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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended November 30, 2021

OR

 

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

For the transition period from ________________ to ________________

Commission File Number: 001-39449

 

Duck Creek Technologies, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-3723837

(State or other jurisdiction of

incorporation or organization)

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

Duck Creek Technologies, Inc.

22 Boston Wharf Road, Floor 10

Boston, MA

02210

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (888724-3509

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.01 par value per share

 

DCT

 

The Nasdaq Stock Market LLC 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

As of January 12, 2022, the registrant had 132,096,745 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 


 

Special Note Regarding Forward-Looking Statements

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

 

our history of losses;

 

loss of key employees;

 

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

 

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

 

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

 

our ability to manage our expanding operations;

 

intense competition in our market;

 

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

 

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

 

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

 

the length and variability of our sales and implementation cycles;

 

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

 

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

 

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

 

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

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

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

i


Basis of Presentation

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

 

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

 

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

 

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

 

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

 

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

 

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

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

Our fiscal year ends on August 31. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended August 31 of that year. For example, references to “fiscal 2021” refer to the fiscal year ended August 31, 2021. Any reference to a year not preceded by “fiscal” refers to a calendar year. Accordingly, our first three fiscal quarters are the successor three-month periods following August 31 (i.e., November 30, February 28 and May 31).

ii


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Consolidated Balance Sheets

1

 

Consolidated Statements of Operations

2

 

Consolidated Statements of Other Comprehensive Income (Loss)

3

 

Consolidated Statements of Stockholders’ Equity

4

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

7

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II.

OTHER INFORMATION

33

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

Signatures

35

 

 

 

iii


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share information)

(Unaudited)

 

 

 

As of November 30,

 

 

As of August 31,

 

 

 

2021

 

 

2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

251,739

 

 

$

185,657

 

Short-term investments

 

 

95,996

 

 

 

191,981

 

Accounts receivable, net

 

 

39,771

 

 

 

34,629

 

Unbilled revenue

 

 

27,611

 

 

 

24,423

 

Prepaid expenses and other current assets

 

 

16,895

 

 

 

14,381

 

Total current assets

 

 

432,012

 

 

 

451,071

 

Property and equipment, net

 

 

14,107

 

 

 

14,305

 

Operating lease assets

 

 

16,970

 

 

 

17,798

 

Goodwill

 

 

272,455

 

 

 

272,455

 

Intangible assets, net

 

 

61,386

 

 

 

65,359

 

Deferred tax assets

 

 

1,042

 

 

 

2,331

 

Unbilled revenue, net of current portion

 

 

1,327

 

 

 

1,401

 

Other assets

 

 

19,199

 

 

 

19,413

 

Total assets

 

$

818,498

 

 

$

844,133

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,321

 

 

$

2,070

 

Accrued liabilities

 

 

28,102

 

 

 

46,437

 

Contingent earnout liability

 

 

 

 

 

5,462

 

Lease liability

 

 

3,999

 

 

 

4,110

 

Deferred revenue

 

 

27,197

 

 

 

29,577

 

Total current liabilities

 

 

60,619

 

 

 

87,656

 

Lease liability, net of current portion

 

 

20,096

 

 

 

21,273

 

Deferred revenue, net of current portion

 

 

68

 

 

 

 

Other long-term liabilities

 

 

3,826

 

 

 

4,466

 

Total liabilities

 

 

84,609

 

 

 

113,395

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock, 134,690,424 shares issued and 132,062,061 shares outstanding at November 30, 2021, 134,625,379 shares issued and 132,000,317 shares outstanding at August 31, 2021, 300,000,000 shares authorized at November 30, 2021 and August 31, 2021, par value $0.01 per share

 

 

1,347

 

 

 

1,346

 

Preferred stock, 0 shares outstanding, 50,000,000 shares authorized at November 30, 2021 and August 31, 2021, par value $0.01 per share

 

 

 

 

 

 

Treasury stock, common shares at cost; 2,628,363 shares at November 30, 2021 and

   2,625,062 shares at August 31, 2021

 

 

(67,905

)

 

 

(67,764

)

Accumulated deficit

 

 

(40,573

)

 

 

(41,265

)

Accumulated other comprehensive income

 

 

51

 

 

 

64

 

Additional paid in capital

 

 

840,969

 

 

 

838,357

 

Total stockholders' equity

 

 

733,889

 

 

 

730,738

 

Total liabilities and stockholders' equity

 

$

818,498

 

 

$

844,133

 

 

See accompanying notes to consolidated financial statements.    

1


 

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share information)

(Unaudited)

 

 

 

For the Three Months Ended

November 30,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Subscription

 

$

35,705

 

 

$

27,909

 

License

 

 

1,912

 

 

 

1,350

 

Maintenance and support

 

 

6,277

 

 

 

6,190

 

Professional services

 

 

29,527

 

 

 

23,457

 

Total revenue

 

 

73,421

 

 

 

58,906

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription

 

 

14,585

 

 

 

10,084

 

License

 

 

244

 

 

 

388

 

Maintenance and support

 

 

880

 

 

 

842

 

Professional services

 

 

15,242

 

 

 

13,716

 

Total cost of revenue

 

 

30,951

 

 

 

25,030

 

Gross margin

 

 

42,470

 

 

 

33,876

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

12,321

 

 

 

11,104

 

Sales and marketing

 

 

13,167

 

 

 

12,597

 

General and administrative

 

 

15,035

 

 

 

14,418

 

Change in fair value of contingent consideration

 

 

67

 

 

 

3

 

Total operating expenses

 

 

40,590

 

 

 

38,122

 

Income (loss) from operations

 

 

1,880

 

 

 

(4,246

)

Other expense, net

 

 

(696

)

 

 

(47

)

Interest expense, net

 

 

(118

)

 

 

(43

)

Income (loss) before income taxes

 

 

1,066

 

 

 

(4,336

)

Provision for income taxes

 

 

374

 

 

 

315

 

Net income (loss)

 

$

692

 

 

$

(4,651

)

Net earnings (loss) per share information1

 

 

 

 

 

 

 

 

Net earnings (loss) per share of common stock, basic

 

$

0.01

 

 

$

(0.04

)

Net earnings (loss) per share, diluted

 

$

0.01

 

 

$

(0.04

)

Weighted average shares of common stock, basic

 

 

132,038,274

 

 

 

130,788,359

 

Weighted average shares of common stock, diluted

 

 

134,212,210

 

 

 

130,788,359

 

 

1.

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

See accompanying notes to consolidated financial statements.

2


 

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Other Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

For the Three Months Ended

November 30,

 

 

 

2021

 

 

2020

 

Net income (loss)

 

$

692

 

 

$

(4,651

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized losses on available-for-sale securities

 

 

(13

)

 

 

 

Total other comprehensive loss

 

 

(13

)

 

 

 

Comprehensive income (loss)

 

$

679

 

 

$

(4,651

)

 

See accompanying notes to consolidated financial statements.

 

 


 

3


 

 

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share information)

(Unaudited)

 

 

 

Common stock

 

 

Treasury Stock

 

 

Additional

paid-in

 

 

Accumulated Other Comprehensive

 

Accumulated

 

 

Total

stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

Income

 

deficit

 

 

equity

 

Balance at August 31, 2021

 

 

134,625,379

 

 

$

1,346

 

 

 

2,625,062

 

 

$

(67,764

)

 

$

838,357

 

 

$

64

 

$

(41,265

)

 

$

730,738

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

692

 

 

 

692

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

3,301

 

 

 

(141

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(141

)

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,481

 

 

 

 

 

 

 

 

 

 

2,481

 

Issuance of common stock upon exercise of stock options

 

 

4,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

132

 

 

 

 

 

 

 

 

 

 

132

 

Vesting of restricted stock awards

 

 

60,148

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

-

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

(13

)

Balance at November 30, 2021

 

 

134,690,424

 

 

$

1,347

 

 

 

2,628,363

 

 

$

(67,905

)

 

$

840,969

 

 

$

51

 

$

(40,573

)

 

$

733,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

4


 

 

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share information)

(Unaudited)

 

 

 

Common stock

 

 

Treasury Stock

 

 

Additional

paid-in

 

 

Accumulated

 

 

Total

stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

equity

 

Balance at August 31, 2020

 

 

133,269,301

 

 

$

1,333

 

 

 

2,555,556

 

 

$

(64,688

)

 

$

821,446

 

 

$

(24,334

)

 

$

733,757

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,651

)

 

 

(4,651

)

Repurchase of common stock

 

 

 

 

 

 

 

 

1,475

 

 

 

(57

)

 

 

 

 

 

 

 

 

(57

)

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,333

 

 

 

 

 

 

2,333

 

Vesting of restricted stock awards

 

 

142,193

 

 

 

1

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

Balance at November 31, 2020

 

 

133,411,494

 

 

$

1,334

 

 

 

2,557,031

 

 

$

(64,745

)

 

$

823,778

 

 

$

(28,985

)

 

$

731,382

 

 

See accompanying notes to consolidated financial statements.

 

 

5


 

 

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

For the Three Months Ended

November 30,

 

 

 

2021

 

 

2020

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

692

 

 

$

(4,651

)

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

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

704

 

 

 

787

 

Amortization of capitalized software

 

 

561

 

 

 

498

 

Amortization of intangible assets

 

 

3,973

 

 

 

4,087

 

Amortization of deferred financing fees

 

 

18

 

 

 

28

 

Share-based compensation expense

 

 

1,212

 

 

 

3,092

 

Loss on change in fair value of contingent earnout liability

 

 

67

 

 

 

3

 

Payment of contingent earnout liability in excess of acquisition date fair value

 

 

(1,650

)

 

 

 

Changes to allowance for credit losses

 

 

817

 

 

 

14

 

Deferred taxes

 

 

1,288

 

 

 

(171

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,959

)

 

 

1,280

 

Unbilled revenue

 

 

(3,115

)

 

 

(1,730

)

Prepaid expenses and other current assets

 

 

(2,428

)

 

 

319

 

Other assets

 

 

604

 

 

 

(15

)

Accounts payable

 

 

(909

)

 

 

712

 

Accrued liabilities

 

 

(16,891

)

 

 

(16,629

)

Deferred revenue

 

 

(2,312

)

 

 

(4,558

)

Operating leases

 

 

(460

)

 

 

(161

)

Cash settlement of vested phantom stock

 

 

(175

)

 

 

(6,677

)

Other long-term liabilities

 

 

(640

)

 

 

1,600

 

Net cash used in operating activities

 

 

(24,603

)

 

 

(22,172

)

Investing activities:

 

 

 

 

 

 

 

 

Maturities of short-term investments

 

 

95,967

 

 

 

 

Capitalized internal-use software

 

 

(366

)

 

 

(536

)

Purchase of property and equipment

 

 

(540

)

 

 

(188

)

Net cash provided by (used) in investing activities

 

 

95,061

 

 

 

(724

)

Financing activities:

 

 

 

 

 

 

 

 

Payment of deferred IPO costs

 

 

 

 

 

(3,650

)

Payment of deferred Class E offering costs

 

 

 

 

 

(192

)

Purchase of treasury stock

 

 

(141

)

 

 

(57

)

Proceeds from stock option exercises

 

 

132

 

 

 

 

Payments of contingent earnout liability

 

 

(3,879

)

 

 

(1,923

)

Payment of deferred financing costs

 

 

(488

)

 

 

 

Net cash used in financing activities

 

 

(4,376

)

 

 

(5,822

)

Net increase (decrease) in cash and cash equivalents

 

 

66,082

 

 

 

(28,718

)

Cash and cash equivalents – beginning of period

 

 

185,657

 

 

 

389,878

 

Cash and cash equivalents – end of period

 

$

251,739

 

 

$

361,160

 

Supplemental disclosure of other cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

 

1,001

 

 

 

730

 

Purchases of property and equipment recorded in accounts payable and accrued liabilities

 

 

161

 

 

 

 

Fair value of contingent consideration

 

 

 

 

 

5,529

 

 

 

See accompanying notes to consolidated financial statements.

 

 

6


 

 

 

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(Unaudited)

(1)

Nature of Business

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

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

Initial Public Offering

On August 14, 2020, the Company completed its IPO. It sold 17,250,000 shares of common stock (including shares issued pursuant to the exercise in full of the underwriters’ option to purchase additional shares) at a public offering price of $27.00 per share for net proceeds of $429.2 million, after deducting underwriting discounts, commissions, and estimated offering expenses.

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

Reorganization Transactions

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

 

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

 

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

 

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

 

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

 

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

7


 

 

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

 

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

 

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

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

(2)

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

 

(a)

Basis of Presentation

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

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

 

(b)

Risk and Uncertainties

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

 

(c)

Principles of Consolidation

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

 

(d)

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2021. There have been no material changes to the significant accounting policies during the three-month period ended November 30, 2021.

Allowance for Credit Losses

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

Investments

 

8


 

 

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

 

(e)

Recently Adopted Accounting Pronouncements

 

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

 

 

(f)

Recent Accounting Pronouncements Not Yet Effective

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

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

 

 

 

 

(g)

Revenue Recognition

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

 

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

 

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

 

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

 

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

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

 

(1)

Identify the contract with the customer

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

 

(2)

Identify the performance obligations in the contract

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

9


 

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

 

(3)

Determine the transaction price

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

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

 

(4)

Allocate the transaction price to the performance obligations in the contract

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

 

(5)

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

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

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

Disaggregation of Revenue

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

The following table summarizes revenue by geographic area based on the location of the contracting entity, regardless of where the products or services are used, for the three months ended November 30, 2021 and November 30, 2020:

 

 

 

For the Three Months Ended

November 30,

 

 

 

2021

 

 

2020

 

United States

 

$

68,741

 

 

$

53,416

 

All other

 

 

4,680

 

 

 

5,490

 

Total revenue

 

$

73,421

 

 

$

58,906

 

 

Subscription Arrangements

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

Software Licenses

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

10


 

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

Maintenance and Support Services

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

Professional Services

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

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

Contracts with Multiple Performance Obligations

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

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

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

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Contract Modifications

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

Contract Balances

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

During the three months ended November 30, 2021 and 2020, $16.9 million and $10.5 million, respectively, of the Company’s unbilled revenue balance that was included in the corresponding unbilled revenue balance at the beginning of the period presented became an unconditional right to payment and was billed to its customers.

During the three months ended November 30, 2021 and 2020, the Company recognized revenue of $13.6 million and $14.8 million, respectively, that was included in the corresponding deferred revenue balance at the beginning of the period presented.  

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As of November 30, 2021, approximately $499.9 million of revenue is expected to be recognized from remaining performance obligations in the amount of approximately $119.7 million in fiscal 2022 and approximately $380.2 million thereafter. The estimated revenues do not include unexercised contract renewals. The Company applied the practical expedient in accordance with ASC 606 to exclude amounts related to professional services contracts that are on a time and materials basis.

(3)

Contingent Earnout Liability

The following table summarizes the changes in fair value of the Company’s contingent earnout liability during the three months ended November 30, 2021:

 

 

 

Outline

Systems, LLC

 

Balance at August 31, 2021

 

$

5,462

 

Change in fair value, including accretion

 

 

67

 

Payments to sellers

 

 

(