Clear Secure Inc

16. Income Taxes

As a result of the IPO and Reorganization, the Company became the sole managing member of Alclear, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Alclear is generally not subject to U.S. federal and most state and local income taxes. Any taxable income or loss generated by Alclear is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. The Company is subject to federal income taxes in the U.S. and its territories, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of Alclear, as well as any stand-alone income or loss generated by the Company. The Company is also subject to income taxes in Israel, Argentina, and Mexico.

The Company reported a tax expense of $409 on a pretax income of $39,000 for the three months ended June 30, 2024 as compared to a tax expense of $211 on a pretax income of $8,245 for the three months ended June 30, 2023. This resulted in an effective tax rate of 1.0% for the three months ended June 30, 2024 as compared to 2.6% percent for the three months ended June 30, 2023. The Company reported a tax expense of $2,374 on a pretax income of $73,053 for the six months ended June 30, 2024, as compared to a tax expense of $92 on a pretax loss of $147 for the six months ended June 30, 2023. This resulted in an effective tax rate of 3.2% for the six months ended June 30, 2024 as compared to (62.6%) for the six months ended June 30, 2023. The Company's effective tax rate differs from the statutory rate primarily due to the following: (1) the impact of Alclear being a partnership and allocating its taxable results to its non-controlling members, (2) movement in valuation allowance, and (3) the impact of U.S. federal and state taxes in excess of applicable tax attributes (e.g., net operating losses and general business tax credits). The Company paid $2,620 and $2,750, respectively, in estimated income taxes for the three and six months ended June 30, 2024, respectively.

The Company didnot have significant unrecognized tax benefits and interest and penalties as of June 30, 2024. The Company is subject to income taxes in the U.S. and its territories, Israel, Argentina, and Mexico. The statute of limitations for adjustments to our historic tax obligations will vary from jurisdiction to jurisdiction. The tax years for U.S. federal and state income tax purposes open for examination are for the years ending December 31, 2018 and forward. The tax years for foreign jurisdictions open for examination are for the years ending December 31, 2019 and forward.

Recent U.S. Tax Legislation

On August 16, 2022, President Biden signed into law the Inflation Reduction Act. The Inflation Reduction Act creates a 15% corporate alternative minimum tax on profit of corporations whose average annual adjusted financial statement income for any consecutive three-tax-year period preceding the tax year exceeds $1 billion and is effective for tax years beginning after December 31, 2022. This provision did not have a material impact on the condensed consolidated financial statements for the six months ended June 30, 2024. Additionally, the Inflation Reduction Act creates an excise tax of 1% on the fair market value of net stock repurchases made after December 31, 2022. During the six months ended June 30, 2024, the Company repurchased 7,983,612 shares of its Class A Common Stock. However, the Company did not record an excise tax as of June 30, 2024 because stock issuances were in excess of repurchases.

As stated in Note 1, in connection with the IPO, the Company entered into the TRA, which generally provides for payment by the Company to the remaining members of Alclear of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Clear Secure, Inc. actually realizes or is deemed to realize as a result of (i) any increase in tax basis in Alclear’s assets resulting from (a) exchanges by Alclear members (or their transferees or other assignees) of Alclear Units (along with the corresponding shares of our Class C Common Stock or Class D Common Stock, as applicable) for shares of the Company’s Class A Common Stock or Class B Common Stock, as applicable, and purchases of Alclear Units and corresponding shares of Class C Common Stock or Class D Common Stock, as the case may be, from the Alclear members (or their transferees or other assignees) or (b) payments under the TRA, and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the TRA. The Company will retain the benefit of the remaining 15% of these net cash savings.

The TRA liability is calculated by determining the tax basis subject to TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the iterative impact. The blended tax rate consists of the U.S. federal income tax rate and an assumed combined state and local income tax rate driven by the apportionment factors applicable to each state. Subsequent changes to the measurement of the TRA liability are recognized in the condensed consolidated statements of operations as a component of other income (expense), net.

The Company expects to obtain an increase in the share of the tax basis of its share of the assets of Alclear when Alclear Units are redeemed or exchanged by Alclear Members and other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that the Company would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

During the six months ended June 30, 2024, the Company issued 7,942,661 shares of Class A Common Stock to certain non-controlling interest holders who exchanged their Alclear Units. Refer to Note 14 for further details. These exchanges resulted in a tax basis increase subject to the provisions of the TRA. The recognition of the Company’s liability under the tax receivable agreement mirrors the recognition related to its deferred tax assets. As of June 30, 2024, the Company has not recognized the deferred tax asset for the step-up in tax basis, as the asset is not more-likely-than-not to be realized. Additionally, as of June 30, 2024, the Company has determined the TRA liability is not probable and therefore has not recorded a tax receivable liability that, if recorded, would be approximately $129,057.

Tax Distributions

The members of Alclear, including Clear Secure, Inc., incur U.S. federal, state and local income taxes on their share of any taxable income of Alclear. The Operating Agreement provides for pro rata cash distributions (“tax distributions”) to the holders of the Alclear Units in an amount generally calculated to provide each member of Alclear with sufficient cash to cover its tax liability in respect of the taxable income of Alclear allocable to them. In general, these tax distributions are computed based on Alclear’s estimated taxable income, multiplied by an assumed tax rate as set forth in the Operating Agreement.

For the six months ended June 30, 2024, Alclear paid tax distributions totaling $24,100 to holders of Alclear Units other than the Company, and recorded a liability of $11,925 to holders of Alclear Units other than other than the Company.

17. Commitments and Contingencies

Litigation

From time to time, the Company is involved in various legal proceedings arising in the ordinary course of business. The Company records a liability when it believes that it is probable that a loss will be incurred and the amount of loss or range of loss can be reasonably estimated. Based on the currently available information, the Company does not believe that there are claims or legal proceedings that would have a material adverse effect on the business, or the condensed consolidated financial statements of the Company.

Commitments other than leases

The Company is subject to minimum spend commitments of $544 over the nextone year under certain service arrangements.

In conjunction with the Company’s revenue share agreements with the airports, certain agreements contain minimum annual contracted fees. These future minimum payments are as follows as of June 30, 2024:

The Company has commitments for future marketing expenditures to sports stadiums of $6,769 through 2027. For the three months ended June 30, 2024 and 2023, marketing expenses related to sports stadiums were $1,167 and $1,391, respectively. For the six months ended June 30, 2024 and 2023 marketing expenses related to sports stadiums were $2,416 and $2,660, respectively.

18. Related Party Transactions

As of June 30, 2024, and December 31, 2023, the Company had total payables to certain related parties of $2,877 and $3,508, respectively.

In connection with certain related parties, for the three months ended June 30, 2024 and 2023, the Company recorded $2,716 and $2,814, respectively, in cost of revenue share fee within the condensed consolidated statements of operations. For the six months ended June 30, 2024 and 2023, the Company recorded expense of $5,952 and $5,664, respectively, within the condensed consolidated statements of operations.

Refer to Note 16 for information regarding the TRA liability. Refer to Note 12 regarding transactions between certain related parties with regards to warrants.

19. Employee Benefit Plan

The Company has a 401(k) retirement, savings and investment plan (the “401(k) Plan”). Participants make contributions to the 401(k) Plan in varying amounts, up to the maximum limits allowable under the Internal Revenue Code. For the three months ended June 30, 2024 and 2023, the Company recorded expense of $446 and $553, respectively, within the condensed consolidated statements of operations. For the six months ended June 30, 2024 and 2023, the Company recorded expense of $1,348 and $1,395, respectively, within the condensed consolidated statements of operations.

20. Debt

In March 2020, the Company entered into a credit agreement for athree-year $50,000 revolving credit facility, with a group of lenders. In April 2021, the Company entered into Amendment No. 1 to the Credit Agreement that increased the commitments under the revolving credit facility to $100,000, which extended the maturity date to March 31, 2024. The revolving credit facility includes a letter of credit sub-facility. In June 2023, the Company entered into Amendment No. 2 to the Credit Agreement to transition from London Interbank Offered Rate to the Secured Overnight Financing Rate ("SOFR") as our benchmark interest rate and to extend the maturity date to June 28, 2026. The line of credit hasnot been drawn against as of June 30, 2024. Prepaid loan fees related to this facility are capitalized and amortized over the remaining term of the credit agreement. The balance expected to be amortized within twelve months from the balance sheet date is presented within Prepaid and other current assets on the condensed consolidated balance sheets, while the long term portion is presented within Other assets in the condensed consolidated balance sheets.

The Company incurred $396 of debt issuance costs in connection to Amendment No.2 to the Credit Agreement. As of June 30, 2024 and December 31, 2023, the balance of these loan fees was $264 and $419, respectively.

The Credit Agreement contains customary terms and conditions, including limitations on consolidations, mergers, indebtedness, and certain payments, as well as a financial covenant relating to leverage. Borrowings under the Credit Agreement generally will bear a floating interest rate per year and will also include interest based on the greater of the prime rate, SOFR, or New York Federal Reserve Bank (NYFRB) rate, plus an applicable margin for specific interest periods.

As of June 30, 2024, the Company had a remaining borrowing capacity of $68,334, net of standby letters of credit, and hadno outstanding debt obligations.

In addition, the Credit Agreement contains certain other covenants (none of which relate to financial condition), events of default and other customary provisions. As of June 30, 2024, the Company was in compliance with all of the financial and non-financial covenants of the Credit Agreement.

21. Subsequent Events

Quarterly Dividend

On August 2, 2024, the Company announced that its Board declared a quarterly dividend of $0.10 per share, payable on September 17, 2024 to holders of record of Class A Common Stock and Class B Common Stock as of the close of business on September 10, 2024 (the “Record Date”). The Company will fund the dividend from proportionate cash distributions by Alclear to all of its members as of the Record Date, including holders of non-controlling interests in Alclear and the Company.

To the extent the quarterly dividend exceeds the Company's current and accumulated earnings and profits, a portion of such dividend may be deemed a return of capital gain to the holders of our Class A Common Stock or Class B Common Stock, as applicable.

During the third quarter of 2024, Delta Air Lines exchanged 4,000,000 of their Alclear Units and corresponding shares of Class C Common Stock for shares of the Company’s Class A Common Stock, and the Company repurchased and retired the shares of Class A Common Stock.

On August 5, 2024, the Company announced that its Board authorized a $100,000 increase to its existing Class A Common Stock share repurchase program, resulting in an aggregate remaining authorization of approximately $100,000, after giving effect to the repurchase from Delta Air Lines. Under the repurchase program, the Company may purchase shares of its Class A Common Stock on a discretionary basis from time to time through open market repurchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The timing and actual number of shares repurchased will be determined by management depending on a variety of factors, including stock price, trading volume, market conditions, and other general business considerations. The repurchase program has no expiration date and may be modified, suspended, or terminated at any time.