What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-04-15 · 130 added, 159 removed, 260 unchanged (53% of the section changed)

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Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with the SEC.

On October 7, 2021, J2 Global, Inc.

completed its previously announced plans to separate into two leading publicly traded companies:

one addressing healthcare interoperability and comprising the Cloud Fax business, which does business as Consensus Cloud Solutions, Inc.

(“Consensus” or “the Company”), and one that will continue J2 Global’s strategy of building a leading internet platform focused on key verticals, including technology & gaming, shopping, health, cybersecurity and martech, which does business as Ziff Davis.

We refer to the transactions that resulted in the separation of Consensus and Ziff Davis into two separate publicly traded companies as the “separation and distribution.”

Following the separation and distribution, Consensus is a leading 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.

Consensus is a leading provider of secure information delivery services with a scalable Software-as-a-Service (“SaaS”) platform.

Consensus serves approximately 1 million customers of all sizes, from enterprises to individuals, across approximately 50 countries and multiple industry verticals including healthcare, government, financial services, law and education.

Beginning as an online fax company over two decades ago, Consensus has evolved into a leading global provider of enterprise secure communication solutions.

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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 2021, 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 2022 and 2021, 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.

We continue to actively monitor the situation and will continue to adapt our business operations as necessary.

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.

Inc., collectively with its consolidated subsidiaries (now known as Ziff Davis).

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 years ended December 31, 2021, 2020 and 2019 (in thousands, except for percentages):

The following table sets forth certain key operating metrics for our continuing operations for the years ended December 31, 2022, 2021 and 2020 (in thousands, except for percentages):

Years ended December 31,

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SoHo 170,199 182,390 181,784

Consolidated 352,122 330,765 321,590

Other Revenues 542 403 969

362,394 352,122 330,765

Other Revenues 28 542 403

Consolidated $ 362,422 $ 352,664 $ 331,168

Average Revenue per Customer Account (“ARPA”) (1)(2)

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(1) Consensus customers are defined as paying Corporate and SoHo customer accounts.

(2) Represents a monthly ARPA calculated for the quarter or year calculated as follows.

(2) Represents a monthly ARPA for the quarter or year calculated as follows.

Monthly ARPA on a quarterly basis is calculated using our standard convention of dividing revenue for the quarter by the average of the quarter’s beginning and ending customer base and dividing that amount by 3 months.

Monthly ARPA on an annual basis is calculated by dividing revenue for the year by the average customer base for the applicable four quarters and dividing that amount by 12 months.

We believe ARPA provides investors an understanding of the average monthly revenues we recognize per account associated within Consensus’ customer base.

We believe ARPA provides investors an understanding of the average monthly revenues we recognize per account associated within the Consensus’ customer base.

As ARPA varies based on fixed subscription fee and variable usage components, we believe it can serve as a measure by which investors can evaluate trends in the types of services, levels of services and the usage levels of those services across Consensus’ customers.

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Actual results may differ significantly from those estimates under different assumptions and conditions and may be material.

We believe that our most critical accounting policies 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, contingent consideration, income taxes and contingencies and allowance for doubtful accounts.

We believe that our most critical accounting policies are those related to revenue recognition, share-based compensation expense, impairment or disposal of long-lived and intangible assets, fair value of assets acquired and liabilities assumed in connection with business combinations, income taxes, contingencies and allowance for doubtful accounts.

We consider these policies critical because they are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Company’s Board of Directors.

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.

Revenue Recognition

Our revenues substantially consist of monthly recurring subscription and usage-based fees, the majority of which are paid in advance by credit card.

We defer 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.

Along with our numerous proprietary solutions, we also generated revenues by reselling various third-party solutions.

These third-party solutions, along with our proprietary products, allowed us to offer customers a variety of solutions to better meet their needs.

We recorded revenue on a gross basis with respect to reseller revenue because we have control of the specified good or service prior to transferring control to the customer.

Our revenues substantially consist of monthly recurring subscription and usage-based fees, a significant portion of which are paid in advance by credit card.

Along with our numerous proprietary solutions, we also generate revenues by reselling various third-party solutions.

These third-party solutions, along with our proprietary products, allow us to offer customers a variety of solutions to better meet their needs.

We record revenue on a gross basis with respect to reseller revenue because we have control of the specified good or service prior to transferring control to the customer.

Share-Based Compensation Expense

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Any such changes could materially impact our 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 our employees.

The Company estimates the expected term based upon the contractual term of the award.

Impairment or Disposal of Long-lived and Intangible Assets

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We have assessed whether events or changes in circumstances have occurred that potentially indicate the carrying amount of definite-lived intangibles and long-lived assets may not be recoverable.

We recorded total impairment of $7.5 million related to operating lease right-of-use assets, of which $6.5 million is related to continuing operations and $1.0 million is related to discontinued operations.

Additionally, we recorded an impairment charge of $1.7 million for property and equipment for the year ended December 31, 2021.

Additionally, we recorded an impairment charge of $1.7 million for associated property and equipment for the year ended December 31, 2021.

The impairment is related to the Company’s decision to exit and seek subleases for certain leased facilities, primarily due to a distributed workforce as a result of the pandemic.

As we seek to return to offices, we will seek a hybrid return to office model.

No impairment was recorded for the years ended December 31, 2020, and 2019, respectively.

No impairment was recorded for the years ended December 31, 2022 and 2020.

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.

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Business Combinations and Valuation of Goodwill and Intangible Assets

We apply the acquisition method of accounting for business combinations in accordance with GAAP and uses 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, revenue growth rates, gross margins, customer attrition rates, royalty rates, discount rates and terminal growth rate assumptions.

We apply the acquisition method of accounting for business combinations in accordance with GAAP and use 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.

We use established valuation techniques and may engage reputable valuation specialists to assist with the valuations.

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If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then we perform 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.

impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill.

We generally determine the fair value of our 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.

Contingent Consideration

Certain of our 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 our 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, we estimate 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.

We consider 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 our other key employees.

The contingent earn-out payments are not affected by employment termination.

We measure our 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 of the Notes to Consolidated Financial Statements).

We may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation.

This simulation uses 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.

We review and re-assess 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 quarterly 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.

For historical periods, we are included in the federal consolidated and state consolidated income tax returns with Ziff Davis and its other subsidiaries.

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and numerous foreign jurisdictions.

Significant judgment is required in evaluating our 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.

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

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain.

We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due.

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ASC 740 contains a two-step approach to recognizing and measuring uncertain income tax positions.

The first step is to evaluate the income 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 first step is to evaluate the income 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 upon 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.

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Non-Income Tax Contingencies

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.

The Company historically did not collect sales tax in states where it was not able to quantify the appropriate sales tax to be collected.

For periods from 2017 through 2021, the Company believed it was probable that a sales tax liability existed for its corporate accounts;

however, it could not estimate the sales tax liability for its corporate customers until the third quarter of

Prior to the third quarter of 2022, the Company was unable to determine which of these customers were either exempt organizations or resellers and were thus exempt from sales tax.

In the third quarter of 2022, the Company completed an analysis of the pool of corporate customers subject to sales tax in order to estimate the range of sales tax liability on its corporate revenues.

As a result, the Company recorded an accrual of $8.0 million during the quarter ended September 30, 2022 within accounts payable and accrued expenses on the Company’s Consolidated Balance Sheets, as the exposure was then probable and estimable.

Additionally, the Company started sales tax collection and remittance on corporate sales in applicable states in August 2022.

See Note 11 - Commitments and Contingencies of the notes to consolidated financial statements in Part II, Item 8 of this Form 10-K.

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.

Accordingly, the Company has recorded a sales tax expense in 2021 of $8.6 million for all periods affected.

In conjunction with the state voluntary disclosure agreement process the company is remitting sales tax for SoHo and corporate sales for current and prior periods.

Taxing authorities may successfully assert that the Company should have collected, or in the future should collect sales and use, telecommunications or similar taxes, and could be subject to liability with respect to past or future tax, which could adversely affect the Company’s operating results.

The Company will continue to review and monitor the impact of sales tax rules in order to mitigate any associated risks on its business.

As such, the Company has a $13.1 million and $8.6 million sales tax liability within accounts payable and accrued expenses on the Company’s Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively.

Allowances for Doubtful Accounts

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Recent Accounting Pronouncements

The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any election to opt out is irrevocable.

We have elected not to opt out of the extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.

For a summary of recent accounting pronouncements applicable to us, see Note 2 to the Consolidated Financial Statements and Note 1 to the Condensed Consolidated Financial Statements.

See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies, to our accompanying consolidated financial statements for a description of recent accounting pronouncements and our expectations of their impact on our consolidated financial position and results of operations.

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We expect our business to primarily grow organically and inorganically through the use of capital for re-investment in the business and opportunistic acquisitions that expedite our product roadmap in the interoperability space should they arise.

The following table sets forth for the years ended December 31, 2021, 2020 and 2019, information derived from our Statements of Income as a percentage of revenues.

The following table sets forth information derived from our Statements of Income as a percentage of revenues for the years ended December 31, 2022, 2021 and 2020.

This information should be read in conjunction with the accompanying financial statements and the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

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Interest income — — —

Other income (expense), net — 10 —

Income from continuing operations before income taxes 46 47 46

Income tax expense (benefit) 11 9 (10)

Other (expense) income, net — — 10

Income before income taxes 28 46 47

Income tax expense 7 11 9

Income from continuing operations 21 35 38

(Loss) income from discontinued operations, net of income tax — (3) 9

Net income 21% 32% 47%

(in thousands, except percentages) 2021 2020 2019 Percentage Change 2021 versus 2020 Percentage Change 2020 versus 2019

(in thousands, except percentages) 2022 2021 2020 Percentage Change 2022 versus 2021

Percentage Change 2021 versus 2020

Revenues $ 362,422 $ 352,664 $ 331,168 3% 6%

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

Revenues increased $21.5 million in the twelve months ended December 31, 2021 over the prior year period primarily due to growth in our corporate business.

Our total revenue increased by $20.5 million primarily as a result of an increase of approximately $20.0 million in corporate revenues due to organic growth in existing customer usage and new customer acquisitions.

Our corporate revenue retention for 2020 customers in 2021 is greater than 100%.

Revenues increased $8.6 million in the twelve months ended December 31, 2020 over the prior year period primarily due to $13.6 million growth in corporate revenues as a result of organic growth in existing customer usage and new customer acquisitions of $8.4 million and $5.2 million due to an acquisition;

partially offset by a decline of $4.5 million in SoHo and $0.6 million in patent revenue.

Revenues increased $9.8 million in the year ended December 31, 2022 over the prior year primarily due to organic growth in our corporate business.

Our total revenue increased by $9.8 million as a result of an increase of approximately $15.6 million in corporate revenues due to organic growth in existing customer usage and new customer acquisitions, as well as acquired revenue of $6.8 million from our acquisition of Summit Healthcare Services, Inc.

(“Summit”), partially offset by a $12.2 million decline in Small office home office (“SoHo”) and $0.4 million in other revenue.

Revenues increased $21.5 million in the year ended December 31, 2021 over the prior comparable period primarily due to growth in our corporate business.

Our total revenue increased primarily as a result of an increase of approximately $20.0 million in corporate revenues due to organic growth in existing customer usage and new customer acquisitions.

Cost of Revenues

(in thousands, except percentages) 2022 2021 2020 Percentage Change 2022 versus 2021 Percentage Change 2021 versus 2020

Cost of revenue $ 58,000 $ 53,379 $ 49,990 9% 7%

As a percent of revenue 16% 16% 15%

Cost of revenues $ 61,951 $ 58,000 $ 53,379 7% 9%

As a percent of revenues 17% 16% 16%

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 twelve months ended December 31, 2021 was primarily due to an increase in revenues, higher software licensing and infrastructure / database hosting costs as a result of moving our data storage from physical storage into the cloud.

The increase in cost of revenues for the twelve months ended December 31, 2020 was primarily due to an increase in revenues, higher phone operation costs, an increase in licensing costs and an overall increase in the operational database hosting expense as a result of moving data storage from physical storage into the cloud.

The increase in cost of revenues for the year ended December 31, 2022 was primarily due to an increase in revenues, compensation for additional acquisition and organic headcount and higher software licensing and infrastructure / database hosting costs as a result of moving our data storage from physical storage into the cloud.

The increase in cost of revenues for the year ended December 31, 2021 compared to the prior comparable period was primarily due to an increase in revenues and higher software licensing and infrastructure / database hosting costs as a result of moving our data storage from physical storage into the cloud.

Operating Expenses

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Sales and marketing $ 64,413 $ 53,648 $ 47,116 20% 14%

As a percent of revenue 15% 14% 16%

As a percent of revenues 18% 15% 14%

Our sales and marketing costs consist primarily of internet-based advertising, personnel costs and other business development-related expenses.

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

The increase in sales and marketing expense of $6.5 million for the twelve months ended December 31, 2021 versus prior period was primarily due to an increase in third party advertising of $3.0 million primarily in SoHo, as well as an increase of $3.5 million in personnel expense due to continued investment in the corporate sales team.

The reduction in sales and marketing expense of $4.4 million for the twelve months ended December 31, 2020 versus prior period was primarily due to a reduction in third party advertising of $4.5 million primarily due to increased SoHo funnel metrics as a result of an increase in demand of our services in a work from home environment, a decrease in travel due to the pandemic, offset by an increase of $0.1 million in sales personnel costs due to the increased focus on the corporate sales team.

The increase in sales and marketing expenses of $10.8 million for the year ended December 31, 2022 versus the prior year was primarily due to an increase in third party advertising of $4.7 million, primarily in SoHo, as well as an increase of $5.0 million in personnel expenses due to continued investment in the corporate sales team.

The increase in sales and marketing expenses of $6.5 million for the year ended December 31, 2021 versus the prior comparable period was primarily due to an increase in third party advertising of $3.0 million, primarily in SoHo, as well as an increase of $3.5 million in personnel expenses due to continued investment in the corporate sales team.

Research, Development and Engineering

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Research, development and engineering $ 10,018 $ 7,652 $ 7,146 31% 7%

As a percent of revenue 2% 2% 3%

As a percent of revenues 3% 2% 2%

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

The increase in research, development and engineering costs for the twelve months ended December 31, 2021 was mostly due to our continued focus on developing our platform, products and solutions to primarily support corporate revenue growth.

The decrease in research, development and engineering costs for the twelve months ended December 31, 2020 was due to the increase in capitalized labor related to developing our platform, products and solutions.

The increase in research, development and engineering costs for the year ended December 31, 2022 was mostly due to our continued focus on developing our platform, products and solutions to primarily support corporate revenue growth as well as additional personnel from our Summit acquisition.

The increase in research, development and engineering costs for the year ended December 31, 2021 versus the prior comparable period was mostly due to our continued focus on developing our platform, products and solutions to primarily support corporate revenue growth.

General and Administrative

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General and administrative $ 74,122 $ 58,228 $ 26,852 27% 117%

As a percent of revenue 17% 8% 7%

As a percent of revenues 20% 17% 8%

Our general and administrative costs consist primarily of personnel-related expenses, depreciation and amortization, share-based compensation expense, bad debt expense, professional fees, severance and insurance costs.

The increase in general and administrative expense for the twelve months ended December 31, 2021 versus prior period was primarily due to $11.5 million in non-recurring expenses related to the spin-off from Ziff Davis, approximately $5.0 million increase in Q4 2021 operational expense due to standalone public company costs, an $8.2 million impairment of our downtown LA office space and an $8.6 million Wayfair Sales Tax expense related to 2017-2021, of which $0.6 million was related to post spin in Q4 2021.

The increase in general and administrative expense for the twelve months ended December 31, 2020 versus prior period was primarily due to $1.7 million in office rent and $1.0 million increase in Salaries and Benefits and Employee Related expenses.

The increase in general and administrative expense for the year ended December 31, 2022 versus the prior year was primarily due to increased expenses related to operating as a standalone public company, included increases of $26.6 million in salary and benefits (inclusive of $15.7 million of share-based compensation) and $6.3 million in professional fees, partially offset by a $4.8 million reduction in bad debt expense and the absence $11.5 million in non-recurring expenses related to the spin-off from Ziff Davis in 2021.

The increase in general and administrative expense for the year ended December 31, 2021 versus the prior comparable period was primarily due to $11.5 million in non-recurring expenses related to the spin-off from Ziff Davis, approximately $5.0 million increase in the fourth quarter of 2021 operational expense due to standalone public company costs, an $8.2 million impairment of our downtown LA office space and an $8.6 million sales tax expense related to 2017-2021, of which $0.6 million was related to post spin in the fourth quarter 2021.

Share-Based Compensation

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Interest expense .

Our interest expense is generated from interest expense due to outstanding debt.

Our interest expense is due to outstanding debt.

Interest expense was $51.4 million, $14.3 million and $75.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Interest expense decreased between 2020 and 2021 due to the Company redeeming all of its outstanding $650 million 6% Senior Notes in 2020, in which the Company recorded a loss on extinguishment of $38.0 million, which is included in interest expense.

This is coupled with the Company recording three months of interest associated with the 2026 and 2028 Senior Notes in the current period, in comparison to nine months of interest associated with the 6% Senior Notes in 2020.

The increase from 2019 to 2020 is primarily due to the extinguishment of the Company’s 6% Senior Notes in 2020.

The increase from 2021 to 2022 is primarily due to twelve months of interest associated with the 2026 and 2028 Senior Notes compared to three months in 2021.

Interest expense decreased between 2020 and 2021 due to the Company redeeming all of its outstanding $650 million 6% Senior Notes in 2020, as a result of which, the Company recorded a loss on extinguishment of $38.0 million included in interest expense for the year ended December 31, 2020.

This is coupled with the Company recording three months of interest associated with the 2026 and 2028 Senior Notes in 2021, in comparison to nine months of interest associated with the 6% Senior Notes in 2020.

Interest income .

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

Interest income was $0.1 million, zero and $0.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Changes in interest income was immaterial between the period from 2020 and 2021 and 2019 to 2020.

Other income (expense), net .

Our other income (expense), net is generated primarily from miscellaneous items and gain or losses on currency exchange.

Other income (expense), net was $0.2 million, $31.6 million, and $(1.4) million for the years ended December 31, 2021, 2020 and 2019, respectively.

The change was attributable to changes in gain or losses on the currency exchange.

The change in our gains (losses) recognized in earnings from 2020 to 2021 were primarily attributable to lower inter-company balances between periods in foreign subsidiaries that were in functional currencies other than the U.S.

Interest income was not material for the years ended December 31, 2022, 2021 and 2020.

Other (expense) income, net .

Our other (expense) income, net is generated primarily from miscellaneous items and gain or losses on currency exchange.

Other (expense) income, net was $(1.6) million, $0.2 million and $31.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The change in our gains (losses) recognized in earnings from 2021 to 2022 was primarily attributable to exchange rate fluctuations on inter-company balances between periods in foreign subsidiaries that were in functional currencies other than the U.S.

Dollar and exchange rate fluctuations.

The change in our gains (losses) recognized in earnings from 2019 to 2020 were primarily attributable to the settlement of certain intra-entity transactions.

The change in our gains (losses) recognized in earnings from 2020 to 2021 was primarily attributable to lower inter-company balances between periods in foreign subsidiaries that were in functional currencies other than the U.S.

Dollar and exchange rate fluctuations.

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, and may be challenged in the future, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient.

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.

As of December 31, 2021 and 2020, the Company has interest expense limitation carryovers of $4.9 million and zero, respectively, which last indefinitely.

The Company also has no federal capital loss limitation carryforwards as of December 31, 2021 nor 2020.

The Company has $0.2 million and zero million foreign tax credit carryforward as of December 31, 2021 and 2020.

As of December 31, 2022 and 2021, the Company has interest expense limitation carryovers of $23.4 million and $4.9 million, respectively, which last indefinitely.

The Company has no federal net operating loss or capital loss limitation carryforwards as of December 31, 2022 or 2021.

The Company has $0.5 million and $0.2 million of foreign tax credit carryforwards as of December 31, 2022 and 2021, respectively, which will expire between 2031 and 2032.

In addition, the Company also has $1.0 million and $0.1 million state research and development tax credits carryforwards, respectively.

If unused, $1 million of the credits as of December 31, 2022 can be carried over indefinitely.

Income tax expense (benefit) amounted to $26.2 million, $39.9 million and $30.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Our effective tax rates for 2022, 2021 and 2020 were 26.5%, 24.8% and 19.8%, respectively.

The increase in our annual effective income tax rate from 2020 to 2021 was primarily attributable to the following:

An increase in tax expense relating to an increase in income in comparison to the prior year, and

an increase in tax expense relating to certain non-deductible expenses incurred in the year in connection with the Spin and the recording of the Non Income Tax Contingency.

The increase in our annual effective income tax rate from 2019 to 2020 was primarily attributable to the following:

An increase in tax expense during 2020 due to a large tax benefit recognized in 2019 from an intra-entity transfer as part of the reorganization of our international operating structure resulting in the recognition of a deferred tax asset with no comparable event during 2020, and

an increase in tax expense in 2020 due to a decrease in relation to certain uncertain tax positions in 2019 with no similar reduction in 2020.

In order to provide additional understanding in connection with our foreign taxes, the following represents the statutory and effective tax rate by significant foreign country:

Ireland Japan Canada

Statutory tax rate 12.5% 30.6% 26.5%

Effective tax rate (1)

2.1% 31.3% 29.7%

(1) Effective tax rate excludes certain discrete items.

The statutory tax rate is the rate imposed on taxable income for corporations by the local government in that jurisdiction.

The effective tax rate measures the taxes paid as a percentage of pretax profit.

The effective tax rate can differ from the statutory tax rate when a company can exempt some income from tax, claim tax credits, or due to the effect of book-tax differences that do not reverse and discrete items.

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.

The increase in our annual effective income tax rate from 2021 to 2022 was primarily attributable to an increase in tax expense relating to certain non-deductible expenses incurred in the year, such as stock based compensation, officer’s compensation, an increase in the reserves for uncertain tax positions and foreign income currently taxed in the U.S., partially offset by increased tax credits and change in the geographical mix of the income.

The increase in our annual effective income tax rate from 2020 to 2021 was primarily attributable to an increase in the state tax expenses due to our expanded state footprints and a reduction in the foreign rate differential due to the change in the geographical mix of earnings.

Quarterly Results of Operations (Unaudited)

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Year ended December 31, 2022

Fourth Quarter Third Quarter Second Quarter First Quarter

Fourth Quarter Third Quarter (1)

Second Quarter (1)

Revenues $ 90,232 $ 91,777 $ 91,115 $ 89,298

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Diluted 19,990,787 19,902,924 19,902,924 19,902,924

(1) The quarterly results for the third quarter of 2022 reflect the restated amounts in the Q3 Form 10-Q/A filed on March 31, 2023.

The quarterly results for the first and second quarters of 2022 reflect the revised amounts presented within the Q3 Form 10-Q/A filed on March 31, 2023.

(2) 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 those quarters prior to the spin 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 in Item 8, Notes to Consolidated Financial Statements.

As a result, the full year 2021 basic and diluted earnings per common share is not comparable to the quarterly results.

Liquidity and Capital Resources

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At December 31, 2022, we had cash and cash equivalents of $94.2 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 for purchases of property and equipment (including capitalized labor) and cash used to pay Ziff Davis for its equity interest in J2 Cloud Services, LLC.

The increase in cash and cash equivalents resulted primarily from cash provided by operations, partially offset by cash used for purchases of property and equipment (including software development costs), acquisitions of businesses and cash used to repurchase our common stock.

As of December 31, 2022, cash and cash equivalents held within domestic and foreign jurisdictions were $37.6 million and $56.6 million, respectively.

On October 7, 2020, the Former Parent issued $750 million aggregate principal amount of 4.625% Senior Notes due 2030.

A portion of the proceeds were used to fund the redemption of the outstanding aggregate principal amount of the 6.0% Senior Notes due 2025 previously issued by J2 Cloud Services, LLC and to pay the redemption premium due in respect of such redemption and accrued and unpaid interest.

The Parent used the remainder of the net proceeds for general corporate purposes including acquisitions.

On October 7, 2021, the Company issued $305 million of 6.0% 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 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 are presented as long-term debt, net of deferred issuance costs, on the Consolidated Balance Sheets as of December 31, 2022 and 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, which commenced on April 15, 2022.

On October 7, 2021, Consensus issued $500 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.

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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.

The 2028 Senior Notes are 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.

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 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 million (the “Credit Facility”).

The 2028 Senior Notes are presented as long-term debt, net of deferred issuance costs, on the Consolidated Balance Sheets as of December 31, 2022 and 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, which commenced on April 15, 2022.

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 revolving credit facility of $25.0 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.

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 expenditure, investment requirements, stock repurchases and cash dividends for at least the next 12 months from the issuance of this Annual Report on Form 10-K.

As of December 31, 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 from the issuance of this Annual Report on Form 10-K and the foreseeable future.

Common Stock Repurchase Program

On March 1, 2022, the Company’s Board of Directors 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 the Company’s common 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.

The Company entered into Rule 10b-18 and Rule 10b5-1 trading plans and during the year ended December 31, 2022, the Company repurchased 189,114 shares under this program.

Vested Restricted Stock

At the time of certain vesting events related to restricted stock units or restricted stock awards that are held by participants in the 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 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 year ended December 31, 2022, the Company withheld shares on its vested restricted stock units relating to its share-based compensation plans of 71,509 shares.

The prior years include cash flows from discontinued operations of the non-Consensus business.

As a result, the prior periods are 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 $83.1 million, $233.7 million and $238.8 million for the years ended December 31, 2022, 2021 and 2020, 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, employee compensation and lease payments associated offices.

The decrease in our net cash provided by operating activities in 2022 compared to 2021 was primarily attributable to decreased income after excluding noncash items, a decrease in other long-term liabilities in 2022 compared to an increase in 2021, and an increase in accounts receivable.

The decrease in our net cash provided by operating activities in 2021 compared to 2020 was primarily attributable to a decrease in operating lease liabilities, offset by increased prepaid expenses, accounts payable and other long-term liabilities.

The increase in our net cash provided by operating activities in 2020 compared to 2019 was primarily attributable to an increase in accounts payable and operating lease liabilities;

partially offset by an decrease lower uncertain tax positions and reduced deferred revenue.

Our prepaid tax payments were zero and $0.3 million at December 31, 2021 and 2020, respectively.

Our cash and cash equivalents and short-term investments were $66.8 million, $66.2 million and $51.1 million at December 31, 2021, 2020 and 2019, respectively.

Our prepaid tax payments were $8.0 million and zero at December 31, 2022 and 2021, respectively.

Net cash used in investing activities was $43.3 million, $42.5 million and $60.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Net cash used in investing activities in 2021 and 2020 was primarily due to business acquisitions and capital expenditures associated with the purchase of property and equipment (including capitalized labor);

Net cash used in investing activities in 2022 was primarily comprised of capital expenditures associated with the purchase of property and equipment (including capitalized software development costs) and business acquisitions.

Net cash used in investing activities in 2021 and 2020 was related to business acquisitions and capital expenditures associated with the purchase of property and equipment (including capitalized software development costs);

partially offset by proceeds from the sale of businesses.

Net cash used in investing activities in 2019 was primarily due to business acquisitions and capital expenditures associated with the purchase of property and equipment (including capitalized labor).

Net cash (used in) provided by financing activities was $(247.8) million, $(179.1) million and $61.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Net cash used in financing activities in 2021 increased over the prior comparable period and was primarily attributable to distributions to the Former Parent;

partially offset by the issuance of debt.

Net cash used in financing activities in 2020 decreased over the prior comparable period and was primarily attributable to the repayment of debt;

partially offset by contributions from the Former Parent.Net cash provided by financing activities in 2019 was primarily attributable to contributions from the Former Parent.

Net cash used in financing activities was $10.6 million, $247.8 million and $179.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Net cash used in financing activities in 2022 included the repurchase of common stock and shares withheld to cover employee income taxes.

Net cash used in financing activities in 2021 increased over 2020 primarily due to distributions to the Former Parent in 2021 compared to contributions from the Former Parent in 2020.

Partially offsetting these amounts, the Company had cash inflows related to the issuance of debt in 2021, compared to repayment of debt in 2020.

Contractual Obligations and Commitments

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Payment Due by Period (in thousands)

Contractual Obligations 1 Year 2-3 Years 4-5 Years More than 5 Years Total

Contractual Obligations 2023 2024 2025 2026 2027 Thereafter Total

Long-term debt - principal (a)

$ — $ — $ — $ 305,000 $ — $ 500,000 $ 805,000

Long-term debt - interest (b)

50,800 50,939 50,800 50,800 32,500 32,589 268,428

Operating leases (c)

Finance leases (d) — — — — —

Telecom services and co-location facilities (e) 621 211 — — 832

Holdback payment (f) 1,565 — — — 1,565

Other (g) 420 — — — 420

2,939 2,842 2,389 2,461 2,534 8,167 21,332

Telecom services and co-location facilities (d)

895 577 282 — — — 1,754

480 — — — — — 480

Total $ 55,114 $ 54,358 $ 53,471 $ 358,261 $ 35,034 $ 540,756 $ 1,096,994

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(d) These amounts represent undiscounted future minimum rental commitments under noncancellable finance leases.

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

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

(g) These amounts primarily represent certain consulting and Board of Director fee arrangements, software license commitments and others.

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

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

As of December 31, 2022, our liability for uncertain tax positions was $6.7 million.

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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-K

Item 7. Management’s Discussion and Analysis