What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-14 · 64 added, 124 removed, 128 unchanged (59% of the section changed)

20 unchanged sentences

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

effectively maintain and manage our billing systems;

allocate time and resources required to manage our legal proceedings;

or adhere to our internal controls and procedures;

effectively maintaining and managing our billing systems;

allocating time and resources required to manage our legal proceedings;

liability for legal and other claims;

or adhering to our internal controls and procedures;

◦ Compete with other similar providers with regard to price, service and functionality;

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◦ Maintain favorable relationships with critical third-party vendors whose financial condition will not negatively impact the services they provide;

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

effectively maintaining and managing our billing systems;

time and resources required to manage our legal proceedings;

liability for legal and other claims;

or adhering to our internal controls and procedures.

In addition, other factors that could cause actual results to differ materially from those anticipated in these forward-looking statements or materially impact our financial results include the risks associated with new accounting pronouncements, as well as those associated with natural disasters, public health crises, pandemics including the COVID-19 outbreak and other catastrophic events outside of our control, including as to COVID-19 the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.

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 one million customers of all sizes, from enterprises to individuals, 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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Its mission is to democratize secure information interchange across technologies and industries, and solve the healthcare interoperability challenge.

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

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

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 third quarter of 2022, we have observed an increasingly competitive labor market.

During fiscal year 2022 and through the first quarter of 2023, 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.

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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 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

The following table sets forth certain key operating metrics for our operations for the three months ended March 31, 2023 and 2022 (in thousands, except for percentages):

Three Months Ended March 31,

Revenue ($ in thousands)

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Corporate 3 4

SoHo 86 98 283 321

Consolidated 81 104

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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.

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Actual results could differ significantly from those estimates under different assumptions and conditions.

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 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, 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

Our critical accounting policies are described in our 2022 Annual Report on Form 10-K filed with the SEC on March 31, 2023.

During the three months ended March 31, 2023, there were no significant changes in our critical accounting policies and estimates.

Results of Operations for the Three Months Ended March 31, 2023 and 2022

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.

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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.

(in thousands, except percentages)

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

2022 2021 2022 2021

(in thousands, except percentages) Three Months Ended March 31, Percentage Change

Revenues $ 91,454 $ 89,298 2%

1 unchanged sentence

Revenues increased by $2.2 million or 2% over the prior comparable three month period.

Our growth was primarily due to an increase of $8.0 million or 19% in our corporate business (inclusive of $1.9 million due to the Summit acquisition);

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

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);

Our growth was primarily due to an increase of $2.9 million or 6% in our corporate business;

partially offset by a decline of $0.7 million or 2% in our SoHo business.

Cost of Revenues

(in thousands, except percentages)

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

2022 2021 2022 2021

Cost of revenue $15,419 $14,604 6% $46,111 $43,128 7%

(in thousands, except percentages) Three Months Ended March 31, Percentage Change

Cost of revenues $17,508 $15,104 16%

As a percent of revenue 19% 17%

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 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.

The increase in cost of revenues for the three months ended March 31, 2023 was primarily due to an increase of $1.1 million in personnel-related expenses and $1.0 million in depreciation associated with platform development costs compared to the prior comparable three month period.

Operating Expenses

Sales and Marketing

(in thousands, except percentages)

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

2022 2021 2022 2021

(in thousands, except percentages) Three Months Ended March 31, Percentage Change

Sales and marketing $16,893 $15,830 7%

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

Sales and marketing cost for the three months ended 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.

Sales and marketing costs for the three months ended March 31, 2023 were $16.9 million (primarily consisting of $9.1 million of third-party advertising costs and $7.2 million of personnel costs) compared to the prior period of $15.8 million (primarily consisting of $9.8 million of third-party advertising costs and $5.6 million of personnel costs).

The increase in sales and marketing expenses for the three months ended March 31, 2023 versus the prior comparable period was primarily due to increased personnel-related expenses, partially offset by a reduction of third-party advertising spend.

Research, Development and Engineering

(in thousands, except percentages)

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

2022 2021 2022 2021

(in thousands, except percentages) Three Months Ended March 31, Percentage Change

Research, development and engineering $1,904 $2,336 (18)%

1 unchanged sentence

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

The increase in research, development and engineering costs for the three 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.

The decrease in research, development and engineering costs for the three months ended March 31, 2023 versus the prior comparable period was primarily attributable to increased capitalization of personnel-related expenses due to our continued focus on internally developing our platform, products and solutions as well as a reduction in external development costs partially offset by an increase in personnel-related expenses.

General and Administrative

(in thousands, except percentages)

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

2022 2021 2022 2021

(in thousands, except percentages) Three Months Ended March 31, Percentage Change

General and administrative $21,152 $17,369 22%

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

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.

The increase in general and administrative expenses for the three months ended March 31, 2023 versus prior comparable period was primarily due to increased expenses of $2.3 million in professional fees in connection with the year-end audit, current quarter bad debt expense of $0.9 million and personnel-related expenses of $0.8 million.

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

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

2022 2021 2022 2021

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 months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31,

Cost of revenues $ 296 $ 223

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General and administrative 4,432 4,551

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

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

Total $ 5,140 $ 5,403

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Interest expense .

Our interest expense is due to outstanding debt.

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 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 interest expense is due to outstanding debt and is reduced by any capitalized interest.

Interest expense for the three months ended March 31, 2023 and 2022 was $12.6 million and $13.3 million, respectively.

Interest expense for both periods included interest expense on $805.0 million of debt associated with the 2026 and 2028 senior notes.

Interest expense for the three months ended March 31, 2023 was reduced by $0.5 million of capitalized interest that did not occur during the first quarter of 2022.

Other (expense) income, net .

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

Other (expense) income, net for the three months ended March 31, 2023 and 2022 was $(0.8) million and $0.2 million, respectively.

Changes in other (expense) income, net was driven by higher foreign exchange losses when compared to the prior comparable period.

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

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

Provision for income taxes for the three months ended 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.

Provision for income taxes for the three months ended March 31, 2023 and 2022 was $5.1 million and $7.0 million, respectively.

The Company’s effective tax rate for the three months ended March 31, 2023 and 2022 was 24.9% and 27.5%, respectively.

The decrease in our effective income tax rate for the three months ended March 31, 2023 was primarily attributable to a reduction in nondeductible expenses for tax purposes and the change in the geographical mix of income.

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

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Cash and Cash Equivalents

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

At March 31, 2023, we had cash and cash equivalents of $111.3 million compared to $94.2 million at December 31, 2022.

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.

partially offset by cash used in the repurchase of commons stock, purchases of property and equipment (including capitalized labor) and the purchase of investments.

As of March 31, 2023, cash and cash equivalents held within domestic and foreign jurisdictions were $44.0 million and $67.3 million, respectively.

Credit Agreement

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..

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.

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.

As of March 31, 2023, no amount has been drawn down on the Credit Facility.

Material Cash Requirements

Our long-term contractual obligations generally include our debt and related interest payments, noncancellable operating leases as well as other commitments.

As of March 31, 2023, we had outstanding $805.0 million in aggregate principal amount of indebtedness (see Note 6 - Debt of the Notes to the Condensed Consolidated Financial Statements).

As of March 31, 2023, our total minimum lease payments are $20.6 million (see Note 7 - Leases of the Notes to the Condensed Consolidated Financial Statements).

As of March 31, 2023, our liability for uncertain tax positions was $7.4 million.

Due to uncertainties in the timing of the amounts and timing of cash settlement with the taxing authorities we are unable to make a reasonably reliable estimate of the timing of payments.

Common Stock Repurchase Program

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

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.

The Company entered into Rule 10b-18 and Rule 10b5-1 trading plans and during the three months ended March 31, 2023 and 2022, the Company repurchased 270,192 and zero, respectively, shares under this program.

Cumulatively as of March 31, 2023, 459,306 shares have been repurchased at an aggregate cost of $16.8 million.

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.

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

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.

As a result, the prior period is not comparable.

During the three months ended March 31, 2023 and 2022 the Company withheld shares on its vested restricted stock units and restricted stock awards relating to its share-based compensation plans of 11,418 and 19,922 shares, respectively.

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

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.

Net cash provided by operating activities was $38.0 million and $49.9 million for the three months ended March 31, 2023 and 2022, 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, 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 September 30, 2022:

Payment Due by Period (in thousands)

Contractual Obligations 2022 2023 2024 2025 2026 Thereafter Total

Long-term debt - principal (a)

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

Long-term debt - interest (b)

25,470 50,800 50,939 50,800 50,800 65,089 293,898

Operating leases (c)

1,169 2,602 2,561 2,389 2,461 10,697 21,879

Telecom services and co-location facilities (d)

151 278 14 1 — — 444

210 375 — — — — 585

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

(a) These amounts represent principal on long-term debt.

(b) These amounts represent interest on long-term debt.

(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 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.

The decrease in our net cash provided by operating activities in 2023 compared to 2022 was largely attributable to an increase in other liabilities in the first quarter of 2022, as well as lower increases in accounts payable and accrued expenses and income taxes payable during 2023 compared to 2022, partially offset by increased income after considering noncash items in 2023 compared to 2022.

Net cash used in investing activities was $12.5 million and $20.8 million for the three months ended March 31, 2023 and 2022, respectively.

For the three months ended March 31, 2023, net cash used in investing activities was primarily attributed to the purchase of investments and capital expenditures associated with the purchase of property and equipment (including capitalized labor).

For the three months ended March 31, 2022, 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).

The decrease in our net cash used in investing activities in 2023 compared to 2022 was due to a lower cash outlay related to the purchase of investments in 2023, compared to a higher cash outlay associated with a business acquisition in 2022.

Net cash used in financing activities was $9.6 million and $1.4 million for the three months ended March 31, 2023 and 2022, respectively.

For the three months ended March 31, 2023 and 2022, net cash used in financing activities was primarily due to the repurchase of common stock and the payment of employee income tax obligations related to the net settlement of equity awards.

The change in net cash used in financing activities in 2023 compared to 2022 was primarily attributable to cash outflows related to the repurchase of common stock 2023 that did not occur in 2022.

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