Consensus Cloud Solutions, Inc. 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Consensus Cloud Solutions, Inc. Los Angeles, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Consensus Cloud Solutions, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLP We have served as the Company's auditor since 2014. Los Angeles, California April 15, 2022 -53- CONSENSUS CLOUD SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2021 and 2020 (In thousands, except share amounts) 2021 2020 ASSETS Cash and cash equivalents $ 66,778 $ 66,210 Accounts receivable, net of allowances of $ 4,743 and $ 4,110 , respectively 24,829 16,071 Prepaid expenses and other current assets 4,650 1,747 Discontinued operations current assets — 114,247 Total current assets 96,257 198,275 Property and equipment, net 33,849 25,053 Operating lease right-of-use assets 7,233 25,711 Intangibles, net 43,549 48,766 Goodwill 339,209 342,430 Deferred income taxes 41,842 44,350 Other assets 873 1,267 Discontinued operations noncurrent assets — 805,568 TOTAL ASSETS $ 562,812 $ 1,491,420 LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY Accounts payable and accrued expenses $ 40,206 $ 32,795 Income taxes payable, current 5,227 1,307 Deferred revenue, current 24,370 24,512 Operating lease liabilities, current 2,421 2,578 Due to Former Parent 5,739 — Discontinued operations current liabilities — 143,474 Total current liabilities 77,963 204,666 Long-term debt 792,040 — Deferred revenue, noncurrent 184 240 Operating lease liabilities, noncurrent 14,108 25,549 Income taxes payable, noncurrent — 943 Liability for uncertain tax positions 4,795 3,050 Deferred income taxes 6,027 5,392 Other long-term liabilities 360 3,061 Discontinued operations noncurrent liabilities — 125,977 TOTAL LIABILITIES 895,477 368,878 Commitments and contingencies (Note 11) — — Common stock, 0.01 par value. Authorized 120,000,000 at December 31, 2021; total issued and outstanding 19,978,580 and zero shares at December 31, 2021 and 2020, respectively. 200 — Additional paid-in capital 2,878 — Accumulated deficit ( 318,886 ) — Net parent investment — 1,178,508 Accumulated other comprehensive loss ( 16,857 ) ( 55,966 ) TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY ( 332,665 ) 1,122,542 TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY $ 562,812 $ 1,491,420 See Notes to Consolidated Financial Statements -54- CONSENSUS CLOUD SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2021, 2020 and 2019 (In thousands, except share and per share data) 2021 2020 2019 Revenues $ 352,664 $ 331,168 $ 322,559 Cost of revenues (1) 58,000 53,379 49,990 Gross profit 294,664 277,789 272,569 Operating expenses: Sales and marketing (1) 53,648 47,116 51,522 Research, development and engineering (1) 7,652 7,146 9,745 General and administrative (1) 58,228 26,852 21,475 Total operating expenses 119,528 81,114 82,742 Income from operations 175,136 196,675 189,827 Interest expense ( 14,272 ) ( 75,788 ) ( 43,457 ) Interest income 60 — 797 Other income (expense), net 160 31,569 ( 1,421 ) Income before income taxes 161,084 152,456 145,746 Income tax expense (benefit) 39,910 30,043 ( 33,137 ) Income from continuing operations 121,174 122,413 178,883 (Loss) income from discontinued operations, net of income tax (1) ( 12,173 ) 30,500 34,084 Net income $ 109,001 $ 152,913 $ 212,967 Net income per common share from continuing operations: Basic $ 6.07 $ 6.15 $ 8.99 Diluted $ 6.04 $ 6.15 $ 8.99 Net (loss) income per common share from discontinued operations: Basic $ ( 0.61 ) $ 1.53 $ 1.71 Diluted $ ( 0.61 ) $ 1.53 $ 1.71 Net income per common share Basic $ 5.46 $ 7.68 $ 10.70 Diluted $ 5.44 $ 7.68 $ 10.70 Weighted average shares outstanding: Basic 19,904,237 19,902,924 19,902,924 Diluted 19,986,889 19,902,924 19,902,924 (1) Includes share-based compensation expense as follows: Cost of revenues $ 72 $ 203 $ 466 Sales and marketing 92 442 134 Research, development and engineering ( 19 ) 383 501 General and administrative 1,711 457 ( 16 ) (Loss) income from discontinued operations 602 4,138 2,711 Total $ 2,458 $ 5,623 $ 3,796 See Notes to Consolidated Financial Statements -55- CONSENSUS CLOUD SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Net income $ 109,001 $ 152,913 $ 212,967 Other comprehensive loss: Foreign currency translation adjustment ( 14,397 ) ( 11,093 ) ( 1,979 ) Other comprehensive loss ( 14,397 ) ( 11,093 ) ( 1,979 ) Comprehensive income $ 94,604 $ 141,820 $ 210,988 See Notes to Consolidated Financial Statements -56- CONSENSUS CLOUD SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Cash flows from operating activities: Net income $ 109,001 $ 152,913 $ 212,967 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 51,811 79,754 80,970 Amortization of financing costs and discounts 442 1,217 1,428 Non-cash operating lease costs 4,396 5,602 7,867 Share-based compensation 2,459 5,623 3,796 Provision for doubtful accounts 7,194 10,133 10,214 Deferred income taxes 7,155 13,256 ( 56,125 ) Loss (gain) on sale of businesses 21,797 ( 17,122 ) — Lease asset impairments and other charges 9,149 — — Changes in fair value of contingent consideration 642 ( 161 ) 607 Foreign currency remeasurement loss (gain) 181 ( 35,142 ) — Goodwill impairment on business 32,629 — — Loss on extinguishment of debt — 37,969 — Decrease (increase) in: Accounts receivable ( 2,788 ) ( 4,909 ) ( 11,272 ) Prepaid expenses and other current assets ( 12,049 ) 717 ( 9,137 ) Other assets ( 3,260 ) 731 ( 3,191 ) Increase (decrease) in: Accounts payable and accrued expenses 5,831 ( 13,369 ) 3,674 Income taxes payable ( 230 ) ( 1,269 ) ( 5,424 ) Deferred revenue ( 1,797 ) ( 2,401 ) 1,080 Operating lease liabilities ( 5,197 ) ( 3,345 ) ( 7,685 ) Liability for uncertain tax positions ( 1,730 ) 8,438 ( 453 ) Other long-term liabilities 8,039 154 ( 2,614 ) Net cash provided by operating activities 233,675 238,789 226,702 Cash flows from investing activities: Purchases of property and equipment ( 32,998 ) ( 32,463 ) ( 22,943 ) Proceeds from sale of assets — 507 — Acquisition of businesses, net of cash received ( 56,838 ) ( 50,208 ) ( 281,552 ) Proceeds from sale of businesses, net of cash divested 48,876 24,353 — Purchases of intangible assets ( 1,511 ) ( 3,110 ) — Net cash used in investing activities ( 42,471 ) ( 60,921 ) ( 304,495 ) Cash flows from financing activities: Payment of debt ( 593 ) ( 650,000 ) — Debt extinguishment costs — ( 29,250 ) — Proceeds from line of credit — — 185,000 Repayment of line of credit — — ( 185,000 ) Issuance of long-term debt 305,000 — — Debt issuance costs ( 10,849 ) — — Issuance of common stock under employee stock purchase plan 519 — — Notes payable from related parties — ( 819 ) ( 952 ) Deferred payments for acquisitions ( 6,267 ) ( 6,571 ) ( 750 ) Contributions from Former Parent 21,238 508,938 64,922 Distribution to Former Parent - Separation ( 290,282 ) — — Distribution of non-fax cash to Former Parent ( 266,539 ) — — Other — ( 1,387 ) ( 1,915 ) Net cash (used in) provided by financing activities ( 247,773 ) ( 179,089 ) 61,305 Effect of exchange rate changes on cash and cash equivalents ( 4,842 ) 6,635 2,253 Net change in cash and cash equivalents ( 61,411 ) 5,414 ( 14,235 ) Cash and cash equivalents at beginning of year 128,189 122,775 137,010 Cash and cash equivalents at end of year $ 66,778 $ 128,189 $ 122,775 Less cash and cash equivalents at end of year, discontinued operations — 61,979 71,634 Cash and cash equivalents at end of year, continuing operations $ 66,778 $ 66,210 $ 51,141 See Notes to Consolidated Financial Statements -57- CONSENSUS CLOUD SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY Years Ended December 31, 2021, 2020 and 2019 (in thousands, except share amounts) Common stock Additional paid-in Accumulated Accumulated other comprehensive Net parent Total Shares Amount capital Deficit loss investment Equity Balance, January 1, 2019 — $ — $ — $ — $ ( 42,894 ) $ 339,182 $ 296,288 Net income — — — — — 212,967 212,967 Other comprehensive income, net of tax — — — ( 1,979 ) — ( 1,979 ) Parent distribution — — — — — ( 109,833 ) ( 109,833 ) Share-based compensation — — — — — 3,796 3,796 Parent contribution — — — — — 64,922 64,922 Balance, December 31, 2019 — $ — $ — $ — $ ( 44,873 ) $ 511,034 $ 466,161 Net income — — — — — 152,913 152,913 Other comprehensive income, net of tax — — — — ( 11,093 ) — ( 11,093 ) Share-based compensation — — — — — 5,623 5,623 Parent Contribution — — — — — 508,938 508,938 Balance, December 31, 2020 — $ — $ — $ — $ ( 55,966 ) $ 1,178,508 $ 1,122,542 Foreign currency translation adjustment prior to Separation — — — — ( 13,555 ) — ( 13,555 ) Net income prior to Separation — — — — — 102,510 102,510 Share-based compensation — — — — — 99 99 Parent contribution prior to Separation — — — — — 21,238 21,238 Recapitalization of J2 Cloud Services 19,902,924 199 1,302,156 — — ( 1,302,355 ) — Transfer of 2028 Notes to Former Parent — — ( 500,000 ) — — — ( 500,000 ) Distribution to Former Parent — — ( 290,282 ) — — — ( 290,282 ) Transfer of non-fax business to Former Parent — — ( 837,251 ) — 53,506 — ( 783,745 ) Reclassification to accumulated deficit — — 325,377 ( 325,377 ) — — — Issuance of shares under ESPP 10,421 — 519 — — — 519 Share-based compensation after Separation 65,235 1 2,359 — — — 2,360 Foreign currency translation adjustment after Separation — — — — ( 842 ) — ( 842 ) Net income after Separation — — 6,491 — 6,491 Balance, December 31, 2021 19,978,580 $ 200 $ 2,878 $ ( 318,886 ) $ ( 16,857 ) $ — $ ( 332,665 ) See Notes to Consolidated Financial Statements -58- CONSENSUS CLOUD SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021, 2020 and 2019 1. The Company Consensus Cloud Solutions, Inc., together with its subsidiaries (“Consensus Cloud Solutions”, “Consensus”, the “Company”, “our”, “us” or “we”), is a provider of secure information delivery services with a scalable Software-as-a-Service (“SaaS”) platform. Consensus serves more than one million customers of all sizes, from enterprises to individuals, across over 50 countries and multiple industry verticals including healthcare, financial services, law and education. Beginning as an online fax company over two decades ago, Consensus has evolved into a global provider of enterprise secure communication solutions. Our communication and digital signature solutions enable our customers to securely and cooperatively access, exchange and use information across organizational, regional and national boundaries. Consensus Cloud Solutions, Inc. Spin-Off On September 21, 2021, J2 Global, Inc., known since October 7, 2021 as Ziff Davis, Inc. (“Ziff Davis” or the “Former Parent”) announced that its Board of Directors approved its previously announced separation of the cloud fax business (the “Separation”), into an independent publicly traded company, Consensus Cloud Solutions, Inc. On October 7, 2021, the Separation was completed and the Former Parent transferred certain assets and liabilities associated with its Cloud Fax business to Consensus, including the equity interests in J2 Cloud Services, LLC (“J2 Cloud Services”), in exchange for approximately $ 259.1 million in cash, an asset related to $ 500.0 million in aggregate principal amount of the 6.5 % Senior Notes due 2028, and the return of the assets and liabilities related to the non-fax business back to Ziff Davis. On October 8, 2021, Consensus began trading on the Nasdaq Stock Market LLC (“Nasdaq”) under the stock symbol “CCSI”. Ziff Davis retained a 19.9 % interest in Consensus following the Separation. 2. Basis of Presentation and Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Consensus and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. (b) Basis of Presentation The consolidated financial statements of Consensus for periods prior to the completion of the Separation are those of J2 Cloud Services, which were derived from the consolidated financial statements of Ziff Davis on a carve-out basis using the historical assets, liabilities, and results of operations attributable to the legal entities and business units which comprised historical J2 Cloud Services. J2 Cloud Services was a wholly-owned subsidiary of Ziff Davis, and together with its subsidiaries, was a provider of internet services, including cloud-based subscription services to consumers and businesses including cloud fax, voice, cybersecurity, privacy and marketing technology. For periods prior to the separation, the consolidated financial statements Consensus included an allocation of certain corporate expenses related to services provided to J2 Cloud Services by Ziff Davis. These expenses included the cost of executive management, information technology, legal, treasury, risk management, human resources, accounting and financial reporting, investor relations, public relations, and internal audit services provided by the Former Parent company personnel to J2 Cloud Services. The cost of these services had been allocated to J2 Cloud Services based on specific identification when possible or, when the expenses were determined to be global in nature, based on the percentage of J2 Cloud Services’ relative revenue to total Ziff Davis revenue for the periods presented. Management believes that these allocations were reasonable representations of the costs incurred for the services provided; however, these allocations may not be indicative of the actual expenses that would have been incurred by J2 Cloud Services had it been operating as an independent company for the periods presented. Interest expense relates to interest incurred on third-party debt issued by historical J2 Cloud Services. No interest expense incurred by Ziff Davis was allocated to J2 Cloud Services as Ziff Davis’ third-party debt was not specifically related to historical operations of J2 Cloud Services. -59- As the Cloud Fax business was not historically held by a single legal entity, “net parent investment” is shown to represent Ziff Davis’ interest in the recorded net assets of historical J2 Cloud Services. Other comprehensive income or loss attributable to J2 Cloud Services is presented as a separate component of equity. In the period in which the Separation occurred, the net parent investment is recharacterized as share capital and additional-paid-in-capital to reflect the capital structure of Consensus upon the legal formation of Consensus and the contribution of the Cloud Fax business with any excess of distributions over net parent investment shown within accumulated deficit. (c) Use of Estimates The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, including judgments about the reported amounts of net revenue and expenses during the reporting period. The Company believes that its most significant estimates are those related to revenue recognition, share-based compensation expense, fair value of assets acquired and liabilities assumed in connection with business combinations, long-lived and intangible asset impairment, lease impairment, contingent consideration, income taxes, sales taxes, contingencies and allowances for doubtful accounts. On an ongoing basis, management evaluates its estimates based on historical experience and on various other factors that the Company believes to be reasonable under the circumstances. Actual results could materially differ from those estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the novel coronavirus pandemic (“COVID-19”). (d) Discontinued Operations The accounting requirements for reporting the Company’s non-fax business as a discontinued operation were met when the Separation was completed. Accordingly, the consolidated financial statements reflect the results of the non-fax business as a discontinued operation for all periods presented (see Note 5 - Discontinued Operations and Disposition of Businesses). (e) Allowances for Doubtful Accounts The Company maintains an allowance for credit losses for accounts receivable, which is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expenses in the Consolidated Statements of Income. The Company assesses collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when it identifies specific customers with known disputes or collectability issues. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status. It also considers customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data. On an ongoing basis, management evaluates the adequacy of these reserves. (f) Revenue Recognition The Company recognizes revenue when the Company satisfies its obligation by transferring control of the goods or services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services (see Note 3 - Revenues). Principal vs. Agent The Company determines whether revenue should be reported on a gross or net basis by assessing whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as the principal in a transaction, the Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports revenue on a net basis. In determining whether the Company acts as the principal or an agent, the Company follows the accounting guidance under Accounting Standards Codification 606, Revenue from Contracts with Customers (“Topic 606”), for principal-agent considerations and assesses: (i) if another party is involved in providing goods or services to the customer and (ii) whether the Company controls the specified goods or services prior to transferring control to the customer. -60- Sales Taxes The Company has made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are (i) both imposed on and concurrent with a specific revenue-producing transaction and (ii) collected by the Company from a customer. (g) Fair Value Measurements Consensus complies with the provisions of Financial Accounting Standards Board (“FASB”) ASC Topic No. 820, Fair Value Measurements and Disclosures (“ASC 820”), in measuring fair value and in disclosing fair value measurements. ASC 820 provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities (see Note 6 - Fair Value Measurements). The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and long-term debt are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value due to the short-term nature of such instruments. The fair value of the Company’s outstanding debt was determined using the quoted market prices of debt instruments with similar terms and maturities when available. As of the same dates, the carrying value of other long-term liabilities approximated fair value as the related interest rates approximate rates currently available to the Company. (h) Cash and Cash Equivalents The Company considers cash equivalents to be only those investments that are highly liquid, readily convertible to cash and with maturities of three months or less at the purchase date. (i) Debt Issuance Costs The Company capitalizes costs incurred with borrowing and issuance of debt securities and records debt issuance costs as a reduction to the debt amount. These costs are amortized and included in interest expense over the life of the borrowing using the effective interest method. (j) Concentration of Credit Risk All of the Company’s cash and cash equivalents are invested at major financial institutions primarily within the United States and Ireland. These institutions are required to invest the Company’s cash in accordance with the Company’s investment policy with the principal objectives being preservation of capital, fulfillment of liquidity needs and above market returns commensurate with preservation of capital. At December 31, 2021, the Company’s cash and cash equivalents were maintained in accounts in qualifying financial institutions that are insured up to the limit determined by the applicable governmental agency. These institutions are primarily in the United States and Ireland, however, the Company has accounts within several other countries including Australia, Canada, France, Hong Kong, Ireland, Japan, New Zealand, Switzerland and the United Kingdom. (k) Foreign Currency Some of Consensus’ foreign subsidiaries use the local currency of their respective countries as their functional currency. Assets and liabilities are translated at exchange rates prevailing at the balance sheet dates. Revenues, costs and expenses are translated into U.S. Dollars at average exchange rates for the period. Gains and losses resulting from translation are recorded as a component of accumulated other comprehensive loss. Net translation loss was $ 14.4 million, $ 11.1 million and $ 2.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Realized gains and losses from foreign currency transactions are recognized within other income (expense), net. Foreign exchange gains (losses) amounted to $ 0.2 million, $ 31.5 million and $( 1.4 ) million for the years ended December 31, 2021, 2020 and 2019, respectively. -61- (l) Property and Equipment Property and equipment are stated at cost. Equipment under finance leases is stated at the present value of the minimum lease payments. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets and is recorded in cost of revenues and general and administrative expenses on the Consolidated Statements of Income. The estimated useful lives of property and equipment range from 1 to 10 years. Fixtures, which are comprised primarily of leasehold improvements and equipment under finance leases, are amortized on a straight-line basis over their estimated useful lives or for leasehold improvements, the related lease term, if less. The Company has capitalized certain internal-use software and website development costs which are included in property and equipment. The estimated useful life of costs capitalized is evaluated for each specific project and ranges from 1 to 5 years (see Note 7 - Property and Equipment). (m) Impairment or Disposal of Long-Lived and Intangible Assets The Company accounts for long-lived assets, which include property and equipment, operating lease right-of-use assets and identifiable intangible assets with finite useful lives (subject to amortization), in accordance with the provisions of FASB ASC Topic No. 360, Property, Plant, and Equipment (“ASC 360”), which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to the expected undiscounted future net cash flows generated by the asset. If it is determined that the asset may not be recoverable, and if the carrying amount of an asset exceeds its estimated fair value, an impairment charge is recognized to the extent of the difference. The Company assesses the impairment of identifiable definite-lived intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors it consider important which could individually or in combination trigger an impairment review include the following: • Significant underperformance relative to expected historical or projected future operating results; • Significant changes in the manner of our use of the acquired assets or the strategy for Consensus’ overall business; • Significant negative industry or economic trends; • Significant decline in the Company’s stock price for a sustained period; and • The Company’s market capitalization relative to net book value. If the Company determined that the carrying value of definite-lived intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, it would record an impairment equal to the excess of the carrying amount of the asset over its estimated fair value. The Company assessed whether events or changes in circumstances have occurred that potentially indicate the carrying amount of definite-lived assets may not be recoverable. In the year ended December 31, 2021, the Company recorded an impairment of $ 1.7 million in property and equipment (see Note 7 - Property and Equipment) and an impairment of $ 6.5 million in operating right-of-use assets (see Note 10 - Leases) in connection with the downtown Los Angeles lease. Additionally, the Company recorded an impairment of $ 1.0 million in operating right-of-use assets included in discontinued operation in relation to exiting a lease. There were no impairments recorded in fiscal years 2020 or 2019, respectively. The Company classifies its long-lived assets to be sold as held for sale in the period (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation expense on the asset. The Company assesses the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale. -62- (n) Business Combinations and Valuation of Goodwill and Intangible Assets The Company applies the acquisition method of accounting for business combinations in accordance with GAAP and uses of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets, including identifiable intangible assets, and liabilities acquired. Such estimates may be based on significant unobservable inputs and assumptions such as, but not limited to, future revenue growth rates, gross and operating margins, customer attrition rates, royalty rates, discount rates and terminal growth rate assumptions. The Company uses established valuation techniques and may engage reputable valuation specialists to assist with the valuations. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the acquisition method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trademarks and trade names, developed technologies and other intangible assets. Intangible assets subject to amortization are amortized over the period of estimated economic benefit ranging from 1 to 20 years and are included in general and administrative expenses on the Consolidated Statements of Income. The Company evaluates our goodwill and indefinite-lived intangible assets for impairment pursuant to FASB ASC Topic No, 350, Intangibles - Goodwill and Other (“ASC 350”), which provides that goodwill and other intangible assets with indefinite lives are not amortized but tested for impairment annually or more frequently if Consensus believes indicators of impairment exist. In connection with the annual impairment test for goodwill, the Company has the option to perform a qualitative assessment in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it was more likely than not that the fair value of the reporting unit is less than its carrying amount, then it performs the impairment test upon goodwill. The impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of valuation. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized for the difference. The Company performed the annual impairment test for goodwill for fiscal year 2021 using a qualitative assessment primarily taking into consideration macroeconomic, industry and market conditions, overall financial performance and any other relevant company-specific events. The Company performed the annual impairment test for intangible assets with indefinite lives for fiscal 2021 using a qualitative assessment primarily taking into consideration macroeconomic, industry and market conditions, overall financial performance and any other relevant company-specific events. Consensus concluded that there were no impairments in 2021, 2020 and 2019. In the first quarter of 2021, the Company changed the annual goodwill impairment assessment date from September 30 to October 1, as it determined this date is preferable, and concluded this was not a material change in accounting principle. (o) Contingent Consideration Certain of Consensus’ acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future income thresholds or other metrics. The contingent earn-out arrangements are based upon the Company’s valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, the Company estimates the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability on the Consolidated Balance Sheets. Consensus considers several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former shareholders of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of the Company’s other key employees. The contingent earn-out payments are not affected by employment termination. -63- The Company measures its contingent earn-out liabilities in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy (see Note 6 - Fair Value Measurements). The Company may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation. This simulation uses a probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. Significant increases or decreases to these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our Consolidated Statements of Cash Flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities. The Company reviews and re-assesses the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could be materially different from the initial estimates or prior amounts. Changes in the estimated fair value of our contingent earn-out liabilities and adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in general and administrative expenses on the Consolidated Statements of Income. (p) Income Taxes Historically, J2 Cloud Services was included in the federal consolidated and state combined income tax returns with the Former Parent and its other subsidiaries. For purposes of the prior year consolidated financial statements, the Company’s taxes were determined using the separate return method as if the Company had filed separate tax returns as a C-Corporation. In addition, J2 Cloud Services’ income is subject to taxation in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company’s income is subject to taxation in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves for tax contingencies are established when the Company believes that certain positions might be challenged despite the Company’s belief that its tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate (see Note 12 - Income Taxes). The Company accounts for income taxes in accordance with FASB ASC Topic No. 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax assets will not be realized. The valuation allowance is reviewed quarterly based upon the facts and circumstances known at the time. In assessing this valuation allowance, the Company reviews historical and future expected operating results and other factors, including its recent cumulative earnings experience, expectations of future taxable income by taxing jurisdiction and the carryforward periods available for tax reporting purposes, to determine whether it is more likely than not that deferred tax assets are realizable. ASC 740 provides guidance on the minimum threshold that an uncertain income tax benefit is required to meet before it can be recognized in the financial statements and applies to all income tax positions taken by a company. ASC 740 contains a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. Uncertain income tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. The Company recognized accrued interest and penalties related to uncertain income tax positions in income tax expense on its Consolidated Statements of Income. -64- In addition, on March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (“CARES”) Act” was enacted into law providing for changes to various tax laws that impact business. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions and technical corrections to tax depreciation methods for qualified improvement property. The Company does not believe these provisions have a significant impact to our current and deferred income tax balances. The Company will benefit from the technical correction to tax depreciation related to qualified improvement property and has elected to defer income tax payments and employer side social security payments where eligible. The CARES Act also appropriated funds for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company did not seek to borrow any funds under the program. However, as a result of an acquisition that closed during the quarter ended December 31, 2020, the Company assumed outstanding PPP loans that had started the process of being forgiven prior to the closing of the acquisition. During the second quarter of 2021, the Company received approval from the SBA to forgive the entire amount of the outstanding PPP Loan. The amount forgiven did not have a significant impact to the Company’s financial statements. (q) Share-Based Compensation The Company accounts for share-based awards to employees and non-employees in accordance with the provisions of FASB ASC Topic No. 718, Compensation - Stock Compensation (“ASC 718”). Accordingly, the Company measures share-based compensation expense at the grant date, based on the fair value of the award, and recognizes the expense over the employee’s requisite service period using the straight-line method. The measurement of share-based compensation expense is based on several criteria, including but not limited to the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate, dividend rate and award cancellation rate. These inputs are subjective and are determined using management’s judgment. If differences arise between the assumptions used in determining share-based compensation expense and the actual factors, which become known over time, Consensus may change the input factors used in determining future share-based compensation expense. Any such changes could materially impact the Company’s results of operations in the period in which the changes are made and in periods thereafter. The Company estimates the expected term based upon the historical exercise behavior of the Company’s employees (see Note 14 - Equity Incentive and Employee Stock Purchase Plan). (r) Earnings Per Common Share (“EPS”) EPS is calculated pursuant to the two-class method as defined in ASC Topic No. 260, Earnings per Share (“ASC 260”), which specifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents are considered participating securities and should be included in the computation of EPS pursuant to the two-class method. Basic EPS is calculated by dividing net distributed and undistributed earnings allocated to common shareholders, excluding participating securities, by the weighted-average number of common shares outstanding. The Company’s participating securities consist of its unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the impact of other potentially dilutive shares outstanding during the period. The dilutive effect of participating securities is calculated under the more dilutive of either the treasury method or the two-class method. In periods prior to the Separation, EPS is calculated using the number of shares issued to the Former Parent upon the legal formation of Consensus and the contribution of the Cloud Fax business. The dilutive effect of Consensus stock-based compensation awards that were exchanged for the Former Parent stock-based compensation awards is included in the denominator of diluted EPS on a prospective basis. (s) Research, Development and Engineering Research, development and engineering costs are expensed as incurred. Costs for software development incurred subsequent to establishing technological feasibility, in the form of a working model, are capitalized and amortized over their estimated useful lives. -65- (t) Segment Reporting FASB ASC Topic No. 280, Segment Reporting (“ASC 280”), establishes standards for the way that public business enterprises report information about operating segments in their annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company’s business segment is based on the organization’s structure used by the chief operating decision maker for making operating and investment decisions and for assessing performance. The chief operating decision maker views the Company as one reportable segment known as Cloud Fax (see Note 17 - Segment Information). (u) Advertising Costs Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2021, 2020 and 2019 was $ 45.7 million, $ 47.1 million and $ 51.5 million, respectively. (v) Recent Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted this ASU in the first quarter of 2021 and has identified no material effect on its financial statements or disclosures. In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investment - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the accounting for certain forward contracts and purchased options under Topic 815. This ASU identifies two main areas for improvement: (1) accounting for certain equity securities upon the application or discontinuation of the equity method of accounting and (2) scope considerations for forward contracts and purchased options on certain securities. The amendment states, as it is related to the first area of improvement, that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendment also states, as it is relates to forward contracts and purchased options on certain securities, an entity should consider certain criteria to determine the accounting for those forward contracts and purchased options. The Company adopted this ASU in the first quarter of 2021 and has identified no effect on its financial statements or disclosures. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. LIBOR is expected to phased out by 2021. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures. In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU reduce the number of accounting models for convertible debt instruments and convertible preferred stock in order to simplify the accounting for convertible instruments and reduce complexity. In addition, it amends the guidance for scope exception surrounding derivatives for contracts in an entity’s own equity. In each case, the related guidance surrounding EPS has also been amended. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company does not expect the adoption of this standard to have an impact on the Company’s consolidated financial statements and related disclosures. -66- In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. The amendments in this ASU improve the consistency of the codification and reorganize the guidance into appropriate sections providing less opportunities for disclosures to be missed. The amendments in this update do not change GAAP and are not expected to result in a significant change in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. The Company adopted this ASU in the first quarter of 2021 and has identified no effect on its financial statements or disclosures. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The amendments in this ASU clarify the scope of ASC 848 to include derivatives that are affected by a change in the interest rate used for discounting, margining, or contract price alignment that do not also reference LIBOR or another reference rate that is expected to be discontinued as a result of reference rate reform. Similar to ASU 2020-04, the guidance is effective for all entities immediately upon issuance on January 7, 2021. The Company adopted this ASU in the first quarter of 2021 and has identified no effect on its financial statements or disclosures. In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this ASU improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability, and payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, including the interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures. (w) Reclassifications Certain prior year reported amounts have been reclassified to conform with the 2021 presentation. 3. Revenues The Company’s revenues substantially consist of monthly recurring subscription and usage-based fees, the majority of which are paid in advance by credit card. The Company defers the portions of monthly, quarterly, semi-annually and annually recurring subscription and usage-based fees collected in advance of the satisfaction of performance obligations and recognizes them in the period earned. Revenues from external customers classified by revenue source are as follows (in thousands): Years ended December 31, 2021 2020 2019 Corporate $ 169,732 $ 148,981 $ 135,353 Small office home office (“SoHo”) 182,390 181,784 186,237 Other 542 403 969 Total Revenues $ 352,664 $ 331,168 $ 322,559 Timing of revenue recognition Point in time $ — $ — $ — Over time 352,664 331,168 322,559 Total $ 352,664 $ 331,168 $ 322,559 The Company has recorded $ 24.5 million and $ 21.6 million of revenue for the years ended December 31, 2021 and 2020, respectively, which was previously included in the deferred revenue balance as of the beginning of each respective year. As of December 31, 2021 and 2020, the Company acquired zero and $ 0.5 million, respectively, of deferred revenue in connection with the Company’s business acquisitions (see Note 4 - Business Acquisitions). -67- Performance Obligations The Company’s contracts with customers may include multiple performance obligations. For such arrangements, revenues are allocated to each performance obligation based on its relative standalone selling price. The Company satisfies its performance obligations upon delivery of services to its customers. Payment terms vary by type and location of the Company’s customers and the services offered. The time between invoicing and when payment is due is not significant. Due to the nature of the services provided, there are no obligations for returns. Significant Judgments In determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is also required to determine the standalone selling price for each distinct performance obligation. Performance Obligations Satisfied Over Time The Company’s business consists primarily of performance obligations that are satisfied over time. This has been determined based on the fact that the nature of services offered are subscription based where the customer simultaneously receives and consumes the benefit of the services provided regardless of whether the customer uses the services or not. Depending on the individual contracts with the customer, revenue for these services are recognized over the contract period when faxing capabilities are provided. The Company has concluded that the best measure of progress toward the complete satisfaction of the performance obligation over time is a time-based measure. The Company recognizes revenue on a straight-line basis throughout the subscription period and believes that the method used is a faithful depiction of the transfer of goods and services. Practical Expedients Existence of a Significant Financing Component in a Contract As a practical expedient, the Company has not assessed whether a contract has a significant financing component because the Company expects at contract inception that the period between payment by the customer and the transfer of promised goods or services by the Company to the customer will be one year or less. In addition, the Company has determined that the payment terms that the Company provides to its customers are structured primarily for reasons other than the provision of finance to the Company. The Company typically charges a single upfront amount for the services because other payment terms would affect the nature of the risk assumed by the Company to provide service given the costs of the customer acquisition and the highly competitive and commoditized nature of the business Consensus operates which allows customers to easily move from one provider to another. This additional risk may make it uneconomical to provide the service. Costs to Fulfill a Contract The Company’s revenues are primarily generated from customer contracts that are for one year or less. Costs primarily consist of incentive compensation paid based on the achievements of sales targets in a given period for related revenue streams and are recognized in the month when the revenue is earned. Incentive compensation is paid on the issuance or renewal of the customer contract. As a practical expedient, for amortization periods which are determined to be one year or less, the Company expenses any incremental costs of obtaining the contract with a customer when incurred. For those customer contracts greater than one year, the Company capitalizes and amortizes the expenses over the period of benefit. Revenues Invoiced The Company has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed. -68- 4. Business Acquisitions For the year ended December 31, 2021, the Company completed a share purchase of SEOmoz, acquired on June 4, 2021, a Seattle-based provider of search engine optimization (“SEO”) solutions. As part of the Separation, the Company transferred the assets acquired to the Former Parent. The allocation of the purchase consideration and further details are included in Business Acquisitions Classified in Discontinued Operations below. For the year ended December 31, 2020, the Company completed an asset purchase of EDC Systems, Inc. (operating under the name “SRFax”), acquired on February 18, 2020, a Canadian-based provider of fax solutions. The purchase price accounting for this acquisition was completed during the year ended December 31, 2021. In addition to the SRFax acquisition, the Company completed a share purchase of the entire issued capital of Inspired eLearning, LLC, acquired on November 2, 2020, a Texas-based platform for cybersecurity awareness and compliance training, as well as the purchase of two other immaterial businesses. As part of the separation, the Company transferred the Inspired eLearning assets and the two immaterial businesses acquired to the Former Parent. The allocation of the purchase consideration and further details are included in Business Acquisitions Classified in Discontinued Operations below. The Consolidated Statement of Income since the date of acquisition and balance sheet as of December 31, 2020, reflect the results of operations of SRFax. For the year ended December 31, 2020, SRFax contributed $ 7.3 million to the Company’s revenues. Net income contributed by SRFax is not separately identifiable due to the Company’s integration activities and is impracticable to provide. Total consideration was $ 25.0 million, net of cash acquired and assumed liabilities for SRFax. The following table summarizes the allocation of the purchase consideration for the acquisition of SRFax (in thousands): Assets and Liabilities Valuation Accounts receivable $ 194 Property and equipment 44 Trade names 907 Customer relationships 8,235 Goodwill 15,844 Other intangibles 379 Accounts payables and accrued expenses ( 94 ) Deferred revenue ( 519 ) Total $ 24,990 During the year ended December 31, 2021, the purchase price accounting has been finalized for SRFax and there were no material adjustments. The fair value of the assets acquired includes accounts receivable of $ 0.2 million. The gross amount due under contracts is $ 0.2 million and immaterial amounts are expected to be uncollectible. The Company did not acquire any other classes of receivables as a result of the SRFax acquisition. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and represents intangible assets that do not qualify for separate recognition. Goodwill recognized in connection with the acquisition of SRFax during the year ended December 31, 2020 is $ 15.8 million, of which the full amount is expected to be deductible for income tax purposes. Unaudited Pro Forma Financial Information for SRFax The following unaudited pro forma information is not necessarily indicative of the Company’s consolidated results of operations in future periods or the results that actually would have been realized had the Company and the acquired business been combined companies during the periods presented. These pro forma results exclude any savings or synergies that would have resulted from the business acquisition had it occurred on January 1, 2019 and do not take into consideration the exiting of -69- any acquired lines of business. This unaudited pro forma supplemental information includes incremental intangible asset amortization, income tax expense, and interest income as a result of the acquisitions, net of the related tax effects. The supplemental information on an unaudited pro forma financial basis presents the combined results of the Company and SRFax as if the acquisition had occurred on January 1, 2019 (in thousands, except per share amounts): Year ended December 31, 2020 December 31, 2019 (unaudited) (unaudited) Revenues $ 332,431 $ 328,351 Net income $ 122,912 $ 180,911 EPS - Basic (1) $ 6.18 $ 9.09 EPS - Diluted (1) $ 6.18 $ 9.09 (1) Basic and Diluted EPS are calculated based on net income from continuing operations attributable to common shareholders. Business Acquisitions Classified in Discontinued Operations The Consolidated Statement of Income since the date of acquisition, reflect the results of operations of SEOmoz within discontinued operations. For the year ended December 31, 2021, SEOmoz contributed $ 14.4 million to revenue within discontinued operations. Total consideration for SEOmoz was $ 66.5 million, net of cash acquired and assumed liabilities. The following table summarizes the allocation of the purchase consideration for the acquisition of SEOmoz (in thousands): Assets and Liabilities Valuation Accounts receivable $ 3,901 Prepaid expenses and other current assets 1,568 Property and equipment 1,838 Operating lease right-of-use assets 5,888 Trade names 7,200 Customer relationships 5,000 Goodwill 41,213 Other intangibles 21,607 Accounts payables and accrued expenses ( 2,352 ) Other current liabilities ( 14 ) Deferred revenue ( 6,398 ) Operating lease liabilities, current ( 7,191 ) Other long-term liabilities ( 785 ) Deferred tax liability ( 4,936 ) Total $ 66,539 The initial accounting for the SEOmoz acquisition is incomplete as of the date of the Separation and has been included in discontinued operations. The fair value of the assets acquired includes accounts receivable of $ 3.9 million. The gross amount due under contracts is $ 4.2 million, of which $ 0.3 million is expected to be uncollectible. The Company did not acquire any other classes of receivables as a result of this acquisition. -70- Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and represents intangible assets that do not qualify for separate recognition. Goodwill recognized in connection with this acquisition is $ 41.2 million of which zero is expected to be deductible for income tax purposes. The Consolidated Statement of Income and Consolidate Balance Sheet since the date of acquisition, reflect the results of operations of Inspired eLearning. For the year ended December 31, 2020, Inspired eLearning contributed $ 1.6 million to revenue within discontinued operations. Total consideration for Inspired eLearning was $ 20.5 million, net of cash acquired and assume liabilities. In the year ended December 31, 2020, two other immaterial businesses were acquired which are included in discontinued operations. The following table summarizes the allocation of the purchase consideration for the acquisition of Inspired eLearning (in thousands), which is included within discontinued operations on the balance sheet: Assets and Liabilities Valuation Accounts receivable $ 1,876 Prepaid expenses and other current assets 1,002 Property and equipment 418 Trade names 2,012 Customer relationships 3,654 Goodwill 13,174 Other intangibles 6,134 Other long-term assets 73 Deferred tax asset 39 Accounts payables and accrued expenses ( 1,878 ) Deferred revenue ( 5,935 ) Operating lease liabilities, current ( 97 ) Total $ 20,472 The initial accounting for the Inspired eLearning acquisition is complete as of the date of the Separation and has been included in discontinued operations. 5. Discontinued Operations and Disposition of Businesses On October 7, 2021, the Former Parent transferred certain assets and liabilities associated with its Cloud Fax business to Consensus, including the equity interests in J2 Cloud Services, in exchange for approximately $ 259.1 million in cash, an asset related to the $ 500 million aggregate principal amount of the 6.5 % Senior Notes due 2028, and the return of the assets and liabilities related to the non-fax business back to Ziff Davis. The transfer to the Former Parent of the non-fax business met the accounting requirements to be presented as a discontinued operation once the Separation was completed as the disposition of the non-fax business constitutes a strategic shift that will have a major effect on the Company’s operations relative to the historical operations of J2 Cloud Services. Accordingly, the consolidated financial statements reflect the results of the non-fax business as a discontinued operation for all periods presented. The Consolidated Balance Sheets and Consolidated Statements of Income report discontinued operations separate from continuing operations. The Consolidated Statements of Comprehensive Income, Consolidated Statements of Cash Flows (including Note 18 - Supplemental Cash Flow Information) and Consolidated Statements of Stockholders’ Equity combine continuing and discontinued operations. The Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholders’ Equity include the non-fax business activity through October 7, 2021. -71- The following table summarizes the major classes of assets and liabilities of discontinued operations that were included in the Company’s Consolidated Balance Sheet as of December 31, 2020 (in thousands): December 31, 2020 ASSETS Cash and cash equivalents $ 61,979 Accounts receivable, net of allowances $ 4,322 26,174 Prepaid expenses and other current assets 26,094 Total current assets, discontinued operations 114,247 Property and equipment, net 34,028 Operating lease right-of-use assets 30,230 Intangibles, net 137,112 Goodwill 582,067 Notes receivable from related parties, noncurrent 8,834 Deferred income taxes, noncurrent 9,772 Other assets 3,525 Total noncurrent assets, discontinued operations 805,568 Total assets, discontinued operations $ 919,815 LIABILITIES Accounts payable and accrued expenses $ 48,243 Income taxes payable, current 8,224 Deferred revenue, current 79,277 Operating lease liabilities, current 7,235 Other current liabilities 495 Total current liabilities, discontinued operations 143,474 Deferred revenue, noncurrent 14,200 Operating lease liabilities, noncurrent 23,758 Liability for uncertain tax positions 49,268 Deferred income taxes, noncurrent 16,003 Other long-term liabilities 22,748 Total noncurrent liabilities, discontinued operations 125,977 Total liabilities, discontinued operations $ 269,451 -72- The key components of income from discontinued operations that were included in the Company’s Consolidated Statement of Income are as follows (in thousands): Year ended December 31 2021 2020 2019 Revenues $ 271,571 $ 347,293 $ 339,276 Cost of revenues 74,294 100,871 94,280 Gross Profit 197,277 246,422 244,996 Operating expenses: Sales and marketing 72,425 72,080 58,875 Research, development and engineering 16,756 15,681 14,332 General and administrative 84,213 118,608 123,812 Goodwill impairment on business 32,629 — — Total operating expense 206,023 206,369 197,019 (Loss) income from discontinued operations ( 8,746 ) 40,053 47,977 Interest expense ( 235 ) ( 939 ) ( 1,015 ) Interest income 693 963 467 (Loss) gain on sale of businesses ( 21,797 ) 17,122 — Other income (expense) 1,752 ( 1,606 ) 103 (Loss) income from discontinued operations before income taxes ( 28,333 ) 55,593 47,532 Income tax (benefit) expense ( 16,160 ) 25,093 13,448 (Loss) income from discontinued operations, net of income taxes $ ( 12,173 ) $ 30,500 $ 34,084 The key components of cash flows from discontinued operations are as follows (in thousands): Year ended December 31 2021 2020 2019 Depreciation and amortization $ 39,727 $ 67,995 $ 70,700 Capital expenditure 14,322 19,633 15,229 Share-based compensation expense 602 4,138 2,711 Non-cash operating lease costs 2,814 4,364 5,454 Deferred taxes 554 7,723 ( 193 ) Foreign currency remeasurement gain ( 9 ) 3,574 1,420 Lease asset impairments and other charges 990 — — Loss (gain) on sale of businesses 21,797 ( 17,122 ) — Goodwill impairment on business $ 32,629 $ — $ — Prior to the Separation, the Company completed the following dispositions that did not meet the criteria for discontinued operations by themselves but were subsequently classified as discontinued operations as they are part of the non-fax business transferred back to the Former Parent. Voice Asset Sales During the first quarter of 2021, the Company committed to a plan to sell certain Voice assets in the United Kingdom as they were determined to be non-core assets. On February 9, 2021, in a cash transaction, the Company sold the Voice assets. The total gain recognized on the sale of these Voice assets was $ 2.8 million which was recorded in discontinued operations on the Consolidated Statement of Income in the year ended December 31, 2021. -73- During the second quarter of 2020, the Company committed to a plan to sell certain Voice assets in Australia and New Zealand as they were determined to be non-core assets. On August 31, 2020, in a cash transaction, the Company sold these Voice assets for a gain of $ 17.1 million which was recorded in discontinued operations on the Consolidated Statement of Income in the year ended December 31, 2020. B2B Back-up During the first quarter of 2021, the Company committed to a plan to sell its B2B Backup business as it was determined to be a non-core business. The B2B Backup business met the held for sale criteria, and accordingly, the assets and liabilities were presented as held for sale on the Consolidated Balance Sheets at March 31, 2021 and June 30, 2021. During the second quarter of 2021, the Company received an offer to purchase the B2B Backup business and management determined that the fair value of the business less cost to sell was lower than its carrying amount. As a result, the Company recorded an impairment to goodwill of $ 32.6 million during the second quarter of 2021, which was recorded in impairment of business on the Consolidated Statement of Income (see Note 8 - Goodwill and Intangible Assets). On September 17, 2021, in a cash transaction, the Company sold the B2B Backup business. The total loss recognized on the sale of the B2B Backup business was $ 24.6 million which was recorded in discontinued operations on the Consolidated Statement of Income in the year ended December 31, 2021. 6. Fair Value Measurements The Company complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: § Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. § Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. § Level 3 – Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value of long-term debt is determined using recent quoted market prices or dealer quotes for each of the Company’s instruments, which are Level 1 inputs. The Company classifies its contingent consideration liability in connection with acquisitions within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. Significant increases or decreases in either of the inputs in isolation would result in a significantly lower or higher fair value measurement. The input used in connection with the current contingent consideration arrangements is forecasted revenues which are compared to the revenue thresholds determined in each contingent arrangement. Based on this revenue comparison, the Company assesses whether it expects a contingent payment to occur. If such payment is expected, the fair value of the contingent consideration will be the expected payment. -74- The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands): December 31, 2020 Level 1 Level 2 Level 3 Fair Value Carrying Value Liabilities: Contingent consideration $ — $ — $ 4,071 $ 4,071 $ 4,071 Total liabilities measured at fair value $ — $ — $ 4,071 $ 4,071 $ 4,071 The following tables presents a reconciliation of the Company’s Level 3 financial liabilities related to contingent consideration that are measured at fair value on a recurring basis (in thousands): Level 3 Affected line item in the Statement of Income Balance as of January 1, 2020 $ — Contingent consideration 4,071 Total fair value adjustments reported in earnings — General and administrative Contingent consideration payments — Not Applicable Balance as of December 31, 2020 $ 4,071 Contingent consideration — Total fair value adjustments reported in earnings 685 General and administrative Contingent consideration payments ( 4,756 ) Not Applicable Balance as of December 31, 2021 $ — The fair value of the contingent consideration was zero and $ 4.1 million at December 31, 2021 and December 31, 2020, respectively. Due to achievement of certain thresholds, $ 4.8 million was paid during 2021. During the year ended December 31, 2021, the Company recorded an increase in the fair value of the contingent consideration of $ 0.7 million and reported such increase in general and administrative expenses. 7. Property and Equipment Property and equipment, stated at cost, at December 31, 2021 and 2020 consisted of the following (in thousands): 2021 2020 Computers and related equipment $ 51,411 $ 35,032 Furniture and equipment 846 147 Leasehold improvements 1,718 2,828 53,975 38,007 Less: Accumulated depreciation and amortization ( 20,126 ) ( 12,954 ) Total property and equipment, net $ 33,849 $ 25,053 Depreciation and amortization expense was $ 7.3 million, $ 7.1 million and $ 3.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. During the fourth quarter of 2021, the Company recorded a non-cash impairment charge of $ 1.7 million for property and equipment related to the impairment of the Downtown Los Angeles lease (see Note 10 - Leases for further details). No impairment was recorded in 2020 or 2019. -75- 8. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the acquisition method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trademarks and trade names, developed technologies and other intangible assets. The fair values of these identified intangible assets are based upon expected future cash flows or income, which take into consideration certain assumptions such as customer turnover, trade names and patent lives. These determinations are primarily based upon the Company’s historical experience and expected benefit of each intangible asset. If it is determined that such assumptions are not accurate, then the resulting change will impact the fair value of the intangible asset. Identifiable intangible assets are amortized over the period of estimated economic benefit, which ranges from 1 year to 20 years. The changes in carrying amounts of goodwill attributable to continuing operations for the years ended December 31, 2021 and 2020 are as follows (in thousands): Amount Balance as of January 1, 2020 $ 320,095 Goodwill acquired (Note 4) 15,844 Foreign exchange translation 6,491 Balance as of December 31, 2020 $ 342,430 Foreign exchange translation ( 3,221 ) Balance as of December 31, 2021 $ 339,209 There has not previously been an impairment charge of goodwill related to continuing operations. Intangible Assets with Indefinite Lives: Intangible assets are summarized as of December 31, 2021 and 2020 as follows (in thousands): 2021 2020 Trade names $ 27,388 $ 27,463 Other 3,683 3,691 Total $ 31,071 $ 31,154 Intangible Assets Subject to Amortization: As of December 31, 2021, intangible assets subject to amortization relate primarily to the following (in thousands): Weighted-Average Amortization Period Historical Cost Accumulated Amortization Net Trade names 1.6 years $ 12,219 $ 10,633 $ 1,586 Patent and patent licenses 0.0 years 10,162 9,751 411 Customer relationships (1) 4.3 years 99,571 90,050 9,521 Other purchased intangibles 3.8 years 13,160 12,200 960 Total $ 135,112 $ 122,634 $ 12,478 (1) Historically, the Company has amortized its customer relationship assets in a pattern that best reflects the pace in which the assets’ benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first four to five years , despite the overall life of the asset. -76- As of December 31, 2020, intangible assets subject to amortization relate primarily to the following (in thousands): Weighted-Average Amortization Period Historical Cost Accumulated Amortization Net Trade names 2.6 years $ 13,435 $ 11,548 $ 1,887 Patent and patent licenses 1.0 year 1,686 1,568 118 Customer relationships (1) 5.3 years 101,780 88,102 13,678 Other purchased intangibles 4.8 years 10,948 9,019 1,929 Total $ 127,849 $ 110,237 $ 17,612 (1) Historically, the Company has amortized its customer relationship assets in a pattern that best reflects the pace in which the assets’ benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first four to five years , despite the overall life of the asset. Expected amortization expenses for intangible assets subject to amortization at December 31, 2021 are as follows (in thousands): Fiscal Year: Amount 2022 $ 4,052 2023 2,832 2024 2,041 2025 1,300 2026 828 Thereafter 1,425 Total expected amortization expense $ 12,478 As part of the Separation, Ziff Davis transferred $ 8.5 million in patent and patent licenses to Consensus in a non-cash transaction. These patent and patent licenses were not historically Cloud Fax assets, thereby increasing the historical cost of patent and patent licenses from $ 1.7 million in 2020 to $ 10.2 million in 2021. Amortization expense was $ 4.8 million, $ 4.7 million and $ 7.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. 9. Long-Term Debt Long-term debt as of December 31, 2021 and 2020 consists of the following (in thousands): 2021 2026 Senior Notes $ 305,000 2028 Senior Notes 500,000 Total Notes 805,000 Less: Deferred issuance costs ( 12,960 ) Total long-term debt $ 792,040 -77- At December 31, 2021, future principal payments for debt were as follows (in thousands): Total Fiscal year: 2022 $ — 2023 — 2024 — 2025 — 2026 305,000 Thereafter 500,000 $ 805,000 Interest expense was $ 14.3 million, $ 75.8 million, and $ 43.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. The $ 75.8 million interest expense for the year ended December 31, 2020 includes a loss on extinguishment of $ 38.0 million for the redemption of all of its outstanding $ 650.0 million 6.0 % Senior Notes in 2020. 2026 Senior Notes On October 7, 2021, Consensus issued $ 305.0 million of senior notes due in 2026 (the “2026 Senior Notes”), in a private placement offering exempt from the registration requirements of the Securities Act of 1933. Consensus received proceeds of $ 301.2 million, after deducting the initial purchasers’ discounts, commissions and offering expenses. The 2026 6.0 % Senior Notes are presented as long-term debt, net of deferred issuance costs, on the Consolidated Balance Sheet as of December 31, 2021. The 2026 Senior Notes bear interest at a rate of 6.0 % per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2022. The 2026 Senior Notes mature on October 15, 2026, and are senior unsecured obligations of the Company which are guaranteed, jointly and severally, on an unsecured basis by certain of the Company’s existing and future domestic direct and indirect wholly-owned subsidiaries (collectively, the “Guarantors”). If Consensus Cloud Solutions, Inc. or any of its restricted subsidiaries acquires or creates a domestic restricted subsidiary, other than an Insignificant Subsidiary (as defined in the indenture pursuant to which the 2026 Senior Notes were issued (the “2026 Indenture”)), after the issue date, or any Insignificant Subsidiary ceases to fit within the definition of Insignificant Subsidiary, such restricted subsidiary is required to unconditionally guarantee, jointly and severally, on an unsecured basis, the Company’s obligations under the 2026 Senior Notes. The Company may redeem some or all of the 2026 Senior Notes at any time on or after October 15, 2023 at specified redemption prices plus accrued and unpaid interest, if any, to, but excluding the redemption date. Before October 15, 2023, and following certain equity offerings, the Company also may redeem up to 40 % of the 2026 Senior Notes at a price equal to 106.0 % of the principal amount, plus accrued and unpaid interest, if any, to, but excluding the redemption date. The Company may make such redemption only if, after such redemption, at least 50 % of the aggregate principal amount of the 2026 Senior Notes remains outstanding. In addition, at any time prior to October 15, 2023, the Company may redeem some or all of the 2026 Senior Notes at a price equal to 100 % of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, plus an applicable “make-whole” premium. The Indenture contains covenants that restrict the Company’s ability to (i) pay dividends or make distributions on the Company’s common stock; (ii) make certain restricted payments; (iii) create liens or enter into sale and leaseback transactions; (iv) enter into transactions with affiliates; (v) merge or consolidate with another company; and (vi) transfer and sell assets. These covenants contain certain exceptions. Restricted payments are applicable only if Consensus Cloud Solutions, Inc. and subsidiaries designated as restricted subsidiaries has a net leverage ratio of greater than 3.0 to 1.0. In addition, if such net leverage ratio is in excess of 3.0 to 1.0, the restriction on restricted payments is subject to various exceptions, including the total aggregate amount not to exceed the greater of (A) $ 100.0 million and (B) 50.0 % of EBITDA for the most recently ended four fiscal quarter period ended immediately prior to such date for which internal financial statements are available. The Company is in compliance with its debt covenants as of December 31, 2021. -78- As of December 31, 2021, the estimated fair value of the 2026 Senior Notes was approximately $ 316.1 million and was based on quoted market prices or dealer quotes for the 2026 Senior Notes which are Level 1 inputs in the fair value hierarchy. The following table provides additional information related to our 2026 Senior Notes (in thousands): 2021 Principal amount of 2026 Senior Notes $ 305,000 Less: Debt issuance costs ( 4,582 ) Net carrying amount of 2026 Senior Notes $ 300,418 2028 Senior Notes On October 7, 2021, Consensus issued $ 500.0 million of 6.5 % senior notes due in 2028 (the “2028 Senior Notes”), in a private placement offering exempt from the registration requirements of the Securities Act of 1933. In exchange for the equity interest in the Company, Consensus issued the 2028 Senior Notes to Ziff Davis (see Note 20 - Related Party Transactions). Ziff Davis then exchanged the 2028 Senior Notes with lenders under its credit agreement (or their affiliates) in exchange for extinguishment of a similar amount indebtedness under such credit agreement for a total amount of $ 483.8 million, after deducting the initial purchasers’ discounts, commissions and offering expenses. The 2028 Senior Notes were presented as long-term debt, net of deferred issuance costs, on the Consolidated Balance Sheet as of December 31, 2021. The 2028 Senior Notes bear interest at a rate of 6.5 % per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2022. The 2028 Senior Notes mature on October 15, 2028, and are senior unsecured obligations of the Company which are guaranteed, jointly and severally, on an unsecured basis by certain of the Company’s existing and future domestic direct and indirect wholly-owned subsidiaries (collectively, the “Guarantors”). If Consensus Cloud Solutions, Inc. or any of its restricted subsidiaries acquires or creates a domestic restricted subsidiary, other than an Insignificant Subsidiary (as defined in the indenture pursuant to which the 2028 Senior Notes were issued (the “2028 Indenture”)), after the issue date, or any Insignificant Subsidiary ceases to fit within the definition of Insignificant Subsidiary, such restricted subsidiary is required to unconditionally guarantee, jointly and severally, on an unsecured basis, the Company’s obligations under the 2028 Senior Notes. The Company may redeem some or all of the 2028 Senior Notes at any time on or after October 15, 2026 at specified redemption prices plus accrued and unpaid interest, if any, to, but excluding the redemption date. The Indenture contains covenants that restrict the Company’s ability to (i) pay dividends or make distributions on the Company’s common stock; (ii) make certain restricted payments; (iii) create liens or enter into sale and leaseback transactions; (iv) enter into transactions with affiliates; (v) merge or consolidate with another company; and (vi) transfer and sell assets . These covenants contain certain exceptions. Restricted payments are applicable only if Consensus Cloud Solutions, Inc. and subsidiaries designated as restricted subsidiaries has a net leverage ratio of greater than 3.0 to 1.0. In addition, if such net leverage ratio is in excess of 3.0 to 1.0, the restriction on restricted payments is subject to various exceptions, including the total aggregate amount not to exceed the greater of (A) $ 100.0 million and (B) 50.0 % of EBITDA for the most recently ended four fiscal quarter period ended immediately prior to such date for which internal financial statements are available. The Company is in compliance with its debt covenants as of December 31, 2021. As of December 31, 2021, the estimated fair value of the 2028 Senior Notes was approximately $ 521.2 million and was based on quoted market prices or dealer quotes for the 2028 Senior Notes which are Level 1 inputs in the fair value hierarchy. The following table provides additional information related to our 2028 Senior Notes (in thousands): 2021 Principal amount of 2028 Senior Notes $ 500,000 Less: Debt issuance costs ( 8,378 ) Net carrying amount of 2028 Senior Notes $ 491,622 -79- 2025 Senior Notes On June 27, 2017, J2 Cloud Services, LLC (“J2 Cloud”) and J2 Cloud Co-Obligor, Inc. (the “Co-Issuer” and together with J2 Cloud, the “Issuers”), wholly-owned subsidiaries of the Company, completed the issuance and sale of $ 650.0 million aggregate principal amount of their 6.0 % senior notes due in 2025 (the “2025 Senior Notes”) in a private placement offering exempt from the registration requirements of the Securities Act of 1933. The Company received proceeds of $ 636.5 million, after deducting the initial purchasers’ discounts, commissions and offering expenses. The 6.0 % Senior Notes bore interest at a rate of 6.0 % per annum, payable semi-annually in arrears on January 15 and July 15 of each year. On October 7, 2020, the Company redeemed all of its outstanding $ 650.0 million 2025 Senior Notes for $ 694.6 million, including an early redemption premium of $ 29.2 million and accrued and unpaid interest of $ 15.4 million. The Company recorded a loss on extinguishment of $ 38.0 million which is recorded in interest expense, net in the Consolidated Statements of Income. 10. Leases Consensus leases certain facilities and equipment under non-cancelable operating and finance leases which expire at various dates through 2031. Office and equipment leases are typically for terms of three to five years and generally provide renewal options for terms up to an additional five years . The Company recorded total non-cash impairment charges of $ 7.5 million, zero , and zero during the years ended December 31, 2021, 2020, and 2019, respectively. The $ 7.5 million in impairment charge during 2021 consists of $ 6.5 million recognized in continuing operations and $ 1.0 million recognized in discontinued operations. For the impairment charge recognized in continuing operations, the Company decided to exit and seek subleases for certain leased facilities primarily due to a “partial remote” work model for a significant number of employees. The Company recorded a non-cash impairment charge of $ 6.5 million related to operating lease right-of-use assets for the affected facility. The impairment was determined by comparing the fair value of the impacted right-of-use asset to the carrying value of the asset as of the impairment measurement date, as required under ASC Topic 360, Property, Plant, and Equipment. The fair value of the right-of-use asset was based on the estimated sublease income for the affected facilities taking into consideration the time it will take to obtain a sublease tenant, the applicable discount rate and the sublease rate which represents Level 3 unobservable inputs. The carrying value of the asset was remeasured to exclude a five year optional lease term that was originally included in the initial assessment. The impairment is presented in general and administrative expenses on the Consolidated Statements of Income . No impairment was recorded in 2020 or 2019. The components of lease expense, recorded in cost of revenues and general and administrative expenses on the Consolidated Statements of Income, were as follows for the year ended (in thousands): Years ended December 31, 2021 2020 Operating lease cost $ 2,675 $ 3,002 Short-term lease cost 875 186 Finance lease cost Amortization of right-of-use assets 834 160 Interest on lease liabilities — — Total lease cost $ 4,384 $ 3,348 -80- Supplemental balance sheet information related to leases was as follows (in thousands): Lease-Related Assets and Liabilities December 31, 2021 December 31, 2020 Operating lease right-of-use assets $ 7,233 $ 25,711 Finance lease right-of-use assets (1) 2,648 800 Total right-of-use assets $ 9,881 $ 26,511 Operating lease liabilities, current $ 2,421 $ 2,578 Operating lease liabilities, noncurrent 14,108 25,549 Total operating lease liabilities $ 16,529 $ 28,127 (1) Included in “Other assets” in the Consolidated Balance Sheet. The full amount of the finance leases were prepaid. Therefore, there is no corresponding lease liability associated with the finance right-of-use assets. Supplemental cash flow information related to leases was as follows (in thousands): Years ended December 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 2,501 $ 1,344 Operating cash flows from finance leases 2,719 959 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 259 $ 356 Finance leases 2,719 959 Other supplemental operating lease information consists of the following: December 31, 2021 December 31, 2020 Operating leases: Weighted average remaining lease term 8.8 years 14.0 years Weighted average discount rate 4.8 % 4.4 % Maturities of lease liabilities as of December 31, 2021 were as follows (in thousands): Total Fiscal Year: 2022 $ 2,515 2023 2,315 2024 2,296 2025 2,259 2026 2,328 Thereafter 10,254 Total lease payments $ 21,967 Less: Imputed interest ( 5,438 ) Present value of operating lease liabilities $ 16,529 -81- Significant Judgments Discount Rate The majority of the Company’s leases are discounted using the Company’s incremental borrowing rate as the rate implicit in the lease is not readily determinable. Rates are obtained from various large banks to determine the appropriate incremental borrowing rate each quarter for collateralized loans with a maturity similar to the lease term. Options The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determined it is reasonably certain of exercising the option at inception or when a triggering event occurs. Facility lease On October 28, 2021, Ziff Davis (the “Assignor”) and Consensus (the “Assignee”) entered into the Assignment and First Amendment to Office Lease (the “Amendment”) with the NREA-TRC 700 LLC (the “Landlord”), in regards to the lease which was previously entered into on April 24, 2019 between the Assignor and the Landlord for certain office space located at 700 South Flower Street, Los Angeles, California (the “Lease”), the lease has an expiration date of January 31, 2031. The Amendment granted the Landlord’s consent to the assignment of the Lease by the Assignor to Assignee. 11. Commitments and Contingencies Litigation From time to time, the Company and its affiliates are involved in litigation and other legal disputes or regulatory inquiries that arise in the ordinary course of business. Any claims or regulatory actions against the Company and its affiliates, whether meritorious or not, could be time consuming and costly, and could divert significant operational resources. The outcomes of such matters are subject to inherent uncertainties, carrying the potential for unfavorable rulings that could include monetary damages and injunctive relief. The Company does not believe, based on current knowledge, that any legal proceedings or claims currently exist which, after giving effect to existing accrued liabilities, are likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. It is the Company’s policy to expense as incurred legal fees related to any litigation. Non-Income Related Taxes The Company has not historically withheld sales tax in states where it was not able to quantify the appropriate sales tax to be withheld. The Company believes it is probable that sales tax liability exists for its corporate accounts for the periods 2017 through 2021. However, the Company is currently unable to determine which of these customers are either exempt organizations or resellers and are thus exempt from sales tax. Therefore it cannot estimate the sales tax liability for these corporate customers. The Company is currently analyzing the pool of corporate customers subject to sales tax in order to estimate the liability and will record an accrual when the exposure is estimable. The Company currently cannot estimate the range of sales tax liability for corporate customers. In the year ended December 31, 2021, the Company determined that a sales tax liability is probable and it developed a methodology to estimate the liability for the sales tax for the SoHo revenue stream during the affected periods 2017 through 2021. Accordingly, the Company has recorded a sales tax expense in 2021 of $ 6.7 million for all periods affected, net of federal income tax benefit of $ 1.9 million of which $ 4.6 million, net of federal income tax benefit of $ 1.3 million, is deemed to be an out of period correction that is not deemed to be material to either the current or any prior periods. -82- 12. Income Taxes The provision for income tax related to continuing operations consisted of the following (in thousands): Years Ended December 31, 2021 2020 2019 Current: Federal $ 22,368 $ 5,831 $ 9,079 State 1,445 923 3,772 Foreign 9,496 17,756 9,944 Total current 33,309 24,510 22,795 Deferred: Federal ( 4,902 ) ( 151 ) 99 State 3,575 762 ( 1,771 ) Foreign 7,928 4,922 ( 54,260 ) Total deferred 6,601 5,533 ( 55,932 ) Total provision $ 39,910 $ 30,043 $ ( 33,137 ) A reconciliation of the statutory federal income tax rate with Consensus’ effective income tax rate is as follows: Years Ended December 31, 2021 2020 2019 Statutory tax rate 21 % 21 % 21 % State income taxes, net 2.9 0.9 0.5 Foreign rate differential ( 0.1 ) ( 2.8 ) ( 5.0 ) Foreign income inclusion 4.9 4.3 1.6 Foreign tax credit ( 4.0 ) ( 3.5 ) ( 1.7 ) Reserve for uncertain tax positions 0.5 0.1 ( 8.3 ) Intra-entity tax benefit — — ( 31.7 ) Tax credits and incentives ( 0.1 ) ( 0.1 ) ( 0.9 ) Executive compensation 0.2 — — Return to provision adjustments — 1.3 — Other ( 0.5 ) ( 1.4 ) 1.6 Effective tax rates 24.8 % 19.8 % ( 22.9 ) % The effective tax rate for the year ended December 31, 2021 differs from the federal statutory rate primarily due to an increase in the net reserve for uncertain tax positions during 2021 driven by an increase in expenses incurred that are not deductible for tax. The effective tax rate for the year ended December 31, 2020 differs from the federal statutory rate primarily due to impacts of the jurisdictional mix of income and the disallowance of certain expenses. The effective tax rate for the year ended December 31, 2019 differs from the federal statutory rate primarily due to a net tax benefit recognized as a result of an intra-entity transfer. In December 2019, the Company completed an intra-entity asset transfer between two of its foreign subsidiaries as part of the reorganization of its international operating structure. -83- Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows (in thousands): Years Ended December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 48 $ 49 Tax credit carryforwards 173 — Accrued expenses 2,669 2,179 Allowance for bad debt 860 609 Share-based compensation expense 245 — Basis difference in property and equipment 30,887 36,139 Impairment of investments — 48 Deferred revenue — 423 Operating lease 4,196 — State taxes 135 175 Other 2,674 4,773 41,887 44,395 Less: valuation allowance ( 45 ) ( 45 ) Total deferred tax assets $ 41,842 $ 44,350 Deferred tax liabilities: Basis difference in property and equipment $ ( 3,304 ) $ ( 1,869 ) ROU asset ( 1,773 ) — Prepaid insurance ( 312 ) ( 203 ) Other ( 638 ) ( 3,320 ) Total deferred tax liabilities ( 6,027 ) ( 5,392 ) Net deferred tax assets $ 35,815 $ 38,958 The Company had approximately $ 35.8 million and $ 39.0 million in net deferred tax assets as of December 31, 2021 and 2020, respectively, related primarily to basis difference between tangible and intangible assets. Based on the weight of available evidence, the Company assesses whether it is more likely than not that some portion or all of a deferred tax asset will not be realized. If necessary, the Company records a valuation allowance sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The deferred tax assets should be realized through future operating results and the reversal of temporary differences. As of December 31, 2021 and 2020, the Company has interest expense limitation carryovers of $ 4.9 million and zero , respectively, which last indefinitely. As of December 31, 2021 and 2020, the Company had $ 0.2 million and zero foreign tax credit carryforward, respectively. In addition, as of December 31, 2021 and 2020, the Company had state research and development tax credits of $ 0.1 million and zero , respectively, which can be carried forward indefinitely. The Company has not provided deferred taxes on approximately $ 244.2 million of undistributed earnings from foreign subsidiaries as of December 31, 2021. The Company has not provided any additional deferred taxes with respect to items such as foreign withholding taxes, state income tax or foreign exchange gain or loss that would be due when cash is actually repatriated to the U.S. because those foreign earnings are considered permanently reinvested in the business or may be remitted substantially free of any additional taxes. Because of the various avenues in which to repatriate the earnings, it is not practicable to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings if eventually remitted. Certain tax payments are prepaid during the year and included within prepaid expenses and other current assets on the Consolidated Balance Sheet. The Company’s prepaid tax payments were zero and $ 0.3 million at December 31, 2021 and 2020, respectively. -84- Income from continuing operations before income taxes included income from domestic operations of $ 80.7 million, $ 49.7 million and $ 81.1 million for the years ended December 31, 2021, 2020 and 2019, respectively, and income from foreign operations of $ 80.4 million, $ 102.8 million and $ 64.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. Uncertain Income Tax Positions Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities in the Consolidated Balance Sheets. As of December 31, 2021, the total amount of unrecognized tax benefits was $ 3.7 million, of which $ 3.7 million, if recognized, would affect the Company’s effective tax rate. As of December 31, 2020, the total amount of unrecognized tax benefits was $ 3.1 million, of which $ 3.1 million, if recognized, would affect the Company’s effective tax rate. As of December 31, 2019, the total amount of unrecognized tax benefits was $ 3.0 million, of which $ 3.0 million, if recognized would affect the Company’s effective tax rate. The aggregate changes in the balance of unrecognized tax benefits, which excludes interest and penalties, for 2021, 2020 and 2019, is as follows (in thousands): Years Ended December 31, 2021 2020 2019 Beginning balance $ 3,050 $ 3,015 $ 10,429 Decreases related to tax positions taken during a prior year — — ( 7,441 ) Increases related to tax positions taken in the current year 685 35 79 Decreases related to expiration of statute of limitations — — ( 52 ) Ending balance $ 3,735 $ 3,050 $ 3,015 The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2021, 2020 and 2019, the total amount of interest and penalties accrued was $ 1.0 million, $ 0.9 million and $ 0.8 million, respectively, which is classified as a liability for uncertain tax positions on the Consolidated Balance Sheets. In connection with tax matters, the Company recognized interest and penalty expense (benefit) in 2021, 2020 and 2019 of $ 0.2 million, $ 0.2 million and $( 4.4 ) million, respectively. Uncertain income tax positions are reasonably possible to significantly change during the next 12 months as a result of completion of income tax audits and expiration of statutes of limitations. At this point it is not possible to provide an estimate of the amount, if any, of significant changes in reserves for uncertain income tax positions as a result of the completion of income tax audits that are reasonably possible to occur in the next 12 months. In addition, the Company cannot currently estimate the amount of, if any, uncertain income tax positions which will be released in the next 12 months as a result of expiration of statutes of limitations due to ongoing audits. As a result of ongoing federal, state and foreign income tax audits (discussed below), it is reasonably possible that the Company’s entire reserve for uncertain income tax positions for the periods under audit will be released. It is also reasonably possible that the Company’s reserves will be inadequate to cover the entire amount of any such income tax liability. Income Tax Audits: The Company files tax returns in the US, Ireland, Netherlands, France, Canada, Japan and Hong Kong. As of December 31, 2021, the Company is not under audit in any jurisdiction that it operates within. The Company has not filed any tax returns for the post spin periods, however it does have some international subsidiaries who have previously filed tax returns in their local jurisdictions. In respect to these international subsidiaries, tax returns filed for the years from 2017 onwards are still open to examination by tax authorities -85- 13. Stockholders’ Equity Recapitalization On October 7, 2021, the Former Parent transferred certain assets and liabilities associated with its Cloud Fax business to Consensus, including the equity interests in J2 Cloud Services, in exchange for approximately $ 259.1 million in cash, an asset related to the $ 500 million aggregate principal amount of the 6.5 % Senior Notes due 2028, and the return of the assets and liabilities related to the non-fax business back to Ziff Davis. In connection with the Separation, 19,902,924 shares of common stock were issued to the Former Parent and the historical net parent investment was recharacterized as share capital and additional-paid-in-capital to reflect the new corporate structure of Consensus. Additional-paid-in-capital (APIC) was further adjusted to reflect (i) the distribution of cash to the Former Parent in the amount of $ 290.3 million ($ 259.1 million base amount plus additional net cash sweeps of $ 31.2 million), (ii) the transfer to the parent of the $ 500.0 million aggregate principal amount of the 6.5 % Senior Notes due 2028, and (iii) the transfer of the net assets of the non-fax business in the amount of $ 837.3 million back to Ziff Davis. At the time of the separation, the excess of the distributions to the former parent over the remaining net parent investment (i.e., the negative APIC balance) was reclassified to accumulated deficit. The Separation was achieved when Ziff Davis’ distributed 80.1 % of the shares of Consensus common stock to holders of Ziff Davis common stock as of the close of business on October 1, 2021, the record date for the distribution. Ziff Davis’ stockholders of record received one share of Consensus common stock for every three shares of Ziff Davis’ common stock. Ziff Davis retained a 19.9 % investment in Consensus following the Separation. On March 1, 2022, the Company’s Board of Directors has approved a share buyback program. Under this program, the Company may purchase in the public market or in off-market transactions up to $ 100.0 million worth of stock through February 2025. The timing and amounts of purchases will be determined by the Company, depending on market conditions and other factors it deems relevant (see Note 21 - Subsequent Events). Dividends The Company currently does not issue dividends to Consensus shareholders. Future dividends are subject to Board approval. Common Stock Periodically, participants in Consensus 2021 stock plan may surrender to the Company shares of Consensus common stock to satisfy tax withholding obligations arising upon the vesting of restricted stock. During the years ended December 31, 2021, 2020, and 2019 the Company purchased zero shares, respectively, from plan participants for this purpose. Refer to Note 14 – Equity Incentive and Employee Stock Purchase Plan, for shares of common stock issued in relation to the Company’s equity incentive plan 14. Equity Incentive and Employee Stock Purchase Plan Prior to the Separation from Ziff Davis, the Company recorded share-based compensation expense for share-based awards granted to its employees and non-employees for services provided based on expense that was allocated from the Former Parent to the Company for each relevant employee on a monthly basis. The Former Parents’ plans included their 2015 Stock Plan and the 2001 Employee Stock Purchase Plan. In connection with the Separation, the Former Parent terminated awards that were held by Consensus employees. These were replaced with awards issued under the 2021 Equity Incentive Plan. Each award held by a Consensus employee under the Former Parent’s compensation plans was converted into 2.21 Consensus awards under the 2021 Equity Incentive Plan, which resulted in 86,460 Ziff Davis awards converted into 191,076 Consensus awards. This modification resulted in no incremental compensation cost. In 2021, the Company recorded a reduction of share-based compensation expense, offset by APIC, of $ 3.2 million, net of federal income tax expense of $ 1.0 million, of which $ 3.0 million, net of federal income tax expense of $ 0.9 million, is deemed to be an out of period correction that is not deemed to be material to either the current or any prior periods. -86- Consensus Equity Incentive Plans (a) The 2021 Equity Incentive Plan In December 2021, Consensus’ Board of Directors adopted the Consensus Cloud Solutions, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the grant of incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and share units, and other share-based awards. 4,000,000 shares of common stock are authorized to be used for 2021 Plan purposes. Restricted Stock and Restricted Stock Units Consensus has awarded restricted stock and restricted stock units to its Board of Directors and senior staff pursuant to the 2021 Plan. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over the applicable vesting period. Vesting periods are approximately one year for awards to members of the Company’s Board of Directors, four years for senior staff (excluding market-based awards discussed below) and five years for the Chief Executive Officer and Chief Operating Officer. The Company issued 59,175 shares of restricted stock awards (excluding awards with market conditions below), all of which were exchanged in the Separation. The Company granted 510,128 shares of restricted stock units (excluding units with market conditions below), which includes 91,203 shares exchanged in the Separation, during the year ended December 31, 2021. Restricted Stock and Restricted Stock Units with Market Conditions Consensus has awarded certain key employees market-based restricted stock awards pursuant to the 2021 Plan. The market-based awards have vesting conditions that are based on specified stock price targets of the Company’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets with a 20 -day and 30 -day lookback (trading days). Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period using the graded-vesting method unless the market condition has been met and requisite service period has been completed, then the expense will be accelerated and recognized in period. During the year ended December 31, 2021, the Company issued 6,060 shares of market-based restricted stock awards, all of which were exchanged in the Separation. The Company granted 503,144 market-based restricted stock units, which includes 34,638 shares exchanged in the Separation, during the year ended December 31, 2021. The per share weighted-average grant-date fair values of the market-based restricted stock awards granted during the year ended December 31, 2021 was $ 57.67 . The weighted-average fair values of market-based restricted stock awards granted have been estimated utilizing the following assumptions: December 31, 2021 Underlying stock price at valuation date $ 57.06 Expected volatility 35.1 % Risk-free interest rate 1.3 % -87- Restricted stock award activity for the year ended December 31, 2021 is set forth below: Number of Shares Weighted-Average Grant-Date Fair Value Nonvested at January 1, 2021 — $ — Exchanged in Separation 65,235 57.77 Granted — — Vested — — Canceled — — Nonvested at December 31, 2021 65,235 $ 57.77 Restricted stock unit activity for the year ended December 31, 2021 is set forth below: Number of Shares Weighted-Average Grant-Date Fair Value Weighted-Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value Outstanding at January 1, 2021 — $ — Exchanged in Separation 125,841 63.69 Granted 887,431 27.78 Vested — — Canceled ( 175 ) — Outstanding at December 31, 2021 1,013,097 $ 29.36 4.53 $ 58,627,923 Vested and expected to vest at December 31, 2021 593,369 $ 38.28 3.68 $ 34,338,282 As of December 31, 2021, the Company had unrecognized share-based compensation cost of $ 48.6 million associated with these awards. This cost of $ 1.6 million and $ 47.0 million is expected to be recognized over a weighted-average period of 1.7 years for awards and 5.4 years for units, respectively. The Company recognized $ 0.2 million of tax benefits related to the restricted stock awards and restricted stock units for the periods ending December 31, 2021 related to the 2021 Plan. (b) Employee Stock Purchase Plan (“ESPP”) In October of 2021, Consensus established the Consensus Cloud Solutions, Inc. 2021 Employee Stock Purchase Plan (the “Purchase Plan”), which provides the issuance of a maximum of 1,000,000 shares of common stock. Under the Purchase Plan, eligible employees can have up to 15 % of their earnings withheld, up to certain maximums, to be used to purchase shares of Consensus’ common stock at certain plan-defined dates. The purchase price for each offering period is 85 % of the lesser of the fair market value of a share of common stock of the Company (a “Share”) on the beginning or the end of the offering period, with each offering period being six months. Consensus performed an analysis of the Purchase Plan terms and determined that a plan provision exists which allows for the more favorable of two exercise prices, commonly referred to as a “look-back” feature. The purchase price discount and the look-back feature cause the Purchase Plan to be compensatory and the Company to recognize compensation expense. The compensation cost is recognized on a straight-line basis over the requisite service period. The Company recognized $ 0.1 million of compensation expense related to the Purchase Plan for the year ended December 31, 2021. The Company used the Black-Scholes option pricing model to calculate the estimated fair value of the purchase right issued under the Purchase Plan. The expected volatility is based on historical volatility of the Company’s common stock. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates was 10.34 % as of December 31, 2021. The compensation expense related to the Purchase Plan has been estimated utilizing the following assumptions: -88- December 31, 2021 Risk-free interest rate 0.05 % Expected term (in years) 0.5 Dividend yield 0.00 % Expected volatility 17.89 % Weighted average volatility 17.89 % During 2021, 10,421 Consensus shares were purchased under the Purchase Plan at $ 49.67 per share. As of December 31, 2021, there are 989,579 shares available under the Purchase Plan for future issuance. Historical Cloud Services (a) The 2015 Stock Option Plan In May 2015, the Former Parent’s Board of Directors adopted the Ziff Davis 2015 Stock Option Plan (the “2015 Plan”). The 2015 Plan provided for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units and other share-based awards. Options under the 2015 Plan may be granted at exercise prices determined by the Former Parent’s Board of Directors, provided that the exercise prices shall not be less than the higher of the par value or 100 % of the fair market value of Ziff Davis’ common stock subject to the option on the date the option is granted. At December 31, 2021, 2020, and 2019, options to purchase were zero , 250 , and 500 shares, respectively, of common stock that were exercisable under and outside of the 2015 Plan, at weighted average exercise prices of zero , $ 29.53 , and $ 29.53 , respectively. Stock options generally expire after 10 years and vest over a 5 -year period. All stock option grants are approved by “outside directors” within the meaning of Internal Revenue Code Section 162(m). -89- Stock Options The stock option activity attributable to Consensus employees for the period ended December, 2021, 2020, and 2019 is summarized as follows: Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (In Years) Intrinsic Value Options outstanding at January 1, 2019 9,710 $ 29.53 Granted — — Exercised ( 1,000 ) $ 29.53 Canceled — — Options outstanding at December 31, 2019 8,710 $ 29.53 Granted — — Exercised ( 250 ) $ 29.53 Canceled — — Options outstanding at December 31, 2020 8,460 $ 29.53 Granted — Exercised ( 250 ) 29.53 Canceled — Adjustment due to Separation ( 8,210 ) Options outstanding at December 31, 2021 — $ — 0.0 $ — Exercisable at December 31, 2021 — $ — 0.0 $ — Vested and expected to vest at December 31, 2021 — $ — 0.0 $ — For the years ended December 31, 2021, 2020, and 2019, the Former Parent granted zero options to Consensus employees, respectively, to purchase shares of common stock pursuant to the 2015 Plan. These stock options vested 20 % per year and expired 10 years from the date of grant. The total intrinsic values of options exercised attributable to Consensus employees during the years ended December 31, 2021, 2020 and 2019 was zero , respectively. The total fair value of options vested during the period prior the Separation was zero for the years ended December 31, 2021, 2020, and 2019, respectively. Cash received by the Former Parent from options exercised under all share-based payment arrangements for the years ended December 31, 2021, 2020 and 2019 was zero . The actual tax benefit realized for the tax deductions from option exercises under the share-based payment arrangements totaled zero for the years ended December 31, 2021, 2020, 2019. As of December 31, 2021, there was zero of total unrecognized compensation expense related to nonvested share-based compensation options granted under the 2015 Plan. Fair Value Disclosure The Former Parent used the Black-Scholes option pricing model to calculate the fair value of each option grant. The expected volatility is based on historical volatility of the Former Parent’s common stock. The Former Parent estimates the expected term based upon the historical exercise behavior of its employees. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Former Parent uses an annualized dividend yield based upon the per share dividends declared by the Former Parent’s Board of Directors. Estimated forfeiture rates were 12.4 %, 13.0 %, and 13.9 % as of December 31, 2021, 2020 and 2019, respectively. Restricted Stock and Restricted Stock Units The Former Parent has awarded restricted stock and restricted stock units to the Former Parent’s Board of Directors and senior staff pursuant to the 2015 Plan. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over the applicable vesting period. Vesting periods are approximately one year for awards to members of the Former Parent’s Board of Directors, five -90- years for senior staff (excluding market-based awards discussed below) and eight years for the Chief Executive Officer. The Former Parent granted 2,207 , 2,961 , and 5,937 shares of restricted stock and restricted units (excluding awards with market conditions below) the years ended December 31, 2021, 2020 and 2019, respectively. Restricted Stock - Awards with Market Conditions The Former Parent has awarded certain key employees market-based restricted stock awards pursuant to the 2015 Plan. The market-based awards have vesting conditions that are based on specified stock price targets of the Parent’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Former Parent achieving the specified stock price targets with a 20 -day and 30 -day lookback (trading days). Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period using the graded-vesting method regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. During the nine months ended September 30, 2021 and the years ended December 31, 2020 and 2019, the Parent awarded 73,094 , 82,112 , and 74,051 market-based restricted stock awards, respectively. The per share weighted average grant-date fair values of the market-based restricted stock awards granted during the years ended December 31, 2021, 2020 and 2019 were $ 113.27 , $ 91.17 , and $ 84.58 , respectively. The Former Parent’s weighted-average fair values of market-based restricted stock awards granted have been estimated utilizing the following assumptions: December 31, December 31, December 31, 2021 2020 2019 Underlying stock price at valuation $ 113.27 $ 91.17 $ 84.58 Expected volatility 30.3 % 27.0 % 28.3 % Risk-free interest rate 1.3 % 0.7 % 2.5 % The total fair value of restricted stock and restricted stock units vested during the years ended December 31, 2021, 2020 and 2019 was $ 1.3 million, $ 0.7 million, and $ 2.0 million, respectively. The actual tax benefit realized for the tax deductions from the vesting of restricted stock awards and units totaled zero , respectively, for the years ended December 31, 2021, 2020 and 2019. -91- The restricted stock award activity for the years ended December 31, 2021, 2020, and 2019 is set forth below: Shares Weighted-Average Grant-Date Fair Value Nonvested at January 1, 2019 58,987 $ 74.77 Granted 7,564 82.64 Vested ( 18,135 ) 70.08 Canceled ( 10,742 ) 72.62 Nonvested at December 31, 2019 37,674 $ 75.03 Granted — — Vested ( 7,785 ) 76.43 Canceled ( 3,020 ) 77.37 Nonvested at December 31, 2020 26,869 $ 57.21 Granted — — Vested ( 6,189 ) 74.52 Canceled ( 6,850 ) 83.14 Adjustment due to Separation ( 13,830 ) 53.72 Nonvested at December 31, 2021 — $ — The restricted stock unit activity attributable to Consensus employees for the years ended December 31, 2021, 2020, and 2019 is set forth below: Number of Shares Weighted-Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value Outstanding at January 1, 2019 17,412 Granted 2,661 Vested ( 4,916 ) Canceled ( 4,800 ) Outstanding at December 31, 2019 10,357 Granted 5,431 Vested ( 1,734 ) Canceled ( 360 ) Outstanding at December 31, 2020 13,694 Granted 4,416 Vested ( 2,470 ) Canceled ( 8,856 ) Adjustment due to Separation ( 6,784 ) Outstanding at December 31, 2021 — 0.0 $ — Vested and expected to vest at December 31, 2021 — 0.0 $ — -92- (b) Employee Stock Purchase Plan ( “ESPP”) In May of 2001, the Former Parent established the J2 Global, Inc. 2001 Employee Stock Purchase Plan, as amended (the “Purchase Plan”), which provided for the issuance of a maximum of 2,000,000 shares of common stock. Under the Purchase Plan, eligible employees can have up to 15 % of their earnings withheld, up to certain maximums, to be used to purchase shares of Ziff Davis’ common stock at certain plan-defined dates. The price of the common stock purchased under the Purchase Plan for the offering periods is equal to 95 % of the fair market value of the common stock at the end of the offering period. On February 2, 2018, the Former Parent approved an amendment to the Former Parent’s Amended and Restated 2001 Employee Stock Purchase Plan, to be effective May 1, 2018, such that (i) the purchase price for each offering period shall be 85 % of the lesser of the fair market value of a share of common stock of the Parent (a “Share”) on the beginning or the end of the offering period, rather than 95 % of the fair market value of a Share at the end of the offering period, and (ii) each offering period will be six months, rather than three months. The Former Parent performed an analysis of the Amendment terms and determined that a plan provision exists which allows for the more favorable of two exercise prices, commonly referred to as a “look-back” feature. The purchase price discount and the look-back feature cause the Former Parent’s Purchase Plan to be compensatory and the Former Parent to recognize compensation expense. The compensation cost is recognized on a straight-line basis over the requisite service period. The Former Parent used the Black-Scholes option pricing model to calculate the estimated fair value of the purchase right issued under the ESPP. The expected volatility is based on historical volatility of the Former Parent’s common stock. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Former Parent uses an annualized dividend yield based upon the per share dividends declared by the Former Parent’s Board of Directors. Estimated forfeiture rates were 11.15 %, 11.15 %, 5.80 % and as of December 31, 2021, 2020 and 2019, respectively. During the years ended December 31, 2021, 2020 and 2019, 503 , 1,413 , and 1,921 shares, respectively were purchased under the Purchase Plan at price at $ 72.92 per share during 2021. As of December 31, 2021, zero shares were available under the Purchase Plan for future issuance. 15. Defined Contribution 401(k) Savings Plan Consensus has a 401(k) Savings Plan that qualifies under Section 401(k) of the Internal Revenue Code. Eligible employees may contribute a portion of their salary through payroll deductions, subject to certain limitations. The Company may make annual contributions at its sole discretion to these plans. For the years ended December 31, 2021, 2020 and 2019, the Company made contributions of $ 0.2 million, $ 0.2 million and $ 0.2 million, respectively, to this 401(k) Savings Plan. -93- 16. Earnings Per Share The components of basic and diluted earnings per share are as follows (in thousands, except share and per share data): Years Ended December 31, 2021 2020 (1) 2019 (1) Numerator for basic and diluted net income per common share: Net income from continuing operations attributable to common shareholders $ 121,174 $ 122,413 $ 178,883 Net income available to participating securities (2) ( 359 ) — — Net income available to common shareholders from continuing operations $ 120,815 $ 122,413 $ 178,883 Denominator: Weighted-average outstanding shares of common stock 19,904,237 19,902,924 19,902,924 Dilutive effect of: Equity incentive plans 71,000 — — Employee Stock Purchase Plan 11,652 — — Common stock and common stock equivalents 19,986,889 19,902,924 19,902,924 Net income per share from continuing operations: Basic $ 6.07 $ 6.15 $ 8.99 Diluted $ 6.04 $ 6.15 $ 8.99 (1) On October 7, 2021, the separation of Consensus into an independent publicly traded company was completed. The Former Parent distributed 19,902,924 shares of Consensus common stock to holders of J2 Global common stock as of the close of business on October 1, 2021, the record date for the distribution. This share amount was utilized for the computation of basic and diluted earnings per share for the years ended December 31, 2020 and 2019, respectively because the number of shares issued simply reflect a recharacterization of the capital account previously held by the former parent (see Note 1 - The Company). (2) Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid). For the year ended December 31, 2021, 191,076 anti-dilutive shares were excluded from earnings per share calculation. 17. Segment Information The Company’s businesses are based on the organizational structure used by the chief operating decision maker (“CODM”) for making operating and investment decisions and for assessing performance. The CODM views the Company as one business, Cloud Fax. The Company’s Cloud Fax business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with minor seasonal weakness in the fourth quarter. The accounting policies of the businesses are the same as those described in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies. The Company evaluates performance based on revenue, gross margin and profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. -94- Consensus maintains operations in the U.S., Canada, Ireland and other countries. Geographic information about the U.S. and all other countries for the reporting periods is presented below. Such information attributes revenues based on markets where revenues are reported (in thousands). Years ended December 31, 2021 2020 2019 Revenues: United States $ 274,814 $ 256,853 $ 249,429 Canada 45,157 40,303 37,191 Ireland 21,913 23,514 26,104 All other countries 10,780 10,498 9,835 Foreign countries 77,850 74,315 73,130 Total $ 352,664 $ 331,168 $ 322,559 December 31, 2021 December 31, 2020 Long-lived assets: United States $ 43,727 $ 50,966 Canada 7,128 10,249 Ireland 2,625 7,026 All other countries 80 135 Foreign countries 9,833 17,410 Total $ 53,560 $ 68,376 18. Supplemental Cash Flows Information Cash paid for interest on outstanding debt during the years ended December 31, 2021, 2020 and 2019 was zero , $ 54.4 million and $ 42.3 million, respectively, which is the primary contributor for total cash paid for interest. Cash paid for income taxes net of refunds received was $ 3.1 million, $ 1.7 million and $ 1.3 million during the years ended December 31, 2021, 2020 and 2019, respectively. During the year ended December 31, 2021, in a non-cash transaction, an asset related to the $ 500.0 million aggregate principal amount of the 6.5 % Senior Notes due 2028 (see Note 9 - Debt) and $ 837.3 million of non-fax business net assets were transferred to Ziff Davis with a corresponding reduction of additional-paid-in-capital. -95- 19. Accumulated Other Comprehensive Income (Loss) The following table summarizes the changes in accumulated balances of other comprehensive loss, which solely comprises of foreign currency translation adjustments, for the years ended December 31, 2021, 2020, and 2019 (in thousands): Foreign Currency Translation Balance as of January 1, 2019 $ ( 42,894 ) Other comprehensive loss before reclassifications ( 1,979 ) Net current period other comprehensive loss ( 1,979 ) Balance as of December 31, 2019 $ ( 44,873 ) Other comprehensive loss before reclassifications ( 11,093 ) Net current period other comprehensive loss ( 11,093 ) Balance as of December 31, 2020 $ ( 55,966 ) Other comprehensive income before reclassifications ( 14,397 ) Transfer of non-fax business to Former Parent 53,506 Net current period other comprehensive income 39,109 Balance as of December 31, 2021 $ ( 16,857 ) There were zero reclassifications out of accumulated other comprehensive loss for the years ended December 31, 2021, 2020, and 2019. 20. Related Party Transactions In preparation for and in executing the Separation, the Company incurred approximately $ 11.5 million (excluding costs associated with the deferred issuance costs) of transaction-related costs, before reimbursement by Ziff Davis. These transaction costs primarily relate to professional fees associated with preparation of regulatory filings and transaction execution and separation activities within finance, tax and legal functions. During the year ended December 31, 2021, Consensus paid approximately $ 16.1 million to Ziff Davis. These transaction-related costs were recorded in ‘General and administrative expenses’ within the Consolidated Statement of Income. The Company also reimbursed Ziff Davis for certain costs associated with the issuance of the 2026 and 2028 Senior Notes totaling $ 7.9 million which was recorded as deferred issuance costs. In addition, the Company paid Ziff Davis approximately $ 8.9 million subsequent to the Separation due to excess cash held at the Separation date net of other related items pursuant to the Separation and Distribution Agreement. In connection with the Separation, Consensus and Ziff Davis entered into several agreements that govern the relationship of the parties following the Separation, including a separation and distribution agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property license agreement, and a stockholder and registration rights agreement (the “Agreements”). The transition services agreement governs services including certain information technology services, finance and accounting services and human resource and employee benefit services. The agreed-upon charges for such services are generally intended to allow the providing company to recover all costs and expenses of providing such services and are expected to terminate no later than twelve months following the Separation. Further, as noted in Note 10, Ziff Davis assigned its lease of office space in Los Angeles, California to Consensus. Ziff Davis and Consensus will have joint liability under the lease through October 7, 2022, after which time the Company will be the sole lessee under the lease. Amounts due to Ziff Davis as of December 31, 2021 was $ 5.7 million related to these items, as well as reimbursement related to certain transaction related costs, and is included in other current liabilities within the Consolidated Balance Sheet. 21. Subsequent Event On February 4, 2022, in a cash transaction, the Company acquired certain assets of Summit Healthcare Services, Inc., a Massachusetts based provider of secure interoperability solutions within the healthcare industry for total consideration of $ 15.0 million. The initial accounting for this acquisition is incomplete due to the timing of available information and purchase accounting information is still being compiled and is not available for disclosure. -96- On March 1, 2022, the Company’s Board of Directors has approved a share buyback program. Under this program, the Company may purchase in the public market or in off-market transactions up to $ 100.0 million worth of stock through February 2025. The timing and amounts of purchases will be determined by the Company, depending on market conditions and other factors it deems relevant. On March 4, 2022, the Company entered into a Credit Agreement with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as administrative agent, collateral agent and sole lead arranger for the Lenders (the “Agent”). Pursuant to the Credit Agreement, the Lenders have provided Consensus with a revolving credit facility of $ 25.0 million (the “Credit Facility”). The final maturity of the Credit Facility will occur on March 4, 2027. Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure None.