CLEARWATER ANALYTICS HOLDINGS, INC.

(CWAN)
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CLEARWATER ANALYTICS HOLDINGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/12/2021 | 04:14pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-Q and with our Management's Discussion and Analysis of Financial Condition
and Results of Operations and financial statements included in the Prospectus.
As discussed in the section titled "Special Note Regarding Forward-Looking
Statements," the following discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed below. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below and in the
section titled "Special Note Regarding Forward-Looking Statements" in this
Quarterly Report on Form 10-Q and those discussed in the section titled "Risk
Factors" in the Prospectus.

Overview

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

We provide investment accounting and reporting, performance measurement,
compliance monitoring and risk analytics solutions for asset managers, insurance
companies and large corporations. Every day, Clearwater's powerful platform
aggregates and normalizes data on over $5.6 trillion of global invested assets
for over 1,000 clients. We bring modern software to an industry that has long
been dominated by difficult-to-use, high cost legacy technologies and processes,
which often lack data integrity and traceability, and often require significant
manual intervention. The strength of our platform is demonstrated by our
approximately 80% win rate for new clients over the prior four years in deals
that reached the proposal stage.

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

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

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

Recent Developments

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 $5.1 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;
(iii) pay $5.1 million of expenses related to the IPO; with the remaining
proceeds intended to be used for general corporate purposes.

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New Credit Agreement


In connection with the closing of the IPO, Clearwater Analytics, LLC (the
"Borrower") has entered into a new credit agreement (the "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 Revolving Facility will be
used for working capital and other general corporate purposes (including
acquisitions permitted under the New Credit Agreement).

Key Factors Affecting Our Performance

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


?
Adding New Clients in Established End Markets: Our future growth is dependent
upon our ability to continue to add new clients. We are focused on continuing to
increase our client base in our established client end-markets of corporations,
insurance companies and asset managers, and doing so with increasingly large and
sophisticated clients. As we add clients, it takes time to fully onboard their
assets to the platform. Our revenue generally increases as assets are added to
the platform, while the effort to serve the client is relatively consistent over
time. Therefore, we expect revenues and gross margins to increase for a client
as the client transitions from the onboarding process to a steady state once
assets have been onboarded. In any period, our gross margins may fluctuate based
on the relative size and number of clients that we are onboarding at that time.
?
Expanding and Retaining Relationships with Existing Clients: Our future growth
is dependent upon retaining our existing clients and expanding our relationships
with these clients through increases in the amount of their assets on our
platform. We have enjoyed consistent gross revenue retention rates of
approximately 98% over the past eleven quarters. The consistency in revenue
retention creates predictability in our business and enables us to better plan
our future investments. Our relationships with our clients expands as these
clients add more assets to our platform, with our net revenue retention rates
(as defined below under "-Key Operating Measures") above 105% over the past two
years. Clients may add assets as a result of acquiring new clients themselves or
by acquiring new businesses or simply through organic growth, which produces
additional assets that they manage using our platform. We believe that our
client service model and technology platform are strong contributing factors in
our attractive retention rates. As such, we expect to continue to invest in both
our operations and research and development functions to maintain and increase
our high levels of client satisfaction, which we believe will lead to strong
client retention and expansion.
?
International Expansion: We believe that the value provided by our platform is
equally applicable to asset owners and asset managers outside of North America,
and there is a significant opportunity to expand our client base and usage of
our platform internationally. Our future growth is dependent upon our ability to
successfully enter new international markets and to expand our client base in
our current international markets. Our cost to acquire clients in international
markets is currently greater than in North America because there is less
awareness of the Clearwater brand and our product capabilities, and we have to
date invested less in sales and marketing internationally. For these reasons, we
expect to invest more in sales and marketing in international markets relative
to North America in order to achieve growth in these international markets.
?
Adding New Clients in Adjacent or Nascent End-Markets: Our strategy is to also
add new clients in our more nascent end-markets, which include state and local
governments, pension funds and sovereign wealth funds, as well as a variety of
alternative asset managers. Traditionally, our existing clients have been among
our best resources for referring new clients to us, and we will continue to
invest in sales and marketing to build awareness of our brand, engage
prospective clients and drive adoption of our platform, particularly as it
relates to expanding into new end-markets. As we establish our presence in new
end-markets, we expect sales and marketing expenditures will be less efficient
than in our established verticals and we will become increasingly more efficient
at acquiring clients in new end-markets over time.
?
Expanding Solutions and Broadening Innovation: Our future growth is dependent
upon our continued expansion of our solutions in order to better retain our
current clients and to develop new use cases that appeal to new clients. While
we believe we will be able to reduce our research and development expenses as a
percentage of revenues as we achieve greater scale, our priority is to maintain
and grow our technological advantage over our competitors. As we identify
opportunities to increase our technological and competitive advantages, we may
increase our investments in research and development at rates that are faster
than our growth in revenues in order to enhance our long-term growth and
profitability.
?
Fluctuations in the Market Value of Assets on the Platform: We generally bill
our clients monthly in arrears based on a basis point rate applied to our
clients' assets on our platform, which can be influenced by general economic
conditions. While 86% of the assets on our platform were high-grade fixed income
securities and structured products as of September 30, 2021 and therefore
subject to very low levels of volatility, the value of our clients' assets on
our platform varies on a daily basis due to changes in securities prices, cash
flow needs, incremental buying and selling of

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assets and other strategic priorities of our clients. For these reasons, our revenue is subject to fluctuations based on economic conditions, including market conditions and the changing interest rate environment

Key Components of Results of Operations

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

Revenue


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

Cost of Revenue


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

Operating Expenses


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

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


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

Interest Expense, Net

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

Loss on Debt Extinguishment

Loss on debt extinguishment related to the early repayment of borrowings under the Previous Credit Agreement with Ares Capital Corporation. 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.

Key Operating Measures


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



                                September 30,       September 30,
                                    2021                2020
                                         (in thousands)
Annualized recurring revenue   $       257,022$       214,877
Gross revenue retention rate                98 %                98 %
Net revenue retention rate                 111 %               109 %




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Annualized Recurring Revenue

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

Because a substantial majority of the assets on our platform have very 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.

Gross Revenue Retention Rate

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

Net Revenue Retention Rate

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

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

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

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                                      Three Months Ended September 30,
                                        2021                      2020
Net income                      $   (11,428 )     (18 %)   $ 11,499        22 %
Adjustments:
Interest expense, net                 8,302        13 %       4,810         9 %
Loss on debt extinguishment          10,303        16 %           -         -
Depreciation and amortization           792         1 %         556         1 %
Equity-based compensation             7,683        12 %       1,714         3 %
Other expenses(1)                     1,430         2 %         425         1 %
Adjusted EBITDA                      17,082        26 %      19,004        36 %
Revenue                         $    64,489       100 %    $ 53,355       100 %




                                      Nine Months Ended September 30,
                                       2021                     2020
Net income                      $  (8,228 )      (5 %)   $  25,134        17 %
Adjustments:
Interest expense, net              25,261        14 %       15,424        10 %
Loss on debt extinguishment        10,303         6 %            -         -
Depreciation and amortization       2,204         1 %        1,603         1 %
Equity-based compensation          19,239        11 %        6,702         5 %
Other expenses(1)                   3,825         2 %        1,439         1 %
Adjusted EBITDA                    52,604        29 %       50,302        34 %
Revenue                         $ 182,259       100 %    $ 148,464       100 %





(1) Other expenses includes management fees to our investors, income taxes related to foreign subsidiaries, 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.


                                         Three Months Ended September 30,                             Nine Months Ended September 30,
                                       2021                           2020                           2021                         2020
Up-C structure expenses          $            726             $                  -             $          1,652             $              -
Management fees and
reimbursed expenses                           618                              229                        1,702                          917
Miscellaneous                                  86                              196                          471                          522
Total other expenses             $          1,430             $                425             $          3,825             $          1,439




Results of Operations

The following tables set forth our results of operations for the three and nine months ended September 2021 and 2020:

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                                         Three Months Ended September 30,     Nine Months Ended September
                                                                                          30,
                                            2021               2020              2021             2020
Revenue                                  $   64,489$        53,355$  182,259$  148,464
Cost of revenue(1)                           17,785                12,325         47,683           39,216
Gross profit                                 46,704                41,030        134,576          109,248
Operating expenses:
Research and development(1)                  18,415                14,760         50,991           38,829
Sales and marketing(1)                       10,126                 4,661         26,151           13,261
General and administrative(1)                10,900                 5,104         29,627           16,078
Total operating expenses                     39,441                24,525        106,769           68,168
Income from operations                        7,263                16,505         27,807           41,080
Interest expense, net                         8,302                 4,810         25,261           15,424
Loss on debt extinguishment                  10,303                     -         10,303                -
Other (income) expense, net                    (130 )                  97            (65 )            213
Income (loss) before income taxes           (11,212 )              11,598         (7,692 )         25,443
Provision for income taxes                      216                    99            536              309
Net income (loss)                           (11,428 )              11,499         (8,228 )         25,134
Less: Net income (loss) attributable
to noncontrolling interests                  (3,114 )                   -             86                -
Net loss attributable to Clearwater
Analytics Holdings, Inc.                 $   (8,314 )     $             -     $   (8,314 )     $        -




(1)

Amounts include equity-based compensation as follows:



Cost of revenue                           $    899$    173$    2,171$    723
Operating expenses:
Research and development                     2,226            487            5,912         1,866
Sales and marketing                          1,655            212            3,782           944
General and administrative                   2,903            842          

7,374 3,169 Total equity-based compensation expense $ 7,683$ 1,714$ 19,239$ 6,702

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




                                             Three Months Ended September 30,            Nine Months Ended September 30,
                                              2021                     2020               2021                     2020
Revenue                                             100 %                    100 %              100 %                    100 %
Cost of revenue                                      28 %                     23 %               26 %                     26 %
Gross profit                                         72 %                     77 %               74 %                     74 %
Operating expenses:
Research and development                             29 %                     28 %               28 %                     26 %
Sales and marketing                                  16 %                      9 %               14 %                      9 %
General and administrative                           17 %                     10 %               16 %                     11 %
Total operating expenses                             61 %                     46 %               59 %                     46 %
Income from operations                               11 %                     31 %               15 %                     28 %
Interest expense, net                                13 %                      9 %               14 %                     10 %
Loss on debt extinguishment                          16 %                      0 %                6 %                      0 %
Other (income) expense, net                           0 %                      0 %                0 %                      0 %
Income before income taxes                          (17 %)                    22 %               (4 %)                    17 %
Income taxes                                          0 %                      0 %                0 %                      0 %
Net income (loss)                                   (18 %)                    22 %               (5 %)                    17 %



Comparison of the Three Months Ended September 30, 2021 and 2020 (unaudited)

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Revenue



            Three Months Ended September 30,
               2021                  2020           $ Change       % Change
                                    (In thousands)
Revenue   $        64,489$        53,355$  11,134             21 %




Revenue increased $11.1 million, or 21%, for the three months ended September
30, 2021 as compared to the corresponding period in 2020. The increase was
driven by 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 loaded on our platform that were billed to customers increased
15% from the three months ended September 30, 2020 to the three months ended
September 30, 2021 while average basis point rate billed to customers increased
by 4.7% from the three months ended September 30, 2020 to the three months ended
September 30, 2021.



Cost of Revenue



                              Three Months Ended September 30,
                                 2021                  2020             $ Change        % Change
                                                        (In thousands)
Equity-based compensation   $           899       $           173      $       726             420 %
All other cost of revenue            16,886                12,152            4,734              39 %

Total cost of revenue $ 17,785$ 12,325 $

 5,460              44 %
Percent of revenue                       28 %                  23 %



Cost of revenue changed as follows:



                                                       Change from
                                                   September 30, 2020
                                                    to September 30,
                                                          2021
                                                     (In thousands)
Increased payroll and related                      $             3,202
Increased equity-based compensation                                726
Increased facilities and infrastructure expenses                   474
Increased outside services and contractors                         367
Increased data costs                                               273
Increased technology                                               200
Other items                                                        218
Total change                                       $             5,460




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



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Operating Expenses

Research and Development



                              Three Months Ended September 30,
                                 2021                  2020             $ Change        % Change
                                                        (In thousands)
Equity-based compensation   $         2,226       $           487      $     1,739             357 %
All other research and
development                          16,189                14,273            1,916              13 %
Total research and
development                 $        18,415$        14,760$     3,655              25 %
Percent of revenue                       29 %                  28 %



Research and development expenses changes as follows:



                                                       Change from
                                                   September 30, 2020
                                                    to September 30,
                                                          2021
                                                     (In thousands)
Increased equity-based compensation                $             1,739
Increased outside services and contractors                       1,213
Increased technology                                               632
Increased facilities and infrastructure expenses                   273
Other items                                                       (192 )
Total change                                       $             3,665




The increase in research and development expense was primarily due to increased
equity-based compensation expense due to increased grant-date fair value of
equity awards, increased utilization of third-party contractors on development
activities, increased technology costs from higher utilization of third-party
cloud computing services and other third-party IT, and increased allocation of
facilities and infrastructure expenses.



Sales and Marketing



                                    Three Months Ended September 30,
                                      2021                     2020             $ Change        % Change
                                                              (In thousands)
Equity-based compensation       $           1,655         $           212      $     1,443             681 %
All other sales and marketing               8,471                   4,449            4,022              90 %
Total sales and marketing       $          10,126         $         4,661      $     5,465             117 %
Percent of revenue                             16 %                     9 %



Sales and marketing expense changes as follows:



                                                       Change from
                                                   September 30, 2020
                                                    to September 30,
                                                          2021
                                                     (In thousands)
Increased payroll and related                      $             3,333
Increased equity-based compensation                              1,443
Increased marketing                                                261
Increased travel and entertainment                                 249
Increased facilities and infrastructure expenses                   214
Other items                                                        (35 )
Total change                                       $             5,465




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The increase in sales and marketing expense is 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, increased travel and entertainment costs
as restrictions due to the COVID-19 pandemic are lifted, and increased
allocation of facilities and infrastructure expenses.



General and Administrative



                                Three Months Ended September 30,
                                  2021                     2020             $ Change        % Change
                                                          (In thousands)
Equity-based compensation   $           2,903         $           842      $     2,061             245 %
All other general and
administrative                          7,997                   4,262            3,735              88 %
Total general and
administrative              $          10,900         $         5,104      $     5,796             114 %
Percent of revenue                         17 %                    10 %



General and administrative expenses changed as follows:



                                                 Change from
                                             September 30, 2020
                                              to September 30,
                                                    2021
                                               (In thousands)
Increased equity-based compensation          $             2,061
Increased payroll and related                                841
Increased outside services and contractors                 1,285
Increased Up-C structure expenses                            726
Increased technology                                         315
Increased recruiting                                         133
Other items                                                  435
Total change                                 $             5,796




The increase in general and administrative expenses was primarily due to
increased equity-based compensation expense due to increased grant-date fair
value of equity awards and additional headcount, increased payroll and related
costs as a result of headcount growth of additional employees, and increased
costs from higher utilization of third-party contractors on accounting, IT and
compliance activities. 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, and increased recruiting to support hiring for
growth initiatives.



Non-Operating Expenses



                                  Three Months Ended September 30,
                                    2021                     2020            $ Change        % Change
                                                           (In thousands)
Interest expense, net         $           8,302         $         4,810     $     3,492              73 %
Loss on debt extinguishment   $          10,303                       -     $    10,303             NMF
Other (income) expense, net   $            (130 )       $            97     $      (227 )          (234 %)


NMF - not meaningful



The increase in interest expense, net was primarily due to increased interest
expense related to incremental borrowings following our debt refinancing in
October 2020. The loss on extinguishment relates to 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.



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Provision for Income Taxes



                                  Three Months Ended September 30,
                                   2021                       2020            $ Change        % Change
                                                           (In thousands)
Provision for income taxes   $            216           $             99   
 $       117             118 %



The increase in provision for income taxes relates to higher foreign jurisdiction income in the period.

Comparison of the Nine Months Ended September 30, 2021 and 2020 (unaudited)

Revenue



              Nine Months Ended September 30,
                2021                   2020           $ Change       % Change
                                     (In thousands)
Revenue   $        182,259$        148,464$  33,795             23 %




Revenue increased $33.8 million, or 23%, in the nine months ended September 30,
2021 as compared to the corresponding period in 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 clients increased 21% from
the nine months ended September 30, 2020 to the nine months ended September 30,
2021 while the average basis point rate billed to customers increased 1.1% from
the nine months ended September 30, 2020 to the nine months ended September 30,
2021.



Costs of Revenue



                               Nine Months Ended September 30,
                                 2021                  2020             $ Change        % Change
                                                        (In thousands)
Equity-based compensation   $         2,171       $           723      $     1,448             200 %
All other cost of revenue            45,512                38,493            7,019              18 %
Total cost of revenue       $        47,683$        39,216$     8,467              22 %
Percent of revenue                       26 %                  26 %



Cost of revenue changed as follows:



                                                       Change from
                                                   September 30, 2020
                                                    to September 30,
                                                          2021
                                                     (In thousands)
Increased payroll and related                      $             4,271
Increased equity-based compensation                              1,448
Increased data costs                                               709
Increased outside services and contractors                         690
Increased facilities and infrastructure expenses                   558
Increased technology                                               472
Increased depreciation and amortization                            454
Other items                                                       (135 )
Total change                                       $             8,467




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

                                       31

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services on operational activities, increased allocation of facilities and
infrastructure expenses and higher depreciation expense from completion of
development projects.



Research and Development



                               Nine Months Ended September 30,
                                 2021                  2020             $ Change        % Change
                                                        (In thousands)
Equity-based compensation   $         5,912       $         1,866      $     4,046             217 %
All other research and
development                          45,079                36,963            8,116              22 %
Total research and
development                 $        50,991$        38,829$    12,162              31 %
Percent of revenue                       28 %                  26 %



Research and development expenses changed as follows:



                                                       Change from
                                                    September 30, 2020
                                                     to September 30,
                                                           2021
                                                      (In thousands)
Increased equity-based compensation                $              4,046
Increased payroll and related                                     3,808
Increased outside services and contractors                        2,369
Increased technology                                              1,585
Increased facilities and infrastructure expenses                    277
Other items                                                          77
Total change                                       $             12,162




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



Sales and Marketing



                                   Nine Months Ended September 30,
                                     2021                  2020             $ Change        % Change
                                                            (In thousands)
Equity-based compensation       $         3,782       $           944      $     2,838             301 %
All other sales and marketing            22,369                12,317           10,052              82 %
Total sales and marketing       $        26,151$        13,261$    12,890              97 %
Percent of revenue                           14 %                   9 %




                                       32
--------------------------------------------------------------------------------

Sales and marketing expenses changed as follows:



                                                       Change from
                                                    September 30, 2020
                                                     to September 30,
                                                           2021
                                                      (In thousands)
Increased payroll and related                      $              7,962
Increased equity-based compensation                               2,838
Increased outside services and contractors                          971
Increased marketing                                                 488
Increased facilities and infrastructure expenses                    310
Increased technology                                                175
Other items                                                         146
Total change                                       $             12,890




The increase in sales and marketing expenses is primarily due to increased
payroll and related costs as a result of headcount growth of additional
employees to expand sales coverage as well as increased equity-based
compensation due to increased grant-date fair value of equity awards. In
addition, sales and marketing expense increased due to higher utilization of
third-party contractors on marketing activities, higher marketing costs due to
increased focus on public relations and branding, higher allocation of
facilities and infrastructure expenses and increased technology costs.



General and Administrative



                               Nine Months Ended September 30,
                                 2021                  2020             $ Change        % Change
                                                        (In thousands)

Equity-based compensation $ 7,374 $ 3,169 $

  4,205             133 %
All other general and
administrative                       22,253                12,909            9,344              72 %
Total general and
administrative              $        29,627$        16,078$    13,549              84 %
Percent of revenue                       16 %                  11 %



General and administrative expenses changed as follows:



                                                 Change from
                                              September 30, 2020
                                               to September 30,
                                                     2021
                                                (In thousands)
Increased equity-based compensation          $              4,205
Increased outside services and contractors                  3,019
Increased payroll and related                               2,311
Increased Up-C structure expenses                           1,652
Increased recruiting                                        1,068
Increased technology                                          710
Other items                                                   584
Total change                                 $             13,549




The increase in general and administrative expenses is primarily due to
increased equity-based compensation expense due to increased grant-date fair
value of equity awards and additional headcount, increased costs 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 expenses increased due to accounting and
legal professional service costs associated with creating

                                       33

--------------------------------------------------------------------------------


our Up-C structure and developing the Tax Receivable Agreement, increased
recruiting costs to support hiring for growth initiatives, and higher
utilization of IT services.



Non-Operating Expenses



                                 Nine Months Ended September 30,
                                   2021                  2020            $ Change        % Change
                                                         (In thousands)
Interest expense, net         $        25,261$        15,424$     9,837              64 %
Loss on debt extinguishment   $        10,303                     -     $    10,303             NMF
Other (income) expense, net   $           (65 )     $           213     $      (278 )          (131 %)


NMF - not meaningful



The increase in interest expense, net was primarily due to increased interest
expense related to incremental borrowings following our debt refinancing in
October 2020. The loss on extinguishment relates to prepayment premium and
unamortized debt issue costs following the repayment of borrowings under the
Previous Credit Agreement in September 2021. The increase in other (income)
expense, net relates to foreign exchange gains and losses driven by fluctuations
in exchange rates.



Provision for Income Taxes



                                   Nine Months Ended September 30,
                                   2021                       2020            $ Change         % Change
                                                            (In thousands)
Provision for income taxes   $            536           $            309   
 $       227               73 %



The increase in provision for income taxes relates to higher foreign jurisdiction income in the period.

Liquidity and Capital Resources

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


As of September 30, 2021, we had cash and cash equivalents of $245.1 million.
Cash and cash equivalents primarily consist of money market mutual funds, which
are highly liquid investments purchased with an original or remaining maturity
of 90 days or less at the date of purchase. We believe our existing cash and
cash equivalents will be sufficient to meet our operating working capital and
capital expenditure requirements over the next 12 months. Our future financing
requirements will depend on many factors, including our growth rate, revenue
retention rates, the timing and extent of spending to support development of our
platform and any future investments or acquisitions we may make. Although we
currently are not a party to any agreement and do not have any understanding
with any third parties with respect to future investments in, or acquisitions
of, businesses or technologies, we may enter into these types of arrangements in
the future, which could also require us to seek additional equity or debt
financing. Additional funds may not be available on terms favorable to us or at
all, including as a result of disruptions in the credit markets. See "Risk
Factors" in the Prospectus.

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




                           Three Months Ended September 30,             

Nine Months Ended September 30,

                              2021                   2020                 2021                   2020
                                                          (In thousands)
Net cash provided by    $          7,264       $         13,673     $         (9,059 )     $         26,035
(used in) operating
activities
Net cash used in
investing activities              (1,268 )                 (759 )             (3,499 )               (3,145 )
Net cash provided by
(used in) financing
activities                       198,027                (20,405 )            196,686                (20,930 )
Effect of exchange rate
changes on cash and
cash equivalents                      11                     87                 (122 )                  (71 )
Increase (decrease) in
cash and cash
equivalents             $        204,034       $         (7,404 )   $      
 184,006       $          1,889



Cash Flows from Operating Activities

                                       34

--------------------------------------------------------------------------------


Net cash provided by operating activities of $7.3 million during the three
months ended September 30, 2021 was primarily the result of our net loss plus
non-cash charges including equity-based compensation, depreciation and
amortization, and debt extinguishment costs. Cash flows resulting from changes
in assets and liabilities include an increase in accounts receivable, a decrease
in prepaid and other assets, an increase in accrued expenses, and increase in
deferred commissions and a decrease in accrued interest on debt. Accounts
receivable increased as a result of increased revenue and timing of collections.
Prepaid and other assets decreased due to amortization of existing third-party
provided services. Accrued expenses and other liabilities increased due to
expenses associated with the IPO. The increase in deferred commissions is due to
higher revenues during the period. Accrued interest on debt decreased due to
payment of unpaid interest upon early repayment of borrowings under the Previous
Credit Agreement.

Net cash provided by operating activities of $13.7 million during the three
months ended September 30, 2020 was primarily the result of our net income 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, and an increase in deferred commissions. Accounts receivable
increased as a result of increased revenue and timing of collections. The
increase in accrued expenses and other liabilities is due to higher accrued
payroll, benefits and bonuses. Deferred commissions increased due to higher
revenue during the period.

Net cash used in operating activities of $9.1 million during the nine months
ended September 30, 2021 was primarily the result of changes in operating assets
and liabilities that decreased operating cash flow by $36.5 million. Accounts
receivable increased $16.1 million during the period. The increase is comprised
of $5.9 million from growth in revenues and $10.2 million from ageing of small
receivable balances across several customers who are experiencing delayed
processing of remittances due to the recent increased trend of employees
voluntarily leaving jobs and the time to train new employees. Prepaid expenses
and other assets increased primarily from the prepayment of management fees to
certain affiliates of the Principal Equity Owners in the amount of $9.6 million.
Deferred commissions increased $2.9 million due to higher revenue in the period.
Accrued sales tax liability decreased $6.2 million as we remitted sales tax
payable for prior periods to different jurisdictions, and accrued interest on
debt decreased $2.3 million due to payment of unpaid interest upon early
repayment of borrowings under our previous Credit Agreement.

Net cash provided by operating activities of $26.0 million during the nine
months ended September 30, 2020 was primarily the result of our net income 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 deferred commissions
and decrease in accrued interest on debt. Accounts receivable and deferred
commissions increased due to higher revenue in the period. Accrued interest on
debt decreased due to our debt refinancing in December 2019 and changes to the
timing of interest payments.


Cash Flows from Investing Activities

Net cash used in investing activities of $1.3 million during the three months ended September 30, 2021 was attributable to purchase of property and equipment.

Net cash used in investing activities of $0.8 million during the three months ended September 30, 2020 was attributable to purchase of property and equipment.

Net cash used in investing activities of $3.5 million during the nine months ended September 30, 2021 was attributable to purchase of property and equipment.

Net cash used in investing activities of $3.1 million during the nine months ended September 30, 2020 was attributable to purchase of property and equipment.

Cash Flows from Financing Activities


Net cash provided by financing activities during the three months ended
September 30, 2021 was $198.0 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, which was
offset by $432.7 million repayment of borrowings and $2.0 million for prepayment
premium and legal fees in relation to the early repayment of the Previous Credit
Agreement, $1.6 million was from minimum tax withholding paid on behalf of
employees for net unit settlement, and $1.5 million was payment of expenses
associated with the IPO.

Net cash used in financing activities during the three months ended September
30, 2020 was $20.4 million, attributable to payments on debt of $20.3 million
and $0.6 million from the repurchase of common units, which is offset by $0.4
million proceeds from exercise of options.

Net cash provided by financing activities during the nine months ended September
30, 2021 was $196.7 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, $1.6 million was proceeds
from the issuance of common units to newly appointed directors and $0.3 million
was proceeds from the exercise of options, which was offset by $434.2 million
repayment of borrowings, $2.0 million for prepayment premium and legal fees in
relation to the early repayment of the Previous Credit Agreement, $2.2 million

                                       35

--------------------------------------------------------------------------------

from minimum tax withholding paid on behalf of employees for net unit settlement, and $1.9 million payment of expenses associated with the IPO.


Net cash used in financing activities during the three months ended September
30, 2020 was $20.9 million, attributable to payments on debt of $20.8 million
and $0.6 million from the repurchase of common units, which is offset by $0.4
million proceeds from exercise of options.

Off-Balance Sheet Arrangements


At September 30, 2021 and December 31, 2020, we did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not
materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships.

Critical Accounting Policies and Estimates


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

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

The Company's significant accounting policies are discussed in "Index to the
Consolidated Financial Statements - Significant Accounting Policies" in the
Prospectus. There have been no significant changes to these policies for the
three months ended September 30, 2021, except for the following:

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 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 as a component of other income (expense), net.

JOBS Act Accounting Election


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

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 2, "Recently Adopted Accounting Pronouncements" and "Recent Accounting Pronouncement Not Yet Adopted," in the accompanying consolidated financial statements.

                                       36

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