Clearwater Analytics Holdings, Inc. - Quarter Report: 2022 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2022


☐	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

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.

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

55,503,094 shares of Class A common stock.

4,502,496 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	3
	Condensed Consolidated Statements of Changes in Equity (Deficit)	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signatures		31

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.

•

“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.

•

“TRA Bonus Agreement” refers to the Tax Receivable Agreement Bonus Letters, each dated as of September 28, 2021, by and among Clearwater Analytics Holdings, Inc. and certain of our executive officers.

•

“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.

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;

•

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

•

those described in the section titled “Risk Factors” in 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.

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited).

Clearwater Analytics Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts, unaudited)


	March 31,			December 31,
	2022			2021
Assets
Current assets:
Cash and cash equivalents	$	263,674		$	254,597
Accounts receivable, net		53,179			50,190
Prepaid expenses and other current assets		17,765			16,551
Total current assets		334,618			321,338
Property and equipment, net		11,854			10,738
Operating lease right-of-use assets, net		23,183			—
Deferred contract costs, non-current		5,331			5,687
Debt issuance costs - line of credit		874			922
Other non-current assets		5,748			5,670
Total assets	$	381,608		$	344,355
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	967		$	1,416
Accrued expenses and other current liabilities		18,822			27,032
Notes payable, current portion		2,750			2,750
Operating lease liability, current portion		5,285			—
Total current liabilities		27,824			31,198
Notes payable, less current maturities and unamortized debt issuance costs		50,491			51,157
Operating lease liability, less current portion		19,400			—
Other long-term liabilities		129			132
Total liabilities		97,844			82,487
Stockholders' Equity
Class A common stock, par value $0.001 per share; 1,500,000,000 shares authorized, 55,450,149 shares issued and outstanding as of March 31, 2022, 47,948,888 shares issued and outstanding as of December 31, 2021		55			48
Class B common stock, par value $0.001 per share; 500,000,000 shares authorized, 4,507,496 shares issued and outstanding as of March 31, 2022, 11,151,110 shares issued and outstanding as of December 31, 2021		5			11
Class C common stock, par value $0.001 per share; 500,000,000 shares authorized, 47,377,587 shares issued and outstanding		47			47
Class D common stock, par value $0.001 per share; 500,000,000 shares authorized, 130,083,755 shares issued and outstanding		130			130
Additional paid-in-capital		404,884			388,591
Accumulated other comprehensive loss		(260	)		(34	)
Accumulated Deficit		(183,180	)		(191,926	)
Total stockholders' equity attributable to Clearwater Analytics Holdings, Inc.		221,681			196,867
Non-controlling interests		62,083			65,001
Total stockholders' equity		283,764			261,868
Total liabilities and Stockholders' Equity	$	381,608		$	344,355

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

Clearwater Analytics Holdings, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts, unaudited)


	Three Months Ended March 31,
	2022		2021
Revenue	$	70,778	$	56,894
Cost of revenue(2)		21,172		14,322
Gross profit		49,606		42,572
Operating expenses:
Research and development(2)		21,294		15,836
Sales and marketing(2)		11,993		7,211
General and administrative(2)		15,040		7,543
Total operating expenses		48,327		30,590
Income from operations		1,279		11,982
Interest expense, net		429		8,449
Other expense, net		85		78
Income before provision for income taxes		765		3,455
Provision for income taxes		237		44
Net income		528		3,411
Less: Net income attributable to non-controlling interests		130		—
Net income attributable to Clearwater Analytics Holdings, Inc.	$	398	$	—

Net income per share attributable to Class A and Class D common stock (Note 8)(1):
Basic and diluted	$	0.00	NMF

Weighted average shares of Class A and Class D common stock outstanding:
Basic		178,517,480	NMF
Diluted		246,916,663	NMF

NMF - not meaningful

(1)

Basic and diluted net income 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 income per share of Class A and Class D common stock and the basis for the computation of net income per share.

(2)

Amounts include equity-based compensation as follows:


Cost of revenue	$	2,311	$	523
Operating expenses:
Research and development		4,305		1,652
Sales and marketing		3,296		832
General and administrative		5,964		1,858
Total equity-based compensation expense	$	15,876	$	4,865

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

Condensed Consolidated Statements of Comprehensive Income

(In thousands, unaudited)


	Three Months Ended March 31,
	2022			2021
Net income	$	528		$	3,411
Other comprehensive income, net of taxes:
Foreign currency translation adjustment		(300	)		21
Comprehensive income	$	228		$	3,432
Less: Comprehensive income attributable to non-controlling interests		56			—
Comprehensive loss attributable to Clearwater Analytics Holdings, Inc.	$	172		$	—

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

Condensed Consolidated Statements of Changes in Equity (Deficit)

(In thousands, except per share amounts, unaudited)


	Clearwater Analytics Holdings, Inc. Stockholders' Equity
	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


				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		—	$	57,436	$	(335,964	)

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

Clearwater Analytics Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)


	Three Months Ended March 31,
	2022			2021
OPERATING ACTIVITIES
Net income	$	528		$	3,411
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		959			677
Operating lease expense		1,540			—
Equity-based compensation		15,876			4,865
Amortization of deferred contract acquisition costs		965			727
Amortization of debt issuance costs, included in interest expense		69			470
Deferred tax expense		24			—
Changes in operating assets and liabilities:
Accounts receivable, net		(2,989	)		(8,594	)
Prepaid expenses and other assets		(1,113	)		(10,471	)
Deferred commissions		(811	)		(359	)
Accounts payable		(345	)		(576	)
Accrued expenses and other liabilities		(7,787	)		(8,518	)
Net cash provided by (used in) operating activities		6,916			(18,368	)
INVESTING ACTIVITIES
Purchases of property and equipment		(2,227	)		(1,310	)
Net cash used in investing activities		(2,227	)		(1,310	)
FINANCING ACTIVITIES
Proceeds from issuance of common units		—			1,560
Proceeds from exercise of options		5,613			—
Minimum tax withholding paid on behalf of employees for net unit settlement		—			(587	)
Repurchase of common units		—			(626	)
Repayments of borrowings		(687	)		(769	)
Payment of costs associated with offering		(214	)		—
Net cash provided by (used in) financing activities		4,712			(422	)
Effect of exchange rate changes on cash and cash equivalents		(324	)		(50	)
Net change in cash and cash equivalents during the period		9,077			(20,150	)
Cash and cash equivalents, beginning of period		254,597			61,088
Cash and cash equivalents, end of period	$	263,674		$	40,938
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	268		$	7,863
Cash paid for income taxes	$	370		$	41
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of property and equipment included in accounts payable and accrued expense	$	—		$	120
Tax distributions included in accrued expenses	$	11		$	—

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

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 (the “Tax Receivable Agreement” or “TRA”) (Note 10).

As of March 31, 2022, the Company owns 78.1% of the interests in CWAN Holdings. Continuing Equity Owners which hold Class B and Class C common stock own the remaining 21.9% 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 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 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, allowances for doubtful accounts, 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 financial statements and related notes during the three months ended March 31, 2022, except as noted below.

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 months ended March 31, 2022, $0.2 million was included in the deferred revenue balance as of December 31, 2021. 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 March 31,
	2022		2021
United States	$	61,777	$	51,545
Rest of World		9,001		5,349
Total revenue	$	70,778	$	56,894

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 March 31, 2022 and December 31, 2021 in accordance with the fair value hierarchy (in thousands):


	March 31, 2022
	Level I		Level II		Level III		Total
Financial Assets:
Cash and cash equivalents:
Money market funds	$	255,373	$	—	$	—	$	255,373
Total assets measured at fair value	$	255,373	$	—	$	—	$	255,373


	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 three months ended March 31, 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):


	March 31,			December 31,
	2022			2021
Unbilled accounts receivable	$	27,049		$	27,086
Billed accounts receivable		26,275			23,227
Allowance for doubtful accounts and reserves		(145	)		(123	)
Accounts receivable, net	$	53,179		$	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):


	March 31,		December 31,
	2022		2021
Prepaid expenses	$	12,843	$	11,722
Deferred contract costs, current portion		3,776		3,573
Other current assets		1,146		1,256
Prepaid expense and other current assets	$	17,765	$	16,551

Accrued Expenses and Other Current Liabilities

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


	March 31,		December 31,
	2022		2021
Accrued sales tax exposure	$	979	$	1,444
Accrued interest		10		9
Accrued bonus		2,562		8,295
Accrued vendor liabilities		4,373		4,756
Accrued benefits and retirement		5,093		4,368
Deferred revenue		1,658		795
Accrued commissions		1,572		2,350
Deferred rent		—		1,514
Income tax payable		709		771
Tax distributions payable		142		169
Other current liabilities		1,724		2,561
Accrued expenses and other current liabilities	$	18,822	$	27,032

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 for the three months ended March 31, 2021, 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

During the three months ended March 31, 2022, operating lease cost was $1.5 million. Variable lease cost and short-term lease cost were immaterial during the three months ended March 31, 2022. Future minimum lease payments at March 31, 2022 under the Company’s non-cancellable leases were as follows (in thousands):


2022 (remaining nine months)	$	4,535
2023		5,866
2024		5,455
2025		5,196
2026		4,525
Thereafter		1,008
Total future minimum lease payments		26,585
Less: Imputed interest		(1,900	)
Present value of future minimum lease payments		24,685
Less: Current portion of operating lease liability		(5,285	)
Operating lease liabilities - noncurrent	$	19,400

The following table presents supplemental information for the Company's non-cancellable operating leases for the three months ended March 31, 2022 (in thousands, except for weighted average and percentage data):


Weighted average remaining lease term	4.66 years
Weighted average discount rate		3.33	%
Cash paid for amounts included in the measurement of lease liabilities	$	1,400
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.

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:


	March 31, 2022					December 31, 2021
	Shares		Ownership %			Shares		Ownership %
Clearwater Analytics Holdings, Inc. interest in CWAN Holdings		185,533,904		78.1	%		178,032,643		75.3	%
Continuing Equity Owners' interest in CWAN Holdings		51,885,083		21.9	%		58,528,697		24.7	%
		237,418,987		100.0	%		236,561,340		100.0	%

Note 8. Earnings Per Share

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


	Three Months Ended March 31, 2022
Numerator:
Net income	$	528
Less: Net income attributable to non-controlling interests		130
Net income attributable to Clearwater Analytics Holdings, Inc. - basic		398
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		130
Net income attributable to Clearwater Analytics Holdings, Inc. - diluted	$	528

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


	Three Months Ended March 31, 2022
	Class A		Class D
Basic net income attributable to Class A and Class D common stockholders
Numerator:
Allocation of net income attributable to Clearwater Analytics, Inc.	$	108	$	290
Denominator:
Weighted average number of shares of Class A and Class D common stock outstanding - basic		48,433,725		130,083,755
Basic net income per share attributable to Class A and Class D common stockholders	$	0.00	$	0.00


	Three Months Ended March 31, 2022
	Class A		Class D
Diluted net income attributable to Class A and Class D common stockholders
Numerator:
Undistributed earnings for basic computation	$	108	$	290
Reallocation of income as a result of conversion of Class B to Class A shares and conversion Class C to Class D shares		25		105
Reallocation of income as a result of conversion of Class D to Class A shares		395		—
Allocation of undistributed income	$	528	$	395

Denominator:
Weighted average number of shares of Class A and Class D common stock outstanding - basic		48,433,725		130,083,755
Add: weighted-average effect of dilutive securities exchangeable for Class A common stock:
Stock options of Clearwater Analytics Holdings, Inc.		8,763,651		—
RSUs of Clearwater Analytics Holdings, Inc.		1,106,835		—
Conversion of Class B stock to Class A stock, and conversion of Class C stock to Class D stock		11,151,110		47,377,587
Conversion of Class D to Class A common stock outstanding		177,461,342		—
Weighted average number of shares of Class A and Class D common stock outstanding - diluted		246,916,663		177,461,342
Diluted net income per share attributable to Class A and Class D common stockholders	$	0.00	$	0.00

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 three months ended March 31, 2022 (in thousands, except per share data):


	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		(857,647	)		6.54			$	10,815
Forfeited		(315,203	)		9.21
Balance - March 31, 2022		21,186,307		$	8.61		7.83	$	263,024
Options vested - March 31, 2022		9,273,109		$	5.62			$	142,661

The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2022 was $7.74 per share. The aggregate intrinsic value as of March 31, 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 March 31, 2022. As of March 31, 2022, the total unrecognized compensation expense related to unvested options was $68.2 million, which is expected to be recognized over a weighted average period of 3.3 years.

RSUs

During June 2021, the Company began to grant RSUs to employees. The summary of RSU activity 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		941,191			21.17
Released		—			—
Cancelled		(157,523	)		—
Unvested units as of March 31, 2022		6,854,336				$	143,941

The aggregate intrinsic value disclosed in the above table is based on the closing stock price on the NYSE on March 31, 2022. As of March 31, 2022, there was $107.2 million of unrecognized equity-based compensation expense related to RSUs, which is expected to be recognized over a weighted average period of 3.3 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 Rate – the 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.

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:


	Three Months Ended March 31,
	2022			2021
Weighted-average grant date fair value per option	$	7.74		$	4.74
Fair value of units/ shares	$17.72 - $18.68			$	12.40
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.

As of March 31, 2022, no shares were issuable to employees based on contribution elections made under the ESPP as the first offering period will end on May 31, 2022. As of March 31, 2022, total unrecognized equity-based compensation costs were $0.5 million, which is expected to be recognized over a weighted average period of 0.2 years.

ESPP payroll contributions accrued at March 31, 2022 totaled $1.9 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 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:


	Three Months Ended March 31,
	2022			2021
Income before provision for income taxes	$	765		$	3,455
Provision for income taxes		237			44
Effective tax rate		31	%		1.3	%

For the three months ended March 31, 2022, the Company’s effective tax rate was more than the statutory rate primarily because of foreign tax expense, 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 March 31, 2021, CWAN Holdings' effective tax rate was less 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 March 31, 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 March 31, 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 legislation 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 months ended March 31, 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 March 31, 2022 are estimated to be $362 million, of which $308 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 has been recorded as of March 31, 2022.

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.

TRA Bonus Agreements

In connection with the execution of the TRA agreement, the Company also entered into the “TRA Bonus Agreements” with certain executive officers. Under the terms of TRA Bonus Agreements, certain executive officers are eligible to receive a cash bonus payment (the “TRA Bonus”) pursuant to payments under the TRA agreement. As the Company has determined that payments to TRA holders are not probable and no TRA liability has been recorded as of March 31, 2022, no liability has been recorded for the TRA Bonus.

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 March 31, 2022 and 2021, the Company recognized a management fee to Principal Equity Owners of $0.6 million and $0.6 million, respectively.

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 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.

Overview

Clearwater brings transparency to the opaque world of investment accounting and analytics with what we believe is the industry’s most trusted and innovative single instance, multi-tenant technology platform. Our cloud-native software allows clients to radically simplify their investment accounting operations, enabling them to focus on higher-value business functions such as asset allocation strategy and investment selection. Our platform provides comprehensive accounting, data and advanced analytics as well as highly-configurable reporting for global investment assets daily or on-demand, instead of weekly or monthly. We give our clients confidence that they are making the most informed decisions about investment performance, regulatory compliance and risk.

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 very 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.

•

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 thirteen 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 105% 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.

Key Components of Results of Operations

The following discussion describes certain line items in our 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. 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.

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.

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:


	Three Months Ended March 31,
	2022			2021
	(in thousands, except percentages)
Annualized recurring revenue	$	287,137		$	232,467
Gross revenue retention rate		98	%		98	%
Net revenue retention rate		107	%		110	%

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 24% 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.

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 March 31, 2022 decreased compared to net revenue retention rate as of March 31, 2021 due to slower asset growth from acquisitions within our insurance client base and decreased pricing of our clients’ fixed income securities. This decrease was partially offset by increased asset growth in our asset management and EMEA clients as of March 31, 2022 relative to March 31, 2021.

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 plus (i) interest expense, net, (ii) depreciation and amortization expense, (iii) equity-based compensation, and (iv) other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA (as defined above) divided by revenue.

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


	Three Months Ended March 31,
	2022				2021
	(in thousands, except percentages)
Net income	$	528	1	%	$	3,411	6	%
Adjustments:
Interest expense, net		429	1	%		8,449	15	%
Depreciation and amortization		959	1	%		677	1	%
Equity-based compensation		15,876	22	%		4,865	9	%
Other expenses(1)		1,070	2	%		713	1	%
Adjusted EBITDA		18,862	27	%		18,115	32	%
Revenue	$	70,778	100	%	$	56,894	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 March 31,
	2022		2021
	(in thousands)
Up-C structure expenses	$	158	$	—
Management fees and reimbursed expenses		591		591
Provision for income tax expense		237		44
Miscellaneous		84		78
Total other expenses	$	1,070	$	713

Results of Operations

The following tables set forth our results of operations for the three months ended March 31, 2022 and 2021:


	Three Months Ended March 31,
	2022		2021
Revenue	$	70,778	$	56,894
Cost of revenue(1)		21,172		14,322
Gross profit		49,606		42,572
Operating expenses:
Research and development(1)		21,294		15,836
Sales and marketing(1)		11,993		7,211
General and administrative(1)		15,040		7,543
Total operating expenses		48,327		30,590
Income from operations		1,279		11,982
Interest expense, net		429		8,449
Other expense, net		85		78
Income before income taxes		765		3,455
Provision for income taxes		237		44
Net income		528		3,411
Less: Net income attributable to non-controlling interests		130		—
Net income attributable to Clearwater Analytics Holdings, Inc.	$	398	$	—

(1)

Amounts include equity-based compensation as follows:


Cost of revenue	$	2,311	$	523
Operating expenses:
Research and development		4,305		1,652
Sales and marketing		3,296		832
General and administrative		5,964		1,858
Total equity-based compensation expense	$	15,876	$	4,865

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


	Month Ended March 31,
	2022			2021
Revenue		100	%		100	%
Cost of revenue		30	%		25	%
Gross profit		70	%		75	%
Operating expenses:
Research and development		30	%		28	%
Sales and marketing		17	%		13	%
General and administrative		21	%		13	%
Total operating expenses		68	%		54	%
Income from operations		2	%		21	%
Interest expense, net		1	%		15	%
Other expense, net		0	%		0	%
Income before income taxes		1	%		6	%
Provision for income taxes		0	%		0	%
Net income		1	%		6	%

Comparison of the Three Months Ended March 31, 2022 and 2021 (unaudited)

Revenue


	Three Months Ended March 31,
	2022		2021		$ Change		% Change
	(In thousands, except percentages)
Revenue	$	70,778	$	56,894	$	13,884		24	%

Revenue increased $13.9 million, or 24%, for the three months ended March 31, 2022 as compared to the corresponding period in 2021. The increase was 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. Average assets on our platform that were billed to new and existing clients increased 21% from the three months ended March 31, 2021 to the three months ended March 31, 2022 while average basis point rate billed to clients increased by 2.6% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

Cost of Revenue


	Three Months Ended March 31,
	2022			2021			$ Change		% Change
	(In thousands, except percentages)
Equity-based compensation	$	2,311		$	523		$	1,788		342	%
All other cost of revenue		18,861			13,799		$	5,062		37	%
Total cost of revenue	$	21,172		$	14,322		$	6,850		48	%
Percent of revenue		30	%		20	%

Cost of revenue changed as follows:


	Change from March 31, 2021 to March 31, 2022
	(In thousands)
Increased payroll and related	$	3,675
Increased equity-based compensation		1,788
Increased data costs		430
Increased technology		288
Increased outside services and contractors		284
Increased depreciation and amortization		239
Other items		146
Total change	$	6,850

The increase in cost of revenue in the three months ended March 31, 2022 is 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 13% of revenues in the three months ended March 31, 2022 compared to 9% in the three months ended March 31, 2021. In addition, cost of revenue increased due to increased data costs to support a larger client base, higher utilization of third-party contractors, technology and IT services on operational activities, and increased allocation of depreciation.

Operating Expenses

Research and Development


	Three Months Ended March 31,
	2022			2021			$ Change		% Change
	(In thousands, except percentages)
Equity-based compensation	$	4,305		$	1,652		$	2,653		161	%
All other research and development		16,989			14,184		$	2,805		20	%
Total research and development	$	21,294		$	15,836		$	5,458		34	%
Percent of revenue		30	%		22	%

Research and development expenses changed as follows:


	Change from March 31, 2021 to March 31, 2022
	(In thousands)
Increased equity-based compensation	$	2,653
Increased payroll and related		1,738
Increased technology		976
Other items		91
Total change	$	5,458

The increase in research and development expense is primarily due to increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount, increased payroll and related costs as a result of headcount growth of additional employees to focus on new offerings, and increased technology costs from higher utilization of third-party cloud computing services and other third-party IT services.

Sales and Marketing


	Three Months Ended March 31,
	2022			2021			$ Change		% Change
	(In thousands, except percentages)
Equity-based compensation	$	3,296		$	832		$	2,464		296	%
All other sales and marketing		8,697			6,379			2,318		36	%
Total sales and marketing	$	11,993		$	7,211		$	4,782		66	%
Percent of revenue		17	%		13	%

Sales and marketing expense changed as follows:


	Change from March 31, 2021 to March 31, 2022
	(In thousands)
Increased equity-based compensation	$	2,464
Increased payroll and related		2,350
Increased marketing		285
Increased travel and entertainment		163
Decreased outside services and contractors		(599	)
Other items		119
Total change	$	4,782

The increase in sales and marketing expense is 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 and branding, and 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 March 31,
	2022			2021			$ Change		% Change
	(In thousands, except percentages)
Equity-based compensation	$	5,964		$	1,858		$	4,106		221	%
All other general and administrative		9,076			5,685			3,391		60	%
Total general and administrative	$	15,040		$	7,543		$	7,497		99	%
Percent of revenue		21	%		13	%

General and administrative expenses changed as follows:


	Change from March 31, 2021 to March 31, 2022
	(In thousands)
Increased equity-based compensation	$	4,107
Increased outside services and contractors		776
Increased insurance		774
Increased payroll and related		762
Increased technology		522
Increased facilities and infrastructure expenses		284
Increased travel and entertainment		173
Other items		99
Total change	$	7,497

The increase in general and administrative expenses is 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, higher utilization of IT services, increased allocation of facility costs and increased travel and entertainment expense due to a reduction in travel restrictions related to the COVID-19 pandemic.

Non-Operating Expenses

Interest Expense, net


	Three Months Ended March 31,
	2022		2021		$ Change			% Change
	(In thousands, except percentages)
Interest expense, net	$	429	$	8,449	$	(8,020	)		(95	%)
Other expense, net		85		78		7			9	%

The decrease in interest expense, net is due to lower borrowings under the New Credit Agreement compared with borrowings under the Previous Credit Agreement. Other expense, net relates to foreign exchange gains and losses driven by fluctuations in exchange rates.

Provision for Income Taxes


	Three Months Ended March 31,
	2022		2021		$ Change		% Change
	(In thousands, except percentages)
Provision for income taxes	$	237	$	44	$	193		439	%

The increase in provision for income taxes relates to change in mix of foreign jurisdiction 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 March 31, 2022, we had cash and cash equivalents of $263.7 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:


	Three Months Ended March 31,
	2022			2021
	(In thousands)
Net cash provided by (used in) operating activities	$	6,916		$	(18,368	)
Net cash used in investing activities		(2,227	)		(1,310	)
Net cash provided by (used in) financing activities		4,712			(422	)
Effect of exchange rate changes on cash and cash equivalents		(324	)		(50	)
Increase in cash and cash equivalents	$	9,077		$	(20,150	)

Cash Flows from Operating Activities

Net cash provided by operating activities of $6.9 million during the three months ended March 31, 2022 was primarily the result of our net loss plus non-cash charges, including equity-based compensation, depreciation and amortization, and operating lease expense. Cash flows resulting from changes in assets and liabilities include an increase in accounts receivable, an increase in prepaid expenses and other assets, and a decrease in accrued expenses. Accounts receivable increased $3.0 million, which is comprised of $0.7 million from growth in revenues and $2.3 million from ageing of small receivable balances across several customers due to short term deterioration in days sales outstanding which we have determined to be collectible. Prepaid expenses and other assets increased $1.1 million primarily due to prepaid IT costs. Accrued expenses decreased $7.8 million primarily due to payment of fiscal year 2021 bonuses to employees, and decreased accrued commissions.

Net cash used in operating activities of $18.4 million during the three months ended March 31, 2021 was primarily the result of changes in working capital including an increase in prepaid expenses and other assets from the prepayment of management fees to certain affiliates of the Principal Equity Owners in the amount of $9.6 million, an increase in accounts receivable from the growth in revenues during the period and a decrease in accrued expenses and other liabilities primarily due to payment of employee bonuses during the period 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 $2.2 million during the three months ended March 31, 2022 was attributable to purchase of property and equipment, and internally developed software.

Net cash used in investing activities of $1.3 million during the three months ended March 31, 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 three months ended March 31, 2022 was $4.7 million, of which $5.6 million was proceeds from exercise of options, which was offset by $0.7 million repayment of borrowings and $0.2 million repayment of costs associated with offering.

Net cash used in financing activities during the three months ended March 31, 2021 was $0.4 million, of which $0.8 million was repayment of borrowings, $0.6 million was repurchase of common units, $0.6 million minimum tax withholding paid on behalf of employees for net unit settlement, which was offset by $1.6 million proceeds from issuance of common unit options.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our 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 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For quantitative and qualitative disclosures about market risk, see “Item 7A., Quantitative and Qualitative Disclosures About Market Risk” of the Annual Report. Our exposures to market risk have not changed materially since December 31, 2021.

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 March 31, 2022. Based on the evaluation of our disclosure controls and procedures as of March 31, 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.

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 March 31, 2022, we issued to stockholders 6,643,614 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.

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
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	XBRL Instance Document
+101.SCH	XBRL Taxonomy Extension Schema Document
+101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
+101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
+101.LAB	XBRL Taxonomy Extension Label Linkbase Document
+101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File

* Filed herewith.

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: May 6, 2022	By:	/s/ Jim Cox
		Jim Cox
		Chief Financial Officer
		(Principal Financial and Accounting Officer and Authorized Signatory)