DUCK CREEK TECHNOLOGIES, INC. - Quarter Report: 2022 February (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 February 28, 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: 001-39449

Duck Creek Technologies, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	84-3723837
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Duck Creek Technologies, Inc. 22 Boston Wharf Road, Floor 10 Boston, MA	02210
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (888) 724-3509

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value per share

DCT

The Nasdaq Stock Market LLC

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 ☒

As of April 5, 2022, the registrant had 132,523,537 shares of common stock, $0.01 par value per share, outstanding.

Special Note Regarding Forward-Looking Statements

Some of the information contained in the section entitled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Quarterly Report on Form 10-Q contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “projects,” “contemplates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. For more information regarding these risks and uncertainties as well as certain additional risks that we face, refer to Part II, “Item 1A. Risk Factors” as well as the factors more fully described in “Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” and in our Annual Report on Form 10-K for the year ended August 31, 2021, and those described from time to time in our future reports filed with the Securities and Exchange Commission. Accordingly, there are, or will be, important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to:

•

our history of losses;

•

loss of key employees;

•

changes in our product revenue mix as we continue to focus on sales of our Software-as-a-service (“SaaS”) solutions, which will cause fluctuations in our results of operations and cash flows between periods;

•

our reliance on orders and renewals from a relatively small number of customers for a substantial portion of our revenue, and the substantial negotiating leverage customers have in renewing and expanding their contracts for our solutions;

•

the success of our growth strategy focused on SaaS solutions and our ability to develop or sell our solutions into new markets or further penetrate existing markets;

•

our ability to manage our expanding operations;

•

intense competition in our market;

•

third parties may assert we are infringing or violating their intellectual property rights;

•

U.S. and global market and economic conditions, particularly adverse in the insurance industry;

•

additional complexity, burdens and volatility in connection with our international sales and operations;

•

the length and variability of our sales and implementation cycles;

•

data breaches, unauthorized access to customer data or other disruptions of our solutions;

•

the significant influence that Apax VIII Fund, a global private equity fund (collectively, with its affiliates, “Apax”) and Accenture plc, a public limited company incorporated in Ireland (collectively, with its affiliates, “Accenture”), will have on the composition of our board of directors, our management, business plans and policies, and any conflicts of interest between Apax and Accenture, on the one hand, and our other stockholders, on the other hand;

•

impact of pandemics, including the COVID-19 pandemic, on U.S. and global economies, our business, our employees, results of operations, financial condition, demand for our products, sales and implementation cycles, and the health of our customers’ and partners’ businesses; and

•

the other risks and uncertainties described under Part II, “Item 1A. Risk Factors.”

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. You should specifically consider the factors identified in this report that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.

Basis of Presentation

As used in this Quarterly Report on Form 10-Q unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” “Duck Creek,” and similar references refer to Duck Creek Technologies, Inc. together with its subsidiaries, and the following terms have the meanings or are calculated as set forth below:

•

We define “subscription revenue” as the revenue derived from the sale of our SaaS solutions through recurring fee arrangements for the period indicated.

•

We define “ACV” as the committed total contract value of new software sales in dollar terms divided by the corresponding minimum number of committed months, with the resultant minimum monthly commitment being multiplied by twelve.

•

We define “carriers” as property and casualty (“P&C”) insurance carriers.

•

We define “core systems” as the following key functions of carriers: policy administration, claims management and billing.

•

We define “customers” as buying entities that contract individually for our products and services. For example, multiple subsidiaries of a single carrier may each constitute a customer if each entity contracts with us separately. By contrast, a carrier that uses our products across multiple subsidiaries under a single enterprise license agreement would constitute a single customer.

•

We define “DWPs” as the gross dollar value of total premiums paid to carriers by policyholders.

Certain monetary amounts, percentages, and other figures included in this Quarterly Report on Form 10-Q have been subject to rounding adjustments. Percentage amounts included in this Quarterly Report on Form 10-Q have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Quarterly Report on Form 10-Q may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Certain other amounts that appear in this Quarterly Report on Form 10-Q may not sum due to rounding. When we state that we are a leading SaaS provider of core systems for the P&C insurance industry, we are basing our leadership on our subscription revenue for fiscal 2021.

Our fiscal year ends on August 31. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended August 31 of that year. For example, references to “fiscal 2022” refer to the fiscal year ended August 31, 2022. Any reference to a year not preceded by “fiscal” refers to a calendar year. Accordingly, our first three fiscal quarters are the successor three-month periods following August 31 (i.e., November 30, February 28 and May 31).

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Other Comprehensive Income (Loss)	3
	Consolidated Statements of Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II.	OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signatures		38

iii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share information)

(Unaudited)


	February 28,			August 31,
	2022			2021
Assets
Current assets:
Cash and cash equivalents	$	348,592		$	185,657
Short-term investments		—			191,981
Accounts receivable, net		39,065			34,629
Unbilled revenue		29,648			24,423
Prepaid expenses and other current assets		18,055			14,381
Total current assets		435,360			451,071
Property and equipment, net		13,333			14,305
Operating lease assets		16,653			17,798
Goodwill		272,455			272,455
Intangible assets, net		57,438			65,359
Deferred tax assets		1,334			2,331
Unbilled revenue, net of current portion		954			1,401
Other assets		20,446			19,413
Total assets	$	817,973		$	844,133
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	485		$	2,070
Accrued liabilities		31,976			46,437
Contingent earnout liability		—			5,462
Lease liability		4,057			4,110
Deferred revenue		24,155			29,577
Total current liabilities		60,673			87,656
Lease liability, net of current portion		19,033			21,273
Deferred revenue, net of current portion		56			—
Other long-term liabilities		1,967			4,466
Total liabilities		81,729			113,395
Commitments and contingencies
Stockholders' equity
Common stock, 135,125,113 shares issued and 132,493,651 shares outstanding at February 28, 2022, 134,625,379 shares issued and 132,000,317 shares outstanding at August 31, 2021, 300,000,000 shares authorized at February 28, 2022 and August 31, 2021, par value $0.01 per share		1,351			1,346
Preferred stock, 0 shares outstanding, 50,000,000 shares authorized at February 28, 2022 and August 31, 2021, par value $0.01 per share		—			—
Treasury stock, common shares at cost; 2,631,462 shares at February 28, 2022 and 2,625,062 shares at August 31, 2021		(68,000	)		(67,764	)
Accumulated deficit		(41,452	)		(41,265	)
Accumulated other comprehensive income		—			64
Additional paid in capital		844,345			838,357
Total stockholders' equity		736,244			730,738
Total liabilities and stockholders' equity	$	817,973		$	844,133

See accompanying notes to consolidated financial statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share information)

(Unaudited)


	Three Months Ended February 28,						Six Months Ended February 28,
	2022			2021			2022			2021
Revenue:
Subscription	$	39,593		$	30,608		$	75,298		$	58,517
License		4,649			3,588			6,561			4,938
Maintenance and support		6,204			5,885			12,481			12,075
Professional services		25,972			22,571			55,499			46,028
Total revenue		76,418			62,652			149,839			121,558
Cost of revenue:
Subscription		14,244			11,411			28,829			21,495
License		413			446			657			834
Maintenance and support		984			859			1,864			1,701
Professional services		16,448			14,826			31,690			28,542
Total cost of revenue		32,089			27,542			63,040			52,572
Gross margin		44,329			35,110			86,799			68,986
Operating expenses:
Research and development		14,316			12,681			26,637			23,785
Sales and marketing		13,571			14,165			26,738			26,762
General and administrative		16,831			14,617			31,866			29,035
Change in fair value of contingent consideration		—			95			67			98
Total operating expenses		44,718			41,558			85,308			79,680
Income (loss) from operations		(389	)		(6,448	)		1,491			(10,694	)
Other income (expense), net		(32	)		510			(728	)		463
Interest expense, net		(35	)		(38	)		(153	)		(81	)
Income (loss) before income taxes		(456	)		(5,976	)		610			(10,312	)
Provision for income taxes		423			388			797			703
Net loss	$	(879	)	$	(6,364	)	$	(187	)	$	(11,015	)
Net loss per share information1
Net loss per share of common stock, basic and diluted	$	(0.01	)	$	(0.05	)	$	(0.00	)	$	(0.08	)
Weighted average shares of common stock, basic and diluted		132,103,016			130,982,116			132,057,733			130,851,680

See Note 8—Net Loss Per Share for additional details.

See accompanying notes to consolidated financial statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Other Comprehensive Income (Loss)

(In thousands)

(Unaudited)


	Three Months Ended February 28,						Six Months Ended February 28,
	2022			2021			2022			2021
Net loss	$	(879	)	$	(6,364	)	$	(187	)	$	(11,015	)
Other comprehensive loss:
Unrealized losses on available-for-sale securities		(51	)		(6	)		(64	)		(6	)
Total other comprehensive loss		(51	)		(6	)		(64	)		(6	)
Comprehensive loss	$	(930	)	$	(6,370	)	$	(251	)	$	(11,021	)

See accompanying notes to consolidated financial statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share information)

(Unaudited)


	Common stock				Treasury Stock					Additional paid-in			Accumulated Other Comprehensive			Accumulated			Total stockholders'
	Shares		Amount		Shares		Amount			capital			Income			deficit			equity
Balance at August 31, 2021		134,625,379	$	1,346		2,625,062	$	(67,764	)	$	838,357		$	64		$	(41,265	)	$	730,738
Net income																	692			692
Repurchase of common stock						3,301		(141	)											(141	)
Share-based compensation expense											2,481									2,481
Issuance of common stock upon exercise of stock options		4,897									132									132
Vesting of restricted stock awards		60,148		1							(1	)								-
Unrealized loss on available-for-sale securities														(13	)					(13	)
Balance at November 30, 2021		134,690,424	$	1,347		2,628,363	$	(67,905	)	$	840,969		$	51		$	(40,573	)	$	733,889
Net income																	(879	)		(879	)
Repurchase of common stock						3,099		(95	)											(95	)
Share-based compensation expense											3,380									3,380
Vesting of restricted stock awards		434,689		4							(4	)								-
Unrealized loss on available-for-sale securities														(51	)					(51	)
Balance at February 28, 2022		135,125,113	$	1,351		2,631,462	$	(68,000	)	$	844,345		$	—		$	(41,452	)	$	736,244

See accompanying notes to consolidated financial statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share information)

(Unaudited)


	Common stock				Treasury Stock					Additional paid-in			Accumulated Other Comprehensive			Accumulated			Total stockholders'
	Shares		Amount		Shares		Amount			capital			Loss			deficit			equity
Balance at August 31, 2020		133,269,301	$	1,333		2,555,556	$	(64,688	)	$	821,446		$	—		$	(24,334	)	$	733,757
Net loss		—		—		—		—			—			—			(4,651	)		(4,651	)
Repurchase of common stock		—		—		1,475		(57	)		—			—			—			(57	)
Share-based compensation expense		—		—		—		—			2,333			—			—			2,333
Vesting of restricted stock awards		142,193		1		—		—			(1	)		—			—			—
Balance at November 31, 2020		133,411,494	$	1,334		2,557,031	$	(64,745	)	$	823,778		$	—		$	(28,985	)	$	731,382
Net loss		—		—		—		—			—			—			(6,364	)		(6,364	)
Proceeds from follow-on offering, net of issuance costs		90,000		1		—		—			3,452						—			3,453
Share-based compensation expense		—		—		—		—			2,478									2,478
Issuance of common stock upon exercise of stock options		36,809		—		—		—			993			—			—			993
Vesting of restricted stock awards		543,170		6		—		—			(6	)		—			—			—
Unrealized loss on available-for-sale securities		—		—		—		—			—			(6	)		—			(6	)
Balance at February 28, 2021		134,081,473	$	1,341		2,557,031	$	(64,745	)	$	830,695		$	(6	)	$	(35,349	)	$	731,936

See accompanying notes to consolidated financial statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended February 28,
	2022			2021
Operating activities:
Net loss	$	(187	)	$	(11,015	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation of property and equipment		1,364			1,587
Amortization of capitalized software		1,122			996
Amortization of intangible assets		7,921			8,175
Amortization of deferred financing fees		57			57
Share-based compensation expense		4,322			7,608
Loss on change in fair value of contingent earnout liability		67			98
Payment of contingent earnout liability in excess of acquisition date fair value		(1,650	)		—
Changes to allowance for credit losses		2,189			10
Deferred taxes		997			(515	)
Changes in operating assets and liabilities
Accounts receivable		(6,625	)		(5,600	)
Unbilled revenue		(4,778	)		(3,359	)
Prepaid expenses and other current assets		(3,588	)		(3,111	)
Other assets		(462	)		(679	)
Accounts payable		(1,839	)		508
Accrued liabilities		(12,643	)		(10,671	)
Deferred revenue		(5,367	)		(1,893	)
Operating leases		(1,148	)		(323	)
Cash settlement of vested phantom stock		(279	)		(6,904	)
Other long-term liabilities		(2,499	)		1,938
Net cash used in operating activities		(23,026	)		(23,093	)
Investing activities:
Purchase of short-term investments		—			(287,912	)
Maturities of short-term investments		191,917			—
Capitalized internal-use software		(687	)		(750	)
Purchase of property and equipment		(573	)		(672	)
Net cash provided by (used in) investing activities		190,657			(289,334	)
Financing activities:
Proceeds from follow-on offering, net of issuance costs		—			3,452
Payment of deferred IPO costs		—			(3,650	)
Payment of deferred Class E offering costs		—			(192	)
Purchase of treasury stock		(236	)		(57	)
Proceeds from stock option exercises		132			993
Payments of contingent earnout liability		(3,879	)		(1,923	)
Payment of deferred financing costs		(713	)		—
Net cash used in financing activities		(4,696	)		(1,377	)
Net increase (decrease) in cash and cash equivalents		162,935			(313,804	)
Cash and cash equivalents – beginning of period		185,657			389,878
Cash and cash equivalents – end of period	$	348,592		$	76,074
Supplemental disclosure of other cash flow information:
Cash paid for income taxes		1,245			1,209
Purchases of property and equipment recorded in accounts payable and accrued liabilities		270			—
Cash payments of contingent earnout liability		5,529			5,529

See accompanying notes to consolidated financial statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts in thousands except unit and per unit and share and per share amounts)

(Unaudited)

(1)

Nature of Business

Duck Creek Technologies, Inc (the Company) is a leading provider of core systems to the property and casualty (P&C) insurance industry through our cloud offering, Duck Creek OnDemand, delivered as software-as-a-service (SaaS). Products offered include Duck Creek Policy, Duck Creek Billing, Duck Creek Claims, Duck Creek Rating, Duck Creek Insights, Duck Creek Distribution Management, Duck Creek Producer, Duck Creek Reinsurance Management, Duck Creek Anywhere Managed Integrations, and Duck Creek Industry Content. The Company also provides its products via perpetual and term license arrangements to customers with legacy systems that have yet to move to the cloud.

The Company was formed as a Delaware corporation on November 15, 2019, with no operating assets or operations for the purpose of facilitating an initial public offering (the IPO) and related Reorganization Transactions (as described below) in order to carry on the business of Disco Topco Holdings (Cayman), L.P. and its subsidiaries (the Operating Partnership). Unless otherwise indicated or the context otherwise requires, references to “Duck Creek Technologies” and the “Company” refer to (a) prior to the consummation of the Reorganization Transactions and the IPO, to Disco Topco Holdings (Cayman), L.P., and its subsidiaries, and (b) after the consummation of the Reorganization Transactions and IPO to Duck Creek Technologies, Inc, and its subsidiaries.

Initial Public Offering

On August 14, 2020, the Company completed its IPO. It sold 17,250,000 shares of 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 $27.00 per share for net proceeds of $429.2 million, after deducting underwriting discounts, commissions, and estimated offering expenses.

The Company used (i) $43.1 million of the net proceeds received from the IPO to redeem all of the outstanding LP Units of the Operating Partnership retained by Accenture plc (Accenture) and RBW Investment GmbH & Co. (RBW), after giving effect to the contributions that were part of the Reorganization Transactions, at a redemption price per LP Unit equal to the IPO price less underwriting discounts and commissions, (ii) $64.7 million of the net proceeds received from the IPO to repurchase from Apax Partners L.P. (Apax) a portion of the shares in the Company received by Apax in the Reorg Merger (as described below) at a repurchase price per share equal to the IPO price less underwriting discounts and commissions, and (iii) $6.7 million of net proceeds received from the IPO to cash settle outstanding equity awards of certain international employees.

Reorganization Transactions

The Company and the Operating Partnership completed a series of transactions concurrently with or immediately following the completion of the IPO (Reorganization Transactions) which are described below:

•

The Company adopted an amended and restated certification of incorporation that authorized, immediately prior to the IPO, one class of common stock and one class of preferred stock.

•

Apax contributed the entity that held all of Apax’s equity interests in the Operating Partnership and all of Apax’s interest in the general partner of the Operating Partnership (General Partner) to a newly-formed Cayman company (the Reorg Subsidiary) in exchange for shares in the Reorg Subsidiary.

•

Accenture contributed to the Company, directly or indirectly, (i) a portion of its equity interests in the Operating Partnership and (ii) all of its interest in the General Partner in exchange for newly-issued common stock in the Company.

•

Certain members of management contributed to the Company, directly or indirectly, all of their respective equity interests in the Operating Partnership in exchange for (i) newly-issued common stock in the Company or (ii) restricted common stock in the Company and options to acquire common stock in the Company with an exercise price equal to the fair market value on the date of grant.

•

All other investors in the Operating Partnership (excluding Apax, Accenture, and RBW) contributed to the Company, directly or indirectly, all of their equity interests in the Operating Partnership in exchange for newly-issued common stock in the Company.

•

The Company contributed a portion of the net proceeds received from the IPO to the Operating Partnership and the Operating Partnership redeemed the outstanding LP Units of the Operating Partnership owned by Accenture and RBW that were not contributed to the Company.

•

Immediately following the completion of the IPO, (i) Apax exchanged all of its shares in the Reorg Subsidiary for newly-issued common stock in the Company and (ii) the Reorg Subsidiary merged with and into the Company (and subsequently ceased existence) (collectively, the Reorg Merger).

•

Following these transactions and the subsequent redemption of the outstanding LP Units owned by Accenture and RBW that were not contributed to the Company, the Company indirectly owns all of the LP Units of the Operating Partnership and all interest in the General Partner.

The Reorganization Transactions are considered transactions between entities under common control. As a result, Disco Topco Holdings (Cayman), L.P., is considered the predecessor of Duck Creek Technologies, Inc. for accounting purposes. This has resulted in the presentation of Disco Topco Holdings (Cayman), L.P.’s historical consolidated financial statements as the historical consolidated financial statements of Duck Creek Technologies, Inc. Duck Creek Technologies, Inc., has accounted for Disco Topco Holdings (Cayman), L.P.’s assets and liabilities at their historical carrying amounts.

(2)

Basis of Presentation, Consolidation, and Summary of Significant Accounting Policies

(a)

Basis of Presentation

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) set by the Financial Accounting Standards Board (FASB), and pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented have been reflected. References to GAAP issued by the FASB in these notes are to the FASB Accounting Standards Codification (FASB ASC).

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2021 filed with the SEC on October 29, 2021. Operating results for interim periods are not necessarily indicative of the results that may be expected for any future period or the entire fiscal year.

(b)

Risk and Uncertainties

There have been no changes to the Company’s Risks and Uncertainties as disclosed in our Annual Report on Form 10-K, filed with the SEC on October 29, 2021, and incorporated herein by reference.

(c)

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

(d)

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2021. There have been no material changes to the significant accounting policies during the six months ended February 28, 2022.

Allowance for Credit Losses

The Company maintains an allowance for expected credit losses for its accounts receivable balance. The allowance reflects the expected collectability of the balance and is based on historical losses, customer-specific factors, and current economic conditions. Credit losses are recorded in general and administrative expense while billing and other revenue adjustments are recorded as a reduction to revenue.

Investments

At the time of purchase, the Company determines the appropriate classification of investments based upon its intent with regard to such investments. All of the Company’s investments are classified as available-for-sale. The Company classifies investments as short-term when their remaining contractual maturities are one year or less from the balance sheet date, and as long-term when the investment has a remaining contractual maturity of more than one year from the balance sheet date. The Company records investments at fair value with unrealized gains and losses recorded as a component of other comprehensive income (loss).

(e)

Recently Adopted Accounting Pronouncements

There have been no changes to our recently adopted accounting pronouncements since the Company’s Annual Report on Form 10-K for the year ended August 31, 2021.

(f)

Recent Accounting Pronouncements Not Yet Effective

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This new guidance provides temporary optional expedients and exceptions to current guidance to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) to alternative reference rates. We may elect to apply the optional expedients and exceptions prospectively through December 31, 2022. The Company does not expect the new standard to have a material impact on its consolidated financial statements.

Other recent accounting pronouncements that are or will be applicable to the Company did not, or are not expected to, have a material impact on the Company’s present or future financial statements.

(g)

Revenue Recognition

The Company derives its revenues primarily from the following four sources, which represent performance obligations of the Company:

•

Sales of hosted software services (SaaS) under subscription arrangements.

•

Sales of software licenses. Software license revenue is derived from the sale of perpetual and term license arrangements to customers.

•

Sales of maintenance and support services. Maintenance and support services include telephone and web-based support, software updates, and rights to unspecified software upgrades on a when-and-if-available basis during the maintenance term.

•

Sales of professional services. Professional services primarily relate to the implementation of the Company’s SaaS offerings and software licenses.

In accordance with ASC 606, the Company recognizes revenue from the identified performance obligations, as determined in its contracts with customers, as control is transferred to the customer in an amount that reflects the consideration the Company expects to receive. The Company applies the following five steps to achieve the core principle of ASC 606:

(1)

Identify the contract with the customer

The Company considers the terms and conditions of the contracts and its customary business practices in identifying contracts under ASC 606. The Company has determined that a contract with a customer exists when the contract is approved, each party’s rights regarding the services to be transferred can be identified, payment terms for the services can be identified, the customer has the ability and intent to pay, and the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.

(2)

Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or

from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract.

(3)

Determine the transaction price

The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for transferring products or services to the customer. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that no significant future reversal of cumulative revenue under the contract will occur. The sale of the Company’s software and SaaS products may include variable consideration relating to changes in a customer’s direct written premium (DWP) managed by these solutions. The Company estimates variable consideration based on historical DWP usage to the extent that a significant revenue reversal is not probable to occur.

In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from customers or to provide customers with financing.

(4)

Allocate the transaction price to the performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (SSP).

(5)

Recognize revenue when (or as) the Company satisfies a performance obligation

Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to a customer. Revenue is recognized when control of the products or services are transferred to the Company’s customers, in an amount that reflects the consideration that it expects to receive in exchange for those products or services.

The Company records revenue net of applicable sales taxes collected. Sales taxes collected from customers are recorded as part of accounts payable in the accompanying consolidated balance sheets and are remitted to state and local taxing jurisdictions based on the filing requirements of each jurisdiction.

Disaggregation of Revenue

The Company provides disaggregation of revenue based on product and service type on the consolidated statements of operations as it believes these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The following table summarizes revenue by geographic area based on the location of the customer contracting entity, regardless of where the products or services are used, for the three and six months ended February 28, 2022 and 2021:


	Three Months Ended February 28,				Six Months Ended February 28,
	2022		2021		2022		2021
United States	$	71,108	$	56,668	$	139,849	$	110,084
All other		5,310		5,984		9,990		11,474
Total revenue	$	76,418	$	62,652	$	149,839	$	121,558

Subscription Arrangements

The transaction price allocated to subscription arrangements is recognized as revenue over time throughout the term of the contract as the services are provided on a continuous basis, beginning after the SaaS environment is provisioned and made available to customers. The Company’s subscription arrangements generally have terms of three to seven years and are generally payable on a monthly basis over the term of the subscription arrangement, which is typically noncancelable. Revenue is recognized ratably using contractual DWP as the measure of progress.

Software Licenses

The Company has concluded that its software licenses provide the customer with the right to functional intellectual property (IP), and are distinct performance obligations as the customer can benefit from the software licenses on their

own. The transaction price allocated to perpetual and term license arrangements is recognized as revenue at a point in time when control is transferred to the customer, which generally occurs at the time of delivery. Perpetual software license fees are generally payable when the contract is executed. Term license fees are generally payable in advance on an annual basis over the term of the license arrangement, which is typically noncancelable. Perpetual and term license arrangements are delivered before related services are provided, including maintenance and support services, and are functional without such services.

Maintenance and Support Services

Maintenance and support contracts associated with the Company’s software licenses entitle customers to receive technical support and software updates, on a when and if available basis, during the term of the maintenance and support contract. Technical support and software updates are considered distinct from the related software licenses but accounted for as a single performance obligation as they each constitute a series of distinct services that are substantially the same and have the same pattern of transfer to the customer. The transaction price allocated to software maintenance and support is recognized as revenue over time on a straight-line basis over the term of the maintenance and support contract. Maintenance and support fees are generally payable in advance on a monthly, quarterly, or annual basis over the term of the maintenance and support contract. Maintenance and support contracts are priced as a percentage of the associated software license.

Professional Services

The Company’s professional services revenue is primarily comprised of implementation services provided to customers. The majority of professional services engagements are billed to customers on a time and materials basis. The Company has determined that professional services provided to customers represent distinct performance obligations. These services may be provided on a stand-alone basis or bundled with other performance obligations, including subscription arrangements, software licenses, and maintenance and support services. The transaction price allocated to these performance obligations is recognized as revenue over time as the services are performed. In those limited instances where professional services arrangements are sold on a fixed price basis, revenue is recognized over time using an input measure of time incurred to date relative to total estimated time to be incurred at project completion. Professional services arrangements are generally invoiced monthly in arrears.

The Company records reimbursable out-of-pocket expenses associated with professional services contracts in both revenue and cost of revenue.

Contracts with Multiple Performance Obligations

The Company’s contracts with customers can include multiple performance obligations, where the transaction price is allocated to each identified performance obligation based on their relative SSP. The Company’s contracts may also grant the customer an option to acquire additional products or services, which the Company assesses to determine whether or not any discount on the products or services is in excess of levels normally available to similar customers and, if so, accounts for the optional product or service as an additional performance obligation.

The Company typically determines SSP based on the observable prices of the promised goods or services charged when sold separately to customers, which are determined using contractually stated prices. In instances where SSP is not directly observable, the Company determines SSP based on its overall pricing objectives, taking into consideration market conditions and other factors, including customer size and geography. The various products and services comprising contracts with multiple performance obligations are typically capable of being distinct and accounted for as separate performance obligations. The Company allocates revenue to each of the performance obligations included in a contract with multiple performance obligations at the inception of the contract.

The SSP for perpetual or term license arrangements sold in contracts with multiple performance obligations is determined using the residual approach. The Company utilizes the residual approach because the selling prices for software licenses are highly variable and a SSP is not discernible from past transactions or other observable evidence. Periodically, the Company evaluates whether the use of the residual approach remains appropriate for performance obligations associated with software licenses when sold as part of contracts with multiple performance obligations. As a result, if the SSP analysis illustrates that the selling prices for software licenses are no longer highly variable, the Company will utilize the relative allocation method for such arrangements.

Contract Modifications

The Company may enter into amendments to previously executed contracts which constitute a contract modification. The effect of a contract modification on the transaction price when the remaining products or services are not distinct is recognized to revenue on a cumulative catch-up basis. Contract modifications are accounted for prospectively when it results in the promise to deliver additional products and services that are distinct and the increase in the price of the contract corresponds to the SSP of the additional products or services.

Contract Balances

Contract assets and liabilities are presented net at the contract level for each reporting period. Contract assets consist of unbilled revenue and represent amounts under contracts with customers where revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of deferred revenue and include billings and payments received in advance of revenue recognized. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining balance is recorded as noncurrent.

During the three months ended February 28, 2022 and 2021, $3.3 million and $2.8 million, respectively, and during the six months ended February 28, 2022 and 2021, $20.2 million and $13.3 million, respectively of the Company’s unbilled revenue balance that was included in the corresponding unbilled revenue balance at the beginning of the period presented became an unconditional right to payment and was billed to its customers.

During the three months ended February 28, 2022 and 2021, the Company recognized revenue of $7.8 million and $9.2 million, respectively, and for the six months ended February 28, 2022 and 2021, $21.4 million and $24.1 million, respectively, that was included in the corresponding deferred revenue balance at the beginning of the period presented.

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As of February 28, 2022, approximately $481.8 million of revenue is expected to be recognized from remaining performance obligations in the amount of approximately $86.8 million in fiscal 2022 and approximately $395.0 million thereafter. The estimated revenues do not include unexercised contract renewals. The Company applied the practical expedient in accordance with ASC 606 to exclude amounts related to professional services contracts that are on a time and materials basis.

(3)

Contingent Earnout Liability

The following table summarizes the changes in fair value of the Company’s contingent earnout liability during the six months ended February 28, 2022:


	Outline Systems, LLC
Balance at August 31, 2021	$	5,462
Change in fair value, including accretion		67
Payments to sellers		(5,529	)
Balance at February 28, 2022	$	—

The final earnout payment related to the Outline acquisition was made in November 2021. The total cumulative earnout paid to the Outline sellers was $10.3 million.

(4)

Fair Value Measurements

Available-for-sale investments within cash equivalents and short-term investments consist of the following (in thousands):


	February 28, 2022
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Money market funds - presented in cash and cash equivalents	$	220,068	$	—	$	—	$	220,068
Total	$	220,068	$	—	$	—	$	220,068


	August 31, 2021
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
U.S. Government agency securities - presented in short-term investments	$	191,917	$	64	$	—	$	191,981
Total	$	191,917	$	64	$	—	$	191,981

The Company has recorded the securities at fair value in its consolidated balance sheet and unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss). The amount of realized gains and losses reclassified into earnings are based on the specific identification of the securities sold or securities that reached maturity date. There were no sales, two purchases within cash and cash equivalents, and eight maturities of securities during the six months ended February 28, 2022.

Fair Value

The Company measures certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market.

Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

•

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

•

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

•

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The following tables present the Company’s financial assets and liabilities measured and recorded at fair value on a recurring basis using the above input categories as of February 28, 2022 and August 31, 2021:


	February 28, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds - presented in cash and cash equivalents	$	220,068	$	—	$	—	$	220,068
Total assets	$	220,068	$	—	$	—	$	220,068
Liabilities:
Liability classified awards	$	780	$	—	$	383	$	1,163
Total liabilities	$	780	$	—	$	383	$	1,163


	August 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
U.S. Government agency securities - presented in short-term investments	$	—	$	191,981	$	—	$	191,981
Total assets	$	—	$	191,981	$	—	$	191,981
Liabilities:
Liability classified awards	$	1,448	$	—	$	1,588	$	3,036
Contingent earnout liability		—		—		5,462		5,462
Total liabilities	$	1,448	$	—	$	7,050	$	8,498

The contingent earnout liability related to business combinations is recorded at fair value on the acquisition date and is adjusted each reporting period for changes in fair value, which can result from changes in anticipated payments and changes in assumed discount periods and rates. These inputs are unobservable in the market and therefore categorized as level 3 inputs as defined above. Quoted prices for liability classified stock appreciation rights are not readily available. Accordingly, the Company uses a Black-Scholes model to estimate the fair value of these awards, which utilizes level three inputs. The following table summarizes the changes in the estimated fair value of the Company’s level 3 categorized liability classified awards for the six months ended February 28, 2022:


Balance as of August 31, 2021	$	1,588
Additions due to new awards		—
Net change in the fair value		(1,205	)
Cash settlement of awards		—
Balance as of February 28, 2022	$	383

(5)

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of February 28, 2022 and August 31, 2021 consisted of the following:


	February 28,		August 31,
	2022		2021
Directors and officers insurance	$	3,084	$	5,515
Computer software and licenses		9,956		5,861
Other		5,015		3,005
Total prepaid expenses and other current assets	$	18,055	$	14,381

(6)

Property and Equipment, Net

Property and equipment, net as of February 28, 2022 and August 31, 2021 consisted of the following:


	February 28,			August 31,
	2022			2021
Leasehold improvements	$	10,393		$	10,572
Internal-use software		9,041			8,230
Computer equipment		5,297			4,849
Furniture and fixtures		1,809			2,304
Office equipment		379			496
Assets under construction		111			111
Total property and equipment	$	27,030		$	26,562
Less accumulated depreciation and amortization		(13,697	)		(12,257	)
Property and equipment, net	$	13,333		$	14,305

Depreciation expense related to property and equipment was $0.7 million and $0.8 million for the three months ended February 28, 2022 and 2021, respectively and $1.4 million and $1.6 million for the six months ended February 28, 2022 and 2021, respectively.

The Company has determined the useful life of capitalized internal-use software to be three years. Amortization expense related to internal-use software was $0.6 million and $0.5 million for the three months ended February 28, 2022 and 2021, respectively and $1.1 million and $1.0 million for the six months ended February 28, 2022 and 2021, respectively.

(7)

Goodwill and Intangible Assets

The Company’s goodwill is the result of its acquisitions of other businesses and represents the excess of purchase consideration over the fair value of assets acquired and liabilities assumed. There has been no change to the $272.5 million carrying amount of goodwill since August 31, 2019.

Intangible assets as of February 28, 2022 and August 31, 2021 consisted of the following:


	February 28, 2022
	Gross carrying amount		Accumulated amortization		Net carrying amount		Weighted average remaining life
Customer relationships	$	103,600		56,955	$	46,645	4.8 years
Acquired technology		32,235		25,727		6,508	1.5 years
Trademarks and tradenames		9,400		5,248		4,152	4.3 years
Domain name		100		55		45	4.4 years
Backlog		6,700		6,612		88	0.4 years
	$	152,035	$	94,597	$	57,438


	August 31, 2021
	Gross carrying amount		Accumulated amortization		Net carrying amount		Weighted average remaining life
Customer relationships	$	103,600		51,815	$	51,785	5.3 years
Acquired technology		32,235		23,509		8,726	1.8 years
Trademarks and tradenames		9,400		4,778		4,622	4.8 years
Domain name		100		50		50	4.8 years
Backlog		6,700		6,524		176	0.8 years
	$	152,035	$	86,676	$	65,359

Amortization expense was $3.9 million and $4.1 million for the three months ended February 28, 2022 and 2021, respectively, and $7.9 million and $8.2 million for the six months ended February 28, 2022 and 2021, respectively. Amortization expense is recorded on a straight-line basis over the estimated useful lives of the assets. Amortization expense associated with the backlog intangible asset is classified as a reduction of revenue in the accompanying consolidated statements of operations.

As of February 28, 2022, the estimated future amortization of purchased intangible assets is as follows:


Fiscal year:
2022	$	7,872
2023		15,225
2024		11,453
2025		11,307
2026 and thereafter		11,581
Total	$	57,438

(8)

Net Loss Per Share

The Company calculates basic earnings per share by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. The diluted earnings per share is computed by assuming the exercise, settlement, and vesting of all potential dilutive common stock equivalents outstanding for the period using the treasury stock method.

The following table sets forth a reconciliation of the numerator and denominator used to compute basic earnings per share of common stock.


	Three Months Ended February 28,						Six Months Ended February 28,
	2022			2021			2022			2021
Numerator
Net loss	$	(879	)	$	(6,364	)	$	(187	)	$	(11,015	)
Denominator
Weighted average shares of common stock - basic and diluted		132,103,016			130,982,116			132,057,733			130,851,680
Net earnings (loss) per share - basic and diluted	$	(0.01	)	$	(0.05	)	$	(0.00	)	$	(0.08	)

As of February 28, 2022, and 2021, 1,619,702 and 2,810,693, respectively, shares outstanding of potential common stock, using of the treasury stock method, were excluded from the computation of diluted weighted-average shares of common stock outstanding because their effect would have been antidilutive.

(9)

Other Assets

Other assets as of February 28, 2022 and August 31, 2021 consisted of the following:


	February 28,		August 31,
	2022		2021
Deferred contract costs	$	13,559	$	14,056
Other noncurrent assets		6,887		5,357
Total other assets	$	20,446	$	19,413

The amortization related to deferred contracts costs was $0.6 million and $1.2 million for the three months ended February 28, 2022 and 2021, respectively, and $1.2 million and $1.8 million for the six months ended February 28, 2022 and 2021, respectively. There was no impairment loss in relation to the costs capitalized.

(10)

Accounts Receivable and Allowance for Credit Losses

Accounts receivable, net as of February 28, 2022 and August 31, 2021, consisted of the following:


	February 28,			August 31,
	2022			2021
Accounts receivable	$	41,758		$	36,054
Allowance for credit losses		(2,693	)		(1,425	)
Accounts receivable, net	$	39,065		$	34,629

The following table presents changes to the allowance for credit losses during the six months ended February 28, 2022:


Allowance, August 31, 2021	$	(1,425	)
Net changes to credit losses		(2,189	)
Write-offs, net		711
Recoveries of previously reserved amounts		210
Allowance, February 28, 2022	$	(2,693	)

(11)

Accrued Liabilities

Accrued liabilities as of February 28, 2022 and August 31, 2021 consisted of the following:


	February 28,		August 31,
	2022		2021
Accrued bonuses	$	8,489	$	18,831
Accrued vacation		7,099		5,572
Accrued hosting fees		6,789		7,500
Accrued withholding taxes		2,425		2,771
Liability-classified phantom units and SARs		1,163		3,036
Accrued professional service fees		454		369
Accrued commissions		294		1,429
Other		5,263		6,929
Total accrued liabilities	$	31,976	$	46,437

(12)

Credit Facility

On October 22, 2021, the Company executed an amended and restated credit agreement for its revolving credit facility, increasing its maximum borrowing capacity from $30.0 million to $45.0 million.

The revolving credit facility has a term of five years and is secured by substantially all of the Company’s tangible assets. Interest accrues on the revolving credit facility at a variable rate based upon the type of borrowing made by the Company. Borrowings can either incur interest at a rate of LIBOR (as administered by ICE Benchmark Administration) plus an applicable margin, or incur interest at the higher of: (i) the Prime Rate, (2) the Fed Funds Rate plus 0.5%, or (3) LIBOR plus 1.0%, plus an applicable margin. The applicable margin ranges from 1.0% to 2.0% depending on the interest rate basis and type of borrowing elected. In addition to interest on the revolving credit facility, the Company pays a commitment fee of 0.5% per annum on the unused portion of the revolving credit facility. Repayment of any amounts borrowed are not required until maturity of the revolving credit facility, however the Company may repay any amounts borrowed at any time, without premium or penalty.

The Company is required to meet certain financial and nonfinancial covenants under the terms of the revolving credit facility. These covenants include limits on the creation of liens, limits on making certain investments, limits on incurring additional indebtedness, and maintaining a leverage ratio at or below a maximum level. The Company was in compliance with these financial and nonfinancial covenants as of February 28, 2022.

There was no outstanding balance under the revolving credit facility at February 28, 2022 or August 31, 2021. Letters of credit of $0.8 million and $0.9 million were outstanding under the revolving credit facility at February 28, 2022 and August 31, 2021, respectively.

(13)

Commitments and Contingencies

(a)

Litigation

From time to time, the Company is a party to or can be threatened with litigation in the ordinary course of business. The Company regularly analyzes current information, including, as applicable, the Company’s defenses and insurance coverage and, as necessary, provides accruals for probable and estimable liabilities for the eventual disposition of any matters. The Company was not a party to any material legal proceedings as of February 28, 2022 or 2021.

(b)

Guarantees

The Company’s products are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and substantially in accordance with the Company’s product documentation under normal use and circumstances. The Company’s services are generally warranted to be performed in a professional manner and to materially conform to the specifications set forth in the related customer contract. The Company’s arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-party’s intellectual property rights.

To date, the Company has not incurred any material costs as a result of such indemnifications or commitments and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

(14)

Share-Based Compensation

Share-based compensation expense has been recorded in the accompanying consolidated statements of operations as follows for the three and six months ended February 28, 2022 and 2021:


	Three Months Ended February 28,				Six Months Ended February 28,
	2022		2021		2022		2021
Cost of subscription revenue	$	121	$	132	$	163	$	212
Cost of maintenance and support revenue		9		8		17		15
Cost of professional services revenue		353		1,139		253		1,750
Research and development		513		709		742		1,220
Sales and marketing		448		1,395		388		2,294
General and administrative		1,666		1,133		2,759		2,117
Total share-based compensation expense	$	3,110	$	4,516	$	4,322	$	7,608

(15)

Segment Information and Information about Geographic Areas

The Company considers operating segments to be components of the Company for which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the chief executive officer. The chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by product and geographic region, for purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it has a single operating segment.

Revenues by geographic area presented based upon the location of the customer are included in Note 2(g).

Property and equipment, net by geographic area are as follows:


	February 28,		August 31,
	2022		2021
United States	$	11,937	$	12,814
All other		1,396		1,491
Total property and equipment, net	$	13,333	$	14,305

(16)

Related-Party Transactions

Services Provided on Behalf of and by Accenture

As of February 28, 2022, Accenture held 16% of the outstanding shares of common stock of the Company.

The Company provides certain professional services and software maintenance services to end customers as a subcontractor to Accenture as part of its typical revenue generating arrangements. During the three and six months ended February 28, 2022 and 2021, the Company recognized immaterial amounts of revenue relating to services performed in this subcontractor capacity.

In addition, the Company also engages Accenture to provide certain professional services on behalf of the Company as part of its typical revenue generating arrangements. During both the three and six months ended February 28, 2022 and 2021, the Company incurred immaterial expenditures relating to services performed by Accenture.

Revenue Contracts with Investors

During the six months ended February 28, 2022, the Company recognized revenue from customers that invested in the Company’s Class E Preferred Units whose shares converted to common stock in our IPO. The Company recognized aggregate revenue of $8.8 million and $8.1 million during the three months ended February 28, 2022 and 2021, respectively, and $15.0 million and $15.6 million during the six months ended February 28, 2022 and 2021, respectively. Deferred revenue from these customers was $2.5 million and $4.1 million as of February 28, 2022 and August 31, 2021, respectively.

Outstanding accounts receivables due from these customers was $8.2 million and $5.0 million as of February 28, 2022 and August 31, 2021, 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 together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements included herein. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled Part II, “Item 1A. Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a leading provider of core systems to the property and casualty (P&C) insurance industry through our cloud offering, Duck Creek OnDemand, delivered as software-as-a-service (SaaS). We have achieved our leadership position by combining over twenty years of deep domain expertise with the differentiated SaaS capabilities and low-code configurability of our technology platform. We believe we are the first company to provide carriers with an end-to-end suite of enterprise-scale core system software that is purpose-built as a SaaS solution. Our product portfolio is built on our modern technology foundation, the Duck Creek Platform, and works cohesively to improve the operational efficiency of insurers’ core processes (policy administration, billing and claims management) as well as other critical functions. The Duck Creek Platform enables our customers to be agile and rapidly capitalize on market opportunities, while reducing their total cost of technology ownership.

Our deep understanding of the P&C insurance industry has enabled us to develop a single, unified suite of insurance software products that is tailored to address the key challenges faced by carriers worldwide. Our solutions promote carriers’ agility, intelligence and efficiency by enabling rapid integration and streamlining the ability to capture, access and utilize data more effectively. The Duck Creek Suite includes several products that support the P&C insurance process lifecycle, such as:

•

Duck Creek Policy: a solution that enables insurers to develop and launch new insurance products and manage all aspects of policy administration, from product definition to quoting, binding, and servicing

•

Duck Creek Billing: a solution that supports fundamental payment and invoicing capabilities (such as billing and collections, commission processing, disbursement management and general ledger capabilities) for all insurance lines and bill types

•

Duck Creek Claims: a solution that supports the entire claims lifecycle from first notice of loss through investigation, payments, negotiations, reporting and closure

In addition, we offer other innovative solutions, such as Duck Creek Rating, Duck Creek Insights, Duck Creek Digital Engagement, Duck Creek Distribution Management, Duck Creek Producer, Duck Creek Reinsurance Management, Duck Creek Anywhere Managed Integrations and Duck Creek Industry Content, which provide additional features and functionalities that further help our customers meet the increasing and evolving demands of the P&C industry. Our customers purchase and deploy Duck Creek OnDemand, our SaaS solution, either individually or as a suite.

We sell our SaaS solutions through recurring fee arrangements where revenue is recognized on a monthly basis following deployment to the customer, which we refer to as subscription revenue. Substantially all of our new bookings come from the sale of SaaS subscriptions of Duck Creek OnDemand. For the six months ended February 28, 2022 and 2021, SaaS ACV bookings represented 92% and 100% of our total ACV bookings, respectively. Historically, we have also sold our products through perpetual and term license arrangements, most commonly installed on-premise, where license revenue is typically recognized in full upon delivery of the software to the customer. We generally price our SaaS and license arrangements at individually negotiated rates based on the amount of a customer’s DWP that will be managed by our solutions with pre-determined fee adjustments as the customer’s DWP increases over the term of the contract, which typically ranges from three to seven years for our SaaS arrangements. We typically invoice our customers monthly, in advance, for SaaS fees whereas our term licenses are typically invoiced annually, in advance. The total cost of a perpetual license is billed in full upon contract signing.

We also derive revenue from maintenance and support services on our perpetual and term license products (primarily software updates, rights to unspecified software upgrades on a when-and-if-available basis and remote support services). We recognize revenue on a monthly basis as maintenance and support services are provided to customers. We generate revenue by providing professional services for both our SaaS solutions and perpetual and term license products (primarily related to implementation services) to the extent requested by our customers. The vast majority of our professional services revenue is recognized on a time and materials basis as the work is delivered to our customers. Our customers may also choose to obtain implementation services through our network of third-party SI partners who provide implementation and other related services to our customers. Our partnerships with leading SIs allow us to grow our business more efficiently by giving us scale to service our growing customer base. We continue to grow our

services organization, including increasing the number of qualified consultants we employ and investing time and resources to develop relationships with new SI partners in existing and new markets.

We sell our products and services to a wide variety of carriers, including many of the largest and most recognizable brands in the P&C insurance industry, as well as smaller national and regional carriers. Our direct sales team focuses on obtaining new customers, which includes carriers that currently operate internally developed or competing systems, as well as selling into our existing customer base, which includes marketing our SaaS solutions to our term and perpetual license customers to drive adoption of our SaaS solutions and cross-selling additional applications. We are committed to continued training and development in order to increase the productivity of our sales team, with regional sales centers in North America, Europe and Australia. Our sales team is complemented by our partnerships with third-party partners, including leading SIs and solution partners. These partners provide additional market validation to our offerings, enhance our sales force through co-marketing efforts and offer greater speed and efficiency of implementation capabilities and related services to our customers. We also engage in a variety of traditional and online marketing activities designed to provide sales support and build brand recognition and enhance our reputation as an industry leader.

We believe our strong customer relationships are a result of our ability to develop innovative technology and incorporate our deep domain expertise into products that serve mission critical functions in our customers’ day-to-day operations. We have over 150 insurance customers, over 70 of which have purchased one or more of our SaaS solutions. For customer concentration purposes, customers are assessed two ways: individual entities (customers) and combining customers that are under common control (affiliated entities). We did not have any affiliated entities that accounted for more than 10% of our total revenue in the second quarter of fiscal 2022 and one affiliated entity that accounted for more than 10% of our total revenue in the second quarter of fiscal 2021.

Key Factors and Trends Affecting Our Results of Operations

Increased focus on the sale of our SaaS solutions and resulting changing revenue mix. A central part of our strategy is to continue to grow our subscription revenue by signing new SaaS customers and increasing sales to our existing SaaS customers. Additionally, over time we also expect to migrate existing term and perpetual license customers to our SaaS solutions. As a result, our software revenue mix will continue to change over time as the portion of license revenue (primarily recognized up-front) decreases and the portion of subscription revenue (recognized monthly) increases, which may make our results in any one period difficult to compare to any other period. For the three months ended February 28, 2022 and 2021, subscription revenue was 78% and 76% of software revenue, respectively. For the six months ended February 28, 2022 and 2021, subscription revenue was 80% and 77% of software revenue, respectively.

Continued and increased adoption of our solutions by customers. Strong customer relationships are a key driver of our success given the importance of customer references for new sales. Our long-term relationships with existing customers provide us with significant opportunities to reach customer decision-makers and sell our product offerings that address the specific customer’s needs, allowing us to recognize incremental sales with lower sales and marketing spend than for a new customer. With the continued launch of new functionality for the Duck Creek Suite, we have the opportunity to realize incremental value by selling additional functionality to customers that do not currently utilize our full product portfolio and by encouraging existing term and perpetual license customers to adopt our SaaS solutions. As we demonstrate our value to customers, we believe we will have the opportunity to sell them additional solutions. Moreover, because our products are priced on the basis of the amount of DWP generated by our customers, we expect our revenue will grow as our customers grow their businesses.

Timing of license revenue recognition and changing contract terms. Because our offerings are typically priced based on a customer’s DWP, and our business relies on a relatively small number of high-value contracts, the license revenues recognized in any fiscal period in which we sign a term license with a large global carrier may be disproportionally higher than revenues recognized in a period in which we only sign term licenses with smaller carriers. We generally experience lengthy sales cycles because potential customers typically undertake a rigorous pre-purchase decision-making and evaluation process. Additionally, our license revenue may significantly increase in any given period in which a new license contract is signed. In fiscal 2018, we revised our contracting practices and began to sell our term licenses with an initial two-year committed term and optional annual renewals instead of our historical three to six year committed terms. This contracting change has impacted historical period-over-period revenue comparisons. However, because of our revenue mix shift to subscription and since our contracts going forward are expected to have, initial two-year committed terms, this change is not expected to have a material impact on the comparability of our results and in future periods. Our term license revenue accounted for 9% of software revenue during both the three months ended February 28, 2022 and 2021, respectively, and for 7% of software revenue during both the six months ended February 28, 2022 and 2021, respectively.

Investment in sales and marketing organization. We plan to continue to invest in our sales and marketing efforts to grow our customer base, increase sales of additional functionality to existing customers and encourage carriers who currently operate legacy systems or use one or more of our competitor’s applications to adopt our SaaS solutions. We expect to add sales personnel and expand our marketing activities. We also intend to continue to expand our international sales and marketing organization, which we believe will be an important factor in our continued growth. Our sales and marketing expenses totaled $13.6 million and $14.2 million in the

three months ended February 28, 2022 and 2021, respectively, and $26.7 million and $26.8 million in the six months ended February 28, 2022 and 2021, respectively. We expect sales and marketing expenses to increase in absolute dollars for the foreseeable future.

Investment in SaaS operations. We will continue to invest in Duck Creek OnDemand, including continued growth in the number of our cloud and SaaS operations experts, to further our goal of delivering the best experience for our SaaS customers. Personnel related costs of our SaaS operations team and data hosting costs are the fastest growing components of our cost of subscription revenue. Our cost of subscription revenue totaled $14.2 million and $11.4 million in the three months ended February 28, 2022 and 2021, respectively, and $28.8 million and $21.5 million in the six months ended February 28, 2022 and 2021, respectively.

Investment in technology and research and development efforts. We are committed to continuing to deliver market-leading software to carriers and believe that maintaining our product leadership is critical to driving further revenue growth. As a result, we intend to continue to make significant investments in our research and development efforts to extend the functionality and breadth of our current solutions as well as develop and launch new products and tools to address the evolving needs of the P&C insurance industry. Our research and development expenses totaled $14.3 million and $12.7 million during the three months ended February 28, 2022 and 2021, respectively, and $26.6 million and $23.8 million during the six months ended February 28, 2022 and 2021, respectively. We expect research and development expenses to increase in absolute dollars for the foreseeable future.

Mix of professional services revenue. Our professional services teams ensure the successful configuration and integration of our solutions and provide continuous support to our customers. We recognize most of our professional services revenue during initial deployment and recognize additional revenue for services provided over the lifetime of a customer’s use of our software. Over time, a customer’s spend on professional services decreases as a percentage of their overall spend with us. In addition, although we plan on increasing our professional services headcount in the long-term, we expect to shift an increasing percentage of implementation work to our network of third-party SIs to better enable us to meet growing market demand. As a result, we expect our overall professional services revenue to increase in absolute dollars due to the growth in the number of our SaaS customers, but to decrease as a percentage of total revenue. During the three months ended February 28, 2022 and 2021, our professional services revenue was $26.0 million and $22.6 million, respectively, and $55.5 million and $46.0 million during the six months ended February 28, 2022 and 2021, respectively.

COVID-19 expenses. In March 2020, we implemented various measures in response to the ongoing COVID-19 pandemic to ensure the safety of our employees. Over a two-day period, we shifted 100% of our employee base to work from home and suspended international and domestic travel. This policy remained largely in place throughout fiscal year 2021, with only certain exceptions being made on a case-by-case basis. In the beginning of fiscal year 2022, we began re-opening offices and resumed some business travel. As a result, there have been slight increases in travel-related expenses in fiscal year 2022.

Due to the success of our work from home program, we have established a remote-first policy for all employees. Under this policy, employees can work from home but have the option to work out of physical office locations when they would like.

Share-based Compensation. For the six months ended February 28, 2022, a portion of our share-based compensation decreased due to liability-based awards whose value depends, in part, upon the Company’s stock price and other market-based metrics.

Components of Results of Operations

Revenue

We generate our revenue from selling subscriptions to our SaaS solutions, licensing our term and perpetual software applications, providing maintenance and support services (primarily software updates, rights to unspecified software upgrades on a when-and-if-available basis and remote support services) to our term and perpetual license customers and providing professional services (primarily related to implementation services) to the extent requested by either our SaaS or term and perpetual license customers. We generally price our SaaS and licenses arrangements based on the amount of a customer’s DWP that will be managed by our software solutions and may include volume-based pricing for customers managing a higher amount of DWP with our solutions. Our SaaS and license contracts generally include provisions for additional fees when the amount of the customer’s DWP managed by our software solutions exceed agreed-upon caps within defined reporting periods, which are recognized on an as incurred basis. Software revenue is comprised of subscription revenue and revenue from licenses and maintenance and support services. Total revenue is comprised of software revenue plus revenue from our professional services.

Subscription

Our subscription revenue is comprised of fees from customers accessing our Duck Creek OnDemand platform and other SaaS solutions. Revenue for a reporting period is generally recognized ratably in proportion to the total contractual DWP, beginning when the service has been made available to the customer. Our subscription revenue accounted for 78% and 76% of software revenue during the three months ended February 28, 2022 and 2021, respectively, and 80% and 77% of software revenue during the six months ended February 28, 2022 and 2021, respectively.

Licenses

On an increasingly limited basis, we sell licenses for our solutions on either a renewable term basis or a perpetual basis. The total contractual consideration allocated to the license is recognized as revenue upon delivery of the software to a customer, assuming all other revenue recognition criteria are satisfied. We sell our term licenses with an initial two-year committed term and optional annual renewals, with the revenue allocated to the initial two-year license period recognized in full upon delivery of the license. We expect potential volatility across quarters for our license revenue due to the timing of license renewals and sales. Our license revenue accounted for 9% of software revenue during both the three months ended February 28, 2022 and 2021, respectively, and 7% of software revenue during both the six months ended February 28, 2022 and 2021, respectively.

Maintenance and Support

In connection with our term and perpetual license arrangements, we offer maintenance and support under renewable, fee-based contracts that include unspecified software updates and upgrades released when and if available, software patches and fixes and email and phone support. Our maintenance and support fees are typically priced as a fixed percentage of the associated license fees. We recognize maintenance and support revenue from customers ratably over the committed term of the contract. Substantially all term and perpetual license customers purchase an agreement for maintenance and support. We expect to continue to generate a relatively consistent stream of revenue from the maintenance and support services we provide to our existing license customers. However, we expect revenue from maintenance and support services to decrease as a percentage of software revenue as we continue to deemphasize license sales in favor of our SaaS solutions. Our maintenance and support revenue accounted for 12% and 15% of software revenue during the three months ended February 28, 2022 and 2021, respectively, and 13% and 16% of software revenue during the six months ended February 28, 2022 and 2021, respectively.

Professional Services

We offer professional services, primarily related to implementation of our products, in connection with both our SaaS solutions and software license products. The vast majority of professional services engagements are billed to customers on a time and materials basis and revenue is generally recognized upon delivery of our services. We expect our professional services revenue to grow over time in absolute dollars due to customer growth and an increasing need for implementation services but decrease as a percentage of total revenue. We believe the rate at which we sell our software will drive a greater need for implementation services that will support both an increase in our professional services revenue and an increase in demand for the services provided by our third-party SIs. Our professional services revenue generates lower gross margins than our software revenue and accounted for 34% and 36% of our total revenue for the three months ended February 28, 2022 and 2021, respectively, and 37% and 38% of our total revenue for the six months ended February 28, 2022 and 2021, respectively.

Cost of Revenue

Our cost of revenue has fixed and variable components and depends on the type of revenue earned in each period. Cost of revenue includes amortization expense associated with acquired technology and other operating expenses directly related to the cost of products and services, including depreciation expense. We expect our cost of revenue to increase in absolute dollars as we continue to hire personnel, to provide hosting services, technical support and consulting services to our growing customer base.

Cost of Subscriptions

Our cost of subscription revenue is primarily comprised of cloud infrastructure costs, royalty fees paid to third-parties, amortization of acquired technology intangible assets and personnel-related expenses for our SaaS operations teams, including salaries and other direct personnel-related costs.

Cost of Licenses

Our cost of license revenue is primarily comprised of royalty fees paid to third-parties and amortization of acquired technology intangible assets.

Cost of Maintenance and Support

Our cost of maintenance and support revenue is comprised of personnel-related expenses for our technical support team, including salaries and other direct personnel-related costs. While we expect the cost of maintenance and support revenue will increase in the near term, it may decrease in the future if we successfully transition our term and perpetual license customers to our SaaS solutions.

Cost of Professional Services

Our cost of professional services revenue is primarily comprised of personnel-related expenses for our professional service employees and contractors, including salaries and other direct personnel-related costs.

Gross Margins

Gross margins have been and will continue to be affected by a variety of factors, including the average sales price of our products and services, DWP volume growth, the mix of revenue between SaaS solutions, software licenses, maintenance and support and professional services and changes in cloud infrastructure and personnel costs. As we transition our product mix to include more SaaS customers, we expect our overall gross margin percentages to decrease in the near-term due to our SaaS gross margin percentages being lower than our license gross margin percentages. Over time, we expect gross margins to increase as we onboard additional customers, achieve growth within existing customers and realize greater economies of scale.

Operating Expenses

Research and Development

Our research and development expenses consist primarily of costs incurred for personnel-related expenses for our technical staff, including salaries and other direct personnel-related costs. Additional expenses include consulting and professional fees for third-party development resources. We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to dedicate substantial resources to develop, improve and expand the functionality of our solutions. Costs incurred in the preliminary design and development stages of our SaaS projects are generally expensed as incurred in accordance with FASB ASC 350-40, Internal-Use Software. Once a SaaS project has reached the application development stage, certain internal, external, direct and indirect costs may be subject to capitalization. Generally, costs are capitalized until the technology is available for its intended use. Subsequent costs incurred for the development of future upgrades and enhancements, which are expected to result in additional functionality, follow the same protocol for capitalization.

Sales and Marketing Expenses

Our sales and marketing expenses consist primarily of personnel related costs for our sales and marketing functions, including salaries and other direct personnel-related costs. Additional expenses include marketing program costs, including costs related to our Formation (held annually, when possible) conference and amortization of acquired intangible assets related to customer relationships. While we expect our sales and marketing expenses to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth, we also anticipate that sales and marketing expenses will remain relatively consistent as a percentage of total revenue.

General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel-related costs for our executive, finance, human resources, information technology and legal functions, including salaries and other direct personnel-related costs. Additional expenses include professional fees, amortization of acquired trademarks, tradenames and domain name intangible assets, insurance and acquisition-related costs. While we expect other general and administrative expense to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth and as a result of our becoming a public company, we also anticipate that general and administrative expenses will decrease as a percentage of total revenue over time.

Change in Fair Value of Contingent Consideration

Certain of our acquisitions have included a component of contingent consideration to be paid to the sellers if certain performance levels are achieved by the acquired entity over a specific period of time. Contingent consideration was initially recorded at fair value on the acquisition date based, in part, on a range of estimated probabilities for achievement of these performance levels. The fair value was periodically adjusted as actual performance levels become known and updates were made to the estimated probabilities for future performance. A gain or loss was recognized in the income statement for fair value adjustments. As a result of additional acquisitions, it is possible that we will incur gains or losses in the future due to the change in the fair value of contingent consideration.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign exchange gains and losses resulting from fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar.

Interest Expense, Net

Interest expense, net comprises interest expense accrued or paid on our indebtedness, net of interest income earned on our cash balances. We expect interest income (expense) to vary each reporting period depending on the amount of outstanding indebtedness, cash, cash equivalents, and investment balances, and prevailing interest rates.

Provision for Income Taxes

We are subject to taxes in the United States as well as other tax jurisdictions or countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to current U.S. income tax. Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets, except in certain foreign subsidiaries that generate income. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets. Realization of our U.S. deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.

Results of Operations

Comparison of the Three Months Ended February 28, 2022 and 2021

The following table sets forth our consolidated results of operations for the periods indicated, expressed in total dollar terms and as a percentage of total revenue:


	Three Months Ended February 28,
(dollars in thousands)	2022						2021
				Percent of Total Revenue						Percent of Total Revenue
Revenue
Subscription	$	39,593			52	%	$	30,608			49	%
License		4,649			6			3,588			6
Maintenance and support		6,204			8			5,885			9
Professional services		25,972			34			22,571			36
Total revenue		76,418			100			62,652			100
Cost of revenue
Subscription		14,244			19			11,411			18
License		413			1			446			1
Maintenance and support		984			1			859			1
Professional services		16,448			22			14,826			24
Total cost of revenue		32,089			43			27,542			44
Gross margins		44,329			57			35,110			56
Operating expenses
Research and development		14,316			19			12,681			20
Sales and marketing		13,571			18			14,165			23
General and administrative		16,831			22			14,617			23
Change in fair value of contingent consideration		—			—			95			—
Total operating expense		44,718			59			41,558			66
Loss from operations		(389	)		(1	)		(6,448	)		(10	)
Other income (expense), net		(32	)		—			510			1
Interest expense, net		(35	)		—			(38	)		—
Loss before income taxes		(456	)		(1	)		(5,976	)		(9	)
Provision for income taxes		423			1			388			1
Net loss	$	(879	)		(1	)%	$	(6,364	)		(10	)%

The following table sets forth share-based compensation expense included in our results of operations for the periods indicated:


	Three Months Ended February 28,				Six Months Ended February 28,
	2022		2021		2022		2021
Cost of subscription revenue	$	121	$	132	$	163	$	212
Cost of maintenance and support revenue		9		8		17		15
Cost of services revenue		353		1,139		253		1,750
Research and development		513		709		742		1,220
Sales and marketing		448		1,395		388		2,294
General and administrative		1,666		1,133		2,759		2,117
Total share-based compensation expense	$	3,110	$	4,516	$	4,322	$	7,608

Revenue

Subscription

Subscription revenue increased $9.0 million, or 29%, during the three months ended February 28, 2022 versus the three months ended February 28, 2021, due to a combination of sales to new customers and increased revenue generated from existing customers, which includes sales of new services and contractual growth.

License

License revenue increased $1.1 million, or 30%, during the three months ended February 28, 2022 versus the three months ended February 28, 2021 primarily due to timing of existing customer renewals, including multi-year license renewals which did not occur in the prior period.

Maintenance and Support

Maintenance and support revenue increased $0.3 million, or 5%, during the three months ended February 28, 2022 versus the three months ended February 28, 2021 primarily due to increases of maintenance and support growth fees charged to customers during the period.

Professional services

Professional services revenue increased $3.4 million, or 15%, during the three months ended February 28, 2022 versus the three months ended February 28, 2021 primarily due to several large implementation projects and growth of our existing software customer base, partially offset by a decrease from completed project implementations.

Cost of Revenue

Cost of revenue increased $4.5 million, or 17%, in the three months ended February 28, 2022 compared to the three months ended February 28, 2021.

Cost of Subscriptions

Cost of subscription revenue increased $2.8 million, or 25%, during the three months ended February 28, 2022 versus the three months ended February 28, 2021 primarily due to an increase in SaaS customers. This increase is comprised primarily of a $1.8 million increase in hosting costs from increased usage and a $1.1 million increase in payroll and related costs as we continue to build out the SaaS operations team and support customer growth.

Cost of License

Cost of license revenue decreased 7% in the three months ended February 28, 2022 versus the three months ended February 28, 2021 primarily due to a decrease in the amount of amortization on previously acquired technology intangible assets.

Cost of Maintenance and Support

Cost of maintenance and support revenue increased $0.1 million, or 15%, in the three months ended February 28, 2022 versus the three months ended February 28, 2021 primarily due to an increase in personnel-related costs required to support our term and perpetual license customers.

Cost of Professional Services

Cost of professional services revenue increased $1.6 million, or 11%, in the three months ended February 28, 2022 versus the three months ended February 28, 2021, mainly attributable to an increase of $2.0 million in payroll and related costs, driven by increased headcount and contingent labor increased $0.6 million. These increases were partially offset by a $0.8 million decrease in share-based compensation expense and decrease of $0.4 million in bonus compensation expense.

Gross Margins

Gross margins increased $9.2 million, or 26%, in the three months ended February 28, 2022 versus the three months ended February 28, 2021, primarily due to a $6.2 million increase in subscription gross margin, a $1.8 million increase in professional services gross margin, a $1.1 million increase in license gross margin, and a nominal increase in maintenance and support gross margin. The increase in subscription gross margins was driven by strong growth in subscription revenue.

Our gross margin percentage increased to 57% from 56% in the three months ended February 28, 2022 versus the three months ended February 28, 2021. The subscription gross margin percentage increased to 64% from 63%, professional services gross margin percentage increased to 37% from 34% and license gross margin percentage increased to 91% from 88% while maintenance and support gross margin percentage decreased to 84% from 85%.

Operating Expenses

Research and Development Expense

Research and development expense increased $1.6 million, or 13%, during the three months ended February 28, 2022 versus the three months ended February 28, 2021 primarily due to a $1.6 million increase in payroll costs from an increase in headcount.

Sales and Marketing Expense

Sales and marketing expense decreased $0.6 million, or (4%), during the three months ended February 28, 2022 versus the three months ended February 28, 2021, primarily due to a $1.3 million decrease in share-based compensation expense and bonus compensation expense, partially offset by a $0.7 million increase in payroll costs from increased headcount.

General and Administrative Expense

General and administrative expense increased $2.2 million, or 15%, in the three months ended February 28, 2022 versus the three months ended February 28, 2021, primarily due to a $1.4 million increase in allowance for credit losses, a $0.5 million increase in share-based compensation expense, a $0.4 million increase in professional service fees, a $0.3 million increase on losses from the disposal of fixed assets, and a $0.3 million increase related to computer hardware and software expenses. These increases were partially offset by a $0.5 million decrease in bonus compensation expense and $0.4 million decrease in facilities.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration is due to changes in estimated contingent consideration as well as present value calculations related to the contingent consideration estimates of the acquisition of Outline Systems LLC, a provider of P&C distribution channel management software and longstanding member of our partner ecosystem (now Duck Creek Distribution Management). The final contingent consideration was paid in full during the first quarter fiscal year 2022.

Other Income (Expense), Net

Other income (expense), net decreased $0.5 million during the three months ended February 28, 2022 as compared to the three months ended February 28, 2021, primarily due to fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar.

Interest Expense, Net

Interest expense, net remained consistent for the three months ended February 28, 2022 versus the three months ended February 28, 2021. Interest expense consists of fees paid to maintain the revolving credit facility, though there were no outstanding borrowings in either period. These expenses were partially offset by interest income received from cash, cash equivalents, and short-term investments.

Provision for Income Taxes

Provision for income taxes increased 9% in the three months ended February 28, 2022 versus the three months ended February 28, 2021 primarily due to the impact of goodwill amortized for tax not for book, impact of higher profits in foreign subsidiaries and state taxes.

Results of Operations

Comparison of the Six Months Ended February 28, 2022 and 2021

The following table sets forth our consolidated results of operations for the periods indicated, expressed in total dollar terms and as a percentage of total revenue:


	Six Months Ended February 28,
(dollars in thousands)	2022						2021
				Percent of Total Revenue						Percent of Total Revenue
Revenue
Subscription	$	75,298			51	%	$	58,517			48	%
License		6,561			4			4,938			4
Maintenance and support		12,481			8			12,075			10
Professional services		55,499			37			46,028			38
Total revenue		149,839			100			121,558			100
Cost of revenue
Subscription		28,829			19			21,495			18
License		657			—			834			1
Maintenance and support		1,864			1			1,701			1
Professional services		31,690			21			28,542			23
Total cost of revenue		63,040			41			52,572			43
Gross margins		86,799			59			68,986			57
Operating expenses
Research and development		26,637			18			23,785			20
Sales and marketing		26,738			18			26,762			22
General and administrative		31,866			21			29,035			24
Change in fair value of contingent consideration		67			—			98			—
Total operating expense		85,308			57			79,680			66
Income (loss) from operations		1,491			2			(10,694	)		(9	)
Other income (expense), net		(728	)		—			463			—
Interest expense, net		(153	)		—			(81	)		—
Income (loss) before income taxes		610			-			(10,312	)		(8	)
Provision for income taxes		797			1			703			1
Net loss	$	(187	)		(0	)%	$	(11,015	)		(9	)%

The following table sets forth share-based compensation expense included in our results of operations for the periods indicated:


	Six Months Ended February 28,
	2022		2021
Cost of subscription revenue	$	163	$	212
Cost of maintenance and support revenue		17		15
Cost of professional services revenue		253		1,750
Research and development		742		1,220
Sales and marketing		388		2,294
General and administrative		2,759		2,117
Total share-based compensation expense	$	4,322	$	7,608

Revenue

Subscription

Subscription revenue increased $16.8 million, or 29%, during the six months ended February 28, 2022 versus the six months ended February 28, 2021, due to a combination of sales to new customers and increased revenue generated from existing customers, which includes sales of new services and contractual growth.

License

License revenue increased $1.6 million, or 33%, during the six months ended February 28, 2022 versus the six months ended February 28, 2021 primarily due to timing of existing customer renewals, including multi-year license renewals which did not occur in the prior period.

Maintenance and Support

Maintenance and support revenue increased $0.4 million, or 3%, during the six months ended February 28, 2022 versus the six months ended February 28, 2021 primarily due to renewal term increases of maintenance and support fees charged to customers during the period.

Professional services

Professional services revenue increased $9.5 million, or 21%, during the six months ended February 28, 2022 versus the six months ended February 28, 2021 primarily due to continued work on several large implementation projects and growth of our existing software customer base, partially offset by a decrease from completed project implementations.

Cost of Revenue

Cost of revenue increased $10.5 million, or 20%, in the six months ended February 28, 2022 compared to the six months ended February 28, 2021.

Cost of Subscriptions

Cost of subscription revenue increased $7.3 million, or 34%, during the six months ended February 28, 2022 versus the six months ended February 28, 2021 primarily due to an increase in SaaS customers, and is comprised of a $4.2 million increase in hosting costs due to usage increase, a $2.0 million increase in payroll and related costs, and a $0.8 million increase in computer hardware and software costs.

Cost of License

Cost of license revenue decreased $0.2 million, or 21% in the six months ended February 28, 2022 versus the six months ended February 28, 2021 primarily due to a decrease in the amount of amortization on previously acquired technology intangible assets.

Cost of Maintenance and Support

Cost of maintenance and support revenue increased $0.2 million, or 10%, in the six months ended February 28, 2022 versus the six months ended February 28, 2021 primarily due to an increase in personnel-related costs required to support our term and perpetual license customers.

Cost of Professional Services

Cost of professional services revenue increased $3.1 million, or 11%, in the six months ended February 28, 2022 versus the six months ended February 28, 2021, mainly attributable to an increase of $3.5 million in payroll and related costs, driven by increased headcount and contingent labor increased $1.1 million. These increases were partially offset by a $1.5 million decrease in share-based compensation expense.

Gross Margins

Gross margins increased $17.8 million, or 26%, in the six months ended February 28, 2022 versus the six months ended February 28, 2021, primarily due to a $9.4 million increase in subscription gross margin, a $6.3 million increase in professional services gross margin, a $1.8 million increase in license gross margin, and a nominal increase in maintenance and support gross margin. The increase in subscription gross margins was driven by strong growth in subscription revenue.

Our gross margin percentage increased to 58% from 57% in the six months ended February 28, 2022 versus the six months ended February 28, 2021. The subscription gross margin percentage experience a nominal decrease to 62% from 63%, professional services gross margin percentage increased to 43% from 38% and license gross margin percentage increased to 90% from 83% while maintenance and support gross margin percentage experienced a nominal decrease to 85% from 86%.

Operating Expenses

Research and Development Expense

Research and development expense increased $2.9 million, or 12%, during the six months ended February 28, 2022 versus the six months ended February 28, 2021 primarily due to a $2.6 million increase in payroll costs from increased headcount and $0.4 million increase in hosting costs. These increases were partially offset by a $0.5 million decrease in share-based compensation expense.

Sales and Marketing Expense

Sales and marketing expense remained consistent for the six months ended February 28, 2022 versus the six months ended February 28, 2021, primarily due to an increase of $1.6 million in payroll and bonus costs from increased headcount, a $0.4 million increase in recruiting, and a $0.4 million increase in travel and entertainment. These increases were offset by a $1.9 million decrease in share-based compensation and a $0.5 million decrease in marketing programs spend.

General and Administrative Expense

General and administrative expense increased $2.8 million, or 10%, in the six months ended February 28, 2022 versus the six months ended February 28, 2021, primarily due to a $2.2 million increase in allowance for credit losses, a $0.6 million increase in share-based compensation expense, a $0.5 million increase related to computer hardware and software expenses, a $0.3 million increase on losses from the disposal of fixed assets, and a $0.3 million increase in insurance expense. These increases were partially offset by a $0.9 million decrease in professional services expense and a $0.5 million decrease in facilities.

Change in Fair Value of Contingent Consideration

Other Income (Expense), Net

Other income (expense), net decreased $1.2 million, or 257% during the six months ended February 28, 2022 as compared to the six months ended February 28, 2021, primarily due to fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar, partially offset by a $0.1 million gain on the derecognition of a lease liability.

Interest Expense, Net

Interest expense, net decreased $0.1 million, or 89% during the six months ended February 28, 2022 versus the six months ended February 28, 2021. Interest expense consists of fees paid to maintain the revolving credit facility, though there were no outstanding borrowings in either period. These expenses were partially offset by interest income received from cash, cash equivalents, and short-term investments during the period.

Provision for Income Taxes

Provision for income taxes increased 13% in the six months ended February 28, 2022 versus the six months ended February 28, 2021 primarily due to the impact of goodwill amortized for tax not for book, impact of higher profits in foreign subsidiaries and state taxes.

Liquidity and Capital

To date, we have financed our operations primarily through cash provided by operating activities, our revolving credit facility, and, most recently, through net proceeds received from our IPO. As of February 28, 2022, we had $348.6 million in cash and cash equivalents, no outstanding borrowings under our revolving credit facility, and $0.8 million of outstanding letters of credit. We also had $44.2 million of additional principal availability under our revolving credit facility. We believe that our existing cash and cash equivalents, together with cash provided by operating activities and amounts available under our revolving credit facility, will be sufficient to meet our operating working capital and capital expenditure requirements over at least the next twelve months. Our future

cash requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of our spending to support our research and development efforts, investments in cloud infrastructure and operating costs, and expansion into other markets. At any given time, we may be evaluating one or more potential investments in, or acquisitions of, businesses or technologies, which could require us to seek additional equity or debt financing. Additional sources of liquidity and capital resources, including equity or debt financing, may not be available on terms favorable to us or at all.

As of February 28, 2022, $121.9 million of cash was held by our foreign subsidiaries. Of this cash balance, $100.0 million is the result of repaying an intercompany loan during the three months ended November 30, 2021 and is held in a U.S. dollar-based bank account. We currently do not anticipate a need to repatriate these funds to finance our U.S. operations; however, we may utilize all or part of the $100.0 million to finance future acquisitions.

Summary of Cash Flows for the Six Months Ended February 28, 2022 and 2021

The following summarizes our cash flows from operating, investing and financing activities for the periods indicated:


	Six Months Ended February 28,
($ in thousands)	2022			2021
Net cash used in operating activities	$	(23,026	)	$	(23,093	)
Net cash provided by (used in) investing activities		190,657			(289,334	)
Net cash used in financing activities		(4,696	)		(1,377	)
Net increase (decrease) in cash and cash equivalents		162,935			(313,804	)
Cash and cash equivalents – beginning of period		185,657			389,878
Cash and cash equivalents – end of period	$	348,592		$	76,074

Operating Activities

We used $23.0 million of cash from operating activities during the six months ended February 28, 2022, resulting from our net income, after including the impact of non-cash benefits, of $16.2 million and $39.2 million of cash used in working capital activities. Cash used in working capital activities during the six months ended February 28, 2022 was primarily due to annual bonus payments of $18.8 million, an increase in accounts receivable and unbilled revenue of $11.4 million, an increase in prepaid expenses of $3.6 million, and a decrease in deferred revenue of $5.4 million.

We used $23.1 million of cash from operating activities during the six months ended February 28, 2021, resulting from our net income, after including the impact of non-cash benefits, of $7.0 million and $30.1 million of cash used in working capital activities. Cash used in working capital activities during the six months ended February 28, 2021 was primarily due to annual bonus payments of $18.2 million and Phantom unit settlement payments of $6.9 million as result of our IPO in the prior period.

Non-cash charges in all periods include depreciation and amortization, share-based compensation expense, deferred taxes, and change in fair value of contingent earn-out liability.

Investing Activities

We had cash provided by investing activities of $190.7 million during the six months ended February 28, 2022 compared to cash used in investing activities of $289.3 million in the six months ended February 28, 2021. During the six months ended February 28, 2022, we had maturities of short-term investments of $191.9 million compared to purchases of short-term investments of $287.9 million in the six months ended February 28, 2021.

In the six months ended February 28, 2022, we spent cash of $0.6 million on purchases of property, plant and equipment, compared to $0.7 million during the six months ended February 28, 2021. Additionally, our capitalized costs for internal use software were $0.7 million during the six months ended February 28, 2022 compared to $0.8 million during the six months ended February 28, 2021.

Financing Activities

We used $4.7 million of cash in financing activities during the six months ended February 28, 2022, compared to cash used in financing activities of $1.4 million during the six months ended February 28, 2021. Cash used in financing activities during the six months ended February 28, 2022 primarily related to a $3.9 million contingent earnout liability payment, as compared to a $1.9

million contingent earnout liability payment in the prior year. During the six months ended February 28, 2021, the Company made $3.7 million in payments of deferred IPO costs and received $3.5 million in proceeds from a follow-on offering.

Other Financial Data and Key Metrics

Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States (“GAAP”); however, management believes evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP financial measures. Specifically, management reviews Adjusted EBITDA, Free Cash Flow, Non-GAAP Gross Margin, Non-GAAP Income from Operations and Non-GAAP Net Income (Loss), each of which is a non-GAAP financial measure, to manage our business, make planning decisions, evaluate our performance and allocate resources and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time.

We believe that Adjusted EBITDA, Free Cash Flow, Non-GAAP Gross Margin, Non-GAAP Income from Operations and Non-GAAP Net Income (Loss) help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, including net income and cash flows from operating activities. For example, with respect to Adjusted EBITDA, some of these limitations include:

•

it does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

•

it does not reflect changes in, or cash requirements for, our working capital needs;

•

it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

•

it does not reflect our income tax expense or the cash requirements to pay our taxes; and

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

These non-GAAP financial measures are not universally consistent calculations, limiting their usefulness as comparative measures. Other companies may calculate similarly titled financial measures differently than we do or may not calculate them at all. Additionally, these non-GAAP financial measures are not measurements of financial performance or liquidity under GAAP. In order to facilitate a clear understanding of our consolidated historical operating results, you should examine our non-GAAP financial measures in conjunction with our historical combined financial statements and notes thereto included elsewhere in this Quarterly Report.

The non-GAAP financial measures and principal metrics we use in managing our business are set forth below:

Adjusted EBITDA. We define Adjusted EBITDA as net loss before interest expense, net; other income (expense), net; provision for income taxes; depreciation of property and equipment; amortization of intangible assets; share-based compensation expense; and the change in fair value of contingent consideration. We believe Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Adjusted EBITDA was $7.3 million and $3.0 million for the three months ended February 28, 2022 and 2021,

respectively, and $15.1 million and $6.6 million for the six months ended February 28, 2022 and 2021, respectively. A reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, is presented below for the periods indicated.


	Three Months Ended February 28,						Six Months Ended February 28,
($ in thousands)	2022			2021			2022			2021
GAAP Net loss	$	(879	)	$	(6,364	)	$	(187	)	$	(11,015	)
Provision for income taxes		423			388			797			703
Other income (expense), net		32			(510	)		728			(463	)
Interest expense, net		35			38			153			81
Depreciation of property and equipment		660			800			1,364			1,587
Amortization of intangible assets		3,904			3,994			7,833			7,988
Share-based compensation expense		3,110			4,516			4,322			7,608
Change in fair value of contingent earnout liability		—			95			67			98
Adjusted EBITDA	$	7,285		$	2,957		$	15,077		$	6,587
Adjusted EBITDA as a percent of total revenue		10	%		5	%		10	%		5	%

Free Cash Flow. We define Free Cash Flow as net cash provided by operating activities, less purchases of property and equipment and capitalized internal-use software. We consider Free Cash Flow to be an important measure in facilitating period-to-period comparisons of liquidity. We use Free Cash Flow in conjunction with traditional GAAP measures as part of our overall assessment of liquidity. Free Cash Flow was $1.2 million and ($1.6) million for the three months ended February 28, 2022 and 2021, respectively, and ($24.3) million and ($24.5) million for the six months ended February 28, 2022 and 2021, respectively. A reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure, is presented below for the periods indicated.


	Three Months Ended February 28,						Six Months Ended February 28,
($ in thousands)	2022			2021			2022			2021
Net cash provided by (used in) operating activities	$	1,577		$	(921	)	$	(23,026	)	$	(23,093	)
Purchases of property and equipment		(33	)		(484	)		(573	)		(672	)
Capitalized internal-use software		(321	)		(214	)		(687	)		(750	)
Free Cash Flow	$	1,223		$	(1,619	)	$	(24,286	)	$	(24,515	)

Non-GAAP Gross Margin. We define Non-GAAP Gross Margin as GAAP gross margin before the portion of share-based compensation expense; amortization of intangible assets; and amortization of capitalized internal-use software that is included in cost of revenue. We believe Non-GAAP Gross Margin provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of gross margin. Non-GAAP Gross Margin was $46.5 million and $38.1 million for the three months ended February 28, 2022 and 2021, respectively, and $90.6 million and $74.3 million for the six months ended February 28, 2022 and 2021, respectively. A reconciliation of Non-GAAP Gross Margin to gross margin, the most directly comparable GAAP financial measure, is presented below for the periods indicated.


	Three Months Ended February 28,				Six Months Ended February 28,
($ in thousands)	2022		2021		2022		2021
GAAP Gross Margin	$	44,329	$	35,110	$	86,799	$	68,986
Share-based compensation expense		483		1,280		433		1,977
Amortization of intangible assets		1,097		1,186		2,218		2,372
Amortization of capitalized internal-use software		561		498		1,122		996
Non-GAAP Gross Margin	$	46,470	$	38,074	$	90,572	$	74,331

Non-GAAP Income from Operations. We define Non-GAAP Income from Operations as GAAP loss from operations before share-based compensation expense; amortization of intangible assets; and the change in fair value of contingent consideration. We believe Non-GAAP Income from Operations provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Non-GAAP Income from Operations was $6.6 million and $2.2 million for the three months ended February 28, 2022 and 2021, respectively, and $13.7 million and $5.0 million for the six months ended February 28, 2022 and 2021, respectively. A reconciliation of Non-GAAP Income from Operations to loss from operations, the most directly comparable GAAP financial measure, is presented below for the periods indicated.


	Three Months Ended February 28,						Six Months Ended February 28,
($ in thousands)	2022			2021			2022		2021
GAAP Income (Loss) from Operations	$	(389	)	$	(6,448	)	$	1,491	$	(10,694	)
Share-based compensation expense		3,110			4,516			4,322		7,608
Amortization of intangible assets		3,904			3,994			7,833		7,988
Change in fair value of contingent earnout liability		—			95			67		98
Non-GAAP Income from Operations	$	6,625		$	2,157		$	13,713	$	5,000

Non-GAAP Net Income (Loss). We define Non-GAAP Net Income as GAAP net loss before share-based compensation expense; amortization of intangible assets; and change in fair value of contingent earnout liability. We believe Non-GAAP Net Income provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Non-GAAP Net Income was $5.0 million and $2.0 million for the three months ended February 28, 2022 and 2021, respectively, and $9.8 million and $4.1 million for the six months ended February 28, 2022 and 2021, respectively. A reconciliation of Non-GAAP Net Income to net loss, the most directly comparable GAAP financial measure, is presented below for the periods indicated.


	Three Months Ended February 28,												Six Months Ended February 28,
($ in thousands)	2022			Per Share			2021			Per Share			2022			Per Share			2021			Per Share
GAAP Net loss	$	(879	)	$	(0.01	)	$	(6,364	)	$	(0.05	)	$	(187	)	$	(0.00	)	$	(11,015	)	$	(0.08	)
Add: GAAP tax provision (1)		423						388						797						703
GAAP pre-tax income (loss)		(456	)					(5,976	)					610						(10,312	)
Share-based compensation expense		3,110						4,516						4,322						7,608
Amortization of intangible assets		3,904						3,994						7,833						7,988
Change in fair value of contingent earnout liability		—						95						67						98
Non-GAAP pre-tax income		6,558						2,629						12,832						5,382
Non-GAAP tax provision applied at a 24% tax rate (1)		1,574						631						3,080						1,292
Non-GAAP Net Income (1)	$	4,984		$	0.04		$	1,998		$	0.01		$	9,752		$	0.07		$	4,090		$	0.03

Shares used in computing Non-GAAP income per share amounts (2):
GAAP weighted-average shares - basic and diluted		132,103,016						130,982,116						132,057,733						130,851,680
Non-GAAP dilutive shares (using the treasury stock method)		1,619,702						2,810,693						1,619,702						2,810,693
Non-GAAP weighted-average shares - diluted		133,722,718						133,792,809						133,677,435						133,662,373

(1)

Our GAAP tax provision is primarily related to state taxes and income taxes in profitable foreign jurisdictions. We maintain a full valuation allowance against our deferred tax assets in the U.S. For purposes of determining our Non-GAAP Net Income, we have applied a tax rate of 24% which represents our estimated effective tax rate.

(2)

For all periods presented, the Company had a GAAP net loss and non-GAAP net income. As such, outstanding potential shares of common stock are only included for the calculation of Non-GAAP earnings per share since these shares would be anti-dilutive for the calculation of GAAP earnings per share.

SaaS Net Dollar Retention Rate. We calculate SaaS Net Dollar Retention Rate by annualizing the recurring subscription revenue recorded in the last month of the measurement period for those revenue-generating customers in place throughout the entire measurement period (the latest twelve-month period). We divide the result by annualized SaaS revenue from the month that is immediately prior to the beginning of the measurement period, for all revenue-generating customers in place at the beginning of the measurement period. Our SaaS Net Dollar Retention Rate was 115.5% and 120.7% as of February 28, 2022 and 2021, respectively. Our calculation excludes one existing contract for a service no longer offered on a standalone basis by the Company. We believe SaaS Net Dollar Retention Rate is an important metric for the Company because, in addition to providing a measure of retention, it indicates our ability to grow revenue within existing customer accounts. SaaS Net Dollar Retention Rate is included in a set of metrics that we calculate quarterly to review with management as well as periodically with members of our board of directors.

SaaS Annual Recurring Revenue (“SaaS ARR”). We calculate SaaS ARR by annualizing the recurring subscription revenue recognized in the last month of the measurement period (the latest twelve-month period). Our SaaS ARR was $151.4 million and $118.1 million as of February 28, 2022 and 2021, respectively. Our calculation excludes one existing contract for a service no longer offered on a standalone basis by the Company. We believe SaaS ARR provides important information about our ability to acquire new subscription SaaS customers and to maintain and expand our relationship with existing subscription SaaS customers. SaaS ARR is included in a set of metrics that we calculate quarterly to review with management as well as periodically with members of our board of directors.

Indebtedness

On October 4, 2016, we entered into a credit agreement with a group of lenders for a revolving credit facility with a maximum borrowing capacity of $30.0 million that was originally scheduled to mature on October 4, 2019. On October 2, 2019, we amended certain of the financial covenants and extended our credit agreement for two years to a maturity date of October 2, 2021. On October 22, 2021, the Company executed an amended and restated credit agreement for its revolving credit facility with a five-year term, increasing its maximum borrowing capacity from $30.0 million to $45.0 million.

Our revolving credit facility is guaranteed by the Company and certain of its domestic subsidiaries and secured by substantially all of our tangible and intangible assets. Interest accrues on our revolving credit facility at a variable rate based upon the type of borrowing made by us. Loans under our revolving credit facility bear interest at a rate of LIBOR (as administered by ICE Benchmark Administration) plus an applicable margin, or incur interest at the higher of: (i) the Prime Rate, (2) the Fed Funds Rate plus 0.5%, or (3) LIBOR plus 1.0%, plus an applicable margin. The applicable margin ranges from 1.0% to 2.0% depending on the interest rate basis and type of borrowing elected (eurocurrency rate loan, base rate loan, swing rate loan or letter of credit). In addition to interest on our revolving credit facility, we pay a commitment fee of 0.5% per annum on the unused portion of our revolving credit facility, as well as customary letter of credit fees. Repayment of any amounts borrowed are not required until maturity of our revolving credit facility, however we may repay any amounts borrowed at any time, without premium or penalty.

We incurred $0.7 million of costs directly related to obtaining our revolving credit facility which have been recorded as deferred financing fees and are amortized to legal expense on a straight-line basis over the term of our revolving credit facility. During fiscal 2017, we executed an irrevocable standby letter of credit totaling $0.8 million against our revolving credit facility in lieu of a cash security deposit for one of our office leases. Two additional irrevocable standby letters of credit were executed during fiscal 2019 for $0.2 million and $0.1 million, respectively, against our revolving credit facility in lieu of cash deposits for two of our office leases. In fiscal 2020, the $0.2 million letter of credit was reduced by $0.1 million. Apart from the letters of credit, we did not have any borrowings outstanding on our revolving credit facility as of February 28, 2022 and 2021.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements, as defined in Regulation S-K, Item 303(a)(4)(ii) promulgated by the SEC under the Securities Act, in the six months ended February 28, 2022 and 2021, respectively.

Critical Accounting Policies and Estimates

The process of preparing our financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Actual amounts may differ from these estimates and judgments. A summary of our significant accounting policies is contained in Note 2 of our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended August 31, 2021 filed with the SEC on October 29, 2021.

Recent Accounting Pronouncements

A summary of recent accounting pronouncements and our assessment of any expected impact of these pronouncements if known is included in Note 2 of our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business, including interest rate and foreign currency exchange risks.

Interest Rate Risk

As of February 28, 2022, our cash and cash equivalents balance did not include any restricted cash, and we had no outstanding indebtedness under our revolving credit facility.

To date, we have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

Foreign Currency Exchange Risk

Our reporting currency is the U.S. dollar, and the functional currency of each of our subsidiaries is the U.S. dollar. Gains or losses due to transactions in foreign currencies are included in “Other Income (Expense)” in our consolidated statements of operations. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future. We do not believe that a 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on operating results.

Our market risks, and the way we manage them, are summarized in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the fiscal year ended August 31, 2021 (filed October 29, 2021). There have been no material changes to our market risks or to our management of such risks as of February 28, 2022.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of February 28, 2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

In the ordinary course of conducting our business, we have in the past and may in the future become involved in various legal actions and other claims. We may also become involved in other judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our businesses. Some of these matters may involve claims of substantial amounts. These legal proceedings may be subject to many uncertainties and there can be no assurance of the outcome of any individual proceedings. Although the outcomes of legal proceedings are inherently difficult to predict, we are not currently involved in any material legal proceedings that, if determined adversely to us, would have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors.

Our business involves significant risks. You should carefully consider the risks described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2021. If any of these risks or uncertainties actually occur, our business, financial condition, prospects, results of operations and cash flow could be materially and adversely affected. In that case, the market price of our common stock could decline. These risks are not the only risks we face. Additional risks or uncertainties not currently known to us, or that we currently deem immaterial, may also have a material adverse effect on our business, financial condition, prospects, results of operations or cash flows, as well as the market price of our securities. We cannot assure you that any of the events discussed in the risk factors will not occur.

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

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.


Exhibit Number		Description

10.1*		Employment Agreement, dated as of February 26, 2022 and effective as of April 4, 2022, by and between Duck Creek Technologies LLC and Kevin R. Rhodes

10.2*		Amendment to Employment Agreement, dated as of March 31, 2022, by and between Duck Creek Technologies LLC and Eugene Van Biert, Jr.

10.3*		Employment Agreement, dated as of November 6, 2016, by and between Duck Creek Technologies LLC and Eugene Van Biert, Jr.

10.4*		Employment Agreement, dated as of August 3, 2020, by and between Duck Creek Technologies LLC and Eva F. Harris (formerly Huston).

31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Inline XBRL Instance Document

101.SCH		Inline Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith.

† Compensatory plan or arrangement.

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.


	Duck Creek Technologies, Inc.

Date: April 7, 2022	By:	/s/ Michael A. Jackowski
		Michael A. Jackowski
		Chief Executive Officer
		(principal executive officer)

Date: April 7, 2022	By:	/s/ Kevin R. Rhodes
		Kevin R. Rhodes
		Chief Financial Officer
		(principal financial officer and principal accounting officer)