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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2021

OR

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

For the transition period from to

Commission File Number: 001-38525

 

AVALARA, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Washington

 

 

91-1995935

(State or other jurisdiction of

incorporation or organization)

 

 

(I.R.S. Employer

Identification No.)

 

 

 

 

255 South King Street, Suite 1800

Seattle, WA

 

 

98104

(Address of principal executive offices)

 

 

(Zip Code)

 

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

 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.0001 Per Share

AVLR

New York Stock Exchange

 

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

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

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

 

Large accelerated filer

 

  

  

Accelerated filer

 

Non-accelerated filer

 

  

 

Small reporting company

 

 

  

Emerging growth company

 

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

 

 

 

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

 

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

 

 

 

 


 

Table of Contents

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

3

 

Consolidated Balance Sheets (unaudited)

 

3

 

Consolidated Statements of Operations (unaudited)

 

4

 

Consolidated Statements of Comprehensive Loss (unaudited)

 

6

 

Consolidated Statements of Cash Flows (unaudited)

 

7

 

Notes to Consolidated Financial Statements (unaudited)

 

9

Item 2.

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

 

40

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

59

Item 4.

Controls and Procedures

 

60

PART II

OTHER INFORMATION

 

61

Item 1.

Legal Proceedings

 

61

Item 1A.

Risk Factors

 

61

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

61

Item 6.

Exhibits

 

62

Signatures

 

64

 

 

 

 

i


 

Special Note Regarding Forward-Looking Statements

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

our ability to expand our international reach;

 

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

 

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

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

 

 

ii


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AVALARA, INC.

Consolidated Balance Sheets

(In thousands, except for per share data)

 

 

 

September 30,

 

December 31,

 

 

 

2021

 

2020

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,536,422

 

$

673,593

 

Restricted cash

 

 

37,700

 

 

19,953

 

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

   $3,983, respectively

 

 

96,305

 

 

75,857

 

Deferred commissions

 

 

15,735

 

 

12,245

 

Prepaid expenses and other current assets

 

 

31,102

 

 

20,098

 

Total current assets before customer fund assets

 

 

1,717,264

 

 

801,746

 

Funds held from customers

 

 

79,884

 

 

30,598

 

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

 

 

1,280

 

 

563

 

Total current assets

 

 

1,798,428

 

 

832,907

 

Noncurrent assets:

 

 

 

 

 

 

 

Restricted cash

 

 

 

 

37,700

 

Deferred commissions

 

 

47,896

 

 

38,625

 

Operating lease right-of-use assets—net

 

 

46,798

 

 

52,320

 

Property and equipment—net

 

 

42,645

 

 

34,713

 

Intangible assets—net

 

 

88,417

 

 

86,513

 

Goodwill

 

 

603,768

 

 

513,234

 

Other noncurrent assets

 

 

10,323

 

 

6,321

 

Total assets

 

$

2,638,275

 

$

1,602,333

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade payables

 

$

18,741

 

$

20,280

 

Accrued expenses

 

 

91,978

 

 

84,532

 

Deferred revenue

 

 

256,182

 

 

208,026

 

Accrued purchase price related to acquisitions

 

 

48,869

 

 

22,473

 

Accrued earnout liabilities

 

 

29,456

 

 

749

 

Operating lease liabilities

 

 

11,839

 

 

11,339

 

Total current liabilities before customer fund obligations

 

 

457,065

 

 

347,399

 

Customer fund obligations

 

 

81,955

 

 

31,549

 

Total current liabilities

 

 

539,020

 

 

378,948

 

Noncurrent liabilities:

 

 

 

 

 

 

 

Convertible senior notes—net

 

 

960,373

 

 

 

Deferred revenue

 

 

1,701

 

 

1,664

 

Accrued purchase price related to acquisitions

 

 

3,889

 

 

49,057

 

Accrued earnout liabilities

 

 

46,416

 

 

34,468

 

Operating lease liabilities

 

 

48,416

 

 

56,625

 

Deferred tax liability

 

 

2,195

 

 

1,031

 

Other noncurrent liabilities

 

 

817

 

 

380

 

Total liabilities

 

 

1,602,827

 

 

522,173

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

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

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

   September 30, 2021 and December 31, 2020

 

 

 

 

 

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

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

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

 

 

9

 

 

9

 

Additional paid-in capital

 

 

1,687,579

 

 

1,640,867

 

Accumulated other comprehensive loss

 

 

(2,579

)

 

(1,339

)

Accumulated deficit

 

 

(649,561

)

 

(559,377

)

Total shareholders’ equity

 

 

1,035,448

 

 

1,080,160

 

Total liabilities and shareholders' equity

 

$

2,638,275

 

$

1,602,333

 

 

 

 

 

 

 

 

 

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

3


 

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

164,237

 

 

$

119,193

 

Professional services

 

 

16,930

 

 

 

8,686

 

Total revenue

 

 

181,167

 

 

 

127,879

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

44,824

 

 

 

31,155

 

Professional services

 

 

8,216

 

 

 

3,777

 

Total cost of revenue

 

 

53,040

 

 

 

34,932

 

Gross profit

 

 

128,127

 

 

 

92,947

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

42,574

 

 

 

32,562

 

Sales and marketing

 

 

75,867

 

 

 

49,057

 

General and administrative

 

 

35,887

 

 

 

23,885

 

Total operating expenses

 

 

154,328

 

 

 

105,504

 

Operating loss

 

 

(26,201

)

 

 

(12,557

)

Other (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(28

)

 

 

(36

)

Interest expense

 

 

815

 

 

 

 

Other (income) expense, net

 

 

6,168

 

 

 

(185

)

Total other (income) expense, net

 

 

6,955

 

 

 

(221

)

Loss before income taxes

 

 

(33,156

)

 

 

(12,336

)

(Benefit from) provision for income taxes

 

 

(610

)

 

 

393

 

Net loss

 

$

(32,546

)

 

$

(12,729

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(0.38

)

 

$

(0.15

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

86,530

 

 

 

82,288

 

 

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

 

4


 

 

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

$

455,997

 

 

$

333,258

 

Professional services

 

 

47,838

 

 

 

22,551

 

Total revenue

 

 

503,835

 

 

 

355,809

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and returns

 

 

123,970

 

 

 

89,451

 

Professional services

 

 

22,416

 

 

 

13,065

 

Total cost of revenue

 

 

146,386

 

 

 

102,516

 

Gross profit

 

 

357,449

 

 

 

253,293

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

121,841

 

 

 

85,253

 

Sales and marketing

 

 

212,068

 

 

 

144,731

 

General and administrative

 

 

101,982

 

 

 

65,595

 

Total operating expenses

 

 

435,891

 

 

 

295,579

 

Operating loss

 

 

(78,442

)

 

 

(42,286

)

Other (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(75

)

 

 

(1,646

)

Interest expense

 

 

815

 

 

 

 

Other (income) expense, net

 

 

9,403

 

 

 

(3,435

)

Total other (income) expense, net

 

 

10,143

 

 

 

(5,081

)

Loss before income taxes

 

 

(88,585

)

 

 

(37,205

)

Provision for income taxes

 

 

1,599

 

 

 

947

 

Net loss

 

$

(90,184

)

 

$

(38,152

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders,

   basic and diluted

 

$

(1.05

)

 

$

(0.48

)

Weighted average shares of common stock outstanding,

   basic and diluted

 

 

86,023

 

 

 

79,715

 

 

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

 

5


 

 

AVALARA, INC.

Consolidated Statements of Comprehensive Loss (unaudited)

(In thousands)

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

Net loss

 

$

(32,546

)

 

$

(12,729

)

Other comprehensive loss — Foreign currency

   translation

 

 

(1,172

)

 

 

(225

)

Total comprehensive loss

 

$

(33,718

)

 

$

(12,954

)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Net loss

 

$

(90,184

)

 

$

(38,152

)

Other comprehensive (loss) income — Foreign currency translation

 

 

(1,240

)

 

 

835

 

Total comprehensive loss

 

$

(91,424

)

 

$

(37,317

)

 

 

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

 

6


 

 

AVALARA, INC.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(90,184

)

 

$

(38,152

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

65,330

 

 

 

34,799

 

Depreciation and amortization

 

 

25,732

 

 

 

11,923

 

Asset impairments

 

 

 

 

 

794

 

Amortization of debt issuance costs

 

 

482

 

 

 

 

Impairment of capitalized cloud computing costs

 

 

345

 

 

 

 

Deferred income tax (benefit) expense

 

 

(2,036

)

 

 

193

 

Non-cash operating lease costs

 

 

7,102

 

 

 

6,027

 

Non-cash change in earnout liabilities

 

 

8,711

 

 

 

(2,325

)

Non-cash bad debt expense

 

 

1,326

 

 

 

1,445

 

Other

 

 

(799

)

 

 

(221

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(18,713

)

 

 

(12,205

)

Prepaid expenses and other current assets

 

 

(13,721

)

 

 

(4,179

)

Deferred commissions

 

 

(12,761

)

 

 

(7,425

)

Other noncurrent assets

 

 

(3,719

)

 

 

(2,698

)

Trade payables

 

 

(2,327

)

 

 

4,683

 

Accrued expenses

 

 

5,981

 

 

 

6,247

 

Deferred revenue

 

 

46,876

 

 

 

19,397

 

Operating lease liabilities

 

 

(8,900

)

 

 

(7,243

)

Net cash provided by operating activities

 

 

8,725

 

 

 

11,060

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(4,463

)

 

 

(2,968

)

Capitalized software development costs

 

 

(9,608

)

 

 

(2,706

)

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

 

 

(33,555

)

 

 

 

Cash paid for acquired intangible assets

 

 

(1,500

)

 

 

 

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

 

 

(381

)

 

 

 

Net cash used in investing activities

 

 

(49,507

)

 

 

(5,674

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from common stock offering, net of underwriting discounts

 

 

 

 

 

556,312

 

Payments of deferred financing costs

 

 

 

 

 

(300

)

Proceeds from convertible senior notes

 

 

977,500

 

 

 

 

Payments of debt issuance costs

 

 

(17,343

)

 

 

 

Purchase of capped calls

 

 

(75,268

)

 

 

 

Proceeds from exercise of stock options

 

 

18,146

 

 

 

30,717

 

Proceeds from purchases of stock under employee stock purchase plan

 

 

14,446

 

 

 

11,337

 

Acquisition-related post-closing payments

 

 

(20,821

)

 

 

(2,763

)

Payments related to business combination earnouts

 

 

(33

)

 

 

(3,760

)

Payments related to asset acquisition earnouts

 

 

(1,266

)

 

 

(65

)

Net increase in customer fund obligations

 

 

37,942

 

 

 

1,681

 

Net cash provided by financing activities

 

 

933,303