10-Q

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, 2020

OR

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

For the transition period from to

Commission File Number: 001-38525

AVALARA, INC.

(Exact Name of Registrant as Specified in its Charter)

Washington	91-1995935
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
255 South King Street, Suite 1800 Seattle, WA	98104
(Address of principal executive offices)	(Zip Code)

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

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.0001 Per Share	AVLR	New York Stock Exchange

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

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

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Small reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of April 30, 2020, the registrant had 78,422,284 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets (unaudited)	1
	Consolidated Statements of Operations (unaudited)	2
	Consolidated Statements of Comprehensive Loss (unaudited)	3
	Consolidated Statements of Cash Flows (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	42
Signatures		43

i

Special Note Regarding Forward-Looking Statements

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

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

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

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

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

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

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

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

• our ability to expand our international reach;

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

• other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A. “Risk Factors” and in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”) under Part I, Item 1A, “Risk Factors.”

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

ii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AVALARA, INC.

Consolidated Balance Sheets

(In thousands, except for per share data)

	March 31,			December 31,
	2020			2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	450,535		$	466,950
Trade accounts receivable—net of allowance for doubtful accounts of $2,233 and    $1,179, respectively		53,797			51,644
Deferred commissions		9,676			9,279
Prepaid expenses and other current assets		18,872			14,127
Total current assets before customer fund assets		532,880			542,000
Funds held from customers		28,096			24,383
Receivable from customers—net of allowance of $305 and $270, respectively		588			420
Total current assets		561,564			566,803
Noncurrent assets:
Deferred commissions		30,990			29,137
Operating lease right-of-use assets—net		53,929			49,321
Property and equipment—net		34,185			34,997
Intangible assets—net		20,949			22,932
Goodwill		101,035			101,224
Other noncurrent assets		3,237			2,853
Total assets	$	805,889		$	807,267
Liabilities and shareholders' equity
Current liabilities:
Trade payables	$	15,289		$	11,693
Accrued expenses		45,187			62,104
Deferred revenue		164,699			160,271
Accrued earnout liabilities		3,671			4,120
Operating lease liabilities		10,140			8,756
Total current liabilities before customer fund obligations		238,986			246,944
Customer fund obligations		28,817			24,783
Total current liabilities		267,803			271,727
Noncurrent liabilities:
Deferred revenue		670			970
Accrued earnout liabilities		—			9,835
Operating lease liabilities		59,887			58,301
Deferred tax liability		399			337
Other noncurrent liabilities		836			2,375
Total liabilities		329,595			343,545
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.0001 par value– no shares issued and outstanding at    March 31, 2020 and December 31, 2019, and 20,000 shares authorized as of    March 31, 2020 and December 31, 2019		—			—
Common stock, $0.0001 par value– 78,295 and 77,448 shares issued and    outstanding at March 31, 2020 and December 31, 2019, respectively, and    600,000 shares authorized as of March 31, 2020 and December 31, 2019		8			8
Additional paid-in capital		1,003,857			976,627
Accumulated other comprehensive loss		(2,094	)		(2,719	)
Accumulated deficit		(525,477	)		(510,194	)
Total shareholders’ equity		476,294			463,722
Total liabilities and shareholders' equity	$	805,889		$	807,267

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

1

AVALARA, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

	For the Three Months Ended March 31,
	2020			2019
Revenue:
Subscription and returns	$	105,546		$	78,231
Professional services		5,897			6,739
Total revenue		111,443			84,970
Cost of revenue:
Subscription and returns		29,517			20,978
Professional services		4,737			4,329
Total cost of revenue		34,254			25,307
Gross profit		77,189			59,663
Operating expenses:
Research and development		25,847			15,956
Sales and marketing		49,634			39,319
General and administrative		21,388			15,234
Total operating expenses		96,869			70,509
Operating loss		(19,680	)		(10,846	)
Other (income) expense:
Interest income		(1,442	)		(767	)
Interest expense		—			111
Other (income) expense, net		(3,372	)		48
Total other (income) expense, net		(4,814	)		(608	)
Loss before income taxes		(14,866	)		(10,238	)
Provision for (benefit from) income taxes		417			116
Net loss	$	(15,283	)	$	(10,354	)
Net loss per share attributable to common shareholders,    basic and diluted	$	(0.20	)	$	(0.15	)
Weighted average shares of common stock outstanding,    basic and diluted		77,904			68,381

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

2

AVALARA, INC.

Consolidated Statements of Comprehensive Loss (unaudited)

(In thousands)

	For the Three Months Ended March 31,
	2020			2019
Net loss	$	(15,283	)	$	(10,354	)
Other comprehensive income (loss)—Foreign currency translation		625			(462	)
Total comprehensive loss	$	(14,658	)	$	(10,816	)

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

3

AVALARA, INC.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

	For the Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(15,283	)	$	(10,354	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		9,731			6,560
Depreciation and amortization		4,091			3,681
Deferred tax expense		62			39
Non-cash operating lease costs		1,956			1,054
Non-cash change in earnout liabilities		(2,509	)		—
Non-cash bad debt expense		631			222
Other		192			58
Changes in operating assets and liabilities:
Trade accounts receivable		(2,750	)		(5,535	)
Prepaid expenses and other current assets		(4,745	)		(1,705	)
Deferred commissions		(2,250	)		(5,266	)
Other noncurrent assets		(384	)		(236	)
Trade payables		3,659			3,590
Accrued expenses		(18,568	)		(10,373	)
Deferred revenue		4,128			9,031
Operating lease liabilities		(2,230	)		(1,187	)
Net cash used in operating activities		(24,269	)		(10,421	)
Cash flows from investing activities:
Purchase of property and equipment		(1,600	)		(2,114	)
Cash paid for acquisitions of businesses		—			(17,310	)
Cash paid for acquired intangible assets		—			(131	)
Net increase in customer fund assets		(3,915	)		(7,224	)
Net cash used in investing activities		(5,515	)		(26,779	)
Cash flows from financing activities:
Payments of deferred financing costs		—			(39	)
Proceeds from exercise of stock options and common stock warrants		7,928			27,311
Proceeds from purchases of stock under employee stock purchase plan		5,716			7,664
Taxes paid related to net share settlement of stock-based awards		—			(93	)
Payment related to business combination earnouts		(3,760	)		—
Payment related to asset acquisition earnouts		(65	)		—
Net increase in customer fund obligations		3,915			7,143
Net cash provided by financing activities		13,734			41,986
Foreign currency effect on cash and cash equivalents		(365	)		(230	)
Net change in cash and cash equivalents		(16,415	)		4,556
Cash and cash equivalents—Beginning of period		466,950			142,322
Cash and cash equivalents—End of period	$	450,535		$	146,878

(Continued)

4

	For the Three Months Ended March 31,
	2020		2019
Supplemental cash flow disclosures:
Cash paid for interest expense	$	—	$	63
Cash paid for operating lease liabilities		3,108		2,110
Cash paid for income taxes		320		77
Non-cash investing and financing activities:
Stock issued related to business combinations	$	3,750	$	—
Accrued purchase price related to acquisitions		—		2,984
Accrued value of earnout related to acquisitions of businesses		—		5,952
Property and equipment additions in accounts payable and    accrued expenses		743		938
Deferred financing costs in accounts payable and accrued    expenses		—		272
Fair value of common stock issued to purchase    intangible assets		87		50
Operating lease right-of-use assets in exchange for lease obligations		6,562		2,388

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

5

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

1. Nature of Operations

Avalara, Inc. (the “Company”) provides software solutions that help businesses of all types and sizes comply with tax requirements for transactions worldwide. The Company offers a broad and growing suite of compliance solutions for transaction 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, and communications 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 in Brazil, Canada, Europe, and India that provide business development, software development, and support services.

2. Significant Accounting Policies

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, 2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020. The accompanying interim consolidated balance sheet as of March 31, 2020, the consolidated interim statements of operations for the three months ended March 31, 2020 and 2019, the consolidated statements of comprehensive loss for the three months ended March 31, 2020 and 2019, and the consolidated statements of cash flows for the three months ended March 31, 2020 and 2019, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full year ending December 31, 2020.

Prior Period Restatements and Adjustments

In preparing the 2019 annual consolidated financial statements, the Company discovered an immaterial error in recording deferred sales commissions for the first three quarters of 2019 impacting its previously reported quarterly financial results. The correction to sales commission expense resulted in an increase in sales and marketing expenses and accumulated deficit of $1.1 million and a $0.01 increase in net loss per share in the first quarter of 2019. The restatement of these prior period corrected amounts is presented in the accompanying unaudited consolidated statement of operations, consolidated statement of comprehensive loss, and consolidated statement of cash flows for the three-months ended March 31, 2019.

Avalara adopted the new lease accounting standard as of January 1, 2019 in the 2019 Annual Report. Due to the timing of adoption, the Company’s 2019 interim financial statements did not reflect the new lease accounting standard. As a result, the presentation of cash flows from operating activities presented in the accompanying unaudited consolidated statement of cash flows for the quarter ended March 31, 2019 include adjustments for the adoption of the new lease accounting standard. The adjustments do not impact previously reported net cash used in operating activities.

Principles of Consolidation

The accompanying consolidated financial statements include those of the Company and its subsidiaries after elimination of all intercompany accounts and transactions.

6

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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 earnout obligations in connection with acquisitions; the expected term of the customer relationship for capitalized contract cost amortization; the valuation of acquired intangible assets; and the valuation of the fair value of reporting units for analyzing goodwill. Actual results could materially differ from those estimates.

Fair Value Measurements

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, trade accounts receivable, trade payables, and accrued expenses, due to their short-term nature.

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 first three months of 2020.

Self-Insurance

Beginning August 1, 2019, the Company established a self-insured healthcare plan for eligible U.S. employees. Under the plan, the Company pays healthcare claims and fees to the plan administrator. Total claim payments are limited by stop-loss insurance policies. As there generally is a lag between the time a claim is incurred by a participant and the time the claim is submitted for payment, the Company has recorded a self-insurance reserve for estimated outstanding claims within accrued expenses in the consolidated balance sheets.

7

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Income Taxes

The Company’s deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and income tax basis of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company assesses its income tax positions and records tax benefits or expense based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequence 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. Judgement 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.

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option, restricted stock unit (“RSU”), or purchase right issued under the Company’s 2018 Employee Stock Purchase Plan (“ESPP”) at the date of grant. The fair value of stock options and purchase rights issued under the ESPP 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 is determined using the fair value of the Company’s underlying common stock on the date of grant. The Company accounts for forfeitures as they occur.

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 services are provided in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Beginning January 1, 2019, the Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers.

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.

8

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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 determination and compliance management services, and fees paid for preparing and filing transaction tax returns on behalf of customers. Under the Company’s subscription agreements, 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 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.

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.

Revenue is recognized ratably over the contractual term of the arrangement, beginning on the date that the service is made available to the customer. The Company invoices its subscription customers for the initial term at contract signing and at each subscription renewal. Initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that are contractually billable and have been invoiced, or which have been collected as cash, are initially recorded as deferred revenue or contract liabilities. While most of the Company’s customers are invoiced once at the beginning of the term, a portion of customers are invoiced semi-annually, quarterly, or monthly.

Included in the total subscription fee for cloud-based solutions are non-refundable upfront fees that are typically charged to new customers. These fees are associated with work performed to set up a customer with the Company’s services, and do not represent a distinct good or service. Instead, the fees are included within the transaction price and allocated to the remaining performance obligations in the contract. The Company recognizes revenue for these fees in accordance with the revenue recognition for those performance obligations.

Also included in subscription and returns revenue is interest income on funds held for customers. The Company uses trust accounts at FDIC-insured institutions to provide tax remittance services to customers and collect funds from customers in advance of remittance to tax authorities. After collection and prior to remittance, the Company earns interest on these funds.

Professional Services Revenue

The Company invoices for professional service arrangements on a fixed fee, milestone, or time and materials basis. Professional services revenue includes fees from providing tax analysis, configurations, registrations, data migrations, integration, training, and other support services. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.

Judgments and Estimates

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.

9

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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.

Leases

Effective January 1, 2019, the Company’s lease accounting policy follows guidance from ASC 842, 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. As of March 31, 2020, all of 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. Operating lease costs are generally fixed payments. 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.

Recently Adopted Accounting Standards

ASU No. 2016-13

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, related to credit losses, which amends the current accounting guidance and requires the measurements of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance in ASU No. 2016-13 is required for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public business entities. The Company adopted this guidance on January 1, 2020. The adoption, which impacted the Company’s allowance for doubtful accounts, did not have a significant impact on the consolidated financial statements.

ASU No. 2018-15

In August 2018, the FASB issued ASU No. 2018-15, related to implementation costs incurred in a cloud computing arrangement that is a service contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use-software. The guidance in ASU No. 2018-15 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2019, for public business entities. The Company adopted this guidance on January 1, 2020 with prospective application, as permitted by the ASU. For the first quarter of 2020, $0.6 million of implementation costs were capitalized and are recorded in other noncurrent assets on the consolidated balance sheet as of March 31, 2020.

10

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

New Accounting Standards Not Yet Adopted

ASU No. 2019-12

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, which simplifies the accounting for income taxes. The guidance in ASU No. 2019-12 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2020, for public business entities, with early adoption permitted. The Company will adopt this guidance on January 1, 2021. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

3. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis

The following financial assets and liabilities are measured at fair value on a recurring basis. The fair values recognized in the accompanying consolidated balance sheets and the level within the fair value hierarchy in which the fair value measurements fall is as follows (in thousands):

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
March 31, 2020	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	443,936	$	443,936	$	—	$	—
Earnout related to business combinations		3,599		—		—		3,599

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
December 31, 2019	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	458,248	$	458,248	$	—	$	—
Earnout related to business combinations		13,808		—		—		13,808

Earnout Liabilities

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 are discussed in Note 5. Earnouts recorded in connection with asset acquisitions are recorded as earnout payments become known. As such, earnouts related to asset acquisitions are not included in these fair value disclosures.

Earnout liabilities 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 are recorded in other (income) expense, net in the consolidated statements of operations.

The Company generally estimates the fair value of earnout liabilities for business combinations using probability-weighted discounted cash flows and Monte Carlo simulations.  As of March 31, 2020, the earnout liability associated with the 2019 acquisition of Portway International Inc. (“Portway”) was valued utilizing a discount rate of 8.0%. The Portway discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout. The earnout periods for the 2019 acquisitions of Compli, Inc. (“Compli”) and Indix Corporation (“Indix”) ended as of January 31, 2020 and February 6, 2020, respectively. Additional information regarding payments of earnout liabilities that occurred during the quarter ended March 31, 2020 is included in Note 5.

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AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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):

	Three Months Ended March 31,
	2020			2019
Earnout liabilities:
Balance beginning of period	$	13,808		$	—
Fair value recorded at acquisition		—			5,952
Payments of earnout liabilities		(7,700	)		—
Total unrealized (gains) losses included in other (income) expense, net		(2,509	)		—
Balance end of period	$	3,599		$	5,952

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, and long-lived assets, are not required to be measured at fair value on a recurring basis. There were no fair value measurements of these assets during the first quarter of 2020.

4. Balance Sheet Detail

Property and equipment, net consisted of the following (in thousands):

	Useful	March 31,			December 31,
	Life (Years)	2020			2019
Computer equipment and software	3 to 5	$	15,596		$	15,636
Internally developed software	6		6,521			5,948
Furniture and fixtures	5		6,559			6,589
Office equipment	3 to 5		850			1,058
Leasehold improvements	1 to 10		29,030			28,984
			58,556			58,215
Accumulated depreciation			(24,371	)		(23,218	)
Property and equipment—net		$	34,185		$	34,997

Depreciation expense was $2.3 million for the three months ended March 31, 2020 and $2.0 million for the three ended March 31, 2019, respectively.

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

	March 31,		December 31,
	2020		2019
Prepaid expenses	$	16,154	$	11,064
Accrued investment income		347		565
Deposits		229		197
Other		2,142		2,301
Total	$	18,872	$	14,127

12

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Accrued expenses consisted of the following (in thousands):

	March 31,		December 31,
	2020		2019
Accrued payroll and related taxes	$	6,748	$	3,985
Accrued federal, state, and local taxes		3,237		2,635
Accrued bonus		3,117		20,206
Self-insurance reserves		2,240		2,238
Employee stock purchase plan contributions		2,582		4,716
Accrued sales commissions		2,423		5,397
Accrued partner commissions		7,321		7,043
Contract liabilities		6,330		5,197
Accrued purchase price related to acquisitions		3,341		2,763
Other		7,848		7,924
Total	$	45,187	$	62,104

Contract liabilities represent amounts that are collected in advance of the satisfaction of performance obligations. See Contract Liabilities in Note 6.

5. Acquisitions of Businesses

January 2019 Acquisition of Compli

On January 22, 2019, the Company completed the acquisition of substantially all the assets of Compli under an Asset Purchase Agreement (the “Compli Purchase”). Compli is a provider of compliance services, technology, and software to producers, distributors, and importers of beverage alcohol in the United States. The Company accounted for the Compli Purchase as a business combination. As a result of the acquisition, the Company expanded its ability to provide transaction tax solutions and content for the beverage alcohol industry.

The total consideration transferred related to this transaction was $17.1 million, consisting of $11.8 million paid in cash at closing, an additional $1.6 million of cash to be paid out after twelve months, and an earnout provision fair valued upon acquisition at $3.8 million. The earnout provision is for a one-time payment and has a maximum payout of $4.0 million based on revenue recognized by the Company from the acquired operating assets for the twelve-month period ended January 31, 2020. The earnout was originally recognized at fair value at the date of the business combination and $4.0 million was paid in the first quarter of 2020.

Estimated fair values of the assets acquired and the liabilities assumed in the Compli Purchase as of the acquisition date are provided in the following table (in thousands):

Assets acquired:
Current assets	$	505
Developed technology, customer relationships, and other intangibles		4,288
Goodwill		12,807
Total assets acquired		17,600
Liabilities assumed:
Current liabilities		482
Total liabilities assumed		482
Net assets acquired	$	17,118

13

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

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 Compli Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	3,250	Multi-period excess earnings-income approach		13	%	6 years
Trademarks and trade names		32	Relief from royalty- income approach		13	%	2 years
Developed technology and    customer database		910	Relief from royalty- income approach		13	%	6 years
Noncompetition agreements		96	With-and-without valuation- income approach		13	%	3 years

The excess of the purchase price over the net identified tangible and intangible assets of $12.8 million has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

February 2019 Acquisition of Indix

On February 6, 2019, the Company completed the acquisition of substantially all the assets of Indix under an Asset Purchase Agreement (the “Indix Purchase”). Indix is an artificial intelligence company providing comprehensive product descriptions for more than one billion products sold and shipped worldwide. The Company accounted for the Indix Purchase as a business combination. As a result of the acquisition, the Company intends to use the Indix artificial intelligence to maintain and expand its tax content database.

The total consideration transferred related to this transaction was $9.1 million, consisting of $5.5 million paid in cash at closing, an additional $1.4 million cash to be paid after eighteen months, and an earnout provision valued upon acquisition at $2.2 million. The earnout provision has a maximum payout of $3.0 million based on the successful transition and achievement of development milestones established in the purchase agreement. The earnout provides for interim payments based on milestones to be evaluated as follows: $0.5 million within three months of closing, $0.65 million within seven months of closing, $0.65 million within eight months of closing, and $1.2 million within 12 months of closing. The earnout was originally recognized at fair value at the date of the business combination and is adjusted to fair value quarterly (see Note 3). The first earnout milestone was achieved in the second quarter of 2019 and was paid in July 2019. The second and fourth milestones were not achieved. A portion of the third milestone was achieved and $0.03 million is recorded within current accrued earnout liabilities on the consolidated balance sheet as of March 31, 2020.

Estimated fair values of the assets acquired and the liabilities assumed in the Indix Purchase as of the acquisition date are provided in the following table (in thousands):

Assets acquired:
Current assets	$	94
Developed technology		4,472
Goodwill		4,953
Total assets acquired		9,519
Liabilities assumed:
Current liabilities		392
Total liabilities assumed		392
Net assets acquired	$	9,127

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 Indix Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate	Estimated Useful Life
Developed technology	$	4,472	Relief from royalty- income approach	24.5%	6 years

14

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

The excess of the purchase price over the net identified tangible and intangible assets of $5.0 million has been recorded as goodwill, which includes cost savings expected from the use of the acquired technology and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

 July 2019 Acquisition of Portway

On July 31, 2019, the Company completed the acquisition of substantially all the assets of Portway under an Asset Purchase Agreement (the “Portway Purchase”). Portway is a provider of Harmonized System classifications and outsourced customs brokerage services. The Company accounted for the Portway Purchase as a business combination. As a result of the acquisition, the Company expanded its cross-border solutions.

The total consideration transferrable related to this transaction was $24.3 million, consisting of $13.0 million paid in cash at closing, an additional $2.0 million of cash to be paid after eighteen months with an acquisition date fair value of $1.9 million, and an earnout provision fair valued upon acquisition at $9.4 million. The earnout is payable in the Company’s common stock no later than February 2021. The maximum number of shares of common stock that could be earned and transferred to the seller is 119,090 shares, which was based on a maximum payout value of $10.0 million and a per share value of $83.97 under the terms of the Portway Purchase. The earnout is based on the achievement of specific revenue and operating metrics through January 2021, and the shares (which were issued at closing and are held in escrow) will be forfeited and cancelled if the metrics are not achieved.

The earnout is based, in part, on two operating metric targets with a maximum payout of $7.5 million. The remainder of the earnout is based on certain revenue targets with a maximum payout of $2.5 million. Pursuant to the Portway Purchase, the shares will be transferred to the seller when the criteria under each provision are satisfied. During the first quarter of 2020, 44,659 shares of common stock (with a $3.8 million value under the Portway Purchase) were transferred to the seller to settle one operating metric target of the earnout. In April 2020, 35,727 shares of common stock (with a $3.0 million value under the Portway Purchase) were transferred to the seller to settle a portion of the second operating metric target. The earnout was originally recognized at fair value at the date of the business combination and is adjusted to fair value quarterly (see Note 3). The remaining earnout liability is recorded in current accrued earnout liabilities on the consolidated balance sheet as of March 31, 2020.

Estimated fair values of the assets acquired and the liabilities assumed in the Portway Purchase as of the acquisition date are provided in the following table (in thousands):  

Assets acquired:
Property and equipment	$	76
Customer relationships and other intangibles		1,865
Goodwill		22,376
Total assets acquired		24,317
Liabilities assumed:
Total liabilities assumed		—
Net assets acquired	$	24,317

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 Portway Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	1,759	Multi-period excess earnings-income approach		12	%	6 years
Noncompetition agreements		106	With-and-without valuation- income approach		12	%	4 years

The excess of the purchase price over the net identified tangible and intangible assets of $22.4 million has been recorded as goodwill, which includes synergies expected from the expanded cross-border product functionality and customs brokerage services and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.  

15

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

6. Revenue

See Note 2 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,
	2020		2019
Revenue (U.S.):
Subscription and returns
Tax determination	$	58,971	$	45,232
Tax returns and compliance management		39,433		26,686
Interest income on funds held for customers		525		729
Total subscription and returns		98,929		72,647
Professional services		5,462		5,735
Total revenue (U.S.)		104,391		78,382
Total revenue (non-U.S.)		7,052		6,588
Total revenue	$	111,443	$	84,970

Disclosures Related to Contracts with Customers

Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent a contract exists, as defined by ASC 606, these liabilities are classified as current and non-current deferred revenue. To the extent that a contract does not exist, as defined by ASC 606 (e.g. customer agreements with non-standard termination rights), these liabilities are classified as contract liabilities. Contract liabilities are transferred to deferred revenue at the point in time when the criteria that establish the existence of a contract are met.

Contract Liabilities

A summary of the activity impacting the contract liabilities during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Contract liabilities:
Balance beginning of period	$	5,197		$	—
Adoption of ASC 606		—			2,090
Contract liabilities transferred to deferred revenue		(2,538	)		(1,257	)
Addition to contract liabilities		3,671			3,375
Balance end of period	$	6,330		$	4,208

As of March 31, 2020, 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.

16

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Deferred Revenue

A summary of the activity impacting deferred revenue balances during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Deferred revenue:
Balance beginning of period	$	161,241		$	134,653
Adoption of ASC 606		—			(11,250	)
Revenue recognized		(111,443	)		(84,970	)
Additional amounts deferred		115,571			94,281
Balance end of period	$	165,369		$	132,714

Assets Recognized from the Costs to Obtain Contracts with Customers

Assets are recognized for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred commissions are amortized over an expected period of benefit of generally six years.

A summary of the activity impacting the deferred commissions during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Deferred commissions:
Balance beginning of period	$	38,416		$	—
Adoption of ASC 606		—			19,267
Additional commissions deferred		4,897			7,656
Amortization of deferred commissions		(2,647	)		(1,279	)
Balance end of period	$	40,666		$	25,644

As of March 31, 2020, $9.7 million of deferred commissions are expected to be amortized within the next 12 months and therefore are included in current assets on the consolidated balance sheets. The remaining amount of deferred commissions are included in noncurrent assets. There were no impairments of assets related to deferred commissions during the three months ended March 31, 2020. There were no assets recognized related to the costs to fulfill contracts during the three months ended March 31, 2020 as these costs were not material.

Remaining Performance Obligations

Contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of March 31, 2020, amounts allocated to these additional contractual obligations are $39.4 million, of which $39.0 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.

17

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

7. Intangible Assets

Finite-lived intangible assets

Finite-lived intangible assets consisted of the following (in thousands):

		March 31, 2020
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,270	$	(11,947	)	$	8,322
Developed technology	3 to 8		36,121		(23,656	)		12,465
Noncompete agreements	3 to 5		762		(614	)		148
Tradename and trademarks	1 to 4		441		(428	)		13
		$	57,594	$	(36,645	)	$	20,949

		December 31, 2019
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,390	$	(11,403	)	$	8,987
Developed technology	3 to 8		36,422		(22,659	)		13,763
Noncompete agreements	3 to 5		777		(612	)		165
Tradename and trademarks	1 to 4		452		(435	)		17
		$	58,041	$	(35,109	)	$	22,932

Finite-lived intangible assets are generally amortized on a straight-line basis over the remaining estimated useful life as management believes this reflects the expected benefit to be received from these assets. Finite-lived intangible assets amortization expense was $1.8 million for the three months ended March 31, 2020 and $1.7 million for the three months ended March 31, 2019.

Goodwill

Changes in the carrying amount of goodwill for the three months ended March 31, 2020 are summarized as follows (in thousands):

Balance—December 31, 2019	$	101,224
Cumulative translation adjustments		(189	)
Balance—March 31, 2020	$	101,035

Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, the Company will conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. The Company has three reporting units for goodwill impairment testing consisting of its U.S., European, and Brazilian operations. As of March 31, 2020, the Brazilian reporting unit had no associated goodwill.

8. Leases    

Total lease cost, net of sublease income, was $3.8 million for the three months ended March 31, 2020 and $2.6 million for the three months ended March 31, 2019. Sublease income was $0.4 million for the three months ended March 31, 2020 and 2019. Leases that commenced in the first three months of 2020 increased operating lease right-of-use assets by $6.6 million.

18

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

9. Commitments and Contingencies

Contingencies

Loss contingencies may arise in connection with the ordinary conduct of the Company’s business activities. The Company considers 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.

On October 22, 2018, PTP OneClick, LLC (“PTP”) filed a lawsuit against Avalara, Inc. in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges that making, using, offering to sell, and selling AvaTax, Avalara Returns, and TrustFile (the “Avalara Products”) infringe U.S. Patent No. 9,760,915 held by PTP and also alleges unspecified trade secret misappropriation, unfair competition, and breach of contract. PTP seeks judgments of willful patent infringement, willful trade secret misappropriation, unfair competition, and breach of contract. PTP requests preliminary and permanent injunctions to enjoin the Company from making, using, offering to sell, and selling the Avalara Products along with treble damages and attorneys’ fees. Based upon the Company’s review of the complaint and the specified patent, the Company believes that the Company has meritorious defenses to PTP’s claims. On November 7, 2018, the Company moved to dismiss the lawsuit and to have the patent held invalid, and also moved to transfer the matter to the United States District Court located in Seattle, Washington. On April 30, 2019, the United States District Court for the Eastern District of Wisconsin granted the Company’s motion to transfer, reserving resolution of the motion to dismiss for the United States District Court for the Western District of Washington. On October 7, 2019, the United States District Court for the Western District of Washington invalidated the patent and dismissed the patent and unfair competition claims with prejudice but did not dismiss the trade secret misappropriation or breach of contract claims. On March 5, 2020, we filed a motion for summary judgment, which remains pending. The court has set the trial date for October 26, 2020. The Company intends to continue to vigorously defend against PTP’s allegations. The Company has not recorded an accrual related this litigation.

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. Except as discussed below, it is not possible to reasonably estimate the potential loss under these indemnification arrangements.

While the Company has never paid a material claim related to these indemnification provisions, the Company believes that, as of March 31, 2020, there is a reasonable possibility that a loss may be incurred pursuant to certain of these arrangements and estimates a range of loss of up to $2.0 million. The Company has not recorded an accrual related to these arrangements as of March 31, 2020 because it has not determined that a loss is probable. The ultimate outcome of these potential obligations is unknown, and it is possible that the actual losses could be higher than the estimated range.  

19

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

10. Debt

Loan and Security Agreement

The Company had a loan and security agreement with Silicon Valley Bank and Ally Bank that consisted of a $50.0 million revolving credit facility (the “Credit Facility”). On June 25, 2019, the Company terminated the Credit Facility.

Prior to termination of the Credit Facility, the Company was required to pay a quarterly fee of 0.50% per annum on the undrawn portion available under the revolving credit facility plus the sum of outstanding letters of credit. Under the Credit Facility, the interest rate on the revolving credit facility was based on the greater of either 4.25% or the current prime rate, plus 1.75%.

11. 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.

In June 2019, the Company completed a follow-on public offering, in which the Company sold 4,133,984 shares of its common stock, including the full exercise of the underwriters’ option to purchase 539,215 additional shares of common stock, at a price of $69.40 per share. The Company received net proceeds of $274.7 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable by the Company of $1.2 million.

The changes to the Company’s shareholders’ equity during the three months March 31, 2020 is as follows (in thousands, except share data):

							Accumulated
					Additional		Other						Total
	Common Stock				Paid-In		Comprehensive			Accumulated			Shareholders’
	Shares		Amount		Capital		Income (Loss)			Deficit			Equity
Balance at January 1, 2020		77,447,620	$	8	$	976,627	$	(2,719	)	$	(510,194	)	$	463,722
Exercise of stock options		532,848				7,928								7,928
Vesting of restricted stock units		186,475
Stock-based compensation cost						9,749								9,749
Shares issued under employee stock    purchase plan		81,894				5,716								5,716
Shares issued related to business    combination earnouts		44,659				3,750								3,750
Shares issued to purchase intangible    assets		1,191				87								87
Gain on translation adjustment								625						625
Net loss											(15,283	)		(15,283	)
Balance at March 31, 2020		78,294,687	$	8	$	1,003,857	$	(2,094	)	$	(525,477	)	$	476,294

20

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

The changes to the Company’s shareholders’ equity for the three months ended March 31, 2019 is as follows (in thousands, except share data):

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			Equity
Balance at January 1, 2019		66,768,563		$	7	$	599,493		$	(2,345	)	$	(487,602	)	$	109,553
Impact of adoption of new accounting    pronouncements - ASC 606 (see Note 2)													27,622			27,622
Exercise of stock options		2,763,291					27,311									27,311
Shares tendered for cashless redemption of    stock-based awards		(2,805	)				(93	)								(93	)
Stock-based compensation cost							6,571									6,571
Shares issued under employee stock    purchase plan		372,764					7,664									7,664
Shares issued to purchase intangible assets		1,634					50									50
Loss on translation adjustment										(462	)					(462	)
Net loss													(10,354	)		(10,354	)
Balance at March 31, 2019		69,903,447		$	7	$	640,996		$	(2,807	)	$	(470,334	)	$	167,862

12. Equity Incentive Plans

The Company has stock-based compensation plans that provide for the award of equity incentives, including stock options, stock awards, RSUs, and purchase rights. As of March 31, 2020, the Company had stock options outstanding under the 2018 Equity Incentive Plan (the “2018 Plan”) and the 2006 Equity Incentive Plan (the “2006 Plan”), had RSUs outstanding under the 2018 Plan, and had purchase rights issued under the ESPP.

In April 2018, the 2018 Plan became effective in connection with the Company’s IPO. The 2018 Plan allows the Company to grant equity incentives to employees, directors, advisors, and consultants providing services to the Company. The total number of shares of common stock reserved for issuance under the 2018 Plan is equal to (1) 5,315,780 shares plus (2) any shares subject to outstanding awards under the 2006 Plan as of June 14, 2018 that subsequently cease to be subject to such awards. The available shares automatically increase each January 1, beginning January 1, 2019, by the lesser of (i) 5% of the aggregate number of shares of common stock outstanding on December 31^st of the immediately preceding calendar year (rounded up to the nearest whole share) and (ii) an amount determined by the Company’s Board of Directors. As of March 31, 2020, 3,540,159 shares were subject to outstanding awards and 9,204,822 shares were available for issuance under the 2018 Plan. The 2018 Plan provides that on the occurrence of certain strategic events, such as a change in control in which options and RSUs are not assumed or substituted, such outstanding options and RSUs will become fully vested and exercisable or payable.

Prior to the 2018 Plan, the Company awarded stock options under the 2006 Plan. The 2006 Plan was terminated in connection with the Company’s IPO. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan. As of March 31, 2020, there were 4,154,956 shares 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,
	2020		2019
Stock-based compensation cost:
Stock options	$	3,849	$	3,917
Restricted stock units		4,933		1,698
Employee stock purchase plan		967		956
Total stock-based compensation cost	$	9,749	$	6,571

21

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

A small portion of stock-based compensation cost above is capitalized in accordance with the accounting guidance for internal-use software. The Company uses the straight-line attribution method for recognizing stock-based compensation expense.

Stock Options

The following table summarizes stock option activity for the Company’s stock-based compensation plans for the three months ended March 31, 2020:

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Shares			Price		Life (Years)		(in thousands)
Options outstanding as of January 1, 2020		5,884,742		$	20.09		7.22	$	312,838
Options granted		211,243			68.61
Options exercised		(532,848	)		14.88
Options cancelled or expired		(79,246	)		15.77
Options outstanding as of March 31, 2020		5,483,891			22.53		7.11		285,564
Options exercisable as of March 31, 2020		2,997,298		$	15.35		6.21	$	177,582

A summary of options outstanding and vested as of March 31, 2020 is as follows:

	Options Outstanding				Options Vested and Exercisable
Exercise	Number		Weighted Average		Number Vested		Weighted Average
Prices	Outstanding		Life (in Years)		and Exercisable		Life (in Years)
$1.50 to $1.90		29,963		1.1		29,963		1.1
2.86 to 6.40		152,780		2.9		152,780		2.9
8.04 to 11.72		457,714		3.9		457,714		3.9
12.20 to 15.06		1,933,421		6.4		1,517,566		6.2
16.06 to 24.00		1,581,078		7.9		555,420		7.8
31.99 to 42.21		826,351		8.7		235,511		8.7
55.10 to 86.61		502,584		9.5		48,344		9.0
		5,483,891				2,997,298

The total intrinsic value of options exercised during the three months ended March 31, 2020 and 2019 was $36.8 million and $109.5 million, respectively.

The weighted average grant date fair value of options granted during the three months ended March 31, 2020 and 2019 was $28.99 and $17.93 per share, respectively. During the three months ended March 31, 2020, 585,475 options vested. There were 2,486,593 options unvested as of March 31, 2020.

As of March 31, 2020, $31.9 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 2.6 years.

22

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

All stock-based payments to participants, including employees and non-employee directors, are measured based on the grant date fair value of the awards and recognized in the consolidated statements of operations over the period during which the participant is required to perform services in exchange for the award. The vesting period is generally four years for employees and one year for non-employee directors. For the options granted during the periods presented, the fair value of options was estimated using the Black-Scholes option-pricing model with the following assumptions:

	For the Three Months Ended March 31,
	2020	2019
Fair market value of common stock	$67.27 - 86.61	$39.76 - 55.79
Volatility	43%	40%
Expected term	6 years	6 years
Expected dividend yield	n/a	n/a
Risk-free interest rate	0.82% - 1.25%	2.31% - 2.65%

The Board of Directors intends all options granted to be exercisable at a price per share not less than the per share fair market value of the Company’s common stock underlying those options on the date of grant. The fair market value per share of the Company’s common stock for purposes of determining stock-based compensation is the closing price of the Company’s common stock as reported on the applicable grant date.

Beginning in 2020, expected volatility for stock options is based on a combination of annualized daily historical volatility of the Company’s stock price and the historical and implied volatility of comparable publicly traded companies over a similar expected term. Prior to 2020, expected volatility was based only on the historical and implied volatility of comparable publicly traded companies over a similar expected term.

The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. Given the Company’s relative inexperience of significant exercise activity, the expected term assumptions were determined based on application of the simplified method of expected term calculation by averaging the contractual life of option grants and the vesting period of such grants. This application, when coupled with the contractual life of ten years and average vesting term of four years for employees and one year for non-employee directors, creates an expected term of six years and five years, respectively.

The Company has not paid and does not expect to pay dividends.

The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the option grant at the date nearest the option grant date.

Restricted Stock Units

The following table summarizes RSU activity for the Company’s stock-based compensation plans for the three months ended March 31, 2020:

				Weighted
				Average
				Grant Date Fair
	Restricted Stock Units			Value Per Share
RSUs outstanding as of January 1, 2020		1,508,281		$	51.52
RSUs granted		945,698			68.89
RSUs vested		(186,475	)		43.89
RSUs cancelled		(56,280	)		49.45
RSUs outstanding as of March 31, 2020		2,211,224		$	59.64

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 date of grant. The vesting period of each RSU grant is generally four years for employees and one year for non-employee directors. As of March 31, 2020, $123.9 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 3.5 years.

23

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

Employee Stock Purchase Plan

The ESPP became effective on June 15, 2018, the first trading day of the Company’s common stock. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. Purchases are accomplished through participation in discrete offering periods. The first offering period began on June 15, 2018 and ended on January 31, 2019. Subsequent offering periods begin on August 1 and February 1 (or such other date determined by our Board of Directors or our Compensation and Leadership Development Committee).

Eligible employees can select a rate of payroll deduction for purchases under the ESPP of between 1% and 15% of their eligible compensation. The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company’s common stock on (i) the first day of the applicable offering period or (ii) the last day of the purchase period in the applicable offering period.

The Company initially reserved 996,709 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP increases automatically on each January 1, beginning January 1, 2019, by the number of shares equal to the least of (i) 1,000,000 shares of common stock, (ii) 1% of the aggregate number of shares of common stock outstanding on December 31^st of the immediately preceding calendar year (rounded up to the nearest whole share), and (iii) an amount determined by the Board of Directors. No more than an aggregate of 10,102,525 shares of common stock may be issued over the ten-year term of the ESPP. As of March 31, 2020, 1,850,081 shares of common stock are reserved for sale under the ESPP.

During the three months ended March 31, 2020, 81,894 shares of common stock were purchased under the ESPP.

As of March 31, 2020, there was approximately $1.3 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, 2020 and will end on July 31, 2020.

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,
	2020	2019
Fair market value of common stock	$85.14	$40.60
Volatility	32%	40%
Expected term	0.5 years	0.5 years
Expected dividend yield	n/a	n/a
Risk-free interest rate	1.54%	2.59%

Beginning in 2020, the expected volatility for ESPP purchase rights is based on daily historical volatility of the Company’s stock price. Prior to 2020, expected volatility was based only on the historical and implied volatility of comparable publicly traded companies over a similar expected term.

13. 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. 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.

24

AVALARA, INC.

Notes to Consolidated Financial Statements

(unaudited)

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share amounts):

	For the Three Months Ended March 31,
	2020			2019
Numerator:
Net loss attributable to common shareholders	$	(15,283	)	$	(10,354	)
Denominator:
Weighted-average common shares    outstanding-basic		77,904			68,381
Dilutive effect of share equivalents resulting from stock    options, restricted stock units, and ESPP shares		—			—
Weighted-average common shares    outstanding-diluted		77,904			68,381
Net loss per common share, basic and diluted	$	(0.20	)	$	(0.15	)

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,
	2020		2019
Options to purchase common shares		5,664		10,237
Unvested restricted stock units		1,554		631
Employee stock purchase plan shares		9		14
Total		7,227		10,882

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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 2019 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 2019 Annual Report. See “Special Note Regarding Forward-Looking Statements” above.

Overview

We provide a leading suite of cloud-based solutions that help businesses of all types and sizes comply with transaction tax requirements worldwide. Our Avalara Compliance Cloud offers a broad and growing suite of compliance solutions that enable businesses to address the complexity of transaction tax compliance, process transactions in real time, produce detailed records of transaction tax determinations, and reduce errors, audit exposure, and total transaction tax compliance costs.

We derive most of our revenue from subscriptions to our solutions. Subscriptions and returns revenue accounted for 95% and 92% of our total revenue during the three months ended March 31, 2020 and 2019, respectively. The initial term of our subscription contracts generally ranges from twelve to eighteen months, and renewal periods are typically one year in length. Subscription and returns revenue is primarily driven by the number of customers we have and the price plans they select for volumes of tax calculations, returns, and tax exemption certificates. We also derive revenue from providing professional services. During the first three months of 2020, we generated approximately 94% of our revenue in North America and we are expanding our international presence to support transaction tax compliance in Europe, South America, and Asia.

Our total revenue for the three months ended March 31, 2020 were $111.4 million compared to $85.0 million for the three months ended March 31, 2019. Our net loss for the three months ended March 31, 2020 was $15.3 million compared to a net loss of $10.4 million for the three months ended March 31, 2019.

Impact of COVID-19 Pandemic

Our global operations expose us to risks associated with public health crises and pandemics, such as the recent novel coronavirus (“COVID-19”) pandemic. Our priority remains the health and safety of our employees and their families. Employees whose jobs can be performed offsite have been instructed to work from home. Currently, nearly all our personnel are able to work from home.

The broader impact of the recent COVID-19 pandemic on our results of operations and overall financial performance remains uncertain, including the impact on our revenue growth, normal operating expenses, and incremental expenses associated with preventative and precautionary measures that we and others are taking in response to the pandemic. In March, there was a decrease in demand for our solutions from customers as well as slower collections on accounts receivable. While we are not insulated from the resulting global economic decline, we currently believe that our strong cash position, which was $450.5 million as of March 31, 2020, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

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, 2020		Dec 31, 2019		Sep 30, 2019		Jun 30, 2019		Mar 31, 2019		Dec 31, 2018		Sep 30, 2018		Jun 30, 2018
Number of core    customers (as of    end of period)		12,710		11,960		11,240		10,430		9,700		9,070		8,490		8,080
Net revenue    retention rate	109%		111%		113%		111%		107%		108%		105%		108%

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Number of Core Customers

We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The mid-market has been and remains our primary target market segment 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, 2020, and December 31, 2019, we had approximately 12,710 and 11,960 core customers, respectively. In the first three months of 2020, our core customers represented more than 80% of our total revenue.

We define a core customer as:

• a unique account identifier in our primary U.S. billing systems, or a billing account (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 and certain legacy billing systems that have not been integrated into our primary U.S. billing systems (e.g., 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 who do not meet the revenue threshold to be considered a core customer. Many of these customers are in the small business and self-serve 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.

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 for these 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 calculation 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. Our net revenue retention rate was 109% for the quarter ended March 31, 2020 and on average has been 111% over the last four quarters ended March 31, 2020.

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 are driven primarily by the acquisition of customers, customer renewals, and additional service offerings purchased by existing customers. Revenue from subscriptions and returns comprised approximately 95% of our revenue for the three months ended March 31, 2020 and 92% of our revenue for the three months ended March 31, 2019.

Subscription and Returns Revenue.   Subscription and returns revenue primarily consist 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.

27

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 twelve to eighteen 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. Subscription and returns revenue also include interest income generated on funds held for 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.

Currently a small component of our total revenue, we offer Streamlined Sales Tax (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.

Professional Services.  We generate professional services revenue from providing tax analysis, configurations, data migrations, integration, training, and other support services. 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. In addition, cost of revenue includes direct costs associated with information technology, such as data center and 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, stock-based compensation, the cost of third-party developers and other independent contractors, and the amortization of capitalized software development costs. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs. Research and development expenses also include allocated costs for certain information technology and facility expenses.

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. 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 databases from acquisitions.

We defer the portion of sales commissions that is considered a cost of obtaining a contract with a customer in accordance with the new revenue recognition standard and amortize these deferred costs over the period of benefit, currently 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 for the full year. Sales commissions are generally earned based on achievement against these targets.

28

We defer the portion of partner commissions costs that are considered a cost of obtaining a contract with a customer in accordance with the new 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. In general, integration partners are 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.

We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, 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, SEC compliance, and internal control compliance.

Total Other (Income) Expense, Net  

Total other (income) expense, net consists of interest income on cash and cash equivalents, quarterly remeasurement of contingent consideration for acquisitions accounted for as business combinations, foreign currency gains and losses, and other nonoperating gains and losses.

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 acquisitions. In the first quarter of 2019, we acquired substantially all the assets of Compli and Indix and in the third quarter of 2019, we acquired substantially all the assets of Portway.

29

	For the Three Months Ended March 31,
	2020			2019
	(in thousands)
Revenue:
Subscription and returns	$	105,546		$	78,231
Professional services		5,897			6,739
Total revenue		111,443			84,970
Cost of revenue:
Subscription and returns		29,517			20,978
Professional services		4,737			4,329
Total cost of revenue(1)		34,254			25,307
Gross profit		77,189			59,663
Operating expenses:
Research and development(1)		25,847			15,956
Sales and marketing(1)		49,634			39,319
General and administrative(1)		21,388			15,234
Total operating expenses		96,869			70,509
Operating loss		(19,680	)		(10,846	)
Total other (income) expense, net		(4,814	)		(608	)
Loss before income taxes		(14,866	)		(10,238	)
Provision for (benefit from) income taxes		417			116
Net loss	$	(15,283	)	$	(10,354	)
(1) The stock-based compensation expense included above was as follows:
	For the Three Months Ended March 31,
	2020			2019
	(in thousands)
Cost of revenue	$	1,196		$	741
Research and development		2,394			1,292
Sales and marketing		2,815			2,169
General and administrative		3,326			2,358
Total stock-based compensation	$	9,731		$	6,560
The amortization of acquired intangibles included above was as follows:
	For the Three Months Ended March 31,
	2020			2019
	(in thousands)
Cost of revenue	$	1,230		$	1,170
Research and development		—			—
Sales and marketing		607			505
General and administrative		4			3
Total amortization of acquired intangibles	$	1,841		$	1,678

30

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,
	2020			2019
Revenue:
Subscription and returns		95	%		92	%
Professional services		5	%		8	%
Total revenue		100	%		100	%
Cost of revenue:
Subscription and returns		26	%		25	%
Professional services		4	%		5	%
Total cost of revenue		31	%		30	%
Gross profit		69	%		70	%
Operating expenses:
Research and development		23	%		19	%
Sales and marketing		45	%		46	%
General and administrative		19	%		18	%
Total operating expenses		87	%		83	%
Operating loss		(18	)%		(13	)%
Total other (income) expense, net		(4	)%		(1	)%
Loss before income taxes		(14	)%		(12	)%
Provision for (benefit from) income taxes		0	%		0	%
Net loss		(14	)%		(12	)%

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Revenue

	For the Three Months Ended March 31,				Change
	2020		2019		Amount			Percentage
	(dollars in thousands)
Revenue:
Subscription and returns	$	105,546	$	78,231	$	27,315			35	%
Professional services		5,897		6,739		(842	)		-12	%
Total revenue	$	111,443	$	84,970	$	26,473			31	%

Total revenue for the three months ended March 31, 2020 increased by $26.5 million, or 31%, compared to the three months ended March 31, 2019. Subscription and returns revenue for the three months ended March 31, 2020 increased by $27.3 million, or 35%, compared to the three months ended March 31, 2019. Professional services revenue for the three months ended March 31, 2020 decreased by $0.8 million, or 12%, compared to the three months ended March 31, 2019 due primarily to a decline in revenue generating activities in March 2020, as the COVID-19 pandemic negatively impacted operations of both our customers and governments.

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, 2020 compared to the same period in 2019, was due primarily to $14.4 million from new U.S. customers, $6.5 million from existing U.S. customers, $4.0 million from SST revenue growth, $0.9 million attributable to revenue growth in our international operations, and $0.9 million from acquisitions made during 2019.

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Cost of Revenue

	For the Three Months Ended March 31,				Change
	2020		2019		Amount		Percentage
	(dollars in thousands)
Cost of revenue
Subscription and returns	$	29,517	$	20,978	$	8,539		41	%
Professional services		4,737		4,329		408		9	%
Total cost of revenue	$	34,254	$	25,307	$	8,947		35	%

Cost of revenue for the three months ended March 31, 2020 increased by $8.9 million, or 35%, compared to the three months ended March 31, 2019. The increase in cost of revenue in absolute dollars was due primarily to an increase of $5.2 million in employee-related costs from higher headcount, an increase of $2.2 million in software hosting costs and an increase of $1.5 million in allocated overhead cost.

Excluding the impact of our 2019 Portway acquisition, cost of revenue headcount increased approximately 34% from the first quarter of 2019 to the first quarter of 2020 due to our continued growth to support our solutions and expand content. Employee-related costs increased due primarily to a $4.1 million increase in salaries and benefits, a $0.5 million increase in stock-based compensation expense, a $0.3 million increase in contract and temporary employee costs, and a $0.2 million increase in compensation expense related to our bonus plans. Software hosting costs have increased due primarily to higher transaction volumes. Allocated overhead consists primarily of facility expenses and shared information technology expenses, both of which were higher in total compared to the prior period due primarily to higher headcount throughout our operations.

Gross Profit

	For the Three Months Ended March 31,						Change
	2020			2019			Amount			Percentage
	(dollars in thousands)
Gross profit
Subscription and returns	$	76,029		$	57,253		$	18,776			33	%
Professional services		1,160			2,410			(1,250	)		-52	%
Total gross profit	$	77,189		$	59,663		$	17,526			29	%
Gross margin
Subscription and returns		72	%		73	%
Professional services		20	%		36	%
Total gross margin		69	%		70	%

Total gross profit for the three months ended March 31, 2020 increased $17.5 million, or 29% compared to the three months ended March 31, 2019. Total gross margin was 69% for the three months ended March 31, 2020 compared to 70% for the same period of 2019. This decrease in gross margin was due primarily to higher software hosting costs.

Research and Development

	For the Three Months Ended March 31,				Change
	2020		2019		Amount		Percentage
	(dollars in thousands)
Research and development	$	25,847	$	15,956	$	9,891		62	%

Research and development expenses for the three months ended March 31, 2020 increased $9.9 million, or 62%, compared to the three months ended March 31, 2019. The increase was due primarily to an increase of $8.1 million in employee-related costs from higher headcount, an increase of $0.9 million in allocated overhead cost, and an increase of $0.5 million in third-party purchased software costs.

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Research and development headcount increased approximately 44% from the first quarter of 2019 to the first quarter of 2020. Employee-related costs increased due primarily to a $6.0 million increase in salaries and benefits, $1.1 million increase in compensation expense related to our bonus plans and a $1.1 million increase in stock-based compensation expense. Software costs increased due primarily to additional investment in information technology security and reporting tools.

Sales and Marketing

	For the Three Months Ended March 31,				Change
	2020		2019		Amount		Percentage
	(dollars in thousands)
Sales and marketing	$	49,634	$	39,319	$	10,315		26	%

Sales and marketing expenses for the three months ended March 31, 2020 increased $10.3 million, or 26%, compared to the three months ended March 31, 2019. The increase was due primarily to an increase of $5.7 million in employee-related costs, an increase of $2.1 million for partner commission expense, an increase of $1.1 million in marketing campaign expenses and an increase of $0.8 million in allocated overhead cost.

Sales and marketing headcount increased approximately 18% from the first quarter of 2019 to the first quarter of 2020. Employee-related costs increased due primarily to a $3.5 million increase in salaries and benefits, $1.0 million increase in travel costs primarily due to our annual sales meeting, $0.7 million increase in compensation expense related to our bonus plans, and a $0.6 million increase in stock-based compensation expense.

Partner commission expense increased due primarily to higher revenues. Marketing campaign expenses increased due to an increase in lead generation activities and brand awareness advertising, partially offset by lower customer event expenses.

General and Administrative

	For the Three Months Ended March 31,				Change
	2020		2019		Amount		Percentage
	(dollars in thousands)
General and administrative	$	21,388	$	15,234	$	6,154		40	%

General and administrative expenses for the three months ended March 31, 2020 increased $6.2 million, or 40%, compared to the three months ended March 31, 2019. The increase was due primarily to an increase of $3.2 million in employee-related costs, an increase of $1.1 million in outside professional services expense, and an increase of $0.8 million in non-income tax expenses.

General and administrative headcount increased approximately 42% from the first quarter of 2019 to the first quarter of 2020. Employee-related costs increased due primarily to a $1.7 million increase in salaries and benefits, a $1.0 million increase in stock-based compensation expense, and a $0.6 million increase in travel costs related to our annual sales and company meetings. Outside professional services expenses increased due to higher audit and internal control compliance costs and higher legal fees associated with expanding our international operations. Non-income tax expenses increased due primarily to higher foreign indirect taxes and higher state franchise taxes.

Total Other (Income) Expense, Net

	For the Three Months Ended March 31,						Change
	2020			2019			Amount
	(dollars in thousands)
Other (income) expense, net
Interest income	$	(1,442	)	$	(767	)	$	(675	)
Interest expense		-			111			(111	)
Other (income) expense, net		(3,372	)		48			(3,420	)
Total other (income) expense, net	$	(4,814	)	$	(608	)	$	(4,206	)

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Total other income for the three months ended March 31, 2020 was $4.8 million compared to $0.6 million for the three months ended March 31, 2019. Interest income increased due to interest earned on investing our public offering cash proceeds. Other income (expense), net was $3.4 million other income for the three months ended March 31, 2020 compared to $0.1 million other expense for the three months ended March 31, 2019, primarily due to changes to our earnout liabilities. We estimate the fair value of earnout liabilities related to business combinations quarterly. During the three-months ended March 31, 2020, the adjustments to fair value decreased the carrying value of the earnout liability for our acquisition of Portway, resulting in other income of $2.5 million. The fair value of the Portway acquisition earnout liability decreased at March 31, 2020 due primarily to a reduction in the revenue projections used to estimate the fair value of the earnout to reflect a decrease in anticipated cross-border transactions as a result of the economic disruption caused by the COVID-19 pandemic.

Provision for (Benefit from) Income Taxes

	For the Three Months Ended March 31,				Change
	2020		2019		Amount
	(dollars in thousands)
Provision for income taxes	$	417	$	116	$	301

The provision for income taxes for the three months ended March 31, 2020 was $0.4 million compared to $0.1 million for the three months ended March 31, 2019. The increase was due primarily to additional foreign income taxes. The effective income tax rate was 2.8% for the three months ended March 31, 2020 compared to 1.1% for the three months ended March 31, 2019. The effective tax rate in both quarters differs from the U.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets.

We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating U.S. tax losses, including in the first quarter of 2020. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development. We expect to maintain a full valuation allowance for the foreseeable future.

Liquidity and Capital Resources

We require cash to fund our operations, including outlays for infrastructure growth, acquisitions, geographic expansion, expanding our sales and marketing activities, research and development efforts, and working capital for our growth. To date, we have financed our operations primarily through cash received from customers for our solutions, public offerings of our common stock, private placements, and bank borrowings. As of March 31, 2020, we had $450.5 million of cash and cash equivalents, most of which was held in money market accounts.

Borrowings

We had a loan and security agreement with Silicon Valley Bank and Ally Bank (the “Lenders”) that consisted of a $50.0 million revolving credit facility (the “Credit Facility”). On June 25, 2019, we terminated the Credit Facility. As of March 31, 2020, we had no credit facilities in place and had no borrowings outstanding.

Future Cash Requirements

As of March 31, 2020, our cash and cash equivalents included proceeds from our June 2019 and our June 2018 public offerings of common stock. We intend to continue to increase our operating expenses and capital expenditures to support the growth in our business and operations. We may also use our cash and cash equivalents to acquire complementary businesses, products, services, technologies, or other assets. We believe that our existing cash and cash equivalents of $450.5 million as of March 31, 2020 will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our financial position and liquidity are, and will be, influenced by a variety of factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing spending, the introduction of new and enhanced solutions, the cash paid for any acquisitions, and the continued market acceptance of our solutions.

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The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:

	For the Three Months Ended March 31,
	2020			2019
	(in thousands)
Cash provided by (used in):
Operating Activities	$	(24,269	)	$	(10,421	)
Investing Activities		(5,515	)		(26,779	)
Financing Activities		13,734			41,986

Operating Activities

Our largest source of operating cash is cash collections from our customers for subscriptions and returns services. Our primary uses of cash from operating activities are for employee-related expenditures, commissions paid to our partners, marketing expenses, and facilities expenses. Cash used in operating activities is comprised of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, other non-cash charges, and net changes in operating assets and liabilities.

For the three months ended March 31, 2020, net cash used in operating activities was $24.3 million compared to net cash used of $10.4 million for the three months ended March 31, 2019. The increase in cash used in operations of $13.9 million was due primarily to higher annual bonus payments of $10.4 million and higher software subscription payments of $2.7 million during the three months ended March 31, 2020. We pay bonuses under our annual incentive plan each March for the previous year ended performance. During the first quarter of each year, we also pay a significant portion of our annual software subscription licenses. These payments were higher in the first three months of 2020 compared to the same period of the prior year due primarily to new software subscriptions for information technology security and reporting tools and more seat licenses for renewing subscriptions due to higher headcount.

Investing Activities

Our investing activities primarily include cash outflows related to purchases of property and equipment, changes in customer fund assets, and, from time-to-time, the cash paid for asset or business acquisitions.

For the three months ended March 31, 2020, cash used in investing activities was $5.5 million, compared to cash used of $26.8 million for the three months ended March 31, 2019. The decrease in cash used of $21.3 million was due primarily to a reduction in cash paid for acquisitions of businesses of $17.3 million, an increase in customer fund assets of $3.9 million in the first three months of 2020 compared to an increase of $7.2 million in the prior period, and lower capital expenditures of $0.5 million. In the first three months of 2019, we acquired substantially all the assets of Compli and Indix for total cash consideration of $17.3 million.

Financing Activities

Our financing activities primarily include cash inflows and outflows from issuance and repurchases of capital stock, our employee stock purchase plan, deferred cash payments made in connection with acquisitions of businesses, and changes in customer fund obligations.

For the three months ended March 31, 2020, cash provided by financing activities was $13.7 million compared to cash provided of $42.0 million for the three months ended March 31, 2019. This decrease in cash provided of $28.3 million was due primarily to a $19.4 million decrease in cash proceeds from exercise of stock options, $1.9 million decrease in cash proceeds from common stock purchased under our employee stock purchase plan, $3.8 million increase in cash paid related to business combination earnouts, and a $3.9 million increase in customer fund obligations in the first three months of 2020 compared to a $7.1 million increase in customer fund obligations in the prior period.

Funds Held from Customers and Customer Fund Obligations

We maintain trust accounts with financial institutions, which allows our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held from customers represent cash and cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Funds held from customers are not commingled with our operating funds, but typically are deposited with funds also held on behalf of our other customers.

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Customer fund obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer fund obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Cash flows related to the cash received from and paid on behalf of customers are reported as follows:

1) changes in customer fund obligations liability are presented as cash flows from financing activities;

2) changes in customer fund assets held and receivables from customers are presented as net cash flows from investing activities; and

3) changes in customer fund assets account that relate to paying for the trust operations, such as banking fees, are presented as cash flows from operating activities.

Contractual Obligations and Commitments

In the first quarter of 2020, our purchase commitments increased $14.0 million as compared to December 31, 2019, primarily related to software license subscriptions that extend up to three years beyond March 31, 2020. There were no other material changes to our contractual obligations as of March 31, 2020 as compared to December 31, 2019.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements in the three months ended March 31, 2020 or 2019.

Use and Reconciliation of Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we have calculated 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, free cash flow, and calculated billings, which are non-GAAP financial measures. We have provided tabular reconciliations of each of these non-GAAP financial measures to its most directly comparable GAAP financial measure.

• We calculate non-GAAP cost of revenue, non-GAAP research and development expense, non-GAAP sales and marketing expense, and non-GAAP general and administrative expense as GAAP cost of revenue, GAAP research and development expense, GAAP sales and marketing expense, and GAAP general and administrative expense before stock-based compensation expense and the amortization of acquired intangible assets included in each of the expense categories.

• We calculate non-GAAP gross profit as GAAP gross profit before stock-based compensation expense and the amortization of acquired intangibles included in cost of revenue. We calculate non-GAAP gross margin as GAAP gross margin before the impact of stock-based compensation expense and the amortization of acquired intangibles included in cost of revenue as a percentage of revenue.

• We calculate non-GAAP operating 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 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.

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. In addition, because we recognize subscription revenue ratably over the subscription term, management uses calculated billings to measure our subscription sales activity for a particular period, to compare subscription sales activity across particular periods, and as a potential indicator of future subscription revenue, the actual timing of which will be affected by several factors, including subscription start date and duration. 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. 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.

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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 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, free cash flow, and calculated billings in conjunction with the related GAAP financial measure.

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

	For the Three Months Ended March 31,
	2020			2019
Reconciliation of Non-GAAP Cost of Revenue:
Cost of revenue	$	34,254		$	25,307
Stock-based compensation expense		(1,196	)		(741	)
Amortization of acquired intangibles		(1,230	)		(1,170	)
Non-GAAP Cost of Revenue	$	31,828		$	23,396
Reconciliation of Non-GAAP Gross Profit:
Gross Profit	$	77,189		$	59,663
Stock-based compensation expense		1,196			741
Amortization of acquired intangibles		1,230			1,170
Non-GAAP Gross Profit	$	79,615		$	61,574
Reconciliation of Non-GAAP Gross Margin:
Gross margin		69	%		70	%
Stock-based compensation expense as a percentage of revenue		1	%		1	%
Amortization of acquired intangibles as a percentage of revenue		1	%		1	%
Non-GAAP Gross Margin		71	%		72	%
Reconciliation of Non-GAAP Research and Development Expense:
Research and development	$	25,847		$	15,956
Stock-based compensation expense		(2,394	)		(1,292	)
Amortization of acquired intangibles		—			—
Non-GAAP Research and Development Expense	$	23,453		$	14,664
Reconciliation of Non-GAAP Sales and Marketing Expense:
Sales and marketing	$	49,634		$	39,319
Stock-based compensation expense		(2,815	)		(2,169	)
Amortization of acquired intangibles		(607	)		(505	)
Non-GAAP Sales and Marketing Expense	$	46,212		$	36,645
Reconciliation of Non-GAAP General and Administrative Expense:
General and administrative	$	21,388		$	15,234
Stock-based compensation expense		(3,326	)		(2,358	)
Amortization of acquired intangibles		(4	)		(3	)
Non-GAAP General and Administrative Expense	$	18,058		$	12,873
Reconciliation of Non-GAAP Operating Loss:
Operating loss	$	(19,680	)	$	(10,846	)
Stock-based compensation expense		9,731			6,560
Amortization of acquired intangibles		1,841			1,678
Non-GAAP Operating Loss	$	(8,108	)	$	(2,608	)
Reconciliation of Non-GAAP Net Loss:
Net loss	$	(15,283	)	$	(10,354	)
Stock-based compensation expense		9,731			6,560
Amortization of acquired intangibles		1,841			1,678
Non-GAAP Net Loss	$	(3,711	)	$	(2,116	)
Free cash flow:
Net cash used in operating activities	$	(24,269	)	$	(10,421	)
Purchases of property and equipment		(1,600	)		(2,114	)
Free cash flow	$	(25,869	)	$	(12,535	)

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The following table reflects calculated billings and reconciles to GAAP revenues. In addition to the defined reconciling items for calculated billings, the first quarter of 2019 also includes one-time reconciling adjustments related to the impact of adoption of ASC 606 as of January 1, 2019.

	Three Months Ended
	Mar 31, 2020			Dec 31, 2019			Sep 30, 2019			Jun 30, 2019			Mar 31, 2019			Dec 31, 2018			Sep 30, 2018			Jun 30, 2018
Total revenue	$	111,443		$	107,627		$	98,525		$	91,299		$	84,970		$	76,923		$	69,919		$	63,879
Add:
Deferred revenue    (end of period)		165,369			161,241			148,466			138,811			132,714			134,653			118,209			109,344
Contract liabilities    (end of period)		6,330			5,197			4,843			4,508			4,208			—			—			—
Impact of adoption    of ASC 606 on    deferred revenue		—			—			—			—			11,250			—			—			—
Less:
Deferred revenue    (beginning of    period)		(161,241	)		(148,466	)		(138,811	)		(132,714	)		(134,653	)		(118,209	)		(109,344	)		(103,878	)
Contract liabilities    (beginning of    period)		(5,197	)		(4,843	)		(4,508	)		(4,208	)		—			—			—			—
Impact of adoption    of ASC 606 on    contract liabilities		—			—			—			—			(2,090	)		—			—			—
Calculated billings	$	116,704		$	120,756		$	108,515		$	97,696		$	96,399		$	93,367		$	78,784		$	69,345

Critical Accounting Policies and Estimates

There have been no material updates or changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in our 2019 Annual Report.

Recent Accounting Pronouncements

For further information on recent accounting pronouncements, refer to Note 2 in the consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We had cash and cash equivalents of $450.5 million and $467.0 million as of March 31, 2020 and December 31, 2019, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with financial institutions. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.

On June 25, 2019, we terminated our Credit Facility. At March 31, 2020, we had no credit facilities in place and had no borrowings outstanding. Any debt we incur in the future may bear interest at variable rates and may expose us to risk related to changes in interest rates.

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Foreign Currency Exchange Risk

Our revenue and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the Euro, British Pound, Indian Rupee, and Brazilian Real. Decreases in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenue and other operating results as expressed in U.S. dollars. For the three months ended March 31, 2020 and 2019, approximately 6% and 8%, respectively, of our revenues were generated in currencies other than U.S. dollars.

We have experienced and will continue to experience fluctuations in our net loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We have not engaged in the hedging of our foreign currency transactions to date. We may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operations and our risk grows.

Inflation

We do not believe that inflation had a material effect on our business, financial condition, or results of operations in the last fiscal year or the first three months of 2020. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act as of March 31, 2020.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of March 31, 2020 due to the material weakness identified as of December 31, 2019 and described below. Management, under the direction and supervision of our chief executive officer and chief financial officer, has performed additional review and analyses and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Previously Identified Material Weakness

As of December 31, 2019, the Company concluded that it had a material weakness as it lacks adequate controls to effectively design, implement, and operate process-level and information technology controls to sufficiently mitigate risks of material misstatement associated with certain complex business processes and changes in those processes or applicable accounting standards. This material weakness led to the following individual significant deficiencies:

• Design and implementation of controls over a portion of the underlying data used to derive the accounting entries related to the adoption of ASC 606;

• Design and implementation of control activities to address changes in ongoing revenue and deferred commission accounting following the adoption of ASC 606;

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• Design and implementation of controls related to the enforcement of segregation of duties in key areas of financial reporting, including sales order pricing and approvals; and

• Operating effectiveness of controls related to the review of manual journal entries.

The Company is working to remediate the material weakness and resulting significant deficiencies in internal control over financial reporting and is taking steps to improve the internal control environment. During the first quarter of 2020, the Company formed an internal working group to detail and implement specific remediation plans for its control deficiencies, engaged with outside consultants to provide advice and assistance, and hired additional personnel to assist with performing and monitoring internal control activity. The Company has recently completed the following:

• Enhanced processes and review controls around revenue recognition and the deferral of commission costs; and

• Implemented additional training to improve documentation that supports effective control operation.

The Company continues to work to:

• Enhance monitoring controls to timely respond to changes in key processes, including any required changes to the design of process level controls;

• Implement system controls, enhancements and automation to reduce manual error-prone processes; and

• Enhance user access reviews and monitoring controls, where appropriate, to improve segregation of duties.

To remediate the material weakness and resulting significant deficiencies, the Company will require additional time to demonstrate the effectiveness of the remediation efforts. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Notwithstanding the material weakness, management has concluded that the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with GAAP.

Changes in Internal Control over Financial Reporting

Other than the changes described above regarding the enhanced processes and additional training implemented in connection with the remediation of the material weakness and resulting significant deficiencies, there were no changes in our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

40

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be subject to legal proceedings arising in the ordinary course of business. In addition, from time to time, third parties may assert intellectual property infringement claims against us in the form of letters and other forms of communication. Regardless of the outcome of any existing or future litigation, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

On October 22, 2018, PTP OneClick, LLC (“PTP”) filed a lawsuit against Avalara, Inc. in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges that making, using, offering to sell, and selling AvaTax, Avalara Returns, and TrustFile (the “Avalara Products”) infringe U.S. Patent No. 9,760,915 held by PTP and also alleges unspecified trade secret misappropriation, unfair competition, and breach of contract. PTP seeks judgments of willful patent infringement, willful trade secret misappropriation, unfair competition, and breach of contract. PTP requests preliminary and permanent injunctions to enjoin us from making, using, offering to sell, and selling the Avalara Products along with treble damages and attorneys’ fees. Based upon our review of the complaint and the specified patent, we believe we have meritorious defenses to PTP’s claims. On November 7, 2018, we moved to dismiss the lawsuit and to have the patent held invalid, and also have moved to transfer the matter to the United States District Court located in Seattle, Washington. On April 30, 2019, the United States District Court for the Eastern District of Wisconsin granted our motion to transfer, reserving resolution of the motion to dismiss for the United States District Court for the Western District of Washington. On October 7, 2019, the United States District Court for the Western District of Washington invalidated the patent and dismissed the patent and unfair competition claims with prejudice but did not dismiss the trade secret misappropriation or breach of contract claims. On March 5, 2020, we filed a motion for summary judgment, which remains pending. The court has set the trial date for October 26, 2020. We intend to continue to vigorously defend against PTP’s allegations. For a description of the risks of this and similar litigation, see “Risk Factors—Our ability to protect our intellectual property is limited and our solutions are, and may in the future be, subject to claims of infringement by third parties” in our 2019 Annual Report.

Item 1A. Risk Factors.

Other than the item discussed below, there have been no material changes to the Company’s Risk Factors as disclosed in our 2019 Annual Report.

The recent novel coronavirus pandemic could adversely affect our business, financial condition, results of operations, and cash flows.

The recent novel coronavirus (COVID-19) pandemic has resulted in widespread disruptions across the United States and the world, including in the states and countries in which we operate. As a result of the COVID-19 pandemic, we have seen decreased demand for our solutions from customers as well as slower collections on accounts receivable. Because we sell our solutions primarily on a subscription basis, the effect of the pandemic may not be fully reflected in our operating results until future periods. Like many companies, including our customers and prospects, most of our employees are working from home, we have limited all non-essential business travel, and we have modified certain other business practices to conform to government restrictions and best practices encouraged by government and regulatory authorities. While we are developing and implementing risk mitigation plans and have reduced our pace of hiring, decreased costs associated with travel and marketing, and delayed certain other non-essential expenditures, these measures may not be sufficient to prevent adverse impacts on our business and financial condition from COVID-19. The degree to which the COVID-19 pandemic may impact our results of operations and financial condition is unknown at this time and will depend on future developments, including the geographic spread of COVID-19, the severity and the duration of the pandemic, and further actions that may be taken by governmental authorities or businesses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On June 14, 2018, the SEC declared effective the Registration Statement on Form S-1 (File No. 333-224850) for our IPO. Using a portion of the proceeds from the IPO, on August 15, 2018, we repaid all amounts outstanding under our term loan facility. Apart from the repayment of our term loan facility, there has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

41

Item 6. Exhibits.

Exhibit Number	Description
3.1	Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q, filed August 10, 2018 (File No. 001-38525)).
3.2	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-Q, filed August 10, 2018 (File No. 001-38525)).
10.1+	Executive Employment Agreement between the Registrant and Ross Tennenbaum effective April 1, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed April 2, 2020 (File No. 001-38525)).
31.1*	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance Document
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

+ Management contract or compensatory plan.

42

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AVALARA, INC.
Date:  May 8, 2020	By:	/s/ Ross Tennenbaum
		Ross Tennenbaum
		Chief Financial Officer and Treasurer (Principal Financial Officer)

43

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott McFarlane, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Avalara, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 8, 2020	By:	/s/ Scott McFarlane
		Scott McFarlane
		Chairman and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ross Tennenbaum, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Avalara, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 8, 2020	By:	/s/ Ross Tennenbaum
		Ross Tennenbaum
		Chief Financial Officer and Treasurer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Avalara, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 8, 2020	By:	/s/ Scott McFarlane
		Scott McFarlane Chairman and Chief Executive Officer
		(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Avalara, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 8, 2020	By:	/s/ Ross Tennenbaum
		Ross Tennenbaum
		Chief Financial Officer and Treasurer (Principal Financial Officer)

XML

Net Loss Per Share Attributable to Common Shareholders

3 Months Ended

Mar. 31, 2020

Earnings Per Share [Abstract]

Net Loss Per Share Attributable to Common Shareholders

13. 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. For purposes of this calculation, all common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common shareholders as their effect is antidilutive. As a result, basic and diluted net loss per common share was the same for each period presented.

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share amounts):

	For the Three Months Ended March 31,
	2020			2019
Numerator:
Net loss attributable to common shareholders	$	(15,283	)	$	(10,354	)
Denominator:
Weighted-average common shares    outstanding-basic		77,904			68,381
Dilutive effect of share equivalents resulting from stock    options, restricted stock units, and ESPP shares		—			—
Weighted-average common shares    outstanding-diluted		77,904			68,381
Net loss per common share, basic and diluted	$	(0.20	)	$	(0.15	)

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,
	2020		2019
Options to purchase common shares		5,664		10,237
Unvested restricted stock units		1,554		631
Employee stock purchase plan shares		9		14
Total		7,227		10,882

XML

Commitments and Contingencies

3 Months Ended

Mar. 31, 2020

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

9. Commitments and Contingencies

Contingencies

Loss contingencies may arise in connection with the ordinary conduct of the Company’s business activities. The Company considers 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.

On October 22, 2018, PTP OneClick, LLC (“PTP”) filed a lawsuit against Avalara, Inc. in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges that making, using, offering to sell, and selling AvaTax, Avalara Returns, and TrustFile (the “Avalara Products”) infringe U.S. Patent No. 9,760,915 held by PTP and also alleges unspecified trade secret misappropriation, unfair competition, and breach of contract. PTP seeks judgments of willful patent infringement, willful trade secret misappropriation, unfair competition, and breach of contract. PTP requests preliminary and permanent injunctions to enjoin the Company from making, using, offering to sell, and selling the Avalara Products along with treble damages and attorneys’ fees. Based upon the Company’s review of the complaint and the specified patent, the Company believes that the Company has meritorious defenses to PTP’s claims. On November 7, 2018, the Company moved to dismiss the lawsuit and to have the patent held invalid, and also moved to transfer the matter to the United States District Court located in Seattle, Washington. On April 30, 2019, the United States District Court for the Eastern District of Wisconsin granted the Company’s motion to transfer, reserving resolution of the motion to dismiss for the United States District Court for the Western District of Washington. On October 7, 2019, the United States District Court for the Western District of Washington invalidated the patent and dismissed the patent and unfair competition claims with prejudice but did not dismiss the trade secret misappropriation or breach of contract claims. On March 5, 2020, we filed a motion for summary judgment, which remains pending. The court has set the trial date for October 26, 2020. The Company intends to continue to vigorously defend against PTP’s allegations. The Company has not recorded an accrual related this litigation.

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. Except as discussed below, it is not possible to reasonably estimate the potential loss under these indemnification arrangements.

While the Company has never paid a material claim related to these indemnification provisions, the Company believes that, as of March 31, 2020, there is a reasonable possibility that a loss may be incurred pursuant to certain of these arrangements and estimates a range of loss of up to $2.0 million. The Company has not recorded an accrual related to these arrangements as of March 31, 2020 because it has not determined that a loss is probable. The ultimate outcome of these potential obligations is unknown, and it is possible that the actual losses could be higher than the estimated range.  

XML

Acquisitions of Businesses

3 Months Ended

Mar. 31, 2020

Business Combinations [Abstract]

Acquisitions of Businesses

5. Acquisitions of Businesses

January 2019 Acquisition of Compli

On January 22, 2019, the Company completed the acquisition of substantially all the assets of Compli under an Asset Purchase Agreement (the “Compli Purchase”). Compli is a provider of compliance services, technology, and software to producers, distributors, and importers of beverage alcohol in the United States. The Company accounted for the Compli Purchase as a business combination. As a result of the acquisition, the Company expanded its ability to provide transaction tax solutions and content for the beverage alcohol industry.

The total consideration transferred related to this transaction was $17.1 million, consisting of $11.8 million paid in cash at closing, an additional $1.6 million of cash to be paid out after twelve months, and an earnout provision fair valued upon acquisition at $3.8 million. The earnout provision is for a one-time payment and has a maximum payout of $4.0 million based on revenue recognized by the Company from the acquired operating assets for the twelve-month period ended January 31, 2020. The earnout was originally recognized at fair value at the date of the business combination and $4.0 million was paid in the first quarter of 2020.

Estimated fair values of the assets acquired and the liabilities assumed in the Compli Purchase as of the acquisition date are provided in the following table (in thousands):

Assets acquired:
Current assets	$	505
Developed technology, customer relationships, and other intangibles		4,288
Goodwill		12,807
Total assets acquired		17,600
Liabilities assumed:
Current liabilities		482
Total liabilities assumed		482
Net assets acquired	$	17,118

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 Compli Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	3,250	Multi-period excess earnings-income approach		13	%	6 years
Trademarks and trade names		32	Relief from royalty- income approach		13	%	2 years
Developed technology and    customer database		910	Relief from royalty- income approach		13	%	6 years
Noncompetition agreements		96	With-and-without valuation- income approach		13	%	3 years

The excess of the purchase price over the net identified tangible and intangible assets of $12.8 million has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

February 2019 Acquisition of Indix

On February 6, 2019, the Company completed the acquisition of substantially all the assets of Indix under an Asset Purchase Agreement (the “Indix Purchase”). Indix is an artificial intelligence company providing comprehensive product descriptions for more than one billion products sold and shipped worldwide. The Company accounted for the Indix Purchase as a business combination. As a result of the acquisition, the Company intends to use the Indix artificial intelligence to maintain and expand its tax content database.

The total consideration transferred related to this transaction was $9.1 million, consisting of $5.5 million paid in cash at closing, an additional $1.4 million cash to be paid after eighteen months, and an earnout provision valued upon acquisition at $2.2 million. The earnout provision has a maximum payout of $3.0 million based on the successful transition and achievement of development milestones established in the purchase agreement. The earnout provides for interim payments based on milestones to be evaluated as follows: $0.5 million within three months of closing, $0.65 million within seven months of closing, $0.65 million within eight months of closing, and $1.2 million within 12 months of closing. The earnout was originally recognized at fair value at the date of the business combination and is adjusted to fair value quarterly (see Note 3). The first earnout milestone was achieved in the second quarter of 2019 and was paid in July 2019. The second and fourth milestones were not achieved. A portion of the third milestone was achieved and $0.03 million is recorded within current accrued earnout liabilities on the consolidated balance sheet as of March 31, 2020.

Estimated fair values of the assets acquired and the liabilities assumed in the Indix Purchase as of the acquisition date are provided in the following table (in thousands):

Assets acquired:
Current assets	$	94
Developed technology		4,472
Goodwill		4,953
Total assets acquired		9,519
Liabilities assumed:
Current liabilities		392
Total liabilities assumed		392
Net assets acquired	$	9,127

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 Indix Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate	Estimated Useful Life
Developed technology	$	4,472	Relief from royalty- income approach	24.5%	6 years

The excess of the purchase price over the net identified tangible and intangible assets of $5.0 million has been recorded as goodwill, which includes cost savings expected from the use of the acquired technology and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.

 July 2019 Acquisition of Portway

On July 31, 2019, the Company completed the acquisition of substantially all the assets of Portway under an Asset Purchase Agreement (the “Portway Purchase”). Portway is a provider of Harmonized System classifications and outsourced customs brokerage services. The Company accounted for the Portway Purchase as a business combination. As a result of the acquisition, the Company expanded its cross-border solutions.

The total consideration transferrable related to this transaction was $24.3 million, consisting of $13.0 million paid in cash at closing, an additional $2.0 million of cash to be paid after eighteen months with an acquisition date fair value of $1.9 million, and an earnout provision fair valued upon acquisition at $9.4 million. The earnout is payable in the Company’s common stock no later than February 2021. The maximum number of shares of common stock that could be earned and transferred to the seller is 119,090 shares, which was based on a maximum payout value of $10.0 million and a per share value of $83.97 under the terms of the Portway Purchase. The earnout is based on the achievement of specific revenue and operating metrics through January 2021, and the shares (which were issued at closing and are held in escrow) will be forfeited and cancelled if the metrics are not achieved.

The earnout is based, in part, on two operating metric targets with a maximum payout of $7.5 million. The remainder of the earnout is based on certain revenue targets with a maximum payout of $2.5 million. Pursuant to the Portway Purchase, the shares will be transferred to the seller when the criteria under each provision are satisfied. During the first quarter of 2020, 44,659 shares of common stock (with a $3.8 million value under the Portway Purchase) were transferred to the seller to settle one operating metric target of the earnout. In April 2020, 35,727 shares of common stock (with a $3.0 million value under the Portway Purchase) were transferred to the seller to settle a portion of the second operating metric target. The earnout was originally recognized at fair value at the date of the business combination and is adjusted to fair value quarterly (see Note 3). The remaining earnout liability is recorded in current accrued earnout liabilities on the consolidated balance sheet as of March 31, 2020.

Estimated fair values of the assets acquired and the liabilities assumed in the Portway Purchase as of the acquisition date are provided in the following table (in thousands):  

Assets acquired:
Property and equipment	$	76
Customer relationships and other intangibles		1,865
Goodwill		22,376
Total assets acquired		24,317
Liabilities assumed:
Total liabilities assumed		—
Net assets acquired	$	24,317

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 Portway Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	1,759	Multi-period excess earnings-income approach		12	%	6 years
Noncompetition agreements		106	With-and-without valuation- income approach		12	%	4 years

The excess of the purchase price over the net identified tangible and intangible assets of $22.4 million has been recorded as goodwill, which includes synergies expected from the expanded cross-border product functionality and customs brokerage services and the value of the assembled workforce. The goodwill is expected to be deductible for tax purposes.  

XML

Fair Value Measurements - Summary of Reconciliation of Beginning and Ending Balances of Recurring Fair Value Measurements (Details) - Recurring Basis - Significant Unobservable Inputs (Level 3) - Earnout Related to Acquisitions - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Earnout liabilities:
Balance beginning of period	$ 13,808	$ 0
Fair value recorded at acquisition	0	5,952
Payments of earnout liabilities	(7,700)	0
Total unrealized (gains) losses included in other (income) expense, net	(2,509)	0
Balance end of period	$ 3,599	$ 5,952

XML

Balance Sheet Detail - Accrued Expenses (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Mar. 31, 2019	Dec. 31, 2018
Accrued Liabilities Current [Abstract]
Accrued payroll and related taxes	$ 6,748	$ 3,985
Accrued federal, state, and local taxes	3,237	2,635
Accrued bonus	3,117	20,206
Self-insurance reserves	2,240	2,238
Employee stock purchase plan contributions	2,582	4,716
Accrued sales commissions	2,423	5,397
Accrued partner commissions	7,321	7,043
Contract liabilities	6,330	5,197	$ 4,208	$ 0
Accrued purchase price related to acquisitions	3,341	2,763
Other	7,848	7,924
Total	$ 45,187	$ 62,104

XML

Equity Incentive Plans - Summary of Options Outstanding and Vested (Details)	3 Months Ended
	Mar. 31, 2020 $ / shares shares
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Option Outstanding, Number Outstanding	5,483,891
Options Vested and Exercisable, Number Vested and Exercisable	2,997,298
Options Vested and Exercisable, Weighted Average Life (in Years)	6 years 2 months 15 days
$1.50 to $1.90
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 1.50
Exercise Prices, High | $ / shares	$ 1.90
Option Outstanding, Number Outstanding	29,963
Options Outstanding, Weighted Average Life (in Years)	1 year 1 month 6 days
Options Vested and Exercisable, Number Vested and Exercisable	29,963
Options Vested and Exercisable, Weighted Average Life (in Years)	1 year 1 month 6 days
2.86 to 6.40
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 2.86
Exercise Prices, High | $ / shares	$ 6.40
Option Outstanding, Number Outstanding	152,780
Options Outstanding, Weighted Average Life (in Years)	2 years 10 months 24 days
Options Vested and Exercisable, Number Vested and Exercisable	152,780
Options Vested and Exercisable, Weighted Average Life (in Years)	2 years 10 months 24 days
8.04 to 11.72
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 8.04
Exercise Prices, High | $ / shares	$ 11.72
Option Outstanding, Number Outstanding	457,714
Options Outstanding, Weighted Average Life (in Years)	3 years 10 months 24 days
Options Vested and Exercisable, Number Vested and Exercisable	457,714
Options Vested and Exercisable, Weighted Average Life (in Years)	3 years 10 months 24 days
12.20 to 15.06
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 12.20
Exercise Prices, High | $ / shares	$ 15.06
Option Outstanding, Number Outstanding	1,933,421
Options Outstanding, Weighted Average Life (in Years)	6 years 4 months 24 days
Options Vested and Exercisable, Number Vested and Exercisable	1,517,566
Options Vested and Exercisable, Weighted Average Life (in Years)	6 years 2 months 12 days
16.06 to 24.00
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 16.06
Exercise Prices, High | $ / shares	$ 24.00
Option Outstanding, Number Outstanding	1,581,078
Options Outstanding, Weighted Average Life (in Years)	7 years 10 months 24 days
Options Vested and Exercisable, Number Vested and Exercisable	555,420
Options Vested and Exercisable, Weighted Average Life (in Years)	7 years 9 months 18 days
31.99 to 42.21
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 31.99
Exercise Prices, High | $ / shares	$ 42.21
Option Outstanding, Number Outstanding	826,351
Options Outstanding, Weighted Average Life (in Years)	8 years 8 months 12 days
Options Vested and Exercisable, Number Vested and Exercisable	235,511
Options Vested and Exercisable, Weighted Average Life (in Years)	8 years 8 months 12 days
55.10 to 86.61
Share Based Compensation Shares Authorized Under Stock Option Plans Exercise Price Range [Line Items]
Exercise Prices, Low | $ / shares	$ 55.10
Exercise Prices, High | $ / shares	$ 86.61
Option Outstanding, Number Outstanding	502,584
Options Outstanding, Weighted Average Life (in Years)	9 years 6 months
Options Vested and Exercisable, Number Vested and Exercisable	48,344
Options Vested and Exercisable, Weighted Average Life (in Years)	9 years

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Shareholders' Equity - Summary of Changes of Shareholders' Equity (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Class Of Stock [Line Items]
Beginning balance	$ 463,722	$ 109,553
Impact of adoption of new accounting pronouncements - ASC 606 (see Note 2)		27,622
Exercise of stock options	$ 7,928	27,311
Exercise of stock options, Shares	532,848
Shares tendered for cashless redemption of stock options		(93)
Stock-based compensation cost	$ 9,749	6,571
Shares issued under employee stock purchase plan	5,716	7,664
Shares issued related to business combination earnouts	3,750
Shares issued to purchase intangible assets	87	50
Gain (Loss) on translation adjustment	625	(462)
Net loss	(15,283)	(10,354)
Ending balance	476,294	167,862
Common Stock
Class Of Stock [Line Items]
Beginning balance	$ 8	$ 7
Beginning balance, Shares	77,447,620	66,768,563
Exercise of stock options, Shares	532,848	2,763,291
Vesting of restricted stock units	186,475
Shares tendered for cashless redemption of stock-based awards, Shares		(2,805)
Shares issued under employee stock purchase plan, Shares	81,894	372,764
Shares issued related to business combination earnouts, Shares	44,659
Shares issued to purchase intangible assets, Shares	1,191	1,634
Ending balance	$ 8	$ 7
Ending balance, Shares	78,294,687	69,903,447
Additional Paid-In Capital
Class Of Stock [Line Items]
Beginning balance	$ 976,627	$ 599,493
Exercise of stock options	7,928	27,311
Shares tendered for cashless redemption of stock options		(93)
Stock-based compensation cost	9,749	6,571
Shares issued under employee stock purchase plan	5,716	7,664
Shares issued related to business combination earnouts	3,750
Shares issued to purchase intangible assets	87	50
Ending balance	1,003,857	640,996
Accumulated Other Comprehensive Income (Loss)
Class Of Stock [Line Items]
Beginning balance	(2,719)	(2,345)
Gain (Loss) on translation adjustment	625	(462)
Ending balance	(2,094)	(2,807)
Accumulated Deficit
Class Of Stock [Line Items]
Beginning balance	(510,194)	(487,602)
Impact of adoption of new accounting pronouncements - ASC 606 (see Note 2)		27,622
Net loss	(15,283)	(10,354)
Ending balance	$ (525,477)	$ (470,334)

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Statement Of Financial Position [Abstract]
Trade accounts receivable, allowance for doubtful accounts	$ 2,233	$ 1,179
Receivable from customers, allowance	$ 305	$ 270
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Preferred stock, shares authorized	20,000,000	20,000,000
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares, issued	78,295,000	77,448,000
Common stock, shares, outstanding	78,295,000	77,448,000
Common stock, shares authorized	600,000,000	600,000,000

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Nature of Operations

3 Months Ended

Mar. 31, 2020

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Nature of Operations

1. Nature of Operations

Avalara, Inc. (the “Company”) provides software solutions that help businesses of all types and sizes comply with tax requirements for transactions worldwide. The Company offers a broad and growing suite of compliance solutions for transaction 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, and communications 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 in Brazil, Canada, Europe, and India that provide business development, software development, and support services.

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Revenue - Summary of Activity Impacting Deferred Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
ASC 606
Deferred Revenue Rollforward
Adoption of ASC 606	$ 0	$ 2,090
Deferred Revenue
Deferred Revenue Rollforward
Balance beginning of period	161,241	134,653
Revenue recognized	(111,443)	(84,970)
Additional amounts deferred	115,571	94,281
Balance end of period	165,369	132,714
Deferred Revenue | ASC 606
Deferred Revenue Rollforward
Adoption of ASC 606	$ 0	$ (11,250)

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Intangible Assets - Schedule of Finite-lived Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Finite Lived Intangible Assets [Line Items]
Gross	$ 57,594	$ 58,041
Accumulated Amortization	(36,645)	(35,109)
Net	20,949	22,932
Customer Relationships
Finite Lived Intangible Assets [Line Items]
Gross	20,270	20,390
Accumulated Amortization	(11,947)	(11,403)
Net	$ 8,322	$ 8,987
Customer Relationships | Minimum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	3 years	3 years
Customer Relationships | Maximum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	10 years	10 years
Developed Technology
Finite Lived Intangible Assets [Line Items]
Gross	$ 36,121	$ 36,422
Accumulated Amortization	(23,656)	(22,659)
Net	$ 12,465	$ 13,763
Developed Technology | Minimum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	3 years	3 years
Developed Technology | Maximum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	8 years	8 years
Noncompete Agreements
Finite Lived Intangible Assets [Line Items]
Gross	$ 762	$ 777
Accumulated Amortization	(614)	(612)
Net	$ 148	$ 165
Noncompete Agreements | Minimum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	3 years	3 years
Noncompete Agreements | Maximum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	5 years	5 years
Tradename and Trademarks
Finite Lived Intangible Assets [Line Items]
Gross	$ 441	$ 452
Accumulated Amortization	(428)	(435)
Net	$ 13	$ 17
Tradename and Trademarks | Minimum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	1 year	1 year
Tradename and Trademarks | Maximum
Finite Lived Intangible Assets [Line Items]
Average Useful Life (Years)	4 years	4 years

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Net Loss Per Share Attributable to Common Shareholders - Schedule of Computation of Basic and Diluted Net Loss Per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Numerator:
Net loss attributable to common shareholders	$ (15,283)	$ (10,354)
Denominator:
Weighted-average common shares outstanding-basic	77,904	68,381
Dilutive effect of share equivalents resulting from stock options, restricted stock units, and ESPP shares	0	0
Weighted-average common shares outstanding-diluted	77,904	68,381
Net loss per common share, basic and diluted	$ (0.20)	$ (0.15)

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Equity Incentive Plans (Tables)

3 Months Ended

Mar. 31, 2020

Summary of Stock-Based Compensation Expense Related to Equity Incentive Rewards

The Company recognized total stock-based compensation cost related to equity incentive awards as follows (in thousands):

	For the Three Months Ended March 31,
	2020		2019
Stock-based compensation cost:
Stock options	$	3,849	$	3,917
Restricted stock units		4,933		1,698
Employee stock purchase plan		967		956
Total stock-based compensation cost	$	9,749	$	6,571

Summary of Stock Option Activity

Stock Options

The following table summarizes stock option activity for the Company’s stock-based compensation plans for the three months ended March 31, 2020:

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Shares			Price		Life (Years)		(in thousands)
Options outstanding as of January 1, 2020		5,884,742		$	20.09		7.22	$	312,838
Options granted		211,243			68.61
Options exercised		(532,848	)		14.88
Options cancelled or expired		(79,246	)		15.77
Options outstanding as of March 31, 2020		5,483,891			22.53		7.11		285,564
Options exercisable as of March 31, 2020		2,997,298		$	15.35		6.21	$	177,582

Summary of Options Outstanding and Vested by Range of Exercise Prices

A summary of options outstanding and vested as of March 31, 2020 is as follows:

	Options Outstanding				Options Vested and Exercisable
Exercise	Number		Weighted Average		Number Vested		Weighted Average
Prices	Outstanding		Life (in Years)		and Exercisable		Life (in Years)
$1.50 to $1.90		29,963		1.1		29,963		1.1
2.86 to 6.40		152,780		2.9		152,780		2.9
8.04 to 11.72		457,714		3.9		457,714		3.9
12.20 to 15.06		1,933,421		6.4		1,517,566		6.2
16.06 to 24.00		1,581,078		7.9		555,420		7.8
31.99 to 42.21		826,351		8.7		235,511		8.7
55.10 to 86.61		502,584		9.5		48,344		9.0
		5,483,891				2,997,298

Summary of Fair Value Estimated Using Black-Scholes Option Pricing Model Assumptions

For the options granted during the periods presented, the fair value of options was estimated using the Black-Scholes option-pricing model with the following assumptions:

	For the Three Months Ended March 31,
	2020	2019
Fair market value of common stock	$67.27 - 86.61	$39.76 - 55.79
Volatility	43%	40%
Expected term	6 years	6 years
Expected dividend yield	n/a	n/a
Risk-free interest rate	0.82% - 1.25%	2.31% - 2.65%

Summary of RSU Activity

The following table summarizes RSU activity for the Company’s stock-based compensation plans for the three months ended March 31, 2020:

				Weighted
				Average
				Grant Date Fair
	Restricted Stock Units			Value Per Share
RSUs outstanding as of January 1, 2020		1,508,281		$	51.52
RSUs granted		945,698			68.89
RSUs vested		(186,475	)		43.89
RSUs cancelled		(56,280	)		49.45
RSUs outstanding as of March 31, 2020		2,211,224		$	59.64

2018 Employee Stock Purchase Plan

Summary of Fair Value Estimated Using Black-Scholes Option Pricing Model Assumptions

	For the Three Months Ended March 31,
	2020	2019
Fair market value of common stock	$85.14	$40.60
Volatility	32%	40%
Expected term	0.5 years	0.5 years
Expected dividend yield	n/a	n/a
Risk-free interest rate	1.54%	2.59%

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Acquisitions of Businesses (Tables)

3 Months Ended

Mar. 31, 2020

Compli, Inc.

Business Acquisition [Line Items]

Schedule of Estimated Fair Value of Assets Acquired and Liabilities Assumed

Estimated fair values of the assets acquired and the liabilities assumed in the Compli Purchase as of the acquisition date are provided in the following table (in thousands):

Assets acquired:
Current assets	$	505
Developed technology, customer relationships, and other intangibles		4,288
Goodwill		12,807
Total assets acquired		17,600
Liabilities assumed:
Current liabilities		482
Total liabilities assumed		482
Net assets acquired	$	17,118

Summary of Valuation Methodologies, Significant Assumptions and Estimated Useful Lives

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 Compli Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	3,250	Multi-period excess earnings-income approach		13	%	6 years
Trademarks and trade names		32	Relief from royalty- income approach		13	%	2 years
Developed technology and    customer database		910	Relief from royalty- income approach		13	%	6 years
Noncompetition agreements		96	With-and-without valuation- income approach		13	%	3 years

Indix Corporation

Business Acquisition [Line Items]

Schedule of Estimated Fair Value of Assets Acquired and Liabilities Assumed

Estimated fair values of the assets acquired and the liabilities assumed in the Indix Purchase as of the acquisition date are provided in the following table (in thousands):

Assets acquired:
Current assets	$	94
Developed technology		4,472
Goodwill		4,953
Total assets acquired		9,519
Liabilities assumed:
Current liabilities		392
Total liabilities assumed		392
Net assets acquired	$	9,127

Summary of Valuation Methodologies, Significant Assumptions and Estimated Useful Lives

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 Indix Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate	Estimated Useful Life
Developed technology	$	4,472	Relief from royalty- income approach	24.5%	6 years

Portway International, Inc

Business Acquisition [Line Items]

Schedule of Estimated Fair Value of Assets Acquired and Liabilities Assumed

Estimated fair values of the assets acquired and the liabilities assumed in the Portway Purchase as of the acquisition date are provided in the following table (in thousands):  

Assets acquired:
Property and equipment	$	76
Customer relationships and other intangibles		1,865
Goodwill		22,376
Total assets acquired		24,317
Liabilities assumed:
Total liabilities assumed		—
Net assets acquired	$	24,317

Summary of Valuation Methodologies, Significant Assumptions and Estimated Useful Lives

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 Portway Purchase are provided in the below table (in thousands):

Intangible	Assigned Value		Valuation Methodology	Discount Rate			Estimated Useful Life
Customer relationships	$	1,759	Multi-period excess earnings-income approach		12	%	6 years
Noncompetition agreements		106	With-and-without valuation- income approach		12	%	4 years

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Revenue - Additional Information (Details) - USD ($)	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Deferred commissions amortization expected period	6 years
Deferred contract costs, expected to be amortized within next 12 Months	$ 9,676,000	$ 9,279,000
Impairments of deferred contract costs	0
Assets recognized related to costs to fulfill contracts	0
Additional contractual obligations	39,400,000
Prepaid Expenses and Other Current Assets
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Deferred contract costs, expected to be amortized within next 12 Months	$ 9,700,000

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Intangible Assets - Additional Information (Details)		3 Months Ended
	Oct. 31, 2018 USD ($)	Mar. 31, 2020 USD ($) Unit	Mar. 31, 2019 USD ($)	Dec. 31, 2019 USD ($)
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, amortization expense		$ 1,800,000	$ 1,700,000
Number of goodwill impairment reporting units | Unit		3
Goodwill impairment charge	$ 0
Goodwill		$ 101,035,000		$ 101,224,000
Brazilian Reporting Unit
Finite Lived Intangible Assets [Line Items]
Goodwill		$ 0

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Equity Incentive Plans - Summary of Fair Value of ESPP Purchase Rights Was Estimated Using Black-Scholes Option-pricing Model (Details) - $ / shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Volatility	43.00%	40.00%
Expected term	6 years	6 years
Expected dividend yield	0.00%	0.00%
2018 Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock	$ 85.14	$ 40.60
Volatility	32.00%	40.00%
Expected term	6 months	6 months
Risk-free interest rate	1.54%	2.59%

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Shareholders' Equity (Tables)

3 Months Ended

Mar. 31, 2020

Stockholders Equity Note [Abstract]

Summary of Changes of Shareholders' Equity (Deficit)

The changes to the Company’s shareholders’ equity during the three months March 31, 2020 is as follows (in thousands, except share data):

							Accumulated
					Additional		Other						Total
	Common Stock				Paid-In		Comprehensive			Accumulated			Shareholders’
	Shares		Amount		Capital		Income (Loss)			Deficit			Equity
Balance at January 1, 2020		77,447,620	$	8	$	976,627	$	(2,719	)	$	(510,194	)	$	463,722
Exercise of stock options		532,848				7,928								7,928
Vesting of restricted stock units		186,475
Stock-based compensation cost						9,749								9,749
Shares issued under employee stock    purchase plan		81,894				5,716								5,716
Shares issued related to business    combination earnouts		44,659				3,750								3,750
Shares issued to purchase intangible    assets		1,191				87								87
Gain on translation adjustment								625						625
Net loss											(15,283	)		(15,283	)
Balance at March 31, 2020		78,294,687	$	8	$	1,003,857	$	(2,094	)	$	(525,477	)	$	476,294

The changes to the Company’s shareholders’ equity for the three months ended March 31, 2019 is as follows (in thousands, except share data):

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			Equity
Balance at January 1, 2019		66,768,563		$	7	$	599,493		$	(2,345	)	$	(487,602	)	$	109,553
Impact of adoption of new accounting    pronouncements - ASC 606 (see Note 2)													27,622			27,622
Exercise of stock options		2,763,291					27,311									27,311
Shares tendered for cashless redemption of    stock-based awards		(2,805	)				(93	)								(93	)
Stock-based compensation cost							6,571									6,571
Shares issued under employee stock    purchase plan		372,764					7,664									7,664
Shares issued to purchase intangible assets		1,634					50									50
Loss on translation adjustment										(462	)					(462	)
Net loss													(10,354	)		(10,354	)
Balance at March 31, 2019		69,903,447		$	7	$	640,996		$	(2,807	)	$	(470,334	)	$	167,862

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Balance Sheet Detail (Tables)

3 Months Ended

Mar. 31, 2020

Balance Sheet Related Disclosures [Abstract]

Schedule of Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

	Useful	March 31,			December 31,
	Life (Years)	2020			2019
Computer equipment and software	3 to 5	$	15,596		$	15,636
Internally developed software	6		6,521			5,948
Furniture and fixtures	5		6,559			6,589
Office equipment	3 to 5		850			1,058
Leasehold improvements	1 to 10		29,030			28,984
			58,556			58,215
Accumulated depreciation			(24,371	)		(23,218	)
Property and equipment—net		$	34,185		$	34,997

Schedule of Prepaid Expense And Other Current Assets

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

	March 31,		December 31,
	2020		2019
Prepaid expenses	$	16,154	$	11,064
Accrued investment income		347		565
Deposits		229		197
Other		2,142		2,301
Total	$	18,872	$	14,127

Schedule of Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	March 31,		December 31,
	2020		2019
Accrued payroll and related taxes	$	6,748	$	3,985
Accrued federal, state, and local taxes		3,237		2,635
Accrued bonus		3,117		20,206
Self-insurance reserves		2,240		2,238
Employee stock purchase plan contributions		2,582		4,716
Accrued sales commissions		2,423		5,397
Accrued partner commissions		7,321		7,043
Contract liabilities		6,330		5,197
Accrued purchase price related to acquisitions		3,341		2,763
Other		7,848		7,924
Total	$	45,187	$	62,104

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Leases

3 Months Ended

Mar. 31, 2020

Leases [Abstract]

Leases

8. Leases    

Total lease cost, net of sublease income, was $3.8 million for the three months ended March 31, 2020 and $2.6 million for the three months ended March 31, 2019. Sublease income was $0.4 million for the three months ended March 31, 2020 and 2019. Leases that commenced in the first three months of 2020 increased operating lease right-of-use assets by $6.6 million.

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Balance Sheet Detail

3 Months Ended

Mar. 31, 2020

Balance Sheet Related Disclosures [Abstract]

Balance Sheet Detail

4. Balance Sheet Detail

Property and equipment, net consisted of the following (in thousands):

	Useful	March 31,			December 31,
	Life (Years)	2020			2019
Computer equipment and software	3 to 5	$	15,596		$	15,636
Internally developed software	6		6,521			5,948
Furniture and fixtures	5		6,559			6,589
Office equipment	3 to 5		850			1,058
Leasehold improvements	1 to 10		29,030			28,984
			58,556			58,215
Accumulated depreciation			(24,371	)		(23,218	)
Property and equipment—net		$	34,185		$	34,997

Depreciation expense was $2.3 million for the three months ended March 31, 2020 and $2.0 million for the three ended March 31, 2019, respectively.

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

	March 31,		December 31,
	2020		2019
Prepaid expenses	$	16,154	$	11,064
Accrued investment income		347		565
Deposits		229		197
Other		2,142		2,301
Total	$	18,872	$	14,127

Accrued expenses consisted of the following (in thousands):

	March 31,		December 31,
	2020		2019
Accrued payroll and related taxes	$	6,748	$	3,985
Accrued federal, state, and local taxes		3,237		2,635
Accrued bonus		3,117		20,206
Self-insurance reserves		2,240		2,238
Employee stock purchase plan contributions		2,582		4,716
Accrued sales commissions		2,423		5,397
Accrued partner commissions		7,321		7,043
Contract liabilities		6,330		5,197
Accrued purchase price related to acquisitions		3,341		2,763
Other		7,848		7,924
Total	$	45,187	$	62,104

Contract liabilities represent amounts that are collected in advance of the satisfaction of performance obligations. See Contract Liabilities in Note 6.

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Equity Incentive Plans

3 Months Ended

Mar. 31, 2020

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Equity Incentive Plans

12. Equity Incentive Plans

The Company has stock-based compensation plans that provide for the award of equity incentives, including stock options, stock awards, RSUs, and purchase rights. As of March 31, 2020, the Company had stock options outstanding under the 2018 Equity Incentive Plan (the “2018 Plan”) and the 2006 Equity Incentive Plan (the “2006 Plan”), had RSUs outstanding under the 2018 Plan, and had purchase rights issued under the ESPP.

In April 2018, the 2018 Plan became effective in connection with the Company’s IPO. The 2018 Plan allows the Company to grant equity incentives to employees, directors, advisors, and consultants providing services to the Company. The total number of shares of common stock reserved for issuance under the 2018 Plan is equal to (1) 5,315,780 shares plus (2) any shares subject to outstanding awards under the 2006 Plan as of June 14, 2018 that subsequently cease to be subject to such awards. The available shares automatically increase each January 1, beginning January 1, 2019, by the lesser of (i) 5% of the aggregate number of shares of common stock outstanding on December 31^st of the immediately preceding calendar year (rounded up to the nearest whole share) and (ii) an amount determined by the Company’s Board of Directors. As of March 31, 2020, 3,540,159 shares were subject to outstanding awards and 9,204,822 shares were available for issuance under the 2018 Plan. The 2018 Plan provides that on the occurrence of certain strategic events, such as a change in control in which options and RSUs are not assumed or substituted, such outstanding options and RSUs will become fully vested and exercisable or payable.

Prior to the 2018 Plan, the Company awarded stock options under the 2006 Plan. The 2006 Plan was terminated in connection with the Company’s IPO. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan. As of March 31, 2020, there were 4,154,956 shares 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,
	2020		2019
Stock-based compensation cost:
Stock options	$	3,849	$	3,917
Restricted stock units		4,933		1,698
Employee stock purchase plan		967		956
Total stock-based compensation cost	$	9,749	$	6,571

A small portion of stock-based compensation cost above is capitalized in accordance with the accounting guidance for internal-use software. The Company uses the straight-line attribution method for recognizing stock-based compensation expense.

Stock Options

The following table summarizes stock option activity for the Company’s stock-based compensation plans for the three months ended March 31, 2020:

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Shares			Price		Life (Years)		(in thousands)
Options outstanding as of January 1, 2020		5,884,742		$	20.09		7.22	$	312,838
Options granted		211,243			68.61
Options exercised		(532,848	)		14.88
Options cancelled or expired		(79,246	)		15.77
Options outstanding as of March 31, 2020		5,483,891			22.53		7.11		285,564
Options exercisable as of March 31, 2020		2,997,298		$	15.35		6.21	$	177,582

A summary of options outstanding and vested as of March 31, 2020 is as follows:

	Options Outstanding				Options Vested and Exercisable
Exercise	Number		Weighted Average		Number Vested		Weighted Average
Prices	Outstanding		Life (in Years)		and Exercisable		Life (in Years)
$1.50 to $1.90		29,963		1.1		29,963		1.1
2.86 to 6.40		152,780		2.9		152,780		2.9
8.04 to 11.72		457,714		3.9		457,714		3.9
12.20 to 15.06		1,933,421		6.4		1,517,566		6.2
16.06 to 24.00		1,581,078		7.9		555,420		7.8
31.99 to 42.21		826,351		8.7		235,511		8.7
55.10 to 86.61		502,584		9.5		48,344		9.0
		5,483,891				2,997,298

The total intrinsic value of options exercised during the three months ended March 31, 2020 and 2019 was $36.8 million and $109.5 million, respectively.

The weighted average grant date fair value of options granted during the three months ended March 31, 2020 and 2019 was $28.99 and $17.93 per share, respectively. During the three months ended March 31, 2020, 585,475 options vested. There were 2,486,593 options unvested as of March 31, 2020.

As of March 31, 2020, $31.9 million of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of approximately 2.6 years.

All stock-based payments to participants, including employees and non-employee directors, are measured based on the grant date fair value of the awards and recognized in the consolidated statements of operations over the period during which the participant is required to perform services in exchange for the award. The vesting period is generally four years for employees and one year for non-employee directors. For the options granted during the periods presented, the fair value of options was estimated using the Black-Scholes option-pricing model with the following assumptions:

	For the Three Months Ended March 31,
	2020	2019
Fair market value of common stock	$67.27 - 86.61	$39.76 - 55.79
Volatility	43%	40%
Expected term	6 years	6 years
Expected dividend yield	n/a	n/a
Risk-free interest rate	0.82% - 1.25%	2.31% - 2.65%

The Board of Directors intends all options granted to be exercisable at a price per share not less than the per share fair market value of the Company’s common stock underlying those options on the date of grant. The fair market value per share of the Company’s common stock for purposes of determining stock-based compensation is the closing price of the Company’s common stock as reported on the applicable grant date.

Beginning in 2020, expected volatility for stock options is based on a combination of annualized daily historical volatility of the Company’s stock price and the historical and implied volatility of comparable publicly traded companies over a similar expected term. Prior to 2020, expected volatility was based only on the historical and implied volatility of comparable publicly traded companies over a similar expected term.

The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. Given the Company’s relative inexperience of significant exercise activity, the expected term assumptions were determined based on application of the simplified method of expected term calculation by averaging the contractual life of option grants and the vesting period of such grants. This application, when coupled with the contractual life of ten years and average vesting term of four years for employees and one year for non-employee directors, creates an expected term of six years and five years, respectively.

The Company has not paid and does not expect to pay dividends.

The risk-free interest rate was based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected term of the option grant at the date nearest the option grant date.

Restricted Stock Units

The following table summarizes RSU activity for the Company’s stock-based compensation plans for the three months ended March 31, 2020:

				Weighted
				Average
				Grant Date Fair
	Restricted Stock Units			Value Per Share
RSUs outstanding as of January 1, 2020		1,508,281		$	51.52
RSUs granted		945,698			68.89
RSUs vested		(186,475	)		43.89
RSUs cancelled		(56,280	)		49.45
RSUs outstanding as of March 31, 2020		2,211,224		$	59.64

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 date of grant. The vesting period of each RSU grant is generally four years for employees and one year for non-employee directors. As of March 31, 2020, $123.9 million of total unrecognized compensation cost related to RSUs was expected to be recognized over a weighted average period of approximately 3.5 years.

Employee Stock Purchase Plan

The ESPP became effective on June 15, 2018, the first trading day of the Company’s common stock. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. Purchases are accomplished through participation in discrete offering periods. The first offering period began on June 15, 2018 and ended on January 31, 2019. Subsequent offering periods begin on August 1 and February 1 (or such other date determined by our Board of Directors or our Compensation and Leadership Development Committee).

Eligible employees can select a rate of payroll deduction for purchases under the ESPP of between 1% and 15% of their eligible compensation. The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company’s common stock on (i) the first day of the applicable offering period or (ii) the last day of the purchase period in the applicable offering period.

The Company initially reserved 996,709 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP increases automatically on each January 1, beginning January 1, 2019, by the number of shares equal to the least of (i) 1,000,000 shares of common stock, (ii) 1% of the aggregate number of shares of common stock outstanding on December 31^st of the immediately preceding calendar year (rounded up to the nearest whole share), and (iii) an amount determined by the Board of Directors. No more than an aggregate of 10,102,525 shares of common stock may be issued over the ten-year term of the ESPP. As of March 31, 2020, 1,850,081 shares of common stock are reserved for sale under the ESPP.

During the three months ended March 31, 2020, 81,894 shares of common stock were purchased under the ESPP.

As of March 31, 2020, there was approximately $1.3 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, 2020 and will end on July 31, 2020.

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,
	2020	2019
Fair market value of common stock	$85.14	$40.60
Volatility	32%	40%
Expected term	0.5 years	0.5 years
Expected dividend yield	n/a	n/a
Risk-free interest rate	1.54%	2.59%

Beginning in 2020, the expected volatility for ESPP purchase rights is based on daily historical volatility of the Company’s stock price. Prior to 2020, expected volatility was based only on the historical and implied volatility of comparable publicly traded companies over a similar expected term.

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Balance Sheet Detail - Property and Equipment, Net (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 58,556	$ 58,215
Accumulated depreciation	(24,371)	(23,218)
Property and equipment—net	34,185	34,997
Computer Equipment and Software
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 15,596	15,636
Computer Equipment and Software | Minimum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	3 years
Computer Equipment and Software | Maximum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	5 years
Internally Developed Software
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 6,521	5,948
Property and equipment, Useful Life	6 years
Furniture and Fixtures
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 6,559	6,589
Property and equipment, Useful Life	5 years
Office Equipment
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 850	1,058
Office Equipment | Minimum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	3 years
Office Equipment | Maximum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	5 years
Leasehold Improvements
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 29,030	$ 28,984
Leasehold Improvements | Minimum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	1 year
Leasehold Improvements | Maximum
Property Plant And Equipment [Line Items]
Property and equipment, Useful Life	10 years

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Acquisitions of Businesses - Additional Information (Details) $ / shares in Units, $ in Thousands				1 Months Ended	3 Months Ended	12 Months Ended
	Jul. 31, 2019 USD ($) OperatingMetric $ / shares shares	Feb. 06, 2019 USD ($)	Jan. 22, 2019 USD ($)	Apr. 30, 2020 USD ($) shares	Mar. 31, 2020 USD ($) shares	Jan. 22, 2020 USD ($)	Jan. 31, 2020 USD ($)	Dec. 31, 2019 USD ($)	Mar. 31, 2019 USD ($)
Business Acquisition [Line Items]
Accrued value of earnout related to acquisition					$ 0				$ 5,952
Goodwill					101,035			$ 101,224
Compli, Inc.
Business Acquisition [Line Items]
Total consideration transferred			$ 17,100
Consideration in cash			11,800			$ 1,600
Accrued value of earnout related to acquisition			3,800
Maximum payout earned							$ 4,000
Earnout recognized at fair value paid					4,000
Goodwill			$ 12,807
Indix Corporation
Business Acquisition [Line Items]
Total consideration transferred		$ 9,100
Consideration in cash		5,500
Accrued value of earnout related to acquisition		2,200
Maximum payout earned		3,000
Goodwill		4,953
Additional cash to be paid, as consideration, after eighteen months		1,400
Indix Corporation | Within Three Months from Closing Date of Acquisition
Business Acquisition [Line Items]
Maximum payout earned		500
Indix Corporation | Within Seven Months from Closing Date of Acquisition
Business Acquisition [Line Items]
Maximum payout earned		650
Indix Corporation | Within 8 Months from Closing Date of Acquisition
Business Acquisition [Line Items]
Maximum payout earned		650
Indix Corporation | Within 12 Months from Closing Date of Acquisition
Business Acquisition [Line Items]
Maximum payout earned		$ 1,200
Indix Corporation | Current Accrued Earnout Liabilities
Business Acquisition [Line Items]
Portion of third milestone payment achieved					$ 30
Portway International, Inc
Business Acquisition [Line Items]
Total consideration transferred	$ 24,300
Consideration in cash	13,000
Accrued value of earnout related to acquisition	9,400
Maximum payout earned	10,000
Goodwill	22,376
Additional cash to be paid, as consideration, after eighteen months	2,000
Acquisition date fair value of cash consideration	$ 1,900
Share price of common shares that could be earned and transferred to seller | $ / shares	$ 83.97
Business combination number of operating metric targets used in earnout payment | OperatingMetric	2
Portway International, Inc | Operating Metrics Targets
Business Acquisition [Line Items]
Maximum payout earned	$ 7,500
Portway International, Inc | Revenue Targets
Business Acquisition [Line Items]
Maximum payout earned	$ 2,500
Portway International, Inc | Operating Metrics Targets One
Business Acquisition [Line Items]
Common stock transferred, shares | shares					44,659
Common stock transferred, value					$ 3,800
Portway International, Inc | Operating Metrics Targets Two | Subsequent Event
Business Acquisition [Line Items]
Common stock transferred, shares | shares				35,727
Common stock transferred, value				$ 3,000
Portway International, Inc | Maximum | Common Stock
Business Acquisition [Line Items]
Number of common shares that could be earned and transferred to seller | shares	119,090

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Equity Incentive Plans - Summary of Stock Option Activity (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Shares
Options outstanding beginning balance	5,884,742
Options granted	211,243
Options exercised	(532,848)
Options cancelled or expired	(79,246)
Options outstanding ending balance	5,483,891	5,884,742
Options exercisable	2,997,298
Weighted Average Exercise Price
Options outstanding beginning balance	$ 20.09
Options granted	68.61
Options exercised	14.88
Options cancelled or expired	15.77
Options outstanding ending balance	22.53	$ 20.09
Options exercisable	$ 15.35
Weighted Average Remaining Contractual Life (Years)
Options outstanding	7 years 1 month 9 days	7 years 2 months 19 days
Options exercisable	6 years 2 months 15 days
Aggregate Intrinsic Value
Options outstanding	$ 285,564	$ 312,838
Options exercisable	$ 177,582

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Shareholders' Equity - Additional Information (Details) $ / shares in Units, $ in Millions	1 Months Ended	3 Months Ended
	Jun. 30, 2019 USD ($) $ / shares shares	Mar. 31, 2020 Class $ / shares shares	Dec. 31, 2019 $ / shares shares
Class Of Stock [Line Items]
Number of classes of stock | Class		2
Capital stock, authorized shares		620,000,000
Common stock, shares authorized		600,000,000	600,000,000
Common stock, par value | $ / shares		$ 0.0001	$ 0.0001
Preferred stock, shares authorized		20,000,000	20,000,000
Preferred stock, par value | $ / shares		$ 0.0001	$ 0.0001
Common Stock | Follow-on Public Offering
Class Of Stock [Line Items]
Follow-on public offering	4,133,984
Common stock price per share | $ / shares	$ 69.40
Proceeds from common stock offering, net of underwriting discounts | $	$ 274.7
Offering expenses paid and payable | $	$ 1.2
Common Stock | Underwriters
Class Of Stock [Line Items]
Follow-on public offering	539,215

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Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Current assets:
Cash and cash equivalents	$ 450,535	$ 466,950
Trade accounts receivable—net of allowance for doubtful accounts of $2,233 and $1,179, respectively	53,797	51,644
Deferred commissions	9,676	9,279
Prepaid expenses and other current assets	18,872	14,127
Total current assets before customer fund assets	532,880	542,000
Funds held from customers	28,096	24,383
Receivable from customers—net of allowance of $305 and $270, respectively	588	420
Total current assets	561,564	566,803
Noncurrent assets:
Deferred commissions	30,990	29,137
Operating lease right-of-use assets—net	53,929	49,321
Property and equipment—net	34,185	34,997
Intangible assets—net	20,949	22,932
Goodwill	101,035	101,224
Other noncurrent assets	3,237	2,853
Total assets	805,889	807,267
Current liabilities:
Trade payables	15,289	11,693
Accrued expenses	45,187	62,104
Deferred revenue	164,699	160,271
Accrued earnout liabilities	3,671	4,120
Operating lease liabilities	10,140	8,756
Total current liabilities before customer fund obligations	238,986	246,944
Customer fund obligations	28,817	24,783
Total current liabilities	267,803	271,727
Noncurrent liabilities:
Deferred revenue	670	970
Accrued earnout liabilities	0	9,835
Operating lease liabilities	59,887	58,301
Deferred tax liability	399	337
Other noncurrent liabilities	836	2,375
Total liabilities	329,595	343,545
Commitments and contingencies	0	0
Shareholders' equity:
Preferred stock, $0.0001 par value– no shares issued and outstanding at March 31, 2020 and December 31, 2019, and 20,000 shares authorized as of March 31, 2020 and December 31, 2019	0	0
Common stock, $0.0001 par value– 78,295 and 77,448 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively, and 600,000 shares authorized as of March 31, 2020 and December 31, 2019	8	8
Additional paid-in capital	1,003,857	976,627
Accumulated other comprehensive loss	(2,094)	(2,719)
Accumulated deficit	(525,477)	(510,194)
Total shareholders’ equity	476,294	463,722
Total liabilities and shareholders' equity	$ 805,889	$ 807,267

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash flows from operating activities:
Net loss	$ (15,283)	$ (10,354)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation	9,731	6,560
Depreciation and amortization	4,091	3,681
Deferred tax expense	62	39
Non-cash operating lease costs	1,956	1,054
Non-cash change in earnout liabilities	(2,509)	0
Non-cash bad debt expense	631	222
Other	192	58
Changes in operating assets and liabilities:
Trade accounts receivable	(2,750)	(5,535)
Prepaid expenses and other current assets	(4,745)	(1,705)
Deferred commissions	(2,250)	(5,266)
Other noncurrent assets	(384)	(236)
Trade payables	3,659	3,590
Accrued expenses	(18,568)	(10,373)
Deferred revenue	4,128	9,031
Operating lease liabilities	(2,230)	(1,187)
Net cash used in operating activities	(24,269)	(10,421)
Cash flows from investing activities:
Purchase of property and equipment	(1,600)	(2,114)
Cash paid for acquisitions of businesses	0	(17,310)
Cash paid for acquired intangible assets	0	(131)
Net increase in customer fund assets	(3,915)	(7,224)
Net cash used in investing activities	(5,515)	(26,779)
Cash flows from financing activities:
Payments of deferred financing costs	0	(39)
Proceeds from exercise of stock options and common stock warrants	7,928	27,311
Proceeds from purchases of stock under employee stock purchase plan	5,716	7,664
Taxes paid related to net share settlement of stock-based awards	0	(93)
Payment related to business combination earnouts	(3,760)	0
Payment related to asset acquisition earnouts	(65)	0
Net increase in customer fund obligations	3,915	7,143
Net cash provided by financing activities	13,734	41,986
Foreign currency effect on cash and cash equivalents	(365)	(230)
Net change in cash and cash equivalents	(16,415)	4,556
Cash and cash equivalents—Beginning of period	466,950	142,322
Cash and cash equivalents—End of period	450,535	146,878
Supplemental cash flow disclosures:
Cash paid for interest expense	0	63
Cash paid for operating lease liabilities	3,108	2,110
Cash paid for income taxes	320	77
Non-cash investing and financing activities:
Stock issued related to business combinations	3,750	0
Accrued purchase price related to acquisitions	0	2,984
Accrued value of earnout related to acquisitions of businesses	0	5,952
Property and equipment additions in accounts payable and accrued expenses	743	938
Deferred financing costs in accounts payable and accrued expenses	0	272
Fair value of common stock issued to purchase intangible assets	87	50
Operating lease right-of-use assets in exchange for lease obligations	$ 6,562	$ 2,388

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Net Loss Per Share Attributable to Common Shareholders - Schedule of Potential Shares Not Included in the Computation of Diluted Earnings Per Share (Details) - shares shares in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	7,227	10,882
Options To Purchase Common Stock
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	5,664	10,237
Unvested Restricted Stock Units
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	1,554	631
Employee Stock Purchase Plan Shares
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount	9	14

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Revenue - Summary of Activity Impacting Contract Liabilities (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Contract Liabilities [Rollforward]
Balance beginning of period	$ 5,197	$ 0
Contract liabilities transferred to deferred revenue	(2,538)	(1,257)
Addition to contract liabilities	3,671	3,375
Balance end of period	6,330	4,208
ASC 606
Contract Liabilities [Rollforward]
Adoption of ASC 606	$ 0	$ 2,090

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Revenue - Additional Information (Details 1) $ in Millions	Mar. 31, 2020 USD ($)
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Additional contractual obligations	$ 39.4
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2020-04-01
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Additional contractual obligations	$ 39.0
Revenue expected to be recognized with remaining amount	12 months

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Leases - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Leases [Abstract]
Total lease cost, net of sublease income	$ 3,800	$ 2,600
Sublease income	400	400
Increase in operating lease right-of-use assets	$ 6,562	$ 2,388

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Net Loss Per Share Attributable to Common Shareholders (Tables)

3 Months Ended

Mar. 31, 2020

Earnings Per Share [Abstract]

Schedule of Computation of Basic and Diluted Net Loss Per Common Share

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share amounts):

	For the Three Months Ended March 31,
	2020			2019
Numerator:
Net loss attributable to common shareholders	$	(15,283	)	$	(10,354	)
Denominator:
Weighted-average common shares    outstanding-basic		77,904			68,381
Dilutive effect of share equivalents resulting from stock    options, restricted stock units, and ESPP shares		—			—
Weighted-average common shares    outstanding-diluted		77,904			68,381
Net loss per common share, basic and diluted	$	(0.20	)	$	(0.15	)

Schedule of Potential Shares Not Included in the Computation of Diluted Earnings Per Share

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,
	2020		2019
Options to purchase common shares		5,664		10,237
Unvested restricted stock units		1,554		631
Employee stock purchase plan shares		9		14
Total		7,227		10,882

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Revenue (Tables)

3 Months Ended

Mar. 31, 2020

Revenue From Contract With Customer [Abstract]

Summary of Total Revenues

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,
	2020		2019
Revenue (U.S.):
Subscription and returns
Tax determination	$	58,971	$	45,232
Tax returns and compliance management		39,433		26,686
Interest income on funds held for customers		525		729
Total subscription and returns		98,929		72,647
Professional services		5,462		5,735
Total revenue (U.S.)		104,391		78,382
Total revenue (non-U.S.)		7,052		6,588
Total revenue	$	111,443	$	84,970

Summary of Activity Impacting Contract Liabilities

A summary of the activity impacting the contract liabilities during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Contract liabilities:
Balance beginning of period	$	5,197		$	—
Adoption of ASC 606		—			2,090
Contract liabilities transferred to deferred revenue		(2,538	)		(1,257	)
Addition to contract liabilities		3,671			3,375
Balance end of period	$	6,330		$	4,208

Summary of Activity Impacting Deferred Revenue

A summary of the activity impacting deferred revenue balances during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Deferred revenue:
Balance beginning of period	$	161,241		$	134,653
Adoption of ASC 606		—			(11,250	)
Revenue recognized		(111,443	)		(84,970	)
Additional amounts deferred		115,571			94,281
Balance end of period	$	165,369		$	132,714

Summary of Activity Impacting Deferred Commissions

A summary of the activity impacting the deferred commissions during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Deferred commissions:
Balance beginning of period	$	38,416		$	—
Adoption of ASC 606		—			19,267
Additional commissions deferred		4,897			7,656
Amortization of deferred commissions		(2,647	)		(1,279	)
Balance end of period	$	40,666		$	25,644

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Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Interim Financial Information

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, 2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020. The accompanying interim consolidated balance sheet as of March 31, 2020, the consolidated interim statements of operations for the three months ended March 31, 2020 and 2019, the consolidated statements of comprehensive loss for the three months ended March 31, 2020 and 2019, and the consolidated statements of cash flows for the three months ended March 31, 2020 and 2019, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full year ending December 31, 2020.

Prior Period Restatements and Adjustments

Prior Period Restatements and Adjustments

In preparing the 2019 annual consolidated financial statements, the Company discovered an immaterial error in recording deferred sales commissions for the first three quarters of 2019 impacting its previously reported quarterly financial results. The correction to sales commission expense resulted in an increase in sales and marketing expenses and accumulated deficit of $1.1 million and a $0.01 increase in net loss per share in the first quarter of 2019. The restatement of these prior period corrected amounts is presented in the accompanying unaudited consolidated statement of operations, consolidated statement of comprehensive loss, and consolidated statement of cash flows for the three-months ended March 31, 2019.

Avalara adopted the new lease accounting standard as of January 1, 2019 in the 2019 Annual Report. Due to the timing of adoption, the Company’s 2019 interim financial statements did not reflect the new lease accounting standard. As a result, the presentation of cash flows from operating activities presented in the accompanying unaudited consolidated statement of cash flows for the quarter ended March 31, 2019 include adjustments for the adoption of the new lease accounting standard. The adjustments do not impact previously reported net cash used in operating activities.

Principles of Consolidation

Principles of Consolidation

The accompanying consolidated financial statements include those of the Company and its subsidiaries after elimination of all intercompany accounts and transactions.

Segments

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

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 earnout obligations in connection with acquisitions; the expected term of the customer relationship for capitalized contract cost amortization; the valuation of acquired intangible assets; and the valuation of the fair value of reporting units for analyzing goodwill. Actual results could materially differ from those estimates.

Fair Value Measurements

Fair Value Measurements

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, trade accounts receivable, trade payables, and accrued expenses, due to their short-term nature.

Long-Lived Assets

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 first three months of 2020.

Self-Insurance

Self-Insurance

Beginning August 1, 2019, the Company established a self-insured healthcare plan for eligible U.S. employees. Under the plan, the Company pays healthcare claims and fees to the plan administrator. Total claim payments are limited by stop-loss insurance policies. As there generally is a lag between the time a claim is incurred by a participant and the time the claim is submitted for payment, the Company has recorded a self-insurance reserve for estimated outstanding claims within accrued expenses in the consolidated balance sheets.

Income Taxes

Income Taxes

The Company’s deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and income tax basis of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company assesses its income tax positions and records tax benefits or expense based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequence 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. Judgement 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.

Stock-Based Compensation

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option, restricted stock unit (“RSU”), or purchase right issued under the Company’s 2018 Employee Stock Purchase Plan (“ESPP”) at the date of grant. The fair value of stock options and purchase rights issued under the ESPP 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 is determined using the fair value of the Company’s underlying common stock on the date of grant. The Company accounts for forfeitures as they occur.

Revenue Recognition

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 services are provided in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Beginning January 1, 2019, the Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers.

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 determination and compliance management services, and fees paid for preparing and filing transaction tax returns on behalf of customers. Under the Company’s subscription agreements, 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 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.

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.

Revenue is recognized ratably over the contractual term of the arrangement, beginning on the date that the service is made available to the customer. The Company invoices its subscription customers for the initial term at contract signing and at each subscription renewal. Initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that are contractually billable and have been invoiced, or which have been collected as cash, are initially recorded as deferred revenue or contract liabilities. While most of the Company’s customers are invoiced once at the beginning of the term, a portion of customers are invoiced semi-annually, quarterly, or monthly.

Included in the total subscription fee for cloud-based solutions are non-refundable upfront fees that are typically charged to new customers. These fees are associated with work performed to set up a customer with the Company’s services, and do not represent a distinct good or service. Instead, the fees are included within the transaction price and allocated to the remaining performance obligations in the contract. The Company recognizes revenue for these fees in accordance with the revenue recognition for those performance obligations.

Also included in subscription and returns revenue is interest income on funds held for customers. The Company uses trust accounts at FDIC-insured institutions to provide tax remittance services to customers and collect funds from customers in advance of remittance to tax authorities. After collection and prior to remittance, the Company earns interest on these funds.

Professional Services Revenue

The Company invoices for professional service arrangements on a fixed fee, milestone, or time and materials basis. Professional services revenue includes fees from providing tax analysis, configurations, registrations, data migrations, integration, training, and other support services. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.

Judgments and Estimates

The Company’s contracts with customers often include obligations to provide multiple services to a customer. Determining whether services are considered distinct performance obligations that should be accounted for separately from one another requires judgment. Subscription services and professional services are both distinct performance obligations that are accounted for separately.

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. The Company allocates revenue to each performance obligation based on the relative SSP. The Company determines SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices, market conditions and entity-specific factors. This includes a review of historical data related to the services being sold and customer demographics. The Company uses a range of amounts to estimate SSP for performance obligations. There is typically more than one SSP for individual services due to the stratification of those services by information, such as size and type of customer.

Assets Recognized from the Costs to Obtain a Contract with a Customer

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain costs related to employee sales incentive programs (sales commissions) and partner commission programs represent incremental costs of obtaining a contract and therefore should be capitalized. Capitalized costs are included in deferred commissions on the consolidated balance sheets. These deferred commissions are amortized over an estimated period of benefit, generally six years. The Company determines the period of benefit by taking into consideration past experience with customers, the expected life of acquired technology that generates revenue, industry peers, and other available information. The period of benefit is generally longer than the term of the initial contract because of anticipated renewals. The Company elected to apply the practical expedient to recognize the incremental costs of obtaining a contract as an expense if the amortization period of the asset would have been one year or less.

Leases

Leases

Effective January 1, 2019, the Company’s lease accounting policy follows guidance from ASC 842, 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. As of March 31, 2020, all of 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. Operating lease costs are generally fixed payments. 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.

Recently Adopted Accounting Standard

Recently Adopted Accounting Standards

ASU No. 2016-13

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, related to credit losses, which amends the current accounting guidance and requires the measurements of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance in ASU No. 2016-13 is required for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public business entities. The Company adopted this guidance on January 1, 2020. The adoption, which impacted the Company’s allowance for doubtful accounts, did not have a significant impact on the consolidated financial statements.

ASU No. 2018-15

In August 2018, the FASB issued ASU No. 2018-15, related to implementation costs incurred in a cloud computing arrangement that is a service contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use-software. The guidance in ASU No. 2018-15 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2019, for public business entities. The Company adopted this guidance on January 1, 2020 with prospective application, as permitted by the ASU. For the first quarter of 2020, $0.6 million of implementation costs were capitalized and are recorded in other noncurrent assets on the consolidated balance sheet as of March 31, 2020.

New Accounting Standards Not Yet Adopted

New Accounting Standards Not Yet Adopted

ASU No. 2019-12

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, which simplifies the accounting for income taxes. The guidance in ASU No. 2019-12 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2020, for public business entities, with early adoption permitted. The Company will adopt this guidance on January 1, 2021. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

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Fair Value Measurements - Additional Information (Details)	Mar. 31, 2020 USD ($)
Fair Value, Measurements, Non-Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value measurements on a non-recurring basis	$ 0
Discount Rate | Discounted Cash Flow and Monte Carlo Simulations | Portway International, Inc
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Discount rate utilized for valuation of earnout liability	8.00%

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Balance Sheet Detail - Prepaid Expenses and Other Current Assets (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Prepaid Expense And Other Assets Current [Abstract]
Prepaid expenses	$ 16,154	$ 11,064
Accrued investment income	347	565
Deposits	229	197
Other	2,142	2,301
Total	$ 18,872	$ 14,127

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Acquisitions of Businesses - Summary of the Valuation Methodologies Significant Assumptions, and Estimated Useful Lives of Acquired Intangible Assets (Details) - USD ($) $ in Thousands	Jul. 31, 2019	Feb. 06, 2019	Jan. 22, 2019
Compli, Inc.
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 4,288
Compli, Inc. | Customer Relationships
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 3,250
Valuation Methodology			Multi-period excess earnings-income approach
Discount Rate			13.00%
Intangible asset, useful life			6 years
Compli, Inc. | Tradename and Trademarks
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 32
Valuation Methodology			Relief from royalty- income approach
Discount Rate			13.00%
Intangible asset, useful life			2 years
Compli, Inc. | Developed Technology
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 910
Valuation Methodology			Relief from royalty- income approach
Discount Rate			13.00%
Intangible asset, useful life			6 years
Compli, Inc. | Noncompete Agreements
Business Acquisition [Line Items]
Intangible assets Assigned value			$ 96
Valuation Methodology			With-and-without valuation- income approach
Discount Rate			13.00%
Intangible asset, useful life			3 years
Indix Corporation
Business Acquisition [Line Items]
Intangible assets Assigned value		$ 4,472
Indix Corporation | Developed Technology
Business Acquisition [Line Items]
Intangible assets Assigned value		$ 4,472
Valuation Methodology		Relief from royalty- income approach
Discount Rate		24.50%
Intangible asset, useful life		6 years
Portway International, Inc
Business Acquisition [Line Items]
Intangible assets Assigned value	$ 1,865
Portway International, Inc | Customer Relationships
Business Acquisition [Line Items]
Intangible assets Assigned value	$ 1,759
Valuation Methodology	Multi-period excess earnings-income approach
Discount Rate	12.00%
Intangible asset, useful life	6 years
Portway International, Inc | Noncompete Agreements
Business Acquisition [Line Items]
Intangible assets Assigned value	$ 106
Valuation Methodology	With-and-without valuation- income approach
Discount Rate	12.00%
Intangible asset, useful life	4 years

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Debt

3 Months Ended

Mar. 31, 2020

Debt Disclosure [Abstract]

Debt

10. Debt

Loan and Security Agreement

The Company had a loan and security agreement with Silicon Valley Bank and Ally Bank that consisted of a $50.0 million revolving credit facility (the “Credit Facility”). On June 25, 2019, the Company terminated the Credit Facility.

Prior to termination of the Credit Facility, the Company was required to pay a quarterly fee of 0.50% per annum on the undrawn portion available under the revolving credit facility plus the sum of outstanding letters of credit. Under the Credit Facility, the interest rate on the revolving credit facility was based on the greater of either 4.25% or the current prime rate, plus 1.75%.

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Revenue

3 Months Ended

Mar. 31, 2020

Revenue From Contract With Customer [Abstract]

Revenue

6. Revenue

See Note 2 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,
	2020		2019
Revenue (U.S.):
Subscription and returns
Tax determination	$	58,971	$	45,232
Tax returns and compliance management		39,433		26,686
Interest income on funds held for customers		525		729
Total subscription and returns		98,929		72,647
Professional services		5,462		5,735
Total revenue (U.S.)		104,391		78,382
Total revenue (non-U.S.)		7,052		6,588
Total revenue	$	111,443	$	84,970

Disclosures Related to Contracts with Customers

Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent a contract exists, as defined by ASC 606, these liabilities are classified as current and non-current deferred revenue. To the extent that a contract does not exist, as defined by ASC 606 (e.g. customer agreements with non-standard termination rights), these liabilities are classified as contract liabilities. Contract liabilities are transferred to deferred revenue at the point in time when the criteria that establish the existence of a contract are met.

Contract Liabilities

A summary of the activity impacting the contract liabilities during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Contract liabilities:
Balance beginning of period	$	5,197		$	—
Adoption of ASC 606		—			2,090
Contract liabilities transferred to deferred revenue		(2,538	)		(1,257	)
Addition to contract liabilities		3,671			3,375
Balance end of period	$	6,330		$	4,208

As of March 31, 2020, contract liabilities are expected to be transferred to deferred revenue within the next 12 months and therefore are included in accrued expenses on the consolidated balance sheets.

Deferred Revenue

A summary of the activity impacting deferred revenue balances during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Deferred revenue:
Balance beginning of period	$	161,241		$	134,653
Adoption of ASC 606		—			(11,250	)
Revenue recognized		(111,443	)		(84,970	)
Additional amounts deferred		115,571			94,281
Balance end of period	$	165,369		$	132,714

Assets Recognized from the Costs to Obtain Contracts with Customers

Assets are recognized for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred commissions are amortized over an expected period of benefit of generally six years.

A summary of the activity impacting the deferred commissions during the three months ended March 31, 2020 is presented below (in thousands):

	Three Months Ended March 31,
	2020			2019
Deferred commissions:
Balance beginning of period	$	38,416		$	—
Adoption of ASC 606		—			19,267
Additional commissions deferred		4,897			7,656
Amortization of deferred commissions		(2,647	)		(1,279	)
Balance end of period	$	40,666		$	25,644

As of March 31, 2020, $9.7 million of deferred commissions are expected to be amortized within the next 12 months and therefore are included in current assets on the consolidated balance sheets. The remaining amount of deferred commissions are included in noncurrent assets. There were no impairments of assets related to deferred commissions during the three months ended March 31, 2020. There were no assets recognized related to the costs to fulfill contracts during the three months ended March 31, 2020 as these costs were not material.

Remaining Performance Obligations

Contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of March 31, 2020, amounts allocated to these additional contractual obligations are $39.4 million, of which $39.0 million is expected to be recognized as revenue over the next 12 months with the remaining amount thereafter.

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Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Significant Accounting Policies

2. Significant Accounting Policies

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, 2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020. The accompanying interim consolidated balance sheet as of March 31, 2020, the consolidated interim statements of operations for the three months ended March 31, 2020 and 2019, the consolidated statements of comprehensive loss for the three months ended March 31, 2020 and 2019, and the consolidated statements of cash flows for the three months ended March 31, 2020 and 2019, are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements. The operating results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full year ending December 31, 2020.

Prior Period Restatements and Adjustments

In preparing the 2019 annual consolidated financial statements, the Company discovered an immaterial error in recording deferred sales commissions for the first three quarters of 2019 impacting its previously reported quarterly financial results. The correction to sales commission expense resulted in an increase in sales and marketing expenses and accumulated deficit of $1.1 million and a $0.01 increase in net loss per share in the first quarter of 2019. The restatement of these prior period corrected amounts is presented in the accompanying unaudited consolidated statement of operations, consolidated statement of comprehensive loss, and consolidated statement of cash flows for the three-months ended March 31, 2019.

Avalara adopted the new lease accounting standard as of January 1, 2019 in the 2019 Annual Report. Due to the timing of adoption, the Company’s 2019 interim financial statements did not reflect the new lease accounting standard. As a result, the presentation of cash flows from operating activities presented in the accompanying unaudited consolidated statement of cash flows for the quarter ended March 31, 2019 include adjustments for the adoption of the new lease accounting standard. The adjustments do not impact previously reported net cash used in operating activities.

Principles of Consolidation

The accompanying consolidated financial statements include those of the Company and its subsidiaries after elimination of all intercompany accounts and transactions.

Segments

The Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

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 earnout obligations in connection with acquisitions; the expected term of the customer relationship for capitalized contract cost amortization; the valuation of acquired intangible assets; and the valuation of the fair value of reporting units for analyzing goodwill. Actual results could materially differ from those estimates.

Fair Value Measurements

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, trade accounts receivable, trade payables, and accrued expenses, due to their short-term nature.

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 first three months of 2020.

Self-Insurance

Beginning August 1, 2019, the Company established a self-insured healthcare plan for eligible U.S. employees. Under the plan, the Company pays healthcare claims and fees to the plan administrator. Total claim payments are limited by stop-loss insurance policies. As there generally is a lag between the time a claim is incurred by a participant and the time the claim is submitted for payment, the Company has recorded a self-insurance reserve for estimated outstanding claims within accrued expenses in the consolidated balance sheets.

Income Taxes

The Company’s deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and income tax basis of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company assesses its income tax positions and records tax benefits or expense based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequence 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. Judgement 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.

Stock-Based Compensation

The Company accounts for stock-based compensation by calculating the fair value of each option, restricted stock unit (“RSU”), or purchase right issued under the Company’s 2018 Employee Stock Purchase Plan (“ESPP”) at the date of grant. The fair value of stock options and purchase rights issued under the ESPP 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 is determined using the fair value of the Company’s underlying common stock on the date of grant. The Company accounts for forfeitures as they occur.

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 services are provided in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Beginning January 1, 2019, the Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers.

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 determination and compliance management services, and fees paid for preparing and filing transaction tax returns on behalf of customers. Under the Company’s subscription agreements, 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 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.

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.

Revenue is recognized ratably over the contractual term of the arrangement, beginning on the date that the service is made available to the customer. The Company invoices its subscription customers for the initial term at contract signing and at each subscription renewal. Initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that are contractually billable and have been invoiced, or which have been collected as cash, are initially recorded as deferred revenue or contract liabilities. While most of the Company’s customers are invoiced once at the beginning of the term, a portion of customers are invoiced semi-annually, quarterly, or monthly.

Included in the total subscription fee for cloud-based solutions are non-refundable upfront fees that are typically charged to new customers. These fees are associated with work performed to set up a customer with the Company’s services, and do not represent a distinct good or service. Instead, the fees are included within the transaction price and allocated to the remaining performance obligations in the contract. The Company recognizes revenue for these fees in accordance with the revenue recognition for those performance obligations.

Also included in subscription and returns revenue is interest income on funds held for customers. The Company uses trust accounts at FDIC-insured institutions to provide tax remittance services to customers and collect funds from customers in advance of remittance to tax authorities. After collection and prior to remittance, the Company earns interest on these funds.

Professional Services Revenue

The Company invoices for professional service arrangements on a fixed fee, milestone, or time and materials basis. Professional services revenue includes fees from providing tax analysis, configurations, registrations, data migrations, integration, training, and other support services. The transaction price allocated to professional services performance obligations is recognized as revenue as services are performed or upon completion of work.

Judgments and Estimates

The Company’s contracts with customers often include obligations to provide multiple services to a customer. Determining whether services are considered distinct performance obligations that should be accounted for separately from one another requires judgment. Subscription services and professional services are both distinct performance obligations that are accounted for separately.

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. The Company allocates revenue to each performance obligation based on the relative SSP. The Company determines SSP for performance obligations based on overall pricing objectives, which take into consideration observable prices, market conditions and entity-specific factors. This includes a review of historical data related to the services being sold and customer demographics. The Company uses a range of amounts to estimate SSP for performance obligations. There is typically more than one SSP for individual services due to the stratification of those services by information, such as size and type of customer.

Assets Recognized from the Costs to Obtain a Contract with a Customer

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain costs related to employee sales incentive programs (sales commissions) and partner commission programs represent incremental costs of obtaining a contract and therefore should be capitalized. Capitalized costs are included in deferred commissions on the consolidated balance sheets. These deferred commissions are amortized over an estimated period of benefit, generally six years. The Company determines the period of benefit by taking into consideration past experience with customers, the expected life of acquired technology that generates revenue, industry peers, and other available information. The period of benefit is generally longer than the term of the initial contract because of anticipated renewals. The Company elected to apply the practical expedient to recognize the incremental costs of obtaining a contract as an expense if the amortization period of the asset would have been one year or less.

Leases

Effective January 1, 2019, the Company’s lease accounting policy follows guidance from ASC 842, 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. As of March 31, 2020, all of 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. Operating lease costs are generally fixed payments. 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.

Recently Adopted Accounting Standards

ASU No. 2016-13

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, related to credit losses, which amends the current accounting guidance and requires the measurements of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance in ASU No. 2016-13 is required for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public business entities. The Company adopted this guidance on January 1, 2020. The adoption, which impacted the Company’s allowance for doubtful accounts, did not have a significant impact on the consolidated financial statements.

ASU No. 2018-15

In August 2018, the FASB issued ASU No. 2018-15, related to implementation costs incurred in a cloud computing arrangement that is a service contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use-software. The guidance in ASU No. 2018-15 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2019, for public business entities. The Company adopted this guidance on January 1, 2020 with prospective application, as permitted by the ASU. For the first quarter of 2020, $0.6 million of implementation costs were capitalized and are recorded in other noncurrent assets on the consolidated balance sheet as of March 31, 2020.

New Accounting Standards Not Yet Adopted

ASU No. 2019-12

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, which simplifies the accounting for income taxes. The guidance in ASU No. 2019-12 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2020, for public business entities, with early adoption permitted. The Company will adopt this guidance on January 1, 2021. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

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Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue:
Revenues	$ 111,443	$ 84,970
Cost of revenue:
Cost of revenues	34,254	25,307
Gross profit	77,189	59,663
Operating expenses:
Research and development	25,847	15,956
Sales and marketing	49,634	39,319
General and administrative	21,388	15,234
Total operating expenses	96,869	70,509
Operating loss	(19,680)	(10,846)
Other (income) expense:
Interest income	(1,442)	(767)
Interest expense	0	111
Other (income) expense, net	(3,372)	48
Total other (income) expense, net	(4,814)	(608)
Loss before income taxes	(14,866)	(10,238)
Provision for (benefit from) income taxes	417	116
Net loss	$ (15,283)	$ (10,354)
Net loss per share attributable to common shareholders, basic and diluted	$ (0.20)	$ (0.15)
Weighted average shares of common stock outstanding, basic and diluted	77,904	68,381
Subscription and Returns
Revenue:
Revenues	$ 105,546	$ 78,231
Cost of revenue:
Cost of revenues	29,517	20,978
Professional Services
Revenue:
Revenues	5,897	6,739
Cost of revenue:
Cost of revenues	$ 4,737	$ 4,329

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Equity Incentive Plans - Summary of Fair Value Estimated Using Black-Scholes Option Pricing Model Assumptions (Details) - $ / shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Volatility	43.00%	40.00%
Expected term	6 years	6 years
Expected dividend yield	0.00%	0.00%
Risk-free interest rate, minimum	0.82%	2.31%
Risk-free interest rate, maximum	1.25%	2.65%
Minimum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock	$ 67.27	$ 39.76
Maximum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of common stock	$ 86.61	$ 55.79

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Equity Incentive Plans - Additional Information (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares subject to outstanding awards	5,483,891		5,884,742
Total intrinsic value of options exercised	$ 36.8	$ 109.5
Weighted average grant date fair value of options granted	$ 28.99	$ 17.93
Number of shares, vested	585,475
Number of options unvested	2,486,593
Contractual life	10 years
Expected term	6 years	6 years
Employees
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options, average vesting term	4 years
Expected term	6 years
Non Employee Directors
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options, average vesting term	1 year
Expected term	5 years
Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total unrecognized compensation expense related to stock options	$ 31.9
Unrecognized compensation expense expected to be recognized over weighted average period	2 years 7 months 6 days
Stock Options | Employees
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options vesting period	4 years
Stock Options | Non Employee Directors
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options vesting period	1 year
Restricted Stock Units (RSUs)
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized compensation expense expected to be recognized over weighted average period	3 years 6 months
Total unrecognized compensation expense expected to be recognized	$ 123.9
Restricted Stock Units (RSUs) | Employees
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options vesting period	4 years
Restricted Stock Units (RSUs) | Non Employee Directors
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options vesting period	1 year
2018 Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock reserved for issuance	5,315,780
Automatically increase percentage of aggregate number of shares of common stock outstanding	5.00%
Shares subject to outstanding awards	3,540,159
Shares available for future issuance	9,204,822
2006 Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares subject to outstanding awards	4,154,956
2018 Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock reserved for issuance	996,709
Total unrecognized compensation expense related to stock options	$ 1.3
Contractual life	10 years
Expected term	6 months	6 months
Initial offering period	June 15, 2018
Description of offering period for ESPP	The first offering period began on June 15, 2018 and ended on January 31, 2019. Subsequent offering periods begin on August 1 and February 1 (or such other date determined by our Board of Directors or our Compensation and Leadership Development Committee).
Description of purchase price for shares of common stock purchased under ESPP	The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company’s common stock on (i) the first day of the applicable offering period or (ii) the last day of the purchase period in the applicable offering period.
Percentage of purchase price for shares of common stock under fair value market	85.00%
Employee stock purchase plan number of shares initially authorized	10,102,525
2018 Employee Stock Purchase Plan | Minimum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Automatically increase percentage of aggregate number of shares of common stock outstanding	1.00%
Percentage of payroll deduction on eligible compensation	1.00%
Increase of common stock capital shares reserved for future issuance in each of calendar year	1,000,000
2018 Employee Stock Purchase Plan | Maximum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Percentage of payroll deduction on eligible compensation	15.00%
Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock reserved for issuance	1,850,081
Common stock, shares purchased	81,894

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Commitments and Contingencies - Additional Information (Details)	3 Months Ended
	Mar. 31, 2020 USD ($)
Loss Contingencies [Line Items]
Loss contingency, inestimable loss	The Company has not recorded an accrual related to these arrangements as of March 31, 2020 because it has not determined that a loss is probable.
Maximum
Loss Contingencies [Line Items]
Estimated range of loss	$ 2,000,000.0

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Acquisitions of Businesses - Schedule of Estimated Fair Value of Assets Acquired and Liabilities Assumed (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Jul. 31, 2019	Feb. 06, 2019	Jan. 22, 2019
Assets acquired:
Goodwill	$ 101,035	$ 101,224
Compli, Inc.
Assets acquired:
Current assets					$ 505
Developed technology, customer relationships, and other intangibles					4,288
Goodwill					12,807
Total assets acquired					17,600
Liabilities assumed:
Current liabilities					482
Total liabilities assumed					482
Net assets acquired					$ 17,118
Indix Corporation
Assets acquired:
Current assets				$ 94
Developed technology, customer relationships, and other intangibles				4,472
Goodwill				4,953
Total assets acquired				9,519
Liabilities assumed:
Current liabilities				392
Total liabilities assumed				392
Net assets acquired				$ 9,127
Portway International, Inc
Assets acquired:
Property and equipment			$ 76
Developed technology, customer relationships, and other intangibles			1,865
Goodwill			22,376
Total assets acquired			24,317
Liabilities assumed:
Net assets acquired			$ 24,317

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Fair Value Measurements - Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis (Details) - Recurring Basis - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Earnout Related to Business Combinations
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Liabilities	$ 3,599	$ 13,808
Significant Unobservable Inputs (Level 3) | Earnout Related to Business Combinations
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Liabilities	3,599	13,808
Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Assets	443,936	458,248
Money Market Funds | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair Value, Assets	$ 443,936	$ 458,248

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Balance Sheet Detail - Additional Information (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Balance Sheet Related Disclosures [Abstract]
Depreciation expense	$ 2.3	$ 2.0

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Shareholders' Equity

3 Months Ended

Mar. 31, 2020

Stockholders Equity Note [Abstract]

Shareholders' Equity

11. 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.

In June 2019, the Company completed a follow-on public offering, in which the Company sold 4,133,984 shares of its common stock, including the full exercise of the underwriters’ option to purchase 539,215 additional shares of common stock, at a price of $69.40 per share. The Company received net proceeds of $274.7 million, after deducting underwriting discounts and commissions and before deducting offering expenses paid and payable by the Company of $1.2 million.

The changes to the Company’s shareholders’ equity during the three months March 31, 2020 is as follows (in thousands, except share data):

							Accumulated
					Additional		Other						Total
	Common Stock				Paid-In		Comprehensive			Accumulated			Shareholders’
	Shares		Amount		Capital		Income (Loss)			Deficit			Equity
Balance at January 1, 2020		77,447,620	$	8	$	976,627	$	(2,719	)	$	(510,194	)	$	463,722
Exercise of stock options		532,848				7,928								7,928
Vesting of restricted stock units		186,475
Stock-based compensation cost						9,749								9,749
Shares issued under employee stock    purchase plan		81,894				5,716								5,716
Shares issued related to business    combination earnouts		44,659				3,750								3,750
Shares issued to purchase intangible    assets		1,191				87								87
Gain on translation adjustment								625						625
Net loss											(15,283	)		(15,283	)
Balance at March 31, 2020		78,294,687	$	8	$	1,003,857	$	(2,094	)	$	(525,477	)	$	476,294

The changes to the Company’s shareholders’ equity for the three months ended March 31, 2019 is as follows (in thousands, except share data):

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Shareholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			Equity
Balance at January 1, 2019		66,768,563		$	7	$	599,493		$	(2,345	)	$	(487,602	)	$	109,553
Impact of adoption of new accounting    pronouncements - ASC 606 (see Note 2)													27,622			27,622
Exercise of stock options		2,763,291					27,311									27,311
Shares tendered for cashless redemption of    stock-based awards		(2,805	)				(93	)								(93	)
Stock-based compensation cost							6,571									6,571
Shares issued under employee stock    purchase plan		372,764					7,664									7,664
Shares issued to purchase intangible assets		1,634					50									50
Loss on translation adjustment										(462	)					(462	)
Net loss													(10,354	)		(10,354	)
Balance at March 31, 2019		69,903,447		$	7	$	640,996		$	(2,807	)	$	(470,334	)	$	167,862

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Intangible Assets

3 Months Ended

Mar. 31, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Intangible Assets

7. Intangible Assets

Finite-lived intangible assets

Finite-lived intangible assets consisted of the following (in thousands):

		March 31, 2020
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,270	$	(11,947	)	$	8,322
Developed technology	3 to 8		36,121		(23,656	)		12,465
Noncompete agreements	3 to 5		762		(614	)		148
Tradename and trademarks	1 to 4		441		(428	)		13
		$	57,594	$	(36,645	)	$	20,949

		December 31, 2019
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,390	$	(11,403	)	$	8,987
Developed technology	3 to 8		36,422		(22,659	)		13,763
Noncompete agreements	3 to 5		777		(612	)		165
Tradename and trademarks	1 to 4		452		(435	)		17
		$	58,041	$	(35,109	)	$	22,932

Finite-lived intangible assets are generally amortized on a straight-line basis over the remaining estimated useful life as management believes this reflects the expected benefit to be received from these assets. Finite-lived intangible assets amortization expense was $1.8 million for the three months ended March 31, 2020 and $1.7 million for the three months ended March 31, 2019.

Goodwill

Changes in the carrying amount of goodwill for the three months ended March 31, 2020 are summarized as follows (in thousands):

Balance—December 31, 2019	$	101,224
Cumulative translation adjustments		(189	)
Balance—March 31, 2020	$	101,035

Goodwill is tested for impairment annually on October 31 at the reporting unit level or whenever circumstances occur indicating goodwill might be impaired. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, the Company will conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. The Company has three reporting units for goodwill impairment testing consisting of its U.S., European, and Brazilian operations. As of March 31, 2020, the Brazilian reporting unit had no associated goodwill.

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Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2020	Apr. 30, 2020
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Trading Symbol	AVLR
Entity Registrant Name	AVALARA, INC.
Entity Central Index Key	0001348036
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		78,422,284
Entity Current Reporting Status	Yes
Entity Shell Company	false
Entity File Number	001-38525
Entity Tax Identification Number	91-1995935
Entity Address, Address Line One	255 South King Street
Entity Address, Address Line Two	Suite 1800
Entity Address, City or Town	Seattle
Entity Address, State or Province	WA
Entity Address, Postal Zip Code	98104
City Area Code	206
Local Phone Number	826-4900
Entity Interactive Data Current	Yes
Title of 12(b) Security	Common Stock, Par Value $0.0001 Per Share
Security Exchange Name	NYSE
Entity Incorporation, State or Country Code	WA
Document Quarterly Report	true
Document Transition Report	false

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Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Statement Of Income And Comprehensive Income [Abstract]
Net loss	$ (15,283)	$ (10,354)
Other comprehensive income (loss)—Foreign currency translation	625	(462)
Total comprehensive loss	$ (14,658)	$ (10,816)

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Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

3. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis

The following financial assets and liabilities are measured at fair value on a recurring basis. The fair values recognized in the accompanying consolidated balance sheets and the level within the fair value hierarchy in which the fair value measurements fall is as follows (in thousands):

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
March 31, 2020	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	443,936	$	443,936	$	—	$	—
Earnout related to business combinations		3,599		—		—		3,599

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
December 31, 2019	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	458,248	$	458,248	$	—	$	—
Earnout related to business combinations		13,808		—		—		13,808

Earnout Liabilities

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 are discussed in Note 5. Earnouts recorded in connection with asset acquisitions are recorded as earnout payments become known. As such, earnouts related to asset acquisitions are not included in these fair value disclosures.

Earnout liabilities 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 are recorded in other (income) expense, net in the consolidated statements of operations.

The Company generally estimates the fair value of earnout liabilities for business combinations using probability-weighted discounted cash flows and Monte Carlo simulations.  As of March 31, 2020, the earnout liability associated with the 2019 acquisition of Portway International Inc. (“Portway”) was valued utilizing a discount rate of 8.0%. The Portway discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the earnout. The earnout periods for the 2019 acquisitions of Compli, Inc. (“Compli”) and Indix Corporation (“Indix”) ended as of January 31, 2020 and February 6, 2020, respectively. Additional information regarding payments of earnout liabilities that occurred during the quarter ended March 31, 2020 is included in Note 5.

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):

	Three Months Ended March 31,
	2020			2019
Earnout liabilities:
Balance beginning of period	$	13,808		$	—
Fair value recorded at acquisition		—			5,952
Payments of earnout liabilities		(7,700	)		—
Total unrealized (gains) losses included in other (income) expense, net		(2,509	)		—
Balance end of period	$	3,599		$	5,952

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, and long-lived assets, are not required to be measured at fair value on a recurring basis. There were no fair value measurements of these assets during the first quarter of 2020.

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Equity Incentive Plans - Summary of Stock-Based Compensation Expense Related to Equity Incentive Rewards (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	$ 9,749	$ 6,571
Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	3,849	3,917
Restricted Stock Units (RSUs)
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	4,933	1,698
Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation cost	$ 967	$ 956

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Debt - Additional Information (Details) - Revolving Credit Facility - Loan and Security Agreement - Silicon Valley Bank and Ally Bank - USD ($)		3 Months Ended
	Jun. 24, 2019	Mar. 31, 2020
Line Of Credit Facility [Line Items]
Credit facilities amount		$ 50,000,000.0
Credit facilities, repayment date		Jun. 25, 2019
Quarterly fee on undrawn portion available under credit facilities	0.50%
Maximum
Line Of Credit Facility [Line Items]
Credit facilities, interest rate	4.25%
Prime Rate | Maximum
Line Of Credit Facility [Line Items]
Credit facilities, variable rate	1.75%

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Equity Incentive Plans - Summary of RSU Activity (Details) - Restricted Stock Units (RSUs)	3 Months Ended
	Mar. 31, 2020 $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
RSUs outstanding as of January 1, 2020, Shares | shares	1,508,281
RSUs granted, Shares | shares	945,698
RSUs vested, Shares | shares	(186,475)
RSUs cancelled, Shares | shares	(56,280)
RSUs outstanding as of March 31, 2020, Shares | shares	2,211,224
RSUs outstanding as of January 1, 2020, Weighted average grant date fair value per share | $ / shares	$ 51.52
RSUs granted, Weighted average grant date fair value per share | $ / shares	68.89
RSUs vested, Weighted average grant date fair value per share | $ / shares	43.89
RSUs cancelled, Weighted average grant date fair value per share | $ / shares	49.45
RSUs outstanding as of March 31, 2020, Weighted average grant date fair value per share | $ / shares	$ 59.64

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Intangible Assets - Schedule of Changes in Carrying Amount of Goodwill (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($)
Goodwill And Intangible Assets Disclosure [Abstract]
Balance—December 31, 2019	$ 101,224
Cumulative translation adjustments	(189)
Balance—March 31, 2020	$ 101,035

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Revenue - Summary of Total Revenues (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Disaggregation Of Revenue [Line Items]
Revenues	$ 111,443	$ 84,970
U.S.
Disaggregation Of Revenue [Line Items]
Revenues	104,391	78,382
Non-U.S.
Disaggregation Of Revenue [Line Items]
Revenues	7,052	6,588
Subscription and Returns, Tax Determination | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	58,971	45,232
Subscription and Returns, Tax Returns and Compliance Management | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	39,433	26,686
Subscription and Returns,Interest Income on Funds Held for Customers | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	525	729
Subscription and Returns
Disaggregation Of Revenue [Line Items]
Revenues	105,546	78,231
Subscription and Returns | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	98,929	72,647
Professional Services
Disaggregation Of Revenue [Line Items]
Revenues	5,897	6,739
Professional Services | U.S.
Disaggregation Of Revenue [Line Items]
Revenues	$ 5,462	$ 5,735

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Revenue - Summary of Activity Impacting Deferred Commissions (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
ASC 606
Capitalized Contract Cost [Line Items]
Adoption of ASC 606	$ 0	$ 2,090
Deferred Commissions
Capitalized Contract Cost [Line Items]
Balance beginning of period	38,416	0
Additional commissions deferred	4,897	7,656
Amortization of deferred commissions	(2,647)	(1,279)
Balance end of period	40,666	25,644
Deferred Commissions | ASC 606
Capitalized Contract Cost [Line Items]
Adoption of ASC 606	$ 0	$ 19,267

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Intangible Assets (Tables)

3 Months Ended

Mar. 31, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Schedule of Finite-lived Intangible Assets

Finite-lived intangible assets consisted of the following (in thousands):

		March 31, 2020
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,270	$	(11,947	)	$	8,322
Developed technology	3 to 8		36,121		(23,656	)		12,465
Noncompete agreements	3 to 5		762		(614	)		148
Tradename and trademarks	1 to 4		441		(428	)		13
		$	57,594	$	(36,645	)	$	20,949

		December 31, 2019
	Average Useful Life (Years)	Gross		Accumulated Amortization			Net
Customer relationships	3 to 10	$	20,390	$	(11,403	)	$	8,987
Developed technology	3 to 8		36,422		(22,659	)		13,763
Noncompete agreements	3 to 5		777		(612	)		165
Tradename and trademarks	1 to 4		452		(435	)		17
		$	58,041	$	(35,109	)	$	22,932

Schedule of Changes in Carrying Amount of Goodwill

Changes in the carrying amount of goodwill for the three months ended March 31, 2020 are summarized as follows (in thousands):

Balance—December 31, 2019	$	101,224
Cumulative translation adjustments		(189	)
Balance—March 31, 2020	$	101,035

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis

The following financial assets and liabilities are measured at fair value on a recurring basis. The fair values recognized in the accompanying consolidated balance sheets and the level within the fair value hierarchy in which the fair value measurements fall is as follows (in thousands):

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
March 31, 2020	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	443,936	$	443,936	$	—	$	—
Earnout related to business combinations		3,599		—		—		3,599

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
December 31, 2019	Value		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	458,248	$	458,248	$	—	$	—
Earnout related to business combinations		13,808		—		—		13,808

Summary of Reconciliation of Beginning and Ending Balances of Recurring Fair Value Measurements

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):

	Three Months Ended March 31,
	2020			2019
Earnout liabilities:
Balance beginning of period	$	13,808		$	—
Fair value recorded at acquisition		—			5,952
Payments of earnout liabilities		(7,700	)		—
Total unrealized (gains) losses included in other (income) expense, net		(2,509	)		—
Balance end of period	$	3,599		$	5,952

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Significant Accounting Policies - Additional Information (Details)	3 Months Ended
	Mar. 31, 2020 USD ($) Segment	Mar. 31, 2019 USD ($) $ / shares
Accounting Policies [Line Items]
Number of operating segment | Segment	1
Impairment of long-lived assets	$ 0
Tax position likely of being realized upon ultimate settlement	greater than 50%
Percentage of likelihood of realization of tax position upon ultimate settlement, minimum	50.00%
Contract payment net terms	30 days
Concessions and cancellations period allowed for standard subscription contract prior to adoption	60 days
Revenue recognition, contractual renewal period	1 year
Deferred commission amortized period	6 years
Other Noncurrent Assets | ASU 2018-15
Accounting Policies [Line Items]
Implementation cost capitalized	$ 600,000
Minimum
Accounting Policies [Line Items]
Revenue recognition initial contractual term	12 months
Maximum
Accounting Policies [Line Items]
Revenue recognition initial contractual term	18 months
Amortization period of asset	1 year
Restatement Adjustment
Accounting Policies [Line Items]
Increase in sales and marketing expenses due to correction		$ 1,100,000
Increase in net loss per share due to correction | $ / shares		$ 0.01
Increase in accumulated deficit due to correction		$ 1,100,000