AVALARA, INC.

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AVALARA, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

05/06/2022 | 06:04am EDT
You should read the following discussion and analysis of our financial condition
and results of operations together with the consolidated financial statements
and related notes that are included elsewhere in this Quarterly Report on Form
10-Q and our Amended 2021 Annual Report. This discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors," in Part II, Item 1A of this
Quarterly Report on Form 10-Q and our Amended 2021 Annual Report. See "Special
Note Regarding Forward-Looking Statements" above.

                                    Overview

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

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

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

During the first quarter of 2022, we continued to re-open certain of our office
locations as many of the preventative measures to contain or mitigate the
COVID-19 pandemic have begun to be lifted. We expect many of our employees to
return to offices on a hybrid work model over the course of this year. We
continue to host many customer activities and events virtually, and, where it is
safe to do so, we have resumed some in-person customer activities and events. As
health and safety conditions allow, we expect to increase in-person customer
activities and events in 2022, which will increase marketing and travel costs
from prior year levels. The extent and timing of the broader impact of the
COVID-19 pandemic on our results of operations, overall financial performance
and operating cash flows remains uncertain, including the impact on our future
revenue growth, the timing of the resumption of normal operating expenses, and
the extent to which any incremental expenses associated with the preventative
and precautionary measures will be necessary.


                              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,      Dec 31,      Sep 30,      Jun 30,      Mar 31,      Dec 31,      Sep 30,      Jun 30,
                     2022         2021         2021         2021         2021         2020         2020         2020
Number of core
customers
  (as of end of
period)              19,160       18,270       17,400       16,570       15,730       15,020       14,300       13,640
Net revenue
  retention rate       115%         116%         116%         116%         113%         115%         116%         114%




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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 small and mid-market customer segments have
been and remain our primary target market segments for marketing and selling our
solutions. We use core customers as a metric to focus our customer count
reporting on our primary target market segment. As of March 31, 2022 and
December 31, 2021, we had approximately 19,160 and 18,270 core customers,
respectively.

We define a core customer as:

• a unique account identifier in our primary U.S. billing systems (multiple

companies or divisions within a single consolidated enterprise that each

have a separate unique account identifier are each treated as separate

      customers);


  • that is active as of the measurement date; and

• for which we have recognized, as of the measurement date, greater than

$3,000 in total revenue during the previous 12 months.



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

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

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

Net Revenue Retention Rate

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

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

            Key Components of Consolidated Statements of Operations

Revenue


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

Subscription and Returns Revenue. Subscription and returns revenue primarily
consists of fees paid by customers to use our solutions. Subscription plan
customers select a price plan that includes an allotted maximum number of
transactions over the subscription term. Unused transactions are not carried
over to the customer's next subscription term, and our customers are not

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

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

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

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


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

Costs and Expenses


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

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

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

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

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


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

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

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

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

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

Total Other Income (Expense), Net


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

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                             Results of Operations

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

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


                                                       For the Three Months Ended March 31,
                                                           2022                    2021
                                                                  (in thousands)
Revenue:
Subscription and returns                             $         186,866       $         139,318
Professional services                                           17,664                  14,283
Total revenue                                                  204,530                 153,601
Cost of revenue:
Subscription and returns                                        50,077                  38,033
Professional services                                           10,049                   6,463
Total cost of revenue(1)                                        60,126                  44,496
Gross profit                                                   144,404                 109,105
Operating expenses:
Research and development(1)                                     50,852                  39,274
Sales and marketing(1)                                          86,447                  64,093
General and administrative(1)                                   42,194                  31,199
Total operating expenses                                       179,493                 134,566
Operating loss                                                 (35,089 )               (25,461 )
Other income (expense), net                                      2,817                  (2,250 )
Loss before income taxes                                       (32,272 )               (27,711 )
Provision for income taxes                                        (285 )                (2,357 )
Net loss                                             $         (32,557 )     $         (30,068 )

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

                                                       For the Three Months Ended March 31,
                                                           2022                    2021
                                                                  (in thousands)
Cost of revenue                                      $           3,759       $           2,032
Research and development                                         9,463                   5,404
Sales and marketing                                              6,711                   4,055
General and administrative                                      12,717                   7,366
Total stock-based compensation                       $          32,650      

$ 18,857

The amortization of acquired intangibles included above was as follows:

                                                       For the Three Months Ended March 31,
                                                           2022                    2021
                                                                  (in thousands)
Cost of revenue                                      $           2,645       $           2,020
Research and development                                             -                       -
Sales and marketing                                              3,606                   1,540
General and administrative                                         854                     861
Total amortization of acquired intangibles           $           7,105       $           4,421


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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,
                                 2022                         2021
Revenue:
Subscription and returns                 91 %                         91 %
Professional services                     9 %                          9 %
Total revenue                           100 %                        100 %
Cost of revenue:
Subscription and returns                 24 %                         25 %
Professional services                     5 %                          4 %
Total cost of revenue                    29 %                         29 %
Gross profit                             71 %                         71 %
Operating expenses:
Research and development                 25 %                         26 %
Sales and marketing                      42 %                         42 %
General and administrative               21 %                         20 %
Total operating expenses                 88 %                         88 %
Operating loss                          (17 )%                       (17 )%
Other income (expense), net               1 %                         (1 )%
Loss before income taxes                (16 )%                       (18 )%
Provision for income taxes                0 %                         (2 )%
Net loss                                (16 )%                       (20 )%




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

Revenue


                                        For the Three Months Ended
                                                 March 31,                          Change
                                          2022              2021           Amount        Percentage
                                                           (dollars in thousands)
Revenue:
Subscription and returns               $   186,866       $   139,318     $   47,548                34 %
Professional services                       17,664            14,283          3,381                24 %
Total revenue                          $   204,530       $   153,601     $   50,929                33 %



Total revenue for the three months ended March 31, 2022, increased by $50.9
million, or 33%, compared to the three months ended March 31, 2021. Subscription
and returns revenue for the three months ended March 31, 2022, increased by
$47.5 million, or 34%, compared to the three months ended March 31, 2021.
Professional services revenue for the three months ended March 31, 2022,
increased by $3.4 million, or 24%, compared to the three months ended March 31,
2021.


Growth in total revenue was due primarily to increased demand for our services
from new and existing customers. The increase in total revenue for the three
months ended March 31, 2022, compared to the same period in 2021, was due
primarily to $21.4 million from new U.S. customers, $13.7 million from existing
U.S. customers, $11.4 million from recent acquisitions (including $6.7 million
from the Track1099 acquisition), $3.3 million from SST revenue growth, and $1.1
million from revenue growth in our international operations. Substantially all
of the revenue generated by Track1099 is recognized in the first quarter of each
year. Excluding recent acquisitions, total revenue for the three months ended
March 31, 2022, increased by $39.6 million, or 26%, compared to the three months
ended March 31, 2021. Of the growth from recent acquisitions, $10.0 million was
generated from subscriptions and returns and $1.4 million from professional
services.


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Cost of Revenue


                                          For the Three Months Ended
                                                   March 31,                            Change
                                           2022                 2021           Amount        Percentage
                                                             (dollars in thousands)
Cost of revenue
Subscription and returns               $     50,077         $     38,033   
 $   12,044                32 %
Professional services                        10,049                6,463          3,586                55 %
Total cost of revenue                  $     60,126         $     44,496     $   15,630                35 %



Cost of revenue for the three months ended March 31, 2022, increased by $15.6
million, or 35%, compared to the three months ended March 31, 2021. The increase
in cost of revenue was due primarily to an increase of $8.3 million in
employee-related costs from higher headcount, an increase of $2.7 million in
software hosting and third-party purchased software costs, an increase of $1.8
million in allocated overhead cost, an increase of $1.3 million in depreciation
expense, and an increase of $0.6 million in amortization expense.


Cost of revenue headcount increased approximately 24% from the first quarter of
2021 to the first quarter of 2022. Employee-related costs increased due
primarily to a $6.3 million increase in salaries and benefits, a $1.7 million
increase in stock-based compensation expense, and a $0.3 million increase in
compensation expense related to our bonus plans.


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


Gross Profit


                                        For the Three Months Ended
                                                 March 31,                          Change
                                          2022              2021           Amount        Percentage
                                                           (dollars in thousands)
Gross profit
Subscription and returns               $   136,789       $   101,285     $   35,504                35 %
Professional services                        7,615             7,820           (205 )              -3 %
Total gross profit                     $   144,404       $   109,105     $   35,299                32 %
Gross margin
Subscription and returns                        73 %              73 %
Professional services                           43 %              55 %
Total gross margin                              71 %              71 %



Total gross profit for the three months ended March 31, 2022, increased by $35.3
million, or 32% compared to the three months ended March 31, 2021. Total gross
margin was 71% for the three months ended March 31, 2022, compared to 71% for
the same period of 2021.

Research and Development


                                          For the Three Months Ended
                                                   March 31,                            Change
                                           2022                 2021           Amount        Percentage
                                                             (dollars in thousands)
Research and development               $     50,852         $     39,274     $   11,578                29 %




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Research and development expenses for the three months ended March 31, 2022,
increased by $11.6 million, or 29%, compared to the three months ended March 31,
2021. The increase was due primarily to an increase of $11.4 million in
employee-related costs from higher headcount.


Research and development headcount increased approximately 38% from the first
quarter of 2021 to the first quarter of 2022. Employee-related costs increased
due primarily to a $5.5 million increase in salaries and benefits, a $4.1
million increase in stock-based compensation expense, and a $1.8 million
increase in compensation expense related to our bonus plans.


Sales and Marketing


                                          For the Three Months Ended
                                                   March 31,                            Change
                                           2022                 2021           Amount        Percentage
                                                             (dollars in thousands)
Sales and marketing                    $     86,447         $     64,093     $   22,354                35 %



Sales and marketing expenses for the three months ended March 31, 2022,
increased by $22.4 million, or 35%, compared to the three months ended March 31,
2021. The increase was due primarily to an increase of $11.9 million in
employee-related costs, an increase of $3.1 million for partner commission
expense, an increase of $2.9 million in marketing campaign expenses, an increase
of $2.1 million in amortization expense, an increase of $1.8 million in
allocated overhead cost, and an increase of $0.5 million in third-party
purchased software costs.


Sales and marketing headcount increased approximately 21% from the first quarter
of 2021 to the first quarter of 2022. Employee-related costs increased due
primarily to a $6.8 million increase in salaries and benefits, a $2.7 million
increase in stock-based compensation expense, a $1.3 million increase in sales
commission expense, a $0.6 million increase in travel costs due to more
in-person meetings and events, and a $0.5 million increase in contract and
temporary employee costs. During 2022, we expect to continue to increase
in-person marketing activities as conditions allow, which will increase travel
costs.


Partner commission expense increased due primarily to higher revenues. Marketing
campaign expenses increased due primarily to increased spending on online
advertising (including pay-per-click advertising) on existing campaigns and new
online advertising for recent acquisitions. Amortization expense increased due
primarily to acquired intangible assets from our recent acquisitions and fair
value adjustments to acquired intangibles. Third-party purchased software costs
increased due primarily to additional investment in lead generation technology
that improves information we use to target potential customers and increased
spending for new marketing analytics tools.


General and Administrative


                                          For the Three Months Ended
                                                   March 31,                            Change
                                           2022                 2021           Amount        Percentage
                                                             (dollars in thousands)
General and administrative             $     42,194         $     31,199     $   10,995                35 %



General and administrative expenses for the three months ended March 31, 2022,
increased by $11.0 million, or 35%, compared to the three months ended March 31,
2021. The increase was due primarily to an increase of $8.3 million in
employee-related costs, an increase of $1.4 million in software hosting and
third-party purchased software costs, an increase of $1.2 million in outside
professional services expense, and an increase of $0.5 million in merchant fees,
partially offset by a $0.3 million decrease in non-income tax expenses.


General and administrative headcount increased approximately 33% from the first
quarter of 2021 to the first quarter of 2022. Employee-related costs increased
due primarily to a $5.4 million increase in stock-based compensation
expense, a $2.4 million increase in salaries and benefits, a $0.4 million
increase in contract and temporary employee costs, and a $0.2 million increase
in travel costs.

Software hosting and third-party purchased software costs increased due
primarily to an increase in the number of licenses purchased due to increased
headcount, higher subscription fees, and increased investment in security
systems. Outside professional services expenses increased due primarily to
increased investment in employee training and development programs, financial
system enhancements, and acquisition-related costs. Merchant fees, which are
credit card processing fees, increased due primarily to an increase in volume of
credit card transactions. Non-income tax expenses decreased due primarily to
lower state indirect taxes.

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Total Other Income (Expense), Net


                                                 For the Three Months Ended March 31,         Change
                                                    2022                    2021              Amount
                                                                (dollars in thousands)
Other income (expense), net
Fair value changes in earnout liabilities       $      4,001         $           (1,350 )   $    5,351
Interest income                                          186                         24            162
Interest expense                                      (1,496 )                        -         (1,496 )
Other income (expense), net                              126                       (924 )        1,050
Total other income (expense), net               $      2,817         $           (2,250 )   $    5,067




Total other income (expense), net for the three months ended March 31, 2022, was
$2.8 million of income compared to $2.3 million of expense for the three months
ended March 31, 2021. Fair value changes in earnout liabilities were $4.0
million of income for the three months ended March 31, 2022, compared to $1.4
million of expense for the same period in 2021. During the three months ended
March 31, 2022, post-acquisition fair value adjustments to earnout liabilities
related to our acquisitions of TTR, Business Licenses, Davo, CrowdReason, and
Track1099 resulted in other income of $4.0 million. During the three months
ended March 31, 2021, post-acquisition fair value adjustments to earnout
liabilities related to our acquisitions of TTR and Business Licenses resulted in
other expense of $1.4 million. Interest income increased due primarily to an
increase in the interest rate earned on our cash and cash equivalents enhanced
by higher average cash balances in the first quarter of 2022. Interest expense
was $1.5 million for the three months ended March 31, 2022, compared to zero for
the three months ended March 31, 2021. Interest expense increased due to accrual
of contractual interest and amortization of the issuance costs on our 2026 Notes
issued in the third quarter of 2021, for which there is no comparable expense
for the three months ended March 31, 2021. Other income (expense), net was $0.1
million income for the three months ended March 31, 2022, compared to $0.9
million expense for the three months ended March 31, 2021, due primarily to
gains on foreign exchange rates in the current period compared to losses on
foreign exchange rates in the prior period.


Provision for Income Taxes


                                 For the Three Months Ended March 31,         Change
                                  2022                       2021             Amount
                                              (dollars in thousands)
Provision for income taxes   $          (285 )       $             (2,357 )   $ 2,072



The provision for income taxes for the three months ended March 31, 2022, was
$0.3 million compared to a provision for income taxes of $2.4 million for the
three months ended March 31, 2021. The effective income tax rate was an expense
of 0.9% for the three months ended March 31, 2022, compared to an expense of
8.5% for the three months ended March 31, 2021. 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. The decrease in expense and
increase in effective rate is due primarily to income tax expense recorded in
the first quarter of 2021 related to TTR purchase accounting adjustments that
was not repeated in the first quarter of 2022.

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 tax losses in the U.S., U.K.,
and Brazil, including in the first quarter of 2022. As a result, we have a full
valuation allowance against our net deferred tax assets, including net operating
loss carryforwards, and research and development tax credits. We expect to
maintain a full valuation allowance for the foreseeable future.



                                       41
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                        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. We have financed our operations primarily through cash received from
customers for our solutions, public offerings of our common stock, and a private
offering of convertible senior notes. As of March 31, 2022, we had $1.5 billion
of cash and cash equivalents, most of which was held in money market accounts.

Borrowings


In August 2021, we completed a private offering of the 2026 Notes. The 2026
Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per
annum, payable semi-annually in arrears on February 1 and August 1 of each year,
commencing on February 1, 2022. The initial conversion price of the 2026 Notes
represented a premium of 47.5% over the closing price of our common stock on
August 10, 2021, the date the 2026 Notes offering was priced. The net proceeds
from the sale of the 2026 Notes were $959.9 million after deducting the issuance
costs. The 2026 Notes will mature on August 1, 2026, unless earlier converted,
redeemed, or repurchased.

We used $75.3 million of the net proceeds from the 2026 Notes offering to pay
for the cost of the capped call transactions entered into with certain financial
institutions. The capped call instruments are intended to offset potential
dilution to our common stock or offset any cash payments we are required to make
in excess of the principal amount, as the case may be, with such reduction or
offset subject to a cap. The capped call instruments are subject to adjustments
for certain corporate events and standard anti-dilution provisions.

Future Cash Requirements


As of March 31, 2022, our cash and cash equivalents included proceeds from our
previous public offerings of common stock and our private offering of the 2026
Notes. We intend to continue to increase our operating expenses and capital
expenditures to support the growth in our business and operations. We expect to
also use our cash and cash equivalents to continue to acquire complementary
businesses, products, services, technologies, or other assets. We believe that
our existing cash and cash equivalents of $1.5 billion as of March 31, 2022,
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.

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,
                                    2022                    2021
                                           (in thousands)
Cash (used in) provided by:
Operating Activities          $         (23,066 )     $         (28,247 )
Investing Activities                     (8,053 )                (5,844 )
Financing Activities                        929                  13,554




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, technology costs such as software hosting costs
and subscriptions to a wide variety of software-as-a-service platforms, 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 income and expense items, and net
changes in operating assets and liabilities.

For the three months ended March 31, 2022, net cash used in operating activities
was $23.1 million compared to net cash used of $28.2 million for the three
months ended March 31, 2021. The decrease in cash used in operations of $5.2
million was due primarily to an increase in cash collected from customers
compared to the same period in 2021. The increase in cash collected from
customers is due primarily to growing demand for our subscription and returns
services and customer credit terms returning to more typical levels in the
current period. In the prior year, we provided extended payment terms to some of
our customers that were impacted by the COVID-19 pandemic.

                                       42
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Investing Activities


Our investing activities primarily include cash outflows related to purchases of
property and equipment, additions of capitalized software assets, and business
acquisitions.

For the three months ended March 31, 2022, cash used in investing activities was
$8.1 million compared to cash used of $5.8 million for the three months ended
March 31, 2021. The increase in cash used in investing activities of $2.2
million was due primarily to an increase in cash paid for capitalized software
development costs of $3.6 million and an increase in capital expenditures of
$0.8 million, partially offset by a decrease in cash paid for acquisitions of
businesses of $2.2 million. In the first quarter of 2022, cash paid for current
period additions of capitalized software increased $2.5 million and cash paid
for capitalized software costs previously included in accrued expenses increased
$1.1 million. In the first quarter of 2021, we paid $1.5 million of additional
purchase price to finalize net working capital and other adjustments related to
the 2020 acquisitions of TTR and Impendulo and a $0.2 million deposit for the
acquisition of Davo that closed in the second quarter of 2021.

Financing Activities


Our financing activities primarily include cash inflows and outflows from
issuance of common stock, our private offering of convertible senior notes, our
employee stock purchase plan, deferred cash payments made in connections with
acquisitions of businesses, and changes in customer fund obligations.

For the three months ended March 31, 2022, cash provided by financing activities
was $0.9 million compared to cash provided of $13.6 million for the three months
ended March 31, 2021. This decrease in cash provided by financing activities of
$12.6 million was due primarily to a $10.8 million increase in deferred cash
payments related to business combination earnouts, a $3.2 million decrease in
cash proceeds from exercise of stock options, and a $1.5 million decrease from
the net change in customer fund obligations, partially offset by a $2.0 million
decrease in cash paid for purchase price holdbacks related to recent
acquisitions, and a $0.9 million increase in cash proceeds from common stock
purchased under our employee stock purchase plan.

Funds Held from Customers and Customer Fund Obligations


We maintain trust accounts with FDIC-insured 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 are not commingled with our operating funds but are typically
deposited with funds also held on behalf of our other customers. Funds held from
customers primarily represent restricted cash equivalents that, based upon our
intent, are restricted solely for satisfying the obligations to remit funds
relating to our tax remittance services. Additionally, a portion of funds held
from customers is invested in available-for-sale securities. The cash flows
related to the purchases of available-for-sale securities with customer funds
are presented on a gross basis in investing activities. Changes in customer
funds assets account that relate to activities paying for the trust operations,
such as banking fees, are included as cash flows from operating activities.

Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Changes in customer funds obligations liability are presented as cash flows from financing activities.

Contractual Obligations and Commitments


For the three months ended March 31, 2022, our purchase commitments increased
approximately $56.8 million compared to December 31, 2021, primarily related to
software hosting and software license subscriptions that extend up to four years
beyond March 31, 2022. There were no other material changes to our contractual
obligations as of March 31, 2022, compared to December 31, 2021.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements in the three months ended March 31, 2022 or 2021.



                                       43
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             Use and Reconciliation of Non-GAAP Financial Measures

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

• 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, respectively, 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 income (loss) as GAAP operating loss before

stock-based compensation expense, amortization of acquired intangibles, and

goodwill impairments. We calculate non-GAAP net income (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 operating activities less cash

used for the purchases of property and equipment and capitalized software

development costs.

• We define calculated billings as total revenue plus the changes in deferred

revenue and contract liabilities in the period, excluding the acquisition

date impact of deferred revenue and contract liabilities assumed in a

business combination. Because we generally recognize subscription revenue

ratably over the subscription term, calculated billings can be used to

measure our subscription sales activity for a particular period, to compare

subscription sales activity across particular periods, and as a potential

indicator of future subscription revenue, the actual timing of which will be

affected by several factors, including subscription start date and duration.



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

We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non-GAAP financial measures in conjunction with the related GAAP financial measure.

                                       44
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The following schedule reflects our non-GAAP financial measures and reconciles our non-GAAP financial measures to the related GAAP financial measures:


                                                            For the Three Months Ended March 31,
                                                                2022                    2021
                                                                       (in thousands)
Reconciliation of Non-GAAP Cost of Revenue:
Cost of revenue                                           $          60,126       $          44,496
Stock-based compensation expense                                     (3,759 )                (2,032 )
Amortization of acquired intangibles                                 (2,645 )                (2,020 )
Non-GAAP Cost of Revenue                                  $          53,722 

$ 40,444


Reconciliation of Non-GAAP Gross Profit:
Gross Profit                                              $         144,404       $         109,105
Stock-based compensation expense                                      3,759                   2,032
Amortization of acquired intangibles                                  2,645                   2,020
Non-GAAP Gross Profit                                     $         150,808 

$ 113,157


Reconciliation of Non-GAAP Gross Margin:
Gross margin                                                             71 %                    71 %

Stock-based compensation expense as a percentage of revenue

                                                                   2 %                     1 %
Amortization of acquired intangibles as a percentage of
revenue                                                                   1 %                     1 %
Non-GAAP Gross Margin                                                    74 %                    74 %

Reconciliation of Non-GAAP Research and Development Expense: Research and development

                                  $          50,852       $          39,274
Stock-based compensation expense                                     (9,463 )                (5,404 )
Amortization of acquired intangibles                                      -                       -
Non-GAAP Research and Development Expense                 $          41,389 

$ 33,870

Reconciliation of Non-GAAP Sales and Marketing Expense: Sales and marketing

                                       $          86,447       $          64,093
Stock-based compensation expense                                     (6,711 )                (4,055 )
Amortization of acquired intangibles                                 (3,606 )                (1,540 )
Non-GAAP Sales and Marketing Expense                      $          76,130 

$ 58,498

Reconciliation of Non-GAAP General and Administrative Expense: General and administrative

                                $          42,194       $          31,199
Stock-based compensation expense                                    (12,717 )                (7,366 )
Amortization of acquired intangibles                                   (854 )                  (861 )
Non-GAAP General and Administrative Expense               $          28,623 

$ 22,972

Reconciliation of Non-GAAP Operating Income (Loss): Operating loss

                                            $         (35,089 )     $         (25,461 )
Stock-based compensation expense                                     32,650                  18,857
Amortization of acquired intangibles                                  7,105                   4,421
Non-GAAP Operating Income (Loss)                          $           4,666 

$ (2,183 )


Reconciliation of Non-GAAP Net Income (Loss):
Net loss                                                  $         (32,557 )     $         (30,068 )
Stock-based compensation expense                                     32,650                  18,857
Amortization of acquired intangibles                                  7,105                   4,421
Non-GAAP Net Income (Loss)                                $           7,198       $          (6,790 )

Free cash flow:
Net cash used in operating activities                     $         (23,066 )     $         (28,247 )
Less: Purchases of property and equipment                            (2,148 )                (1,366 )
Less: Capitalized software development costs                         (5,905 )                (2,311 )
Free cash flow                                            $         (31,119 )     $         (31,924 )




                                       45
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The following table reflects calculated billings and reconciles to GAAP revenues
(in thousands):

                                                                                                        Three Months Ended
                                        Mar 31,               Dec 31,               Sep 30,               Jun 30,               Mar 31,               Dec 31,          Sep 30,        Jun 30,
                                         2022                2021 (1)              2021 (1)              2021 (1)                2021                2020 (1)            2020           2020
Total revenue                       $       204,530       $       195,142       $       181,167       $       169,067       $       153,601       $       144,760     $  127,879     $  116,487
Add:
Deferred revenue
  (end of period)                           303,610               282,955               257,883               239,395               225,531               209,690        180,640        167,719
Contract liabilities
  (end of period)                               897                 6,918                 8,597                11,406                12,466                10,134          7,673          6,195
Less:
Deferred revenue (beginning
  of period)                               (282,955 )            (257,883 )            (239,395 )            (225,531 )            (209,690 )            (180,640 )     (167,719 )     (165,369 )
Contract liabilities (beginning
  of period)                                 (6,918 )              (8,597 )             (11,406 )             (12,466 )             (10,134 )              (7,673 )       (6,195 )       (6,330 )
Deferred revenue and contract
  liabilities assumed in
  business combinations                           -                  (747 )                (430 )                (886 )                   -                (9,194 )            -              -
Calculated billings                 $       219,164       $       217,788       $       196,416       $       180,985       $       171,774       $    

167,077 $ 142,278 $ 118,702 (1) These quarters include reconciling adjustments to exclude the acquisition-date fair value of deferred revenue and contract liabilities assumed in business combinations.




                   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 Amended 2021 Annual Report.

Recent Accounting Pronouncements


For further information on recent accounting pronouncements, refer to Note 1 in
the Notes to Consolidated Financial Statements contained within this Quarterly
Report on Form 10-Q.

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