What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-09 · 65 added, 64 removed, 187 unchanged (41% of the section changed)

13 unchanged sentences

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

◦ Generate sufficient cash flow to make interest and debt payments, reinvest in our business, and pursue desired activities and businesses plans while satisfying restrictive covenants relating to debt obligations;

◦ Generate sufficient cash flow to make interest and debt payments, reinvest in our business, and pursue desired activities and business plans while satisfying restrictive covenants relating to debt obligations;

◦ Acquire businesses on acceptable terms and successfully integrate and realize anticipated synergies from such acquisitions;

2 unchanged sentences

◦ Accurately estimate the assumptions underlying our effective worldwide tax rate;

◦ Manage risks from our international operations, including risks associated with currency fluctuations and foreign exchange controls and adverse changes in global financial markets;

◦ Manage certain risks inherent to our business, such as costs associated with fraudulent activity, system failure or network security breach;

28 unchanged sentences

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.

During fiscal year 2021 and through the third quarter 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.

4 unchanged sentences

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 and six months ended June 30, 2022 and 2021 (in thousands, except for percentages):

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

34 unchanged sentences

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

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

Emerging Growth Company Status

We are an emerging growth company, as defined in Section 3(a) of the Exchange Act, as amended by the JOBS Act.

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 Six Months Ended June 30, 2022 and 2021

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, exemptions from the requirement of holding a nonbinding advisory vote on executive compensation, and exemption from new or revised financial accounting.

As of December 31, 2022, we will no longer be an emerging growth company as defined in Section 3(a) of the Exchange Act, as we will be a large accelerated filer.

Results of Operations for the Three and Nine Months Ended September 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 June 30, Percentage Change Six Months Ended June 30, Percentage Change

Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

4 unchanged sentences

partially offset by a decline of $1.2 million or 3% in our SoHo business.

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

Revenues increased by $16.3 million or 6% over the prior comparable nine month period.

Our growth was primarily due to an increase of $20.6 million or 16% in our corporate business (inclusive of $5.3 million due to the Summit acquisition);

2 unchanged sentences

(in thousands, except percentages)

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

Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

2 unchanged sentences

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 and six months ended June 30, 2022 was primarily due to an increase in network operations and customer service expenses;

The increase in cost of revenues for the three and nine months ended September 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 June 30, Percentage Change Six Months Ended June 30, Percentage Change

Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

4 unchanged sentences

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

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.

Sales and marketing cost for the three months ended September 30, 2022 was $16.6 million (primarily consisting of $10.3 million of third-party advertising costs and $6.0 million of personnel costs) compared to the prior period of $13.1 million (primarily consisting of $8.2 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 September 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 nine months ended September 30, 2022 was $48.9 million (primarily consisting of $30.7 million of third-party advertising costs and $17.3 million of personnel costs) compared to the prior period of $40.0 million (primarily consisting of $25.5 million of third-party advertising costs and $14.2 million of personnel costs).

The increase in sales and marketing expenses for the nine months ended September 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 June 30, Percentage Change Six Months Ended June 30, Percentage Change

Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

2 unchanged sentences

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

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.

The increase in research, development and engineering costs for the three and nine months ended September 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 June 30, Percentage Change Six Months Ended June 30, Percentage Change

Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

3 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 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.

The increase in general and administrative expense for the three months ended September 30, 2022 versus prior comparable period was primarily due to $7.8 million in non-income tax related expenses.

In addition, increased expenses related to operating as a standalone public company, included increases of $7.0 million in salary and benefits (inclusive of $3.6 million of share-based compensation) and $2.2 million in professional fees.

The increase in general and administrative expense for the nine months ended September 30, 2022 versus prior comparable period was primarily due to increased expenses related to operating as a standalone public company, included increases of $22.6 million in salary and benefits (inclusive of $11.7 million of share-based compensation), $5.3 million in professional fees, $2.3 million in computer and related expenses, $1.5 million insurance expenses, and $1.0 million in depreciation and amortization expense.

The increase was also due to $8.5 million in non-income tax related expenses.

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 six months ended June 30, 2022 and 2021 (in thousands):

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

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 nine months ended September 30, 2022 and 2021 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

5 unchanged sentences

Continuing Operations 4,614 352 14,608 1,116

Income from discontinued operations — 1,048 — 2,156

Loss from discontinued operations — 1,099 — 3,254

Total $ 4,614 $ 1,451 $ 14,608 $ 4,370

2 unchanged sentences

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.

Interest expense for the three months ended September 30, 2022 and 2021 was $13.9 million and $0.1 million, respectively.

Interest expense for the nine months ended September 30, 2022 and 2021 was $39.6 million and $0.6 million, respectively.

Interest expense for the three and nine months ended September 30, 2022 included interest expense on $805.0 million of debt associated with the 2026 and 2028 senior notes, which were entered into in October 2021, and as such there was no interest expense related to these facilities in prior comparable periods.

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 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.

Other income, net for the three months ended September 30, 2022 and 2021 was $3.0 million and $1.6 million, respectively.

Other income, net for the nine months ended September 30, 2022 and 2021 was $4.7 million and $1.8 million.

Changes in Other income, net in both periods were driven by higher foreign exchange gains when compared to the prior comparable periods.

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.

1 unchanged sentence

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 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.

Provision for income taxes for the three months ended September 30, 2022 and 2021 was $6.9 million and $11.5 million, respectively.

Provision for income taxes for the nine months ended September 30, 2022 and 2021 was $21.9 million and $36.6 million, respectively.

The Company’s effective tax rate for the three months ended September 30, 2022 and 2021 was 28.8% and 21.9%, respectively.

The Company’s effective tax rate for the nine months ended September 30, 2022 and 2021 was 27.4% and 23.5%, respectively.

The increase in our effective income tax rate for the three and nine months ended September 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.

3 unchanged sentences

Cash and Cash Equivalents

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 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”) with an option held by the Company to obtain an additional commitment of up to a maximum of $25.0 million..

At September 30, 2022, we had cash and cash equivalents of $103.7 million compared to $66.8 million at December 31, 2021.

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

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

As of September 30, 2022, cash and cash equivalents held within domestic and foreign jurisdictions were $51.1 million and $52.6 million, respectively.

On March 4, 2022, the Company entered into a Credit Agreement with certain lenders party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as agent (the “Agent”).

Pursuant to the Credit Agreement, the Lenders have provided Consensus with a senior secured 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 June 30, 2022, no amount has been drawn down on the Credit Facility.

As of September 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.

3 unchanged sentences

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

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.

The Company entered into Rule 10b-18 and Rule 10b5-1 trading plans and during the three and nine months ended September 30, 2022, the Company repurchased zero and 189,114, respectively, 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.

2 unchanged sentences

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.

During the three and nine months ended September 30, 2022 the Company withheld shares on its vested restricted stock units relating to its share-based compensation plans of 1,906 and 29,725 shares, respectively.

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

1 unchanged sentence

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

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.

Net cash provided by operating activities was $89.3 million and $196.4 million for the nine months ended September 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 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.

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.

The decrease in our net cash provided by operating activities in 2022 compared to 2021 was attributable to decreased income after considering noncash items, an increase in accounts receivable, and a decrease in other liabilities;

partially offset by increases in accounts payable and accrued expenses and our liability for uncertain tax positions, as well as changes in prepaid expenses and other current assets, income tax payable and operating lease liabilities in the prior year period that were lower in the current year period.

Our cash and cash equivalents were $103.7 million and $66.8 million at September 30, 2022 and December 31, 2021, respectively.

Net cash used in investing activities was $34.3 million and $37.8 million for the nine months ended September 30, 2022 and 2021, respectively.

For the nine months ended September 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 non-fax businesses in 2021.

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;

partially offset by proceeds from the sale of non-fax businesses in 2021.

Net cash (used in) provided by financing activities was $(8.9) million and $14.4 million for the nine months ended September 30, 2022 and 2021, respectively.

For the nine months ended September 30, 2022 and 2021, net cash (used in) 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 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 cash inflows related to contributions from the Former Parent that occurred in 2021, partially offset by deferred payments for acquisitions in 2021;

compared to cash outflows related to the repurchase of common stock and shares withheld to cover employee income taxes in 2022.

Contractual Obligations and Commitments

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

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

Payment Due by Period (in thousands)

8 unchanged sentences

151 278 14 1 — — 444

Holdback payment (e)

210 375 — — — — 585

210 — — — — — 210

Total $ 27,000 $ 54,055 $ 53,514 $ 53,190 $ 358,261 $ 575,786 $ 1,121,806

3 unchanged sentences

(d) These amounts represent service commitments to various telecommunication providers.

(e) These amounts represent the holdback amounts in connection with certain business acquisitions.

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

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

(e) These amounts represent certain agreements associated with the Summit acquisition and Board of Directors fee arrangements.

As of September 30, 2022, our liability for uncertain tax positions was $7.0 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