Market Overview

Avalara Announces First Quarter 2019 Financial Results

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First Quarter Total Revenue of $85.0 Million

Approximately 9,700 Core Customers as of March 31, 2019

Avalara, Inc. (NYSE:AVLR), a leading provider of tax compliance
automation for businesses of all sizes, today announced financial
results for its first quarter ended March 31, 2019.

"We are off to a strong start in fiscal 2019, as our first quarter
revenue grew 38% over the prior year's quarter," said Scott McFarlane,
Avalara co-founder and chief executive officer. "In addition, we
strengthened and expanded our leadership team during the quarter. We
believe that the automation of transaction tax compliance will be
adopted over an extended period, as customers upgrade systems, expand
their businesses both domestically and internationally, and respond to
changing government rules, such as the recent legislative responses to
the Supreme Court's Wayfair decision. Based on our broad tax content,
robust platform, partner channel, and pre-built integrations, we believe
Avalara is positioned as a clear choice to lead this automation cycle."

Adoption of the New Revenue Recognition Standard – ASC 606

Avalara adopted the new revenue recognition accounting standard
Accounting Standards Codification ("ASC") 606 effective January 1, 2019
on a modified retrospective basis. Financial results for reporting
periods during 2019 are presented in compliance with the new revenue
recognition standard. Historical financial results for reporting periods
prior to 2019 are presented in conformity with amounts previously
disclosed under the prior revenue recognition standard ASC 605. This
press release includes additional information to reconcile the impacts
of the adoption of the new revenue recognition standard on the Company's
financial results for the quarter ended March 31, 2019, including the
presentation of financial results during 2019 under ASC 605 for
comparison to the prior year.

First Quarter 2019 Financial Results – ASC 606 (standard adopted
effective January 1, 2019)

  • Revenue: ASC 606 total revenue was $85.0 million. Subscription
    and returns revenue was $78.2 million. Professional services revenue
    was $6.7 million.
  • Gross Profit: ASC 606 GAAP gross profit was $59.7 million,
    representing a 70% gross margin. ASC 606 non-GAAP gross profit was
    $61.6 million, representing a 72% non-GAAP gross margin.
  • Operating Loss: ASC 606 GAAP operating loss was $9.7
    million. ASC 606 non-GAAP operating loss was $1.5 million.
  • Net Loss: ASC 606 GAAP net loss was $9.2 million. ASC
    606 non-GAAP net loss was $1.0 million.
  • Net Loss per Share: ASC 606 GAAP net loss per share was
    $0.14 based on 68.4 million weighted-average shares outstanding. ASC
    606 non-GAAP net loss per share was $0.01 based on 68.4 million
    weighted-average shares outstanding.
  • Deferred Revenue: ASC 606 total deferred revenue was $132.7
    million at March 31, 2019. The current portion of ASC 606 deferred
    revenue was $131.7 million at March 31, 2019.
  • Cash: Net cash used in operating activities was $10.4 million,
    compared to $13.4 million used in operating activities in the first
    quarter of 2018. Free cash flow was negative $12.5 million, compared
    to negative $17.0 million in the first quarter of 2018. Our
    cash and cash equivalents totaled $146.9 million at March 31, 2019.
  • Calculated Billings: Calculated billings were $96.4 million in
    the first quarter of 2019, compared to calculated billings of $73.0
    million in the first quarter of 2018.

First Quarter 2019 Financial Results – ASC 605

  • Revenue: ASC 605 total revenue was $85.0 million, up 38% from
    $61.4 million in the first quarter of 2018. Subscription and returns
    revenue was $78.3 million, up 35% from $57.9 million in the same
    period last year. Professional services revenue was $6.7 million, up
    91% from $3.5 million in the same period last year.
  • Gross Profit: ASC 605 GAAP gross profit was $59.7 million,
    representing a 70% gross margin, compared to a GAAP gross profit of
    $43.9 million and a 71% gross margin in the first quarter of 2018. ASC
    605 non-GAAP gross profit was $61.6 million, representing a 72%
    non-GAAP gross margin, compared to a non-GAAP gross profit of $45.1
    million and a 73% non-GAAP gross margin in the first quarter of 2018.
  • Operating Loss: ASC 605 GAAP operating loss was $16.1
    million, compared to a GAAP operating loss of $15.3 million in the
    first quarter of 2018. ASC 605 non-GAAP operating loss was $7.8
    million, compared to a non-GAAP operating loss of $10.3 million in the
    first quarter of 2018.
  • Net Loss: ASC 605 GAAP net loss was $15.6 million, compared to
    a GAAP net loss of $15.2 million in the first quarter of 2018. ASC 605
    non-GAAP net loss was $7.4 million, compared to a non-GAAP net loss of
    $10.3 million in the first quarter of 2018.
  • Net Loss per Share: ASC 605 GAAP net loss per share was $0.23
    based on 68.4 million weighted-average shares outstanding, compared to
    a GAAP net loss per share of $2.47 based on 6.2 million
    weighted-average shares outstanding in the first quarter of 2018. ASC
    605 non-GAAP net loss per share was $0.11 based on 68.4 million
    non-GAAP shares outstanding in the first quarter of 2019, compared to
    ASC 605 non-GAAP net loss per share of $0.16 based on 65.7 million
    non-GAAP shares outstanding in the first quarter of 2018.
  • Deferred Revenue: Total ASC 605 deferred revenue was $146.2
    million at March 31, 2019, up from $134.7 million at December 31,
    2018. The current portion of ASC 605 deferred revenue was $136.7
    million at March 31, 2019, up from $125.3 million at December 31, 2018.
  • Cash: The adoption of ASC 606 did not have an impact on cash
    and free cash flow.

Reconciliations of GAAP to non-GAAP financial measures have been
provided in the tables included in this release.

Operating Highlights

  • Key Metrics: We ended the first quarter of 2019 with
    approximately 9,700 core customers, up from approximately 9,070 core
    customers at the end of the previous quarter. Net revenue retention
    rate was 107% in the first quarter of 2019 and has averaged 107% over
    the last four quarters.
  • Announced New Leadership Team Members: We announced the
    appointment of Amit Mathradas as president and chief operating officer
    (COO), Sanjay Parthasarathy as chief product officer (CPO), and Ross
    Tennenbaum as executive vice president of strategic initiatives. Based
    out of the company's Seattle headquarters, the three newly created
    positions joined Avalara's leadership team and more than 1,800 team
    members worldwide.

Amit Mathradas, president and COO, will oversee the end-to-end customer
experience for businesses seeking tax compliance support, including
business development, sales, marketing, customer success, global
compliance, and professional services. Prior to joining Avalara,
Mathradas served as general manager and head of North American Small
Business at digital payments company PayPal, where he led the company's
small business segment, managing teams responsible for acquisition,
activation, cross-sell, and retention for millions of merchants. Sanjay
Parthasarathy, CPO, joined Avalara from Indix, an artificial
intelligence-based product information platform, after its acquisition
in February 2019. As CPO, Parthasarathy is charged with unifying global
product management, enhancing the in-product customer experience, and
driving the long-term global product roadmap. Before founding Indix,
Parthasarathy was a senior executive and leader at Microsoft for nearly
20 years. Ross Tennenbaum is now executive vice president of strategic
initiatives, which encompasses products from various investments and
acquisitions, and is at the heart of many of Avalara's primary growth
initiatives. He joined the company from Goldman Sachs, where he served
as a managing director in its technology investment banking division.

  • Recognized as a Leader in First IDC MarketScape Report on Global
    Tax Automation:
    We were named as a Leader in the IDC MarketScape:
    Worldwide SAAS and Cloud-Enabled Sales Tax and VAT Automation
    Applications 2019 Vendor Assessment (doc #US43263718, January 2019).
    The report highlights an increase in business interest and need for a
    tax automation solution to mitigate new compliance risks resulting
    from a rapidly expanding global digital economy, new legislation
    across the globe to capture new revenue from this digital
    transformation, and enhanced indirect tax enforcement tactics. The IDC
    MarketScape report is a guidance tool for businesses seeking to
    digitize their tax compliance processes. The report suggests
    considering Avalara when "your business is growing and encountering
    indirect tax management challenges, such as navigating regulatory
    change, beginning an omni-channel ecommerce strategy, facing new
    product expansion, or selling in new geographic areas."

Financial Outlook

For the second quarter of 2019, the Company currently expects:

  • ASC 606 total revenue between $84.0 and $85.0 million.
  • ASC 606 non-GAAP operating loss between $7.5 and $8.5 million.

For the full year 2019, the Company currently expects:

  • ASC 606 total revenue between $346.0 and $349.0 million.
  • ASC 606 non-GAAP operating loss between $10.0 and $15.0 million.

Conference Call Information

Avalara will host a conference call at 2:00 p.m. Pacific Time (or 5:00
p.m. Eastern Time) today, May 7, 2019, to discuss its financial results
and business highlights. The conference call can be accessed by dialing
(844) 882-5970 from the United States and Canada or (647) 253-8697
internationally with conference ID 3856977. A live webcast of the call
will also be available on the Avalara investor relations website at
investor.avalara.com.

A telephone replay of the conference call will be available until 8:59
p.m. Pacific Time on Tuesday, May 14, 2019 and a webcast replay will
also be archived at investor.avalara.com. The telephone replay will be
available by dialing (800) 585-8367 from the United States and Canada or
(416) 621-4642 internationally with conference ID 3856977.

About Avalara, Inc.

Avalara helps businesses of all sizes get tax compliance right. In
partnership with leading ERP, accounting, ecommerce, and other financial
management system providers, Avalara delivers cloud-based compliance
solutions for various transaction taxes, including sales and use, VAT,
GST, excise, communications, lodging, and other indirect tax types.
Headquartered in Seattle, Avalara has offices across the U.S. and around
the world in Canada, the U.K., Belgium, Brazil, and India. More
information at www.avalara.com.

Forward-Looking Statements

This press release and the accompanying conference call contain
forward-looking statements including, among others, statements about our
financial outlook for the second quarter and full year 2019. 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.

These forward-looking statements involve risks, uncertainties, and
assumptions that could cause actual performance or results to differ
materially from those expressed or suggested by the forward-looking
statements. If any of these risks or uncertainties materialize, or if
any of our assumptions prove incorrect, our actual results could differ
materially from the results expressed or implied by these
forward-looking statements. These risks and uncertainties include risks
associated with: 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 risks
described in the other filings we make with the Securities and Exchange
Commission from time to time, including the risks described under the
heading "Risk Factors" in our Annual Report on Form 10-K, which was
filed with the Securities and Exchange Commission on February 28, 2019,
and which should be read in conjunction with our financial results and
forward-looking statements. All forward-looking statements in this press
release are based on information available to us as of the date hereof,
and we do not assume any obligation to update the forward-looking
statements provided to reflect events that occur or circumstances that
exist after the date on which they were made, except as required by law.

Use of Non-GAAP Financial Measures

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

  • We calculate non-GAAP cost of revenue, non-GAAP research and
    development expense, non-GAAP sales and marketing expense, and
    non-GAAP general and administrative expense as GAAP cost of revenue,
    GAAP research and development expense, GAAP sales and marketing
    expense, and GAAP general and administrative expense before the
    stock-based compensation expense and the amortization of acquired
    intangible assets included in each of the expense categories.
  • We calculate non-GAAP gross profit as GAAP gross profit before the
    stock-based compensation expense and amortization of acquired
    intangibles that is included in cost of revenue. We calculate non-GAAP
    gross margin as GAAP gross margin before the impact of stock-based
    compensation expense included in cost of revenue as a percentage of
    revenue and amortization of acquired intangibles included in cost of
    revenue as a percentage of revenue.
  • We calculate non-GAAP operating loss as GAAP operating loss before
    stock-based compensation expense, amortization of acquired
    intangibles, and goodwill impairments. We calculate non-GAAP net loss
    as GAAP net loss before stock-based compensation expense, amortization
    of acquired intangibles, and goodwill impairments.
  • We calculate non-GAAP shares outstanding for 2018 as GAAP
    weighted-average shares outstanding during the period adjusted as if
    (1) the conversion of preferred stock into common stock had occurred
    at the beginning of each respective period presented and (2) the
    issuance of 8,625,000 shares of common stock in our IPO had occurred
    as of January 1, 2018.
  • We calculate non-GAAP net loss per share as non-GAAP net loss divided
    by non-GAAP shares outstanding.
  • We define free cash flow as net cash (used in) provided by operating
    activities less cash used for the purchases of property and equipment.
  • We define calculated billings as total revenue plus the changes in
    deferred revenue and contract liabilities in the period. Because we
    recognize subscription revenue ratably over the subscription term,
    calculated billings can be used to measure our subscription sales
    activity for a particular period, to compare subscription sales
    activity across particular periods, and as an indicator of future
    subscription revenue.

Management uses these non-GAAP financial measures to understand and
compare operating results across accounting periods, for internal
budgeting and forecasting purposes, and to evaluate financial
performance and liquidity. We believe that non-GAAP financial measures
provide useful information to investors and others in understanding and
evaluating our results, prospects, and liquidity period-over-period
without the impact of certain items that do not directly correlate to
our performance and that may vary significantly from period to period
for reasons unrelated to our operating performance, as well as comparing
our financial results to those of other companies. We believe that
non-GAAP per share measures provide investors and other users of our
financial information consistency with our past financial performance.

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

The company has not reconciled its expectations of non-GAAP financial
measures to the corresponding GAAP measures primarily because
stock-based compensation expense cannot be reasonably calculated or
predicted at this time. Accordingly, a reconciliation is not available
without unreasonable effort.

Our definitions of these non-GAAP financial measures may differ from the
definitions used by other companies and therefore comparability may be
limited. In addition, other companies may not publish these or similar
metrics. Thus, our non-GAAP financial measures should be considered in
addition to, not as a substitute for, or in isolation from, measures
prepared in accordance with GAAP. We encourage investors and others to
review our financial information in its entirety, not to rely on any
single financial measure and to view non-GAAP financial measures in
conjunction with the related GAAP financial measure.

Definitions of Key Business Metrics

We also use key business metrics, such as core customers and net revenue
retention rate.

Core Customers

We believe core customers is a key indicator of our market penetration,
growth, and potential future revenue. We use core customers as a metric
to focus our customer count reporting on our primary target market
segment. We define a core customer as:

  • a unique account identifier in our billing system (multiple companies
    or divisions within a single consolidated enterprise that each have a
    separate unique account identifier are each treated as separate
    customers);
  • that is active as of the measurement date; and
  • for which we have recognized, as of the measurement date, greater than
    $3,000 in total revenue during the last twelve months.

Currently, our core customer count includes only customers with unique
account identifiers in our primary U.S. billing systems and does not
include customers who subscribe to our solutions through our
international subsidiaries or certain legacy billing systems primarily
related to past acquisitions. 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 who do
not meet the revenue threshold to be considered a core customer. These
customers provide us with market share and awareness, and we anticipate
that some may grow into core customers. We believe there is strategic
value to addressing the small business and self-serve segment of the
marketplace.

Net Revenue Retention Rate

We believe that our net revenue retention rate provides insight into our
ability to retain and grow revenue from our customers, as well as their
potential long-term value to us. We also believe it reflects the
stability of our revenue base, which is one of our core competitive
strengths. We calculate our net revenue retention rate by dividing (a)
total revenue in the current quarter from any billing accounts that
generated revenue during the corresponding quarter of the prior year by
(b) total revenue in such corresponding quarter from those same billing
accounts. This calculation includes changes 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 primarily
related to past acquisitions.

Reported Consolidated Results

AVALARA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS

(in thousands, except per share amounts)

  For the Three Months Ended March 31,
2019   2018
Revenue:
Subscription and returns $ 78,231 $ 57,870
Professional services   6,739   3,507
Total revenue   84,970   61,377
Cost of revenue:
Subscription and returns 20,978 14,817
Professional services   4,329   2,692
Total cost of revenue (1)   25,307   17,509
Gross profit   59,663   43,868
Operating expenses:
Research and development (1) 15,956 12,619
Sales and marketing (1) 38,208 37,307
General and administrative (1)   15,234   9,211
Total operating expenses   69,398   59,137
Operating loss   (9,735 )   (15,269 )
Other (income) expense:
Interest income (767 ) (36 )
Interest expense 111 894
Other (income) expense, net   48   (30 )
Total other (income) expense, net   (608 )   828
Loss before income taxes (9,127 ) (16,097 )
Provision for (benefit from) income taxes   116   (848 )
Net loss $ (9,243 ) $ (15,249 )
 
Net loss per share attributable to common shareholders, basic and
diluted
$ (0.14 ) $ (2.47 )
Weighted average shares of common stock outstanding, basic and
diluted
68,381 6,170
 
For the Three Months Ended March 31,
(1) The stock-based compensation expense included above was as
follows:
2019 2018
Cost of revenue $ 741 $ 296
Research and development 1,292 581
Sales and marketing 2,169 1,045
General and administrative   2,358   1,588
Total stock-based compensation $ 6,560 $ 3,510
 
The amortization of acquired intangibles included above was as
follows:
 
Cost of revenue $ 1,170 $ 898
Research and development
Sales and marketing 505 502
General and administrative   3   10
Total amortization of acquired intangibles $ 1,678 $ 1,410
 

 

The total employer payroll tax expense on employee stock transactions
included above was $2.4 million for the three months ended March 31,
2019, of which $0.3 million is included in cost of revenue, $0.5 million
is included in research and development, $0.8 million is included in
sales and marketing, and $0.8 million is included in general and
administrative.

AVALARA, INC.
CONSOLIDATED BALANCE SHEETS
(in
thousands)

  March 31,   December 31,
2019 2018
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 146,878 $ 142,322
Trade accounts receivable—net of allowance for doubtful accounts 45,381 40,287
Deferred commissions 6,062
Prepaid expenses and other current assets   13,255   11,307
Total current assets before customer fund assets   211,576   193,916
Funds held from customers 19,365 13,113
Receivable from customers—net of allowance for doubtful accounts   1,238   270
Total current assets 232,179 207,299
Noncurrent assets:
Property and equipment—net 33,819 33,373
Goodwill 78,842 61,300
Intangible assets—net 26,440 19,371
Deferred commissions 19,582
Other noncurrent assets   1,824   1,589
Total assets $ 392,686 $ 322,932
 
Liabilities and shareholders' equity
Current liabilities:
Trade payables 9,536 4,847
Accrued expenses 41,600 42,217
Deferred revenue   131,733   125,260
Total current liabilities before customer fund obligations 182,869 172,324
Customer fund obligations   20,502   13,349
Total current liabilities 203,371 185,673
Noncurrent liabilities:
Deferred revenue 981 9,393
Deferred tax liability 599 560
Deferred rent 16,927 17,317
Other noncurrent liabilities   1,835   436
Total liabilities   223,713   213,379
Commitments and contingencies
Shareholders' equity:
Preferred stock
Common stock 7 7
Additional paid-in capital 640,996 599,493
Accumulated other comprehensive loss (2,807 ) (2,345 )
Accumulated deficit   (469,223 )   (487,602 )
Total shareholders' equity   168,973   109,553
Total liabilities and shareholders' equity $ 392,686 $ 322,932
 

AVALARA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(in thousands)

   
For the Three Months Ended March 31,
2019 2018
Cash flows from operating activities:
Net loss $ (9,243 ) $ (15,249 )
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 3,681 2,990
Stock-based compensation 6,560 3,510
Deferred tax expense 39 (1,018 )
Amortization of deferred rent (133 ) 301
Non-cash change in earnout liability (71 )
Non-cash bad debt expense 222 67
Other 58 180
Changes in operating assets and liabilities:
Trade accounts receivable (5,535 ) (6,428 )
Prepaid expenses and other current assets (1,705 ) (1,907 )
Other long-term assets (236 ) 110
Trade payables 3,590 (1,736 )
Accrued expenses and other current liabilities (10,373 ) (5,771 )
Deferred commissions (6,377 )
Deferred revenue   9,031   11,647
Net cash used in operating activities   (10,421 )   (13,375 )
Cash flows from investing activities:
Net increase in customer fund assets (7,224 ) (18,527 )
Cash paid for acquired intangible assets (131 )
Cash paid for acquisitions of businesses (17,310 )
Purchase of property and equipment   (2,114 )   (3,625 )
Net cash used in investing activities   (26,779 )   (22,152 )
Cash flows from financing activities:
Proceeds from credit facility 18,000
Payments of deferred financing costs (39 )
Net increase in customer fund obligations 7,143 18,527
Proceeds from exercise of stock options and common stock warrants 27,311 326
Proceeds from purchases of stock under employee stock purchase plan 7,664
Taxes paid related to net share settlement of stock-based awards (93 ) (2,016 )
Repurchase of shares     (819 )
Net cash provided by financing activities 41,986 34,018
Foreign currency effect on cash and cash equivalents   (230 )   56
Net change in cash and cash equivalents   4,556   (1,453 )
Cash and cash equivalents—Beginning of period   142,322   14,075
Cash and cash equivalents—End of period $ 146,878 $ 12,622
 

AVALARA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS

RECONCILIATION OF THE IMPACTS FROM THE ADOPTION
OF THE NEW REVENUE RECOGNITION STANDARD (ASC 606)

(in
thousands, except per share amounts)

  For the Three Months Ended March 31,
2019   2018

As Reported

(ASC 606)

 

Impacts from

Adoption

 

Without

Adoption

(ASC 605)

As Reported

(ASC 605)

Revenue:
Subscription and returns $ 78,231 $ 84 $ 78,315 $ 57,870
Professional services   6,739   (53 )   6,686   3,507
Total revenue   84,970   31   85,001   61,377
Cost of revenue:
Subscription and returns 20,978 20,978 14,817
Professional services   4,329     4,329   2,692
Total cost of revenue   25,307     25,307   17,509
Gross profit   59,663   31   59,694   43,868
Operating expenses:
Research and development 15,956 15,956 12,619
Sales and marketing 38,208 6,376 44,584 37,307
General and administrative   15,234     15,234   9,211
Total operating expenses   69,398   6,376   75,774   59,137
Operating loss   (9,735 )   (6,345 )   (16,080 )   (15,269 )
Other (income) expense:
Interest income (767 ) (767 ) (36 )
Interest expense 111 111 894
Other (income) expense, net   48     48   (30 )
Total other (income) expense, net   (608 )     (608 )   828
Loss before income taxes (9,127 ) (6,345 ) (15,472 ) (16,097 )
Provision for (benefit from) income taxes   116     116   (848 )
Net loss $ (9,243 ) $ (6,345 ) $ (15,588 ) $ (15,249 )
 

Net loss per share attributable to common shareholders, basic and
diluted

$ (0.14 ) $ (0.09 ) $ (0.23 ) $ (2.47 )

Weighted average shares of common stock outstanding, basic and
diluted

68,381 68,381 6,170
 

AVALARA, INC.
CONSOLIDATED BALANCE SHEETS
RECONCILIATION
OF THE IMPACTS FROM THE ADOPTION OF THE NEW REVENUE RECOGNITION STANDARD
(ASC 606)

(in thousands)

  March 31,   December 31,
2019 2018

As Reported

(ASC 606)

 

Impacts from

Adoption

 

Without

Adoption

(ASC 605)

As Reported

(ASC 605)

(unaudited) (unaudited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 146,878 $ $ 146,878 $ 142,322
Trade accounts receivable—net of allowance for doubtful accounts 45,381 919 46,300 40,287
Deferred commissions 6,062 (6,062 )
Prepaid expenses and other current assets   13,255     13,255   11,307
Total current assets before customer fund assets   211,576   (5,143 )   206,433   193,916
Funds held from customers 19,365 19,365 13,113
Receivable from customers—net of allowance for doubtful accounts   1,238     1,238   270
Total current assets 232,179 (5,143 ) 227,036 207,299
Noncurrent assets:
Property and equipment—net 33,819 33,819 33,373
Goodwill 78,842 78,842 61,300
Intangible assets—net 26,440 26,440 19,371
Deferred commissions 19,582 (19,582 )
Other noncurrent assets   1,824     1,824   1,589
Total assets $ 392,686 $ (24,725 ) $ 367,961 $ 322,932
 
Liabilities and shareholders' equity
Current liabilities:
Trade payables 9,536 9,536 4,847
Accrued expenses 41,600 (4,208 ) 37,392 42,217
Deferred revenue   131,733   4,951   136,684   125,260
Total current liabilities before customer fund obligations 182,869 743 183,612 172,324
Customer fund obligations   20,502     20,502   13,349
Total current liabilities 203,371 743 204,114 185,673
Noncurrent liabilities:
Deferred revenue 981 8,499 9,480 9,393
Deferred tax liability 599 599 560
Deferred rent 16,927 16,927 17,317
Other noncurrent liabilities   1,835     1,835   436
Total liabilities   223,713   9,242   232,955   213,379
Commitments and contingencies
Shareholders' equity:
Preferred stock
Common stock 7 7 7
Additional paid-in capital 640,996 640,996 599,493
Accumulated other comprehensive income loss (2,807 ) (2,807 ) (2,345 )
Accumulated deficit   (469,223 )   (33,967 )   (503,190 )   (487,602 )
Total shareholders' equity   168,973   (33,967 )   135,006   109,553
Total liabilities and shareholders' equity $ 392,686 $ (24,725 ) $ 367,961 $ 322,932
 

AVALARA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS

RECONCILIATION OF THE IMPACTS FROM THE ADOPTION OF THE
NEW REVENUE RECOGNITION STANDARD (ASC 606)

(in thousands)

  For the Three Months Ended March 31,
2019   2018

As Reported

(ASC 606)

 

Impacts from

Adoption

 

Without

Adoption

(ASC 605)

As Reported

(ASC 605)

Cash flows from operating activities:
Net loss $ (9,243 ) $ (6,345 ) $ (15,588 ) $ (15,249 )
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,681 3,681 2,990
Stock-based compensation 6,560 6,560 3,510
Deferred tax expense 39 39 (1,018 )
Amortization of deferred rent (133 ) (133 ) 301
Non-cash change in earnout liability (71 )
Non-cash bad debt expense 222 222 67
Other 58 58 180
Changes in operating assets and liabilities:
Trade accounts receivable (5,535 ) (114 ) (5,649 ) (6,428 )
Prepaid expenses and other current assets (1,705 ) (1,705 ) (1,907 )
Other long-term assets (236 ) (236 ) 110
Trade payables 3,590 3,590 (1,736 )
Accrued expenses and other current liabilities (10,373 ) (2,118 ) (12,491 ) (5,771 )
Deferred commissions (6,377 ) 6,377
Deferred revenue   9,031   2,200   11,231   11,647
Net cash used in operating activities   (10,421 )     (10,421 )   (13,375 )
Cash flows from investing activities:
Net increase in customer fund assets (7,224 ) (7,224 ) (18,527 )
Cash paid for acquired intangible assets (131 ) (131 )
Cash paid for acquisitions of businesses (17,310 ) (17,310 )
Purchase of property and equipment   (2,114 )     (2,114 )   (3,625 )
Net cash used in investing activities   (26,779 )     (26,779 )   (22,152 )
Cash flows from financing activities:
Proceeds from credit facility 18,000
Payments of deferred financing costs (39 ) (39 )
Net increase in customer fund obligations 7,143 7,143 18,527
Proceeds from exercise of stock options and common stock warrants 27,311 27,311 326

Proceeds from purchases of stock under employee stock purchase
plan

7,664 7,664
Taxes paid related to net share settlement of stock-based awards (93 ) (93 ) (2,016 )
Repurchase of shares         (819 )
Net cash provided by financing activities   41,986     41,986   34,018
Foreign currency effect on cash and cash equivalents   (230 )     (230 )   56
Net change in cash and cash equivalents 4,556 4,556 (1,453 )
Cash and cash equivalents—Beginning of period   142,322     142,322   14,075
Cash and cash equivalents—End of period $ 146,878 $ $ 146,878 $ 12,622
 

AVALARA, INC.
UNAUDITED PRESENTATION AND RECONCILIATION
TO NON-GAAP FINANCIAL MEASURES

RECONCILIATION OF THE IMPACTS
FROM THE ADOPTION OF THE NEW REVENUE RECOGNITION STANDARD (ASC 606)

(in
thousands, except per share amounts)

The following schedules reflect our non-GAAP financial measures and
reconcile our non-GAAP financial measures to the related GAAP financial
measures:

Summary of Non-GAAP Financial Measures:

  For the Three Months Ended March 31,
2019   2018

As
Reported

(ASC 606)

 

Impacts
from

Adoption

 

Without

Adoption

(ASC 605)

 

As
Reported

(ASC 605)

Non-GAAP cost of revenue $ 23,396   $   $ 23,396 $ 16,315
Non-GAAP gross profit 61,574 31 61,605 45,062
Non-GAAP gross margin 72 % 0 % 72 % 73 %
Non-GAAP research and development expense $ 14,664 $ $ 14,664 $ 12,038
Non-GAAP sales and marketing expense 35,534 6,376 41,910 35,760
Non-GAAP general and administrative expense 12,873 12,873 7,613
Non-GAAP operating loss (1,497 ) (6,345 ) (7,842 ) (10,349 )
Non-GAAP net loss (1,005 ) (6,345 ) (7,350 ) (10,329 )
Non-GAAP net loss per share (0.01 ) (0.09 ) (0.11 ) (0.16 )
Free cash flow (12,535 ) (12,535 ) (17,000 )
 

Reconciliation of Non-GAAP Financial Measures:

  For the Three Months Ended March 31,
2019   2018
    Without
As Reported Impacts from Adoption As Reported
(ASC 606) Adoption (ASC 605) (ASC 605)
Reconciliation of Non-GAAP Cost of Revenue:
Cost of revenue $ 25,307 $

-

$ 25,307 $ 17,509
Stock-based compensation expense (741 )

-

(741 ) (296 )
Amortization of acquired intangibles   (1,170 )  

-

  (1,170 )   (898 )
Non-GAAP Cost of Revenue $ 23,396 $

-

$ 23,396 $ 16,315
 
Reconciliation of Non-GAAP Gross Profit:
Gross Profit $ 59,663 $ 31 $ 59,694 $ 43,868
Stock-based compensation expense 741

-

741 296
Amortization of acquired intangibles   1,170  

-

  1,170   898
Non-GAAP Gross Profit $ 61,574 $ 31 $ 61,605 $ 45,062
 
Reconciliation of Non-GAAP Gross Margin:
Gross margin 70 % 0 % 70 % 71 %
Stock-based compensation expense as a percentage of revenue 1 % 0 % 1 % 0 %
Amortization of acquired intangibles as a percentage of revenue   1 %   0 %   1 %   1 %
Non-GAAP Gross Margin   72 %   0 %   72 %   73 %
 
Reconciliation of Non-GAAP Research and Development Expense:
Research and development $ 15,956 $

-

$ 15,956 $ 12,619
Stock-based compensation expense (1,292 )

-

(1,292 ) (581 )
Amortization of acquired intangibles  

-

 

-

 

-

 

-

Non-GAAP Research and Development Expense $ 14,664 $

-

$ 14,664 $ 12,038
 
Reconciliation of Non-GAAP Sales and Marketing Expense:
Sales and marketing $ 38,208 $ 6,376 $ 44,584 $ 37,307
Stock-based compensation expense (2,169 )

-

(2,169 ) (1,045 )
Amortization of acquired intangibles   (505 )  

-

  (505 )   (502 )
Non-GAAP Sales and Marketing Expense $ 35,534 $ 6,376 $ 41,910 $ 35,760
 

Reconciliation of Non-GAAP General and Administrative Expense:

General and administrative $ 15,234 $

-

$ 15,234 $ 9,211
Stock-based compensation expense (2,358 )

-

(2,358 ) (1,588 )
Amortization of acquired intangibles   (3 )  

-

  (3 )   (10 )
Non-GAAP General and Administrative Expense $ 12,873 $

-

$ 12,873 $ 7,613
 

(continued)

 

Reconciliation of Non-GAAP Operating Loss:

Operating loss $ (9,735 ) $ (6,345 ) $ (16,080 ) $ (15,269 )
Stock-based compensation expense 6,560

-

6,560 3,510
Amortization of acquired intangibles   1,678  

-

  1,678   1,410
Non-GAAP Operating Loss $ (1,497 ) $ (6,345 ) $ (7,842 ) $ (10,349 )
 
Reconciliation of Non-GAAP Net Loss:
Net loss $ (9,243 ) $ (6,345 ) $ (15,588 ) $ (15,249 )
Stock-based compensation expense 6,560

-

6,560 3,510
Amortization of acquired intangibles   1,678  

-

  1,678   1,410
Non-GAAP Net Loss $ (1,005 ) $ (6,345 ) $ (7,350 ) $ (10,329 )
 
Reconciliation of Non-GAAP Net Loss Per Share:
Net loss per share $ (0.14 ) $ (0.09 ) $ (0.23 ) $ (2.47 )
Stock-based compensation expense per share 0.10

-

0.10 0.57
Amortization of acquired intangibles per share 0.02

-

0.02 0.23
Non-GAAP unweighted adjustment to common and preferred shares

issued (1) per share

 

-

 

-

 

-

  1.51
Non-GAAP Net Loss Per Share $ (0.01 ) $ (0.09 ) $ (0.11 ) $ (0.16 )
 
Computation of Non-GAAP Shares Outstanding:
Weighted average shares of common stock outstanding used in
computing net loss per share
68,381

-

68,381 6,170
Non-GAAP adjustment to common and preferred shares issued (1)  

-

 

-

 

-

  59,513
Non-GAAP Shares Outstanding Used in Computing Non-GAAP Net Loss
Per Share
  68,381  

-

  68,381   65,683
 
Free Cash Flow:
Net cash (used in) provided by operating activities $ (10,421 ) $

-

$ (10,421 ) $ (13,375 )
Purchases of property and equipment   (2,114 )  

-

  (2,114 )   (3,625 )
Free Cash Flow $ (12,535 ) $

-

$ (12,535 ) $ (17,000 )
 

(1) The Company's IPO closed on June 19, 2018 and 8,625,000 shares
of common stock were issued. In connection
with the IPO, the
Company's outstanding convertible preferred stock converted into
50,888,014 shares of
common stock. See description of
adjustment in "Use of Non-GAAP Financial Measures" section.

   

(concluded)

 

AVALARA, INC.
UNAUDITED PRESENTATION OF CALCULATED
BILLINGS

Three Months Ended

Mar 31,

2019 (1)

 

Dec 31,

2018

 

Sep 30,

2018

 

Jun 30,

2018

 

Mar 31,

2018

 

Dec 31,

2017

 

Sep 30,

2017

 

Jun 30,

2017

 

Mar 31,

2017

Total revenue $ 84,970 $ 76,923 $ 69,919 $ 63,879 $ 61,377 $ 58,035 $ 55,268 $ 50,891 $ 48,965
Add:

Deferred revenue (end of

period)

132,714 134,653 118,209 109,344 103,878 92,231 84,637 81,546 77,453

Contract liabilities (end of

period)

4,208

Impact of adoption of ASC 606

on deferred revenue

11,250
Less:

Deferred revenue (beginning of

period)

(134,653 ) (118,209 ) (109,344 ) (103,878 ) (92,231 ) (84,637 ) (81,546 ) (77,453 ) (72,480 )

Contract liabilities (beginning

of period)

Impact of adoption of ASC 606

on contract liabilities

  (2,090 )                
Calculated billings $ 96,399 $ 93,367 $ 78,784 $ 69,345 $ 73,024 $ 65,629 $ 58,359 $ 54,984 $ 53,938

(1) The first quarter of 2019 includes reconciling adjustments to
exclude the one-time impact of adoption of ASC 606 as of January 1, 2019.

AVALARA, INC.
UNAUDITED PRESENTATION OF KEY BUSINESS
METRICS

Mar 31,

2019

   

Dec 31,

2018

   

Sep 30,

2018

   

Jun 30,

2018

   

Mar 31,

2018

   

Dec 31,

2017

   

Sep 30,

2017

   

Jun 30,

2017

Number of core

customers (as of

end of period)

  9,700     9,070   8,490   8,080   7,760   7,490   7,250   6,970

Net revenue

retention rate

107% 108% 105% 108% 109% 105% 107% 106%

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