Item 1. Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
AVALARA, INC.
Notes to Consolidated Financial Statements
(unaudited)
1.Summary of Significant Accounting Policies
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.
Interim Financial Information
The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as amended by the Form 10-K/A for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on May 5, 2022 (the “Amended 2021 Annual Report”). The accompanying interim consolidated balance sheet as of March 31, 2022, the consolidated interim statements of operations, consolidated statements of comprehensive loss, and the consolidated statements of cash flows for the three months ended March 31, 2022, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the three months ended March 31, 2022, are not necessarily indicative of the results expected for the full year ending December 31, 2022.
Prior Period Restatements and Adjustments
While preparing the financial statements for the first quarter of 2022, the Company discovered an error in its recognition of stock-based compensation expense for restricted stock units (“RSUs”) impacting previously reported interim and annual consolidated financial statements. In the previously presented consolidated financial statements, the correction resulted in an increase of $0.1 million to stock-based compensation and an increase of $0.1 million to net loss on the consolidated statement of operations and the consolidated statement of cash flows for the three months ended March 31, 2021. The correction increased net loss and total comprehensive loss by $0.1 million on the consolidated statement of comprehensive loss for the three months ended March 31, 2021. The correction did not change total net cash used in operating activities on the consolidated statement of cashflows for the three months ended March 31, 2021. The correction increased additional paid-in capital and accumulated deficit by $0.1 million, with no change to total shareholders’ equity, on the consolidated statement of shareholders’ equity as of March 31, 2021. An explanation of the impact on the consolidated financial statements is contained in “Note 15—Correction of Previously Issued Consolidated Financial Statements” to the accompanying consolidated financial statements included in the Amended 2021 Annual Report, and the impact to each quarterly period consolidated statement of operations is included in “Quarterly Results of Operations” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” also included in the Amended 2021 Annual Report.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation.
Principles of Consolidation
The accompanying consolidated financial statements include those of the Company, its subsidiaries, and a variable interest entity for which the Company is the primary beneficiary, after elimination of all intercompany accounts and transactions.
8
Segments
The Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. 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.
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.
Customer Funds Assets and Obligations
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, certain customers began to remit tax payments to the Customer Trust with almost all customer funds remitted to and held by the Customer Trust as of December 31, 2021. 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.
9
The following table details funds held from customers and customer fund obligations held by the Company and by the Customer Trust as of March 31, 2022 and December 31, 2021:
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Funds held from customers (current assets): |
|
|
|
|
|
|
|
|
Restricted cash equivalents – Company |
|
$ |
647 |
|
|
$ |
13 |
|
Restricted cash equivalents – Customer Trust |
|
|
63,353 |
|
|
|
62,126 |
|
Available-for-sale securities – Customer Trust |
|
|
359 |
|
|
|
370 |
|
Funds held from customers |
|
$ |
64,359 |
|
|
$ |
62,509 |
|
Customer fund obligations (current liabilities): |
|
|
|
|
|
|
|
|
Customer fund obligations – Company |
|
|
66,368 |
|
|
|
64,302 |
|
Customer fund obligations |
|
$ |
66,368 |
|
|
$ |
64,302 |
|
Receivable from customers, net was $1.6 million and $1.5 million as of March 31, 2022, and December 31, 2021, respectively.
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 three months ended March 31, 2022 or 2021.
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.
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.
10
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 three months ended March 31, 2022 and 2021, $5.4 million and $2.5 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.
Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. An impairment is recognized in the event the carrying value of such assets is not recoverable. If the carrying value is not recoverable, the fair value is determined, and an impairment is recognized for the amount by which the carrying value exceeds the fair value. No impairment of long-lived assets occurred in the three months ended March 31, 2022 or 2021.
Leases
Leases arise from contracts which convey the right to control the use of identified property or equipment for a period of time in exchange for consideration. The Company’s leasing arrangements are primarily for office space used to conduct operations. The Company determines whether an arrangement is or contains a lease at the inception date, based on whether there is an identified asset and whether the Company controls the use of the identified asset throughout the period of use. Leases commence when the lessor makes the asset available for use.
Leases are classified at commencement as either operating or finance leases. All the Company’s leases are classified as operating leases. Rent expense for operating leases is recognized on the straight-line method over the term of the agreement beginning on the lease commencement date. Lease-related costs, which are variable rather than fixed, are expensed in the period incurred. Variable lease costs consist primarily of common area maintenance and utilities costs for the Company’s office spaces that are due based on the actual costs incurred by the landlord. Lease payments that depend on an index or a rate are measured using the index or rate at the commencement date and are included in operating lease costs. Subsequent increases to lease payments due to a change in the index or rate are expensed as a variable lease cost.
Convertible Senior Notes
In August 2021, the Company completed a private offering of $977.5 million principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are 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 March 31, 2022, and December 31, 2021.
11
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 a tax benefit 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 period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. The Company will recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. 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.
12
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.
The Company earns Streamlined Sales Tax (“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 historically most of the Company's customers are invoiced once at the beginning of the term, an increasing portion of customers are invoiced semi-annually, quarterly, or monthly.
Included in the total subscription fee for cloud-based solutions are non-refundable upfront fees that are typically charged to new customers. These fees are associated with work performed to set up a customer with the Company’s services, and do not represent a distinct good or service. Instead, the fees are included within the transaction price and allocated to the remaining performance obligations in the contract. The Company recognizes revenue for these fees in accordance with the revenue recognition for those performance obligations.
Also included in subscription and returns revenue is interest income on funds held from customers. The Company uses trust accounts at FDIC-insured institutions to provide tax remittance services to customers and collect funds from customers in advance of remittance to tax authorities. After collection and prior to remittance, the Company earns interest on these funds.
Professional Services Revenue
The Company generates professional services revenue from providing tax analysis and services, including business licenses and tax registrations, tax refund claims and recovery assistance, voluntary disclosure agreements, nexus studies, and back filing services. Additionally, the Company provides configurations, data migrations, integration, and training for its subscriptions and returns products. 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.
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.
13
Stock-Based Compensation
The Company accounts for stock-based compensation by calculating the fair value of each option, 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.
Recently Adopted Accounting Standards
There are no accounting standards that have been recently adopted.
New Accounting Standards Not Yet Adopted
ASU 2021-08
In October 2021, the Financial Accounting Standards Board 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 currently expects 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.
2.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 |
|
March 31, 2022 |
|
Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Money market funds |
|
$ |
1,405,965 |
|
|
$ |
1,405,965 |
|
|
$ |
— |
|
|
$ |
— |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities |
|
|
359 |
|
|
|
359 |
|
|
|
— |
|
|
|
— |
|
Earnouts related to business combinations |
|
|
96,757 |
|
|
|
— |
|
|
|
— |
|
|
|
96,757 |
|
14
|
|
|
|
|
|
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 |
|
|
370 |
|
|
|
370 |
|
|
|
— |
|
|
|
— |
|
Earnouts related to business combinations |
|
|
113,978 |
|
|
|
— |
|
|
|
— |
|
|
|
113,978 |
|
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 4. 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 6, 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.
15
The following table provides summary information of the assumptions used to calculate the estimated earnout liabilities related to 2021 and 2020 acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
Discount Rate as of |
|
Balance as of |
|
Balance as of |
|
|
Acquisition |
|
Year of Acquisition |
|
Earnout Target |
|
Method |
|
Earnout Period |
March 31, 2022 |
|
March 31, 2022 |
|
December 31, 2021 |
|
|
CrowdReason |
|
|
2021 |
|
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 |
|
5.0 |
% |
(a) |
|
$ |
24,368 |
|
$ |
26,320 |
|
|
Track1099 |
|
|
2021 |
|
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 |
|
10.0 |
% |
(a) |
|
|
6,570 |
|
|
7,880 |
|
|
Davo |
|
|
2021 |
|
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 |
|
8.0 |
% |
(a) |
|
|
34,940 |
|
|
35,885 |
|
|
Transaction Tax Resources (“TTR”) |
|
|
2020 |
|
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 |
% |
(c) |
|
|
11,910 |
|
|
24,830 |
|
|
Business Licenses |
|
|
2020 |
|
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 |
|
6.2 |
% |
(b) |
|
|
18,969 |
|
|
19,063 |
|
|
Balance end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
96,757 |
|
$ |
113,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
|
(c) $13.2 million was paid on March 2, 2022 in satisfaction of the first earnout period for TTR. The second earnout period, if achieved, is payable in March 2023. The discount rate of 15% was only used for revenue that was non-contracted as of March 31, 2022. The discount rate of 15% 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. For contracted revenue, no risk adjusted discount rate was assumed, other than the cost of debt, as it is not subject to forecasting uncertainty. |
|
|
A reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs, is as follows (in thousands):
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Earnout liabilities related to business combinations: |
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
113,978 |
|
|
$ |
34,501 |
|
Measurement period adjustments |
|
|
— |
|
|
|
1,802 |
|
Payments of earnout liabilities |
|
|
(13,220 |
) |
|
|
— |
|
Fair value changes included in total other expense (income), net |
|
|
(4,001 |
) |
|
|
1,350 |
|
Balance end of period |
|
$ |
96,757 |
|
|
$ |
37,653 |
|
16
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.
Fair Value of Other Financial Instruments
The Company has $977.5 million in principal amount of the 2026 Notes. See Note 9 for further details. The Company carries the 2026 Notes at par value less unamortized debt issuance costs on its consolidated balance sheet as of March 31, 2022, and 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 March 31, 2022, was approximately $837.1 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 quarter.
3.Balance Sheet Detail
Property and equipment, net consisted of the following (in thousands):
|
|
Useful |
|
March 31, |
|
|
December 31, |
|
|
|
Life (Years) |
|
2022 |
|
|
2021 |
|
Computer equipment and software |
|
3 to 5 |
|
$ |
21,240 |
|
|
$ |
19,923 |
|
Internally developed software |
|
3 to 6 |
|
|
32,244 |
|
|
|
27,099 |
|
Furniture and fixtures |
|
5 |
|
|
6,428 |
|
|
|
6,425 |
|
Office equipment |
|
2 to 5 |
|
|
1,343 |
|
|
|
1,275 |
|
Leasehold improvements |
|
1 to 10 |
|
|
30,102 |
|
|
|
30,046 |
|
|
|
|
|
|
91,357 |
|
|
|
84,768 |
|
Accumulated depreciation |
|
|
|
|
(41,989 |
) |
|
|
(38,304 |
) |
Property and equipment—net |
|
|
|
$ |
49,368 |
|
|
$ |
46,464 |
|
Depreciation expense was $4.0 million for the three months ended March 31, 2022, and $2.6 million for the three months ended March 31, 2021.
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Licenses and subscriptions |
|
$ |
18,670 |
|
|
$ |
14,511 |
|
Prepaid and other current taxes |
|
|
2,444 |
|
|
|
3,132 |
|
Deposits |
|
|
4,903 |
|
|
|
3,746 |
|
Prepaid employee related expenses |
|
|
2,755 |
|
|
|
2,780 |
|
Prepaid cloud computing implementation costs |
|
|
2,262 |
|
|
|
1,708 |
|
Prepaid insurance |
|
|
3,960 |
|
|
|
— |
|
Other |
|
|
4,320 |
|
|
|
3,390 |
|
Total |
|
$ |
39,314 |
|
|
$ |
29,267 |
|
17
Accrued expenses consisted of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Accrued bonus |
|
$ |
11,476 |
|
|
$ |
40,853 |
|
Accrued partner commissions |
|
|
14,133 |
|
|
|
13,088 |
|
Accrued payroll and related taxes |
|
|
15,127 |
|
|
|
10,208 |
|
Employee stock purchase plan contributions |
|
|
3,463 |
|
|
|
7,113 |
|
Accrued sales commissions |
|
|
5,422 |
|
|
|
7,007 |
|
Contract liabilities |
|
|
897 |
|
|
|
6,918 |
|
Accrued federal, state, local, and foreign taxes |
|
|
3,574 |
|
|
|
3,926 |
|
Self-insurance reserves |
|
|
2,471 |
|
|
|
2,401 |
|
Accrued interest payable on Convertible Senior Notes |
|
|
414 |
|
|
|
944 |
|
Other |
|
|
12,125 |
|
|
|
17,334 |
|
Total |
|
$ |
69,102 |
|
|
$ |
109,792 |
|
4. 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 March 31, 2022, and will be released to the Inposia shareholders during the 18 months following the acquisition, subject to reduction for certain indemnification and other potential obligations of the Inposia shareholders. The shares held in escrow are considered issued and outstanding and are recorded in shareholders’ equity on the consolidated balance sheet as of December 31, 2021 and March 31, 2022.
Total consideration associated with this acquisition is presented below (in thousands):
|
|
Total Consideration |
|
Cash paid at closing (net of amounts returned) |
|
$ |
14,456 |
|
Fair value of common stock issued at closing |
|
|
22,971 |
|
Total consideration |
|
$ |
37,427 |
|
18
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):
|
|
Fair Value |
|
Assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
$ |
1,264 |
|
Trade accounts receivable |
|
|
1,767 |
|
Other current assets |
|
|
268 |
|
Operating lease right-of-use assets |
|
|
928 |
|
Property and equipment |
|
|
98 |
|
Developed technology, customer relationships, and other intangibles |
|
|
14,269 |
|
Goodwill |
|
|
26,520 |
|
Other noncurrent assets |
|
|
35 |
|
Total assets acquired |
|
|
45,149 |
|
Liabilities assumed: |
|
|
|
|
Trade payables and accrued expenses |
|
|
1,478 |
|
Deferred revenue |
|
|
810 |
|
Other liabilities, noncurrent |
|
|
106 |
|
Operating lease liabilities |
|
|
928 |
|
Deferred tax liability |
|
|
4,400 |
|
Total liabilities assumed |
|
|
7,722 |
|
Net assets acquired |
|
$ |
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 below table (in thousands):
Intangible |
|
Fair Value |
|
|
Valuation Methodology |
|
Discount Rate |
|
|
Estimated Useful Life |
Customer relationships |
|
$ |
3,288 |
|
|
Multi-period excess earnings-income approach |
|
18.5% |
|
|
8 years |
Developed technology |
|
|
9,572 |
|
|
Relief from royalty-income approach |
|
18.5% |
|
|
6 years |
Noncompetition agreements |
|
|
1,174 |
|
|
With-and-without valuation-income approach |
|
21.0% |
|
|
3 years |
Tradename |
|
|
235 |
|
|
Relief from royalty-income approach |
|
18.5% |
|
|
3 years |
The excess of the purchase price over the net identified tangible and intangible assets is $26.5 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.
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.
19
Total consideration associated with this acquisition is presented below (in thousands):
|
|
Total Consideration |
|
Cash paid through closing |
|
$ |
23,818 |
|
Fair value of earnout provision |
|
|
30,338 |
|
Fair value of holdbacks |
|
|
2,591 |
|
Total consideration |
|
$ |
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):
|
|
Fair Value |
|
Assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
$ |
198 |
|
Funds held from customers |
|
|
12,464 |
|
Trade accounts receivable |
|
|
119 |
|
Other current assets |
|
|
58 |
|
Operating lease right-of-use assets |
|
|
46 |
|
Developed technology, customer relationships, and other intangibles |
|
|
4,651 |
|
Goodwill |
|
|
51,911 |
|
Other noncurrent assets |
|
|
2 |
|
Total assets acquired |
|
|
69,449 |
|
Liabilities assumed: |
|
|
|
|
Accrued expenses |
|
|
117 |
|
Deferred revenue |
|
|
75 |
|
Operating lease liabilities |
|
|
46 |
|
Customer fund obligations |
|
|
12,464 |
|
Total liabilities assumed |
|
|
12,702 |
|
Net assets acquired |
|
$ |
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 below table (in thousands):
Intangible |
|
Fair Value |
|
|
Valuation Methodology |
|
Discount Rate |
|
|
Estimated Useful Life |
Customer relationships |
|
$ |
2,050 |
|
|
Multi-period excess earnings-income approach and replacement cost method-cost approach |
|
13.5% |
|
|
6 years |
Developed technology |
|
|
1,950 |
|
|
Relief from royalty-income approach |
|
13.5% |
|
|
5 years |
Noncompetition agreements |
|
|
564 |
|
|
With-and-without valuation-income approach |
|
15.5% |
|
|
5 years |
Tradename |
|
|
87 |
|
|
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.
20
September 2021 Acquisition of 3CE Technologies, Inc
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 March 31, 2022, is presented below (in thousands):
|
|
Total Consideration (preliminary) |
|
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):
|
|
Fair Value (preliminary) |
|
Assets acquired: |
|
|
|
|
Prepaid and other current assets |
|
$ |
2 |
|
Developed technology, customer relationships, and other intangibles |
|
|
5,850 |
|
Goodwill |
|
|
42,962 |
|
Total assets acquired |
|
|
48,814 |
|
Liabilities assumed: |
|
|
|
|
Current liabilities |
|
|
1 |
|
Deferred revenue |
|
|
9 |
|
Total liabilities assumed |
|
|
10 |
|
Net assets acquired |
|
$ |
48,804 |
|
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.
21
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 |
|
|
100 |
|
|
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 March 31, 2022, is presented below (in thousands):
|
|
Total Consideration (preliminary) |
|
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):
|
|
Fair Value (preliminary) |
|
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 |
|
|
101 |
|
Deferred revenue & contract liabilities |
|
|
676 |
|
Total liabilities assumed |
|
|
777 |
|
Net assets acquired |
|
$ |
36,364 |
|
22
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 |
|
|
450 |
|
|
Multi-period excess earnings-income approach |
|
15.0% |
|
|
1 year |
Noncompetition agreements |
|
|
100 |
|
|
With-and-without valuation-income approach |
|
20.0% |
|
|
5 years |
Tradename |
|
|
150 |
|
|
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.
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 2021 acquisitions as though the companies were combined as of January 1, 2021. There were no acquisitions during the three months ended March 31, 2022. 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 Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Total revenue |
|
$ |
204,530 |
|
|
$ |
163,275 |
|
Pre-tax loss |
|
|
(32,272 |
) |
|
|
(27,806 |
) |
23
5.Revenue
See Note 1 for a description of the Company’s revenue recognition accounting policy.
Disaggregation of Revenue
The following table disaggregates revenue generated within the United States (“U.S.”) from revenue generated from customers outside of the U.S. Revenue for transaction tax compliance in the U.S. is further disaggregated based on the solutions or services purchased by customers. Total revenues consisted of the following (in thousands):
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Revenue (U.S.): |
|
|
|
|
|
|
|
|
Subscription and returns |
|
|
|
|
|
|
|
|
Tax calculations |
|
$ |
100,500 |
|
|
$ |
76,396 |
|
Tax returns and compliance management |
|
|
73,727 |
|
|
|
52,847 |
|
Interest income on funds held for customers |
|
|
208 |
|
|
|
141 |
|
Total subscription and returns |
|
|
174,435 |
|
|
|
129,384 |
|
Professional services |
|
|
16,041 |
|
|
|
13,288 |
|
Total revenue (U.S.) |
|
|
190,476 |
|
|
|
142,672 |
|
Total revenue (non-U.S.) |
|
|
14,054 |
|
|
|
10,929 |
|
Total revenue |
|
$ |
204,530 |
|
|
$ |
153,601 |
|
Disclosures Related to Contracts with Customers
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent a contract exists, as defined by ASC 606, these liabilities are classified as current and non-current deferred revenue. To the extent that a contract does not exist, as defined by ASC 606 (e.g., customer agreements with non-standard termination rights), these liabilities are classified as contract liabilities. Contract liabilities are transferred to deferred revenue at the point in time when the criteria that establish the existence of a contract are met.
Contract Liabilities
A summary of the activity impacting the contract liabilities during the three months ended March 31, 2022 and 2021, is presented below (in thousands):
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Contract liabilities: |
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
6,918 |
|
|
$ |
10,134 |
|
Contract liabilities transferred to deferred revenue |
|
|
(6,622 |
) |
|
|
(3,866 |
) |
Addition to contract liabilities |
|
|
601 |
|
|
|
6,198 |
|
Balance end of period |
|
$ |
897 |
|
|
$ |
12,466 |
|
As of March 31, 2022, 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. As of December 31, 2021 the majority of the contract liability balance related to a single marketplace partner. During the first quarter of 2022, the agreement with this partner was amended such that amounts are no longer presented separately as contract liabilities.
24
Deferred Revenue
A summary of the activity impacting deferred revenue balances during the three months ended March 31, 2022 and 2021, is presented below (in thousands):
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Deferred revenue: |
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
282,955 |
|
|
$ |
209,690 |
|
Revenue recognized |
|
|
(204,530 |
) |
|
|
(153,601 |
) |
Additional amounts deferred |
|
|
225,185 |
|
|
|
169,442 |
|
Balance end of period |
|
$ |
303,610 |
|
|
$ |
225,531 |
|
As of March 31, 2022, $302.5 million of deferred revenue is expected to be recognized within the next 12 months and is included in current liabilities on the consolidated balance sheets. The remaining amount of deferred revenue is included in noncurrent liabilities and is expected to be recognized within the next 18 months.
Assets Recognized from the Costs to Obtain Contracts with Customers
Assets are recognized for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred commissions are amortized over an expected period of benefit of generally six years.
A summary of the activity impacting the deferred commissions during the three months ended March 31, 2022, is presented below (in thousands):
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Deferred commissions: |
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
68,519 |
|
|
$ |
50,870 |
|
Additional commissions deferred |
|
|
6,832 |
|
|
|
5,695 |
|
Amortization of deferred commissions |
|
|
(4,584 |
) |
|
|
(3,335 |
) |
Balance end of period |
|
$ |
70,767 |
|
|
$ |
53,230 |
|
As of March 31, 2022, $17.3 million of deferred commissions are expected to be amortized within the next 12 months and are included in current assets on the consolidated balance sheets. The remaining amount of deferred commissions is included in noncurrent assets. There were no impairments of assets related to deferred commissions during the three months ended March 31, 2022 or 2021. There were no assets recognized related to the costs to fulfill contracts during the three months ended March 31, 2022, or 2021 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 March 31, 2022, the remaining performance obligations to which enforceable rights exist are $392.9 million, of which $377.2 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 March 31, 2022, $89.3 million relates to non-cancellable amounts that have not yet been invoiced, of which $74.7 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.
25
6.Intangible Assets
Intangible assets consisted of the following (in thousands):
|
|
|
|
March 31, 2022 |
|
|
|
Useful Life
(Years) |
|
Gross |
|
|
Accumulated
Amortization |
|
|
Net |
|
Backlog |
|
1 to 7 |
|
$ |
4,500 |
|
|
$ |
(2,249 |
) |
|
$ |
2,251 |
|
Customer relationships |
|
5 to 10 |
|
|
75,162 |
|
|
|
(26,527 |
) |
|
|
48,635 |
|
Developed technology (1) |
|
1 to 6 |
|
|
73,204 |
|
|
|
(40,516 |
) |
|
|
32,688 |
|
Noncompetition agreements |
|
3 to 5 |
|
|
6,445 |
|
|
|
(2,064 |
) |
|
|
4,381 |
|
Tradename and trademarks |
|
1 to 3 |
|
|
7,272 |
|
|
|
(5,452 |
) |
|
|
1,820 |
|
|
|
|
|
$ |
166,583 |
|
|
$ |
(76,808 |
) |
|
$ |
89,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Developed technology intangible assets include IPR&D of $0.4 million as of March 31, 2022, which is not subject to amortization. |
|
|
|
|
|
December 31, 2021 |
|
|
|
Useful Life
(Years) |
|
Gross |
|
|
Accumulated
Amortization |
|
|
Net |
|
Backlog |
|
3 |
|
$ |
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 $0.4 million as of December 31, 2021, which is not subject to amortization. |
|
Finite-lived intangible assets are amortized over their estimated useful life. Finite-lived intangible assets amortization expense was $7.1 million for the three months ended March 31, 2022, and $4.4 million for the three months ended March 31, 2021.
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 will not exceed $30 million, inclusive of an earnout computed on future billings recognized by the Company over six years post acquisition. The earnout is payable in cash or common stock at the end of each six-month measurement period ending on June 30 or December 31 through 2023. Through March 31, 2022, the sellers have earned approximately $2.6 million under the earnout provision since the acquisition date. An earnout liability of $0.3 million was recorded within the current portion of accrued earnout liabilities as of March 31, 2022, for the earnout period ending June 30, 2022, and is expected to be paid in cash to the sellers in the third quarter of 2022.
Goodwill
Changes in the carrying amount of goodwill for the three months ended March 31, 2022, are summarized as follows (in thousands):
Balance—December 31, 2021 |
|
$ |
672,381 |
|
Cumulative translation adjustments |
|
|
(950 |
) |
Balance—March 31, 2022 |
|
$ |
671,431 |
|
Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, the Company will conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to the excess, not to
26
exceed the carrying value. The Company has three reporting units for goodwill impairment testing consisting of its U.S., European, and Brazilian operations. As of March 31, 2022, the Brazilian reporting unit had no associated goodwill.
7.Leases
Total lease cost, net of sublease income, was $3.8 million for the three months ended March 31, 2022, and $3.9 million for the three months ended March 31, 2021. Sublease income was $0.4 million for the three months ended March 31, 2022 and 2021. Leases that commenced in the first three months of 2022 increased operating lease right-of-use assets by $1.4 million.
8.Commitments and Contingencies
Contingencies
Loss contingencies may arise in connection with the ordinary conduct of the Company’s business activities. The Company considers all loss contingencies on a quarterly basis and based on known facts assesses whether potential losses are considered reasonably possible, probable, and estimable. The Company establishes an accrual for loss contingencies when the loss is both probable and reasonably estimable. If the estimated loss is a range of potential outcomes and there is no better estimate within the range, management accrues the amount at the low end of the range. These accruals represent management’s estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. Significant judgment is required to determine both likelihood of there being a probable loss and the estimated amount of a loss. If a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrual, but will evaluate other disclosure requirements and continue to monitor the matter for developments that would make the loss contingency both probable and reasonably estimable. The ultimate outcome of any litigation relating to a loss contingency is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of management resources and other factors.
In its standard subscription agreements, the Company has agreed to indemnification provisions with respect to certain matters. Further, from time to time, the Company has also assumed indemnification obligations through its acquisition activity. These indemnification provisions can create a liability to the Company if its services do not appropriately calculate taxes due to tax jurisdictions, or if the Company is delinquent in the filing of returns on behalf of its customers. Although the Company’s agreements have disclaimers of warranties that limit its liability (beyond the amounts the Company agrees to pay pursuant to its indemnification obligations and guarantees, as applicable), a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold the Company liable for certain errors. Further, in some instances the Company has negotiated agreements with specific customers or assumed agreements in connection with the Company’s acquisitions that do not limit this liability or disclaim these warranties. It is not possible to reasonably estimate the potential loss under these indemnification arrangements.
27
9.Debt
Convertible Senior Notes
In August 2021, the Company completed a private offering of $977.5 million principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on February 1, 2022. The 2026 Notes will mature on August 1, 2026, unless earlier converted, redeemed, or repurchased. The Company incurred $17.6 million of debt issuance costs in connection with the 2026 Notes offering consisting of the initial purchasers’ commissions and legal, accounting, and other direct costs of the offering. The total proceeds from the offering, net of the debt issuance costs, were $959.9 million. The Company used $75.3 million of the net proceeds from the sale of the 2026 Notes to pay the premiums of the capped call options described further below.
As of March 31, 2022, none of the conversion conditions of the 2026 Notes described in the Amended 2021 Annual Report were met.
The net carrying amount of the 2026 Notes was as follows (in thousands):
|
|
March 31, |
|
December 31, |
|
|
|
2022 |
|
2021 |
|
Principal |
|
$ |
977,500 |
|
$ |
977,500 |
|
Unamortized debt issuance costs |
|
|
(15,356 |
) |
|
(16,241 |
) |
Net carrying amount |
|
$ |
962,144 |
|
$ |
961,259 |
|
The following table sets forth the interest expense recognized related to the 2026 Notes (in thousands):
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
Contractual interest expense |
|
$ |
611 |
|
Amortization of debt issuance costs |
|
|
885 |
|
Total interest expense related to 2026 Notes |
|
$ |
1,496 |
|
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.
10.Shareholders’ Equity
Authorized Capital—Common Stock and Preferred Stock
Under the Amended and Restated Articles of Incorporation, which became effective in June 2018, the Company is authorized to issue 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.
28
The changes to the Company’s shareholders’ equity during the three months ended March 31, 2022, is as follows (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Shareholders’ |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Deficit |
|
|
Equity |
|
Balance at January 1, 2022 |
|
87,086,665 |
|
|
$ |
9 |
|
|
$ |
1,732,742 |
|
|
$ |
(3,428 |
) |
|
$ |
(702,869 |
) |
|
$ |
1,026,454 |
|
Exercise of stock options |
|
107,623 |
|
|
|
|
|
|
|
2,281 |
|
|
|
|
|
|
|
|
|
|
|
2,281 |
|
Vesting of restricted stock units |
|
466,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of performance share units |
|
38,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost |
|
|
|
|
|
|
|
|
|
33,371 |
|
|
|
|
|
|
|
|
|
|
|
33,371 |
|
Shares issued under employee stock
purchase plan |
|
85,926 |
|
|
|
|
|
|
|
8,006 |
|
|
|
|
|
|
|
|
|
|
|
8,006 |
|
Loss on translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,347 |
) |
|
|
|
|
|
|
(1,347 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,557 |
) |
|
|
(32,557 |
) |
Balance at March 31, 2022 |
|
87,785,002 |
|
|
$ |
9 |
|
|
$ |
1,776,400 |
|
|
$ |
(4,775 |
) |
|
$ |
(735,426 |
) |
|
$ |
1,036,208 |
|
The changes to the Company’s shareholders’ equity for the three months ended March 31, 2021, is as follows (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Shareholders’ |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Deficit |
|
|
Equity |
|
Balance at January 1, 2021 |
|
85,057,727 |
|
|
$ |
9 |
|
|
$ |
1,648,741 |
|
|
$ |
(1,339 |
) |
|
$ |
(567,251 |
) |
|
$ |
1,080,160 |
|
Exercise of stock options |
|
296,226 |
|
|
|
|
|
|
|
5,529 |
|
|
|
|
|
|
|
|
|
|
|
5,529 |
|
Vesting of restricted stock units |
|
346,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost |
|
|
|
|
|
|
|
|
|
19,127 |
|
|
|
|
|
|
|
|
|
|
|
19,127 |
|
Shares issued under employee stock
purchase plan |
|
60,064 |
|
|
|
|
|
|
|
7,088 |
|
|
|
|
|
|
|
|
|
|
|
7,088 |
|
Loss on translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
(390 |
) |
|
|
|
|
|
|
(390 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,068 |
) |
|
|
(30,068 |
) |
Balance at March 31, 2021 |
|
85,760,025 |
|
|
$ |
9 |
|
|
$ |
1,680,485 |
|
|
$ |
(1,729 |
) |
|
$ |
(597,319 |
) |
|
$ |
1,081,446 |
|
11.Equity Incentive Plans
The Company has stock-based compensation plans that provide for the award of equity incentives, including stock options, stock awards, RSUs, PSUs, and purchase rights. As of March 31, 2022, the Company had stock options outstanding under the 2018 Plan and the 2006 Equity Incentive Plan (the “2006 Plan”), RSUs and PSUs outstanding under the 2018 Plan, and purchase rights issued under the ESPP. The 2018 Plan became effective in connection with the Company’s initial public offering at which time the 2006 Plan was terminated. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan.
As of March 31, 2022, 4,500,890 shares were subject to outstanding awards under the 2018 plan and 14,372,738 shares were available for issuance under the 2018 Plan. As of March 31, 2022, 1,093,901 shares were subject to outstanding stock options under the 2006 Plan.
29
Stock-Based Compensation
The Company recognized total stock-based compensation cost related to equity incentive awards as follows (in thousands):
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Stock-based compensation cost: |
|
|
|
|
|
|
|
|
Stock options |
|
$ |
2,161 |
|
|
$ |
3,223 |
|
Restricted stock units |
|
|
22,128 |
|
|
|
11,769 |
|
Performance share units |
|
|
7,813 |
|
|
|
2,832 |
|
Employee stock purchase plan |
|
|
1,269 |
|
|
|
1,303 |
|
Total stock-based compensation cost |
|
$ |
33,371 |
|
|
$ |
19,127 |
|
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 $0.6 million and $0.2 million for the three months ended March 31, 2022 and 2021, 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 the three months ended March 31, 2022:
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
|
|
Shares |
|
|
Price |
|
|
Life (in Years) |
|
|
(in thousands) |
|
Options outstanding as of January 1, 2022 |
|
|
2,278,789 |
|
|
$ |
33.52 |
|
|
|
6.30 |
|
|
$ |
217,824 |
|
Options granted |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(107,623 |
) |
|
$ |
21.20 |
|
|
|
|
|
|
|
|
|
Options cancelled or expired |
|
|
(4,291 |
) |
|
$ |
111.83 |
|
|
|
|
|
|
|
|
|
Options outstanding as of March 31, 2022 |
|
|
2,166,875 |
|
|
$ |
33.98 |
|
|
|
6.08 |
|
|
$ |
141,996 |
|
Options exercisable as of March 31, 2022 |
|
|
1,778,867 |
|
|
$ |
28.90 |
|
|
|
5.81 |
|
|
$ |
125,598 |
|
The total intrinsic value of options exercised during the three months ended March 31, 2022 and 2021 was $7.7 million and $41.9 million, respectively. As of March 31, 2022, $8.9 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 1.5 years.
Restricted Stock Units
The following table summarizes RSU activity for the Company’s stock-based compensation plans for the three months ended March 31, 2022:
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Restricted Stock Units |
|
|
Value Per Share |
|
RSUs outstanding as of January 1, 2022 |
|
|
2,861,963 |
|
|
$ |
99.41 |
|
RSUs granted |
|
|
1,903,805 |
|
|
|
97.15 |
|
RSUs vested |
|
|
(466,497 |
) |
|
|
80.86 |
|
RSUs cancelled |
|
|
(98,343 |
) |
|
|
94.81 |
|
RSUs outstanding as of March 31, 2022 |
|
|
4,200,928 |
|
|
$ |
100.56 |
|
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 three or four years for employees and one year for non-employee directors.
30
As of March 31, 2022, $374.0 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 the three months ended March 31, 2022:
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Performance Share Units |
|
|
Value Per Share |
|
PSUs outstanding as of January 1, 2022 |
|
|
114,890 |
|
|
$ |
147.26 |
|
PSUs granted |
|
|
223,363 |
|
|
|
98.90 |
|
PSUs vested |
|
|
(38,291 |
) |
|
|
147.26 |
|
PSUs cancelled |
|
|
— |
|
|
|
— |
|
PSUs outstanding as of March 31, 2022 |
|
|
299,962 |
|
|
$ |
111.25 |
|
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 PSUs earned for grants made in 2022 and 2021 may vary between 0% and 250% of the PSUs 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 March 31, 2022, $53.3 million of total unrecognized compensation cost related to PSUs was expected to be recognized over a weighted average period of approximately 2.0 years.
Employee Stock Purchase Plan
During the three months ended March 31, 2022, 85,926 shares of common stock were purchased under the ESPP.
As of March 31, 2022, there was approximately $1.7 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 February 1, 2022 and will end on July 31, 2022.
For the periods presented, the fair value of ESPP purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Fair market value of common stock |
|
$ |
111.00 |
|
|
$ |
152.35 |
|
Volatility |
|
33% |
|
|
34% |
|
Expected term |
|
0.5 years |
|
|
0.5 years |
|
Expected dividend yield |
|
n/a |
|
|
n/a |
|
Risk-free interest rate |
|
0.48% |
|
|
0.08% |
|
12.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
31
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 Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders |
|
$ |
(32,557 |
) |
|
$ |
(30,068 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding-basic |
|
|
87,463 |
|
|
|
85,436 |
|
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 |
|
|
87,463 |
|
|
|
85,436 |
|
Net loss per common share, basic and diluted |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common shareholders for the periods presented because the impact of including them would have been antidilutive (in thousands):
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Options to purchase common shares |
|
|
2,236 |
|
|
|
3,396 |
|
Unvested RSUs |
|
|
2,853 |
|
|
|
2,258 |
|
Unvested PSUs |
|
|
243 |
|
|
|
75 |
|
ESPP shares |
|
|
9 |
|
|
|
7 |
|
Convertible senior notes (if converted) |
|
|
4,100 |
|
|
|
— |
|
Total |
|
|
9,441 |
|
|
|
5,736 |
|
13.Subsequent Events
On April 8, 2022, the Company released a $37.7 million general indemnification holdback to the sellers of TTR in connection with the October 2020 acquisition of TTR. The funds for payment of the TTR holdback were recorded as restricted cash – current and the liability was included in accrued purchase price related to acquisitions – current on the consolidated balance sheet as of March 31, 2022.
On May 5, 2022, the Company released an $11.1 million general indemnification holdback to the sellers of Business Licenses in connection with the November 2020 acquisition of Business Licenses. The liability was included in accrued purchase price related to acquisitions – current on the consolidated balance sheet as of March 31, 2022.
After March 31, 2022, but before the filing of this Form 10-Q, the Company acquired two businesses with closing cash payments that totaled $12.1 million.
32