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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 ~~March 31~~June 30, 2022

☐	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 ~~April~~August 283, 2022, the registrant had 8788,~~859~~265,~~718~~657 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets (unaudited)	3
	Consolidated Statements of Operations (unaudited)	4
	Consolidated Statements of Comprehensive Loss (unaudited)	56
	Consolidated Statements of Cash Flows (unaudited)	67
	Notes to Consolidated Financial Statements (unaudited)	89
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3336
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4655
Item 4.	Controls and Procedures	4756
PART II	OTHER INFORMATION	4958
Item 1.	Legal Proceedings	4958
Item 1A.	Risk Factors	4958
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4958
Item 6.	Exhibits	5059
Signatures		5160

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

• our ability to expand our international reach; ~~and~~

•

the risk that the proposed transaction with Vista Equity Partners will not be consummated or will not be consummated in a timely manner;

•

the effect of the announcement of the proposed transaction on our ability to retain and hire key personnel and maintain relationships with our key business partners and customers, and others with whom we do business, or on our operating results and businesses generally;

•

risks associated with the disruption of management’s attention from ongoing business operations due to the proposed transaction;

•

significant costs associated with the proposed transaction;

•

potential litigation relating to the proposed transaction;

•

restrictions during the pendency of the proposed transaction that may impact our ability to pursue certain business opportunities; 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, 2021, as amended by the Form 10-K/A for the year ended December 31, 2021 filed on May 5, 2022 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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AVALARA, INC.

Consolidated Balance Sheets

(In thousands, except for per share data)

	March 31,			December 31,
	June 30,			December 31,
	2022			2021
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,~~481~~460,~~853~~594		$	1,514,064
Restricted cash		~~37,700~~—			37,700
Trade accounts receivable—net of allowance for doubtful accounts of $5,772 and $5,803, respectively		113,469			114,248
Trade accounts receivable—net of allowance for doubtful accounts of $5,560 and $5,803, respectively		115,523			114,248
Deferred commissions		1718,~~296~~629			16,364
Prepaid expenses and other current assets		3943,~~314~~244			29,267
Total current assets before customer fund assets		1,~~689~~637,~~632~~990			1,711,643
Funds held from customers		6472,~~359~~957			62,509
Receivable from customers—net of allowance of $507 and $439, respectively		1,579			1,472
Receivable from customers—net of allowance of $533 and $439, respectively		1,889			1,472
Total current assets		1,~~755~~712,~~570~~836			1,775,624
Noncurrent assets:
Deferred commissions		5356,~~471~~946			52,155
Operating lease right-of-use assets—net		4344,~~225~~874			44,385
Property and equipment—net		4952,~~368~~765			46,464
Intangible assets—net		8986,~~775~~986			96,818
Goodwill		~~671~~677,~~431~~496			672,381
Other noncurrent assets		1012,~~827~~565			10,704
Total assets	$	2,~~673~~644,~~667~~468		$	2,698,531
Liabilities and shareholders' equity
Current liabilities:
Trade payables	$	1819,~~211~~188		$	16,683
Accrued expenses		6980,~~102~~897			109,792
Deferred revenue		~~302~~306,~~496~~834			280,816
Accrued purchase price related to acquisitions		525,~~683~~597			51,476
Accrued earnout liabilities		3738,~~390~~135			33,151
Operating lease liabilities		1112,~~847~~076			11,453
Total current liabilities before customer fund obligations		~~491~~462,~~729~~727			503,371
Customer fund obligations		6675,~~368~~399			64,302
Total current liabilities		~~558~~538,~~097~~126			567,673
Noncurrent liabilities:
Convertible senior notes—net		~~962~~963,~~144~~029			961,259
Deferred revenue		~~1,114~~859			2,139
Accrued purchase price related to acquisitions		6,~~715~~720			7,988
Accrued earnout liabilities		59,~~706~~424			81,485
Operating lease liabilities		43,~~549~~620			45,614
Deferred tax liability		5,~~383~~863			5,158
Other noncurrent liabilities		~~751~~487			761
Total liabilities	$	1,~~637~~618,~~459~~128			1,672,077
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.0001 par value – no shares issued and outstanding at March 31, 2022, and December 31, 2021, and 20,000 shares authorized as of March 31, 2022, and December 31, 2021		—			—
Preferred stock, $0.0001 par value – no shares issued and outstanding at June 30, 2022, and December 31, 2021, and 20,000 shares authorized as of June 30, 2022, and December 31, 2021		—			—
Common stock, $0.0001 par value – 87,785 and 87,087 shares issued and outstanding at March 31, 2022, and December 31, 2021, respectively, and 600,000 shares authorized as of March 31, 2022, and December 31, 2021		9			9
Common stock, $0.0001 par value – 88,123 and 87,087 shares issued and outstanding at June 30, 2022, and December 31, 2021, respectively, and 600,000 shares authorized as of June 30, 2022, and December 31, 2021		9			9
Additional paid-in capital		1,~~776~~825,~~400~~991			1,732,742
Accumulated other comprehensive loss		(48,~~775~~386	)		(3,428	)
Accumulated deficit		(~~735~~791,~~426~~274	)		(702,869	)
Total shareholders’ equity		1,~~036~~026,~~208~~340			1,026,454
Total liabilities and shareholders' equity	$	2,~~673~~644,~~667~~468		$	2,698,531

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

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,
	2022			2021
Revenue:
Subscription and returns	$	~~186~~189,~~866~~764		$	~~139~~152,~~318~~442
Professional services		1718,~~664~~829			1416,~~283~~625
Total revenue		~~204~~208,~~530~~593			~~153~~169,~~601~~067
Cost of revenue:
Subscription and returns		5051,~~077~~036			3841,~~033~~477
Professional services		1011,~~049~~036			67,~~463~~836
Total cost of revenue		6062,~~126~~072			4449,~~496~~313
Gross profit		~~144~~146,~~404~~521			~~109~~119,~~105~~754
Operating expenses:
Research and development		5056,~~852~~647			3941,~~274~~234
Sales and marketing		86101,~~447~~242			6472,~~093~~651
General and administrative		4244,~~194~~592			3136,~~199~~113
Total operating expenses		~~179~~202,~~493~~481			~~134~~149,~~566~~998
Operating loss		(3555,~~089~~960	)		(2530,~~461~~244	)
Other income (expense):
Fair value changes in earnout liabilities		~~4,001~~117			(1,~~350~~181	)
Interest income		~~186~~1,859			2423
Interest expense		(1,~~496~~497	)		—
Other income (expense), net		~~126~~528			~~(924~~220	)
Total other income (expense), net		21,~~817~~007			(~~2,250~~938	)
Loss before income taxes		(3254,~~272~~953	)		(2731,~~711~~182	)
Provision for income taxes		(285	)		(2,357	)
(Provision for) benefit from income taxes		(895	)		148
Net loss	$	(3255,~~557~~848	)	$	(3031,~~068~~034	)
Net loss per share attributable to common shareholders, basic and diluted	$	(0.3763	)	$	(0.3536	)
Weighted average shares of common stock outstanding, basic and diluted		87,~~463~~989			8586,~~436~~090

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

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

	For the Six Months Ended June 30,
	2022			2021
Revenue:
Subscription and returns	$	376,630		$	291,760
Professional services		36,493			30,908
Total revenue		413,123			322,668
Cost of revenue:
Subscription and returns		101,113			79,510
Professional services		21,085			14,299
Total cost of revenue		122,198			93,809
Gross profit		290,925			228,859
Operating expenses:
Research and development		107,499			80,508
Sales and marketing		187,689			136,744
General and administrative		86,786			67,312
Total operating expenses		381,974			284,564
Operating loss		(91,049	)		(55,705	)
Other income (expense):
Fair value changes in earnout liabilities		4,118			(2,531	)
Interest income		2,045			47
Interest expense		(2,993	)		—
Other income (expense), net		654			(704	)
Total other income (expense), net		3,824			(3,188	)
Loss before income taxes		(87,225	)		(58,893	)
Provision for income taxes		(1,180	)		(2,209	)
Net loss	$	(88,405	)	$	(61,102	)

Net loss per share attributable to common shareholders, basic and diluted	$	(1.01	)	$	(0.71	)
Weighted average shares of common stock outstanding, basic and diluted		87,728			85,765

AVALARA, INC.

Consolidated Statements of Comprehensive Loss (unaudited)

(In thousands)

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,
	2022			2021
Net loss	$	(3255,~~557~~848	)	$	(3031,~~068~~034	)
Other comprehensive loss — Foreign currency translation		(1,347	)		(390	)
Other comprehensive (loss) income — Foreign currency translation		(3,611	)		322
Total comprehensive loss	$	(3359,~~904~~459	)	$	(30,~~458~~712	)

	For the Six Months Ended June 30,
	2022			2021
Net loss	$	(88,405	)	$	(61,102	)
Other comprehensive loss — Foreign currency translation		(4,958	)		(68	)
Total comprehensive loss	$	(93,363	)	$	(61,170	)

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

AVALARA, INC.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

	For the Three Months Ended March 31,
	For the Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net loss	$	(3288,~~557~~405	)	$	(3061,~~068~~102	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		3279,~~650~~350			1845,~~857~~476
Depreciation and amortization		1122,~~132~~726			716,~~071~~101
Amortization of debt issuance costs		~~885~~1,771			—
Impairment of capitalized cloud computing costs		—136			345
Deferred income tax expense		~~225~~660			2,~~028~~279
Non-cash operating lease costs		25,~~523~~141			24,~~175~~708
Fair value changes in earnout liabilities		(4,~~001~~118	)		12,~~350~~531
Non-cash bad debt expense		521			582
Bad debt expense		1,309			976
Other		~~(16~~388	)		(~~389~~122	)
Changes in operating assets and liabilities:
Trade accounts receivable		~~326~~(2,357	)		(148,~~695~~412	)
Prepaid expenses and other current assets		(914,~~946~~096	)		(910,~~186~~563	)
Deferred commissions		(27,~~248~~056	)		(29,~~360~~773	)
Other noncurrent assets		(~~123~~1,996	)		~~541~~(1,597	)
Trade payables		2,~~338~~801			(12,~~895~~890	)
Accrued expenses		(4231,~~371~~447	)		(153,~~634~~532	)
Deferred revenue		2024,~~655~~610			1528,~~841~~819
Operating lease liabilities		(36,~~059~~279	)		(25,~~810~~941	)
Net cash used in operating activities		(2316,~~066~~862	)		(282,~~247~~697	)
Cash flows from investing activities:
Purchase of property and equipment		(23,~~148~~110	)		(13,~~366~~070	)
Capitalized software development costs		(511,~~905~~179	)		(25,~~311~~953	)
Cash paid for acquisitions of businesses, net of cash and restricted cash equivalents acquired		—(11,713	)		(224,~~167~~009	)
Net cash used in investing activities		(8,053	)		(5,844	)
Cash paid for acquired intangible assets		—			(1,500	)
Proceeds from maturity of customer fund available-for-sale securities		73			—
Net cash used in investing activities		(25,929	)		(34,532	)
Cash flows from financing activities:
Proceeds from exercise of stock options		24,~~281~~097			510,~~529~~197
Proceeds from purchases of stock under employee stock purchase plan		8,006			7,088
Acquisition-related post-closing payments		—(48,736	)		(120,~~971~~821	)
Payments related to business combination earnouts		(10,770	)		—
Payments related to asset acquisition earnouts		(~~593~~636	)		(690	)
Payments on financed asset purchases		(61125	)		—
Net increase in customer fund obligations		211,~~066~~097			32,~~598~~895
Net cash provided by financing activities		929			13,554
Net cash used in financing activities		(37,067	)		(1,331	)
Foreign currency effect		(~~160~~777	)		6(422	)
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents		(3080,~~350~~635	)		(2038,~~531~~982	)
Cash, cash equivalents, restricted cash, and restricted cash equivalents—Beginning of period		1,613,903			761,844
Cash, cash equivalents, restricted cash, and restricted cash equivalents—End of period	$	1,~~583~~533,~~553~~268		$	~~741~~722,~~313~~862
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets, end of period:
Cash and cash equivalents	$	1,~~481~~460,~~853~~594		$	~~638~~639,~~794~~479
Restricted cash		~~37,700~~—			6837,~~886~~803
Restricted cash equivalents—funds held from customers		6472,~~000~~674			3345,~~633~~580
Total cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period	$	1,~~583~~533,~~553~~268		$	~~741~~722,~~313~~862

	For the Three Months Ended March 31,
	2022		2021
Supplemental cash flow disclosures:
Cash paid for interest expense	$	1,140	$	—
Cash paid for operating lease liabilities		4,088		3,493
Cash paid for income taxes		506		153
Non-cash investing and financing activities:
Accrued value of earnout related to acquisitions of businesses		—		(1,802	)
Accrued purchase of intangible assets		304		178
Property and equipment additions in accounts payable and accrued expenses		491		1,263
Capitalized internally developed software costs included in accounts payable and accrued expenses		482		—
Stock-based compensation costs capitalized to internally developed software		481		225
Operating lease right-of-use assets in exchange for lease obligations		1,362		43

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

	For the Six Months Ended June 30,
	2022		2021
Supplemental cash flow disclosures:
Cash paid for interest expense	$	1,140	$	—
Cash paid for operating lease liabilities		8,181		7,226
Cash paid for income taxes		1,023		437

Non-cash investing and financing activities:
Stock issued related to business combinations	$	—	$	22,971
Accrued purchase price related to acquisitions		1,728		2,600
Accrued value of earnout related to acquisitions of businesses		—		26,818
Accrued purchase of intangible assets		895		475
Customer fund obligations assumed in business combinations		—		12,464
Property and equipment additions in accounts payable and accrued expenses		643		682
Capitalized internally developed software costs included in accounts payable and accrued expenses		965		—
Stock-based compensation costs capitalized to internally developed software		1,481		549
Operating lease right-of-use assets in exchange for lease obligations		5,629		1,549

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~~June 30, 2022, the consolidated interim statements of operations, consolidated statements of comprehensive loss, and the consolidated statements of cash flows for the three and six months ended ~~March 31~~June 30, 2022 and 2021, 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 and six months ended ~~March 31~~June 30, 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 $018.13 million to additional paid-in capital and accumulated deficit on the consolidated balance sheet as of December 31, 2021, an increase of $3.4 million to stock-based compensation and net loss on the consolidated statement of operations for the three months ended June 30, 2021, and an increase of $03.1 5 million to stock-based compensation and net loss on the consolidated statement of operations and the consolidated statement of cash flows for the ~~three~~six months ended ~~March~~June 3130, 2021. The correction increased net loss and total comprehensive loss by $03.14 million and $3.5 million on the consolidated statement of comprehensive loss for the three and six months ended ~~March~~June 3130, 2021, respectively. The correction did not change total net cash used in operating activities on the consolidated statement of ~~cashflows~~cash flows for the ~~three~~six months ended ~~March~~June 3130, 2021. The correction increased additional paid-in capital and accumulated deficit by $07.19 million, ~~with~~and no$11.4 ~~change~~million ~~to total shareholders’ equity,~~ on the consolidated statement of shareholders’ equity as of ~~March~~January 311, 2021 and June 30, 2021, respectively, with no change to total shareholders’ equity. 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.

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; the estimated business performance metrics as of the interim period for the annual bonus accrual; 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~~convertible ~~Senior~~senior ~~Notes~~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.

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.

9The following table details funds held from customers and customer fund obligations held by the Company and by the Customer Trust as of June 30, 2022 and December 31, 2021:

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:

	June 30,		December 31,
	2022		2021
Funds held from customers (current assets):
Restricted cash equivalents – Company	$	151	$	13
Restricted cash equivalents – Customer Trust		72,523		62,126
Available-for-sale securities – Customer Trust		283		370
Funds held from customers	$	72,957	$	62,509
Customer fund obligations (current liabilities):
Customer fund obligations – Company	$	75,399	$	64,302
Customer fund obligations	$	75,399	$	64,302

	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 $1.9 million and $1.5 million as of June 30, 2022, and December 31, 2021, respectively.

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 and six months ended ~~March 31~~June 30, 2022, respectively or the year ended December 31, 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.

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 and six months ended ~~March 31~~June 30, 2022, $6.9 million and $12.3 million of software development costs were capitalized, respectively. For the three and six months ended June 30, 2021, $5.4.0 million and $26.5 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 and six months ended ~~March 31~~June 30, 2022, respectively or for the year ended December 31, 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~~June 3130, 2022, and December 31, 2021.

Income Taxes

The Company’s deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and income tax basis of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company assesses its income tax positions and records 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.

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.

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.

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

March 31, 2022

Value

(Level 1)

(Level 2)

(Level 3)

June 30, 2022

Value

(Level 1)

(Level 2)

(Level 3)

Money market funds

1,~~405~~393,~~965~~015

—

Available-for-sale securities:

U.S. treasury securities

~~359~~283

—

Earnouts related to business combinations

96,~~757~~640

—

96,~~757~~640

			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.

1516

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

Year of

Discount Rate as of

Balance as of

Acquisition

~~Year of~~ Acquisition

~~Earnout Target~~

Earnout Target

~~Method~~

Method

~~Earnout Period~~

~~March~~Earnout ~~31, 2022~~Period

June 30, 2022

~~March 31, 2022~~

June 30, 2022

~~December 31, 2021~~

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.~~

Specific revenue growth thresholds through October 2024, with a cap of $30.0 million; to be settled in cash.

~~Probability-weighted discounted cash flows and Monte Carlo simulation~~

Probability-weighted discounted cash flows and Monte Carlo simulation

~~October 2024~~

October 2024

~~5.0~~

~~(a)~~6.0

$(a)

~~24,368~~

$23,261

~~26,320~~

26,320

Track1099

2021

~~Specific revenue growth thresholds through April 2023, with a cap of $12.5 million; to be settled in cash.~~

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~~

Probability-weighted discounted cash flows and Monte Carlo simulation

~~April 2023~~

April 2023

~~10.0~~

~~(a)~~14.0

(a)

~~6,570~~

6,639

~~7,880~~

7,880

Davo

2021

~~Specific revenue growth thresholds through March 2023, with no cap; to be settled in cash.~~

Specific revenue growth thresholds through March 2023, with no cap; to be settled in cash.

~~Probability-weighted discounted cash flows and Monte Carlo simulation~~

Probability-weighted discounted cash flows and Monte Carlo simulation

~~March 2023~~

March 2023

~~8.0~~

~~(a)~~9.5

(a)

~~34,940~~

36,140

~~35,885~~

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.~~

Specific revenue growth thresholds through December 2022, with cap of $26.4 million; to be settled in cash. (c)

~~Probability-weighted discounted cash flows and Monte Carlo simulation~~

Probability-weighted discounted cash flows and Monte Carlo simulation

~~December 2022~~

December 2022

~~15.0~~

~~(c)~~16.0

(c)

~~11,910~~

12,200

~~24,830~~

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.~~

Achievement of certain performance metrics through November 2024, with cap of $20.7 million; to be settled in common stock.

~~Scenario-based approach~~

Scenario-based approach

~~November 2024~~

November 2024

~~6.2~~

~~(b)~~9.5

(b)

~~18,969~~

18,400

~~19,063~~

19,063

Balance end of period

~~96,757~~

$96,640

~~113,978~~

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.

(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 16% was only used for revenue that was non-contracted as of June 30, 2022. The discount rate of 16% 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,
	Three Months Ended June 30,
	2022			2021
Earnout liabilities related to business combinations:
Balance beginning of period	$	~~113~~96,~~978~~757		$	3437,~~501~~653
Measurement period adjustments		—			1,802
Fair value recorded at acquisition		—			28,620
Payments of earnout liabilities		(13,220	)		—
Fair value changes included in other (income) expense, net		(117	)		1,181
Fair value changes included in total other expense (income), net		(4,001	)		1,350
Balance end of period	$	96,640		$	67,454
Balance end of period	$	96,757		$	37,653

1617

	For the Six Months Ended June 30,
	2022			2021
Earnout liabilities related to business combinations:
Balance beginning of period	$	113,978		$	34,501
Fair value recorded at acquisition		—			28,620
Measurement period adjustments		—			1,802
Payments of earnout liabilities		(13,220	)		—
Fair value changes included in total other (income) expense, net		(4,118	)		2,531
Balance end of period	$	96,640		$	67,454

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~~sheets as of ~~March~~June 3130, 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~~June 3130, 2022, was approximately $~~837~~767.14 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~~June 3130,			December 31,
	Life (Years)	2022			2021
Computer equipment and software	3 to 5	$	21,~~240~~894		$	19,923
Internally developed software	3 to 6		3238,~~244~~562			27,099
Furniture and fixtures	5		6,~~428~~623			6,425
Office equipment	2 to 5		1,~~343~~358			1,275
Leasehold improvements	1 to 10		3029,~~102~~893			30,046
			91,357			84,768
			98,330			84,768
Accumulated depreciation			(4145,~~989~~565	)		(38,304	)
Property and equipment—net		$	4952,~~368~~765		$	46,464

Depreciation expense was $4.03 million and $8.3 million for the three and six months ended ~~March 31~~June 30, 2022, respectively, and $2.68 million and $5.4 million for the three and six months ended ~~March 31~~June 30, 2021, respectively.

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

	March 31,		December 31,
	June 30,		December 31,
	2022		2021
Licenses and subscriptions	$	1823,~~670~~591	$	14,511
Prepaid and other current taxes		2,~~444~~470		3,132
Deposits		43,~~903~~199		3,746
Prepaid employee related expenses		23,~~755~~204		2,780
Prepaid cloud computing implementation costs		2,262		1,708
Capitalized cloud computing implementation costs		2,980		1,708
Prepaid insurance		32,~~960~~640		—
Other		45,~~320~~160		3,390
Total	$	3943,~~314~~244	$	29,267

1718

Accrued expenses consisted of the following (in thousands):

	March 31,		December 31,
	June 30,		December 31,
	2022		2021
Accrued bonus	$	1120,~~476~~434	$	40,853
Accrued partner commissions		1412,~~133~~624		13,088
Accrued payroll and related taxes		1514,~~127~~523		10,208
Employee stock purchase plan contributions		36,~~463~~231		7,113
Accrued sales commissions		56,~~422~~649		7,007
Contract liabilities		~~897~~643		6,918
Accrued federal, state, local, and foreign taxes		34,~~574~~281		3,926
Self-insurance reserves		2,~~471~~642		2,401
Accrued interest payable on Convertible Senior Notes		414		944
Accrued interest payable on convertible senior notes		1,025		944
Other		1211,~~125~~845		17,334
Total	$	6980,~~102~~897	$	109,792

4. Acquisitions of Businesses

2022 Acquisitions

On May 3, 2022, the Company acquired substantially all the assets of Paper Crane, Inc (“Paper Crane”) under an Asset Purchase Agreement (the “Paper Crane Purchase”). Paper Crane is a US-based company that provides geospatial software, services, content and automated analysis. The acquisition will help expand and improve Avalara’s property tax offerings. The Company accounted for the Paper Crane Purchase as a business combination. The total preliminary consideration related to this transaction is $10.5 million, consisting of $9.2 million cash paid at close and an acquisition holdback with a fair value upon acquisition of $1.3 million. The preliminary fair values of the assets acquired and the liabilities assumed in the Paper Crane Purchase as of the acquisition date include intangible assets of $3.2 million, primarily attributable to developed technology and goodwill of $7.3 million.

For the six months ended June 30, 2022, the Company completed one additional acquisition for consideration of $3.3 million. This entity has been included in our consolidated results of operations since its acquisition date.

April 2021 Acquisition of Inposia

On April 1, 2021, the Company acquired the outstanding equity of INPOSIA Solutions, GmbH (“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~~June 3130, 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~~June 3130, 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

1819

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 Technologies LLC, a Delaware limited liability company (“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.~~

1920

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.

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.

2021

September 2021 Acquisition of 3CE ~~Technologies, Inc~~

On September 7, 2021, the Company acquired substantially all the assets of 3CE Technologies, Inc (“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 LLC, a Delaware limited liability company (“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~~June 3130, 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)
	As of June 30, 2022
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.

2122

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, a Texas limited liability company (“CrowdReason”) and CorrelationAdvisors, LLC, a Texas limited liability company (“CorrelationAdvisors”) 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~~June 3130, 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)
	As of June 30, 2022
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

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.

Activity Related to Prior Acquisitions

See Note 2 for activity related to accrued earnout liabilities. In addition, during the second quarter of 2022, the Company paid $48.8 million in post-closing payments for the settlement of accrued purchase price related to acquisitions of TTR and Business Licenses. The funds for payment of the $37.7 million 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 December 31, 2021.

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~~2022 acquisitions as though the companies were combined as of January 1, 2021., ~~There~~and ~~were~~all no2021 acquisitions ~~during~~as though the ~~three~~companies ~~months~~were ~~ended~~combined ~~March~~as 31of January 1, ~~2022~~2020. 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,
	For the Three Months Ended June 30,
	2022			2021
Total revenue	$	~~204~~208,~~530~~637		$	~~163~~171,~~275~~198
Pre-tax loss		(3254,~~272~~941	)		(2733,~~806~~107	)
	For the Six Months Ended June 30,
	2022			2021
Total revenue	$	413,326		$	334,591
Pre-tax loss		(87,490	)		(59,551	)

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,
	For the Three Months Ended June 30,
	2022		2021
Revenue (U.S.):
Subscription and returns
Tax calculations	$	~~100~~106,~~500~~453	$	7683,~~396~~366
Tax returns and compliance management		7371,~~727~~701		5256,~~847~~752
Interest income on funds held for customers		~~208~~305		~~141~~202
Total subscription and returns		~~174~~178,~~435~~459		~~129~~140,~~384~~320
Professional services		16,~~041~~981		1314,~~288~~571
Total revenue (U.S.)		~~190~~195,~~476~~440		~~142~~154,~~672~~891
Total revenue (non-U.S.)		1413,~~054~~153		1014,~~929~~176
Total revenue	$	~~204~~208,~~530~~593	$	~~153~~169,~~601~~067

	For the Six Months Ended June 30,
	2022		2021
Revenue (U.S.):
Subscription and returns
Tax calculations	$	206,954	$	159,763
Tax returns and compliance management		145,428		109,599
Interest income on funds held from customers		512		342
Total subscription and returns		352,894		269,704
Professional services		33,022		27,859
Total revenue (U.S.)		385,916		297,563
Total revenue (non-U.S.)		27,207		25,105
Total revenue	$	413,123	$	322,668

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 and six months ended ~~March 31~~June 30, 2022 and 2021 and 2021, is presented below (in thousands):

	For the Three Months Ended March 31,
	Three Months Ended June 30,
	2022			2021
Contract liabilities:
Balance beginning of period	$	897		$	12,466
Contract liabilities transferred to deferred revenue		(528	)		(5,265	)
Addition to contract liabilities		274			4,205
Balance end of period	$	643		$	11,406
	For the Six Months Ended June 30,
	2022			2021
Contract liabilities:
Balance beginning of period	$	6,918		$	10,134
Contract liabilities transferred to deferred revenue		(6,~~622~~992	)		(39,~~866~~131	)
Addition to contract liabilities		~~601~~717			610,~~198~~403
Balance end of period	$	~~897~~643		$	1211,~~466~~406

As of ~~March 31~~June 30, 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.

2426

Deferred Revenue

A summary of the activity impacting deferred revenue balances during the three and six months ended ~~March 31~~June 30, 2022 and 2021, is presented below (in thousands):

	For the Three Months Ended March 31,
	Three Months Ended June 30,
	2022			2021
Deferred revenue:
Balance beginning of period	$	303,610		$	225,531
Revenue recognized		(208,593	)		(169,067	)
Additional amounts deferred		212,676			182,931
Balance end of period	$	307,693		$	239,395
	For the Six Months Ended June 30,
	2022			2021
Deferred revenue:
Balance beginning of period	$	282,955		$	209,690
Revenue recognized		(~~204~~413,~~530~~123	)		(~~153~~322,~~601~~668	)
Additional amounts deferred		~~225~~437,~~185~~861			~~169~~352,~~442~~373
Balance end of period	$	~~303~~307,~~610~~693		$	~~225~~239,~~531~~395

As of ~~March 31~~June 30, 2022, $~~302~~306.58 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 and six months ended ~~March 31~~June 30, 2022 and 2021, is presented below (in thousands):

	For the Three Months Ended March 31,
	Three Months Ended June 30,
	2022			2021
Deferred commissions:
Balance beginning of period	$	70,767		$	53,230
Additional commissions deferred		9,611			10,907
Amortization of deferred commissions		(4,803	)		(3,494	)
Balance end of period	$	75,575		$	60,643
	For the Six Months Ended June 30,
	2022			2021
Deferred commissions:
Balance beginning of period	$	68,519		$	50,870
Additional commissions deferred		616,~~832~~443			516,~~695~~602
Amortization of deferred commissions		(49,~~584~~387	)		(36,~~335~~829	)
Balance end of period	$	7075,~~767~~575		$	5360,~~230~~643

As of ~~March 31~~June 30, 2022, $1718.36 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~~six months ended ~~March 31~~June 30, 2022 or 2021. There were no assets recognized related to the costs to fulfill contracts during the ~~three~~six months ended ~~March 31~~June 30, 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~~June 30, 2022, the remaining performance obligations to which enforceable rights exist are $~~392~~394.93 million, of which $~~377~~382.25 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~~June 30, 2022, $8986.36 million relates to non-cancellable amounts that have not yet been invoiced, of which $7475.7 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.

6.Intangible Assets

Intangible assets consisted of the following (in thousands):

March 31, 2022

June 30, 2022

Useful Life (Years)

Gross

Accumulated Amortization

Net

Backlog

1 to 7

4,500

(2,~~249~~683

)

21,~~251~~817

Customer relationships

54 to 10

7574,~~162~~993

(2629,~~527~~102

)

4845,~~635~~891

Developed technology (1)

1 to 6

73,204

(40,516

)

32,688

Developed technology

1 to 6

77,431

(43,300

)

34,131

Noncompetition agreements

3 to 5

6,~~445~~479

(2,~~064~~359

)

4,~~381~~120

Tradename and trademarks

1 to 3

7,~~272~~250

(56,~~452~~223

)

1,~~820~~027

~~166~~170,~~583~~653

(7683,~~808~~667

)

8986,~~775~~986

(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 $7.13 million and $14.5 million for the three and six months ended ~~March 31~~June 30, 2022, respectively, and $46.42 million and $10.6 million for the three and six months ended ~~March 31~~June 30, 2021, respectively.

Acquisitions of finite-lived intangible assets

In May 2018, the Company acquired developed technology to facilitate cross-border transactions (e.g., tariffs and duties), from Tradestream Technologies Inc. and Wise 24 Inc. (the “Sellers”) for cash and common stock. 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~~June 30, 2022, the sellers have earned approximately $23.62 million under the earnout provision since the acquisition date. An earnout liability of $0.39 million was recorded within the current portion of accrued earnout liabilities as of ~~March 31~~June 30, 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~~six months ended ~~March 31~~June 30, 2022, are summarized as follows (in thousands):

Balance—December 31, 2021	$	672,381
Cumulative translation adjustments		(950	)
Additions - 2022 acquisitions (1)		8,972
Balance—March 31, 2022	$	671,431
Cumulative translation adjustments		(3,857	)
Balance—June 30, 2022	$	677,496

~~Goodwill~~ (1) See isNote ~~tested~~4 for ~~impairment~~additions 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 details

26Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, the Company will conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. The Company has three reporting units for goodwill impairment testing consisting of its U.S., European, and Brazilian operations. As of June 30, 2022, the Brazilian reporting unit had no associated goodwill.

~~exceed~~During the ~~carrying~~second ~~value~~quarter of 2022, the Company observed a decline in the market valuation of the Company’s common shares along with a decline in the macroeconomic environment. ~~The~~As a result, the Company ~~has~~evaluated ~~three~~whether such events would indicate the fair values of its reporting units ~~for~~were ~~goodwill~~below ~~impairment~~their ~~testing~~respective ~~consisting~~carrying values. Management did not identify any factors that would indicate the fair values of ~~its~~the UCompany’s reporting units were below their respective carrying values.S. However, the Company continues to monitor the key inputs to the fair value of its European reporting unit, ~~and~~which ~~Brazilian~~includes ~~operations~~significant revenue growth from a single marketplace partner. AsA further decline in market capitalization of ~~March 31~~the Company, ~~2022~~macroeconomic conditions, or internal cashflow forecasts could result in an impairment of some or all of the ~~Brazilian~~goodwill associated with the European reporting unit ~~had~~in nofuture ~~associated~~periods. The carrying value of goodwill for the European reporting unit as of June 30, 2022 is approximately $44.3 million.

7.Leases

Total lease cost, net of sublease income, was $34.81 million and $7.9 million for the three and six months ended ~~March 31~~June 30, 2022, respectively, and $34.94 million and $8.3 million for the three and six months ended ~~March 31~~June 30, 2021, respectively. Sublease income was $0.45 million and $0.9 million for the three and six months ended ~~March 31~~June 30, 2022, respectively and $0.4 million and $0.8 million for the three and six months ended June 30, 2021, respectively. Leases that commenced in the first ~~three~~half ~~months~~ of 2022 increased operating lease right-of-use assets by $15.46 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.

2729

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.

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~~June 30, 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,
	June 30,			December 31,
	2022			2021
Principal	$	977,500		$	977,500
Unamortized debt issuance costs		(1514,~~356~~471	)		(16,241	)
Net carrying amount	$	~~962~~963,~~144~~029		$	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,
	For the Three Months Ended June 30,
	2022
Contractual interest expense	$	611
Amortization of debt issuance costs		~~885~~886
Total interest expense related to 2026 Notes	$	1,~~496~~497
	For the Six Months Ended June 30,
	2022
Contractual interest expense	$	1,222
Amortization of debt issuance costs		1,771
Total interest expense related to 2026 Notes	$	2,993

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.

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.

28The changes to the Company’s shareholders’ equity during the six months ended June 30, 2022, is as follows (in thousands, except share data):

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
Exercise of stock options		110,997				1,816								1,816
Vesting of restricted stock units		227,429
Stock-based compensation cost						47,775								47,775
Loss on translation adjustment								(3,611	)					(3,611	)
Net loss											(55,848	)		(55,848	)
Balance at June 30, 2022		88,123,428	$	9	$	1,825,991	$	(8,386	)	$	(791,274	)	$	1,026,340

							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~~six months ended ~~March 31~~June 30, 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
Exercise of stock options		253,395				4,668								4,668
Vesting of restricted stock units		75,571												—
Stock-based compensation cost						26,976								26,976
Shares issued for acquisitions of businesses		164,416				22,971								22,971
Gain on translation adjustment								322						322
Net loss											(31,034	)		(31,034	)
Balance at June 30, 2021		86,253,407	$	9	$	1,735,100	$	(1,407	)	$	(628,353	)	$	1,105,349

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~~June 30, 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~~June 30, 2022, 45,~~500~~537,~~890~~432 shares were subject to outstanding awards under the 2018 plan and 14,~~372~~180,~~738~~777 shares were available for issuance under the 2018 Plan. As of ~~March 31~~June 30, 2022, 1983,~~093,901~~868 shares were subject to outstanding stock options under the 2006 Plan.

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,
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Stock-based compensation cost:
Stock options	$	2,~~161~~036	$	3,~~223~~074	$	4,197	$	6,297
Restricted stock units		2239,~~128~~199		1118,~~769~~321		61,327		30,090
Performance share units		75,~~813~~669		24,~~832~~632		13,482		7,464
Employee stock purchase plan		~~1,269~~871		~~1,303~~949		2,140		2,252
Total stock-based compensation cost	$	3347,~~371~~775	$	1926,~~127~~976	$	81,146	$	46,103

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 $01.62 million and $01.28 million for the three and six months ended ~~March 31~~June 30, 2022, respectively, and $0.4 million and $0.6 million for the three and six months ended June 30, 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~~six months ended ~~March 31~~June 30, 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~~218,~~623~~620	)	$	2118.2074
Options cancelled or expired		(4,~~291~~824	)	$	~~111~~101.8344
Options outstanding as of March 31, 2022		2,166,875		$	33.98		6.08	$	141,996
Options outstanding as of June 30, 2022		2,055,345		$	34.94		5.87	$	73,302
Options exercisable as of March 31, 2022		1,778,867		$	28.90		5.81	$	125,598
Options exercisable as of June 30, 2022		1,770,387		$	30.74		5.66	$	70,574

The total intrinsic value of options exercised during the ~~three~~six months ended ~~March 31~~June 30, 2022 and 2021 was $715.71 million and $4170.97 million, respectively. As of ~~March 31~~June 30, 2022, $86.9 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 1.53 years.

Restricted Stock Units

The following table summarizes RSU activity for the Company’s stock-based compensation plans for the ~~three~~six months ended ~~March 31~~June 30, 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		12,~~903~~222,~~805~~991			9794.1595
RSUs vested		(~~466~~693,~~497~~926	)		~~80.~~86.66
RSUs cancelled		(98225,~~343~~035	)		9497.8114
RSUs outstanding as of March 31, 2022		4,200,928		$	100.56
RSUs outstanding as of June 30, 2022		4,165,993		$	99.28

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.

As of June 30, 2022, $348.4 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 2.7 years.

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~~six months ended ~~March 31~~June 30, 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
PSUs outstanding as of June 30, 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~~June 30, 2022, $5340.3 million of total unrecognized compensation cost related to PSUs was expected to be recognized over a weighted average period of approximately 21.07 years.

Employee Stock Purchase Plan

During the ~~three~~six months ended ~~March 31~~June 30, 2022, 85,926 shares of common stock were purchased under the ESPP.

As of ~~March 31~~June 30, 2022, there was approximately $10.73 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,
	For the Six Months Ended June 30,
	2022		2021	~~2021~~
Fair market value of common stock	$111.00	~~111.00~~	$152.35	$	~~152.35~~
Volatility	33%		34%	~~34%~~
Expected term	0.5 years		0.5 years	~~0.5 years~~
Expected dividend yield	n/a		n/a	~~n/a~~
Risk-free interest rate	0.48%		0.08%	~~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 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.

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,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2022			2021			2022			2021
Numerator:
Net loss attributable to common shareholders	$	(3255,~~557~~848	)	$	(3031,~~068~~034	)	$	(88,405	)	$	(61,102	)
Denominator:
Weighted-average common shares outstanding-basic		87,~~463~~989			8586,~~436~~090			87,728			85,765
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~~989			8586,~~436~~090			87,728			85,765
Net loss per common share, basic and diluted	$	(0.3763	)	$	(0.3536	)	$	(1.01	)	$	(0.71	)

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,
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Options to purchase common shares		2,~~236~~109		3,~~396~~115		2,172		3,255
Unvested RSUs		24,~~853~~087		2,~~258~~746		3,474		2,504
Unvested PSUs		~~243~~300		75121		272		98
ESPP shares		950		738		30		22
Convertible senior notes (if converted)		4,100		—		4,100		—
Total		910,~~441~~646		56,~~736~~020		10,048		5,879

13.Subsequent Events

On ~~April~~July 825, 2022, the Company ~~released~~paid a $3718.72 million ~~general indemnification holdback~~ to the sellers of ~~TTR~~Davo in connection with the ~~October~~first ~~2020~~earnout ~~acquisition~~period of ~~TTR. The funds for payment of~~ the ~~TTR~~Davo ~~holdback~~Purchase. ~~were~~The ~~recorded as restricted cash – current and the~~ liability was included in accrued ~~purchase~~earnout ~~price~~liabilities, ~~related to acquisitions –~~ current on the consolidated balance sheet as of ~~March~~June 3130, 2022.

On ~~May~~August 58, 2022, the Company ~~released~~entered into an ~~$11~~Agreement and Plan of Merger (the “Merger Agreement”) with Lava Intermediate, Inc.1, ~~million~~a ~~general~~Delaware ~~indemnification~~corporation ~~holdback~~(“Parent”), and Lava Merger Sub, Inc., a Washington corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the ~~sellers~~Merger ofAgreement, ~~Business~~Merger ~~Licenses~~Sub inwill ~~connection~~be merged with and into the ~~November~~Company, ~~2020~~with ~~acquisition~~the Company surviving as a wholly owned subsidiary of ~~Business~~Parent ~~Licenses.~~(the “Merger”). The ~~liability~~Merger ~~was~~Agreement ~~included~~provides, among other things, that on the terms and conditions set forth in ~~accrued~~the ~~purchase~~Merger ~~price~~Agreement, ~~related~~at tothe ~~acquisitions~~effective –time ~~current~~of onthe Merger (the ~~consolidated~~“Effective ~~balance~~Time”), ~~sheet~~and as a result of ~~March~~the 31Merger, ~~2022~~each share of common stock of the Company that is issued and outstanding immediately prior to the Effective Date (subject to certain exceptions) will be converted into the right to receive $93.50 in cash.

~~After~~The ~~March~~Company 31and Parent have made customary representations, ~~2022~~warranties and covenants in the Merger Agreement, ~~but~~including, ~~before~~among others, covenants that: (i) the ~~filing~~Company will conduct its and its subsidiaries’ business in the ordinary course of ~~this~~business ~~Form~~during ~~10-Q~~the interim period between the execution of the Merger Agreement and the Effective Time, (ii) the Company ~~acquired~~will ~~two~~not ~~businesses~~engage ~~with~~in ~~closing~~certain ~~cash~~types ~~payments~~of ~~that~~transactions ~~totaled~~or ~~$12~~take certain actions outside the ordinary course during such period without the prior consent of Parent, (iii) the Company will cause a meeting of the Company’s shareholders to be held to consider approval of the Merger Agreement, and (iv) subject to certain customary exceptions, the board of directors of the Company will recommend adoption of the Merger Agreement by the shareholders of the Company.1 ~~million~~The Company has also made certain additional customary covenants, including, among others, covenants not to: (i) solicit or knowingly encourage any inquiries with respect to certain alternative business combination transactions or (ii) subject to certain exceptions designed to allow the board of directors of the Company to fulfill its fiduciary duties to the Company’s shareholders, engage in any discussions concerning, or provide any confidential information to, any person relating to certain alternative business combination transactions.

32Subject to certain limitations, if the Merger is not consummated by February 8, 2023 (the “End Date”), each of the Company and Parent may terminate the Merger Agreement. The right to terminate the Merger Agreement at the End Date will not be available to a party if the failure of the Merger to have been consummated on or before such date was primarily caused by the failure of such party to perform any of its obligations under the Merger Agreement.

The Merger Agreement contains certain customary termination rights for the Company and Parent, including the Company’s right to terminate the Merger Agreement to accept a superior proposal subject to compliance with certain procedures specified in the Merger Agreement. Upon termination of the Merger Agreement under certain specified circumstances, the Company will be required to pay Parent a termination fee of $242.329 million. The Merger Agreement provides that Parent will be required to pay the Company a termination fee of $484.659 million (the “Parent Termination Fee”) under certain circumstances if the Merger Agreement is terminated by the Company because certain conditions to closing have been satisfied, the Company indicates in writing that it is ready and willing to close, and Parent and Merger Sub fail to consummate the Merger within three business days during which time the Company stood ready, willing and able to consummate the Merger.

In connection with the Merger, the Company expects to incur significant expenses, such as transaction, professional services, and other costs. An estimate of these expenses cannot be made at this time. The consummation of the Merger is subject to certain customary conditions, including, but not limited to, the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s common stock and the receipt of regulatory approval. The Merger is expected to close during the second half of 2022.

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

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Amended 2021 Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q and our Amended 2021 Annual Report. See “Special Note Regarding Forward-Looking Statements” above.

Overview

We are a leading provider of tax compliance automation for businesses of all sizes. The Avalara Compliance Cloud includes calculation, returns, compliance document management, licensing and registration, fiscal representation, and tax content and insight solutions. We sell our solutions primarily on a subscription basis through our sales force, which focuses on selling to qualified leads provided by our marketing efforts and by partner referrals.

We focus on maintaining and expanding our partner network, which has been and will continue to be an essential part of our growth. We continue to increase the available number of partner integrations, which are designed to link the Avalara Compliance Cloud to a wide variety of business applications, including accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM systems. Through marketing activities, we generate awareness from many businesses, both large and small, and enhance communications with our existing customers.

We make substantial investments by increasing headcount, investing in better software tools and technologies, and making strategic acquisitions to continuously improve the Avalara Compliance Cloud. With these investments, we will continue scaling our platform for continued growth, adding new features and functionality, supporting new products and content types, and improving the user experience. We have made multiple acquisitions in the last few years to augment our tax content, serve the needs of customers in different geographies or industries, and improve additional aspects of tax compliance solutions. We expect to continue to make significant investments, both organically and through acquisitions, to gain new and relevant content, technology, and expertise that best serve the transaction tax needs of our customers.

During the ~~first~~second quarter of 2022, wemost ~~continued to re-open certain~~ of our office locations were open as many of the preventative measures to contain or mitigate the COVID-19 pandemic have ~~begun~~been ~~to be~~ lifted. WeSome ~~expect many~~ of our employees have begun to return to offices onat aleast ~~hybrid~~one ~~work~~day ~~model~~per ~~over~~week, ~~the~~but ~~course~~most ofhave ~~this~~continued ~~year~~work-from-home arrangements. We ~~continue~~expect more employees to ~~host~~return ~~many~~to ~~customer~~our ~~activities~~offices ~~and~~over ~~events~~the ~~virtually,~~course ~~and~~of this year, ~~where~~but it is ~~safe~~uncertain as to dohow ~~so,~~many weemployees ~~have~~will ~~resumed~~ultimately ~~some~~do ~~in-person~~so ~~customer activities~~ and ~~events.~~how Asoften ~~health~~they ~~and~~will ~~safety~~work ~~conditions~~in ~~allow,~~our weoffices. ~~expect~~Our return-to ~~increase in~~-~~person~~office ~~customer~~approach ~~activities~~may ~~and~~vary ~~events~~among inlocations ~~2022,~~depending ~~which~~on ~~will~~applicable ~~increase~~health ~~marketing~~protocols and ~~travel~~may ~~costs~~change ~~from~~at ~~prior~~any ~~year~~time ~~levels.~~in ~~The~~response ~~extent~~to ~~and~~new ~~timing~~developments ofin the ~~broader impact of the~~ COVID-19 pandemic. onWe ~~our~~continue ~~results~~to ofhost ~~operations,~~many ~~overall~~employee ~~financial performance~~ and ~~operating~~customer ~~cash~~activities ~~flows~~and ~~remains~~events ~~uncertain~~virtually, ~~including~~and, ~~the~~where ~~impact~~it onis ~~our~~safe ~~future~~to ~~revenue~~do ~~growth~~so, ~~the~~we ~~timing~~have ofresumed ~~the~~some ~~resumption~~in-person ofactivities ~~normal~~and ~~operating~~events. ~~expenses,~~As health and ~~the~~safety ~~extent~~conditions toallow, ~~which~~we ~~any~~expect ~~incremental~~to ~~expenses~~continue ~~associated~~to ~~with~~increase ~~the~~in-person ~~preventative~~activities and ~~precautionary~~events ~~measures~~in 2022, which will beincrease ~~necessary~~marketing and travel costs from prior year levels.

During the second quarter of 2022, we experienced some impacts from recent macroeconomic factors, including the tightening labor market, geopolitical developments in Europe, and increasing inflation rates. Specifically, we experienced lower productive sales capacity due to longer hiring times combined with higher attrition for our sales and marketing personnel. We also experienced softness in lead-generation and sales execution with new prospects, along with a lower percentage of existing customers that expanded their services during the quarter. In our European business, which benefited in previous periods from regulatory changes enacted over the last few years, we experienced only mild impacts from recent geopolitical developments in Europe.

The extent and timing of the broader impact of macroeconomic factors and the COVID-19 pandemic on our results of operations, overall financial performance and operating cash flows remains uncertain, including the impact on our future revenue growth and the timing of the resumption of normal operating expenses. Although we did not identify any factors that would indicate the fair values of our reporting units were below their respective carrying values, further macroeconomic impacts could result in an impairment of some or all of the goodwill associated with our European reporting unit in future periods. In addition, we continue to utilize our leased office space in our operations, albeit well below capacity levels, but as our utilization stabilizes and our intention for the use of those spaces becomes clear, this could result in long-lived asset impairments in future periods.

Recent Events (Proposed Merger Transaction)

On August 8, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lava Intermediate, Inc., a Delaware corporation (“Parent”), and Lava Merger Sub, Inc., a Washington corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”). The Merger Agreement provides, among other things, that on the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), and as a result of the Merger, each share of common stock of the Company that is issued and outstanding immediately prior to the Effective Date (subject to certain exceptions) will be converted into the right to receive $93.50 in cash.

The consummation of the Merger is subject to certain customary conditions, including, but not limited to, the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s common stock and the receipt of regulatory approval. The Merger is expected to close during the second half of 2022. See Note 13 in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

Key Business Metrics

We regularly review several metrics to evaluate growth trends, measure our performance, formulate financial projections, and make strategic decisions. We discuss revenue and the components of operating results under the section of this report titled, “Key Components of Consolidated Statements of Operations,” and we discuss other key business metrics below.

Mar 31, 2022

Dec 31, 2021

Sep 30, 2021

Jun 30, 2021

Mar 31, 2021

Dec 31, 2020

Sep 30, 2020

Jun 30, 2020

Jun 30, 2022

Mar 31, 2022

Dec 31, 2021

Sep 30, 2021

Jun 30, 2021

Mar 31, 2021

Dec 31, 2020

Sep 30, 2020

Number of core customers (as of end of period)

1920,~~160~~110

1819,~~270~~160

1718,~~400~~270

1617,~~570~~400

1516,~~730~~570

15,~~020~~730

1415,~~300~~020

1314,~~640~~300

Net revenue retention rate

~~115%~~

113

~~116%~~

115

~~116%~~

116

~~116%~~

116

~~113%~~

116

~~115%~~

113

~~116%~~

115

~~114%~~

116

Number of Core Customers

We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The small and mid-market customer segments have been and remain our primary target market segments for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our primary target market segment. As of ~~March 31~~June 30, 2022 and December 31, 2021, we had approximately 1920,~~160~~110 and 18,270 core customers, respectively.

We define a core customer as:

•

a unique account identifier in our primary U.S. billing systems (multiple companies or divisions within a single consolidated enterprise that each have a separate unique account identifier are each treated as separate customers);

•

that is active as of the measurement date; and

•

for which we have recognized, as of the measurement date, greater than $3,000 in total revenue during the previous 12 months.

Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers that subscribe to our solutions through our international subsidiaries and certain legacy and acquired billing systems that have not yet been integrated into our primary U.S. billing systems (e.g., recent acquisitions and our lodging tax compliance solution). As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric.

We also have a substantial number of customers of various sizes that do not meet the revenue threshold to be considered a core customer. Many of these customers are in the emerging and small business segment of the marketplace, which represents strategic value and a growth opportunity for us. Customers who do not meet the revenue threshold to be considered a core customer provide us with market share and awareness, and we anticipate that some may grow into core customers. In addition, we have numerous enterprise-level ~~customers that only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers.~~

customers that only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers.

In addition to customers with whom we have a direct relationship, some of our customers are business application publishers (including ecommerce platforms) that include automated tax determination powered by Avalara. While those platform providers may be core customers to Avalara, their end-user customers generally are not.

Net Revenue Retention Rate

We believe that our net revenue retention rate provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it reflects the stability of our revenue base, which is one of our core competitive strengths. We calculate our net revenue retention rate by dividing (a) total subscription and returns revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total subscription and returns revenue in such corresponding quarter from those same billing accounts. This calculation includes changes during the period for such billing accounts, such as additional solutions purchased, changes in pricing and transaction volume, and terminations, but does not reflect revenue for new billing accounts added during the one-year period.

Currently, our net revenue retention rate includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems that have not been integrated into our primary U.S. billing systems. Our net revenue retention rate was ~~115~~113% for the quarter ended ~~March 31~~June 30, 2022, and on average has been ~~116~~115% over the last four quarters ended ~~March 31~~June 30, 2022.

Key Components of Consolidated Statements of Operations

Revenue

We generate revenue from two primary sources: (1) subscription and returns; and (2) professional services. Subscription and returns revenue is driven primarily by the acquisition of customers, customer renewals, and additional service offerings purchased by existing customers. Revenue from subscription and returns comprised approximately 91% of our revenue for ~~both~~ the ~~three~~six months ended ~~March 31~~June 30, 2022 and 90% of our revenue for the six months ended June 30, 2021.

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

entitled to any refund of fees paid or relief from fees due if they do not use the allotted number of transactions. If a subscription plan customer exceeds the selected maximum transaction level, we will generally upgrade the customer to a higher tier or, in some cases, charge overage fees on a per transaction or return basis. Customers purchase tax return preparation on a subscription basis for an allotted number of returns. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer.

Our standard subscription contracts are generally non-cancelable after the first 60 days of the contract term. Cancellations under our standard subscription contracts are not material, and do not have a significant impact on revenue recognized. We generally invoice our subscription customers for the initial term at contract signing and upon renewal. Our initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term.

Currently a small component of our total revenue, we offer SST services to businesses that are registered to participate in the program. We earn a fee (SST revenue) from participating state and local governments based on a percentage of the sales tax reported and paid, and as a result, we generally provide SST services at no cost to the seller.

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

Professional Services. We generate professional services revenue from providing tax analysis and services, including business licenses and tax registrations, tax refund claims and recovery assistance, voluntary disclosure agreements, nexus studies, and back filing services. We also provide configurations, data migrations, integration, and training for our subscriptions and returns products. We bill for service arrangements on a fixed fee, milestone, or time and materials basis, and we recognize the transaction price allocated to professional services performance obligations as revenue as services are performed and are collectable under the terms of the associated contracts.

We bill for service arrangements on a fixed fee, milestone, or time and materials basis, and we recognize the transaction price allocated to professional services performance obligations as revenue as services are performed and are collectable under the terms of the associated contracts.

Costs and Expenses

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

Research and Development. Research and development expenses consist primarily of employee-related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, software hosting costs for research and product development activities, and the cost of third-party developers. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Capitalized software development costs, which consist primarily of employee-related costs, are amortized as cost of subscription and returns revenue. Research and development expenses also include allocated costs for certain information technology and facility expenses, along with depreciation of equipment.

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

Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses for our sales and marketing staff, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, integration and referral partner commissions, costs of marketing and promotional events, corporate communications, online marketing, solution marketing, and other brand-building activities. As a result of the current COVID-19 pandemic, we suspended in-person promotional and customer events and converted many of these activities to virtual events, which temporarily reduced these types of marketing expenses. We began to gradually resume limited in-person marketing activities in the second half of 2021 where it was safe to do so. During 2022, we expect to continue to increase in-person marketing activities as conditions allow, although we do not expect these events to return to pre-pandemic levels in the near term. Sales and marketing expenses include allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as customer relationships, customer lists, and backlog from acquisitions.

expenses, along with depreciation of equipment and amortization of intangibles such as customer relationships, customer lists, and backlog from acquisitions.

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

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

We intend to continue to invest in sales and marketing and expect spending in these areas to increase in absolute dollars as we continue to expand our business. We expect sales and marketing expenses to continue to be among the most significant components of our operating expenses.

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

We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations (in the U.S. and internationally), hire and train additional personnel, evaluate and integrate acquisitions, and incur costs as a public company. Specifically, we expect to continue to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, acquisition evaluation and execution, SEC compliance, and internal control compliance.

Total Other Income (Expense), Net

Total other income (expense), net consists of quarterly remeasurement of earnout liabilities for acquisitions accounted for as business combinations, interest income on cash and cash equivalents, interest expense related to our 2026 Notes, foreign currency gains and losses, and other non-operating gains and losses.

3640

Results of Operations

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

The comparability of periods covered by our financial statements is impacted by recent acquisitions. In the first half of 2022, we acquired substantially all the assets of Paper Crane and the outstanding equity of one additional acquisition. During the second quarter of 2021, we acquired substantially all the assets of Davo and the outstanding equity of Inposia. During the third quarter of 2021, we acquired substantially all the assets of 3CE Technologies. During the fourth quarter of 2021, we acquired substantially all the assets of Track1099 LLC and of CrowdReason Limited Liability Company and CorrelationAdvisors LLC (see Note 4 in the Notes to Consolidated Financial Statements).

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,
	2022			2021
	(in thousands)
Revenue:
Subscription and returns	$	~~186~~189,~~866~~764		$	~~139~~152,~~318~~442
Professional services		1718,~~664~~829			1416,~~283~~625
Total revenue		~~204~~208,~~530~~593			~~153~~169,~~601~~067
Cost of revenue:
Subscription and returns		5051,~~077~~036			3841,~~033~~477
Professional services		1011,~~049~~036			67,~~463~~836
Total cost of revenue(1)		6062,~~126~~072			4449,~~496~~313
Gross profit		~~144~~146,~~404~~521			~~109~~119,~~105~~754
Operating expenses:
Research and development(1)		5056,~~852~~647			3941,~~274~~234
Sales and marketing(1)		86101,~~447~~242			6472,~~093~~651
General and administrative(1)		4244,~~194~~592			3136,~~199~~113
Total operating expenses		~~179~~202,~~493~~481			~~134~~149,~~566~~998
Operating loss		(3555,~~089~~960	)		(2530,~~461~~244	)
Other income (expense), net		21,~~817~~007			(~~2,250~~938	)
Loss before income taxes		(3254,~~272~~953	)		(2731,~~711~~182	)
Provision for income taxes		(285	)		(2,357	)
(Provision for) benefit from income taxes		(895	)		148
Net loss	$	(3255,~~557~~848	)	$	(3031,~~068~~034	)
(1) The stock-based compensation expense included above was as follows:
	For the Three Months Ended March 31,
	For the Three Months Ended June 30,
	2022			2021
	(in thousands)
Cost of revenue	$	36,~~759~~200		$	23,~~032~~082
Research and development		914,~~463~~641			57,~~404~~192
Sales and marketing		611,~~711~~905			45,~~055~~955
General and administrative		1213,~~717~~954			710,~~366~~390
Total stock-based compensation	$	3246,~~650~~700		$	1826,~~857~~619
The amortization of acquired intangibles included above was as follows:
	For the Three Months Ended March 31,
	For the Three Months Ended June 30,
	2022			2021
	(in thousands)
Cost of revenue	$	2,~~645~~851		$	2,~~020~~394
Research and development		—			—
Sales and marketing		3,~~606~~603			12,~~540~~905
General and administrative		~~854~~839			~~861~~894
Total amortization of acquired intangibles	$	7,~~105~~293		$	46,~~421~~193

3741

	For the Six Months Ended June 30,
	2022			2021
	(in thousands)
Revenue:
Subscription and returns	$	376,630		$	291,760
Professional services		36,493			30,908
Total revenue		413,123			322,668
Cost of revenue:
Subscription and returns		101,113			79,510
Professional services		21,085			14,299
Total cost of revenue⁽¹⁾		122,198			93,809
Gross profit		290,925			228,859
Operating expenses:
Research and development⁽¹⁾		107,499			80,508
Sales and marketing⁽¹⁾		187,689			136,744
General and administrative⁽¹⁾		86,786			67,312
Total operating expenses		381,974			284,564
Operating loss		(91,049	)		(55,705	)
Other income (expense), net		3,824			(3,188	)
Loss before income taxes		(87,225	)		(58,893	)
Provision for income taxes		(1,180	)		(2,209	)
Net loss	$	(88,405	)	$	(61,102	)

(1) The stock-based compensation expense included above was as follows:

	For the Six Months Ended June 30,
	2022			2021
	(in thousands)
Cost of revenue	$	9,959		$	5,114
Research and development		24,104			12,596
Sales and marketing		18,616			10,010
General and administrative		26,671			17,756
Total stock-based compensation	$	79,350		$	45,476

The amortization of acquired intangibles included above was as follows:

	For the Six Months Ended June 30,
	2022			2021
	(in thousands)
Cost of revenue	$	5,496		$	4,414
Research and development		—			—
Sales and marketing		7,209			4,445
General and administrative		1,693			1,755
Total amortization of acquired intangibles	$	14,398		$	10,614

The following sets forth our results of operations for the periods presented as a percentage of our total revenue for those periods:

	For the Three Months Ended March 31,
		For the Three Months Ended June 30,
	~~2022~~	2022			~~2021~~	2021
Revenue:
Subscription and returns		91	%91	%		91	%90	%
Professional services		9	%9	%		9	%10	%
Total revenue		~~100~~	%100	%		~~100~~	%100	%
Cost of revenue:
Subscription and returns		24	%24	%		25	%25	%
Professional services		5	%5	%		4	%5	%
Total cost of revenue		29	%30	%		29	%29	%
Gross profit		71	%70	%		71	%71	%
Operating expenses:
Research and development		25	%27	%		26	%24	%
Sales and marketing		42	%49	%		42	%43	%
General and administrative		21	%21	%		20	%21	%
Total operating expenses		88	%97	%		88	%89	%
Operating loss		~~(17~~	)%(27	)%		~~(17~~	)%(18	)%
Other income (expense), net		1	%0	%		(1	)%(1	)%
Loss before income taxes		~~(16~~	)%(26	)%		~~(18~~	)%(18	)%
Provision for income taxes		0	%			(2	)%
(Provision for) benefit from income taxes			0	%			0	%
Net loss		~~(16~~	)%(27	)%		~~(20~~	)%(18	)%

Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021

	For the Six Months Ended June 30,
	2022			2021
Revenue:
Subscription and returns		91	%		90	%
Professional services		9	%		10	%
Total revenue		100	%		100	%
Cost of revenue:
Subscription and returns		24	%		25	%
Professional services		5	%		4	%
Total cost of revenue		30	%		29	%
Gross profit		70	%		71	%
Operating expenses:
Research and development		26	%		25	%
Sales and marketing		45	%		42	%
General and administrative		21	%		21	%
Total operating expenses		92	%		88	%
Operating loss		(22	)%		(17	)%
Other income (expense), net		1	%		(1	)%
Loss before income taxes		(21	)%		(18	)%
Provision for income taxes		0	%		(1	)%
Net loss		(21	)%		(19	)%

Three Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021

Revenue

	For the Three Months Ended March 31,				Change
	For the Three Months Ended June 30,				Change
	2022		2021		Amount		Percentage
	(dollars in thousands)
Revenue:
Subscription and returns	$	~~186~~189,~~866~~764	$	~~139~~152,~~318~~442	$	4737,~~548~~322		3424	%
Professional services		1718,~~664~~829		1416,~~283~~625		32,~~381~~204		2413	%
Total revenue	$	~~204~~208,~~530~~593	$	~~153~~169,~~601~~067	$	5039,~~929~~526		3323	%

Total revenue for the three months ended ~~March 31~~June 30, 2022, increased by $5039.95 million, or 3323%, compared to the three months ended ~~March 31~~June 30, 2021. Subscription and returns revenue for the three months ended ~~March 31~~June 30, 2022, increased by $4737.53 million, or 3424%, compared to the three months ended ~~March 31~~June 30, 2021. Professional services revenue for the three months ended ~~March 31~~June 30, 2022, increased by $32.42 million, or 2413%, compared to the three months ended ~~March 31~~June 30, 2021.

Growth in total revenue was due primarily to increased demand for our services from new and existing customers. The increase in total revenue for the three months ended ~~March 31~~June 30, 2022, compared to the same period in 2021, was due primarily to $2122.41 million from new U.S. customers, $13.70 million from existing U.S. customers, $113.~~4 million from recent acquisitions (including $~~6.7 million from ~~the Track1099 acquisition), $3.3 million from~~ SST revenue growth, and $1.15 million from ~~revenue~~recent ~~growth~~acquisitions, inpartially ~~our~~offset ~~international~~by ~~operations~~$0.8 ~~Substantially~~million ~~all~~from ofa ~~the~~decline in revenue ~~generated by Track1099 is recognized~~ in ~~the~~our ~~first~~international ~~quarter of each year~~operations. Excluding recent acquisitions, total revenue for the three months ended ~~March 31~~June 30, 2022, increased by $3938.60 million, or 2623%, compared to the three months ended ~~March 31~~June 30, 2021. Of the growth from recent acquisitions, $101.0 million was generated from subscriptions and returns and $10.45 million from professional services.

Cost of Revenue

	For the Three Months Ended March 31,				Change
	For the Three Months Ended June 30,				Change
	2022		2021		Amount		Percentage
	(dollars in thousands)
Cost of revenue
Subscription and returns	$	5051,~~077~~036	$	3841,~~033~~477	$	129,~~044~~559		3223	%
Professional services		1011,~~049~~036		67,~~463~~836		3,~~586~~200		5541	%
Total cost of revenue	$	6062,~~126~~072	$	4449,~~496~~313	$	1512,~~630~~759		3526	%

Cost of revenue for the three months ended ~~March 31~~June 30, 2022, increased by $1512.68 million, or 3526%, compared to the three months ended ~~March 31~~June 30, 2021. The increase in cost of revenue was due primarily to an increase of $89.30 million in employee-related costs from higher headcount, an increase of $~~2.7 million in software hosting and third-party purchased software costs, an increase of $~~1.85 million in allocated overhead cost, an increase of $1.34 million in depreciation expense, and an increase of $0.65 million in amortization expense.

Cost of revenue headcount increased approximately 2414% from the ~~first~~second quarter of 2021 to the ~~first~~second quarter of 2022. Employee-related costs increased due primarily to a $6.34 million increase in salaries and benefits, and a $13.71 million increase in stock-based compensation expense, partially offset by a $0.5 million decrease in contract and temporary employee costs and a $0.32 million ~~increase~~decrease in compensation expense related to our bonus plans.

Software hosting and third-party purchased software costs increased due primarily to higher transaction volumes, new contract rates and incremental investment in new data analytics and security software licenses. Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2021 and 2022. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions.

Gross Profit

	For the Three Months Ended March 31,						Change
	For the Three Months Ended June 30,						Change
	2022			2021			Amount			Percentage
	(dollars in thousands)
Gross profit
Subscription and returns	$	~~136~~138,~~789~~728		$	~~101~~110,~~285~~965		$	3527,~~504~~763			3525	%
Professional services		7,~~615~~793			78,~~820~~789			(~~205~~996	)		-311	%
Total gross profit	$	~~144~~146,~~404~~521		$	~~109~~119,~~105~~754		$	3526,~~299~~767			3222	%
Gross margin
Subscription and returns		73	%		73	%
Professional services		4341	%		5553	%
Total gross margin		7170	%		71	%

Total gross profit for the three months ended ~~March 31~~June 30, 2022, increased by $3526.38 million, or 3222% compared to the three months ended ~~March 31~~June 30, 2021. Total gross margin was 7170% for the three months ended ~~March 31~~June 30, 2022, compared to 71% for the same period of 2021.

Research and Development

For the Three Months Ended March 31,

Change

For the Three Months Ended June 30,

Change

2022

2021

Amount

Percentage

(dollars in thousands)

Research and development

5056,~~852~~647

3941,~~274~~234

1115,~~578~~413

2937

39Research and development expenses for the three months ended June 30, 2022, increased by $15.4 million, or 37%, compared to the three months ended June 30, 2021. The increase was due primarily to an increase of $14.6 million in employee-related costs from higher headcount, and an increase of $0.7 million in allocated overhead cost.

Research and development ~~expenses~~headcount ~~for~~increased approximately 27% from the ~~three~~second ~~months~~quarter ~~ended~~of ~~March 31,~~2021 to the second quarter of 2022,. Employee-related costs increased bydue primarily to a $117.67 million, orincrease ~~29%,~~in ~~compared~~salaries toand ~~the~~benefits ~~three~~and ~~months~~a ~~ended March 31, 2021~~$7.4 ~~The~~million increase in ~~was~~stock-based ~~due~~compensation ~~primarily~~expense, topartially anoffset ~~increase~~by ofa $110.49 million decrease in ~~employee-~~compensation expense related ~~costs~~to ~~from~~our ~~higher~~bonus ~~headcount~~plans.

~~Research~~Shared ~~and~~information ~~development~~technology ~~headcount~~expenses ~~increased~~are ~~approximately~~higher ~~38%~~compared ~~from the first quarter of 2021~~ to the ~~first~~prior ~~quarter~~period ~~of 2022. Employee-related costs increased~~ due primarily to ahigher ~~$5.5~~headcount ~~million~~throughout ~~increase in salaries and benefits, a $4.1 million increase in stock-based compensation expense, and a $1.8 million increase in compensation expense related to~~ our ~~bonus plans~~operations.

Sales and Marketing

For the Three Months Ended March 31,

Change

For the Three Months Ended June 30,

Change

2022

2021

Amount

Percentage

(dollars in thousands)

Sales and marketing

86101,~~447~~242

6472,~~093~~651

2228,~~354~~591

3539

Sales and marketing expenses for the three months ended ~~March 31~~June 30, 2022, increased by $2228.46 million, or 3539%, compared to the three months ended ~~March 31~~June 30, 2021. The increase was due primarily to an increase of $1119.96 million in employee-related costs, an increase of $3.12 million in marketing campaign expenses, an increase of $2.2 million for partner commission expense, an increase of $21.93 million in ~~marketing~~allocated ~~campaign~~overhead ~~expenses~~cost, an increase of $20.18 million in ~~amortization~~third-party ~~expense~~purchased software costs, an increase of $10.87 million in ~~allocated~~amortization ~~overhead cost~~expense, and an increase of $0.5 million in ~~third-party~~outside ~~purchased~~professional ~~software~~services ~~costs~~expense.

Sales and marketing headcount increased approximately 2119% from the ~~first~~second quarter of 2021 to the ~~first~~second quarter of 2022. Employee-related costs increased due primarily to a $6.8.3 million increase in salaries and benefits, a $25.79 million increase in stock-based compensation expense, a $1.3.6 million increase in ~~sales~~travel ~~commission~~and ~~expense~~

Filing Compare · AVALARA, INC.