What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 76 added, 46 removed, 146 unchanged (46% of the section changed)

11 unchanged sentences

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

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

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

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

18 unchanged sentences

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

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.

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

5 unchanged sentences

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

During fiscal year 2022 and through the first quarter of 2023, we have observed an increasingly competitive labor market.

During fiscal year 2022 and through the second 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.

4 unchanged sentences

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

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

Three Months Ended March 31,

The following table sets forth certain key operating metrics for our operations for the three and six months ended June 30, 2023 and 2022 (in thousands, except for percentages):

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

2023 2022 2023 2022

Revenue ($ in thousands)

14 unchanged sentences

Corporate 3 4 6 7

SoHo 74 96 153 196

Consolidated 77 100 159 203

12 unchanged sentences

This measure is calculated monthly and expressed as an average over the applicable period.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements.

1 unchanged sentence

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

During the six months ended June 30, 2023, there were no significant changes in our critical accounting policies and estimates.

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

1 unchanged sentence

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 March 31, Percentage Change

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2023 2022 2023 2022

Revenues $ 92,792 $ 91,115 2% $ 184,246 $ 180,413 2%

1 unchanged sentence

Revenues increased by $1.7 million or 2% over the prior comparable three month period.

Our growth was primarily due to an increase of $1.5 million or 3% in our corporate business and an increase of $0.2 million or 1% in our SoHo business.

Revenues increased by $3.8 million or 2% over the prior comparable six month period.

Our growth was primarily due to an increase of $4.4 million or 5% in our corporate business;

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

partially offset by an anticipated decline of $0.6 million or 1% in our SoHo business.

Cost of Revenues

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

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2023 2022 2023 2022

Cost of revenues $17,246 $15,587 11% $34,754 $30,692 13%

1 unchanged sentence

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

The increase in cost of revenues for the three months ended March 31, 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.

The increase in cost of revenues for the three months ended June 30, 2023 was primarily due to an increase of $1.1 million in personnel-related expenses and $0.4 million in depreciation associated with platform development costs compared to the prior comparable three month period.

The increase in cost of revenues for the six months ended June 30, 2023 was primarily due to an increase of $2.3 million in personnel-related expenses and $1.4 million in depreciation associated with platform development costs compared to the prior comparable six month period.

Operating Expenses

Sales and Marketing

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

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2023 2022 2023 2022

Sales and marketing $17,507 $16,394 7% $34,400 $32,224 7%

3 unchanged sentences

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

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.

Sales and marketing costs for the three months ended June 30, 2023 were $17.5 million (primarily consisting of $10.0 million of third-party advertising costs and $7.0 million of personnel costs) compared to the prior period of $16.4 million (primarily consisting of $10.3 million of third-party advertising costs and $5.9 million of personnel costs).

The increase in sales and marketing expenses for the three months ended June 30, 2023 versus the prior comparable period was primarily due to increased personnel-related expenses, partially offset by a reduction of third-party advertising spend.

Sales and marketing costs for the six months ended June 30, 2023 were $34.4 million (primarily consisting of $19.1 million of third-party advertising costs and $14.2 million of personnel costs) compared to the prior period of $32.2 million (primarily consisting of $20.4 million of third-party advertising costs and $11.5 million of personnel costs).

The increase in sales and marketing expenses for the six months ended June 30, 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 March 31, Percentage Change

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2023 2022 2023 2022

Research, development and engineering $1,765 $2,741 (36)% $3,669 $5,077 (28)%

1 unchanged sentence

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

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.

The decrease in research, development and engineering costs for the three and six months ended June 30, 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 March 31, Percentage Change

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2023 2022 2023 2022

General and administrative $17,432 $15,816 10% $38,584 $33,185 16%

2 unchanged sentences

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

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.

The increase in general and administrative expenses for the three months ended June 30, 2023 versus prior comparable period was primarily due to increased expenses of $1.8 million in bad debt expense, $0.5 million in computer equipment costs and $0.5 million in personnel-related expenses;

partially offset by a $1.3 million reduction in professional fees and the absence of expenses of $0.4 million related to the registration of shares for sale held by Ziff Davis that were incurred in the second quarter of 2022.

The increase in general and administrative expenses for the six months ended June 30, 2023 versus prior comparable period was primarily due to increased expenses of $3.2 million in bad debt expense, $1.2 million in personnel-related expenses and $0.9 million in professional fees primarily in connection with the year-end audit;

partially offset by the absence of expenses of $0.4 million related to the registration of shares for sale held by Ziff Davis that were incurred in the second quarter of 2022.

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

Three Months Ended March 31,

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Condensed Consolidated Statements of Income for the three and six months ended June 30, 2023 and 2022 (in thousands):

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

2023 2022 2023 2022

Cost of revenues $ 334 $ 216 $ 630 $ 439

7 unchanged sentences

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 the three months ended June 30, 2023 and 2022 was $12.8 million and $12.4 million, respectively.

Interest expense for the six months ended June 30, 2023 and 2022 was $25.4 million and $25.6 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.

Interest expense for the three and six months ended June 30, 2023 was reduced by $0.5 million and $1.0 million of capitalized interest, respectively, that did not occur during 2022.

Interest income.

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

Interest income was $0.7 million and zero for the three months ended June 30, 2023 and 2022, respectively.

Interest income was $0.7 million and zero for the six months ended June 30, 2023 and 2022, respectively.

Interest income was higher compared to the prior comparable periods due to investments in money market funds starting in 2023.

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.

Other (expense) income, net for the three months ended June 30, 2023 and 2022 was $0.6 million and $1.6 million, respectively.

Other (expense) income, net for the six months ended June 30, 2023 and 2022 was $(0.3) million and $1.8 million, respectively.

Changes in other (expense) income, net in three month period was driven by lower foreign exchange gains when compared to the prior comparable period.

Changes in other (expense) income, net in six month period 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.

1 unchanged sentence

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

Provision for income taxes for the three months ended 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.

Provision for income taxes for the three months ended June 30, 2023 and 2022 was $6.2 million and $7.9 million, respectively.

Provision for income taxes for the six months ended June 30, 2023 and 2022 was $11.3 million and $14.9 million, respectively.

The Company’s effective tax rate for the three months ended June 30, 2023 and 2022 was 22.7% and 26.4%, respectively.

The Company’s effective tax rate for the six months ended June 30, 2023 and 2022 was 23.7% and 26.9%, respectively.

The decrease in our effective income tax rate for the three and six months ended June 30, 2023 was primarily attributable to a reduction in nondeductible expenses, primarily consisting of sales tax penalties 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.

3 unchanged sentences

Cash and Cash Equivalents

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

At June 30, 2023, we had cash and cash equivalents of $112.0 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 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.

As of June 30, 2023, cash and cash equivalents held within domestic and foreign jurisdictions were $35.2 million and $76.8 million, respectively.

Credit Agreement

2 unchanged sentences

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

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

As of June 30, 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.

As of June 30, 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 June 30, 2023, our total minimum lease payments are $20.1 million (see Note 7 - Leases of the Notes to the Condensed Consolidated Financial Statements).

As of June 30, 2023, our liability for uncertain tax positions was $8.2 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.

4 unchanged sentences

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

The Company entered into Rule 10b-18 and Rule 10b5-1 trading plans and during the three months ended 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.

The Company entered into Rule 10b-18 and Rule 10b5-1 trading plans and during the three months ended June 30, 2023 and 2022, the Company repurchased 68,362 and 189,114, respectively, shares under this program.

During the six months ended June 30, 2023 and 2022, the Company repurchased 338,554 and 189,114 shares, respectively, under this program.

Cumulatively as of June 30, 2023, 527,668 shares have been repurchased at an aggregate cost of $18.9 million (inclusive of excise tax of $0.1 million).

The excise tax is assessed at 1% of the fair market value of net stock repurchases after December 31, 2022.

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

2 unchanged sentences

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

During the three 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.

During the three and six months ended June 30, 2023 the Company withheld shares on its vested restricted stock units and restricted stock awards relating to its share-based compensation plans of 21,538 and 32,956 shares, respectively.

During the three and six months ended June 30, 2022 the Company withheld shares on its vested restricted stock units and restricted stock awards relating to its share-based compensation plans of 7,897 and 27,819 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 $38.0 million and $49.9 million for the three months ended March 31, 2023 and 2022, respectively.

Net cash provided by operating activities was $52.1 million and $52.2 million for the six months ended June 30, 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 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).

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.

Net cash provided by operating activities was consistent period over period, however the net cash provided by operating activities in 2023 included a larger decrease in accounts payable and accrued expenses and a larger increase in accounts receivable in 2023, as well as a decrease in deferred revenue in 2023 compared to an increase in deferred revenue in 2022.

Largely offsetting these items were increases in the provision for doubtful accounts and deferred income taxes, net in 2023.

Net cash used in investing activities was $22.7 million and $29.1 million for the six months ended June 30, 2023 and 2022, respectively.

For the six months ended June 30, 2023, net cash used in investing activities was primarily attributed to capital expenditures associated with the purchase of property and equipment (including capitalized labor) and the purchase of investments.

For the six months ended June 30, 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, partially offset by an increase in capital expenditures associated with the purchase of property and equipment (including capitalized labor) in 2023.

Net cash used in financing activities was $11.5 million and $8.8 million for the six months ended June 30, 2023 and 2022, respectively.

For the six months ended June 30, 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 an increase in cash outflows related to the repurchase of common stock in 2023 compared to 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