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Clearwater Analytics Holdings, Inc. - Quarter Report: 2022 June (Form 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 June 30, 2022

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: 001-40838

 

img265069965_0.jpg 

Clearwater Analytics Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

87-1043711

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

777 W. Main Street

Suite 900

Boise, ID

83702

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (208) 918-2400

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A common stock, par value $0.001 per share

 

CWAN

 

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, 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

 

 

Smaller 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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No

As of July 29, 2022, the number of outstanding shares of the registrant’s common stock was:

57,669,237 shares of Class A common stock.

2,696,785 shares of Class B common stock.

47,377,587 shares of Class C common stock.

130,083,755 shares of Class D common stock.

 

 

 

 


 

Table of Contents

 

 

 

Page

 

Glossary

ii

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

iv

PART I.

FINANCIAL INFORMATION

1

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

3

 

Condensed Consolidated Statements of Changes in Equity (Deficit)

4

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

PART II.

OTHER INFORMATION

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

37

 

 

 

 

i


 

 

 

 

 

GLOSSARY

 

As used in this Quarterly Report on Form 10-Q, the terms identified below have the meanings specified below unless otherwise noted or the context indicates otherwise:

“Company,” “we,” “us,” “our,” “Clearwater” and similar references refer, (1) following the consummation of the Transactions, to Clearwater Analytics Holdings, Inc., and, unless otherwise stated, all of its direct and indirect subsidiaries, including CWAN Holdings, LLC, and (2) prior to the completion of the Transactions, to CWAN Holdings, LLC and, unless otherwise stated, all of its direct and indirect subsidiaries.
“Annual Report” refers to our Annual Report on Form 10-K, dated December 31, 2021 (File No. 001-40838), as filed with the SEC on March 16, 2022.
“Blocker Entities” refers to entities that, prior to the consummation of the Transactions, were affiliated with certain of the Continuing Equity Owners, each of which was a direct or indirect owner of LLC Interests in CWAN Holdings, LLC prior to the Transactions and is taxable as a corporation for U.S. federal income tax purposes.
“Blocker Shareholders” refers to entities affiliated with certain of the Continuing Equity Owners, each of which was an owner of one or more of the Blocker Entities prior to the Transactions, which exchanged their interests in the Blocker Entities for shares of our Class A common stock, in the case of Other Continuing Equity Owners, and for shares of our Class D common stock, in the case of the Principal Equity Owners, in connection with the consummation of the Transactions.
“Continuing Equity Owners” refers collectively to direct or indirect holders of LLC Interests and/or our Class B common stock, Class C common stock and/or Class D common stock immediately following consummation of the Transactions, including the Principal Equity Owners and certain of our directors and officers and their respective Permitted Transferees who may exchange at each of the irrespective options, in whole or in part from time to time, their LLC Interests (along with an equal number of shares of Class B common stock or Class C common stock, as the case may be (and such shares shall be immediately cancelled)) for newly issued shares of our Class A common stock or our Class D common stock, as the case may be, and additionally holders of shares of our Class D common stock may convert such shares at any time for newly issued shares of our Class A common stock, on a one-for-one basis (in which case their shares of our Class D common stock will be cancelled on a one-for-one basis upon any such issuance).
“IPO” refers to our initial public offering, which closed in September 2021.
“JOBS Act” means the Jumpstart Our Business Startups Act of 2012, as amended.
“LLC Agreement” refers to CWAN Holdings, LLC’s Third Amended and Restated Limited Liability Company Agreement.
“LLC Interests” refers to the common units of CWAN Holdings, LLC, including those that we purchased with a portion of the net proceeds from the IPO.
“New Credit Agreement” refers to a new credit agreement which Clearwater Analytics, LLC entered into with JPMorgan Chase Bank, N.A. on September 28, 2021 in connection with the closing of the IPO.
“NYSE” refers to the New York Stock Exchange.
“Other Continuing Equity Owners” refers to Continuing Equity Owners who are not also Principal Equity Owners.
“Permira” refers to Permira Advisers LLC, one of our largest owners through holdings by its affiliates.
“Permitted Transferee” refers to, subject to the provisions of the LLC Agreement, (a) with respect to any Principal Equity Owner, any of such Principal Equity Owner’s affiliates and (b) with respect to any Other Continuing Equity Owner, any such Other Continuing Equity Owner’s affiliates or, in the case of individuals, members of their immediate family.
“Previous Credit Agreement” refers to the Fifth Amendment to the Credit Agreement which Clearwater Analytics, LLC entered into with Ares Capital Corporation and Golub Capital LLC in October 2020. The outstanding borrowings under the Fifth Amendment to Credit Agreement were repaid in full in September 2021 in connection with the closing of the IPO.
“Principal Equity Owners” refers to Welsh Carson, Warburg Pincus, Permira and their respective affiliates and Permitted Transferees.
“QTD” for any given year means the three months ended June 30 of that year.

ii


 

“SaaS” refers to Software-as-a-Service.
“SEC” refers to the Securities and Exchange Commission.
“Tax Receivable Agreement” or “TRA” refers to the Tax Receivable Agreement, dated as of September 28, 2021, by and among Clearwater Analytics Holdings, Inc., CWAN Holdings, LLC and the other parties thereto.
“Transactions” refers to the organizational transactions described under “Transactions” in Note 1 to our unaudited condensed consolidated financial statements of this Quarterly Report on Form 10-Q.
“Up-C” refers to the Company’s umbrella partnership-C-corporation organizational structure. See Note 1 “Organization and Description of Business” to our unaudited condensed consolidated financial statements of this Quarterly Report on Form 10-Q.
“Warburg Pincus” refers to Warburg Pincus LLC, one of our largest owners through holdings by its affiliates.
“Welsh Carson” refers to Welsh, Carson, Anderson & Stowe, one of our largest owners through holdings by its affiliates.
“YTD” for any given year means the six months ended June 30 of that year.

 

 

iii


 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Important factors that could cause actual results, performance or achievements to differ materially from our expectations include, but are not limited to, the following:

we operate in a highly competitive industry, with many companies competing for business from insurance companies, asset managers, corporations and government entities on the basis of a number of factors, including the quality and breadth of solutions and services provided, ability to innovate, reputation and the prices of services, and this competition could hurt our financial performance;
market volatility, a downturn in economic conditions or other factors may cause negative trends or fluctuations in the value of the assets on the Company’s platform;
we have experienced rapid revenue growth over the past several years, which may be difficult to sustain, and we depend on attracting and retaining top talent to continue growing and operating our business, and if we are unable to hire, integrate, develop, motivate and retain our personnel, we may not be able to maintain or manage our growth, which could have a material adverse effect on our business, financial condition or results of operations;
if our investment accounting and reporting solutions, regulatory reporting solutions or risk management or performance analytics solutions fail to perform properly due to undetected errors or similar problems, our business, financial condition, reputation or results of operations could be materially adversely affected;
our business relies heavily on computer equipment, cloud-based services, electronic delivery systems, networks and telecommunications systems and infrastructure, the Internet and the information technology systems of third parties. Any failures or disruptions in any of the foregoing could result in reduced revenues, increased costs and the loss of clients and could harm our business, financial condition, reputation and results of operations;
if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed;
if our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our competitive position may be harmed;
we may need to defend ourselves against third-party claims that we are infringing, misappropriating or otherwise violating others’ intellectual property rights, which could divert management’s attention, cause us to incur significant costs, and prevent us from selling or using the technology to which such rights relate;
Our “Principal Equity Owners”, will continue to have significant influence over us, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote;
we are classified as a “controlled company,” and as a result, we qualify for, and rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements. In addition, the Principal Equity Owners’ interests may conflict with our interests and the interests of other stockholders;
the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers;
provisions in our certificate of incorporation and bylaws, may have the effect of delaying or preventing a change of control or changes in our management; and

iv


 

those described in the section titled “Risk Factors” in our Annual Report and in periodic reports that we file with the SEC, and our reports to shareholders. These filings are available at www.sec.gov and on our website.

 

Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q and should not be relied upon as representing Clearwater's expectations or beliefs as of any date subsequent to the time they are made. Clearwater does not undertake to and specifically declines any obligation to update any forward-looking statements that may be made from time to time by or on behalf of Clearwater.

You should read this Quarterly Report on Form 10-Q in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2021, included in our Annual Report.

 

v


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited).

Clearwater Analytics Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts and per share amounts, unaudited)

 

 

 

June 30

 

 

December 31

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

278,646

 

 

$

254,597

 

Short-term investments

 

 

3,000

 

 

 

 

Accounts receivable, net

 

 

55,593

 

 

 

50,190

 

Prepaid expenses and other current assets

 

 

17,223

 

 

 

16,551

 

Total current assets

 

 

354,462

 

 

 

321,338

 

Property and equipment, net

 

 

12,613

 

 

 

10,738

 

Operating lease right-of-use assets, net

 

 

21,583

 

 

 

 

Deferred contract costs, non-current

 

 

5,572

 

 

 

5,687

 

Debt issuance costs - line of credit

 

 

826

 

 

 

922

 

Other non-current assets

 

 

5,589

 

 

 

5,670

 

Total assets

 

$

400,645

 

 

$

344,355

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

891

 

 

$

1,416

 

Accrued expenses and other current liabilities

 

 

20,916

 

 

 

27,032

 

Notes payable, current portion

 

 

2,750

 

 

 

2,750

 

Operating lease liability, current portion

 

 

5,185

 

 

 

 

Total current liabilities

 

 

29,742

 

 

 

31,198

 

Notes payable, less current maturities and unamortized debt issuance costs

 

 

49,824

 

 

 

51,157

 

Operating lease liability, less current portion

 

 

17,789

 

 

 

 

Tax receivable agreement liability

 

 

3,100

 

 

 

 

Other long-term liabilities

 

 

965

 

 

 

132

 

Total liabilities

 

 

101,420

 

 

 

82,487

 

Stockholders' Equity

 

 

 

 

 

 

Class A common stock, par value $0.001 per share; 1,500,000,000 shares authorized, 57,660,081 shares issued and outstanding as of June 30, 2022, 47,948,888 shares issued and outstanding as of December 31, 2021

 

 

58

 

 

 

48

 

Class B common stock, par value $0.001 per share; 500,000,000 shares authorized, 2,696,785 shares issued and outstanding as of June 30, 2022, 11,151,110 shares issued and outstanding as of December 31, 2021

 

 

3

 

 

 

11

 

Class C common stock, par value $0.001 per share; 500,000,000 shares authorized, 47,377,587 shares issued and outstanding as of June 30, 2022 and December 31, 2021

 

 

47

 

 

 

47

 

Class D common stock, par value $0.001 per share; 500,000,000 shares authorized, 130,083,755 shares issued and outstanding as of June 30, 2022 and December 31, 2021

 

 

130

 

 

 

130

 

Additional paid-in-capital

 

 

420,123

 

 

 

388,591

 

Accumulated other comprehensive loss

 

 

(1,012

)

 

 

(34

)

Accumulated Deficit

 

 

(183,198

)

 

 

(191,926

)

Total stockholders' equity attributable to Clearwater Analytics Holdings, Inc.

 

 

236,151

 

 

 

196,867

 

Non-controlling interests

 

 

63,074

 

 

 

65,001

 

Total stockholders' equity

 

 

299,225

 

 

 

261,868

 

Total liabilities and Stockholders' Equity

 

$

400,645

 

 

$

344,355

 

 

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

1


 

Clearwater Analytics Holdings, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share amounts and per share amounts, unaudited)

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue

 

$

73,409

 

 

$

60,876

 

 

$

144,187

 

 

$

117,770

 

Cost of revenue(2)

 

 

20,919

 

 

 

15,576

 

 

 

42,091

 

 

 

29,898

 

Gross profit

 

 

52,490

 

 

 

45,300

 

 

 

102,096

 

 

 

87,872

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(2)

 

 

22,836

 

 

 

16,740

 

 

 

44,130

 

 

 

32,576

 

Sales and marketing(2)

 

 

13,074

 

 

 

8,814

 

 

 

25,067

 

 

 

16,025

 

General and administrative(2)

 

 

15,453

 

 

 

11,184

 

 

 

30,493

 

 

 

18,727

 

Total operating expenses

 

 

51,363

 

 

 

36,738

 

 

 

99,690

 

 

 

67,328

 

Income from operations

 

 

1,127

 

 

 

8,562

 

 

 

2,406

 

 

 

20,544

 

Interest expense, net

 

 

403

 

 

 

8,510

 

 

 

832

 

 

 

16,959

 

Tax receivable agreement expense

 

 

3,100

 

 

 

 

 

 

3,100

 

 

 

 

Other (income) expense, net

 

 

(444

)

 

 

(13

)

 

 

(359

)

 

 

65

 

Income (loss) before provision for income taxes

 

 

(1,932

)

 

 

65

 

 

 

(1,167

)

 

 

3,520

 

Provision for income taxes

 

 

298

 

 

 

276

 

 

 

535

 

 

 

320

 

Net income (loss)

 

 

(2,230

)

 

 

(211

)

 

 

(1,702

)

 

 

3,200

 

Less: Net income attributable to non-controlling interests

 

 

198

 

 

 

 

 

 

329

 

 

 

 

Net loss attributable to Clearwater Analytics
Holdings, Inc.

 

$

(2,428

)

 

$

 

 

$

(2,031

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Class A and Class D common stock (Note 8)(1):

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.01

)

 

NMF

 

 

$

(0.01

)

 

NMF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of Class A and Class D common stock
outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

185,781,262

 

 

NMF

 

 

 

182,085,548

 

 

NMF

 

Diluted

 

 

237,545,574

 

 

NMF

 

 

 

237,213,366

 

 

NMF

 

NMF - not meaningful

(1)
Basic and diluted net loss per share of Class A and Class D common stock is applicable only for the periods after the IPO and related transactions (as defined in Note 1 to the Unaudited Condensed Consolidated Financial Statements). See Note 8 for the number of shares used in the computation of net loss per share of Class A and Class D common stock and the basis for the computation of net loss per share.
(2)
Amounts include equity-based compensation as follows:

 

Cost of revenue

 

$

2,376

 

 

$

749

 

 

$

4,687

 

 

$

1,272

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,565

 

 

 

2,034

 

 

 

8,870

 

 

 

3,686

 

Sales and marketing

 

 

3,215

 

 

 

1,295

 

 

 

6,511

 

 

 

2,127

 

General and administrative

 

 

6,035

 

 

 

2,613

 

 

 

11,999

 

 

 

4,471

 

Total equity-based compensation expense

 

$

16,191

 

 

$

6,691

 

 

$

32,067

 

 

$

11,556

 

 

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

2


 

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income (loss)

 

$

(2,230

)

 

$

(211

)

 

$

(1,702

)

 

$

3,200

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(961

)

 

 

(5

)

 

 

(1,261

)

 

 

16

 

Comprehensive income (loss)

 

$

(3,191

)

 

$

(216

)

 

$

(2,963

)

 

$

3,216

 

Less: Comprehensive income (loss) attributable to non-controlling interests

 

 

(11

)

 

 

 

 

 

45

 

 

 

 

Comprehensive income (loss) attributable to Clearwater Analytics Holdings, Inc.

 

$

(3,180

)

 

$

(216

)

 

$

(3,008

)

 

$

3,216

 

 

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

3


 

Condensed Consolidated Statements of Changes in Equity (Deficit)

(In thousands, except share amounts, unaudited)

 

 

 

 

 

Class A
Shares

 

 

Class A
Amount

 

 

Class B
Shares

 

 

Class B
Amount

 

 

Class C
Shares

 

 

Class C
Amount

 

 

Class D
Shares

 

 

Class D
Amount

 

 

Additional
Paid in
Capital

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Accumulated
Deficit

 

 

Non-
controlling
Interest

 

 

Total
stockholders'
equity

 

Balance at December 31, 2021

 

 

 

 

47,948,888

 

 

$

48

 

 

 

11,151,110

 

 

$

11

 

 

 

47,377,587

 

 

$

47

 

 

 

130,083,755

 

 

$

130

 

 

$

388,591

 

 

$

(34

)

 

$

(191,926

)

 

$

65,001

 

 

$

261,868

 

Exercise of options to purchase common stock

 

 

 

 

857,647

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,226

 

 

 

 

 

 

 

 

 

1,387

 

 

 

5,613

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,067

 

 

 

 

 

 

 

 

 

3,960

 

 

 

16,028

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(226

)

 

 

 

 

 

(74

)

 

 

(300

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

398

 

 

 

130

 

 

 

528

 

Accrued tax distributions payable to Continuing Equity Owners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

27

 

Effect of LLC unit exchanges

 

 

 

 

6,643,614

 

 

 

7

 

 

 

(6,643,614

)

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,348

 

 

 

(8,348

)

 

 

 

Balance at March 31, 2022

 

 

 

 

55,450,149

 

 

$

55

 

 

 

4,507,496

 

 

$

5

 

 

 

47,377,587

 

 

$

47

 

 

 

130,083,755

 

 

$

130

 

 

$

404,884

 

 

$

(260

)

 

$

(183,180

)

 

$

62,083

 

 

$

283,764

 

Exercise of options to purchase common stock

 

 

 

 

105,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

603

 

 

 

 

 

 

 

 

 

168

 

 

 

771

 

Restricted stock units released

 

 

 

 

93,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESPP shares issued

 

 

 

 

200,220

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,877

 

 

 

 

 

 

 

 

 

523

 

 

 

2,401

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,759

 

 

 

 

 

 

 

 

 

3,555

 

 

 

16,314

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(752

)

 

 

 

 

 

(209

)

 

 

(961

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,428

)

 

 

198

 

 

 

(2,230

)

Accrued tax distributions payable to Continuing Equity Owners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(834

)

 

 

(834

)

Effect of LLC unit exchanges

 

 

 

 

1,810,711

 

 

 

2

 

 

 

(1,810,711

)

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,410

 

 

 

(2,410

)

 

 

 

Balance at June 30, 2022

 

 

 

 

57,660,081

 

 

 

58

 

 

 

2,696,785

 

 

$

3

 

 

 

47,377,587

 

 

$

47

 

 

 

130,083,755

 

 

$

130

 

 

$

420,123

 

 

$

(1,012

)

 

$

(183,198

)

 

$

63,074

 

 

$

299,225

 

 

4


 

 

 

 

 

 

 

Clearwater Analytics Holdings, Inc. Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CWAN Holdings, LLC
(Prior to
Transactions)
Members' Deficit

 

 

Class A
Shares

 

 

Class A
Amount

 

 

Class B
Shares

 

 

Class B
Amount

 

 

Class C
Shares

 

 

Class C
Amount

 

 

Class D
Shares

 

 

Class D
Amount

 

 

Additional
Paid in
Capital

 

 

Accumulated
Other
Comprehensive
Income

 

 

Accumulated
Deficit

 

 

Non-
controlling
Interest

 

 

Total
members'
deficit

 

Balance at December 31, 2020

 

$

(245,806

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(98,860

)

 

$

58

 

 

 

 

 

 

 

 

$

(344,608

)

Issuance of common units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,560

 

 

 

 

 

 

 

 

 

 

 

 

1,560

 

Repurchase of common units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(626

)

 

 

 

 

 

 

 

 

 

 

 

(626

)

Options withheld for minimum tax obligations for net unit settlement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(587

)

 

 

 

 

 

 

 

 

 

 

 

(587

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,865

 

 

 

 

 

 

 

 

 

 

 

 

4,865

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

Net income

 

 

3,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,411

 

Balance at March 31, 2021

 

$

(242,395

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(93,648

)

 

$

79

 

 

 

 

 

 

 

 

$

(335,964

)

Exercise of options to purchase common units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

251

 

 

 

 

 

 

 

 

 

 

 

 

251

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,691

 

 

 

 

 

 

 

 

 

 

 

 

6,691

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

(5

)

Net loss

 

 

(211

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(211

)

Balance as of June 30, 2021

 

$

(242,606

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(86,706

)

 

$

74

 

 

 

 

 

 

 

 

$

(329,238

)

 

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

5


 

Clearwater Analytics Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$

(1,702

)

 

$

3,200

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

2,118

 

 

 

1,412

 

Noncash operating lease cost

 

 

3,334

 

 

 

 

Equity-based compensation

 

 

32,067

 

 

 

11,556

 

Change in tax receivable liability

 

 

3,100

 

 

 

 

Amortization of deferred contract acquisition costs

 

 

2,067

 

 

 

1,511

 

Amortization of debt issuance costs, included in interest expense

 

 

138

 

 

 

974

 

Deferred tax benefit

 

 

(484

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(5,403

)

 

 

(12,193

)

Prepaid expenses and other assets

 

 

55

 

 

 

(11,433

)

Deferred commissions

 

 

(2,115

)

 

 

(1,245

)

Accounts payable

 

 

(421

)

 

 

50

 

Accrued expenses and other liabilities

 

 

(7,130

)

 

 

(4,805

)

Accrued sales tax liability

 

 

(457

)

 

 

(5,379

)

Net cash provided by (used in) operating activities

 

 

25,167

 

 

 

(16,352

)

INVESTING ACTIVITIES

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,968

)

 

 

(2,231

)

Purchase of short-term investments

 

 

(3,000

)

 

 

 

Net cash used in investing activities

 

 

(6,968

)

 

 

(2,231

)

FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from issuance of common units

 

 

 

 

 

1,560

 

Proceeds from exercise of options

 

 

6,384

 

 

 

251

 

Minimum tax withholding paid on behalf of employees for net unit settlement

 

 

 

 

 

(587

)

Repurchase of common units

 

 

 

 

 

(626

)

Repayments of borrowings

 

 

(1,375

)

 

 

(1,539

)

Proceeds from employee stock purchase plan

 

 

2,401

 

 

 

 

Payment of costs associated with the IPO

 

 

(214

)

 

 

(400

)

Net cash provided by (used in) financing activities

 

 

7,196

 

 

 

(1,341

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,346

)

 

 

(133

)

Net change in cash and cash equivalents during the period

 

 

24,049

 

 

 

(20,057

)

Cash and cash equivalents, beginning of period

 

 

254,597

 

 

 

61,088

 

Cash and cash equivalents, end of period

 

$

278,646

 

 

$

41,031

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

615

 

 

$

15,769

 

Cash paid for income taxes

 

$

486

 

 

$

57

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Direct costs incurred with the IPO included in other assets and accrued expenses

 

$

 

 

$

1,172

 

Tax distributions to unitholders included in accrued expense

 

$

976

 

 

$

 

 

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

6


 

Clearwater Analytics Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Organization and Description of Business

Clearwater Analytics Holdings, Inc. was incorporated as a Delaware corporation on May 18, 2021, as a holding company for the purpose of facilitating the IPO and other related transactions in order to carry on the business of the Company. Prior to the IPO, all business operations were conducted through Carbon Analytics Holdings, LLC, which changed its name to CWAN Holdings, LLC (“CWAN Holdings”) in connection with the IPO. Clearwater provides a SaaS solution for automated investment data aggregation, reconciliation, accounting and reporting services to insurers, investment managers, corporations, institutional investors and government entities. Following the IPO, Clearwater Analytics Holdings, Inc.'s principal asset consists of ownership of common units in CWAN Holdings. As the sole managing member of CWAN Holdings, Clearwater Analytics Holdings, Inc. operates and controls all the business operations of Clearwater. Our corporate structure following the IPO, as described above, is commonly referred to as an “Up-C” structure.

The Company headquarters are located in Boise, ID, and we operate in four offices throughout the U.S. and six offices internationally.

Initial Public Offering

On September 28, 2021, the Company completed its IPO, in which it sold 34,500,000 shares of Class A common stock (including shares issued pursuant to the exercise in full of the underwriters’ option to purchase additional shares) at a public offering price of $18.00 per share for net proceeds of $582.2 million, after deducting underwriting discounts of $38.8 million (but excluding other offering expenses of $5.3 million). The Company used proceeds from the IPO to (i) purchase 34,500,000 common units of CWAN Holdings (“LLC interests”); (ii) repay approximately $437.4 million of outstanding borrowings under the Previous Credit Agreement including prepayment premiums and accrued interest; (iii) pay $5.3 million of expenses related to the IPO; with the remaining proceeds intended to be used for general corporate purposes.

Transactions

In connection with the IPO, the Company completed the following organizational transactions (the “Transactions”):

the amendment and restatement of the limited liability company agreement of CWAN Holdings to, among other things, appoint Clearwater Analytics Holdings, Inc. as the sole managing member of CWAN Holdings and provide certain exchange and redemption rights to direct or indirect holders of interests in CWAN Holdings and/or our Class B common Stock, Class C common Stock and/or Class D common stock immediately following consummation of the Transactions, including the Principal Equity Owners, and the Continuing Equity Owners;
the amendment and restatement of the certificate of incorporation of Clearwater Analytics Holdings, Inc. to create Class A, B, C and D common stock;
the mergers of Blocker Entities into Clearwater Analytics Holdings, Inc. and the issuance of Class A common stock, Class B common stock, Class C common stock, and Class D common stock to Blocker Shareholders and the Continuing Equity Owners. Blocker Entities refers to entities affiliated with certain of the Continuing Equity Owners, each of which was a direct or indirect owner of LLC Interests in CWAN Holdings prior to the Transactions and was taxable as a corporation for U.S. federal income tax purposes, and Blocker Shareholders refers to entities affiliated with certain of the Continuing Equity Owners, each of which was an owner of one or more of the Blocker Entities prior to the Transactions, which exchanged their interests in the Blocker Entities for shares of our Class A common stock, in the case of Continuing Equity Owners other than the Principal Equity Owners, and for shares of our Class D common stock, in the case of the Principal Equity Owners, in connection with the consummation of the Transactions;
the issue of 11,151,110 shares of Class B common stock to Continuing Equity Owners other than the Principal Equity Owners and 47,377,587 shares of Class C common stock to the Principal Equity Owners, on a one-to-one basis with the number of common units of CWAN Holdings. Holders of our Class B and Class C common stock, along with the holders of our Class A and Class D common stock have certain voting rights, but holders of our Class B and Class C common stock do not have an economic interest in the Company;
the issue of 130,083,755 shares of Class D common stock to the Principal Equity Owners, on a one-to-one basis, with the number of common units of CWAN Holdings. Holders of Class D common stock have certain voting rights and are entitled an economic interest in the Company; and
the execution of the Tax Receivable Agreement, by and among Clearwater Analytics Holdings, Inc., CWAN Holdings, LLC and the other parties thereto (Note 10).

7


 

As of June 30, 2022, the Company owns 78.9% of the interests in CWAN Holdings. Continuing Equity Owners which hold Class B and Class C common stock own the remaining 21.1% of the interests in CWAN Holdings. The attributes of the Company's classes of common stock are summarized in the following table:

 

Class of Common Stock

 

Votes per Share

 

Economic Rights

Class A common stock

 

1

 

Yes

Class B common stock

 

1

 

No

Class C common stock

 

10

 

No

Class D common stock

 

10

 

Yes

 

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the SEC and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for the unaudited interim periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year.

Principles of consolidation

The condensed consolidated financial statements include the accounts of the Company and its directly and indirectly wholly-owned or controlled subsidiaries. As the Transactions are considered transactions between entities under common control, the financial statements for periods prior to the IPO and the Transactions have been adjusted to combine the previously separate entities for presentation purposes. All intercompany balances and transactions have been eliminated through consolidation. Clearwater Analytics Holdings, Inc. consolidated the financial results of CWAN Holdings as a Variable Interest Entity (“VIE”). Clearwater Analytics Holdings, Inc. owns the majority economic interest and has the power to control all the business and affairs of CWAN Holdings.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Actual results could differ materially from those estimates.

Items subject to estimates and assumptions include the useful lives and recoverability of long-lived assets, the average period of benefit associated with deferred contract costs, sales reserves, the incremental borrowing rate applied in lease accounting, accruals for sales tax liabilities, the fair value of equity awards, tax valuation allowance and probability of making payments under the TRA, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities, and measurement of revenues and expenses. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, the Company’s condensed consolidated financial statements will be affected.

Significant Accounting Policies

The Company's significant accounting policies are discussed in Note 2 – Basis of Presentation and Summary of Significant Accounting Policies in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company's unaudited condensed consolidated financial statements and related notes during the three and six months ended June 30, 2022, except as noted below.

Short-term Investments

We classify our investments with an original maturity of greater than three months, but less than one year, as short-term investments. Investments in debt securities that we have the positive intent and ability to hold until maturity are classified as held-to-maturity debt securities. Our held-to-maturity debt securities consist of short term certificates of deposit which mature in less than one year. Held-to-maturity debt investments are recorded at amortized cost, which approximates fair value, and realized gains or losses are reported in earnings. The Company does not hold any other short-term investments.

8


 

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provides clarification to ASU 2016-02. These ASU's (collectively, the “new lease standard”) requires lessees to recognize on the balance sheet the assets and liabilities for the assets and obligations created by those leases. The standard was effective for public companies for annual periods beginning after December 15, 2018, including interim periods therein. The Company is allowed to use the private company adoption timelines, and therefore the standard is effective for the Company for its annual period beginning January 1, 2022, and interim periods therein.

On January 1, 2022, the Company adopted ASU No. 2016-02, and its associated amendments using the modified retrospective transition method by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. There was no cumulative-effect adjustment recorded to stockholders' equity upon adoption. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carry forward its historical lease classification, assessment on whether a contract was or contains a lease, and initial direct costs for leases that existed prior to January 1, 2022. The Company also elected to combine its lease and non-lease components and not recognize right-of-use (“ROU”) assets and lease liabilities for leases with an initial term of 12 months or less. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of ROU assets.

At the date of adoption, the Company derecognized a deferred rent liability of approximately $1.5 million, and recognized a $23.1 million ROU asset and $24.6 million lease liability based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

Note 3. Revenue Recognition

The Company is applying the optional exemption to not disclose transaction price allocated to the remaining performance obligations as the Company’s performance obligations are part of contracts that have an expected original duration of one year or less.

Of the total revenue recognized for the three and six months ended June 30, 2022, $0.2 million and $0.3 million was included in the deferred revenue balance as of December 31, 2021, respectively. Revenues recognized from performance obligations satisfied (or partially satisfied) in previous periods were not material.

The following table presents the Company’s revenue disaggregated by geography, based on billing address of the customer (in thousands):

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

United States

 

$

62,116

 

 

$

55,801

 

 

$

123,893

 

 

$

107,346

 

Rest of World

 

 

11,293

 

 

 

5,075

 

 

 

20,294

 

 

 

10,424

 

Total revenue

 

$

73,409

 

 

$

60,876

 

 

$

144,187

 

 

$

117,770

 

 

Note 4. Fair Value Measurements

The following tables set forth the fair value of the Company’s financial assets measured at fair value as of June 30, 2022 and December 31, 2021 in accordance with the fair value hierarchy (in thousands):

 

 

 

June 30, 2022

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

267,069

 

 

$

 

 

$

 

 

$

267,069

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

3,000

 

 

 

 

 

 

3,000

 

Total assets measured at fair value

 

$

267,069

 

 

$

3,000

 

 

$

 

 

$

270,069

 

 

9


 

 

 

 

December 31, 2021

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

248,744

 

 

$

 

 

$

 

 

$

248,744

 

Total assets measured at fair value

 

$

248,744

 

 

$

 

 

$

 

 

$

248,744

 

 

During the six months ended June 30, 2022 and year ended December 31, 2021, there were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 of the fair value hierarchy.

Note 5. Supplemental Consolidated Balance Sheet Information

Accounts Receivable, net

Accounts receivable, net consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Unbilled accounts receivable

 

$

27,384

 

 

$

27,086

 

Billed accounts receivable

 

 

28,269

 

 

 

23,227

 

Allowance for doubtful accounts and reserves

 

 

(60

)

 

 

(123

)

Accounts receivable, net

 

$

55,593

 

 

$

50,190

 

 

The majority of invoices included within the unbilled accounts receivable balance are issued within the first few days of the month directly following the period of service.

Prepaid Expenses and Other Current Assets

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Prepaid expenses

 

$

11,531

 

 

$

11,722

 

Deferred contract costs, current portion

 

 

3,735

 

 

 

3,573

 

Other current assets

 

 

1,957

 

 

 

1,256

 

Prepaid expense and other current assets

 

$

17,223

 

 

$

16,551

 

 

Property and equipment, net

Depreciation and amortization expense for the three months ended June 30, 2022 and 2021 was $1.2 million and $0.7 million, respectively, and for the six months ended June 30, 2022 and 2021 was $2.1 million and $1.4 million, respectively. Accumulated depreciation and amortization as of June 30, 2022 and December 31, 2021 was $14.3 million and $12.2 million, respectively.

10


 

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Accrued sales tax exposure

 

$

987

 

 

$

1,444

 

Accrued bonus

 

 

4,569

 

 

 

8,295

 

Accrued vendor liabilities

 

 

4,972

 

 

 

4,756

 

Accrued benefits and retirement

 

 

3,264

 

 

 

4,368

 

Deferred revenue

 

 

1,091

 

 

 

795

 

Accrued commissions

 

 

1,710

 

 

 

2,350

 

Deferred rent

 

 

 

 

 

1,514

 

Income tax payable

 

 

1,358

 

 

 

771

 

Tax distributions payable to Continuing Equity Owners

 

 

130

 

 

 

169

 

Other current liabilities

 

 

2,835

 

 

 

2,570

 

Accrued expenses and other liabilities

 

$

20,916

 

 

$

27,032

 

 

11


 

Note 6. Leases

The Company adopted ASC 842 as of January 1, 2022. The Company leases facilities under non-cancelable operating lease agreements with varying terms that range from one to 10 years. In addition, some of these leases have renewal options for up to five years. The Company determines if an arrangement contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, and operating lease liabilities on the Company's condensed consolidated balance sheets. The Company does not have any finance leases.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent) separately from the non-lease components (e.g., common-area maintenance costs).

Rent expense was $0.9 million and $1.8 million for the three and six months ended June 30, 2021, respectively, which the Company recognized on a straight-line basis over the non-cancellable lease term.

Future minimum lease payments at December 31, 2021 under the Company’s non-cancellable leases were as follows (in thousands):

 

2022

 

$

3,927

 

2023

 

 

3,843

 

2024

 

 

3,649

 

2025

 

 

3,434

 

2026

 

 

3,007

 

Thereafter

 

 

809

 

Total minimum lease payments

 

$

18,669

 

 

Operating lease cost was $1.5 million and $2.9 million for the three and six months ended June 30, 2022, respectively. Variable lease cost and short-term lease cost were immaterial during the three and six months ended June 30, 2022. Future minimum lease payments at June 30, 2022 under the Company’s non-cancellable leases were as follows (in thousands):

 

2022 (remaining six months)

 

$

2,949

 

2023

 

 

5,779

 

2024

 

 

5,372

 

2025

 

 

5,125

 

2026

 

 

4,456

 

Thereafter

 

 

965

 

Total future minimum lease payments

 

 

24,646

 

Less: Imputed interest

 

 

(1,672

)

Present value of future minimum lease payments

 

 

22,974

 

Less: Current portion of operating lease liability

 

 

(5,185

)

Operating lease liabilities - noncurrent

 

$

17,789

 

 

12


 

The following table presents supplemental information for the Company's non-cancellable operating leases for the six months ended June 30, 2022 (in thousands, except for weighted average and percentage data):

 

Weighted average remaining lease term

 

4.42

 

Weighted average discount rate

 

 

3.33

%

Cash paid for amounts included in the measurement of lease liabilities

 

$

2,910

 

Noncash right-of-use assets obtained in exchange for operating lease obligations(1)

 

$

24,522

 

(1)
Amount includes $23.1 million related to the adoption of ASC 842 for existing operating leases on January 1, 2022, and $1.4 million related to the Company entering into a new non-cancellable operating lease for office space in London on March 2, 2022.

13


 

Note 7. Non-controlling Interest

In connection with the Transactions, the Company became the sole managing member of CWAN Holdings, and has the sole voting interest in, and control of the management of, CWAN Holdings. As a result, the Company consolidates the financial results of CWAN Holdings. The non-controlling interest on our consolidated balance sheet relates to the interests of CWAN Holdings held by the Continuing Equity Owners. The ownership of the LLC interests is summarized as follows:

 

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

Shares

 

 

Ownership %

 

 

Shares

 

 

Ownership %

 

Clearwater Analytics Holdings, Inc. interest in CWAN Holdings

 

 

187,743,836

 

 

 

78.9

%

 

 

178,032,643

 

 

 

75.3

%

Continuing Equity Owners' interest in CWAN Holdings

 

 

50,074,372

 

 

 

21.1

%

 

 

58,528,697

 

 

 

24.7

%

 

 

 

237,818,208

 

 

 

100.0

%

 

 

236,561,340

 

 

 

100.0

%

 

Note 8. Loss Per Share

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted net loss per share of Class A and Class D common stock for the periods following the Transactions (in thousands):

 

 

 

Three Months Ended June 30, 2022

 

 

Six Months Ended June 30, 2022

 

Numerator:

 

 

 

 

 

 

Net loss

 

$

(2,230

)

 

$

(1,702

)

Less: Net income attributable to non-controlling interests

 

 

198

 

 

 

329

 

Net loss attributable to Clearwater Analytics Holdings, Inc. - basic

 

 

(2,428

)

 

 

(2,031

)

Reallocation of net income attributable to non-controlling interests from the assumed exchange of Class B and Class C stock for Class A and Class D stock

 

 

198

 

 

 

329

 

Net loss attributable to Clearwater Analytics Holdings, Inc. - diluted

 

$

(2,230

)

 

$

(1,702

)

 

The following tables sets forth the computation of basic and diluted net loss per share of Class A and Class D common stock (in thousands, except share amounts and per share amounts):

 

 

Three Months Ended June 30, 2022

 

 

Six Months Ended June 30, 2022

 

 

 

Class A

 

 

Class D

 

 

Class A

 

 

Class D

 

Basic net loss attributable to Class A and Class D common stockholders

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of net loss attributable to Clearwater Analytics, Inc.

 

$

(728

)

 

$

(1,700

)

 

$

(580

)

 

$

(1,451

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of Class A and Class D common stock outstanding - basic

 

 

55,697,507

 

 

 

130,083,755

 

 

 

52,001,793

 

 

 

130,083,755

 

Basic net loss per share attributable to Class and Class D common stockholders

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.01

)

 

14


 

 

 

 

Three Months Ended June 30, 2022

 

 

Six Months Ended June 30, 2022

 

 

 

Class A

 

 

Class D

 

 

Class A

 

 

Class D

 

Diluted net loss attributable to Class A and Class D common stockholders

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed loss for basic computation

 

$

(728

)

 

$

(1,700

)

 

$

(580

)

 

$

(1,451

)

Reallocation of earnings as a result of conversion of Class B to Class A shares and conversion Class C to Class D shares

 

 

163

 

 

 

35

 

 

 

150

 

 

 

179

 

Reallocation of earnings as a result of conversion of Class D to Class A shares

 

 

(1,665

)

 

 

 

 

 

(1,272

)

 

 

 

Allocation of undistributed loss

 

$

(2,230

)

 

$

(1,665

)

 

$

(1,702

)

 

$

(1,272

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of Class A and Class D common stock outstanding - basic

 

 

55,697,507

 

 

 

130,083,755

 

 

 

52,001,793

 

 

 

130,083,755

 

Add: weighted-average effect of dilutive securities exchangeable for Class A common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class B stock to Class A stock, and conversion of Class C stock to Class D stock

 

 

4,386,725

 

 

 

47,377,587

 

 

 

7,750,231

 

 

 

47,377,587

 

Conversion of Class D to Class A common shares outstanding

 

 

177,461,342

 

 

 

 

 

 

177,461,342

 

 

 

 

Weighted average number of shares of Class A and Class D common stock outstanding - diluted

 

 

237,545,574

 

 

 

177,461,342

 

 

 

237,213,366

 

 

 

177,461,342

 

Diluted net loss per share attributable to Class A and Class D common stockholders

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.01

)

 

Shares of the Company's Class B and Class C common stock do not participate in the earnings or losses of Clearwater Analytics Holdings, Inc. and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B and Class C common stock under the two-class method has not been presented.

Note 9. Equity-Based Compensation

In September 2021, the Board of Directors of the Company (the “Board”) adopted the Clearwater Analytics Holdings, Inc. 2021 Omnibus Incentive Plan (the “2021 Plan”), pursuant to which employees, consultants and directors of our Company and our affiliates performing services for us, including our executive officers, are eligible to receive awards. The 2021 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), bonus stock, dividend equivalents, other stock-based awards, substitute awards, annual incentive awards and performance awards intended to align the interests of participants with those of our shareholders. A total of 57,197,804 shares of common stock are authorized for issuance under the 2021 Plan. In connection with the approval of the 2021 Plan, the 2017 Equity Incentive Plan (the “2017 Plan”) was terminated and all outstanding stock options and RSUs were transferred to the 2021 Plan.

Options

The following table summarizes the stock option activity for the six months ended June 30, 2022 (in thousands, except per share data):

 

15


 

 

Stock Options

 

 

 

Weighted Average Exercise Price

 

 

 

Weighted Average Remaining Contractual Life (Years)

 

 

Aggregate Intrinsic Value

 

Balance - December 31, 2021

 

22,315,171

 

 

 

 

$

8.52

 

 

 

 

 

 

 

 

 

Granted

 

43,986

 

 

 

 

18.19

 

 

 

 

 

 

 

 

Exercised

 

(962,898

)

 

 

 

6.63

 

 

 

 

 

 

$

11,819

 

Forfeited

 

(742,744

)

 

 

 

10.04

 

 

 

 

 

 

 

 

Balance - June 30, 2022

 

20,653,515

 

 

 

$

8.57

 

 

 

 

7.56

 

 

$

86,343

 

Options vested - June 30, 2022

 

10,176,248

 

 

 

$

6.29

 

 

 

 

 

 

$

60,748

 

 

The weighted-average grant-date fair value of stock options granted during the six months ended June 30, 2022 was $7.74 per share. The aggregate intrinsic value as of June 30, 2022 disclosed in the above table is based on the difference between the exercise price of the stock option and the closing stock price on the NYSE on June 30, 2022. As of June 30, 2022, the total unrecognized compensation expense related to unvested options was $58.8 million, which is expected to be recognized over a weighted average period of 2.6 years.

RSUs

During June 2021, the Company began to grant RSUs to employees. The summary of RSU activity for the six months ended June 30, 2022 is as follows (in thousands, except per share data):

 

 

Units Activity

 

 

Weighted Average Grant Date Fair Value

 

 

Aggregate Intrinsic Value

 

Unvested units as of December 31, 2021

 

6,070,668

 

 

$

 

 

 

 

Granted

 

1,161,813

 

 

 

17.04

 

 

 

 

Released

 

(93,750

)

 

 

 

 

 

 

Cancelled

 

(374,558

)

 

 

 

 

 

 

Unvested units as of June 30, 2022

 

6,764,173

 

 

 

 

 

$

81,441

 

 

The aggregate intrinsic value disclosed in the above table is based on the closing stock price on the NYSE on June 30, 2022. As of June 30, 2022, there was $97.6 million of unrecognized equity-based compensation expense related to RSUs, which is expected to be recognized over a weighted average period of 3.1 years.

Determination of Fair Value

The Company estimated the fair value of each stock option awarded on the date of grant using the Black-Scholes option-pricing model utilizing the assumptions noted below:

Fair Value of Units – prior to the IPO, the fair value of the common stock underlying the equity-based awards was determined by the Company’s Board of Directors, with input from management and third-party valuations. Subsequent to the IPO, the fair value of the common stock underlying equity-awards was determined using the closing price on the date of the award being granted.

Expected Term – the expected term represents the period that the awards are expected to be outstanding. The Company issues “plain vanilla,” awards and the Company determines the expected term using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the equity-based awards.

Expected Volatility – the stock price volatility is estimated based on the volatility of a set of publicly traded comparable companies with a look back period consistent with the expected life.

Risk-Free Interest Rate – the risk-free interest rate is calculated using the average of the published interest rates of U.S. Treasury zero-coupon issues with maturities that approximate the expected term of the equity-based awards.

Dividend Ratethe dividend yield assumption is zero. Although the Company made a special one-time dividend in conjunction with the November 2020 recapitalization transaction, the Company has no history of making regular dividends, nor plans to make future dividend payments.

16


 

The following assumptions were used to calculate the fair value of options granted to employees on the date of grant using the Black-Scholes option-pricing model:

 

 

Six Months Ended June 30,

 

 

2022

 

 

2021

 

Weighted-average grant date fair value per option

$

7.74

 

 

$

5.08

 

Fair value of units

$17.72 - $18.68

 

 

$12.40 - $14.28

 

Expected term (in years)

 

5.50

 

 

6.00 - 6.25

 

Expected volatility

 

44

%

 

 

40

%

Risk-free interest rates

1.8 - 2.0%

 

 

0.6 - 1.1%

 

 

In addition to the Black-Scholes assumptions discussed immediately above, forfeitures may also have a significant impact on the related equity-based compensation. The forfeiture of options and RSUs is recognized as forfeitures occur.

In the period subsequent to the IPO, the Company estimated the fair value of each RSU awarded using the closing price on the date of the award being granted.

Employee Stock Purchase Plan

In September 2021, the Board adopted the Clearwater Analytics Holdings, Inc. 2021 Employee Stock Purchase Plan (“ESPP”). As of January 1, 2022, a total of 5,837,791 shares of Class A common stock were available for issuance under the ESPP. The offering periods are scheduled to start on June 1 and December 1 of each year. Eligible employees may purchase the Company's common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee's payroll deductions under the ESPP are limited to 10% of the employee's compensation and an employee may not purchase more than $25,000 of stock during any calendar year in which the employee’s option to purchase stock under the ESPP is outstanding at any time.

On May 31, 2022, a total of 200,220 shares were issued to employees for the offering period ended May 31, 2022. As of June 30, 2022, total unrecognized equity-based compensation costs related to ESPP were $0.7 million, which is expected to be recognized over the remaining current offering period ending November 30, 2022.

ESPP payroll contributions accrued at June 30, 2022 totaled $0.4 million and are included within accrued expenses in the consolidated balance sheets. Employee payroll contributions used to purchase shares under the ESPP will be reclassified to stockholders' equity at the end of the offering period.

Note 10. Income Taxes

As a result of the IPO, Clearwater Analytics Holdings, Inc. owns a portion of CWAN Holdings, which contains all operations of the business and is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CWAN Holdings is generally not subject to U.S. federal, state, and local income taxes. Any taxable income or loss generated by CWAN Holdings is passed through to and included in the taxable income or loss of its members in accordance with the terms of the operating agreement of CWAN Holdings. Before the IPO, the majority of CWAN Holdings’ income was passed through to its members and nontaxable to the entity. CWAN Holdings’ international wholly-owned subsidiaries are subject to taxes in foreign jurisdictions.

Clearwater Analytics Holdings, Inc. is taxed as a corporation and pays corporate federal, state, and local taxes on income allocated to it from CWAN Holdings based on Clearwater Analytics Holdings, Inc.’s economic interest held in CWAN Holdings. While the Company consolidates CWAN Holdings for financial reporting purposes, the Company will not be taxed on the earnings attributed to the non-controlling interests. As a result, the income tax burden on the earnings taxed to the non-controlling interests is not reported by the Company in its condensed consolidated financial statements.

Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in the applicable quarter. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate may be subject to significant volatility due to several factors, including our ability to accurately predict the proportion of our pretax income in multiple jurisdictions, certain book-tax differences, and exchanges from non-controlling interests.

The following table provides details of the provision for income taxes:

 

17


 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Income before provision for income taxes

 

$

(1,932

)

 

$

65

 

 

$

(1,167

)

 

$

3,520

 

Provision for income taxes

 

 

298

 

 

 

276

 

 

 

535

 

 

 

320

 

Effective tax rate

 

 

(15.4

%)

 

 

424.6

%

 

 

(45.8

%)

 

 

9.1

%

 

For the three months and six months ended June 30, 2022, the Company’s effective tax rate was different than the statutory rate primarily because of foreign taxes, equity-based compensation and the valuation allowance on the U.S. deferred tax assets. In addition, the Company is not liable for income taxes on the portion of CWAN Holdings earnings that are attributable to non-controlling interests.

For the three months ended June 30, 2021, CWAN Holdings' effective tax rate was different than the statutory rate primarily because of true-ups related to foreign taxes. For the six months ended June 30, 2021, CWAN Holdings' effective tax rate was different than the statutory rate primarily because its earnings were exempt from federal corporate income taxation due to its status as a partnership.

The Company regularly monitors its uncertain tax benefits, and as of June 30, 2022, there were no material uncertain tax benefits that, if realized, would affect the estimated annual effective tax rate, nor do we expect any significant changes within the next 12 months.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence as of June 30, 2022, we believe that it is more likely than not that the tax benefits of the U.S. losses incurred may not be realized. Accordingly, we have recorded a full valuation allowance against the tax benefits of the U.S. losses incurred. We intend to maintain the full valuation allowance on the U.S. net deferred tax assets until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance.

On March 16, 2022, Idaho enacted House Bill 563 that amended portions of relevant tax laws. Due to our valuation allowance in the U.S., this legislation did not have a significant impact on the provision for income taxes for the three and six months ended June 30, 2022. However, we expect our blended state tax rate to decrease due to the new law.

Tax Receivable Agreement Liability

Pursuant to our election under Section 754 of the Internal Revenue Code (the “Code”), we expect to obtain an increase in our share of the tax basis in the net assets of CWAN Holdings when its units are redeemed or exchanged. We intend to treat any redemptions and exchanges of CWAN Holdings units as direct purchases of the units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent the tax basis is allocated to those capital assets.

In connection with the IPO and related transactions, we entered into a TRA that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of CWAN Holdings resulting from any redemptions or exchanges of CWAN Holdings units, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest and TRA bonus payments pursuant to the TRA (the “TRA Payments”). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in CWAN Holdings or the Company. The rights of each member of CWAN Holdings, that is a party to the TRA, are assignable to transferees of their respective CWAN Holdings units.

The estimation of a liability under the TRA is, by its nature, imprecise and subject to significant assumptions regarding a number of factors, including (but not limited to) the amount and timing of taxable income generated by the Company each year as well as the tax rate then applicable. The future tax benefits related to ownership exchanges as of June 30, 2022 are estimated to be $372 million, of which $317 million is estimated to be the associated TRA liability.

As noted above, the Company evaluated the realizability of its U.S. deferred tax assets and has recorded a full valuation against those benefits. As a result, the Company determined that payments to TRA holders are not probable and no TRA liability related to future years has been recorded as of June 30, 2022. We are projecting taxable income for the current year and have recorded a TRA liability of $3.1 million as of June 30, 2022. There are many assumptions and considerations that impact our taxable income position in the current year, some of which are out of our direct control. As such, the estimate of our taxable income position (and thus, the TRA liability recognized) for the current year could change significantly.

18


 

As non-controlling interest holders exercise their right to exchange their units in CWAN Holdings, a TRA liability may be recorded based on 85% of the estimated future tax benefits that the Company may realize as a result of increases in the tax basis of CWAN Holdings. The amount of the increase in the tax basis, the related estimated tax benefits, and the related TRA liability to be recorded will depend (among other things) on the price of the Company’s Class A stock at the time of the relevant redemption or exchange.

Note 11. Transactions with Related Parties

During January 2021, the Company paid $9.6 million in relation to management fees to Principal Equity Owners which is recorded as prepaid management fees within prepaid expenses and other current assets and non-current assets. The prepaid management fees are being amortized over four years. In the three months ended June 30, 2022 and 2021, the Company recognized a management fee to Principal Equity Owners of $0.6 million and $0.5 million, respectively. In the six months ended June 30, 2022 and 2021, the Company recognized a management fee to Principal Equity Owners of $1.2 million and $1.1 million, respectively.

In connection with Marcus Ryu not standing for re-election to the Company’s board of directors at its annual meeting in June 2022, to retain Mr. Ryu’s valuable insights, in April 2022 we entered into an advisory agreement with Mr. Ryu. Pursuant to this agreement, Mr. Ryu will serve as a senior advisor to the Company with respect to our go-to-market strategy in the insurance sector for a period of 18 months following the 2022 annual meeting. In consideration for Mr. Ryu’s service as a senior advisor, the options to purchase our Class A shares already owned by Mr. Ryu were amended to provide for a half-yearly vesting period following the next annual vesting period of his options.

19


 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements included in the Annual Report. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and in the section titled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and those discussed in the section titled “Risk Factors” in the Annual Report.

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We provide investment accounting and reporting, performance measurement, compliance monitoring and risk analytics solutions for asset managers, insurance companies and large corporations. Every day, Clearwater’s powerful platform aggregates and normalizes data on over $5.9 trillion of global invested assets for over 1,100 clients. We bring modern software to an industry that has long been dominated by difficult-to-use, high cost legacy technologies and processes, which often lack data integrity and traceability, and often require significant manual intervention. The strength of our platform is demonstrated by our approximately 80% win rate for new clients over the prior four years in deals that reached the proposal stage.

We allow our clients to replace legacy systems with modern cloud-native software. Our platform helps clients reduce cost, time, errors and risk and allows them to reallocate resources to other value-creating activities. Our software aggregates, reconciles and validates data from more than 2,500 daily data feeds and more than four million securities that have been modeled across multiple currencies, asset classes and countries. This cleansed and validated data runs through our proprietary accounting, performance, compliance and risk solutions to provide clients with powerful analytics and daily or on-demand configurable reporting. We offer multi-asset class, multi-basis, multi-currency accounting and analytics that provide clients with a comprehensive view of their holdings and related performance. This allows our clients to make better, more timely decisions about their investment portfolios.

Clearwater benefits from powerful network effects. With our single instance, multi-tenant architecture, every client, whether new or existing, enriches our global data set by making it more complete and accurate. Our software continually sources, ingests, models, reconciles and validates the terms, conditions and features of every investment security held by all of our clients. This continuous process helps to create a single repository of comprehensive, accurate investment data (often referred to within the industry as a “Golden Copy” of data) that benefits all our clients to the extent they otherwise have rights to the data. Through this continuous process, we are able to identify and adjudicate data discrepancies that otherwise could introduce error and risk into our clients’ investment portfolios. We believe that a meaningful competitive advantage of this network effect is that we are increasingly seen as the best and most accurate source of investment accounting data and analytics in the industry.

We have a 100% recurring revenue model. We charge our clients a fee that is primarily based on the amount of assets they manage on our platform, subject to contracted minimums. A majority of the assets on our platform are high-grade fixed income assets, leading to relatively low levels of volatility and highly predictable revenue streams. When applicable, we charge additional transaction fees for certain alternative asset classes (e.g., derivatives and other financial instruments).

Key Factors Affecting Our Performance

The growth and future success of our business depends on many factors, including those described below.

Adding New Clients in Established End Markets: Our future growth is dependent upon our ability to continue to add new clients. We are focused on continuing to increase our client base in our established client end-markets of corporations, insurance companies and asset managers, and doing so with increasingly large and sophisticated clients. As we add clients, it takes time to fully onboard their assets to the platform. Our revenue generally increases as assets are added to the platform, while the effort to serve the client is relatively consistent over time. Therefore, we expect revenues and gross margins to increase for a client as the client transitions from the onboarding process to a steady state once assets have been onboarded. In any period, our gross margins may fluctuate based on the relative size and number of clients that we are onboarding at that time.

20


 

Expanding and Retaining Relationships with Existing Clients: Our future growth is dependent upon retaining our existing clients and expanding our relationships with these clients through increases in the amount of their assets on our platform. We have enjoyed consistent gross revenue retention rates of approximately 98% over the past fourteen quarters. The consistency in revenue retention creates predictability in our business and enables us to better plan our future investments. Our relationships with our clients expands as these clients add more assets to our platform, with our net revenue retention rates (as defined below under “—Key Operating Measures”) above 104% over the past two years. Clients may add assets as a result of acquiring new clients themselves or by acquiring new businesses or simply through organic growth, which produces additional assets that they manage using our platform. We believe that our client service model and technology platform are strong contributing factors in our attractive retention rates. As such, we expect to continue to invest in both our operations and research and development functions to maintain and increase our high levels of client satisfaction, which we believe will lead to strong client retention and expansion.
International Expansion: We believe that the value provided by our platform is equally applicable to asset owners and asset managers outside of North America, and there is a significant opportunity to expand our client base and usage of our platform internationally. Our future growth is dependent upon our ability to successfully enter new international markets and to expand our client base in our current international markets. Our cost to acquire clients in international markets is currently greater than in North America because there is less awareness of the Clearwater brand and our product capabilities, and we have to date invested less in sales and marketing internationally. For these reasons, we expect to invest more in sales and marketing in international markets relative to North America in order to achieve growth in these international markets.
Adding New Clients in Adjacent or Nascent End-Markets: Our strategy is to also add new clients in our more nascent end-markets, which include state and local governments, pension funds and sovereign wealth funds, as well as a variety of alternative asset managers. Traditionally, our existing clients have been among our best resources for referring new clients to us, and we will continue to invest in sales and marketing to build awareness of our brand, engage prospective clients and drive adoption of our platform, particularly as it relates to expanding into new end-markets. As we establish our presence in new end-markets, we expect sales and marketing expenditures will be less efficient than in our established verticals and we will become increasingly more efficient at acquiring clients in new end-markets over time.
Expanding Solutions and Broadening Innovation: Our future growth is dependent upon our continued expansion of our solutions in order to better retain our current clients and to develop new use cases that appeal to new clients. While we believe we will be able to reduce our research and development expenses as a percentage of revenues as we achieve greater scale, our priority is to maintain and grow our technological advantage over our competitors. As we identify opportunities to increase our technological and competitive advantages, we may increase our investments in research and development at rates that are faster than our growth in revenues in order to enhance our long-term growth and profitability.
Fluctuations in the Market Value of Assets on the Platform: We generally bill our clients monthly in arrears based on a basis point rate applied to our clients’ assets on our platform, which can be influenced by general economic conditions. While 78% of the assets on our platform were high-grade fixed income securities and structured products as of December 31, 2021 and therefore typically subject to low levels of volatility, the value of our clients’ assets on our platform varies on a daily basis due to changes in securities prices, cash flow needs, incremental buying and selling of assets and other strategic priorities of our clients. For these reasons, our revenue is subject to fluctuations based on economic conditions, including market conditions and the changing interest rate environment. For example, our net revenue retention rate was impacted by decreases in clients assets under management on our platform by 2% during the three months ended March 31, 2022, and an incremental 3% during the three months ended June 30, 2022, reducing our annualized recurring revenue.

Key Components of Results of Operations

The following discussion describes certain line items in our condensed consolidated statements of operations.

Revenue

We generate revenue from fees derived from providing clients with access to the solutions and services on our software-as-a-service platform. Sales of our offering include a right to use our software in a hosted environment without taking possession of the software. Our contracts are generally cancellable with 30 days’ notice without penalty. We invoice clients monthly in arrears based on a percentage of the average daily value of assets within a client’s accounts on our platform during that month, or a fixed monthly fee. Payment terms may vary by contract but generally include a requirement of payment within 30 days following the month in which services are provided. Fees invoiced in advance of the delivery of the Company’s performance obligations are deemed set-up activities and are deferred as a material right and recognized over time, typically 12 months.

21


 

Cost of Revenue

Cost of revenue consists of expenses related to delivery of revenue-generating services, including expenses associated with client services, onboarding, reconciliation and agreements related to the purchase of data used in the provision of our services. Salary and benefits for certain personnel associated with supporting these functions, in addition to allocated overhead and depreciation for facilities, are also included in cost of revenue.

Operating Expenses

Research and development expense consists primarily of salary and benefits for our development staff as well as contractors’ fees and other costs associated with the enhancement of our offering, ensuring operational stability and performance and development of new offerings.

Sales and marketing expense consists of the costs of personnel involved in the sales and marketing process, sales commissions, advertising and promotional materials, sales facilities expenses, and the cost of trade shows and seminars.

General and administrative expense consists primarily of personnel costs for information technology, finance, administration, human resources and general management, as well as expenses from legal, corporate technology and accounting service providers.

Interest Expense, Net

Interest expense, net primarily relates to interest expense and reflects interest accrued on our outstanding term loan during the course of the applicable period. The accrual of interest varies depending on the timing and amount of borrowings and repayments during the period as well as fluctuations in interest rates. Interest income is also included in interest expense, net.

Tax Receivable Agreement Expense

In connection with the IPO and related transactions, we entered into a TRA that provides for the payment by us of 85% of certain tax benefits that we realize as a result of increases in our tax basis of CWAN Holdings resulting from redemptions or exchanges of CWAN Holdings units. Tax receivable agreement expense relates to payments we anticipate making under the TRA.

Other Expense, Net

Other expense, net consists of foreign currency gains and losses.

Provision for Income Taxes

Provision for income taxes consists of income taxes related to federal, state, and foreign jurisdictions where we conduct our business. Our effective tax rate may increase in the future as our ownership in CWAN Holdings increases via exchanges from historical partners. In addition, our discrete items may not be consistent from period to period and could cause volatility in our effective tax rate.

Key Operating Measures

We consider certain operating measures, such as annualized recurring revenue, gross retention rates and net retention rates, in measuring the performance of our business. The following table summarizes these operating measures for the dates presented:

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Annualized recurring revenue (in thousands)

 

$

290,354

 

 

$

245,033

 

Gross revenue retention rate

 

 

98

%

 

 

98

%

Net revenue retention rate

 

 

104

%

 

 

109

%

 

Annualized Recurring Revenue

Annualized recurring revenue is calculated at the end of a period by dividing the recurring revenue in the last month of such period by the number of days in the month and multiplying by 365.

Because a substantial majority of the assets on our platform typically have low levels of volatility with respect to their market value, the growth in annualized recurring revenue is generally not attributable to the fluctuating market value of the assets on our platform. Rather, the growth in annualized recurring revenue is due to an increase in the number of clients using our offering as well as from onboarding more assets of our existing clients onto our platform.

Annualized recurring revenue increased 18% on account of growth in our client base as we brought new clients onto our platform and also added additional assets onto our platform from existing clients.

22


 

Gross Revenue Retention Rate

Gross revenue retention rate represents annual contract value (“ACV”) at the beginning of the 12-month period ended on the reporting date less client attrition over the prior 12-month period, divided by ACV at the beginning of the 12-month period, expressed as a percentage. ACV is comprised of annualized recurring revenue plus contracted-not-billed revenue, which represents the estimated annual contracted revenue for new and existing client opportunities prior to revenue recognition. In order to arrive at total ACV, we include contracted-not-billed revenue, as it is contracted revenue that has not been recognized but that we expect to produce recognized revenue in the future. Client attrition occurs when a client provides a contract termination notice. The amount of client attrition is calculated as the reduction in annualized revenue of the client at the time of the notice and is recorded in the month the final billing occurs. In the case of client attrition where contracted-not-billed revenue is still present for a client, both annualized recurring revenue and contracted-not-billed revenue associated with such client are deducted from ACV.

Gross revenue retention rates have remained consistent at approximately 98% since 2019. We believe the consistent and high gross revenue retention rate is a testament to the value proposition that our leading solution offers.

Net Revenue Retention Rate

Net revenue retention rate is the percentage of recurring revenue retained from clients on the platform for 12 months and includes changes from the addition, removal or value of assets on our platform, contractual changes that have an impact to annualized recurring revenues and lost revenue from client attrition. We calculate net revenue retention rate as of a period end by starting with the annualized recurring revenue from clients as of the 12 months prior to such period end. We then calculate the annualized recurring revenue from these clients as of the current period end. We then divide the total current period end annualized recurring revenue by the 12-month prior period end annualized recurring revenue to arrive at the net revenue retention rate.

Net revenue retention rate as of June 30, 2022 was 104% which represents growth in clients on our platform of 4% year over year. Net revenue retention rate as of June 30, 2022 decreased compared to net revenue retention rate as of June 30, 2021 primarily due to fluctuations in the market value of assets which clients maintain on our platform and decreased pricing of our clients’ fixed income securities.

Non-GAAP Financial Measures

We also consider certain non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), such as adjusted EBITDA and adjusted EBITDA Margin, in measuring the performance of our business. The non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. However, we believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance, when reviewed in conjunction with our GAAP financial statements. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP, and because these amounts are not determined in accordance with GAAP, they should not be used exclusively in evaluating our business and operations. In addition, undue reliance should not be placed upon non-GAAP or operating information because this information is neither standardized across companies nor subjected to the same control activities and audit procedures that produce our GAAP financial results.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA and Adjusted EBITDA Margin are supplemental performance measures that our management uses to assess our operating performance. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) depreciation and amortization, (iii) equity-based compensation, (iv) tax receivable agreement expense, and (v) other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA (as defined above) divided by revenue.

23


 

The following tables reconcile net income (loss) to Adjusted EBITDA and include amounts expressed as a percentage of revenue for the periods indicated.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands, except percentages)

 

Net income (loss)

 

$

(2,230

)

 

 

(3

%)

 

$

(211

)

 

 

(0

%)

 

$

(1,702

)

 

 

(1

%)

 

$

3,200

 

 

 

3

%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

403

 

 

 

1

%

 

 

8,510

 

 

 

14

%

 

 

832

 

 

 

1

%

 

 

16,959

 

 

 

14

%

Depreciation and amortization

 

 

1,159

 

 

 

2

%

 

 

735

 

 

 

1

%

 

 

2,118

 

 

 

1

%

 

 

1,412

 

 

 

1

%

Equity-based compensation

 

 

16,191

 

 

 

22

%

 

 

6,691

 

 

 

11

%

 

 

32,067

 

 

 

22

%

 

 

11,556

 

 

 

10

%

Tax receivable agreement expense

 

 

3,100

 

 

 

4

%

 

 

 

 

 

0

%

 

 

3,100

 

 

 

2

%

 

 

 

 

 

0

%

Other expenses(1)

 

 

451

 

 

 

1

%

 

 

1,682

 

 

 

3

%

 

 

1,522

 

 

 

1

%

 

 

2,394

 

 

 

2

%

Adjusted EBITDA

 

 

19,074

 

 

 

26

%

 

 

17,407

 

 

 

29

%

 

 

37,937

 

 

 

26

%

 

 

35,521

 

 

 

30

%

Revenue

 

$

73,409

 

 

 

100

%

 

$

60,876

 

 

 

100

%

 

$

144,187

 

 

 

100

%

 

$

117,770

 

 

 

100

%

(1)
Other expenses includes management fees to our investors, income taxes, foreign exchange gains and losses and other expenses that are not reflective of our core operating performance including the costs to set up our Up-C structure and the Tax Receivable Agreement.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Up-C structure expenses

 

$

 

 

$

926

 

 

$

158

 

 

$

926

 

Management fees and reimbursed expenses

 

 

597

 

 

 

493

 

 

 

1,188

 

 

 

1,083

 

Provision for income tax expense

 

 

298

 

 

 

276

 

 

 

535

 

 

 

320

 

Miscellaneous

 

 

(444

)

 

 

(13

)

 

 

(359

)

 

 

65

 

Total other expenses

 

$

451

 

 

$

1,682

 

 

$

1,522

 

 

$

2,394

 

 

24


 

Results of Operations

The following tables set forth our results of operations for the three and six months ended June 30, 2022 and 2021:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue

 

$

73,409

 

 

$

60,876

 

 

$

144,187

 

 

$

117,770

 

Cost of revenue(1)

 

 

20,919

 

 

 

15,576

 

 

 

42,091

 

 

 

29,898

 

Gross profit

 

 

52,490

 

 

 

45,300

 

 

 

102,096

 

 

 

87,872

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

22,836

 

 

 

16,740

 

 

 

44,130

 

 

 

32,576

 

Sales and marketing(1)

 

 

13,074

 

 

 

8,814

 

 

 

25,067

 

 

 

16,025

 

General and administrative(1)

 

 

15,453

 

 

 

11,184

 

 

 

30,493

 

 

 

18,727

 

Total operating expenses

 

 

51,363

 

 

 

36,738

 

 

 

99,690

 

 

 

67,328

 

Income from operations

 

 

1,127

 

 

 

8,562

 

 

 

2,406

 

 

 

20,544

 

Interest expense, net

 

 

403

 

 

 

8,510

 

 

 

832

 

 

 

16,959

 

Tax receivable agreement expense

 

 

3,100

 

 

 

 

 

 

3,100

 

 

 

-

 

Other (income) expense, net

 

 

(444

)

 

 

(13

)

 

 

(359

)

 

 

65

 

Income (loss) before income taxes

 

 

(1,932

)

 

 

65

 

 

 

(1,167

)

 

 

3,520

 

Provision for income taxes

 

 

298

 

 

 

276

 

 

 

535

 

 

 

320

 

Net income (loss)

 

 

(2,230

)

 

 

(211

)

 

 

(1,702

)

 

 

3,200

 

Less: Net income attributable to noncontrolling interests

 

 

198

 

 

 

 

 

 

329

 

 

 

 

Net loss attributable to Clearwater Analytics Holdings, Inc.

 

$

(2,428

)

 

$

 

 

$

(2,031

)

 

$

 

 

 

(1)
Amounts include equity-based compensation as follows:

 

Cost of revenue

 

$

2,376

 

 

$

749

 

 

$

4,687

 

 

$

1,272

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,565

 

 

 

2,034

 

 

 

8,870

 

 

 

3,686

 

Sales and marketing

 

 

3,215

 

 

 

1,295

 

 

 

6,511

 

 

 

2,127

 

General and administrative

 

 

6,035

 

 

 

2,613

 

 

 

11,999

 

 

 

4,471

 

Total equity-based compensation expense

 

$

16,191

 

 

$

6,691

 

 

$

32,067

 

 

$

11,556

 

 

The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

Cost of revenue

 

 

28

%

 

 

26

%

 

 

29

%

 

 

25

%

Gross profit

 

 

72

%

 

 

74

%

 

 

71

%

 

 

75

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

31

%

 

 

27

%

 

 

31

%

 

 

28

%

Sales and marketing

 

 

18

%

 

 

14

%

 

 

17

%

 

 

14

%

General and administrative

 

 

21

%

 

 

18

%

 

 

21

%

 

 

16

%

Total operating expenses

 

 

70

%

 

 

60

%

 

 

69

%

 

 

57

%

Income from operations

 

 

2

%

 

 

14

%

 

 

2

%

 

 

17

%

Interest expense, net

 

 

1

%

 

 

14

%

 

 

1

%

 

 

14

%

Tax receivable agreement expense

 

 

4

%

 

 

0

%

 

 

2

%

 

 

0

%

Other (income) expense, net

 

 

(1

%)

 

 

0

%

 

 

0

%

 

 

0

%

Income (loss) before income taxes

 

 

(3

%)

 

 

0

%

 

 

(1

%)

 

 

3

%

Provision for income taxes

 

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

Net income (loss)

 

 

(3

%)

 

 

0

%

 

 

(1

%)

 

 

3

%

 

25


 

Comparison of the Three Months and Six Months Ended June 30, 2022 and 2021 (unaudited)

Revenue

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

(In thousands, except percentages)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

Revenue

 

$

73,409

 

 

$

60,876

 

 

$

12,533

 

 

 

21

%

 

$

144,187

 

 

$

117,770

 

 

$

26,417

 

 

 

22

%

 

Revenue increased $12.5 million and $26.4 million for the three and six months ended June 30, 2022, respectively, compared to the same periods of 2021. The increase was on account of growth in our client base as we brought new clients onto our platform, as well as changes to our existing clients’ assets on our platform. Average assets on our platform that were billed to new and existing clients increased 16% and 18% for the three and six months ended June 30, 2022, respectively, compared to the same periods of 2021. Average basis point rate billed to clients increased by 4.0% and 3.3% for the three and six months ended June 30, 2022, respectively, compared to the same periods of 2021.

 

Cost of Revenue

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

(In thousands, except percentages)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

Equity-based compensation

 

$

2,376

 

 

$

749

 

 

$

1,627

 

 

 

217

%

 

$

4,687

 

 

$

1,272

 

 

$

3,415

 

 

 

268

%

All other cost of revenue

 

 

18,543

 

 

 

14,827

 

 

 

3,716

 

 

 

25

%

 

 

37,404

 

 

 

28,626

 

 

 

8,778

 

 

 

31

%

Total cost of revenue

 

$

20,919

 

 

$

15,576

 

 

$

5,343

 

 

 

34

%

 

$

42,091

 

 

$

29,898

 

 

$

12,193

 

 

 

41

%

Percent of revenue

 

 

28

%

 

 

26

%

 

 

 

 

 

 

 

 

29

%

 

 

25

%

 

 

 

 

 

 

 

Cost of revenue changed as follows:

 

 

 

 

Change From 2021 to 2022 QTD

 

 

Change From 2021 to 2022 YTD

 

 

 

 

 

 

 

 

Increased payroll and related

 

$

2,440

 

 

$

6,107

 

Increased equity-based compensation

 

 

1,627

 

 

 

3,415

 

Increased travel and entertainment

 

 

361

 

 

 

486

 

Increased depreciation and amortization

 

 

324

 

 

 

563

 

Increased facilities and infrastructure expenses

 

 

276

 

 

 

402

 

Increased data costs

 

 

267

 

 

 

606

 

Increased outside services and contractors

 

 

109

 

 

 

393

 

(Decreased) increased technology

 

 

(48

)

 

 

240

 

Other items

 

 

(13

)

 

 

(19

)

Total change

 

$

5,343

 

 

$

12,193

 

 

 

The increase in cost of revenue for the three and six months ended June 30, 2022 was primarily due to increased payroll and related costs as a result of headcount growth of additional employees across our client services, onboarding and reconciliation teams to support a larger client base as well as increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount. Cost of revenue headcount grew at a faster rate than overall revenue growth as we continue to expand our scale to support our expected continued international expansion. International revenue grew to 15% and 14% of revenues in the three and six months ended June 30, 2022, respectively, compared to 8% and 9% in the three and six months ended June 30, 2021, respectively. In addition, cost of revenue increased due to increased travel and entertainment costs due to a reduction in travel restrictions related to

26


 

the COVID-19 pandemic, increased data costs to support a larger client base, higher utilization of third-party contractors on operational activities, and increased allocation of facilities cost and depreciation.

 

27


 

Operating Expenses

Research and Development

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

(In thousands, except percentages)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

Equity-based compensation

 

$

4,565

 

 

$

2,034

 

 

$

2,531

 

 

 

124

%

 

$

8,870

 

 

$

3,686

 

 

$

5,184

 

 

 

141

%

All other research and development

 

 

18,271

 

 

 

14,706

 

 

 

3,565

 

 

 

24

%

 

 

35,260

 

 

 

28,890

 

 

 

6,370

 

 

 

22

%

Total research and development

 

$

22,836

 

 

$

16,740

 

 

$

6,096

 

 

 

36

%

 

$

44,130

 

 

$

32,576

 

 

$

11,554

 

 

 

35

%

Percent of revenue

 

 

31

%

 

 

27

%

 

 

 

 

 

 

 

 

31

%

 

 

28

%

 

 

 

 

 

 

 

Research and development expenses changed as follows:

 

 

 

 

Change From 2021 to 2022 QTD

 

 

Change From 2021 to 2022 YTD

 

 

 

 

 

 

 

 

Increased equity-based compensation

 

$

2,531

 

 

$

5,184

 

Increased payroll and related

 

 

1,977

 

 

 

3,712

 

Increased technology

 

 

1,091

 

 

 

2,067

 

Increased travel and entertainment

 

 

214

 

 

 

261

 

Increased facilities and infrastructure expenses

 

 

187

 

 

 

238

 

Other items

 

 

96

 

 

 

92

 

Total change

 

$

6,096

 

 

$

11,554

 

 

 

The increase in research and development expense for the three month and six months ended June 30, 2022 was primarily due to increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount, as well as increased payroll and related costs as a result of headcount growth of additional employees to focus on new offerings. In addition, research and development expense increased due to increased technology costs from higher utilization of third-party cloud computing services and other third-party IT services, increased travel and entertainment costs due to a reduction in travel restrictions related to the COVID-19 pandemic, and increased allocation of facilities costs.

 

Sales and Marketing

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

(In thousands, except percentages)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

Equity-based compensation

 

$

3,215

 

 

$

1,295

 

 

$

1,920

 

 

 

148

%

 

$

6,511

 

 

$

2,127

 

 

$

4,384

 

 

 

206

%

All other sales and marketing

 

 

9,859

 

 

 

7,519

 

 

 

2,340

 

 

 

31

%

 

 

18,556

 

 

 

13,898

 

 

 

4,658

 

 

 

34

%

Total sales and marketing

 

$

13,074

 

 

$

8,814

 

 

$

4,260

 

 

 

48

%

 

$

25,067

 

 

$

16,025

 

 

$

9,042

 

 

 

56

%

Percent of revenue

 

 

18

%

 

 

14

%

 

 

 

 

 

 

 

 

17

%

 

 

14

%

 

 

 

 

 

 

 

28


 

Sales and marketing expense changed as follows:

 

 

 

 

Change From 2021 to 2022 QTD

 

 

Change From 2021 to 2022 YTD

 

 

 

 

 

 

 

 

Increased equity-based compensation

 

$

1,920

 

 

$

4,384

 

Increased payroll and related

 

 

1,389

 

 

 

3,737

 

Increased marketing

 

 

616

 

 

 

928

 

Increased travel and entertainment

 

 

503

 

 

 

665

 

Increased facilities and infrastructure expenses

 

 

106

 

 

 

151

 

Decreased outside services and contractors

 

 

(287

)

 

 

(887

)

Other items

 

 

13

 

 

 

64

 

Total change

 

$

4,260

 

 

$

9,042

 

 

 

29


 

The increase in sales and marketing expense for the three and six months ended June 30, 2022 was primarily due to increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount, as well as increased payroll and related costs as a result of additional employees to expand sales coverage. In addition, sales and marketing expense increased from higher marketing costs due to increased focus on public relations, events and branding across the globe, increased travel and entertainment costs due to a reduction in travel restrictions related to the COVID-19 pandemic. These increases were partially offset by lower utilization of third-party consultants supporting marketing initiatives.

 

General and Administrative

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

(In thousands, except percentages)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

Equity-based compensation

 

$

6,035

 

 

$

2,613

 

 

$

3,422

 

 

 

131

%

 

$

11,999

 

 

$

4,471

 

 

$

7,528

 

 

 

168

%

All other general and administrative

 

 

9,418

 

 

 

8,571

 

 

 

847

 

 

 

10

%

 

 

18,494

 

 

 

14,256

 

 

 

4,238

 

 

 

30

%

Total general and administrative

 

$

15,453

 

 

$

11,184

 

 

$

4,269

 

 

 

38

%

 

$

30,493

 

 

$

18,727

 

 

$

11,766

 

 

 

63

%

Percent of revenue

 

 

21

%

 

 

18

%

 

 

 

 

 

 

 

 

21

%

 

 

16

%

 

 

 

 

 

 

 

General and administrative expenses changed as follows:

 

 

 

 

Change From 2021 to 2022 QTD

 

 

Change From 2021 to 2022 YTD

 

 

 

 

 

 

 

 

Increased equity-based compensation

 

$

3,422

 

 

$

7,528

 

Increased outside services and contractors

 

 

1,199

 

 

 

1,980

 

Increased insurance

 

 

747

 

 

 

1,521

 

Increased payroll and related

 

 

397

 

 

 

1,158

 

Increased travel and entertainment

 

 

263

 

 

 

436

 

Increased facilities and infrastructure expenses

 

 

102

 

 

 

327

 

Increased technology

 

 

19

 

 

 

461

 

Decreased recruiting

 

 

(751

)

 

 

(781

)

Decreased Up-C structure expenses

 

 

(926

)

 

 

(768

)

Other items

 

 

(203

)

 

 

(96

)

Total change

 

$

4,269

 

 

$

11,766

 

 

 

The increase in general and administrative expense for the three and six months ended June 30, 2022 was primarily due to increased equity-based compensation expense due to increased grant-date fair value of equity awards and additional headcount, and higher utilization of accounting and legal professional services in connection with being a public company. In addition, general and administrative expenses increased due to insurance costs for our directors and officers, increased payroll and related costs as a result of headcount growth of additional employees, increased travel and entertainment expense due to a reduction in travel restrictions related to the COVID-19 pandemic, increased allocation of facility costs and increased technology costs. These increases were partially offset by decreased costs associated with creating the Up-C structure, including costs related to the Tax Receivable Agreement, and decreased third-party agency recruitment costs.

30


 

 

Non-Operating Expenses

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

(In thousands, except percentages)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

Interest expense, net

 

$

403

 

 

$

8,510

 

 

$

(8,107

)

 

 

(95

%)

 

$

832

 

 

$

16,959

 

 

$

(16,127

)

 

 

(95

%)

Tax receivable agreement expense

 

$

3,100

 

 

 

 

 

$

3,100

 

 

NMF

 

 

$

3,100

 

 

 

 

 

$

3,100

 

 

NMF

 

Other (income) expense, net

 

$

(444

)

 

$

(13

)

 

$

(431

)

 

 

3315

%

 

$

(359

)

 

$

65

 

 

$

(424

)

 

 

(652

%)

 

The decrease in interest expense, net for the three and six months ended June 30, 2022 is due to lower borrowings under the New Credit Agreement compared with borrowings under the Previous Credit Agreement.

Tax receivable agreement expense relates to payments we anticipate making under the TRA. This expense is incurred in lieu of income tax expense when we utilize tax deductions subject to our TRA. Absent the utilization of these deductions we would be projecting to have taxable income in the current year, which would ordinarily incur income tax expense in our financial results. Absent the Up-C structure and TRA, income tax expense would have increased by $3.6 million and the TRA expense would be zero. Effectively, the Up-C structure and TRA are reducing total expenses for the Company by $500 thousand for the three and six months ended June 30, 2022. There are many assumptions and considerations that impact our taxable income position in the current year, some of which are out of our direct control. As such, the estimate of our taxable income position (and thus, the TRA expense we incur) for the current year could change significantly. Note that if our current estimates and assumptions do not change then the TRA liability related to this expense is expected to be paid in Q4 2023.

Other expense, net relates to foreign exchange gains and losses driven by fluctuations in exchange rates.

 

31


 

Provision for Income Taxes

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

(In thousands, except percentages)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

298

 

 

$

276

 

 

$

22

 

 

 

8

%

 

$

535

 

 

$

320

 

 

$

215

 

 

 

67

%

 

The increase in provision for income taxes for the three and six months ended June 30, 2022 relates to change in mix of foreign jurisdiction taxable income in the period.

Liquidity and Capital Resources

To date, we have primarily financed our operations through cash flows from operations and financing activities.

As of June 30, 2022, we had cash and cash equivalents of $278.6 million. Cash and cash equivalents primarily consist of money market mutual funds, which are highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. We believe our existing cash and cash equivalents will be sufficient to meet our operating working capital and capital expenditure requirements over the next 12 months. Our future financing requirements will depend on many factors, including our growth rate, revenue retention rates, the timing and extent of spending to support development of our platform and any future investments or acquisitions we may make. Additional funds may not be available on terms favorable to us or at all, including as a result of disruptions in the credit markets. See “Risk Factors” in the Annual Report.

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

 

 

Six Months Ended June 30,

 

 

2022

 

 

2021

 

 

(In thousands)

 

Net cash provided by (used in) operating activities

$

25,167

 

 

$

(16,352

)

Net cash used in investing activities

 

(6,968

)

 

 

(2,231

)

Net cash provided by (used in) financing activities

 

7,196

 

 

 

(1,341

)

Effect of exchange rate changes on cash and cash equivalents

 

(1,346

)

 

 

(133

)

Net change in cash and cash equivalents during the period

$

24,049

 

 

$

(20,057

)

 

Cash Flows from Operating Activities

Net cash provided by operating activities of $25.2 million during the six months ended June 30, 2022 was primarily the result of our net loss plus non-cash charges, including equity-based compensation, tax receivable agreement expense, operating lease expense and depreciation and amortization. Cash flows resulting from changes in assets and liabilities include an increase in accounts receivable, an increase in deferred commissions and a decrease in accrued expenses and other liabilities. Accounts receivable increased $5.4 million, which is comprised of $2.6 million from growth in revenues and $2.8 million from ageing of small receivable balances across several customers due to short-term deterioration in days sales outstanding which we continue to believe is collectible. The increase in deferred commissions is due to higher revenues during the period. Accrued expenses and other liabilities decreased $7.1 million primarily due to payment of fiscal year 2021 bonuses to employees.

Net cash used in operating activities of $16.4 million during the six months ended June 30, 2021 was primarily the result of changes in operating assets and liabilities that decreased operating cash flow by $35.0 million. Accounts receivable increased $12.2 million during the period, which is comprised of $7.7 million from growth in revenues and $4.5 million from aging of receivables due to certain clients changing their internal systems and processes which caused a delay in remittance of payment. Prepaid expenses and other assets increased by $11.4 million primarily from the prepayment of management fees to certain affiliates of the Principal Equity Owners in the amount of $9.6 million. Accrued expenses and other liabilities decreased $9.5 million primarily due to payment of sales tax liabilities of $5.4 million, and reimbursement of $4.9 million in excess contribution to investors as part of a recapitalization transaction performed in October 2020.

 

Cash Flows from Investing Activities

Net cash used in investing activities of $7.0 million during the six months ended June 30, 2022 was attributable to purchase of property and equipment and short-term investments, and internally developed software.

32


 

Net cash used in investing activities of $2.2 million during the six months ended June 30, 2021 was attributable to purchase of property and equipment, and internally developed software.

 

Cash Flows from Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2022 was $7.2 million, of which $6.4 million was proceeds from the exercise of options and $2.4 million was proceeds from our employee stock purchase plan, which was partially offset by $1.4 million used in the repayment of borrowings and $0.2 million used in the repayment of costs associated with the IPO.

Net cash used in financing activities during the six months ended June 30, 2021 was $1.3 million, of which $1.5 million was used in the repayment of borrowings, $0.6 million was used in the repurchase of common units, $0.6 million was used to pay minimum tax withholding on behalf of employees for net unit settlement, and $0.4 million was used for the payment of costs associated with the IPO, which was partially offset by $1.6 million proceeds from the issuance of common units and $0.3 million proceeds from the exercise of options.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and related notes, which have been prepared in accordance with GAAP. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.

On an ongoing basis, we evaluate the process we use to develop estimates. We base our estimates on historical experience and on other information that we believe is reasonable for making judgments at the time the estimates are made. Actual results may differ from our estimates due to actual outcomes being different from those on which we based our assumptions.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the Annual Report under the caption “Critical Accounting Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7.

On January 1, 2022, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding ROU assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. See Note 2 — Basis of Presentation and Summary of Significant Accounting Policies and Note 6 — Leases in the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the adoption.

JOBS Act Accounting Election

We meet the definition of an emerging growth company under the Jumpstart Our Business Startups Act of 2012, which permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 2, “Recently Adopted Accounting Pronouncements” in the accompanying unaudited condensed consolidated financial statements.

33


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

AUM Market Price Risk

Substantially all of our revenue is derived from fees that are primarily based on the amount of assets on our platform. These fees are stated in basis points, or 1/100th of 1%. Though in substantially all cases we charge a minimum fee regardless of the assets that are loaded onto our platform, our revenues fluctuate based on the value of the assets that our clients maintain on our platform. Movements in funds invested between different securities or fluctuations in securities prices or investment performance could cause the value of AUM to decline, which would result in lower fees we receive from our clients.

Interest Rate Risk

We have interest rate risk relating to debt and associated interest expense under the New Credit Agreement, which is indexed to LIBOR or LIBOR equivalent once LIBOR is phased out. At any time, a rise in interest rates could have a material adverse impact on our earnings and cash flows. Conversely, a decrease in interest rates could result in a material increase in earnings and cash flows. We estimate that a hypothetical increase or decrease in LIBOR of 100 basis points would increase or decrease, respectively, our interest expense by approximately $0.5 million on an annual basis, based on our $52.9 million debt balance under the New Credit Agreement at June 30, 2022.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rule 13a–15(e) and Rule 15d–15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits 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, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. 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, 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.

34


 

 

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are subject to certain legal proceedings and claims that arise in the normal course of business. In the opinion of our management, we are not involved in any litigation or proceedings with third parties that we believe could have a material adverse effect on our results of operations, financial condition or business.

Item 1A. Risk Factors.

For a discussion of potential risks and uncertainties, see the information in the section titled "Risk Factors" in the Annual Report.

Item 2. Unregistered Sales of Equity Securities.

Pursuant to the LLC Agreement, shares of the Company's Class B common stock may each be exchanged, together with a corresponding LLC Interest, at the option of the holder of such share of Class B common stock for one fully paid and non-assessable share of Class A common stock. There is no cash or other consideration paid by the holder converting such shares and, accordingly, there is no cash or other consideration received by the Company. The shares of Class A common stock common stock issued by the Company in such exchanges are exempt from registration pursuant to Section 4(a)(2) of the Securities Act.

On April 30, 2022, we issued to stockholders 172,790 shares of Class A common stock upon the exchange of the same number of shares of our Class B common stock and corresponding LLC Interests held by such stockholders.

On May 31, 2022, we issued to stockholders 15,000 shares of Class A common stock upon the exchange of the same number of shares of our Class B common stock and corresponding LLC Interests held by such stockholders.

On June 30, 2022, we issued to stockholders 1,622,921 shares of Class A common stock upon the exchange of the same number of shares of our Class B common stock and corresponding LLC Interests held by such stockholders.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

35


 

Item 6. Exhibits.

Exhibits filed or furnished herewith are designated by an asterisk (*); all exhibits not so designated are incorporated by reference to a prior filing as indicated.

 

Exhibit

Number

 

Description

 

Report or Registration Statement

SEC File or Registration Number

Exhibit Reference

 

 

 

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation of Clearwater Analytics Holdings, Inc., dated September 27, 2021

8-K filed September 28, 2021

001-40838

3.1

3.2

 

Amended and Restated Bylaws of Clearwater Analytics Holdings, Inc., dated September 27, 2021

8-K filed September 28, 2021

001-40838

3.2

10.1*

 

Advisory Services Agreement between Clearwater Analytics Holdings, Inc. and Marcus Ryu, dated April 16, 2022

 

 

 

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.

36


 

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.

 

 

 

Company Name

 

 

 

 

Date: August 5, 2022

 

By:

/s/ Jim Cox

 

 

 

Jim Cox

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer and Authorized Signatory)

 

37