Form 10-Q DUCK CREEK TECHNOLOGIES, For: May 31

 

 

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 May 31, 2022

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: (888) 724-3509

 

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.01 par value per share		DCT		The Nasdaq Stock Market LLC

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

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

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

 

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 June 28, 2022, the registrant had 132,571,189 shares of common stock, $0.01 par value per share, outstanding.

 

 

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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:

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.

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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:

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

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

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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	36
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38
Signatures		39

 

 

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share information)

(Unaudited)

 

		May 31,				August 31,
		2022				2021
Assets
Current assets:
Cash and cash equivalents		$	141,683			$	185,657
Short-term investments			223,511				191,981
Accounts receivable, net			32,105				34,629
Unbilled revenue			29,380				24,423
Prepaid expenses and other current assets			13,194				14,381
Total current assets			439,873				451,071
Property and equipment, net			12,740				14,305
Operating lease assets			15,783				17,798
Goodwill			272,455				272,455
Intangible assets, net			53,502				65,359
Deferred tax assets			1,398				2,331
Unbilled revenue, net of current portion			916				1,401
Other assets			20,031				19,413
Total assets		$	816,698			$	844,133
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	1,048			$	2,070
Accrued liabilities			33,814				46,437
Contingent earnout liability			—				5,462
Lease liability			4,072				4,110
Deferred revenue			24,378				29,577
Total current liabilities			63,312				87,656
Lease liability, net of current portion			17,852				21,273
Deferred revenue, net of current portion			49				—
Other long-term liabilities			2,376				4,466
Total liabilities			83,589				113,395
Commitments and contingencies
Stockholders' equity
Common stock, 135,183,927 shares issued and 132,547,111 shares outstanding at May 31, 2022, 134,625,379 shares issued and 132,000,317 shares outstanding at August 31, 2021, 300,000,000 shares authorized at May 31, 2022 and August 31, 2021, par value $0.01 per share			1,352				1,346
Preferred stock, 0 shares outstanding, 50,000,000 shares authorized at May 31, 2022 and August 31, 2021, par value $0.01 per share			—				—
Treasury stock, common shares at cost; 2,636,816 shares at May 31, 2022 and    2,625,062 shares at August 31, 2021			(68,110	)			(67,764	)
Accumulated deficit			(47,216	)			(41,265	)
Accumulated other comprehensive income			169				64
Additional paid in capital			846,914				838,357
Total stockholders' equity			733,109				730,738
Total liabilities and stockholders' equity		$	816,698			$	844,133

 

See accompanying notes to consolidated financial statements.

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DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share information)

(Unaudited)

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2022				2021				2022				2021
Revenue:
Subscription		$	38,049			$	33,552			$	113,347			$	92,069
License			2,877				2,474				9,438				7,412
Maintenance and support			6,038				6,329				18,519				18,404
Professional services			25,400				25,583				80,899				71,611
Total revenue			72,364				67,938				222,203				189,496
Cost of revenue:
Subscription			14,639				12,045				43,468				33,540
License			441				535				1,098				1,369
Maintenance and support			928				855				2,792				2,556
Professional services			16,061				14,315				47,751				42,857
Total cost of revenue			32,069				27,750				95,109				80,322
Gross margin			40,295				40,188				127,094				109,174
Operating expenses:
Research and development			14,236				12,255				40,873				36,040
Sales and marketing			16,003				13,628				42,741				40,390
General and administrative			14,783				15,238				46,649				44,273
Change in fair value of contingent consideration			—				(389	)			67				(291	)
Total operating expenses			45,022				40,732				130,330				120,412
Loss from operations			(4,727	)			(544	)			(3,236	)			(11,238	)
Other income (expense), net			(913	)			546				(1,641	)			1,009
Interest income (expense), net			283				(6	)			130				(87	)
Loss before income taxes			(5,357	)			(4	)			(4,747	)			(10,316	)
Provision for income taxes			407				353				1,204				1,056
Net loss		$	(5,764	)		$	(357	)		$	(5,951	)		$	(11,372	)
Net loss per share information1
Net loss per share of common stock, basic and diluted		$	(0.04	)		$	(0.00	)		$	(0.05	)		$	(0.08	)
Weighted average shares of common stock, basic and diluted			132,523,919				131,613,003				132,131,077				130,992,672

 

See accompanying notes to consolidated financial statements.

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DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Other Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2022				2021				2022				2021
Net loss		$	(5,764	)		$	(357	)		$	(5,951	)		$	(11,372	)
Other comprehensive loss:
Unrealized gains on available-for-sale securities			169				85				105				79
Total other comprehensive income			169				85				105				79
Comprehensive loss		$	(5,595	)		$	(272	)		$	(5,846	)		$	(11,293	)

 

See accompanying notes to consolidated financial statements.

 

 

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DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share information)

(Unaudited)

 

		Common stock								Treasury Stock								Additional paid-in				Accumulated Other Comprehensive				Accumulated				Total stockholders'
		Shares				Amount				Shares				Amount				capital				Income				deficit				equity
Balance at August 31, 2021			134,625,379			$	1,346				2,625,062			$	(67,764	)		$	838,357			$	64			$	(41,265	)		$	730,738
Net income			—				—				—				—				—				—				692				692
Repurchase of common stock			—				—				3,301				(141	)			—				—				—				(141	)
Share-based compensation expense							—				—				—				2,481				—				—				2,481
Issuance of common stock upon exercise of stock options			4,897				—				—				—				132				—				—				132
Vesting of restricted stock awards			60,148				1				—				—				(1	)			—				—				—
Unrealized loss on available-for-sale securities			—				—				—				—				—				(13	)			—				(13	)
Balance at November 30, 2021			134,690,424			$	1,347				2,628,363			$	(67,905	)		$	840,969			$	51			$	(40,573	)		$	733,889
Net loss			—				—				—				—				—				—				(879	)			(879	)
Repurchase of common stock			—				—				3,099				(95	)			—				—				—				(95	)
Share-based compensation expense			—				—				—				—				3,380				—				—				3,380
Issuance of common stock upon exercise of stock options			—				—				—				—				—				—				—				—
Vesting of restricted stock awards			434,689				4				—				—				(4	)			—				—				—
Unrealized loss on available-for-sale securities			—				—				—				—				—				(51	)			—				(51	)
Balance at February 28, 2022			135,125,113			$	1,351				2,631,462			$	(68,000	)		$	844,345			$	—			$	(41,452	)		$	736,244
Net loss			—				—				—				—				—				—				(5,764	)			(5,764	)
Repurchase of common stock			—				—				5,354				(110	)			—				—				—				(110	)
Share-based compensation expense			—				—				—				—				2,569				—				—				2,569
Vesting of restricted stock awards			58,814				1				—				—				—				—				—				1
Unrealized gain on available-for-sale securities			—				—				—				—				—				169				—				169
Balance at May 31, 2022			135,183,927			$	1,352				2,636,816			$	(68,110	)		$	846,914			$	169			$	(47,216	)		$	733,109

 

See accompanying notes to consolidated financial statements.

 

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DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share information)

(Unaudited)

 

		Common stock								Treasury Stock								Additional paid-in				Accumulated Other Comprehensive				Accumulated				Total stockholders'
		Shares				Amount				Shares				Amount				capital				Loss				deficit				equity
Balance at August 31, 2020			133,269,301			$	1,333				2,555,556			$	(64,688	)		$	821,446			$	—			$	(24,334	)		$	733,757
Net loss			—				—				—				—				—				—				(4,651	)			(4,651	)
Repurchase of common stock			—				—				1,475				(57	)			—				—				—				(57	)
Share-based compensation expense			—				—				—				—				2,333				—				—				2,333
Vesting of restricted stock awards			142,193				1				—				—				(1	)			—				—				—
Balance at November 31, 2020			133,411,494			$	1,334				2,557,031			$	(64,745	)		$	823,778			$	—			$	(28,985	)		$	731,382
Net loss			—				—				—				—				—				—				(6,364	)			(6,364	)
Proceeds from follow-on offering, net of issuance costs			90,000				1				—				—				3,452				—				—				3,453
Share-based compensation expense			—				—				—				—				2,478				—				—				2,478
Issuance of common stock upon exercise of stock options			36,809				—				—				—				993				—				—				993
Vesting of restricted stock awards			543,170				6				—				—				(6	)			—				—				—
Unrealized loss on available-for-sale securities			—				—				—				—				—				(6	)			—				(6	)
Balance at February 28, 2021			134,081,473			$	1,341				2,557,031			$	(64,745	)		$	830,695			$	(6	)		$	(35,349	)		$	731,936
Net loss			—				—				—				—				—				—				(357	)			(357	)
Share-based compensation expense			—				—				—				—				1,974				—				—				1,974
Issuance of common stock upon exercise of stock options			35,674				—				—				—				963				—				—				963
Vesting of restricted stock awards			100,263				1				—				—				(1	)			—				—				—
Unrealized loss on available-for-sale securities			—				—				—				—				—				85				—				85
Balance at May 31, 2021			134,217,410			$	1,342				2,557,031			$	(64,745	)		$	833,631			$	79			$	(35,706	)		$	734,601

 

See accompanying notes to consolidated financial statements.

 

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DUCK CREEK TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Nine Months Ended May 31,
		2022				2021
Operating activities:
Net loss		$	(5,951	)		$	(11,372	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation of property and equipment			1,987				2,377
Amortization of capitalized software			1,684				1,506
Amortization of intangible assets			11,857				12,262
Amortization of deferred financing fees			93				85
Share-based compensation expense			6,729				9,305
Change in fair value of contingent earnout liability			67				(291	)
Payment of contingent earnout liability in excess of acquisition date fair value			(1,650	)			—
Changes to allowance for credit losses			2,243				664
Deferred taxes			932				(676	)
Other non-cash items			—				(37	)
Changes in operating assets and liabilities
Accounts receivable			281				(8,693	)
Unbilled revenue			(4,471	)			(3,459	)
Prepaid expenses and other current assets			1,237				262
Other assets			(48	)			(376	)
Accounts payable			(1,006	)			895
Accrued liabilities			(9,910	)			(6,402	)
Deferred revenue			(5,150	)			(2,029	)
Operating leases			(1,444	)			(1,328	)
Cash settlement of vested phantom stock			(1,011	)			(9,075	)
Other long-term liabilities			(2,089	)			164
Net cash used in operating activities			(5,620	)			(16,218	)
Investing activities:
Purchase of short-term investments			(223,342	)			(287,912	)
Maturities of short-term investments			191,917				32,000
Capitalized internal-use software			(1,282	)			(864	)
Purchase of property and equipment			(841	)			(834	)
Net cash used in investing activities			(33,548	)			(257,610	)
Financing activities:
Proceeds from follow-on offering, net of issuance costs			—				3,452
Payment of deferred IPO costs			—				(3,650	)
Payment of deferred Class E offering costs			—				(192	)
Purchase of treasury stock			(346	)			(57	)
Proceeds from stock option exercises			132				1,957
Payments of contingent earnout liability			(3,879	)			(1,923	)
Payment of deferred financing costs			(713	)			—
Net cash used in financing activities			(4,806	)			(413	)
Net decrease in cash and cash equivalents			(43,974	)			(274,241	)
Cash and cash equivalents – beginning of period			185,657				389,878
Cash and cash equivalents – end of period		$	141,683			$	115,637
Supplemental disclosure of other cash flow information:
Cash paid for income taxes			1,455				2,373
Purchases of property and equipment recorded in accounts payable and accrued liabilities			—				306
Cash payments of contingent earnout liability			5,529				1,923

 

 

See accompanying notes to consolidated financial statements.

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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)

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements included herein. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled Part II, “Item 1A. Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

Overview

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

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

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

We sell our SaaS solutions through recurring fee arrangements where revenue is recognized on a monthly basis following deployment to the customer, which we refer to as subscription revenue. Substantially all of our new bookings come from the sale of SaaS subscriptions of Duck Creek OnDemand. For the nine months ended May 31, 2022 and 2021, SaaS ACV bookings represented 100% and 94% of our total ACV bookings, respectively. Historically, we have also sold our products through perpetual and term license arrangements, most commonly installed on-premise, where license revenue is typically recognized in full upon delivery of the software to the customer. We generally price our SaaS and license arrangements at individually negotiated rates based on the amount of a customer’s DWP that will be managed by our solutions with pre-determined fee adjustments as the customer’s DWP increases over the term of the contract, which typically ranges from three to seven years for our SaaS arrangements. We typically invoice our customers monthly, in advance, for SaaS fees whereas our term licenses are typically invoiced annually, in advance. The total cost of a perpetual license is billed in full upon contract signing.

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

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

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

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

Key Factors and Trends Affecting Our Results of Operations

Increased focus on the sale of our SaaS solutions and resulting changing revenue mix. A central part of our strategy is to continue to grow our subscription revenue by signing new SaaS customers and increasing sales to our existing SaaS customers. Additionally, over time we also expect to migrate existing term and perpetual license customers to our SaaS solutions. As a result, our software revenue mix will continue to change over time as the portion of license revenue (primarily recognized up-front) decreases and the portion of subscription revenue (recognized monthly) increases, which may make our results in any one period difficult to compare to any other period. For the three months ended May 31, 2022 and 2021, subscription revenue was 81% and 79% of software revenue, respectively. For the nine months ended May 31, 2022 and 2021, subscription revenue was 80% and 78% of software revenue, respectively.

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

Timing of license revenue recognition and changing contract terms. Because our offerings are typically priced based on a customer’s DWP, and our business relies on a relatively small number of high-value contracts, the license revenues recognized in any fiscal period in which we sign a term license with a large global carrier may be disproportionally higher than revenues recognized in a period in which we only sign term licenses with smaller carriers. We generally experience lengthy sales cycles because potential customers typically undertake a rigorous pre-purchase decision-making and evaluation process. Additionally, our license revenue may significantly increase in any given period in which a new license contract is signed. In fiscal 2018, we revised our contracting practices and began to sell our term licenses with an initial two-year committed term and optional annual renewals instead of our historical three to six year committed terms. This contracting change has impacted historical period-over-period revenue comparisons. However, because of our revenue mix shift to subscription and since our contracts going forward are expected to have, initial two-year committed terms, this change is not expected to have a material impact on the comparability of our results and in future periods. Our term license revenue accounted for 6% of software revenue during both the three months ended May 31, 2022 and 2021, respectively, and for 7% and 6% of software revenue during the nine months ended May 31, 2022 and 2021, respectively.

Investment in sales and marketing organization. We plan to continue to invest in our sales and marketing efforts to grow our customer base, increase sales of additional functionality to existing customers and encourage carriers who currently operate legacy systems or use one or more of our competitor’s applications to adopt our SaaS solutions. We expect to add sales personnel and expand our marketing activities. We also intend to continue to expand our international sales and marketing organization, which we believe will be an important factor in our continued growth. Our sales and marketing expenses totaled $16.0 million and $13.6 million in the

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three months ended May 31, 2022 and 2021, respectively, and $42.7 million and $40.4 million in the nine months ended May 31, 2022 and 2021, respectively. We expect sales and marketing expenses to increase in absolute dollars for the foreseeable future.

Investment in SaaS operations. We will continue to invest in Duck Creek OnDemand, including continued growth in the number of our cloud and SaaS operations experts, to further our goal of delivering the best experience for our SaaS customers. Personnel related costs of our SaaS operations team and data hosting costs are the fastest growing components of our cost of subscription revenue. Our cost of subscription revenue totaled $14.6 million and $12.0 million in the three months ended May 31, 2022 and 2021, respectively, and $43.5 million and $33.5 million in the nine months ended May 31, 2022 and 2021, respectively.

Investment in technology and research and development efforts. We are committed to continuing to deliver market-leading software to carriers and believe that maintaining our product leadership is critical to driving further revenue growth. As a result, we intend to continue to make significant investments in our research and development efforts to extend the functionality and breadth of our current solutions as well as develop and launch new products and tools to address the evolving needs of the P&C insurance industry. Our research and development expenses totaled $14.2 million and $12.3 million during the three months ended May 31, 2022 and 2021, respectively, and $40.9 million and $36.0 million during the nine months ended May 31, 2022 and 2021, respectively. We expect research and development expenses to increase in absolute dollars for the foreseeable future.

Mix of professional services revenue. Our professional services teams ensure the successful configuration and integration of our solutions and provide continuous support to our customers. We recognize most of our professional services revenue during initial deployment and recognize additional revenue for services provided over the lifetime of a customer’s use of our software. Over time, a customer’s spend on professional services decreases as a percentage of their overall spend with us. In addition, although we plan on increasing our professional services headcount in the long-term, we expect to shift an increasing percentage of implementation work to our network of third-party SIs to better enable us to meet growing market demand. As a result, we expect our overall professional services revenue to increase in absolute dollars due to the growth in the number of our SaaS customers, but to decrease as a percentage of total revenue. During the three months ended May 31, 2022 and 2021, our professional services revenue was $25.4 million and $25.6 million, respectively, and $80.9 million and $71.6 million during the nine months ended May 31, 2022 and 2021, respectively.

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

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

Share-based Compensation. For the nine months ended May 31, 2022, a portion of our share-based compensation decreased due to liability-based awards whose value depends, in part, upon the Company’s stock price and other market-based metrics.

Components of Results of Operations

Revenue

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

Subscription

Our subscription revenue is comprised of fees from customers accessing our Duck Creek OnDemand platform and other SaaS solutions. Revenue for a reporting period is generally recognized ratably in proportion to the total contractual DWP, beginning when the service has been made available to the customer. Our subscription revenue accounted for 81% and 79% of software revenue during the three months ended May 31, 2022 and 2021, respectively, and 80% and 78% of software revenue during the nine months ended May 31, 2022 and 2021, respectively.

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Licenses

On an increasingly limited basis, we sell licenses for our solutions on either a renewable term basis or a perpetual basis. The total contractual consideration allocated to the license is recognized as revenue upon delivery of the software to a customer, assuming all other revenue recognition criteria are satisfied. We sell our term licenses with an initial two-year committed term and optional annual renewals, with the revenue allocated to the initial two-year license period recognized in full upon delivery of the license. We expect potential volatility across quarters for our license revenue due to the timing of license renewals and sales. Our license revenue accounted for 6% of software revenue during both the three months ended May 31, 2022 and 2021, respectively, and 7% and 6% of software revenue during the nine months ended May 31, 2022 and 2021, respectively.

Maintenance and Support

In connection with our term and perpetual license arrangements, we offer maintenance and support under renewable, fee-based contracts that include unspecified software updates and upgrades released when and if available, software patches and fixes and email and phone support. Our maintenance and support fees are typically priced as a fixed percentage of the associated license fees. We recognize maintenance and support revenue from customers ratably over the committed term of the contract. Substantially all term and perpetual license customers purchase an agreement for maintenance and support. We expect to continue to generate a relatively consistent stream of revenue from the maintenance and support services we provide to our existing license customers. However, we expect revenue from maintenance and support services to decrease as a percentage of software revenue as we continue to deemphasize license sales in favor of our SaaS solutions. Our maintenance and support revenue accounted for 13% and 15% of software revenue during the three months ended May 31, 2022 and 2021, respectively, and 13% and 16% of software revenue during the nine months ended May 31, 2022 and 2021, respectively.

Professional Services

We offer professional services, primarily related to implementation of our products, in connection with both our SaaS solutions and software license products. The vast majority of professional services engagements are billed to customers on a time and materials basis and revenue is generally recognized upon delivery of our services. We expect our professional services revenue to grow over time in absolute dollars due to customer growth and an increasing need for implementation services but decrease as a percentage of total revenue. We believe the rate at which we sell our software will drive a greater need for implementation services that will support both an increase in our professional services revenue and an increase in demand for the services provided by our third-party SIs. Our professional services revenue generates lower gross margin than our software revenue and accounted for 35% and 38% of our total revenue for the three months ended May 31, 2022 and 2021, respectively, and 36% and 38% of our total revenue for the nine months ended May 31, 2022 and 2021, respectively.

Cost of Revenue

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

Cost of Subscriptions

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

Cost of Licenses

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

Cost of Maintenance and Support

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

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Cost of Professional Services

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

Gross Margin

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

Operating Expenses

Research and Development

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

Sales and Marketing Expenses

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

General and Administrative Expenses

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

Change in Fair Value of Contingent Consideration

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

Other Income (Expense), Net

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

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Interest Income (Expense), Net

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

Provision for Income Taxes

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

Results of Operations

Comparison of the Three Months Ended May 31, 2022 and 2021

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

 

		Three Months Ended May 31,
(dollars in thousands)		2022								2021
						Percent of Total  Revenue								Percent of Total  Revenue
Revenue
Subscription		$	38,049				53	%		$	33,552				49	%
License			2,877				4				2,474				4
Maintenance and support			6,038				8				6,329				9
Professional services			25,400				35				25,583				38
Total revenue			72,364				100				67,938				100
Cost of revenue
Subscription			14,639				20				12,045				18
License			441				1				535				1
Maintenance and support			928				1				855				1
Professional services			16,061				22				14,315				21
Total cost of revenue			32,069				44				27,750				41
Gross margin			40,295				56				40,188				59
Operating expenses
Research and development			14,236				20				12,255				18
Sales and marketing			16,003				22				13,628				20
General and administrative			14,783				20				15,238				22
Change in fair value of contingent consideration			—				—				(389	)			—
Total operating expense			45,022				62				40,732				60
Loss from operations			(4,727	)			(7	)			(544	)			(1	)
Other income (expense), net			(913	)			(1	)			546				1
Interest income (expense), net			283				—				(6	)			—
Loss before income taxes			(5,357	)			(7	)			(4	)			-
Provision for income taxes			407				1				353				1
Net loss		$	(5,764	)			(8	)%		$	(357	)			(1	)%

 

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

		Three Months Ended May 31,								Nine Months Ended May 31,
		2022				2021				2022				2021
Cost of subscription revenue		$	90			$	90			$	253			$	302
Cost of maintenance and support revenue			9				7				26				22
Cost of services revenue			396				253				649				2,003
Research and development			539				285				1,281				1,505
Sales and marketing			338				199				726				2,493
General and administrative			1,035				863				3,794				2,980
Total share-based compensation expense		$	2,407			$	1,697			$	6,729			$	9,305

 

Revenue

Subscription

Subscription revenue increased $4.5 million, or 13%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021, due to a combination of sales to new customers and increased revenue generated from existing customers, which includes sales of new services and contractual growth.

License

License revenue increased $0.4 million, or 16%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021 primarily due to contractual increases on, as well as timing of, existing customer renewals, including multi-year license renewals which did not occur in the prior period.

Maintenance and Support

Maintenance and support revenue decreased $0.3 million, or 5%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021 primarily due to timing of maintenance and support fees charged to customers during the period.

Professional services

Professional services revenue decreased $0.2 million, or 1%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021 primarily due to decreases from completed project implementations, partially offset by continued work on several large implementation projects from our existing software customer base.

Cost of Revenue

Cost of revenue increased $4.3 million, or 16%, during the three months ended May 31, 2022 compared to the three months ended May 31, 2021.

Cost of Subscriptions

Cost of subscription revenue increased $2.6 million, or 22%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021 primarily due to an increase in SaaS customers. This increase is comprised primarily of a $1.6 million increase in hosting costs from increased usage and a $1.1 million increase in payroll and related costs as we continue to build out the SaaS operations team and support customer growth.

Cost of License

Cost of license revenue decreased $0.1 million, or 18% during the three months ended May 31, 2022 versus the three months ended May 31, 2021 primarily due to a decrease in the amount of amortization on previously acquired technology intangible assets.

Cost of Maintenance and Support

Cost of maintenance and support revenue increased $0.1 million, or 9%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021 primarily due to an increase in personnel-related costs required to support our term and perpetual license customers.

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Cost of Professional Services

Cost of professional services revenue increased $1.7 million, or 12%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021, mainly attributable to an increase of $1.4 million in payroll and related costs, driven by increased headcount and an increase of $0.3 million in contingent labor.

Gross Margin

Gross margin increased $0.1 million, or remained relatively flat, during the three months ended May 31, 2022 versus the three months ended May 31, 2021, primarily due to a $1.9 million increase in subscription gross margin and a $0.5 million increase in license gross margin partially offset by a $1.9 million decrease in professional services gross margin and a $0.4 million decrease in maintenance and support gross margin. The increase in subscription gross margin was driven by strong growth in subscription revenue.

Our gross margin percentage decreased to 56% from 59% during the three months ended May 31, 2022 versus the three months ended May 31, 2021. The subscription gross margin percentage decreased to 62% from 64%, maintenance and support gross margin percentage decreased to 84% from 85%, and professional services gross margin percentage decreased to 37% from 44% while license gross margin percentage increased to 85% from 78%.

Operating Expenses

Research and Development Expense

Research and development expense increased $2.0 million, or 16%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021 primarily due to a $1.1 million increase in payroll costs from an increase in headcount.

Sales and Marketing Expense

Sales and marketing expense increased $2.4 million, or 17%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021, primarily due to a $1.6 million increase in marketing programs driven by our annual user conference that took place in March 2022 but was not held in March 2021 due to the COVID-19 pandemic, and a $0.4 million increase in travel and entertainment expense period over period.

General and Administrative Expense

General and administrative expense decreased $0.5 million, or 3%, during the three months ended May 31, 2022 versus the three months ended May 31, 2021, primarily due to a $0.9 million decrease in professional service fees, a $0.6 million decrease in allowance for credit losses, and a $0.3 million decrease in facilities expense. These decreases were partially offset by a $0.5 million increase in payroll costs and a $0.4 million increase in computer hardware and software expense.

Change in Fair Value of Contingent Consideration

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

Other Income (Expense), Net

Other income (expense), net decreased $1.5 million during the three months ended May 31, 2022 as compared to the three months ended May 31, 2021, primarily due to fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar.

Interest Income (Expense), Net

Interest income (expense), net increased $0.3 million during the three months ended May 31, 2022 versus the three months ended May 31, 2021. Interest income received from cash, cash equivalents, and short-term investments was partially offset by interest expense, which consists of fees paid to maintain the revolving credit facility, though there were no outstanding borrowings in either period.

 

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Provision for Income Taxes

Provision for income taxes increased 15% during the three months ended May 31, 2022 versus the three months ended May 31, 2021 primarily due to the impact of goodwill amortized for tax purposes versus book purposes, the impact of higher profits in foreign subsidiaries and higher state taxes.

Results of Operations

Comparison of the Nine Months Ended May 31, 2022 and 2021

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

		Nine Months Ended May 31,
(dollars in thousands)		2022								2021
						Percent of Total  Revenue								Percent of Total  Revenue
Revenue
Subscription		$	113,347				52	%		$	92,069				48	%
License			9,438				4				7,412				4
Maintenance and support			18,519				8				18,404				10
Professional services			80,899				36				71,611				38
Total revenue			222,203				100				189,496				100
Cost of revenue
Subscription			43,468				20				33,540				17
License			1,098				1				1,369				1
Maintenance and support			2,792				1				2,556				1
Professional services			47,751				21				42,857				23
Total cost of revenue			95,109				43				80,322				42
Gross margin			127,094				57				109,174				58
Operating expenses
Research and development			40,873				18				36,040				19
Sales and marketing			42,741				19				40,390				21
General and administrative			46,649				21				44,273				23
Change in fair value of contingent consideration			67				1				(291	)			—
Total operating expense			130,330				59				120,412				63
Income (loss) from operations			(3,236	)			(2	)			(11,238	)			(5	)
Other income (expense), net			(1,641	)			(1	)			1,009				—
Interest income (expense), net			130				1				(87	)			—
Income (loss) before income taxes			(4,747	)			(2	)			(10,316	)			(5	)
Provision for income taxes			1,204				1				1,056				1
Net loss		$	(5,951	)			(3	)%		$	(11,372	)			(6	)%

 

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

		Nine Months Ended May 31,
		2022				2021
Cost of subscription revenue		$	253			$	302
Cost of maintenance and support revenue			26				22
Cost of professional services revenue			649				2,003
Research and development			1,281				1,505
Sales and marketing			726				2,493
General and administrative			3,794				2,980
Total share-based compensation expense		$	6,729			$	9,305

 

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Revenue

Subscription

Subscription revenue increased $21.3 million, or 23%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021, due to a combination of sales to new customers and increased revenue generated from existing customers, which includes sales of new services and contractual growth.

License

License revenue increased $2.0 million, or 27%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021 primarily due to contractual increases on, as well as the timing of, existing customer renewals, including multi-year license renewals which did not occur in the prior period.

Maintenance and Support

Maintenance and support revenue increased $0.1 million, or 1%, in the nine months ended May 31, 2022 versus the nine months ended May 31, 2021 primarily due to renewal term increases of maintenance and support fees charged to customers during the period.

Professional services

Professional services revenue increased $9.3 million, or 13%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021 primarily due to continued work on several large implementation projects and growth of our existing software customer base, partially offset by a decrease from completed project implementations.

Cost of Revenue

Cost of revenue increased $14.8 million, or 18%, during the nine months ended May 31, 2022 compared to the nine months ended May 31, 2021.

Cost of Subscriptions

Cost of subscription revenue increased $9.9 million, or 30%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021 primarily due to an increase in SaaS customers, and is comprised of a $5.8 million increase in hosting costs due to usage increase, a $3.1 million increase in payroll and related costs, and a $1.1 million increase in computer hardware and software costs.

Cost of License

Cost of license revenue decreased $0.3 million, or 20% during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021 primarily due to a decrease in the amount of amortization on previously acquired technology intangible assets and timing of royalty fees incurred to third parties.

Cost of Maintenance and Support

Cost of maintenance and support revenue increased $0.2 million, or 9%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021 primarily due to an increase in personnel-related costs required to support our term and perpetual license customers.

Cost of Professional Services

Cost of professional services revenue increased $4.9 million, or 11%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021, mainly attributable to an increase of $5.0 million in payroll and related costs, driven by increased headcount, and an increase of $1.4 million in contingent labor. These increases were partially offset by a $1.3 million decrease in share-based compensation expense and a $0.5 million decrease in bonus expense.

Gross Margin

Gross margin increased $17.9 million, or 16%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021, primarily due to a $11.4 million increase in subscription gross margin, a $4.4 million increase in professional services gross margin, a $2.3 million increase in license gross margin, and a nominal decrease in maintenance and support gross margin. The increase in subscription gross margin was driven by strong growth in subscription revenue.

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Our gross margin percentage decreased to 57% from 58% during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021. The subscription gross margin percentage experienced a decrease to 62% from 64%, and maintenance and support gross margin percentage experienced a decrease to 85% from 86%, while professional services gross margin percentage increased to 41% from 40% and license gross margin percentage increased to 88% from 82%.

Operating Expenses

Research and Development Expense

Research and development expense increased $4.8 million, or 13%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021 primarily due to a $3.8 million increase in payroll costs from increased headcount, a $0.5 million increase in computer hardware and software, and a $0.5 million increase in hosting costs. These increases were partially offset by a $0.5 million decrease in bonus expense and a $0.4 million decrease in capitalized software.

Sales and Marketing Expense

Sales and marketing expense increased $2.4 million, or 6% during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021, primarily due to an increase of $1.6 million in payroll costs from increased headcount, a $1.0 million increase in marketing programs spend, a $0.8 million increase in travel and entertainment expense, and a $0.7 million increase in recruiting. These increases were partially offset by a $1.8 million decrease in share-based compensation and a $0.6 million decrease in bonus expense.

General and Administrative Expense

General and administrative expense increased $2.4 million, or 5%, during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021, primarily due to a $1.6 million increase in the allowance for credit losses, a $1.1 million increase in payroll related costs, a $0.9 million increase in computer hardware and software expense, and a $0.8 million increase in share-based compensation expense. These increases were partially offset by a $1.8 million decrease in professional services expense, $0.9 million decrease in facilities expense, and a $0.6 million decrease in bonus expense.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration is due to changes in estimated contingent consideration as well as present value calculations related to the contingent consideration estimates of the acquisition of Outline Systems LLC, a provider of P&C distribution channel management software and longstanding member of our partner ecosystem (now Duck Creek Distribution Management). The final contingent consideration has been paid in full as of May 31, 2022.

Other Income (Expense), Net

Other income (expense), net decreased $2.7 million during the nine months ended May 31, 2022 as compared to the nine months ended May 31, 2021, primarily due to fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar.

Interest Income (Expense), Net

Interest income (expense), net increased $0.2 million during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021. Interest income received from cash, cash equivalents, and short-term investments was partially offset by interest expense, which consists of fees paid to maintain the revolving credit facility, though there were no outstanding borrowings in either period.

 

Provision for Income Taxes

Provision for income taxes increased 14% during the nine months ended May 31, 2022 versus the nine months ended May 31, 2021 primarily due to the impact of goodwill amortized for tax purposes versus book purposes, the impact of higher profits in foreign subsidiaries, and higher state taxes.

Liquidity and Capital

To date, we have financed our operations primarily through cash provided by operating activities, our revolving credit facility, and, most recently, through net proceeds received from our IPO. As of May 31, 2022, we had $141.7 million in cash and cash equivalents, no outstanding borrowings under our revolving credit facility, and $0.7 million of outstanding letters of credit. We also had $44.2 million of additional principal availability under our revolving credit facility. We believe that our existing cash and cash equivalents, together with cash provided by operating activities and amounts available under our revolving credit facility, will be

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

As of May 31, 2022, $55.3 million of cash and cash equivalents and $69.8 million of short-term investments were held by our foreign subsidiaries, $100.0 million of which is the result of repaying an intercompany loan during the three months ended November 30, 2021 and is held or invested in a U.S. dollar-based bank account. We currently do not anticipate a need to repatriate these funds to finance our U.S. operations; however, we may utilize all or part of the $100.0 million to finance future acquisitions.

Summary of Cash Flows for the Six Months Ended May 31, 2022 and 2021

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

 

		Nine Months Ended May 31,
($ in thousands)		2022				2021
Net cash used in operating activities		$	(5,620	)		$	(16,218	)
Net cash used in investing activities			(33,548	)			(257,610	)
Net cash used in financing activities			(4,806	)			(413	)
Net decrease in cash and cash equivalents			(43,974	)			(274,241	)
Cash and cash equivalents – beginning of period			185,657				389,878
Cash and cash equivalents – end of period		$	141,683			$	115,637

 

Operating Activities

We used $5.6 million of cash from operating activities during the nine months ended May 31, 2022, primarily resulting from our net loss, after including the impact of non-cash benefits, of $20.0 million and $24.0 million of cash used in working capital activities. Cash used in working capital activities during the nine months ended May 31, 2022 was primarily due to annual bonus payments of $18.8 million, an increase in accounts receivable and unbilled revenue of $4.2 million, a decrease in accrued liabilities of $9.9 million, and a decrease in deferred revenue of $5.2 million.

We used $16.2 million of cash from operating activities during the nine months ended May 31, 2021, resulting from our net income, after including the impact of non-cash benefits, of $13.9 million and $30.0 million of cash used in working capital activities. Cash used in working capital activities during the nine months ended May 31, 2021 was primarily due to annual bonus payments of $18.2 million, Phantom unit settlement payments of $9.1 million as result of our IPO in the prior period, and a decrease of $6.4 million in accrued liabilities.

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

Investing Activities

We used $33.5 million of cash from investing activities during the nine months ended May 31, 2022 compared to cash used in investing activities of $257.6 million in the nine months ended May 31, 2021. During the nine months ended May 31, 2022, we had maturities of short-term investments of $191.9 million and purchases of short-term investments of $223.3 million compared to $32 million of maturities and $287.9 million of purchasers of short-term investments in the nine months ended May 31, 2021.

In the nine months ended May 31, 2022, we used $0.8 million of cash on purchases of property, plant and equipment, compared to $0.8 million during the nine months ended May 31, 2021. Additionally, our capitalized costs for internal use software were $1.3 million during the nine months ended May 31, 2022 compared to $0.9 million during the nine months ended May 31, 2021.

Financing Activities

We used $4.8 million of cash in financing activities during the nine months ended May 31, 2022, compared to cash used in financing activities of $0.4 million during the nine months ended May 31, 2021. Cash used in financing activities during the nine months ended May 31, 2022 primarily related to a $3.9 million contingent earnout liability payment, as compared to a $1.9 million

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contingent earnout liability payment in the prior year. During the nine months ended May 31, 2021, the Company made $3.7 million in payments of deferred IPO costs and received $3.5 million in proceeds from a follow-on offering.

Other Financial Data and Key Metrics

Non-GAAP Financial Measures

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

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

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

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

Adjusted EBITDA. We define Adjusted EBITDA as net loss before interest expense, net; other income (expense), net; provision for income taxes; depreciation of property and equipment; amortization of intangible assets; share-based compensation expense; the change in fair value of contingent consideration; and acquisition-related expenses. We believe Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Adjusted EBITDA was $2.4 million and $5.5 million for the three months ended May 31, 2022 and 2021, respectively, and $17.5 million and $12.1 million for the nine months ended May 31, 2022 and 2021, respectively. A reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

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		Three Months Ended May 31,								Nine Months Ended May 31,
($ in thousands)		2022				2021				2022				2021
GAAP Net loss		$	(5,764	)		$	(357	)		$	(5,951	)		$	(11,372	)
Provision for income taxes			407				353				1,204				1,056
Other income (expense), net			913				(546	)			1,641				(1,009	)
Interest (income) expense, net			(283	)			6				(130	)			87
Depreciation of property and equipment			623				790				1,987				2,377
Amortization of intangible assets			3,892				3,994				11,725				11,982
Share-based compensation expense			2,407				1,697				6,729				9,305
Change in fair value of contingent earnout liability			—				(389	)			67				(291	)
Acquisition-related expenses			217				—				217				—
Adjusted EBITDA		$	2,412			$	5,548			$	17,489			$	12,135
Adjusted EBITDA as a percent of total revenue			3	%			8	%			8	%			6	%

 

Free Cash Flow. We define Free Cash Flow as net cash provided by operating activities, less purchases of property and equipment and capitalized internal-use software. We consider Free Cash Flow to be an important measure in facilitating period-to-period comparisons of liquidity. We use Free Cash Flow in conjunction with traditional GAAP measures as part of our overall assessment of liquidity. Free Cash Flow was $16.5 million and $6.6 million for the three months ended May 31, 2022 and 2021, respectively, and ($7.7) million and ($17.9) million for the nine months ended May 31, 2022 and 2021, respectively. A reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

		Three Months Ended May 31,								Nine Months Ended May 31,
($ in thousands)		2022				2021				2022				2021
Net cash provided by (used in) operating activities		$	17,406			$	6,875			$	(5,620	)		$	(16,218	)
Purchases of property and equipment			(268	)			(162	)			(841	)			(834	)
Capitalized internal-use software			(595	)			(114	)			(1,282	)			(864	)
Free Cash Flow		$	16,543			$	6,599			$	(7,743	)		$	(17,916	)

 

Non-GAAP Gross Margin. We define Non-GAAP Gross Margin as GAAP gross margin before the portion of share-based compensation expense; amortization of intangible assets; and amortization of capitalized internal-use software that is included in cost of revenue. We believe Non-GAAP Gross Margin provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of gross margin. Non-GAAP Gross Margin was $42.4 million and $42.2 million for the three months ended May 31, 2022 and 2021, respectively, and $133.0 million and $116.6 million for the nine months ended May 31, 2022 and 2021, respectively. A reconciliation of Non-GAAP Gross Margin to gross margin, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

		Three Months Ended May 31,								Nine Months Ended May 31,
($ in thousands)		2022				2021				2022				2021
GAAP Gross margin		$	40,295			$	40,188			$	127,094			$	109,174
Share-based compensation expense			495				350				928				2,327
Amortization of intangible assets			1,084				1,187				3,302				3,559
Amortization of capitalized internal-use software			562				510				1,684				1,506
Non-GAAP Gross margin		$	42,436			$	42,235			$	133,008			$	116,566

 

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Non-GAAP Income from Operations. We define Non-GAAP Income from Operations as GAAP loss from operations before share-based compensation expense; amortization of intangible assets; the change in fair value of contingent consideration; and acquisition-related expenses. We believe Non-GAAP Income from Operations provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Non-GAAP Income from Operations was $1.8 million and $4.8 million for the three months ended May 31, 2022 and 2021, respectively, and $15.5 million and $9.8 million for the nine months ended May 31, 2022 and 2021, respectively. A reconciliation of Non-GAAP Income from Operations to loss from operations, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

		Three Months Ended May 31,								Nine Months Ended May 31,
($ in thousands)		2022				2021				2022				2021
GAAP Loss from operations		$	(4,727	)		$	(544	)		$	(3,236	)		$	(11,238	)
Share-based compensation expense			2,407				1,697				6,729				9,305
Amortization of intangible assets			3,892				3,994				11,725				11,982
Change in fair value of contingent earnout liability			—				(389	)			67				(291	)
Acquisition-related expenses			217				—				217				—
Non-GAAP Income from operations		$	1,789			$	4,758			$	15,502			$	9,758

 

Non-GAAP Net Income (Loss). We define Non-GAAP Net Income as GAAP net loss before share-based compensation expense; amortization of intangible assets; change in fair value of contingent earnout liability; and acquisition-related expenses. We believe Non-GAAP Net Income provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Non-GAAP Net Income was $0.9 million and $4.0 million for the three months ended May 31, 2022 and 2021, respectively, and $10.6 million and $8.1 million for the nine months ended May 31, 2022 and 2021, respectively. A reconciliation of Non-GAAP Net Income to net loss, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

		Three Months Ended May 31,															Nine Months Ended May 31,
($ in thousands)		2022				Per Share				2021				Per Share			2022				Per Share				2021				Per Share
GAAP Net loss		$	(5,764	)		$	(0.04	)		$	(357	)		$	(0.00	)	$	(5,951	)		$	(0.05	)		$	(11,372	)		$	(0.08	)
Add: GAAP tax provision (1)			407								353							1,204								1,056
GAAP pre-tax loss			(5,357	)							(4	)						(4,747	)							(10,316	)
Share-based compensation expense			2,407								1,697							6,729								9,305
Amortization of intangible assets			3,892								3,994							11,725								11,982
Change in fair value of contingent earnout liability			—								(389	)						67								(291	)
Acquisition-related expenses			217								—							217								—
Non-GAAP pre-tax income			1,159								5,298							13,991								10,680
Non-GAAP tax provision applied at a 24% tax rate (1)			278								1,272							3,358								2,563
Non-GAAP Net Income (1)		$	881			$	0.01			$	4,026			$	0.03		$	10,633			$	0.08			$	8,117			$	0.06
Shares used in computing Non-GAAP net income per share      amounts (2):
GAAP weighted-average shares - basic and diluted			132,523,919								131,613,003							132,131,077								130,992,672
Non-GAAP dilutive shares (using the treasury stock method)			1,505,488								2,405,177							1,505,488								2,405,177
Non-GAAP weighted-average shares - diluted			134,029,407								134,018,180							133,636,565								133,397,849

 

SaaS Net Dollar Retention Rate. We calculate SaaS Net Dollar Retention Rate by annualizing the recurring subscription revenue recognized in the last month of the measurement period for those revenue-generating customers in place throughout the entire measurement period (the latest twelve-month period). We divide the result by annualized SaaS revenue from the month that is immediately prior to the beginning of the measurement period, for all revenue-generating customers in place at the beginning of the measurement period. Our SaaS Net Dollar Retention Rate was 112.3% and 133.1% as of May 31, 2022 and 2021, respectively. Our calculation excludes one existing contract for a service no longer offered on a standalone basis by the Company. We believe SaaS Net Dollar Retention Rate is an important metric for the Company because, in addition to providing a measure of retention, it indicates our ability to grow revenue within existing customer accounts. SaaS Net Dollar Retention Rate is included in a set of metrics that we calculate quarterly to review with management as well as periodically with members of our board of directors.

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SaaS Annual Recurring Revenue (“SaaS ARR”). We calculate SaaS ARR by annualizing the recurring subscription revenue recognized in the last month of the measurement period (the latest twelve-month period). Our SaaS ARR was $155.3 million and $124.1 million as of May 31, 2022 and 2021, respectively. Our calculation excludes one existing contract for a service no longer offered on a standalone basis by the Company. We believe SaaS ARR provides important information about our ability to acquire new subscription SaaS customers and to maintain and expand our relationship with existing subscription SaaS customers. SaaS ARR is included in a set of metrics that we calculate quarterly to review with management as well as periodically with members of our board of directors.

 

Indebtedness

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

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

The Company is required to meet certain financial and nonfinancial covenants under the terms of the revolving credit facility. These covenants include limits on the creation of liens, limits on making certain investments, limits on incurring additional indebtedness, and maintaining a leverage ratio at or below a maximum level. The Company was in compliance with these financial and nonfinancial covenants as of May 31, 2022.

We incurred $0.7 million of costs directly related to obtaining our revolving credit facility which have been recorded as deferred financing fees and are amortized to legal expense on a straight-line basis over the term of our revolving credit facility. During fiscal 2017, we executed an irrevocable standby letter of credit totaling $0.8 million against our revolving credit facility in lieu of a cash security deposit for one of our office leases. Two additional irrevocable standby letters of credit were executed during fiscal 2019 for $0.2 million and $0.1 million, respectively, against our revolving credit facility in lieu of cash deposits for two of our office leases. In fiscal 2020, the $0.2 million letter of credit was reduced by $0.1 million. In fiscal 2022, the $0.8 million letter of credit was reduced to $0.5 million. Apart from the letters of credit, we did not have any borrowings outstanding on our revolving credit facility as of May 31, 2022 and 2021.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements, as defined in Regulation S-K, Item 303(a)(4)(ii) promulgated by the SEC under the Securities Act, in the nine months ended May 31, 2022 and 2021, respectively.

Critical Accounting Policies and Estimates

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

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Recent Accounting Pronouncements

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Interest Rate Risk

As of May 31, 2022, our cash and cash equivalents balance included one U.S. Treasury bill and no restricted cash, and we had no outstanding indebtedness under our revolving credit facility.

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

Foreign Currency Exchange Risk

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

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of May 31, 2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

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

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits.

 

Exhibit Number		Description
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document
101.SCH		Inline Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

* Filed herewith.

† Compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		Duck Creek Technologies, Inc.
Date: June 30, 2022		By:	/s/ Michael A. Jackowski
			Michael A. Jackowski
			Chief Executive Officer
			(principal executive officer)
Date: June 30, 2022		By:	/s/ Kevin R. Rhodes
			Kevin R. Rhodes
			Chief Financial Officer
			(principal financial officer and principal accounting officer)

 

39

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