ZIFF DAVIS, INC. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures 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. Our CEO and CFO concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective as of such date due to a material weakness in internal control over financial reporting, described below. Management’s Report on Internal Control over Financial Reporting Ziff Davis’ management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) for Ziff Davis. 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 these acquisitions, under Section 404 of the Sarbanes-Oxley Act, management was not required to and therefore did not assess the effectiveness of internal control over financial reporting of all of the 2021 acquisitions (see Note 4 - Business Acquisitions in the accompanying consolidated financial statements). These acquisitions combined constituted 5.3% of total assets as of December 31, 2021 and 2.8% of revenues for the year then ended. During the year ended December 31, 2021, we determined that we did not design and maintain effective controls over the accounting for certain elements related to the Consensus Cloud Solutions, Inc. (“Consensus”) Spin-off resulting in a material weakness. The control activities were not designed to allow the Company to timely identify and account for (i) a debt exchange with a third-party lender that resulted in a loss on extinguishment of existing debt, (ii) the unrealized gain on the Company’s remaining 19.9% investment in Consensus, and (iii) the completeness and accuracy of certain amounts classified in discontinued operations in the consolidated financial statements. Although this control weakness did not result in any material misstatement of our consolidated financial statements for the periods presented, it is reasonably possible that it could have led to a material misstatement of account balances or disclosures. Accordingly, management has concluded that this control weakness constitute material weakness. 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 weakness in internal control over financial reporting described above, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2021. Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed significant procedures for the year ended December 31, 2021. 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. GAAP. 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. -142- Our internal controls over financial reporting as of December 31, 2021 have been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in the attestation report which is included herein. Remediation Plan for the Material Weakness To remediate the material weakness, our management is enhancing and revising the design of existing controls and procedures over our accounting for significant unusual transactions. These controls relate to the research, analysis and documentation supporting our management’s evaluations, judgments, and conclusions that were required in order to account for significant unusual transactions. We plan to enhance our approach to and the execution of the research, analysis, and documentation related to these matters. Our existing process of consulting third party experts will also be enhanced and will continue to include outreach to and coordination with experts with the relevant knowledge and experience 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. We expect that the remediation of this material weakness will be completed no later than December 31, 2022. Changes in Internal Control Over Financial Reporting Other than in respect of the remediation activities undertaken in connection with the material weakness described above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) 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. -143- (d) Report of Independent Registered Public Accounting Firm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Ziff Davis, Inc. New York, New York Opinion on Internal Control over Financial Reporting We have audited Ziff Davis, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (201 3) 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, 2021, 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, 2021 and 2020, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as “the financial statements”) and our report dated March 14, 2022 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 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. A material weakness regarding management’s failure to design and maintain controls over the Consensus Cloud Solutions, Inc. spin-off has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 financial statements, and this report does not affect our report dated March 14, 2022 on those financial statements. -144- 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 2021 acquisitions, which are included in the consolidated balance sheets of the Company as of December 31, 2021, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the year then ended. These acquisitions combined constituted 5.3% of total assets as of December 31, 2021, and 2.8% of revenues from continuing operations for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of the 2021 acquisitions because of the timing of these acquisitions. 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 the 2021 acquisitions. 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. 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. /s/ BDO USA, LLP Los Angeles, California March 14, 2022 -145- Item 9B. Other Information On October 7, 2021, the Separation was completed and the Company transferred J2 Cloud Services, LLC to Consensus who in turn transferred non-fax assets and liabilities back to the Company such that Consensus was left with the cloud fax business. The Separation was achieved through the Company’s distribution of 80.1% of the shares of Consensus common stock to holders of J2 Global, Inc. common stock as of the close of business on October 1, 2021, the record date for the distribution. The Company’s stockholders of record received one share of Consensus common stock for every three shares of J2 Global’s common stock. The Separation was effectuated pursuant to a Separation and Distribution Agreement, dated October 7, 2021 (the “Separation and Distribution Agreement”), as Exhibit 2.1 of this report. Attached to this report as Exhibit 99.1 are the unaudited pro forma statement of operations of the Company for the nine months ended September 30, 2021 and the fiscal years ended December 31, 2020, December 31, 2019, and December 31, 2018, and the unaudited pro forma consolidated balance sheet as of September 30, 2021. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to the information to be set forth in our proxy statement (“2022 Proxy Statement”) for the 2022 annual meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2021. Item 11. Executive Compensation The information required by this item is incorporated by reference to the information to be set forth in our 2022 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to the information to be set forth in our 2022 Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to the information to be set forth in our 2022 Proxy Statement. Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference to the information to be set forth in our 2022 Proxy Statement. PART IV Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements. The following financial statements are filed as a part of this Annual Report on Form 10-K: Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Los Angeles, California; PCAOB ID # 243 ) Consolidated Balance Sheets Consolidated Statements of Operations -146- Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statement Schedule The following financial statement schedule is filed as part of this Annual Report on Form 10-K: Schedule II-Valuation and Qualifying Accounts All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto. 3. Exhibits The following exhibits are filed with this Annual Report on Form 10-K or are incorporated herein by reference as indicated below (numbered in accordance with Item 601 of Regulation S-K). We shall furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) upon request. Exhibit No. Exhibit Title 2.1 Separation and Distribution Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (26) 3.1 Amended and Restated Certificate of Incorporation of J2 Global, Inc., dated as of June 10, 2014 (8) 3. 2 Amendment to the Amended and Restated Certificate of Incorporation of J2 Global, Inc., dated as of September 5, 2019 (1 7 ) 3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Ziff Davis, Inc. dated as of October 7, 2021 (26) 3.4 Fifth Amended and Restated By-Laws (27) 4.1 Specimen of Common Stock Certificate (6) 4.2.1 Indenture, dated as of June 10, 2014 (9) 4.2.2 First Supplemental Indenture, dated as of June 17, 2014 (10) 4.3 Indenture, dated as of June 27, 2017 (1 3 ) 4.4 Indenture, dated as of November 15, 2019 (1 8 ) 4.5 Description of Registered Securities (2 1 ) 4.6 Indenture, dated as of October 7, 2020 (7) 4.7 Form of Waiver Regarding Restricted Stock Agreements (2 2 ) 10.1 J2 Global, Inc. 2007 Stock Option Plan (5) 10.2 J2 Global, Inc. 2015 Stock Option Plan (11) 10.3 Form of Restricted Stock Agreement Pursuant to J2 Global, Inc. 2015 Stock Option Plan ( 2 3 ) 10.3.1 Form of Performance Stock Unit Agreement Pursuant to J2 Global, Inc. 2015 Stock Option Plan (23) 10.4 Amended and Restated J2 Global, Inc. 2001 Employee Stock Purchase Plan (4) 10.4.1 Amendment to Amended and Restated J2 Global, Inc. 2001 Employee Stock Purchase Plan (1 4 ) 10.5 Letter Agreement, dated as of April 1, 2001, between J2 Global, Inc. and Orchard Capital Corporation (2) 10.5.1 Amendment to Letter Agreement, dated as of December 31, 2001, between J2 Global, Inc. and Orchard Capital Corporation (3) 10.6 Registration Rights Agreement, dated as of June 30, 1998, by and among JFAX Communications, Inc., the Delaware State Employees’ Retirement Fund, the Declaration of Trust for Defined Benefit Plan of ICI American Holdings Inc., the Declaration of Trust for Defined Benefit Plan of Zeneca Holdings Inc., the J.W. McConnell Family Foundation, DCJ Fund Investment Partners II, L.P., DLJ Capital Corporation, GMT Partners, LLC, Orchard/JFAX Investors, L.L.C. and DLJ Private Equity Employees Fund, L.P. (1) -147- 10.7 Second Amended and Restated Limited Partnership Agreement, dated as of January 19, 2018, by and among OCV I GP, LLC and J2 Global, Inc. (1 5 ) 10.8 Credit Agreement, dated as of January 7, 2019, among J2 Cloud Services , LLC, MUFG Union Bank, N.A., as Administrative Agent, and MUFG Union Bank, N.A., as Sole Lead Arranger (1 6 ) 10.8.1 First Amendment to Credit Agreement, dated July 1, 2019 ( 19 ) 10.8.2 Second Amendment to Credit Agreement, dated August 16, 2019 (2 0 ) 10.9 Credit Agreement, dated as of April 7, 2021, among J2 Global, Inc., the Lenders from time to time party thereto and MUFG Union Bank, N.A., as Administrative Agent and Collateral Agent (24) 10.9.1 First Amendment to Credit Agreement, dated as of June 2, 2021, by and among J2 Global, Inc., the subsidiaries of J2 Global, Inc. party thereto as guarantors, Citicorp North America Inc. and MUFG (4) Union Bank, N.A., as lenders, and MUFG Union Bank, N.A., as administrative agent for the lenders.(24) 10.9.2 Second, Third and Fourth Amendments to Credit Agreement by and among J2 Global, Inc., the subsidiaries of J2 Global, Inc. party thereto as guarantors, Citicorp North America Inc. and MUFG Union Bank, N.A., as lenders, and MUFG Union Bank, N.A., as administrative agent for the lenders. (25) 10.1 0 Transition Services Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (26) 10.11 Tax Matters Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (26) 10.12 Employee Matters Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (26) 10.13 Intellectual Property License Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (26) 10.14 Stockholder and Registration Rights Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (26) 10.15 Stipulation of Settlement and Amendment No. 1 to the Second Amended and Restated Limited Partnership Agreement 10.16 Order Approving Stipulated Settlement 21.1 List of subsidiaries of J2 Global, Inc. 23.1 Consent of Independent Registered Public Accounting Firm – BDO USA, LLP 31.1 Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 99.1 Unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2021 and the fiscal years ended December 31, 2020, December 31, 2019, and December 31, 2018 , and the unaudited pro forma consolidated balance sheet as of September 30, 2021 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) -148- ____________________ (1) Incorporated by reference to Ziff Davis’ Registration Statement on Form S-1 filed with the Commission on April 16, 1999, Registration No. 333-76477. (2) Incorporated by reference to Ziff Davis’ Annual Report on Form 10-K/A filed with the Commission on April 30, 2001. (3) Incorporated by reference to Ziff Davis’ Annual Report on Form 10-K filed with the Commission on April 1, 2002. (4) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on May 3, 2006. (5) Incorporated by reference to Exhibit A to Ziff Davis’ Definitive Proxy Statement on Schedule 14A filed with the Commission on September 18, 2007. (6) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on December 7, 2011. (7) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on October 7, 2020. (8) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on June 10, 2014. (9) Incorporated by reference to Ziff Davis’ Registration Statement on Form S-3ASR filed with the Commission on June 10, 2014, Registration No. 333-196640. (10) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on June 17, 2014. (11) Incorporated by reference to Annex A to Ziff Davis’ Definitive Proxy Statement on Schedule 14A filed with the Commission on March 26, 2015. (12) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on May 11, 2020. (13) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on June 27, 2017. (14) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on February 8, 2018. (15) Incorporated by reference to Ziff Davis’ Current Report on Form 10-K filed with the Commission on March 1, 2018. (16) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on January 9, 2019. (17) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on November 1, 2019. (18) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on November 15, 2019. (19) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on July 1, 2019. (20) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on August 16, 2019. (21) Incorporated by reference to Ziff Davis’ Annual Report on Form 10-K filed with the Commission on March 2, 2020. (22) Incorporated by reference to Ziff Davis’ Current Report on Form 10-Q filed with the Commission on August 10, 2020. (23) Incorporated by reference to Ziff Davis’ Quarterly Report on Form 10-Q filed with the Commission on May 10, 2021. (24) Incorporated by reference to Ziff Davis’ Quarterly Report on Form 10-Q filed with the Commission on August 9, 2021. (25) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on September 22, 2021. (26) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on October 8, 2021. (27) Incorporated by reference to Ziff Davis’ Quarterly Report on Form 10-Q filed with the Commission on November 9, 2021. Item 16. Form 10-K Summary None. -149- SIGNATURE 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 March 14, 2022. Ziff Davis, Inc. By: /s/ VIVEK SHAH Vivek Shah Chief Executive Officer (Principal Executive Officer) -150- 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 March 14, 2022. Signature Title /s/ VIVEK SHAH Chief Executive Officer and a Director Vivek Shah (Principal Executive Officer) /s/ BRET RICHTER Chief Financial Officer Bret Richter (Principal Financial Officer) /s/ STEVE P. DUNN Chief Accounting Officer Steve P. Dunn /s/ RICHARD S. RESSLER Chairman of the Board and a Director Richard S. Ressler /s/ SARAH FAY Director Sarah Fay /s/ TRACE HARRIS Director Trace Harris /s/ WILLIAM B. KRETZMER Director William B. Kretzmer /s/ JONATHAN F. MILLER Director Jonathan F. Miller /s/ SCOTT C. TAYLOR Director Scott C. Taylor -151- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands) Description Balance at Beginning of Period Additions: Charged to Costs and Expenses Deductions: Write-offs (1) and recoveries Balance at End of Period Year Ended December 31, 2021: Allowance for doubtful accounts $ 11,552 $ 3,107 $ ( 4,848 ) $ 9,811 Deferred tax asset valuation allowance $ 8,262 $ 178 $ ( 6,628 ) $ 1,812 Year Ended December 31, 2020: Allowance for doubtful accounts $ 8,480 $ 5,315 $ ( 2,243 ) $ 11,552 Deferred tax asset valuation allowance $ 563 $ 9,456 $ ( 1,757 ) $ 8,262 Year Ended December 31, 2019: Allowance for doubtful accounts $ 6,369 $ 5,884 $ ( 3,773 ) $ 8,480 Deferred tax asset valuation allowance $ — $ 595 $ ( 32 ) $ 563 ______________________ (1) Represents specific amounts written off that were considered to be uncollectible. -152-