# Clearwater Analytics Holdings, Inc. (CWAN) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Clearwater Analytics Holdings, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1866368/000095017023005990/cwan-20221231.htm
Accession: 0000950170-23-005990
Filing date: 2023-03-03
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CWAN/
All MD&A years: /company/CWAN/mda/
Previous year: /company/CWAN/mda/fy2021/ (FY 2021)
Next year: /company/CWAN/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Overview

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

We provide investment accounting and reporting, performance measurement, compliance monitoring and risk analytics solutions for asset managers, insurance companies and large corporations. Every day, Clearwater’s powerful platform aggregates and normalizes data on over $6.4 trillion of global invested assets for over 1,200 clients. We bring modern software to an industry that has long been dominated by difficult-to-use, high cost legacy technologies and processes, which often lack data integrity and traceability, and often require significant manual intervention. The strength of our platform is demonstrated by our approximately 80% win rate for new clients over the prior four years in deals that reached the proposal stage.

We allow our clients to replace legacy systems with modern cloud-native software. Our platform helps clients reduce cost, time, errors and risk and allows them to reallocate resources to other value-creating activities. Our software aggregates, reconciles and validates data from more than 2,800 daily data feeds and more than four million securities that have been modeled across multiple currencies, asset classes and countries. This cleansed and validated data runs through our proprietary accounting, performance, compliance and risk solutions to provide clients with powerful analytics and daily or on-demand configurable reporting. We offer multi-asset class, multi-basis, multi-currency accounting and analytics that provide clients with a comprehensive view of their holdings and related performance. This allows our clients to make better, more timely decisions about their investment portfolios.

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

We have a 100% recurring revenue model, excluding license related revenue from the JUMP acquisition. We charge our clients a fee that is primarily based on the amount of assets they manage on our platform, subject to contracted minimums. A majority of the assets on our platform are high-grade fixed income assets, leading to very low levels of volatility and highly predictable revenue streams. In 2022, we transitioned our contracting structure to a framework we describe as Base+ for all new clients. A Base+ contract framework includes a base fee for a prospective or existing client’s book of business plus an incremental fee for increases in assets on the platform. This structure is designed to limit the downside volatility in our asset-based fees. We also began to amend contracts with our existing clients to either modify the structure of such contracts from a pure asset-based fee to this Base+ model or to increase the basis point price. Throughout 2022, 80% of our clients (based on percentage of annual recurring revenue) either modified their contracts to Base+ or agreed to price increases under their existing contracts. The Base+ model includes annual increases in the base fee and enable us to charge additional fees for supplemental services provided for certain alternative asset classes (e.g., LPx) or additional products (e.g. Prism, Performance Plus) should the client choose to utilize those services.

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Recent Developments

Acquisition of JUMP Technology

On November 30, 2022, the Company completed its acquisition of JUMP Technology, a Paris, France-based provider of investment management software. With the addition of JUMP, Clearwater Analytics positions itself to become a provider of end-to-end solutions to investment management companies globally. JUMP is a leading provider of investment management software in France and several other countries in Europe. Covering the entire investment management value chain, JUMP’s solutions can be customized for investment management companies, private banks, family offices, insurers, and institutional investors.

The total purchase consideration for the acquisition of JUMP is €75 million cash. A total of €67.5 million cash was paid as purchase consideration upon completion of the acquisition. The Share Purchase Agreement includes an indemnification holdback which requires the remaining €7.5 million cash to be paid as purchase consideration over the subsequent two years subject to no indemnification claims being submitted. We expensed acquisition-related costs in the amount of $1.7 million in general and administrative expenses in 2022.

Initial Public Offering

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

Transactions

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

•
the amendment and restatement of the limited liability company agreement of CWAN Holdings to, among other things, appoint Clearwater Analytics Holdings, Inc. as the sole managing member of CWAN Holdings and provide certain exchange and redemption rights to direct or indirect holders of interests in CWAN Holdings and/or our Class B common stock, Class C common stock and/or Class D common stock immediately following consummation of the Transactions, including the Principal Equity Owners, and certain of our directors and officers and their respective permitted transferees (the “Continuing Equity Owners”);

•
the amendment and restatement of the certificate of incorporation of Clearwater Analytics Holdings, Inc. to create Class A, B, C and D common stock;

•
the mergers of Blocker Entities into Clearwater Analytics Holdings, Inc and the issuance of Class A

common stock, Class B common stock, Class C common stock, and Class D common stock to Blocker

Shareholders and the Continuing Equity Owners. Blocker Entities refers to entities affiliated with certain of the Continuing Equity Owners, each of which was a direct or indirect owner of LLC Interests in CWAN Holdings, LLC prior to the Transactions and was taxable as a corporation for U.S. federal income tax purposes, and Blocker Shareholders refers to entities affiliated with certain of the Continuing Equity Owners, each of which was an owner of one or more of the Blocker Entities prior to the Transactions, which exchanged their interests in the Blocker Entities for shares of our Class A common stock, in the case of Continuing Equity Owners other than the Principal Equity Owners, and for shares of our Class D common stock, in the case of the Principal Equity Owners, in connection with the consummation of the Transactions;

•
the issue of 11,151,110 shares of Class B common stock to Continuing Equity Owners other than the Principal Equity Owners and 47,377,587 shares of Class C common stock to the Principal Equity Owners, on a one-to-one basis with the number of common units of CWAN Holdings. Holders of our Class B and Class C common stock, along with the holders of our Class A and Class D common stock have certain voting rights, but holders of our Class B and Class C common stock do not have an economic interest in the Company;

•
the issue of 130,083,755 shares of Class D common stock to the Principal Equity Owners, on a one-to-one basis, with the number of common units of CWAN Holdings. Holders of Class D common stock have certain voting rights and are entitled to an economic interest in the Company;

•
the execution of the Tax Receivable Agreement, by and among Clearwater Analytics Holdings, Inc., CWAN Holdings, LLC and the other parties thereto (the “Tax Receivable Agreement” or “TRA”) (refer to Note 16 “Income Taxes” in the notes to our audited consolidated financial statements of this Annual Report).

41

New Credit Agreement

In connection with the closing of the IPO, Clearwater Analytics, LLC entered into a new credit agreement with JPMorgan Chase Bank, N.A. that included a $55 million New Term Loan and a $125 million Revolving Facility. The New Term Loan and Revolving Facility will be used for working capital and other general corporate purposes (including acquisitions permitted under the New Credit Agreement).

Previous Credit Agreement

On October 19, 2020, we entered into the Fifth Amendment to the Credit Agreement with Ares Capital Corporation and Golub Capital LLC. The agreement provided for a total term loan of $435 million and revolving line of credit of $30 million. Under the terms of the Fifth Amendment to the Credit Agreement, we were required to maintain certain customary affirmative and negative covenants, including covenants that limited our ability to, among other things, incur indebtedness, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions. We were also required to maintain compliance with a consolidated net leverage ratio. The line of credit and term note agreements also included customary events of default.

The outstanding borrowings under the Fifth Amendment to the Credit Agreement of $432.7 million were repaid in full in September 2021 in connection with the closing of the IPO. The repayment of the borrowings resulted in a loss on extinguishment of $10.3 million.

Recapitalization

On November 2, 2020, the Company completed a recapitalization transaction on behalf of existing unitholders of CWAN Holdings, LLC. The transaction allowed existing unitholders to sell their units to new investors. In addition, option holders were offered the opportunity to exercise and sell a portion of their vested options, which were accelerated in certain cases (See Note 14, Equity-Based Compensation – Modification of option awards). In total 132,658,542 units transferred ownership. After completion of the recapitalization transaction, entities ultimately controlled by WCAS maintained a majority interest in and control of the Company.

In connection with the transaction, selling unitholders contributed $49.0 million for bonuses paid to employees and related payroll taxes in 2020.

Key Factors Affecting Our Performance

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

•
Adding New Clients in Established End Markets: Our future growth is dependent upon our ability to continue to add new clients, and in 2022 we added over 130 new clients. We are focused on continuing to increase our client base in our established client end-markets of corporations, insurance companies and asset managers, and doing so with increasingly large and sophisticated clients. As we add clients, it takes time to fully onboard their assets to the platform. Our revenue generally increases as assets are added to the platform, while the effort to serve the client is relatively consistent over time. Therefore, we expect revenues and gross margins to increase for a client as the client transitions from the onboarding process to a steady state once assets have been onboarded. In any period, our gross margins may fluctuate based on the relative size and number of clients that we are onboarding at that time.

•
Expanding and Retaining Relationships with Existing Clients: Our future growth is dependent upon retaining our existing clients and expanding our relationships with these clients through increases in the amount of their assets on our platform. We have enjoyed consistent gross revenue retention rates of approximately 98% over the past sixteen quarters. The consistency in revenue retention creates predictability in our business and enables us to better plan our future investments. Our relationships with our clients expands as these clients add more assets to our platform, with our net revenue retention rates (as defined below under “—Key Operating Measures”) between 103% and 107% in 2022. Clients may add assets as a result of acquiring new clients themselves or by acquiring new businesses or simply through organic growth, which produces additional assets that they manage using our platform. We believe that our client service model and technology platform are strong contributing factors in our attractive retention rates. As such, we expect to continue to invest in both our operations and research and development functions to maintain and increase our high levels of client satisfaction, which we believe will lead to strong client retention and expansion.

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•
International Expansion: We believe that the value provided by our platform is equally applicable to asset owners and asset managers outside of North America, and there is a significant opportunity to expand our client base and usage of our platform internationally. Our future growth is dependent upon our ability to successfully enter new international markets and to expand our client base in our current international markets. Our cost to acquire clients in international markets is currently greater than in North America because there is less awareness of the Clearwater brand and our product capabilities, and we have to date invested less in sales and marketing internationally. For these reasons, we expect to invest more in sales and marketing in international markets relative to North America in order to achieve growth in these international markets.

•
Adding New Clients in Adjacent or Nascent End-Markets: Our strategy is to also add new clients in our more nascent end-markets, which include state and local governments, pension funds and sovereign wealth funds, as well as a variety of alternative asset managers. Traditionally, our existing clients have been among our best resources for referring new clients to us, and we will continue to invest in sales and marketing to build awareness of our brand, engage prospective clients and drive adoption of our platform, particularly as it relates to expanding into new end-markets. As we establish our presence in new end-markets, we expect sales and marketing expenditures will be less efficient than in our established verticals and we will become increasingly more efficient at acquiring clients in new end-markets over time.

•
Expanding Solutions and Broadening Innovation: Our future growth is dependent upon our continued expansion of our solutions in order to better retain our current clients and to develop new use cases that appeal to new clients. While we believe we will be able to reduce our research and development expenses as a percentage of revenues as we achieve greater scale, our priority is to maintain and grow our technological advantage over our competitors. As we identify opportunities to increase our technological and competitive advantages, we may increase our investments in research and development at rates that are faster than our growth in revenues in order to enhance our long-term growth and profitability.

•
Fluctuations in the Market Value of Assets on the Platform: We generally bill our clients monthly in arrears based on a basis point rate applied to our clients’ assets on our platform, which can be influenced by general economic conditions. While 77% of the assets on our platform were high-grade fixed income securities and structured products as of December 31, 2022 and traditionally subject to lower levels of volatility, the value of our clients’ assets on our platform varies on a daily basis due to changes in securities prices, cash flow needs, incremental buying and selling of assets and other strategic priorities of our clients. For these reasons, our revenue is subject to fluctuations based on economic conditions, including market conditions and the changing interest rate environment.

Key Components of Results of Operations

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

Revenue

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

Cost of Revenue

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

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Operating Expenses

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

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

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

Interest (Income) Expense, Net

Interest expense reflects interest accrued on our outstanding term loans under the New Credit Agreement and Previous Credit Agreement during the course of the applicable period. The accrual of interest varies depending on the timing and amount of borrowings and repayments during the period as well as fluctuations in interest rates. Interest income relates to interest received on our cash and cash equivalents based on interest rates in the course of the applicable period.

Tax Receivable Agreement Expense

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

Loss on Debt Extinguishment

Loss on debt extinguishment related to the early repayment of borrowings under the Previous Credit Agreement. The debt was extinguished on September 28, 2021 in connection with the closing of the IPO.

Other (Income) Expense, Net

Other (income) expense, net relates to foreign currency gains and losses.

Provision for Income Taxes

Provision for income taxes consists of income taxes related to federal, state, and foreign jurisdictions where we conduct our business, net of our valuation allowance. Our effective tax rate may increase in the future as our ownership in CWAN Holdings increases via exchanges from historical partners. In addition, our discrete items (e.g. changes in tax rates or laws, equity-based compensation deductions, or mix of income between tax jurisdictions) may not be consistent from year to year and could cause volatility in our effective tax rate.

Key Operating Measures

We consider certain operating measures, such as annualized recurring revenue, gross retention rates and net retention rates, in measuring the performance of our business.

Annualized Recurring Revenue

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

44

The following table summarizes the Company’s annualized recurring revenue as of the dates presented:

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[[/GREPCENT_TABLE]]

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

Annualized recurring revenue increased 14% from December 31, 2021 to December 31, 2022 on account of growth in our client base as we brought new clients onto our platform and also added additional assets onto our platform from existing clients. The increase in annualized recurring revenue was partially offset by the decreases in client’s assets on the platform from decreases in fixed income and equity security prices during 2022, which we estimate resulted in a 5% reduction in the growth of annualized recurring revenue.

Revenue Retention Rate

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

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

The following table summarizes our retention rates as of the dates presented:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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

Net revenue retention rate as of December 31, 2022 was 106% which represents growth in clients on our platform of 6% year over year. Net revenue retention rate as of December 31, 2022 decreased compared to net revenue retention rate as of December 31, 2021 primarily due to decreases in the market value of assets which clients maintain on our platform.

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Non-GAAP Financial Measures

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

Adjusted EBITDA and Adjusted EBITDA Margin

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

The following table reconciles net loss to Adjusted EBITDA and includes amounts expressed as a percentage of revenue for the periods indicated.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

(1)
Other expenses includes management fees to our investors, income taxes, foreign exchange gains and losses and other expenses that are not reflective of our core operating performance including the costs to set up our Up-C structure and Tax Receivable Agreement, and transaction expenses which include legal, accounting, banking, consulting, diligence, and other expenses related to completed and contemplated acquisitions.

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[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","(in thousands)"],["Up-C structure expenses","","$","158","","","$","1,660","","","$","\u2014"],["Transaction expenses","","","1,711","","","","\u2014","","","","\u2014"],["Amortization of prepaid management fees and reimbursable expenses","","","2,486","","","","2,367","","","","1,597"],["Provision for income taxes","","","1,360","","","","487","","","","902"],["Miscellaneous","","","(50",")","","","83","","","","56"],["Total other expenses","","$","5,665","","","$","4,597","","","$","2,555"]]
[[/GREPCENT_TABLE]]

Results of Operations

The following tables set forth our results of operations for the years ended December 31, 2022, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Revenue","","$","303,426","","","$","252,022","","","$","203,222"],["Cost of revenue(1)","","","87,784","","","","67,864","","","","53,263"],["Gross profit","","","215,642","","","","184,158","","","","149,959"],["Operating expenses:"],["Research and development(1)","","","94,120","","","","72,690","","","","55,262"],["Sales and marketing(1)","","","52,638","","","","39,065","","","","22,243"],["General and administrative(1)","","","63,767","","","","43,942","","","","43,874"],["Recapitalization compensation expenses","","","\u2014","","","","\u2014","","","","48,998"],["Total operating expenses","","","210,525","","","","155,697","","","","170,377"],["Income (loss) from operations","","","5,117","","","","28,461","","","","(20,418",")"],["Interest (income) expense, net","","","(1,137",")","","","25,682","","","","22,854"],["Tax receivable agreement expense","","","11,639","","","","\u2014","","","","\u2014"],["Loss on debt extinguishment","","","\u2014","","","","10,303","","","","\u2014"],["Other (income) expense, net","","","(50",")","","","83","","","","56"],["Loss before income taxes","","","(5,335",")","","","(7,607",")","","","(43,328",")"],["Provision for income taxes","","","1,360","","","","487","","","","902"],["Net loss","","","(6,695",")","","","(8,094",")","","","(44,230",")"],["Less: Net income attributable to noncontrolling interests","","","1,272","","","","119","","","","\u2014"],["Net loss attributable to Clearwater Analytics Holdings, Inc.","","$","(7,967",")","","$","(8,213",")","","$","\u2014"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["Cost of revenue","","$","9,043","","","$","4,786","","","$","1,669"],["Operating expenses:"],["Research and development","","","17,950","","","","10,409","","","","4,208"],["Sales and marketing","","","12,711","","","","7,059","","","","3,911"],["General and administrative","","","25,987","","","","14,441","","","","14,814"],["Total equity-based compensation expense","","$","65,691","","","$","36,695","","","$","24,602"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Revenue","","","100","%","","","100","%","","","100","%"],["Cost of revenue","","","29","%","","","27","%","","","26","%"],["Gross profit","","","71","%","","","73","%","","","74","%"],["Operating expenses:"],["Research and development","","","31","%","","","29","%","","","27","%"],["Sales and marketing","","","17","%","","","16","%","","","11","%"],["General and administrative","","","21","%","","","17","%","","","22","%"],["Recapitalization compensation expenses","","","\u2014","","","","\u2014","","","","24","%"],["Total operating expenses","","","69","%","","","62","%","","","84","%"],["Income (loss) from operations","","","2","%","","","11","%","","","(10","%)"],["Interest (income) expense, net","","","0","%","","","10","%","","","11","%"],["Tax receivable agreement expense","","","4","%","","","\u2014","","","","\u2014"],["Loss on debt extinguishment","","","\u2014","","","","4","%","","","\u2014"],["Other (income) expense, net","","","\u2014","","","","\u2014","","","","\u2014"],["Loss before income taxes","","","(2","%)","","","(3","%)","","","(21","%)"],["Provision for income taxes","","","0","%","","","0","%","","","0","%"],["Net loss","","","(2","%)","","","(3","%)","","","(22","%)"]]
[[/GREPCENT_TABLE]]

Comparison of the Years Ended December 31, 2022, 2021 and 2020

Revenue

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","(In thousands, except percentages)"],["Revenue","","$","303,426","","","$","252,022","","","$","203,222"],["Change over prior year","","","51,404","","","","48,800"],["Percent change over prior year","","","20","%","","","24","%"]]
[[/GREPCENT_TABLE]]

Revenue increased $51.4 million, or 20%, 2022 compared to 2021. The increase was on account of growth in our client base as we brought new clients onto our platform, as well as changes to our existing clients’ assets on our platform. Average assets on our platform that were billed to new and existing clients increased 15% from 2021 to 2022 while average basis point rate billed to clients increased by 2.6% from 2021 to 2022. Revenue related to JUMP was $2.7 million in 2022.

Revenue increased $48.8 million, or 24%, 2021 compared to 2020. The increase was on account of growth in our client base as we brought new clients onto our platform and also added additional assets onto our platform from existing clients. Average assets on our platform that were billed to new and existing clients increased 20% from 2020 to 2021 while average basis point rate billed to clients increased by 1.8% from 2020 to 2021.

48

Cost of Revenue

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","$ Change","","","% Change","","","2021","","","$ Change","","","% Change","","","2020"],["","","(In thousands, except percentages)"],["Equity-based compensation","","$","9,043","","","$","4,257","","","","89","%","","$","4,786","","","$","3,117","","","","187","%","","$","1,669"],["All other cost of revenue","","","78,741","","","","15,663","","","","25","%","","","63,078","","","","11,484","","","","22","%","","","51,594"],["Total cost of revenue","","$","87,784","","","$","19,920","","","","29","%","","$","67,864","","","$","14,601","","","","27","%","","$","53,263"],["Percent of revenue","","","29","%","","","","","","","","","27","%","","","","","","","","","26","%"]]
[[/GREPCENT_TABLE]]

Cost of revenue changed as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Change from December 31, 2021 to December 31, 2022","","","Change from December 31, 2020 to December 31, 2021"],["Increased payroll and related","","$","10,060","","","$","7,346"],["Increased equity-based compensation","","","4,257","","","","3,117"],["Increased depreciation and amortization","","","1,588","","","","632"],["Increased data costs","","","1,169","","","","990"],["Increased travel and entertainment","","","1,095","","","","4"],["Increased technology","","","711","","","","729"],["Increased facilities and infrastructure expenses","","","582","","","","797"],["Increased outside services and contractors","","","486","","","","1,002"],["Other items","","","(28",")","","","(16",")"],["Total change","","$","19,920","","","$","14,601"]]
[[/GREPCENT_TABLE]]

The increase in cost of revenue in 2022 was primarily due to increased payroll and related costs as a result of headcount growth of additional employees across our client services, onboarding and reconciliation teams to support a larger client base as well as increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount. Cost of revenue headcount grew at a faster rate than overall revenue growth as we continue to expand and increase our scale to support our expected continued international expansion. International revenue grew to 14% of revenues in 2022, compared to 9% in 2021. In addition, cost of revenue increased from a rise in depreciation and amortization due to the completion of internal IT projects, increased data costs to support a larger client base, increased travel and entertainment costs due to the relaxation of travel restrictions from the COVID-19 pandemic in 2022 compared to 2021, higher utilization of third-party contractors, technology and IT services on operational activities, and increased allocation of facility costs.

The increase in cost of revenue in 2021 was primarily due to increased payroll and related costs as a result of headcount growth of additional employees across our client services, onboarding and reconciliation teams to support a larger client base as well as increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount. In addition, higher utilization of third-party contractors, technology and IT services on operational activities, increased data costs to support a larger client base, and increased allocations of depreciation and facility costs increased cost of revenue.

49

Operating Expenses

Research and Development

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","$ Change","","","% Change","","","2021","","","$ Change","","","% Change","","","2020"],["","","(In thousands, except percentages)"],["Equity-based compensation","","$","17,950","","","$","7,541","","","","72","%","","$","10,409","","","$","6,201","","","","147","%","","$","4,208"],["All other research and development","","","76,170","","","","13,889","","","","22","%","","","62,281","","","","11,227","","","","22","%","","","51,054"],["Total research and development","","$","94,120","","","$","21,430","","","","29","%","","$","72,690","","","$","17,428","","","","32","%","","$","55,262"],["Percent of revenue","","","31","%","","","","","","","","","29","%","","","","","","","","","27","%"]]
[[/GREPCENT_TABLE]]

Research and development expense changed as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Change from December 31, 2021 to December 31, 2022","","","Change from December 31, 2020 to December 31, 2021"],["Increased payroll and related","","$","9,301","","","$","5,085"],["Increased equity-based compensation","","","7,541","","","","6,201"],["Increased technology","","","4,495","","","","2,187"],["Increased travel and entertainment costs","","","694","","","","92"],["Increased facilities and infrastructure expenses","","","591","","","","255"],["(Decreased) increased outside services and contractors","","","(985",")","","","3,050"],["(Decreased) increased depreciation and amortization","","","(44",")","","","576"],["Other items","","","(163",")","","","(18",")"],["Total change","","$","21,430","","","$","17,428"]]
[[/GREPCENT_TABLE]]

The increase in research and development expense in 2022 was primarily due to increased payroll and related costs as a result of headcount growth of additional employees to focus on new offerings, as well as increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount. In addition, research and development expense increased due to increased technology costs from higher utilization of third-party cloud computing and other third-party services, increased travel and entertainment costs due to the relaxation of travel restrictions from the COVID-19 pandemic in 2022 compared to 2021, and increased allocation of facilities costs. These increases were partially offset by lower utilization of third-party consultants on development activities due to a focus on internal hiring of developers, and decreased depreciation expense due to lower impairment losses on abandoned capitalized software projects.

The increase in research and development expense in 2021 was primarily due to increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount, increased payroll and related costs as a result of headcount growth of additional employees to focus on new offerings, increased technology costs from higher utilization of third-party cloud computing services and other third-party IT services, and increased allocations of facility costs and increased depreciation due to impairment losses related to abandoned capitalized software projects.

50

Sales and Marketing

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","$ Change","","","% Change","","","2021","","","$ Change","","","% Change","","","2020"],["","","(In thousands, except percentages)"],["Equity-based compensation","","$","12,711","","","$","5,652","","","","80","%","","$","7,059","","","$","3,148","","","","80","%","","$","3,911"],["All other sales and marketing","","","39,927","","","","7,921","","","","25","%","","","32,006","","","","13,674","","","","75","%","","","18,332"],["Total sales and marketing","","$","52,638","","","$","13,573","","","","35","%","","$","39,065","","","$","16,822","","","","76","%","","$","22,243"],["Percent of revenue","","","17","%","","","","","","","","","16","%","","","","","","","","","11","%"]]
[[/GREPCENT_TABLE]]

Sales and marketing expense changed as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Change from December 31, 2021 to December 31, 2022","","","Change from December 31, 2020 to December 31, 2021"],["Increased payroll and related","","$","5,677","","","$","10,926"],["Increased equity-based compensation","","","5,652","","","","3,148"],["Increased marketing","","","1,617","","","","903"],["Increased travel and entertainment","","","1,225","","","","297"],["Increased technology","","","234","","","","303"],["Increased facilities and infrastructure expenses","","","215","","","","443"],["(Decreased) increased outside services and contractors","","","(1,036",")","","","709"],["Other items","","","(11",")","","","93"],["Total change","","$","13,573","","","$","16,822"]]
[[/GREPCENT_TABLE]]

The increase in sales and marketing expense in 2022 was primarily due to increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount, as well as increased payroll and related costs as a result of additional employees to expand sales coverage. In addition, sales and marketing expense increased from higher marketing costs due to increased focus on public relations, events and branding across the globe including the in-person Clearwater Connect conference in September 2022, increased travel and entertainment costs due to the relaxation of travel restrictions from the COVID-19 pandemic in 2022 compared to 2021, increased utilization of IT services and increased allocation of facilities cost. These increases were partially offset by lower utilization of third-party consultants supporting marketing initiatives.

The increase in sales and marketing expense in 2021 was primarily due to increased payroll and related costs as a result of additional employees to expand sales coverage as well as increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount. In addition, sales and marketing expense increased from higher marketing costs due to increased focus on public relations and branding, higher utilization of third-party contractors on marketing activities, increased allocation of facility and technology costs, and increased travel and entertainment costs due to a reduction in travel restrictions related to the COVID-19 pandemic.

51

General and Administrative

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","$ Change","","","% Change","","","2021","","","$ Change","","","% Change","","","2020"],["","","(In thousands, except percentages)"],["Equity-based compensation","","$","25,987","","","$","11,546","","","","80","%","","$","14,441","","","$","(373",")","","","(3","%)","","$","14,814"],["All other general and administrative","","","37,780","","","","8,279","","","","28","%","","","29,501","","","","441","","","","2","%","","","29,060"],["Total general and administrative","","$","63,767","","","$","19,825","","","","45","%","","$","43,942","","","$","68","","","","0","%","","$","43,874"],["Percent of revenue","","","21","%","","","","","","","","","17","%","","","","","","","","","22","%"]]
[[/GREPCENT_TABLE]]

General and administrative expense changed as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Change from December 31, 2021 to December 31, 2022","","","Change from December 31, 2020 to December 31, 2021"],["Increased (decreased) equity-based compensation","","$","11,546","","","$","(373",")"],["Increased insurance","","","1,858","","","","852"],["Increase (decreased) accrued sales tax exposure","","","1,755","","","","(10,907",")"],["Increased transaction expenses","","","1,711","","","","\u2014"],["Increased technology","","","1,637","","","","919"],["Increased payroll and related","","","1,311","","","","3,445"],["Increased outside services and contractors","","","1,052","","","","3,767"],["Increased (decreased) travel and entertainment","","","705","","","","(129",")"],["Increased facilities and infrastructure expenses","","","104","","","","306"],["(Decreased) increased Up-C structure expenses","","","(1,502",")","","","1,670"],["(Decreased) increased recruiting expense","","","(1,024",")","","","381"],["Other items","","","672","","","","137"],["Total change","","$","19,825","","","$","68"]]
[[/GREPCENT_TABLE]]

The increase in general and administrative expense in 2022 was primarily due to increased equity-based compensation expense due to increased grant-date fair value of equity awards, additional headcount and additional equity awards to JUMP employees, and higher insurance costs for our directors and officers. Accrued sales tax exposure has moved $1.8 million year on year as we have released less accrued sales tax during 2022 when compared to 2021. In December 2021, we reduced our estimated sales tax liability by $2.0 million as actual amounts remitted via voluntary disclosure agreements were less than estimated as more customers were able to prove partial usage outside of the jurisdiction. In addition, general and administrative expense increased due to increased transaction expenses related to the completed acquisition of JUMP Technology and other contemplated but not completed acquisitions, higher utilization of IT services, increased payroll and related costs as a result of headcount growth of additional employees, higher utilization of accounting and legal professional services in connection with being a public company, increased travel and entertainment expense due to the relaxation of travel restrictions from the COVID-19 pandemic in 2022 compared to 2021, and increased allocation of depreciation and facility costs. These increases were partially offset by decreased costs associated with setting up our the Up-C structure and the Tax Receivable Agreement, and decreased third-party agency recruitment costs.

52

The increase in general and administrative expense in 2021 is due to higher utilization of third-party contractors on accounting, IT and compliance activities, increased payroll and related costs as a result of headcount growth. In addition, general and administrative expense increased due to accounting and legal professional service costs associated with creating our Up-C structure and developing the Tax Receivable Agreement, higher utilization of IT services, increased insurance costs for our directors and officers, increased recruiting costs to support growth initiatives and increased allocation of facility costs. These increases were offset by the absence of an expense related to accrued sales tax liability as we recorded $9.1 million of additional liability for sales tax during 2020. Beginning January 2021, we commenced collecting and remitting sales tax to jurisdictions on behalf of customers which has not resulted in additional exposure. In December 2021, we reduced our estimated sales tax liability by $2.0 million as actual amounts remitted via voluntary disclosure agreements were less than estimated as more customers were able to prove partial usage outside of the jurisdiction. Additional reductions in general and administrative expense are due to decreased equity-based compensation as a result of equity award modifications that took place in January and November 2020, and decreased travel and entertainment expense.

Recapitalization Compensation Expense

During November 2020, we completed the Recapitalization transaction on behalf of existing CWAN LLC unitholders. The transaction allowed existing unitholders to sell their units to new investors. In connection with the transaction, selling unitholders contributed $49.0 million towards bonuses paid to employees and related payroll taxes in 2020. These amounts were recorded as Recapitalization compensation expense within the consolidated statement of operations. The bonuses were paid to employees from departments which have historically been recorded in the below categories in the consolidated statements of operations:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2020"],["Cost of revenue","","$","6,205"],["Research and development","","","8,891"],["Sales and marketing","","","7,951"],["General and administrative","","","25,951"],["Total recapitalization compensation","","$","48,998"]]
[[/GREPCENT_TABLE]]

Non-Operating Expenses

Interest Expense, Net

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","$ Change","","","% Change","","","2021","","","$ Change","","","% Change","","","2020"],["","","(In thousands, except percentages)"],["Interest (income) expense, net","","$","(1,137",")","","$","(26,819",")","","","(104","%)","","$","25,682","","","$","2,828","","","","12","%","","$","22,854"],["Tax receivable agreement expense","","","11,639","","","","11,639","","","NMF","","","","\u2014","","","","\u2014","","","NMF","","","","\u2014"],["Loss on extinguishment","","","\u2014","","","","(10,303",")","","","(100","%)","","","10,303","","","","10,303","","","NMF","","","","\u2014"],["Other (income) expense, net","","","(50",")","","","(133",")","","","(160","%)","","","83","","","","27","","","","48","%","","","56"]]
[[/GREPCENT_TABLE]]

NMF - not meaningful

The decrease in interest (income) expense, net for the year ended December 31, 2022 is due to decreased interest expense from lower borrowings under the New Credit Agreement compared with borrowings under the Previous Credit Agreement, and by increased interest income on our cash and cash equivalents from higher interest rates. The increase in interest expense in 2021 was primarily due to increased interest expense related to incremental borrowings following our debt refinancing in October 2020, offset by repayment in September 2021.

The TRA expense is incurred in the period in which we determine that it is probable that payments will be made under the terms of the TRA. Before considering tax deductions subject to our TRA Agreements, we estimate that we would have reported taxable income in 2022 due to the capitalization of research and development expenses under Section 174 and equity-based compensation expense that has yet to meet the rules for tax deductibility. Therefore, we expect to utilize tax deductions subject to our TRA and have therefore recorded the associated TRA expense. The TRA liability related to this expense is expected to be paid in the fourth quarter of 2023.

53

The loss on extinguishment relates to a prepayment premium and unamortized debt issue costs following the repayment of borrowings under the Previous Credit Agreement in September 2021. Other (income) expense, net relates to foreign exchange gains and losses driven by fluctuations in exchange rates.

Provision for Income Taxes

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["","","(In thousands, except percentages)"],["Provision for income taxes","","$","1,360","","","$","487","","","$","902"],["Percent of revenue","","","0","%","","","0","%","","","0","%"],["Change over prior year","","$","873","","","$","(415",")"],["Percent change over prior year","","","179","%","","","(46","%)"]]
[[/GREPCENT_TABLE]]

The increase (decrease) in provision for income taxes in 2022 and 2021 relates to change in mix of foreign jurisdiction income in the period.

Financial Information by Quarter (Unaudited)

The following table sets forth the Company's unaudited quarterly consolidated statements of operations data for 2022 and 2021. This information should be read in conjunction with our consolidated financial statements and related notes thereto included in this report. We have prepared the unaudited consolidated quarterly financial information for the quarters presented on the same basis as our consolidated financial statements. The historical quarterly results presented are not necessarily indicative of the results that may be expected for any future periods.

54

[[GREPCENT_TABLE]]
[["","","For the Three Months Ended (Unaudited)"],["","","2022","","","2021"],["","","Dec 31","","","Sep 30","","","Jun 30","","","Mar 31","","","Dec 31","","","Sep 30","","","Jun 30","","","Mar 31"],["","","(In thousands, except per share data)"],["Revenue","","$","82,687","","","$","76,552","","","$","73,409","","","$","70,778","","","$","69,762","","","$","64,489","","","$","60,876","","","$","56,894"],["Cost of revenue(2)","","","22,973","","","","22,720","","","","20,919","","","","21,172","","","","20,180","","","","17,785","","","","15,576","","","","14,322"],["Gross profit","","","59,714","","","","53,832","","","","52,490","","","","49,606","","","","49,582","","","","46,704","","","","45,300","","","","42,572"],["Operating expenses:"],["Research and development(2)","","","24,553","","","","25,438","","","","22,836","","","","21,294","","","","21,699","","","","18,415","","","","16,740","","","","15,836"],["Sales and marketing(2)","","","14,383","","","","13,187","","","","13,074","","","","11,993","","","","12,914","","","","10,126","","","","8,814","","","","7,211"],["General and administrative(2)","","","16,903","","","","16,371","","","","15,453","","","","15,040","","","","14,316","","","","10,900","","","","11,184","","","","7,543"],["Total operating expenses","","","55,839","","","","54,996","","","","51,363","","","","48,327","","","","48,929","","","","39,441","","","","36,738","","","","30,590"],["Income (loss) from operations","","","3,875","","","","(1,164",")","","","1,127","","","","1,279","","","","653","","","","7,263","","","","8,562","","","","11,982"],["Interest (income) expense, net","","","(1,276",")","","","(693",")","","","403","","","","429","","","","421","","","","8,302","","","","8,497","","","","8,527"],["Tax receivable agreement expense","","","5,939","","","","2,600","","","","3,100","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Loss on debt extinguishment","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","10,303","","","","\u2014","","","","\u2014"],["Other (income) expense, net","","","778","","","","(469",")","","","(444",")","","","85","","","","147","","","","(130",")","","","\u2014","","","","\u2014"],["Loss before provision for income taxes","","","(1,566",")","","","(2,602",")","","","(1,932",")","","","765","","","","85","","","","(11,212",")","","","65","","","","3,455"],["Provision for income taxes","","","401","","","","424","","","","298","","","","237","","","","(49",")","","","216","","","","276","","","","44"],["Net loss","","","(1,967",")","","","(3,026",")","","","(2,230",")","","","528","","","","134","","","","(11,428",")","","","(211",")","","","3,411"],["Less: Net income attributable to non-controlling interests","","","941","","","","(52",")","","","198","","","","130","","","","33","","","","(3,114",")","","","\u2014","","","","\u2014"],["Net loss attributable to Clearwater Analytics Holdings, Inc.","","$","(2,908",")","","$","(2,974",")","","$","(2,428",")","","$","398","","","$","101","","","$","(8,314",")","","","\u2014","","","","\u2014"],["Net loss per share attributable to Class A and Class D common stock (1):"],["Basic","","$","(0.02",")","","$","(0.02",")","","$","(0.01",")","","$","0.00","","","$","0.00","","","$","(0.05",")","","NMF","","","NMF"],["Diluted","","$","(0.02",")","","$","(0.01",")","","$","(0.01",")","","$","0.00","","","$","0.00","","","$","(0.05",")","","NMF","","","NMF"]]
[[/GREPCENT_TABLE]]

55

Liquidity and Capital Resources

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

As of December 31, 2022, we had cash and cash equivalents of $250.7 million. Cash and cash equivalents primarily consist of money market mutual funds, which are highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. We used proceeds from the IPO and cash generated from operating activities for the purchase consideration paid upon completion of the acquisition of JUMP Technology. We believe our existing cash and cash equivalents will be sufficient to meet our operating working capital and capital expenditure requirements over the next 12 months. Our future financing requirements will depend on many factors, including our growth rate, revenue retention rates, the timing and extent of spending to support development of our platform and any future investments or acquisitions we may make. Additional funds may not be available on terms favorable to us or at all, including as a result of disruptions in the credit markets. See “Risk Factors” elsewhere in this Annual Report on Form 10-K.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021","","","2020"],["","(In thousands)"],["Net cash provided by (used in) operating activities","$","58,005","","","$","3,358","","","$","(6,486",")"],["Net cash used in investing activities","","(76,551",")","","","(5,025",")","","","(3,806",")"],["Net cash provided by financing activities","","16,229","","","","195,288","","","","51,041"],["Effect of exchange rate changes on cash and cash equivalents","","(1,556",")","","","(112",")","","","85"],["Change in cash and cash equivalents","$","(3,873",")","","$","193,509","","","$","40,834"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Net cash provided operating activities of $58.0 million during 2022 was primarily the result of our net loss plus non-cash charges, including equity-based compensation, tax receivable agreement expense, operating lease expense and depreciation and amortization. Cash flows resulting from changes in assets and liabilities include an increase in accounts receivable, increase in prepaid expenses and other assets and an increase in deferred commissions. Accounts receivable increased $19.1 million, which is comprised of $9.5 million from growth in revenues and $9.6 million from aging of receivable balances for certain customers due to short-term deterioration in days sales outstanding which we continue to believe is collectible. Prepaid expenses and other assets increased $5.0 million due to timing of payments to data vendors, and deferred commissions increased $5.8 million due to higher revenue in the year.

Net cash provided by operating activities of $3.4 million during 2021 was primarily the result of our net loss plus non-cash charges including equity-based compensation, depreciation and amortization, and debt extinguishment costs offset by changes in operating assets and liabilities that decreased operating cash flow by $43.4 million. Accounts receivable increased $17.3 million during the year. The increase is comprised of $8.8 million from growth in revenues and $8.5 million from aging of small receivable balances across several customers due to short-term deterioration in days sales outstanding which we have determined to be collectible. Prepaid expenses and other assets increased $13.1 million primarily from the prepayment of management fees to certain affiliates of the Principal Equity Owners in the amount of $9.6 million, insurance for our directors and officers and increased prepaid data costs. Deferred commissions increased $5.2 million due to higher revenue in the year. Accrued expenses decreased $3.5 million primarily due to payment of accrued reimbursement of excess contribution related to the Recapitalization transaction. Accrued sales tax liability decreased $8.5 million as we remitted sales tax payable for prior periods to different jurisdictions, and accrued interest on debt decreased $2.3 million due to lower interest payments due under the New Credit Agreement.

Net cash used in operating activities of $6.5 million during 2020 was primarily the result of our net loss plus non-cash charges including equity-based compensation, depreciation and amortization. Cash flows resulting from changes in assets and liabilities include an increase in accounts receivable, an increase in accrued expenses and other liabilities, an increase in accrued sales tax liability, an increase in deferred commissions, and an increase in accrued interest on debt. Accounts receivable increased as a result of increased revenue and timing of collections. Accrued expenses and other liabilities increased due to accrued reimbursement to members of an excess contribution following the Company’s calculation of actual costs incurred related to the Recapitalization. Accrued sales tax liability increased due to a change in our estimate of the liability following the completion of a comprehensive review of sales tax reporting obligations across jurisdictions during 2020. The increase in deferred commissions is due to higher revenues during the period. Accrued interest on debt increased due to incremental borrowings following our debt refinancing in October 2020.

56

Cash Flows from Investing Activities

Net cash used in investing activities of $76.5 million during 2022 was primarily due to $65.8 million related to the acquisition of JUMP, net of cash acquired, $3.0 million attributable to the purchase of short-term investments, and $7.8 million attributable to the purchase of property plant and equipment, including internally developed software.

Net cash used in investing activities of $5.0 million during 2021 was attributable to the purchase of property and equipment, including internally developed software.

Net cash used in investing activities of $3.8 million during 2020 was attributable to the purchase of property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities during 2022 was $16.2 million, of which $18.3 million was proceeds from the exercise of options and $4.2 million was proceeds from our employee stock purchase plan, which was offset by $3.2 million from minimum tax withholding paid on behalf of employees for net share settlement, and $2.8 million used in the repayment of borrowings.

Net cash provided by financing activities during 2021 was $195.3 million, of which $582.2 million was proceeds from the IPO, net of underwriting discounts, $53.6 million was proceeds from borrowings, net of debt issuance costs from our New Credit Agreement, $2.8 million was proceeds from the exercise of options and $1.6 million was proceeds from the issuance of common units to directors appointed prior to the IPO, which was offset by $434.9 million repayment of borrowings, $5.1 million payment of expenses associated with the IPO, $2.0 million prepayment premium and legal fees in relation to early repayment of the Previous Credit Agreement, and $2.2 million from minimum tax withholding paid on behalf of employees for net unit settlement.

Net cash provided by financing activities during 2020 was $51.0 million, of which $202.7 million was from proceeds from borrowings under an amendment to our credit facility and $49.0 million was from contributions from members for Recapitalization compensation expenses, which was offset by $173.2 million of dividends and distributions to members, $21.6 million for the repayment of borrowings and a $5.8 million payment of debt issuance costs.

Indebtedness

For a discussion of our “Indebtedness”, refer to Note 8 - “Credit Agreement” in the notes to our audited financial statements of this Annual Report.

Critical Accounting Estimates

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

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

We believe the following accounting policies contain the more significant judgments and estimates used in the preparation of our consolidated financial statements:

•
Revenue recognition

•
Equity-based compensation

•
Income taxes

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Revenue Recognition

We earn revenues primarily from providing access to our SaaS platform solution to our clients, and to a lesser degree, from services that support the implementation on the platform. We recognize revenue when we satisfy performance obligations under the terms of the contract in an amount that reflects the consideration we expect to receive in exchange for the services. We determine the appropriate amount of revenue to be recognized using the following steps: (i) identification of contracts with clients, (ii) identification of the performance obligations in the contract, (iii) determination of transaction price, (iv) allocation of contract transaction price to the performance obligation, and (v) recognition of revenue when or as we satisfy a performance obligation. Often contracts contain more than one performance obligation. Performance obligations are the unit of accounting for revenue recognition and generally represent the distinct services that are promised to the client.

We typically bill our clients monthly in arrears based on a percentage of the average of the daily value of the assets within a client’s accounts on our platform. Payment terms may vary by contract but generally include a requirement of payment within 30 days following the month in which services were provided. Clients generally have the right to cancel with 30 days’ notice with no penalty.

Our services allow the client access without taking possession of the software. Non-refundable fees invoiced in advance of the delivery of our performance obligations are deemed set-up activities and are deferred as a material right and recognized over time, typically 12 months. After set-up activities, clients typically receive benefits from implementation services prior to the “go live” date, at which point they can use the platform as intended in the arrangement. We have determined these implementation services are generally a separate performance obligation. As our platform must stand ready to provide the services throughout the contract period, revenues are recognized as the services are provided over time beginning on the date the service is made available as intended in the arrangement.

Equity-Based Compensation

We measure and recognize equity-based compensation expense for instruments based on the estimated fair value of equity-based awards on the date of grant using the Black-Scholes option-pricing model for options and the fair value of the equity on the date of grant for RSUs. We recognize equity-based compensation expense over the requisite service period on a straight-line basis, which is generally consistent with the vesting of the awards, based on the estimated fair value of the equity-based awards issued to employees and directors that are expected to vest. Equity-based compensation that vests on a performance event, such as annual targets for the Company, begins to be recognized at the date that the performance event becomes probable, and compensation expense is recognized on a straight-line basis over any remaining service period. If there are any modifications of equity-based awards, we may be required to accelerate, increase, decrease or reverse any equity-based compensation expense on the unvested awards. The Company records forfeitures when they occur for all equity-based awards.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe it is more likely than not that they will not be realized. We consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under tax law, and results of recent operations.

We record uncertain tax positions in accordance with ASC 740, Income Taxes on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (2) for those tax positions that meet the more likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We consider many factors when evaluating our uncertain tax positions, which involve significant judgment and may require periodic adjustments. The resolution of these uncertain tax positions in a manner inconsistent with management’s expectations could have a material impact on our consolidated financial statements. We recognize interest and penalties related to uncertain tax positions as a component of our provision for income taxes. Accrued interest and penalties are included with the related tax liability.

We account for amounts payable under the TRA in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. As such, subsequent changes to the measurement of the TRA liability are recognized in the statements of operations.

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JOBS Act Accounting Election

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