provision for U.S. or additional foreign withholding taxes for any outside basis differences inherent in its investments in foreign subsidiaries that are indefinitely reinvested. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.
Reconciliation of (Provision for) Benefit from Income Taxes
Major differences between the U.S. statutory rate of 21% and the effective tax rate are as follows (in thousands):
For the Year Ended December 31,
Tax at statutory rate
$
25,601
$
12,073
$
10,345
State taxes
4,462
1,349
1,941
Research and development credits
3,993
2,960
2,285
Stock-based compensation
47,602
56,766
67,718
Impact of foreign operations
2,740
(1,373
)
Change in valuation allowance
(85,842
)
(65,485
)
(80,284
)
Other
(1,864
)
(1,587
)
Total
$
(3,308
)
$
8,309
$
(955
)
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
December 31,
Deferred tax assets:
Net operating loss carryforward
$
315,482
$
240,048
Stock-based compensation
18,400
10,484
Deferred revenue
-
Research and development credit, net of
uncertain tax position reserve
13,543
9,284
Operating lease liabilities
14,498
16,237
Other
14,191
11,016
Total deferred tax assets
376,796
287,069
Deferred tax liabilities:
Deferred commissions
(17,208
)
(12,288
)
Operating lease right-of-use assets
(11,331
)
(12,243
)
Property and equipment
(6,625
)
(4,458
)
Definite-lived intangibles
(5,073
)
(8,278
)
Indefinite-lived intangibles
(4,433
)
(3,127
)
Deferred revenue
-
(322
)
Other
(86
)
(193
)
Total deferred tax liabilities
(44,756
)
(40,909
)
Net deferred tax assets before valuation
allowance
332,040
246,160
Valuation allowance
(335,952
)
(246,598
)
Net deferred tax liability
$
(3,912
)
$
(438
)
The following tables summarizes the Company's net operating loss and research credit carryforwards (dollars in thousands):
December 31, 2021
Year Expiration
Begins (if not
utilized)
Federal net operating loss carryforwards generated 2017 and prior
$
288,052
Federal net operating loss carryforwards generated after 2017
857,522
Non-expiring
Total Federal net operating loss carryforwards
1,145,574
State net operating loss carryforwards
790,264
Foreign net operating loss carryforwards
110,463
Non-expiring
Federal research & development credits
21,890
State research & development credits
1,191
Foreign research & development credits
The future utilization of federal net operating loss carryforwards generated after 2017 is limited to 80% of taxable income. An additional limitation applies to the use of federal net operating loss and credit carryforwards, under Section 382 of the Internal Revenue Code of 1986, as amended, that is applicable if the Company experiences an “ownership change”. The Company has experienced various “ownership changes” in prior years. The resulting Section 382 limitations are not expected to materially impact the Company’s ability to utilize carryforwards. Future changes in the ownership of the Company could further limit the Company’s ability to utilize its NOLs and credits.
Accounting for Uncertainty in Income Taxes
The Company has assessed its ability to realize its deferred tax assets and has 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 its deferred tax assets, the Company placed a significant amount of weight on its history of generating tax losses in the U.S., U.K., and Brazil, including in the current year. The increase in the valuation allowance each period was primarily related to U.S. federal and state tax losses incurred during the period.
The Company has established an accrual for uncertain tax positions related to its U.S. research and development credits and for the valuation of intellectual property transferred between international entities. As of December 31, 2021 and 2020, the Company has $9.1 million and $7.0 million of unrecognized tax benefits, of which the total amount that would impact the effective tax rate, if recognized, is $0.2 million. As of December 31, 2021, the Company has recorded an immaterial amount of interest and penalties related to its unrecognized tax benefits, which are classified as a component of income tax expense. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next 12 months.
A reconciliation of the beginning and ending balances for unrecognized tax benefits is as follows (in thousands):
For the Year Ended December 31,
Balance at January 1
$
7,029
$
5,210
$
4,118
Additions for tax positions related to the
current year
2,081
1,799
1,435
Additions for tax positions related to prior years
-
Reductions for tax positions related to prior years
-
-
(343
)
Reductions related to settlements
-
-
-
Reductions related to a lapse of statute
-
-
-
Balance at December 31
$
9,133
$
7,029
$
5,210
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With limited exceptions, all tax years for which the Company has filed a tax return remain open due to the existence of NOLs.
14. Net Loss Per Share Attributable to Common Shareholders
The Company calculates basic and diluted net loss per share attributable to common shareholders in conformity with the two-class method required for companies with participating securities.
The diluted net loss per share attributable to common shareholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. This includes using the if-converted method for calculating any potential dilutive effect of the convertible senior notes. For purposes of this calculation, all common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common shareholders as their effect is antidilutive. As a result, basic and diluted net loss per common share was the same for each period presented.
The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share data):
For the Year Ended December 31,
Numerator:
Net loss attributable to common shareholders
$
(125,233
)
$
(49,183
)
$
(50,214
)
Denominator:
Weighted-average common shares
outstanding-basic
86,263
80,985
73,345
Dilutive effect of share equivalents resulting from
stock options, RSUs, PSUs, ESPP shares, and
convertible senior notes (if converted)
-
-
-
Weighted-average common shares
outstanding-diluted
86,263
80,985
73,345
Net loss per common share, basic and diluted
$
(1.45
)
$
(0.61
)
$
(0.68
)
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):
Year Ended December 31,
Options to purchase common shares
2,905
4,653
7,987
Unvested RSUs
2,635
2,091
1,157
Unvested PSUs
-
-
ESPP shares
Convertible senior notes (if converted)
1,584
-
-
Total
7,242
6,754
9,157

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), we conducted an evaluation (pursuant to Rule 13a-15(b) of 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 December 31, 2021.
Disclosure controls and procedures 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 those designed to ensure that such information 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 as of December 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). Based on this evaluation our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2021, our internal control over financial reporting was effective.
The Company acquired INPOSIA Solutions, GmbH on April 1, 2021, substantially all the assets of DAVO Technologies LLC on April 20, 2021, substantially all the assets of 3CE Technologies, Inc. on September 7, 2021, substantially all the assets of Track1099 LLC on October 1, 2021, and substantially all the assets of CrowdReason Limited Liability Company and CorrelationAdvisors LLC on October 18, 2021. Management excluded these acquisitions from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. Total assets excluded from this assessment were $37.6 million, representing 1% of the Company’s consolidated total assets as of December 31, 2021, total liabilities excluded from this assessment were $33.3 million, representing 2% of the Company’s consolidated total liabilities as of December 31, 2021, and total revenue excluded from this assessment was $9.6 million, representing 1% of the Company’s total revenue for the year ended December 31, 2021.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche, LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8, “Financial Statements”, of this Annual Report on Form 10-K.
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 three months ended December 31, 2021 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 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.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
Effective February 22, 2022, we entered into new employment agreements with Scott McFarlane, Chief Executive Officer, and Alesia Pinney, Executive Vice President, Chief Legal Officer, and Secretary. The new employment agreements replace in their entirety those that expired in June 2021 and are materially similar to the prior employment agreements with each of Mr. McFarlane and Ms. Pinney.
Under Mr. McFarlane’s employment agreement, his current base salary is $575,000, increased to $600,000 effective April 1, 2022, subject to periodic review. Mr. McFarlane is eligible to receive an annual target performance-based bonus of 100% of his base salary and to participate in the Company’s employee benefit plans. In the event Mr. McFarlane’s employment is terminated by us without “cause” or by Mr. McFarlane for “good reason” (each as defined in the employment agreement), including pursuant to a change in control termination, Mr. McFarlane will be eligible to receive the following severance payments and benefits, subject to execution, and non-revocation, of a general release and waiver of claims against us in a form satisfactory to us and continued compliance with our proprietary information and inventions agreement:
•
Severance pay equal to 12 months’ base salary, provided that in the event of a change in control termination, this amount will be equal to 18 months’ base salary;
•
In the event of a change in control termination, payment of the target bonus for the year of termination, pro-rated for the number of full months worked in such calendar year;
•
COBRA continuation coverage for a period of 12 months following the last day of the month containing Mr. McFarlane’s termination, provided that coverage will be for 18 months in the event of a change in control termination (or in either case until such earlier time as Mr. McFarlane is no longer entitled to COBRA continuation coverage under the group health plan, whichever period is shorter); and
•
In the event of a change in control termination, full acceleration of time-based equity awards.
Under Ms. Pinney’s employment agreement, her current base salary is $375,000, increased to $390,000 effective April 1, 2022, subject to periodic review. Ms. Pinney is eligible to receive an annual target performance-based bonus of 60% of her base salary and to participate in the Company’s employee benefit plans. In the event Ms. Pinney’s employment is terminated by us without “cause” or by Ms. Pinney for “good reason” (each as defined in the employment agreement), including pursuant to a change in control termination, Ms. Pinney will be eligible to receive the same severance payments and benefits as above for Mr. McFarlane, except that severance pay and COBRA continuation coverage will be for 6 months outside of a change in control termination and 12 months in the event of a change in control termination. Receipt of severance benefits is subject to execution, and non-revocation, of a general release and waiver of claims against us in a form satisfactory to us and continued compliance with our proprietary information and inventions agreement.
The foregoing description of the employment agreements is qualified in their entirety by reference to the full text of the employment agreements, copies of which are attached as Exhibit 10.9 (Scott McFarlane) and Exhibit 10.10 (Alesia Pinney) to this Annual Report on Form 10-K and incorporated herein by reference.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to the relevant information from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Shareholders within 120 days after the end of the fiscal year ended December 31, 2021.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to the relevant information from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Shareholders within 120 days after the end of the fiscal year ended December 31, 2021.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to the relevant information from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Shareholders within 120 days after the end of the fiscal year ended December 31, 2021.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to the relevant information from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Shareholders within 120 days after the end of the fiscal year ended December 31, 2021.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Shareholders within 120 days after the end of the fiscal year ended December 31, 2021.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
(1)
Consolidated Financial Statements
The financial statements filed as part of this Annual Report on Form 10-K are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-K.
(2)
Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or notes to the consolidated financial statements under Part II, Item 8 of this Annual Report on Form 10-K.
(3)
Exhibits
The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreement. The agreements may contain representations and warranties that the parties made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the applicable agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of such agreement. In addition, such representations and warranties: (i) may not be accurate or complete as of any specified date; (ii) are modified and qualified in important part by the underlying disclosure schedules; (iii) may be subject to a contractual standard of materiality different from those generally applicable to investors; or (iv) may have been used for the purpose of allocating risk among the parties to the applicable agreement, rather than establishing matters as facts. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the applicable agreement, which subsequent information may or may not be fully reflected in Company’s public disclosures. For the foregoing reasons, the representations and warranties should not be relied upon as statements of factual information.
Exhibit Index
Exhibit
Number
Description
2.1
Agreement and Plan of Merger, dated October 5, 2020, by and among Avalara, Inc., Tannin Merger Sub, Inc., Transaction Tax Resources, Inc., and Northwest Cloud Co. LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K, filed October 6, 2020 (File No. 001-38525))
2.2
Asset Purchase Agreement, dated November 5, 2020, by and among Avalara, Inc. and Business Licenses, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K, filed November 5, 2020 (File No. 001-38525))
3.1
Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38525) filed with the SEC on August 10, 2018)
3.2
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38525) filed with the SEC on August 10, 2018)
4.1
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-224850) filed with the SEC on June 4, 2018)
4.2
Description of the Registrant’s securities (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 10-K, filed February 28, 2020 (File No. 001-38525))
4.3
Indenture, dated as of August 13, 2021, by and between Avalara, Inc. and The Bank of New York Mellon Trust Company, N.A., as indenture trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K, filed August 13, 2021 (File No. 001-38525))
4.4
Form of 0.25% Convertible Senior Note due 2026 (included in Exhibit 4.3)
10.1+
Avalara, Inc. 2006 Equity Incentive Plan, as amended, and related forms of award agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.2+
Avalara, Inc. 2018 Equity Incentive Plan and related forms of award agreements (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.3*+
Avalara, Inc. 2022 Executive and Leadership Bonus Plan
10.4+
Avalara, Inc. 2018 Employee Stock Purchase Plan, as amended and restated, effective August 8, 2018 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38525) filed with the SEC on August 10, 2018)
10.5*+
Avalara, Inc. Equity Award Acceleration Policy, as amended and restated, effective January 25, 2022
10.6+
Form of Performance Share Unit Award Notice and Performance Share Unit Agreement under 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38525) filed with the SEC on May 7, 2021)
10.7+
Avalara, Inc. Outside Director Compensation Policy, amended and restated as of January 27, 2021 (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-K, filed February 25, 2021 (File No. 001-38525))
10.8+
Form of Indemnification Agreement made by and between the Registrant and each of its directors and executive officers (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.9*+
Executive Employment Agreement between the Registrant and Scott McFarlane dated February 22, 2022
10.10*+
Executive Employment Agreement between the Registrant and Alesia Pinney dated February 22, 2022
10.11+
Executive Employment Agreement between the Registrant and Amit Mathradas dated January 6, 2019 (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-K, filed February 28, 2020 (File No. 001-38525))
10.12+
Executive Employment Agreement between the Registrant and Ross Tennenbaum effective April 1, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed April 2, 2020 (File No. 001-38525))
10.13
Lease Agreement between W2007 Seattle Office Second and Spring Building Realty, LLC and Avalara, Inc. dated August 14, 2014 (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.14
Office Building Lease by and between 255 South King Street Limited Partnership and the Registrant dated June 9, 2016 (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.15
First Amendment of Office Building Lease by and between 255 South King Street Limited Partnership and the Registrant dated June 1, 2017 (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.16
Second Amendment of Office Building Lease by and between 255 South King Street Limited Partnership and the Registrant dated October 2, 2017 (incorporated by reference to Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.17
Third Amendment of Office Building Lease by and between 255 South King Street Limited Partnership and the Registrant dated November 29, 2017 (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.18
Fourth Amendment of Office Building Lease by and between 255 South King Street Limited Partnership and the Registrant dated February 19, 2018 (incorporated by reference to Exhibit 10.21 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.19
Fifth Amendment of Office Building Lease by and between 255 South King Street Limited Partnership and the Registrant dated September 26, 2018 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38525) filed with the SEC on November 8, 2018)
10.20
Ninth Amended and Restated Investors’ Rights Agreement, dated September 12, 2016, as amended (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.21
Tenth Amended and Restated Voting Agreement, dated September 12, 2016 (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 (File No. 333-224850) filed with the SEC on May 11, 2018)
10.22
Form of Capped Call Confirmation (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed August 13, 2021 (File No. 001-38525)
21.1*
List of subsidiaries of the Registrant
23.1*
Consent of Deloitte & Touche LLP, Independent Public Accounting Firm
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*
Filed herewith.
+
Indicates a management contract or compensatory plan, contract or arrangement.