What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-16 · 74 added, 61 removed, 177 unchanged (43% of the section changed)

11 unchanged sentences

◦ Sustain growth or profitability, particularly in light of an uncertain U.S.

or worldwide economy and the related impact on customer acquisition and retention rates, customer usage levels, and credit and debit card payment declines;

or worldwide economy, inflationary pressures and increasing interest rates, and the related impact on customer acquisition and retention rates, customer usage levels, and credit and debit card payment declines;

◦ Maintain and increase our customer base and average revenue per user;

33 unchanged sentences

Consensus’s communication and interoperability solutions enable its customers to securely and cooperatively access, exchange and use information across organizational, regional and national boundaries.

The COVID-19 pandemic continues to have widespread, rapidly evolving and unpredictable impacts on global economies, inflation, supply chains, work force participation and wages, and has created significant volatility and disruption in financial markets.

Our focus remains on promoting employee health and safety and serving our customers.

During fiscal year 2021 and fiscal quarter 2022, we have observed an increasingly competitive labor market.

The global economy continues to be impacted by macroeconomic uncertainty and volatility resulting from the COVID-19 pandemic, Russia’s invasion of Ukraine, inflationary pressures, supply chain disruptions and challenges and labor market pressures.

During fiscal year 2021 and through the first half of 2022, we have observed an increasingly competitive labor market.

Increased employee turnover, changes in the availability of our employees, including as a result of COVID-19-related absences, and labor shortages generally have resulted in, and could continue to result in, increased costs, and could adversely impact the efficiency of our operations.

1 unchanged sentence

For purposes of this management’s discussion and analysis of the results of operations and financial condition of Consensus (“MD&A”) section, we use the terms “the Company,” “we,” “us” and “our” to refer to Consensus.

References in this MD&A section to “Parent” or “Parent Company” refer to Ziff Davis, Inc., collectively with its consolidated subsidiaries.

References in this MD&A section to “Former Parent” or “Former Parent Company” refers to Ziff Davis, Inc., collectively with its consolidated subsidiaries.

Key Performance Metrics

We use the following metrics to evaluate our business, including the growth of our business, the value provided by customers to our business, and our customer retention.

The following table sets forth certain key operating metrics for Consensus continuing operations for the three months ended March 31, 2022 and 2021 (in thousands, except for percentages):

Three Months Ended March 31,

The following table sets forth certain key operating metrics for Consensus continuing operations for the three and six months ended June 30, 2022 and 2021 (in thousands, except for percentages):

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Revenue ($ in thousands)

14 unchanged sentences

Corporate 4 3 7 7

SoHo 96 110 196 223

Consolidated 100 113 203 230

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Our critical accounting policies are described in our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

During the three months ended March 31, 2022, there were no significant changes in our critical accounting policies and estimates.

During the six months ended June 30, 2022, there were no significant changes in our critical accounting policies and estimates.

Emerging Growth Company Status

1 unchanged sentence

For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements and exemptions from the requirement of holding a nonbinding advisory vote on executive compensation, exemption from new or revised financial accounting.

Results of Operations for the Three and Three Months Ended March 31, 2022 and 2021

Results of Operations for the Three and Six Months Ended June 30, 2022 and 2021

The main strategic focus of our Consensus offerings is to enable our customers to securely and cooperatively access, exchange and use information across organizational, regional and national boundaries.

2 unchanged sentences

(in thousands, except percentages)

Three Months Ended March 31, Percentage Change

Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

Revenues $ 93,163 $ 87,842 6% $ 184,088 $ 174,462 6%

Our revenues primarily consist of revenues from “fixed” customer subscription revenues and “variable” revenues generated from actual usage of our services.

We also generate an immaterial amount of Consensus revenues from intellectual property licensing.

Revenues increased by $5.3 million or 6% over the prior comparable three month period.

Our growth was primarily due to an increase $5.4 million or 13% in our corporate business (inclusive of $0.8 million due to the Summit acquisition);

Our growth was primarily due to an increase of $7.1 million or 17% in our corporate business (inclusive of $2.6 million due to the Summit acquisition);

partially offset by a decline of $1.8 million or 4% in our SoHo business.

Revenues increased by $9.6 million or 6% over the prior comparable six month period.

Our growth was primarily due to an increase of $12.5 million or 15% in our corporate business (inclusive of $3.4 million due to the Summit acquisition);

partially offset by a decline of $2.9 million or 3% in our SoHo business.

Cost of Revenues

(in thousands, except percentages)

Three Months Ended March 31, Percentage Change

Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

Cost of revenue $15,587 $14,554 7% $30,692 $28,524 8%

1 unchanged sentence

Cost of revenues is primarily comprised of costs associated with data transmission, network operations, customer service, software licenses for resale, online processing fees and equipment depreciation.

The increase in cost of revenues for the three months ended March 31, 2022 was primarily due to an increase in network operations and customer service expenses;

The increase in cost of revenues for the three and six months ended June 30, 2022 was primarily due to an increase in network operations and customer service expenses;

partially offset by a decrease in data transmission costs.

2 unchanged sentences

(in thousands, except percentages)

Three Months Ended March 31, Percentage Change

Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

Sales and Marketing $16,394 $13,681 20% $32,224 $26,916 20%

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Our sales personnel consist of a combination of inside sales and outside sales professionals.

Sales and marketing cost for the three months ended March 31, 2022 was $15.8 million (primarily consisting of $10.1 million of third-party advertising costs and $5.5 million of personnel costs) compared to the prior period of $13.2 million (primarily consisting of $8.5 million of third-party advertising costs and $4.6 million of personnel costs).

The increase in sales and marketing expenses for the three months ended March 31, 2022 versus the prior comparable period was primarily due to increased advertising operations, sales and advertising and costs associated with the business acquired in the quarter.

Sales and marketing cost for the three months ended June 30, 2022 was $16.4 million (primarily consisting of $10.3 million of third-party advertising costs and $5.9 million of personnel costs) compared to the prior period of $13.7 million (primarily consisting of $8.8 million of third-party advertising costs and $4.8 million of personnel costs).

The increase in sales and marketing expenses for the three months ended June 30, 2022 versus the prior comparable period was primarily due to increased advertising operations, sales and advertising and costs associated with the business acquired in the current year.

Sales and marketing cost for the six months ended June 30, 2022 was $32.2 million (primarily consisting of $20.4 million of third-party advertising costs and $11.5 million of personnel costs) compared to the prior period of $26.9 million (primarily consisting of $17.3 million of third-party advertising costs and $9.5 million of personnel costs).

The increase in sales and marketing expenses for the six months ended June 30, 2022 versus the prior comparable period was primarily due to increased advertising operations, sales and advertising and costs associated with the business acquired in the current year.

Research, Development and Engineering

(in thousands, except percentages)

Three Months Ended March 31, Percentage Change

Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

Research, Development and Engineering $2,741 $1,940 41% $5,077 $3,616 40%

1 unchanged sentence

Our research, development and engineering costs consist primarily of personnel-related expenses.

The increase in research, development and engineering costs for the three months ended March 31, 2022 versus the prior comparable periods was primarily due to our continued focus on developing our platform, product and solutions primarily supporting our corporate revenue growth and incremental costs as a result of our Summit acquisition.

During the three months ended March 31, 2022 and 2021, the Company capitalized internally developed software of $6.5 million and $3.3 million, respectively, which is recorded in property, plant and equipment on the Condensed Consolidated Balance Sheet.

The increase in research, development and engineering costs for the three and six months ended June 30, 2022 versus the prior comparable periods was primarily due to our continued focus on developing our platform, products and solutions primarily supporting our corporate revenue growth and incremental costs as a result of our Summit acquisition.

General and Administrative

(in thousands, except percentages)

Three Months Ended March 31, Percentage Change

Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

General and Administrative $17,450 $5,976 192% $36,256 $12,025 202%

2 unchanged sentences

share-based compensation expense, bad debt expense, professional fees and insurance costs.

The increase in general and administrative expense for the three months ended March 31, 2022 versus prior comparable period was primarily due to operating as a standalone public company.

The increase in costs was primarily attributable to $8.1 million in salary and benefits (inclusive of $4.4 million of share-based compensation), $1.1 million in professional fees, $0.8 million in depreciation and amortization and $0.7 million in Wayfair Sales Tax expense.

The increase in general and administrative expense for the three months ended June 30, 2022 versus prior comparable period was primarily due to operating as a standalone public company.

The increase in costs was primarily attributable to $7.6 million in salary and benefits (inclusive of $3.8 million of share-based compensation) and $2.0 million in professional fees.

The increase in general and administrative expense for the six months ended June 30, 2022 versus prior comparable period was primarily due to operating as a standalone public company.

The increase in costs was primarily attributable to $15.6 million in salary and benefits (inclusive of $8.0 million of share-based compensation), $3.0 million in professional fees, $1.5 million in computer and related expense and $1.1 million in depreciation and amortization expense.

Share-Based Compensation

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying condensed consolidated statements of income for the three and three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended March 31,

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2022 and 2021 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Cost of revenues $ 216 $ 49 $ 439 $ 99

8 unchanged sentences

Interest expense .

Our interest expense is generated primarily from interest expense due on outstanding debt.

Interest expense for the three months ended March 31, 2022 and 2021 was $13.3 million and $0.2 million, respectively.

Interest expense increased over the prior comparable period due to three months of interest expense on $805.0 million of debt associated with the 2026 and 2028 senior notes in the current period which was not present in the prior comparable period.

Interest income .

Our interest income is generated by interest income earned on cash and cash equivalents.

Interest income for the three months ended March 31, 2022 and 2021 was zero and $9.0 thousand, respectively.

Changes in interest income was immaterial when compared to the prior comparable period.

Our interest expense is due to outstanding debt.

Interest expense for the three months ended June 30, 2022 and 2021 was $12.4 million and $0.3 million, respectively.

Interest expense for the six months ended June 30, 2022 and 2021 was $25.6 million and $0.5 million, respectively.

Interest expense increased over the prior comparable periods due to three and six months of interest expense on $805.0 million of debt associated with the 2026 and 2028 senior notes in the current period which was not present in the prior comparable period.

Other income, net .

Our other income, net is generated primarily from miscellaneous items and gains or losses on currency exchange.

Other income, net for the three months ended March 31, 2022 and 2021 was $0.2 million and $0.4 million, respectively.

Changes in Other income, net was immaterial when compared to the prior comparable period.

Other income, net for the three months ended June 30, 2022 and 2021 was $1.6 million and $(0.1) million, respectively.

Other income, net for the six months ended June 30, 2022 and 2021 was $1.8 million and $0.3 million, Changes in Other income, net in both periods were driven by higher foreign exchange gains when compared to the prior comparable period.

Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those related to transfer pricing) and different tax rates in the various jurisdictions in which we operate.

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When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.

Provision for income taxes for the three months ended March 31, 2022 and 2021 amounted to $7.0 million and $12.6 million, respectively.

Our effective tax rate for the three months ended March 31, 2022 and 2021 was 27.4% and 24.3%, respectively.

The increase in our effective income tax rate for the three months ended March 31, 2022 was primarily attributable to an increase in tax expense due to certain compensation not being deductible for tax purposes.

Provision for income taxes for the three months ended June 30, 2022 and 2021 was $7.9 million and $12.5 million, respectively.

Provision for income taxes for the six months ended June 30, 2022 and 2021 was $15.0 million and $25.1 million, respectively.

The Company’s effective tax rate for the three months ended June 30, 2022 and 2021 was 26.3% and 24.3%, respectively.

The Company’s effective tax rate for the six months ended June 30, 2022 and 2021 was 26.8% and 24.3%, respectively.

The increase in our effective income tax rate for the three and six months ended June 30, 2022 was primarily attributable to an increase in tax expense due to certain expenses not being deductible for tax purposes.

Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis.

We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business.

Certain of these tax positions have in the past been, and are currently being, challenged, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient.

Certain of these tax positions have in the past been challenged and this may have a significant impact on our effective tax rate if our tax reserves are insufficient.

Liquidity and Capital Resources

Cash and Cash Equivalents

At March 31, 2022, we had cash and cash equivalents of $93.9 million compared to $66.8 million at December 31, 2021.

At June 30, 2022, we had cash and cash equivalents of $76.3 million compared to $66.8 million at December 31, 2021.

The increase in cash and cash equivalents resulted primarily from cash provided from operations;

partially offset by cash used in a business and asset acquisition, purchases of property and equipment (including capitalized labor) and the surrendering of shares to cover employee income tax related to the release of equity awards.

As of March 31, 2022, cash and cash equivalents held within domestic and foreign jurisdictions were $59.1 million and $34.8 million, respectively.

As of June 30, 2022, cash and cash equivalents held within domestic and foreign jurisdictions were $35.8 million and $40.5 million, respectively.

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 million (the “Credit Facility”).

Pursuant to the Credit Agreement, the Lenders have provided Consensus with a revolving credit facility of $25 million (the “Credit Facility”) with an option held by the Company to obtain an additional commitment of up to a maximum of $25.0 million..

The final maturity of the Credit Facility will occur on March 4, 2027.

As of March 31, 2022, no amount has been drawn down on the Credit Facility.

As of June 30, 2022, no amount has been drawn down on the Credit Facility.

We currently anticipate that our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our anticipated needs for working capital, capital expenditures and stock repurchases, if any, for at least the next 12 months.

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The timing and amounts of purchases will be determined by the Company, depending on market conditions and other factors it deems relevant.

During Q1 2022, the Company entered into Rule 10b-18 and Rule 10b5-1 trading plans and during the three months ended March 31, 2022, the Company repurchased zero shares under these program.

Periodically, participants in the Consensus’ Equity Incentive Plan surrender to the Company shares of the Company’s stock to satisfy tax withholding obligations arising upon the vesting of restricted stock.

During the three months ended March 31, 2022, participants surrendered to the Company 19,922 shares from plan participants for this purpose at an aggregate cost of $1.2 million.

The prior period includes cash flows from discontinued operations of the non-Consensus business, accordingly does not lend itself to a quarter-over-quarter analysis.

The Company entered into Rule 10b-18 and Rule 10b5-1 trading plans and during the three months ended June 30, 2022, the Company repurchased 189,114 shares under this program.

At the time of certain vesting events related to restricted stock units or restricted stock awards that are held by participants in Consensus’ Equity Incentive Plan, a portion of the awards subject to vesting are withheld by the Company to satisfy the employees’ tax withholding obligations that arise upon the vesting of restricted stock.

As a result, the number of shares issued upon vesting for these awards is net of the statutory withholding requirements that the Company pays on behalf of its employees.

Although shares withheld are not issued, they are treated as common share repurchases in the Company’s condensed consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

These shares do not count against the authorized capacity under the Company’s share repurchase program described above.

During the three and six months ended June 30, 2022 the Company withheld shares on its vested restricted stock units relating to its share-based compensation plans of 7,897 and 27,819 shares, respectively.

The prior period includes cash flows from discontinued operations of the non-Consensus business.

As a result, the prior period is not comparable.

Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents.

Net cash provided by operating activities was $49.9 million and $59.9 million for the three months ended March 31, 2022 and 2021, respectively.

Net cash provided by operating activities was $52.2 million and $126.6 million for the six months ended June 30, 2022 and 2021, respectively.

Our operating cash flows resulted primarily from cash received from our customers offset by cash payments we made to third parties for their services and employee compensation.

The decrease in our net cash provided by operating activities in 2022 compared to 2021 was attributable to decreased income after considering noncash items;

partially offset by cash inflows from accounts payable and accrued expenses, other long-term liabilities,income taxes, accounts receivable and prepaid expenses.

Our cash and cash equivalents were $93.9 million and $66.8 million at March 31, 2022 and December 31, 2021, respectively.

Net cash used in investing activities was $20.8 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022 and 2021, net cash used in investing activities was primarily due to business and asset acquisitions and capital expenditures associated with the purchase of property and equipment (including capitalized labor);

partially offset by proceeds from the sale of businesses.

The increase in our net cash used in investing activities in 2022 compared to 2021 was primarily due to additional cash used for business and asset acquisitions;

partially offset by cash inflows from income taxes payable deferred revenue and liability for uncertain tax positions.

Our cash and cash equivalents were $76.3 million and $66.8 million at June 30, 2022 and December 31, 2021, respectively.

Net cash used in investing activities was $29.1 million and $80.8 million for the six months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022 and 2021, net cash used in investing activities was primarily due to business and asset acquisitions and capital expenditures associated with the purchase of property and equipment (including capitalized labor);

partially offset by proceeds from the sale of businesses.

Net cash (used in) provided by financing activities was $(1.4) million and $10.6 million for the three months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022 and 2021, net cash provided by financing activities was primarily due to contributions from the former parent, Ziff Davis;

partially offset by deferred payments for acquisitions and the the surrendering of shares to cover employee income tax related to the release of equity awards.

change in net cash (used in) provided by financing activities in 2022 compared to 2021 was primarily attributable to decreased contributions from the former parent;

partially offset by deferred payments for business acquisitions in the prior period;

partially offset by the surrendering of shares to cover employee income tax related to the release of equity awards.

The decrease in our net cash used in investing activities in 2022 compared to 2021 was primarily due to a decrease in cash outlays associated with business acquisitions and capital expenditures.

Net cash (used in) provided by financing activities was $(8.8) million and $18.8 million for the six months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022 and 2021, net cash provided by financing activities was primarily due to contributions from the Former Parent;

partially offset by the repurchase of common stock, deferred payments for acquisitions and the the surrendering of shares to cover employee income tax related to the release of equity awards.

The change in net cash (used in) provided by financing activities in 2022 compared to 2021 was primarily attributable to decreased contributions from the Former Parent, the repurchase of common stock and shares withheld to cover employee income taxes;

partially offset by a decrease in deferred payments for acquisitions in the current period.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of March 31, 2022:

The following table summarizes our contractual obligations and commitments as of June 30, 2022:

Payment Due by Period (in thousands)

18 unchanged sentences

(f) These amounts represent certain consulting and Board of Directors fee arrangements.

As of March 31, 2022, our liability for uncertain tax positions was $4.8 million.

As of June 30, 2022, our liability for uncertain tax positions was $6.3 million.

The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlement with the taxing authorities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis