AVALARA, INC. Item 8.01 Other Events.
As previously announced, onAugust 8, 2022 ,Avalara, Inc. , aWashington corporation ("Avalara" or the "Company"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and amongAvalara ,Lava Intermediate, Inc. , aDelaware corporation ("Parent"), andLava Merger Sub Inc. , aDelaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to which, on the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and intoAvalara (the "Merger"), withAvalara continuing as the surviving corporation in the Merger and as a wholly owned subsidiary of Parent.
Supplemental Disclosures in Connection with Transaction Litigation
This Current Report on Form 8-K (this "Form 8-K") is being filed to update and supplement the definitive proxy statement (the "Proxy Statement") filed by the Company onSeptember 12, 2022 and mailed by the Company to its stockholders commencing onSeptember 12, 2022 . The information contained in this Form 8-K is incorporated by reference into the Proxy Statement. Terms used in this Form 8-K, but not otherwise defined, shall have the meanings ascribed to such terms in the Proxy Statement. Following the announcement of the Merger Agreement and as of the date of this Form 8-K, eight lawsuits have been filed in connection with the Merger on behalf of purported individual stockholders of the Company-James Albrecht v.Avalara, Inc. , et al., No. 22-cv-7486 (S.D.N.Y.,Sept. 1, 2022 ),Ryan O'Dell v.Avalara, Inc. , et al., No. 22-cv-7720 (S.D.N.Y.,Sept. 9, 2022 ),Stephen Bushansky v.Avalara, Inc. , et al., No. 22-cv-7882 (S.D.N.Y.,Sept. 14, 2022 ),Michael Rubin v.Avalara, Inc. , et al., No. 22-cv-08042 (S.D.N.Y.,Sept. 20, 2022 ),Anthony Morgan v.Avalara, Inc. , et al., No. 22-cv-08077 (S.D.N.Y.,Sept. 21, 2022 ),Edward Benes v.Avalara, Inc. , et al., No. 22-cv-08079 (S.D.N.Y.,Sept. 21, 2022 ),Susan Finger v.Avalara, Inc. , et al., No. 22-cv-08092 (S.D.N.Y.,Sept. 22, 2022 ), andShannon O'Neill v.Avalara, Inc. , et al., No. 22-cv-8140 (S.D.N.Y.,Sept. 26, 2022 ). These lawsuits (collectively, the "Actions"), name the Company and individual officer(s) and members of the Company's board of directors as defendants (collectively, the "Defendants"). The complaints in the Actions allege that the preliminary version of the Proxy Statement, together with the Proxy Statement (collectively, the "Proxy Statements"), were materially deficient and therefore misleading in certain respects in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 promulgated thereunder. Specifically, the complaints in the Actions allege, among other things, that the Proxy Statements failed to disclose certain information relating to the Company's financial projections, Goldman Sachs' financial analyses, potential conflicts of interest, and the process and events that preceded the signing of the Merger Agreement.Avalara believes that the Actions are without merit and that no further disclosure is required to supplement the Proxy Statement under applicable law; however, to eliminate the burden, expense, and uncertainties inherent in such litigation, and without admitting any liability or wrongdoing, the Company has agreed to make certain supplemental disclosures to the Proxy Statement as set forth below. Nothing in these supplemental disclosures shall be deemed an admission of the legal necessity or materiality under applicable law of any of the disclosures set forth herein. The Defendants have vigorously denied, and continue vigorously to deny, that they have committed any violation of law or engaged in any of the wrongful acts that were alleged in the Actions.
Supplements to the Proxy Statement
The supplemental disclosures to the Proxy Statement set forth in this Form 8-K below should be read alongside the Proxy Statement, which should be read in its entirety, and to the extent that information in this Form 8-K differs from or updates information contained in the Proxy Statement, this Form 8-K shall supersede the information in the Proxy Statement. Defined terms used but not otherwise defined herein have the meanings set forth in the Proxy Statement.
1. The section of the Proxy Statement entitled "The Merger-Background of the
Merger" is hereby supplemented as follows:
A. By adding the underlined and bolded text below to the seventh fullparagraph on page 36 (such paragraph beginning with "Over the course of
the end of May…") of the Proxy Statement:
Over the course of the end of May and the first week of June, Party A, Party B, Party C, Party D, Party E, Vista and Party G entered into confidentiality agreements withAvalara . The confidentiality agreements included a prohibition on the counterparty contacting debt or equity financing sources withoutAvalara's prior approval, as well as a standstill provision, which did not prohibit the counterparty from making private acquisition proposals toAvalara and that fell away upon the announcement of the proposed merger (and which provided that such standstill provisions would fall away, among other things, upon the announcement of certain similar potential extraordinary transactions involvingAvalara ). As Party B had already engaged in discussions with an institutional co-investor regarding a potential acquisition ofAvalara prior to being contacted by Goldman Sachs, Party B requested consent fromAvalara to contact such institutional co-investor as a potential financing source in connection with the potential sale process. Following discussions betweenAvalara senior management and representatives of Goldman Sachs,Avalara's senior management determined it was in the best interests ofAvalara , and consistent with the directions of the Board, to permit Party B to contact such institutional co-investor as a potential financing source. Party F informed Goldman Sachs that it did not wish to participate in the potential sale process and did not execute a confidentiality agreement.
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B. By adding the underlined and bolded text below to the fifth full
paragraph on page 38 (such paragraph beginning with "Also on
2022, the Board…") of the Proxy Statement:
Also onJune 17, 2022 , the Board held a special meeting by videoconference with members ofAvalara's senior management and representatives of Goldman Sachs andSimpson Thacher & Bartlett LLP ("Simpson Thacher"),Avalara's outside counsel, in attendance. Before the representatives of Goldman Sachs joined the meeting, members ofAvalara's senior management reviewed with the Board an extrapolation of the May Projections for fiscal years 2026 through 2042 that had been prepared byAvalara's senior management for use by Goldman Sachs in their financial analyses. Following discussion, the Board approved the extrapolation of the May Projections for use by Goldman Sachs in their financial analyses. A member ofAvalara's senior management also reviewed with the Board the engagement letter with Goldman Sachs that had been previously reviewed by a majority of the directors and entered into byAvalara , which the Board ratified at this meeting. Following such discussion, representatives of Goldman Sachs joined the meeting. A representative of Simpson Thacher reviewed and discussed with the Board its fiduciary duties, including those in connection with a potential sale ofAvalara after taking into consideration the potential conflict of interest arising from the fact thatRoss Tennenbaum ,Avalara's chief financial officer, was previously employed by Goldman Sachs untilMarch 2019 . Representatives of Goldman Sachs provided an update on the potential sale process, including an inquiry from a representative of a private equity firm regarding a rumor of a potential transaction process involvingAvalara , in respect of which the representatives of Goldman Sachs expressed their views that the private equity firm did not have a serious interest inAvalara given the nature of the outreach and that they had not made any further inquiries, and a request by Vista to potentially review the proposed form of merger agreement for any transaction in advance of submitting initial indications of interest. A representative of Simpson Thacher reviewed with the Board a draft merger agreement that contemplated, among other things, a "hell or high water" regulatory efforts standard requiring an acquiror to take all actions to obtain all necessary regulatory approval, a "go-shop" provision permittingAvalara to solicit alternative proposals following the execution of the merger agreement, the ability ofAvalara to terminate the merger agreement to accept a superior proposal, a company termination fee equal to 2.0% of transaction equity value (or, with respect to a proposal received from a party that made an alternative proposal during the "go-shop" period, 1.0% of transaction equity value) and a reverse termination fee equal to 8.0% of transaction equity value. Following discussion, the Board directed members ofAvalara's senior management and Goldman Sachs to provide the draft merger agreement to the parties participating in the potential sale process. Thereafter, the draft merger agreement was made available in the virtual data room to Party A, Party B, Party C, Party E and Vista. The draft merger agreement was not made available to Party G as they were still separately considering whether to explore a potential transaction.
2. The section of the Proxy Statement entitled "The Merger-Opinion of Goldman
Sachs & Co. LLC " is hereby supplemented as follows:
A. By adding the underlined and bolded text below to the last paragraph
beginning on page 54 and continuing onto page 55 of the Proxy Statement
under the heading "Illustrative Discounted Cash Flow Analysis" (such
paragraph beginning with "Using the Forecasts and the NOL Forecasts…"):
Illustrative Discounted Cash Flow Analysis. Using the Forecasts and the NOL Forecasts, Goldman Sachs performed an illustrative discounted cash flow analysis onAvalara to derive a range of illustrative present values per share ofAvalara's common stock. Using the mid-year convention for discounting cash flows and discount rates ranging from 11.50% to 15.50%, reflecting estimates ofAvalara's weighted average cost of capital, Goldman Sachs discounted to present value as ofJune 30, 2022 (i) estimates of unlevered free cash flow (less stock-based compensation expenses) forAvalara for the third and fourth quarters of fiscal year 2022 and the fiscal years 2023 through 2042 as reflected in the Forecasts and (ii) a range of illustrative terminal values forAvalara , which were calculated by applying perpetuity growth rates ranging from 2.0% to 4.0% to a terminal year estimate of the unlevered free cash flow (less stock-based compensation expenses) to be generated byAvalara of$3,047 million , as provided byAvalara management and approved for Goldman Sachs' use byAvalara management (which analysis implied exit terminal year EV / NTM unlevered free cash flow (unburdened by stock-based compensation expenses) multiples ranging from 7.1x to 12.6x). Goldman Sachs derived such discount rates by application of the Capital Asset Pricing Model, which requires certain company-specific inputs, includingAvalara's target capital structure weightings, the cost of long-term debt, after-tax yield on permanent excess cash, if any, future applicable marginal cash tax rate and a beta forAvalara , as well as certain financial metrics forthe United States financial markets generally. The range of illustrative perpetuity growth rates forAvalara was estimated by Goldman Sachs utilizing its professional judgment and experience, taking into account the Forecasts and market expectations regarding long-term real growth of gross domestic product and inflation. In addition, assuming discount rates ranging from 11.50% to 15.50%, reflecting an estimate ofAvalara's weighted average cost of capital, Goldman Sachs discounted to present value as ofJune 30, 2022 the estimated benefits ofAvalara's net operating losses ("NOLs") for the fiscal years 2022 through 2042, as reflected in the NOL Forecasts.
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B. By adding the underlined and bolded text below to the first full
paragraph on page 55 of the Proxy Statement under the heading
"Illustrative Discounted Cash Flow Analysis" (such paragraph beginning
with "Goldman Sachs derived a range of illustrative enterprise…"):
Goldman Sachs derived a range of illustrative enterprise values forAvalara by adding the ranges of present values it derived as described above. Goldman Sachs then subtracted from the range of illustrative enterprise values it derived forAvalara $1,087 million (which is the amount ofAvalara's total debt and debt-like items as ofJune 30, 2022 , including$978 million of convertible senior notes,$12 million of accrued purchase price related to acquisitions and$97 million of accrued earnout liabilities), and added$1,461 million (which is the amount ofAvalara's unrestricted cash and cash equivalents as ofJune 30, 2022 ), as provided byAvalara management and approved for Goldman Sachs' use byAvalara management, to derive a range of illustrative equity values forAvalara . Goldman Sachs then divided the range of illustrative equity values it derived by the corresponding number of fully diluted outstanding shares ofAvalara's common stock, the range of which was 93.6 million to 94.1 million, as provided byAvalara management and approved for Goldman Sachs' use byAvalara management, using the treasury stock method, to derive a range of illustrative present values per share ofAvalara's common stock ranging from$54.74 to$112.95 .
C. By adding the underlined and bolded text below to, and removing the
strikethrough text from, the third full paragraph on page 55 of the Proxy
Statement under the heading "Illustrative Present Value of Future Share
Price Analysis" (such paragraph beginning with "Goldman Sachs then
subtracted the amount…"):
Goldman Sachs then subtracted the amount of Avalara's total debt and debt-like
items, which included convertible senior notes, accrued purchase price related
to acquisitions and accrued earnout liabilities, of $1,062 million ,
$1,011 million and $996 million , as of December 31 for each of the fiscal years
2022, 2023 and 2024, respectively, and added the amount of Avalara's
unrestricted cash and cash equivalents of $1,493 million , $1,527 million and
$1,696 million , as of December 31 for each of the fiscal years 2022 to 20242022,
2023 and 2024, respectively, each as provided by Avalara management and approved
for Goldman Sachs' use by Avalara management, from the respective enterprise
values in order to derive a range of illustrative equity values as of
December 31 for each of the fiscal years 2022 to 2024. Goldman Sachs then
divided these implied equity values by the approximately 96 million, 100 million
and 104 million projected year-end number of fully diluted outstanding shares of
Avalara's common stock for each of the fiscal years 2022 to 20242022, 2023 and
2024, respectively, calculated based on estimated annual dilution and the number
ofapproximately 94 million fully diluted shares of Avalara's common stock, each
as provided by Avalara management and approved for Goldman Sachs' use by Avalara
management, using the treasury stock method, to derive a range of implied future
equity values per share of Avalara's common stock. Goldman Sachs then discounted
these implied future equity values per share to August 5, 2022 using an
illustrative discount rate of 13.75%, reflecting an estimate of Avalara's cost
of equity. Goldman Sachs derived such discount rate by application of the
Capital Asset Pricing Model, which requires certain company-specific inputs,
including a beta for the company, as well as certain financial metrics for the
United States financial markets generally. This analysis resulted in a range of
implied present values of $75.42 to $125.43 per share of Avalara's common stock.
D. By replacing the table and accompanying footnotes on page 56 of the Proxy
Statement under the heading "Selected Transactions Analysis" in their
entirety with the following table and accompanying footnotes:
Announcement EV/NTM Transaction All Cash
Date Target Acquiror Revenue Value ($B) Consideration
August 2022 Ping Identity Thoma Bravo 7.7 x $ 2.8 Yes
June 2022 Zendesk Permira & H&F 5.5 x $ 9.9 Yes
April 2022 SailPoint Thoma Bravo 12.9 x $ 7.0 Yes
April 2022 Datto Kaseya / Insight 8.0 x $ 6.0 Yes
June 2022 Anaplan Thoma Bravo 12.8 x(1) $ 10.1 Yes
March 2022 Mandiant Google 9.7 x $ 5.5 Yes
July 2021 Medallia Thoma Bravo 10.8 x $ 6.4 Yes
April 2021 Proofpoint Thoma Bravo 9.1 x $ 11.4 Yes
December 2020 Pluralsight Vista 8.5 x $ 3.7 Yes
December 2020 Slack Salesforce 28.4 x(2) $ 28.1 No
June 2019 Tableau Salesforce 10.9 x $ 15.7 No
February 2019 Ultimate Software Hellman & Friedman 8.4 x $ 10.9 Yes
November 2018 Apptio Vista 7.1 x $ 1.8 Yes
October 2018 SendGrid Twilio 11.5 x $ 1.8 No
June 2018 Adaptive Insights Workday 10.9 x $ 1.6 Yes
March 2018 MuleSoft Salesforce 15.7 x $ 6.5 No
July 2016 Netsuite Oracle 8.6 x $ 9.4 Yes
June 2016 Demandware Salesforce 8.9 x $ 2.8 Yes
May 2016 Marketo Vista 5.9 x $ 1.7 Yes
April 2016 Cvent Vista 6.1 x $ 1.5 Yes
October 2015 Solarwinds Thoma Bravo 7.7 x $ 4.4 Yes
September 2014 Concur SAP 10.2 x $ 8.3 Yes
July 2013 Sourcefire Cisco 7.7 x $ 2.4 Yes
Median (All Transactions) 8.9 x
Median (All Transactions - Cash Only) 8.5 x
(1) Reflects revised purchase price of
2022.
(2) As of pre-announcement date as disclosed in Slack's Form S-4.
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E. By adding the underlined and bolded text below to the second full
paragraph on page 57 of the Proxy Statement under the heading "Selected
Transactions Analysis" (such paragraph beginning with "Based on the
results of the foregoing…"):
Based on the results of the foregoing calculations and Goldman Sachs' analyses
of the various transactions and its professional judgment and experience,
Goldman Sachs selected a reference range of EV/NTM revenue multiples of 7.0x to
12.0x and applied such range to Avalara's NTM revenue, to derive a range of
implied enterprise values for Avalara . Goldman Sachs then subtracted from the
range of implied enterprise values $1,087 million (which is the amount of
Avalara's total debt and debt-like items as of June 30, 2022 , including
$978 million of convertible senior notes, $12 million of accrued purchase price
related to acquisitions and $97 million of accrued earnout liabilities), and
added $1,461 million (which is the amount of Avalara's unrestricted cash and
cash equivalents as of June 30, 2022 ), as provided by Avalara management and
approved for Goldman Sachs' use by Avalara management, to derive a range of
illustrative equity values for Avalara . Goldman Sachs divided the range of
illustrative equity values by the corresponding number of fully diluted
outstanding shares of Avalara's common stock, the range of which was
93.9 million to 94.2 million, as provided by Avalara management and approved for
Goldman Sachs' use by Avalara management, using the treasury stock method, to
derive a range of implied equity values per share of Avalara's common stock of
$79.08 to $132.25 .
3. The section of the Proxy Statement entitled "The Merger-Financial
Projections" is hereby supplemented as follows:
A. By adding the underlined and bolded text below to the third full
paragraph on page 55 under the heading "Illustrative Present Value ofFuture Share Price Analysis" (such paragraph beginning with "Goldman
Sachs then subtracted the amount…") of the Proxy Statement:
The May Projections were made available to Vista and other potential bidders involved in the potential sale process in the course of their due diligence, and the July Projections were made available to Vista in the course of its due diligence.Avalara's senior management also prepared extrapolations of the May Projections and the July Projections (the latter of which we refer to as the "July Extrapolations") for fiscal years 2026 through 2042, which were approved by the Board and provided to Goldman Sachs along with the May Projections and the July Projections. The July Projections and the July Extrapolations were approved by the Board, and the NOL Forecasts were approved byAvalara's senior management and provided to the Board, for Goldman Sachs's use for purposes of its financial analyses summarized above under "Opinion ofGoldman Sachs & Co. LLC ." Goldman Sachs expressed no view or opinion as to these financial projections or the assumptions on which they were based. A summary of the May Projections and the July Projections (which we refer to collectively as the "Projections") and the July Extrapolations, in each case including the NOL Forecasts, are set forth below.
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B. By replacing the table entitled "July Projections and NOL Forecasts" and
accompanying footnotes in their entirety with the following tables and
accompanying footnotes:
July Projections
(US$ in millions) 2022E 2023E 2024E 2025E
Total Revenue $ 869 $ 1,106 $ 1,405 $ 1,793
Non-GAAP Gross Profit(1) $ 640 $ 833 $ 1,083 $ 1,421
Non-GAAP Operating Income (Loss)(2) $ 0 $ 52 $ 140 $ 273
Unlevered Free Cash Flow(3) $ 27 $ 88 $ 187 $ 334
Stock Based Compensation $ 139 $ 188 $ 225 $ 269
Total Federal Net Operating Losses Used $ 0 $ 0 $ 0 $ 0
Total State Net Operating Losses Used $ 0 $ 0 $ 0 $ 0
Total Cash Tax Savings from NOLs(4) $ 0 $ 0 $ 0 $ 0
GAAP Operating Income (Loss)(5) $ (163 ) $ (160 ) $ (109
)
(1) Non-GAAP Gross Profit is defined as gross profit excluding the effects of
stock-based compensation expense and amortization of acquired intangible
assets.
(2) Non-GAAP Operating Income (Loss) is defined as operating income (loss)
excluding the effects of stock-based compensation expense and amortization of
acquired intangible assets.
(3) "Unlevered Free Cash Flow" is defined as Non-GAAP Operating Income (Loss),
less estimated cash taxes excluding the effect of utilization of state and
federal net operating losses ("NOLs") where applicable, plus depreciation and
amortization, less capital expenditures, plus change in deferred revenues,
less other changes in net working capital. In performing its discounted cash
flow analysis, Goldman Sachs used Unlevered Free Cash Flow, less Stock Based
Compensation expense, plus the effect of utilization of NOLs where
applicable.
(4) Assumes federal income tax rate of 21% and state income tax rate of 4%.
(5) GAAP Operating Income (Loss) is defined as operating income (loss) including
the effects of stock-based compensation expense and amortization of acquired
intangible assets.
July Extrapolations
(US$ in millions) 2026E 2027E 2028E 2029E 2030E
Total Revenue $ 2,230 $ 2,735 $ 3,290 $ 3,890 $ 4,535
Non-GAAP Gross Profit(1) $ 1,765 $ 2,170 $ 2,610 $ 3,090 $ 3,640
Non-GAAP Operating Income (Loss)(2) $ 385 $ 510 $ 650 $ 820 $ 1,060
Unlevered Free Cash Flow(3) $ 434 $ 542 $ 653 $ 782 $ 974
Stock Based Compensation $ 312 $ 328 $ 329 $ 311 $ 317
Total Federal Net Operating Losses Used $ 58 $ 145 $ 257 $ 407 $ 594
Total State Net Operating Losses Used $ 58 $ 145 $ 257 $ 407 $ 374
Total Cash Tax Savings from NOLs(4) $ 15 $ 36 $ 64 $ 102 $ 140
GAAP Operating Income (Loss)(5) $ 73 $ 182 $ 321 $ 509 $ 743
(US$ in millions) 2031E 2032E 2033E 2034E 2035E 2036E
Total Revenue $ 5,215 $ 5,910 $ 6,615 $ 7,315 $ 8,010 $ 8,680
Non-GAAP Gross Profit(1) $ 4,205 $ 4,765 $ 5,395 $ 5,970 $ 6,565 $ 7,115
Non-GAAP Operating Income (Loss)(2) $ 1,300 $ 1,535 $ 1,840 $ 2,115 $ 2,420 $ 2,710
Unlevered Free Cash Flow(3) $ 1,170 $ 1,344 $ 1,582 $ 1,778 $ 2,032 $ 2,231
Stock Based Compensation $ 365 $ 355 $ 397 $ 366 $ 401 $ 347
Total Federal Net Operating Losses Used $ 132 $ 0 $ 0 $ 0 $ 0 $ 0
Total State Net Operating Losses Used $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Total Cash Tax Savings from NOLs(4) $ 28 $ 0 $ 0 $ 0 $ 0 $ 0
GAAP Operating Income (Loss)(5) $ 935 $ 1,180 $ 1,443 $ 1,749 $ 2,020 $ 2,363
(US$ in millions) 2037E 2038E 2039E 2040E 2041E 2042E
Total Revenue $ 9,330 $ 9,960 $ 10,565 $ 11,145 $ 11,695 $ 12,210
Non-GAAP Gross Profit(1) $ 7,645 $ 8,255 $ 8,755 $ 9,240 $ 9,695 $ 10,120
Non-GAAP Operating Income (Loss)(2) $ 3,005 $ 3,350 $ 3,600 $ 3,850 $ 4,140 $ 4,315
Unlevered Free Cash Flow(3) $ 2,454 $ 2,715 $ 2,877 $ 3,063 $ 3,279 $ 3,407
Stock Based Compensation $ 373 $ 398 $ 317 $ 334 $ 351 $ 366
Total Federal Net Operating Losses Used $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Total State Net Operating Losses Used $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Total Cash Tax Savings from NOLs(4) $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
GAAP Operating Income (Loss)(5) $ 2,632 $ 2,952 $ 3,283 (1) Non-GAAP Gross Profit is defined as gross profit excluding the effects of
stock-based compensation expense and amortization of acquired intangible
assets.
(2) Non-GAAP Operating Income (Loss) is defined as operating income (loss)
excluding the effects of stock-based compensation expense and amortization of
acquired intangible assets.
(3) "Unlevered Free Cash Flow" is defined as Non-GAAP Operating Income (Loss),
less estimated cash taxes excluding the effect of utilization of state and
federal net operating losses ("NOLs") where applicable, plus depreciation and
amortization, less capital expenditures, plus change in deferred revenues,
less other changes in net working capital. In performing its discounted cash
flow analysis, Goldman Sachs used Unlevered Free Cash Flow, less Stock Based . . .
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