SEC Filing | Thoughtworks, Inc.

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twks-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 September 30, 2022


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

For transition period from ______ to _____

Commission File Number 001-40812

THOUGHTWORKS HOLDING, INC.

(Exact name of registrant as specified in its charter)


Delaware						82-2668392
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

200 East Randolph Street, 25th Floor

Chicago, Illinois 60601

(312) 373-1000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value

TWKS

Nasdaq Global Select Market

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, a 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 November 10, 2022, there were 314,838,787 shares of the registrant's common stock outstanding.

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THOUGHTWORKS HOLDING, INC.
QUARTERLY REPORT ON FORM 10-Q
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		Page
Forward-Looking Statements		3

Part I. Financial Information
Item 1	Condensed Consolidated Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021	5
	Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the three and nine months ended September 30, 2022 and 2021 (Unaudited)	6
	Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity for the three and nine months ended September 30, 2022 and 2021 (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited)	9
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	11
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosure About Market Risk	42
Item 4	Controls and Procedures	42

Part II. Other Information
Item 1	Legal Proceedings	44
Item 1A	Risk Factors	44
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3	Defaults Upon Senior Securities	44
Item 4	Mine Safety Disclosures	44
Item 5	Other Information	44
Item 6	Exhibits	45
Signatures		46

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FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q (the “Quarterly Report”) contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” "strive," “will,” “would” or similar expressions and the negatives of those terms but the absence of these words does not mean that the statement is not forward-looking. The forward-looking statements are contained principally in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements may include information concerning our possible or assumed future results of operations, client demand, business strategies, technology developments, financing and investment plans, competitive position, our industry, macroeconomic and regulatory environment, potential growth opportunities and the effects of competition.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. You should read this Quarterly Report and the documents that we have filed as exhibits hereto, completely and with the understanding that our actual future results may be materially different from what we expect.

Important factors that could cause actual results to differ materially from our expectations include:

•we may be unable to implement our growth strategy;

•our ability to generate and retain business depends on our reputation in the marketplace;

•we must successfully attract, hire, train and retain skilled professionals to service our clients’ projects and we must productively deploy our professionals to remain profitable;

•increases in wages, equity compensation and other compensation expenses could prevent us from sustaining our competitive advantage and increase our costs;

•our business and operations may be harmed if we cannot positively evolve and preserve our Thoughtworks culture;

•our global business exposes us to operational, geopolitical, regulatory, legal and economic risks;

•our business, financial condition and results of operations may be adversely affected by fluctuations in foreign currency exchange rates or changes in our effective tax rates;

•if we fail to adequately innovate, adapt and/or remain at the forefront of emerging technologies and related client demands, we could be materially adversely affected;

•we may not be successful at attracting new clients or retaining and expanding our relationships with our existing clients;

•we face intense competition and operate in a rapidly evolving industry, which makes it difficult to evaluate our future prospects;

•we generally do not have long-term commitments or contracts with our clients;

•we face risks associated with having a long selling and implementation cycle for our services;

•our profitability could suffer if we cannot accurately price our solutions and services, maintain favorable pricing for our solutions and services, are unable to collect on receivables from clients or fail to meet our contractual and other obligations to clients;

•the COVID-19 pandemic has impacted our business and operations, and future business and operational challenges posed by the COVID-19 pandemic could materially adversely affect us;

•we face risks associated with security breaches as well as privacy and data protection regulations, and we may incur significant liabilities if we fail to manage those risks;

•we may not be able to prevent unauthorized use of our intellectual property, and our intellectual property rights may not be adequate to protect our business and competitive position;

•investment funds advised by Apax Partners L.L.P. control us, and such control may give rise to actual or perceived conflicts of interests;

•our status as a “controlled company” will grant us exemptions from certain corporate governance requirements, and our status as an “emerging growth company” will allow us to comply with reduced public company reporting requirements; and

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other factors disclosed in the section entitled “Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2022 (the "2021 Annual Report").

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include, but are not limited to, those disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report and in our 2021 Annual Report. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other Securities and Exchange Commission (“SEC”) filings and public communications. You should evaluate all forward-looking statements made in this Quarterly Report in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)


THOUGHTWORKS HOLDING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data and per share data)
	September 30, 2022		December 31, 2021
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	184,544	$	368,209
Trade receivables, net of allowance of $11,734 and $8,916, respectively	145,686		145,874
Unbilled receivables	172,766		104,057
Prepaid expenses and other current assets	33,438		60,799

Total current assets	536,434		678,939
Property and equipment, net	37,656		34,500
Right-of-use assets	38,168		—
Intangibles and other assets:
Goodwill	394,398		346,719
Trademark	273,000		273,000
Customer relationships, net	123,962		125,867
Other non-current assets	30,401		25,125
Total assets	$	1,434,019	$	1,484,150
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	4,799	$	4,773
Long-term debt - current	7,150		7,150
Income taxes payable	31,408		15,693
Accrued compensation	113,120		87,059
Deferred revenue	2,352		13,807
Value-added tax and sales tax payable	1,826		7,954
Accrued expenses	27,500		44,094
Lease liabilities, current	15,076		—
Total current liabilities	203,231		180,530
Lease liabilities, non-current	25,888		—
Long-term debt, less current portion	393,492		497,380
Deferred tax liabilities	61,424		78,944
Other long-term liabilities	20,326		18,805
Total liabilities	704,361		775,659
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; 100,000,000 shares authorized, zero issued and outstanding at September 30, 2022 and December 31, 2021, respectively	—		—
Common stock, $0.001 par value; 1,000,000,000 shares authorized, 365,376,105 and 356,117,752 issued, 314,733,382 and 305,132,181 outstanding at September 30, 2022 and December 31, 2021, respectively	365		356
Treasury stock, 50,642,723 and 50,985,571 shares at September 30, 2022 and December 31, 2021, respectively	(625,155)		(629,424)
Additional paid-in capital	1,572,038		1,390,630
Accumulated other comprehensive loss	(53,254)		(10,863)
Retained deficit	(164,336)		(42,208)
Total stockholders' equity	729,658		708,491
Total liabilities and stockholders' equity	$	1,434,019	$	1,484,150

The accompanying notes form an integral part of the condensed consolidated financial statements.

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THOUGHTWORKS HOLDING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME (unaudited)

(In thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues	$	332,447	$	285,051	$	985,494	$	783,145
Operating expenses:
Cost of revenues	236,007		183,945		739,097		471,047
Selling, general and administrative expenses	89,559		113,019		297,587		248,366
Depreciation and amortization	5,303		4,173		15,364		13,007
Total operating expenses	330,869		301,137		1,052,048		732,420
Income (loss) from operations	1,578		(16,086)		(66,554)		50,725
Other (expense) income:
Interest expense	(5,871)		(6,734)		(15,502)		(20,316)
Net realized and unrealized foreign currency loss	(13,127)		(1,934)		(21,614)		(3,608)
Other income (expense), net	2,056		162		1,731		306
Total other (expense) income	(16,942)		(8,506)		(35,385)		(23,618)
(Loss) income before income taxes	(15,364)		(24,592)		(101,939)		27,107
Income tax expense	16,027		643		19,348		15,605
Net (loss) income	$	(31,391)	$	(25,235)	$	(121,287)	$	11,502

Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments	(18,110)		(7,109)		(42,391)		(9,002)
Comprehensive (loss) income	$	(49,501)	$	(32,344)	$	(163,678)	$	2,500

Net loss per common share:
Basic loss per common share	$	(0.10)	$	(0.10)	$	(0.39)	$	(0.20)
Diluted loss per common share	$	(0.10)	$	(0.10)	$	(0.39)	$	(0.20)

Weighted average shares outstanding:
Basic	311,621,233		241,351,052		309,481,860		237,121,811
Diluted	311,621,233		241,351,052		309,481,860		237,121,811

The accompanying notes form an integral part of the condensed consolidated financial statements.

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THOUGHTWORKS HOLDING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (unaudited)

(In thousands, except share data)


	Redeemable, Convertible Preferred Stock			Common Stock			Treasury			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings (Deficit)
	Shares	Amount		Shares	Amount		Shares	Amount								Total
Balance as of December 31, 2020	23,493,546	$	322,800	278,322,716	$	279	572,711	$	(1,608)	$	381,172	$	(1,589)	$	106,458	$	484,712
Net income	—	—		—	—		—	—		—		—		18,585		18,585
Other comprehensive loss, net of tax	—	—		—	—		—	—		—		(3,968)		—		(3,968)
Issuance of common stock on exercise of options	—	—		27,184	—		—	—		62		—		—		62
Issuance of common stock	—	—		133,313	—		—	—		1,873		—		—		1,873
Issuance of Series A redeemable convertible preferred stock, net of issuance costs of $9.0 million	27,765,084	380,994		—	—		—	—		—		—		—		—
Other	—	—		—	—		—	—		(104)		—		—		(104)
Tender offer	—	—		(50,412,860)	—		50,412,860	(627,816)		(10,391)				(79,222)		(717,429)
Stock-based compensation expense	—	—		—	—		—	—		1,874		—		—		1,874
Balance as of March 31, 2021	51,258,630	$	703,794	228,070,353	$	279	50,985,571	$	(629,424)	$	374,486	$	(5,557)	$	45,821	$	(214,395)
Net income	—	—		—	—		—	—		—		—		18,152		18,152
Other comprehensive income, net of tax	—	—		—	—		—	—		—		2,075		—		2,075
Issuance of common stock on exercise of options	—	—		10,297	—		—	—		24		—		—		24
Issuance of Series B Redeemable Convertible Preferred Stock, net of issuance costs of $2.8 million	8,231,328	122,228		—	—		—	—		—		—		—		—
Dividends	—	—		—	—		—	—		(279,191)		—		(45,821)		(325,012)
Other	—	—		—	—		—	—		104		—		—		104
Stock-based compensation expense	—	—		—	—		—	—		8,362		—		—		8,362
Balance as of June 30, 2021	59,489,958	$	826,022	228,080,650	$	279	50,985,571	$	(629,424)	$	103,785	$	(3,482)	$	18,152	$	(510,690)
Net loss	—	—		—	—		—	—		—		—		(25,235)		(25,235)
Other comprehensive loss, net of tax	—	—		—	—		—	—		—		(7,109)		—		(7,109)
Issuance of common stock upon initial public offering, net of issuance costs of $30.3 million	—	—		16,429,964	16		—	—		314,700		—		—		314,716
Conversion of redeemable convertible preferred stock to common stock	(59,489,958)	(826,022)		59,489,958	60		—	—		825,962		—		—		826,022
Issuance of common stock on exercise of options, net of withholding taxes	—	—		1,116,471	1		—	—		(972)		—		—		(971)
Stock-based compensation expense	—	—		—	—		—	—		72,600		—		—		72,600
Balance as of September 30, 2021	—	$	—	305,117,043	$	356	50,985,571	$	(629,424)	$	1,316,075	$	(10,591)	$	(7,083)	$	669,333

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	Redeemable, Convertible Preferred Stock			Common Stock			Treasury			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings (Deficit)
	Shares	Amount		Shares	Amount		Shares	Amount								Total
Balance as of December 31, 2021	—	$	—	305,132,181	$	356	50,985,571	$	(629,424)	$	1,390,630	$	(10,863)	$	(42,208)	$	708,491
Net loss	—	—		—	—		—	—		—		—		(59,904)		(59,904)
Other comprehensive loss, net of tax	—	—		—	—		—	—		—		(5,679)		—		(5,679)

Issuance of common stock for equity incentive awards, net of withholding taxes	—	—		4,736,820	5		—	—		(28,047)		—		—		(28,042)
Reissuance of treasury shares for equity incentive awards	—	—		155,806	—		(155,806)	1,940		(1,796)		—		—		144
Stock-based compensation expense	—	—		—	—		—	—		120,737		—		—		120,737
Cumulative effect related to adoption of ASU 2016-13	—	—		—	—		—	—		—		—		(841)		(841)
Balance as of March 31, 2022	—	$	—	310,024,807	$	361	50,829,765	$	(627,484)	$	1,481,524	$	(16,542)	$	(102,953)	$	734,906
Net loss	—	—		—	—		—	—		—		—		(29,992)		(29,992)
Other comprehensive loss, net of tax	—	—		—	—		—	—		—		(18,602)		—		(18,602)
Issuance of common stock for equity incentive awards, net of withholding taxes	—	—		888,186	1		—	—		2,442		—		—		2,443
Reissuance of treasury shares for equity incentive awards	—	—		51,311	—		(51,311)	639		(496)		—		—		143
Stock-based compensation expense	—	—		—	—		—	—		54,948		—		—		54,948
Balance as of June 30, 2022	—	$	—	310,964,304	$	362	50,778,454	$	(626,845)	$	1,538,418	$	(35,144)	$	(132,945)	$	743,846
Net loss	—	—		—	—		—	—		—		—		(31,391)		(31,391)
Other comprehensive loss, net of tax	—	—		—	—		—	—		—		(18,110)		—		(18,110)
Issuance of common stock for equity incentive awards, net of withholding taxes	—	—		3,633,347	3		—	—		(13,635)		—		—		(13,632)
Reissuance of treasury shares for equity incentive awards	—	—		135,731	—		(135,731)	1,690		(1,541)		—		—		149
Stock-based compensation expense	—	—		—	—		—	—		48,796		—		—		48,796
Balance as of September 30, 2022	—	$	—	314,733,382	$	365	50,642,723	$	(625,155)	$	1,572,038	$	(53,254)	$	(164,336)	$	729,658

The accompanying notes form an integral part of the condensed consolidated financial statements.

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THOUGHTWORKS HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(121,287)	$	11,502
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense	25,561		21,702
Bad debt expense (recovery)	2,447		(611)
Deferred income tax benefit	(24,087)		(12,209)
Stock-based compensation expense	224,481		82,836
Unrealized foreign currency exchange losses	24,953		3,912
Non-cash lease expense on right-of-use assets	13,807		—
Other operating activities, net	(546)		1,360
Changes in operating assets and liabilities:
Trade receivables	(10,803)		(3,960)
Unbilled receivables	(78,445)		(39,670)
Prepaid expenses and other assets	(4,856)		(29,147)
Lease liabilities	(11,842)		—

Accounts payable	(177)		1,602
Accrued expenses and other liabilities	17,135		58,182
Net cash provided by operating activities	56,341		95,499
Cash flows from investing activities:
Purchase of property and equipment	(19,672)		(21,504)
Proceeds from disposal of fixed assets	437		375
Acquisitions, net of cash acquired	(70,011)		(44,759)
Net cash used in investing activities	(89,246)		(65,888)
Cash flows from financing activities:
Proceeds from initial public offering, net of issuance costs and underwriting discounts	—		314,716
Proceeds from issuance of Series A redeemable convertible preferred stock, net of issuance costs	—		380,994
Proceeds from issuance of Series B redeemable convertible preferred stock, net of issuance costs	—		122,228
Proceeds from issuance of common stock	—		1,873
Payments of obligations of long-term debt	(105,363)		(234,921)
Payments of debt issuance costs	—		(7,098)


Proceeds from borrowings on long-term debt	—		401,285
Proceeds from issuance of common stock on exercise of options, net of employee tax withholding	5,651		(885)
Shares and options purchased under tender offer	—		(701,960)
Dividends paid	—		(315,003)
Withholding taxes paid on tender offer	(15,469)		—
Withholding taxes paid on dividends previously declared	(10,009)		—
Withholding taxes paid related to net share settlement of equity awards	(33,017)		—
Other financing activities, net	(6)		1,317
Net cash used in financing activities	(158,213)		(37,454)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(18,032)		(3,394)
Net decrease in cash, cash equivalents and restricted cash	(209,150)		(11,237)
Cash, cash equivalents and restricted cash at beginning of the period	394,942		492,199
Cash, cash equivalents and restricted cash at end of the period	$	185,792	$	480,962

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THOUGHTWORKS HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
	Nine Months Ended September 30,
	2022		2021
Supplemental disclosure of cash flow information:
Interest paid	$	14,486	$	18,736
Income taxes paid	$	22,830	$	21,307

Supplemental disclosures of non-cash financing activities:
Withholding taxes payable included within accrued expenses	$	—	$	34,539
Withholding taxes payable included within accrued compensation	$	11,534	$	—
Option costs receivable included within prepaid expenses and other current assets	$	105	$	—
Conversion of convertible preferred stock to common stock	$	—	$	826,022
Net settlement on exercise of shares	$	—	$	3,611

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	184,544	$	452,810
Restricted cash included in other current assets	—		26,827
Restricted cash included in other non-current assets	1,248		1,325
Total cash, cash equivalents and restricted cash	$	185,792	$	480,962

The accompanying notes form an integral part of the condensed consolidated financial statements.

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THOUGHTWORKS HOLDING, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Note 1 – Business and Summary of Significant Accounting Policies

Thoughtworks Holding, Inc. (together with its subsidiaries, the “Company”) develops, implements, and services complex enterprise application software, and provides business technology consulting. The Company conducts business in Australia, Brazil, Canada, Chile, China, Ecuador, Finland, Germany, Hong Kong, India, Italy, the Netherlands, Romania, Singapore, Spain, Thailand, the United Kingdom and the United States. Thoughtworks Holding, Inc. is the ultimate parent holding company of Thoughtworks, Inc. among other subsidiaries.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Thoughtworks Holding, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2021 Annual Report.

Certain amounts in the prior period consolidated financial statements and notes have been reclassified to conform to the 2022 presentation. These reclassifications had no effect on results of operations previously reported.

Preparation of Financial Statements and Use of Estimates

The preparation of these condensed consolidated financial statements is in conformity with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for credit losses, valuation and impairment of goodwill and long-lived assets, income taxes, accrued bonus, contingencies, stock-based compensation and litigation costs. The Company bases its estimates on current expectations and historical experience and on other assumptions that its management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources. Actual results can differ from those estimates, and such differences may be material to the condensed consolidated financial statements in the future. Operating results for interim periods are not necessarily indicative of results that may be expected to occur for the entire year. In management’s opinion, all adjustments considered necessary for a fair presentation of the accompanying unaudited condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature.

Restricted Cash

Restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Restricted cash is restricted as to withdrawal or use. The Company has restricted cash held on deposit at various financial institutions. The amounts are held to secure bank guarantees of amounts related to government requirements and as collateral for a corporate credit card.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting which requires it to allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on the estimated fair values at the acquisition date. The fair value of the net assets acquired for the business is determined utilizing expectations and assumptions believed reasonable by management. The excess of the purchase consideration transferred over the fair values of assets acquired and liabilities assumed is recorded

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as goodwill. As additional information is obtained about the assets and liabilities of the acquisition during the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed with an offset to goodwill. After the measurement period, any adjustments are recorded in the condensed consolidated statements of (loss) income and comprehensive (loss) income. Acquisition costs are expensed as incurred.

Some business combinations may include a contingent consideration agreement. The Company determines the fair value of the contingent consideration liability using a Monte Carlo Simulation. The liability is remeasured to fair value at each reporting date with adjustments recorded within other income (expense), net in the condensed consolidated statements of (loss) income and comprehensive (loss) income.

Government Assistance

The Company has historically received government subsidies in the form of cash in China and Singapore related to expenses such as rent, wages, training benefits and taxes. The subsidies are recorded against the related expense within selling, general and administrative ("SG&A") expense or cost of revenues in the condensed consolidated statements of (loss) income and comprehensive (loss) income. The Company recorded an immaterial amount for the three and nine months ended September 30, 2022.

Allowance for Credit Losses

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) in the first quarter of 2022. See “—Recently Adopted Accounting Standards” below for further discussion. The Company is exposed to credit risk primarily through trade receivables and unbilled receivables. Activity related to the Company’s allowance for credit losses is as follows (in thousands):


	Nine Months Ended September 30,
	2022
Allowance for credit losses, beginning balance	$	(8,916)
Impact of accounting standard adoption	(841)
Current provision for expected credit losses	(2,447)
Write-offs charged against allowance	114
Recoveries of amounts previously written off	—
Changes due to exchange rates	356
Allowance for credit losses, ending balance	$	(11,734)

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which amends existing accounting standards for lease accounting and requires lessees to recognize virtually all leases on the balance sheet by recording a right-of-use asset and a lease liability (for other than short term leases). The Company early adopted the standard effective January 1, 2022. The Company elected the modified retrospective transition method, and as a result, the Company did not adjust its comparative period financial information or make the new required lease disclosures for periods before the date of adoption. The Company elected to use the package of practical expedients, which permits the Company to not reassess: (i) whether a contract is or contains a lease, (ii) lease classification, and (iii) initial direct costs resulting from the lease. The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets. The Company is electing not to apply the recognition requirements to short-term leases of 12 months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term. The Company also elected the option to combine lease and non-lease components as a single component for the Company's entire population of lease assets. Upon adoption, the Company recorded $40.9 million of right-of-use assets ("ROU") and $43.7 million of lease liabilities. Refer to Note 7, Leases, for further discussion.

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions, and reasonable and supportable forecasts, or a current expected credit loss (“CECL”) model. For trade receivables, loans, and other financial instruments, companies are required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. In November 2019, the FASB issued ASU 2019-10 which delayed the effective date for the CECL standard. The guidance and related amendments are effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date.

The Company early adopted the accounting standard by recording a cumulative effect adjustment to retained earnings as of January 1, 2022 using a modified retrospective approach. The adoption mainly impacts trade receivables and unbilled receivables. The Company analyzed its historical credit loss experience and considered current conditions and reasonable forecasts in developing the expected credit loss rates. The adoption of this new standard did not have a material impact on the Company's condensed consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10, Disclosures by Business Entities About Government Assistance (Topic 832), which requires business entities to provide certain disclosures when they (1) have received government assistance and (2) use a grant or contribution accounting model by analogy to other accounting guidance. The guidance is effective for all entities for fiscal years beginning after December 15, 2021. Entities may apply the ASU’s provisions either (1) prospectively to all transactions within the scope of Accounting Standards Codification ("ASC") 832 that are reflected in the financial statements as of the adoption date and all new transactions entered into after the date of adoption or (2) retrospectively. The Company adopted the standard on January 1, 2022 on a prospective basis. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The optional amendments are effective as of March 12, 2020 through December 31, 2022, and upon adoption may be applied prospectively through December 31, 2022. The Company is currently assessing the impact of this ASU on the condensed consolidated financial statements and will adopt this new standard in the fiscal year beginning January 1, 2023.

In October 2021, the FASB issued ASU 2021-08, which amends ASC 805 to require acquiring entities to apply ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to recognize and measure contract assets and contract liabilities in a business combination. The guidance is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities should apply the ASU’s provisions prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently assessing the impact of this ASU on the condensed consolidated financial statements and will adopt this new standard in the fiscal year beginning January 1, 2023.

Concentration of Credit Risk and Other Risks and Uncertainties

Revenue generated from the Company's operations outside of the United States for the three months ended September 30, 2022 and 2021 was approximately 62% and 66%, respectively, and approximately 63% and 65% for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022 and December 31, 2021, approximately 70% and 73%, respectively, of trade receivables and unbilled receivables was due from customers located outside the United States. At September 30, 2022 and December 31, 2021, the Company had net property and equipment of $28.6 million and $26.6 million, respectively, outside the United States.

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Note 2 – Revenue Recognition

The Company disaggregates revenues from contracts with customers by geographic customer location, industry vertical and revenue contract types. Geographic customer location is pertinent to understanding the Company's revenues, as the Company generates its revenues from providing professional services to customers in various regions across the world. The Company groups customers into one of five industry verticals. Revenue contract types are differentiated by the type of pricing structure for customer contracts, which is predominantly time-and-materials, but also includes fixed price contracts.

Disaggregation of Revenues

The following table presents the disaggregation of the Company’s revenues by customer location (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

North America (1)	$	129,421	$	103,769	$	382,856	$	290,954
APAC (2)	108,353		98,756		320,233		260,928
Europe (3)	79,937		69,522		239,466		196,476
LATAM	14,736		13,004		42,939		34,787
Total revenues	$	332,447	$	285,051	$	985,494	$	783,145

(1)For the three months ended September 30, 2022 and 2021, the United States represented 36.4%, or $121.1 million, and 33.9%, or $96.5 million, respectively, of the Company’s total revenues. For the nine months ended September 30, 2022 and 2021, the United States represented 36.5%, or $359.7 million, and 35.1%, or $275.0 million, of the Company’s total revenues, respectively. Canadian operations were determined to be immaterial given the revenues as a percentage of total North America revenues was less than 10% for the three and nine months ended September 30, 2022 and 2021.

(2)For the three months ended September 30, 2022 and 2021, Australia represented 11.5%, or $38.4 million, and 10.9%, or $31.0 million, respectively, of the Company’s total revenues. For the nine months ended September 30, 2022 and 2021, Australia represented 11.6%, or $114.5 million, and 10.7%, or $83.7 million, respectively, of the Company’s total revenues.

(3)For the three months ended September 30, 2021, the United Kingdom represented 10.5%, or $30.0 million, respectively, of the Company's total revenues. For the nine months ended September 30, 2022 and 2021, the United Kingdom represented 10.4%, or $102.6 million, and 10.7%, or $83.5 million, respectively, of the Company’s total revenues. For the three and nine months ended September 30, 2021, Germany represented 10.5%, or $30.0 million, and 10.7%, or $84.2 million, respectively, of the Company’s total revenues. For the three months ended September 30, 2022, revenue in the United Kingdom as a percentage of the Company's total revenues was less than 10%. For the three and nine months ended September 30, 2022, revenue in Germany as a percentage of the Company’s total revenues was less than 10%.

Other foreign countries were determined to be immaterial given the revenues as a percentage of the Company’s total revenues was less than 10% for the three and nine months ended September 30, 2022 and 2021.

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The following table presents the disaggregation of the Company’s revenues by industry vertical (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Technology and business services	$	94,219	$	75,086	$	274,815	$	211,226
Energy, public and health services	83,386		71,556		237,101		205,465
Retail and consumer	57,919		57,723		182,982		146,647
Financial services and insurance	55,004		46,739		173,139		121,848
Automotive, travel and transportation	41,919		33,947		117,457		97,959

Total revenues	$	332,447	$	285,051	$	985,494	$	783,145

The following table presents the disaggregation of the Company’s revenues by contract type (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Time-and-material	$	282,190	$	237,533	$	829,485	$	635,608
Fixed-price	50,257		47,518		156,009		147,537

Total revenues	$	332,447	$	285,051	$	985,494	$	783,145

Contract Balances

The following table is a summary of the Company’s contract assets and contract liabilities (in thousands):


	As of September 30, 2022		As of December 31, 2021
Contract assets included in unbilled receivables	$	50,426	$	25,408
Contract liabilities included in deferred revenue	$	2,352	$	13,807

Contract assets primarily relate to unbilled amounts on fixed-price contracts. Contract assets are recorded when services have been provided but the Company does not have an unconditional right to receive consideration. Professional services performed on or prior to the balance sheet date, but invoiced thereafter, are reflected in unbilled receivables.

Contract liabilities represent amounts collected from the Company’s customers for revenues not yet earned. Such amounts are anticipated to be recorded as revenues when services are performed in subsequent periods. For the three months ended September 30, 2022 and 2021, the Company recognized $0.5 million and $0.5 million, respectively, of revenues that were included in current liabilities at the prior year end. For the nine months ended September 30, 2022 and 2021, the Company recognized $13.1 million and $11.2 million, respectively, of revenues that were included in current liabilities at the prior year end.

Costs to Obtain a Customer Contract

The Company incurs certain incremental costs to obtain a contract that the Company expects to recover. The Company applies a practical expedient and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs would primarily relate to commissions paid to our account executives and are included in SG&A expenses. The Company did not have long term contracts to capitalize related costs prior to the fourth quarter of 2021.

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The following table is a summary of the Company’s costs to obtain contracts and related amortization and impairment where the amortization period of the assets is greater than one year (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Balance at beginning of period	$	1,642	$	—	$	2,039	$	—
Costs to obtain contracts capitalized	488		—		726		—
Amortization of capitalized costs	(291)		—		(916)		—

Changes due to exchange rates	(3)		—		(13)		—
Balance at end of period	$	1,836	$	—	$	1,836	$	—

Transaction Price Allocated to Remaining Performance Obligations

The Company does not have material future performance obligations that extend beyond one year. Accordingly, the Company has applied the optional exemption for contracts that have an original expected duration of one year or less.

Note 3 – Acquisitions

On April 26, 2022, the Company completed the acquisition of Connected Lab Inc. ("Connected"), an end-to-end product design and development firm that partners with their clients to discover and deliver products that drive business impact, in an all-cash transaction for a gross purchase price of $83.8 million, or $79.4 million net of cash acquired of $4.4 million, which is inclusive of a $14.0 million contingent consideration liability as discussed below and other adjustments. Connected is now wholly owned by the Company. The acquisition will advance the Company's capabilities in solving business problems through product-led design processes, from defining the strategy to discovery and delivery and enhance the Thoughtworks customer experience, product and design service line in North America.

In connection with the acquisition, the Company recorded a liability of $14.0 million of contingent consideration, which is included within the total purchase price and classified within accrued expenses in the condensed consolidated balance sheet. The present value of the contingent consideration liability was determined using a Monte Carlo Simulation that calculated the average present value of the earnout payment. The fair value measurement of the earnout includes a performance metric which is an unobservable Level 3 input. The contingent consideration is payable in cash dependent upon achievement of the performance metric. The liability is remeasured to fair value at each reporting date with adjustments recorded within other income (expense), net in the condensed consolidated statements of (loss) income and comprehensive (loss) income. As of September 30, 2022, the maximum potential payout is $16.0 million. The determined actual payout is expected to occur in the second quarter of 2023.

The following table presents the change in the contingent consideration liability (in thousands):


Three Months Ended September 30,		Nine Months Ended September 30,
2022	2021	2022	2021