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Item 9A. Controls and Procedures

2023-03-31 compared with 2022-04-15 · 95 added, 20 removed, 128 unchanged (47% of the section changed)

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The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the year ended December 31, 2021, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report due to a material weakness in internal control over financial reporting, described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The Company did not design and maintain effective internal controls over the accounting for certain elements of the spin-off transaction, a significant unusual transaction, which resulted in a material weakness in internal control over financial reporting as of December 31, 2021.

Our CEO and CFO concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective as of such date due to material weaknesses in internal control over financial reporting, described below.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

Consensus’ management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for Consensus.

In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) using the 2013 framework.

Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Because of the timing of acquisition in 2022, pursuant to applicable SEC staff guidance, management was not required to and therefore did not assess the effectiveness of internal control over financial reporting of Summit Healthcare (see Note 4 - Business Acquisitions in the accompanying consolidated financial statements).

This acquisition constituted 2.8% of total assets as of December 31, 2022 and 1.9% of revenues for the year then ended.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

As a result of the material weaknesses in internal control over financial reporting described below, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2022.

Previously Reported Material Weakness

During the year ended December 31, 2021, we determined that the Company did not design and maintain effective internal controls over the accounting for certain elements of the spin-off transaction, a significant unusual transaction, which resulted in a material weakness in internal control over financial reporting as of December 31, 2022.

The control activities were not designed to allow the Company to timely identify and account for the following aspects of the spin-off transaction (i) changes to stockholders’ equity and (ii) the completeness and accuracy of certain amounts classified in discontinued operations in the consolidated financial statements and related disclosures.

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Significant additional procedures were required by the Company to mitigate the risks associated with the material weakness.

Although the control deficiency did not result in any material misstatement of the consolidated financial statements for the periods presented, there is a reasonable possibility that it could lead to a material misstatement of account balances or disclosures.

Accordingly, management has concluded that the control deficiency constitutes a material weakness.

To remediate the material weakness, our management is enhancing existing controls and procedures over our accounting for significant unusual transactions.

These controls relate to the analysis and disclosures and the accounting for significant unusual transactions.

We plan to enhance our approach and procedures by augmenting internal resources and increasing the deployment of both internal and external subject matter experts to assist our management with the evaluation of our accounting for significant unusual transactions.

We believe that these actions will remediate the material weakness.

The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

This Annual Report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

Remediation Measures

Throughout the year ended December 31, 2022, the Company undertook remediation measures related to the previously reported material weakness in internal control over financial reporting.

Specifically, we enhanced existing controls and procedures over our accounting for significant unusual transactions by augmenting internal resources and increasing the deployment of both internal and external subject matter experts to assist our management with the evaluation of our accounting for significant unusual transactions.

We completed our remediation procedures in the quarter ended December 31, 2022 including testing the design and confirming the implementation of the related controls.

However, as noted below, this material weakness has not been fully remediated as of December 31, 2022.

Material Weaknesses as of December 31, 2022

As previously disclosed, in the Current Report on Form 8-K that the Company filed with the SEC on February 22, 2023, the Company determined that its financial statements for the interim period ended September 30, 2022 ("Quarterly Report") should be restated (the “Restatement”) due to unintentional errors primarily relating to (i) its SoHo business that inadvertently grossed up revenue by $1.9 million and $5.3 million for the three and nine month periods ended September 30, 2022, respectively, with a corresponding offset to bad debt expense and (ii) the timing of revenue recognition of $2.2 million and $2.5 million for the three and nine month periods ended September 30, 2022, respectively, which after review, the Company has concluded should be reclassified as deferred revenue.

In connection with the Restatement and other matters identified during our audits, the Company identified the following material weaknesses in our internal control over financial reporting as of December 31, 2022:

Control Environment and Monitoring

Material weaknesses existed in the design of our entity-level controls impacting the control environment and the effective monitoring of controls to prevent or detect material misstatements to the consolidated financial statements.

These deficiencies were primarily caused by a lack of sufficient accounting resources and technical expertise during the first half of the year, which contributed to (i) ineffective structure and accountability over the performance of controls and (ii) ineffective evaluation and determination as to whether the components of internal controls were present and functioning.

These material weaknesses contributed to the following additional material weaknesses:

Control Activities and Information and Communication

• Management did not design and maintain effective internal controls that addressed (i) appropriate revenue recognition accounting policies, (ii) the review of reports used to support manual revenue recognition entries for completeness and accuracy and (iii) precision and documentation of management review controls over transactions and analysis that support revenue recognition and the allowance for bad debt.

• Management did not design and maintain effective internal controls to ensure the complete assessment and timeliness in preparing and reviewing technical accounting documentation relating to significant unusual transactions.

• Management did not design and maintain effective internal controls to ensure the timeliness of balance sheet account reconciliations, including account balances related to the spin-off transaction.

• Management did not design and maintain effective internal controls in the areas of (i) user access and segregation of duties related to systems that track employee related costs, and (ii) the documentation of the review of completeness and accuracy of underlying data used in the operation of certain internal controls that support employee related costs and internally developed software.

Remediation Measures

We have identified and begun to implement several steps, as further described below, designed to remediate the foregoing material weaknesses and to enhance our overall control environment.

To remediate these material weaknesses, we began the year ending December 31, 2023 with the appropriate level of resources and technical expertise in finance, accounting, financial reporting and tax departments compared to the first half of the year ended December 31, 2022.

During the fourth quarter of 2022, we implemented Blackline’s Modern Accounting Playbook software to bolster our internal controls over balance sheet account reconciliations in 2023.

As part of the 2022 year end close, we performed enhanced revenue

reconciliation procedures in response to the errors identified and disclosed in our the Current Report on Form 8-K that the Company filed with the SEC on February 22, 2023, and will continue these practices throughout fiscal year 2023.

During the first quarter of fiscal year 2023, we implemented new internal controls to properly address the segregation of duties and select system user access findings identified via our audits.

Also, we will be expanding the use of our financial reporting team’s SEC experts to ensure technical accounting memos and related documentation are prepared and reviewed timely with regard to significant unusual transactions.

Lastly, we continue to address and implement new accounting policies and management review controls over analysis, schedules and reports that support revenue recognition, bad debt reserve and financial reporting process to significantly reduce the risk of reporting errors.

While the foregoing measures are intended to effectively remediate the material weaknesses described in this Item 9A, it is possible that additional remediation steps will be necessary.

As such, as we continue to evaluate and implement our plan to remediate the material weaknesses, our management may decide to take additional measures to address the material weaknesses or modify the remediation steps described above.

The material weaknesses cannot be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed significant additional procedures for the year ended December 31, 2022.

Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S.

Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K.

Our independent registered public accounting firm, BDO USA LLP, has issued an audit report with respect to our internal control over financial reporting, which appears below.

Other than the material weakness in our internal control over financial reporting described above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) which occurred during the fourth quarter of our fiscal year ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Except as discussed above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) which occurred during the fourth quarter of our fiscal year ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(d) Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Consensus Cloud Solutions, Inc.

Los Angeles, California

Opinion on Internal Control over Financial Reporting

We have audited Consensus Cloud Solutions, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).

In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as “the consolidated financial statements”) and our report dated March 31, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Annual Report on Internal Control over Financial Reporting”.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Material weaknesses regarding management’s failure to design and maintain controls over (1) entity-level controls impacting the control environment and monitoring of controls;

(2) accounting for revenue recognition and related controls;

(3) accounting for significant unusual transactions;

(4) balance sheet account reconciliations;

and (5) user access and segregation of duties related to systems that track employee related costs have been identified and described in management’s assessment.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated March 31, 2023 on those consolidated financial statements.

As indicated in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Summit Healthcare Services, Inc.

(“Summit”), which was acquired on February 4, 2022 and which is included in the consolidated balance sheet of the Company as of December 31, 2022, and the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for the year then ended.

Summit constituted 2.8% of total assets as of December 31, 2022, and 1.9% of revenues for the year then ended.

Management did not assess the effectiveness of internal control over financial reporting of Summit because of the timing of the acquisition which was completed on February 4, 2022.

Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Summit.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

/s/ BDO USA, LLP

Los Angeles, California

March 31, 2023

Other Information

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Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ (Deficit) Equity

Consolidated Statements of Stockholders’ Deficit

Consolidated Statements of Cash Flows

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The following financial statement schedule is filed as part of this Annual Report on Form 10-K:

Schedule II-Valuation and Qualifying Accounts

Schedule II-Valuation and Qualifying Accounts for the three years ended December 31, 2022

All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.

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32.1** Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101* The following financial information from Consensus Cloud Solutions, Inc.’s Quarterly Report on Form 10-K for the year ended December 31, 2021, formatted in XBRL (eXtensible Business Reporting Language):

(i) Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020, (ii) Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019, (v) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019, and (vi) the Notes to Consolidated Financial Statements.

101* The following financial information from Consensus Cloud Solutions, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in XBRL (eXtensible Business Reporting Language):

(i) Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021, (ii) Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020, (v) Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2022, 2021 and 2020, and (vi) the Notes to Consolidated Financial Statements.

104* Cover Page Interactive Data File (embedded within the Inline XBRL document)

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Form 10-K Summary

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 15, 2022.

Consensus Cloud Services, Inc.

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(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated, in each case on April 15, 2022.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities, in each case on March 31, 2023.

Signature Title

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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 9A. Controls and Procedures