ZIFF DAVIS, INC. 10-Q

Item 1. Financial Statements ZIFF DAVIS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands except share and per share data) September 30, 2023 December 31, 2022 ASSETS Cash and cash equivalents $ 660,624 $ 652,793 Short-term investments 29,797 58,421 Accounts receivable, net of allowances of $ 7,388 and $ 6,868 , respectively 291,485 304,739 Prepaid expenses and other current assets 81,757 68,319 Total current assets 1,063,663 1,084,272 Long-term investments 140,167 127,871 Property and equipment, net of accumulated depreciation of $ 308,368 and $ 255,586 , respectively 186,165 178,184 Intangible assets, net 367,943 462,815 Goodwill 1,539,663 1,591,474 Deferred income taxes 8,573 8,523 Other assets 77,053 80,131 TOTAL ASSETS $ 3,383,227 $ 3,533,270 LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable $ 127,818 $ 120,829 Accrued employee related costs 37,011 42,178 Other accrued liabilities 47,219 39,539 Income taxes payable, current 4,985 19,712 Deferred revenue, current 182,741 187,904 Other current liabilities 19,724 22,286 Total current liabilities 419,498 432,448 Long-term debt 1,000,743 999,053 Deferred revenue, noncurrent 8,000 9,103 Income taxes payable, noncurrent 8,486 11,675 Deferred income taxes 51,098 79,007 Other long-term liabilities 91,264 109,373 TOTAL LIABILITIES 1,579,089 1,640,659 Commitments and contingencies (Note 8) Preferred stock, $ 0.01 par value. Authorized 1,000,000 and none issued — — Preferred stock - Series A, $ 0.01 par value. Authorized 6,000 ; total issued and outstanding zero — — Preferred stock - Series B, $ 0.01 par value. Authorized 20,000 ; total issued and outstanding zero — — Common stock, $ 0.01 par value. Authorized 95,000,000 ; total issued and outstanding 45,984,858 and 47,269,446 shares at September 30, 2023 and December 31, 2022, respectively 460 473 Additional paid-in capital 462,812 439,681 Treasury stock, at cost ( zero and zero shares, at September 30, 2023 and December 31, 2022, respectively) — — Retained earnings 1,426,979 1,537,830 Accumulated other comprehensive loss ( 86,113 ) ( 85,373 ) TOTAL STOCKHOLDERS’ EQUITY 1,804,138 1,892,611 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,383,227 $ 3,533,270 See Notes to Condensed Consolidated Financial Statements (Unaudited) -3- ZIFF DAVIS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands except share and per share data) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Total revenues $ 340,985 $ 341,873 $ 974,143 $ 994,297 Operating costs and expenses: Cost of revenues 55,526 52,603 148,677 144,707 Sales and marketing 125,062 119,474 360,916 361,013 Research, development, and engineering 17,597 17,735 53,328 55,883 General and administrative 99,269 95,658 302,481 299,842 Goodwill impairment on business 56,850 27,369 56,850 27,369 Total operating costs and expenses 354,304 312,839 922,252 888,814 (Loss) income from operations ( 13,319 ) 29,034 51,891 105,483 Interest expense, net ( 2,817 ) ( 8,560 ) ( 17,780 ) ( 28,419 ) Gain on debt extinguishment, net — 10,112 — 11,505 Unrealized (loss) gain on short-term investments held at the reporting date, net ( 6,019 ) 4,201 ( 29,560 ) ( 14,165 ) Gain (loss) on investments, net — 471 357 ( 47,772 ) Other (loss) income, net ( 3,571 ) 4,218 ( 5,982 ) 12,962 (Loss) income before income taxes and income (loss) from equity method investment, net ( 25,726 ) 39,476 ( 1,074 ) 39,594 Income tax expense ( 5,335 ) ( 18,100 ) ( 11,180 ) ( 33,231 ) Income (loss) from equity method investment, net 90 ( 3,191 ) ( 9,665 ) ( 10,077 ) Net (loss) income $ ( 30,971 ) $ 18,185 $ ( 21,919 ) $ ( 3,714 ) Net (loss) income per common share: Basic $ ( 0.67 ) $ 0.39 $ ( 0.47 ) $ ( 0.08 ) Diluted $ ( 0.67 ) $ 0.39 $ ( 0.47 ) $ ( 0.08 ) Weighted average shares outstanding: Basic 46,062,097 46,871,897 46,612,660 46,967,671 Diluted 46,062,097 46,871,897 46,612,660 46,967,671 See Notes to Condensed Consolidated Financial Statements (Unaudited) -4- ZIFF DAVIS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited, in thousands) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Net (loss) income $ ( 30,971 ) $ 18,185 $ ( 21,919 ) $ ( 3,714 ) Other comprehensive loss, net of tax: Foreign currency translation adjustment ( 6,841 ) ( 24,753 ) ( 660 ) ( 55,283 ) Consensus separation adjustment — — — 4,056 Change in fair value on available-for-sale investments, net of tax expense of $ 93 and benefit of $ 37 for the three and nine months ended September 30, 2023, respectively 309 ( 169 ) ( 80 ) ( 169 ) Other comprehensive loss, net of tax ( 6,532 ) ( 24,922 ) ( 740 ) ( 51,396 ) Comprehensive loss $ ( 37,503 ) $ ( 6,737 ) $ ( 22,659 ) $ ( 55,110 ) See Notes to Condensed Consolidated Financial Statements (Unaudited) -5- ZIFF DAVIS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Nine months ended September 30, Cash flows from operating activities: 2023 2022 Net loss $ ( 21,919 ) $ ( 3,714 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 167,333 174,880 Non-cash operating lease costs 7,248 9,043 Share-based compensation 24,393 20,806 Provision for credit losses on accounts receivable 2,296 ( 1,142 ) Deferred income taxes, net ( 25,658 ) ( 13,552 ) Gain on extinguishment of debt — ( 11,505 ) Goodwill impairment on business 56,850 27,369 Changes in fair value of contingent consideration — ( 2,305 ) Loss from equity method investments 9,665 10,077 Unrealized loss on short-term investments held at the reporting date, net 29,560 14,165 (Gain) loss on investments, net ( 357 ) 47,772 Other 5,113 2,320 Decrease (increase) in: Accounts receivable (includes $ 0 and $ 9,425 with related parties) 11,043 85,121 Prepaid expenses and other current assets ( 10,059 ) 3,177 Other assets ( 7,961 ) ( 8,667 ) Increase (decrease) in: Accounts payable 1,955 ( 11,445 ) Deferred revenue ( 6,820 ) ( 25,400 ) Accrued liabilities and other current liabilities ( 14,839 ) ( 23,781 ) Net cash provided by operating activities 227,843 293,219 Cash flows from investing activities: Purchases of property and equipment ( 82,476 ) ( 80,767 ) Acquisition of businesses, net of cash received ( 9,492 ) ( 104,094 ) Investment in available-for-sale securities — ( 15,000 ) Purchases of equity investments ( 11,790 ) — Proceeds from sale of equity investments 3,174 — Other ( 4,154 ) — Net cash used in investing activities ( 104,738 ) ( 199,861 ) Cash flows from financing activities: Payment of debt — ( 166,904 ) Proceeds from term loan — 112,286 Debt extinguishment costs — ( 756 ) Repurchase of common stock ( 107,341 ) ( 76,545 ) Issuance of common stock under employee stock purchase plan 4,725 5,235 Proceeds from exercise of stock options — 148 Deferred payments for acquisitions ( 14,141 ) ( 14,734 ) Other ( 53 ) ( 559 ) Net cash used in financing activities ( 116,810 ) ( 141,829 ) Effect of exchange rate changes on cash and cash equivalents 1,536 ( 24,454 ) Net change in cash and cash equivalents 7,831 ( 72,925 ) Cash and cash equivalents at beginning of period 652,793 694,842 Cash and cash equivalents at end of period $ 660,624 $ 621,917 See Notes to Condensed Consolidated Financial Statements (Unaudited) -6- ZIFF DAVIS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited, in thousands, except share amounts) Three months ended September 30, 2023 Accumulated Common stock Additional paid-in Treasury stock Retained other comprehensive Total Stockholders’ Shares Amount capital Shares Amount earnings loss Equity Balance, July 1, 2023 46,402,143 $ 464 $ 448,920 — $ — $ 1,492,879 $ ( 79,581 ) $ 1,862,682 Net loss — — — — — ( 30,971 ) — ( 30,971 ) Other comprehensive loss, net of tax expense of $ 93 — — — — — — ( 6,532 ) ( 6,532 ) Issuance of restricted stock, net 2,041 — ( 265 ) — — 35 — ( 230 ) Issuance of common stock, net 186,102 2 13,420 — — — — 13,422 Repurchase of common stock — — — 605,428 ( 41,019 ) — — ( 41,019 ) Retirement of common stock ( 605,428 ) ( 6 ) ( 6,035 ) ( 605,428 ) 41,019 ( 34,978 ) — — Share-based compensation — — 6,774 — — — — 6,774 Other, net — — ( 2 ) — — 14 — 12 Balance, September 30, 2023 45,984,858 $ 460 $ 462,812 — $ — $ 1,426,979 $ ( 86,113 ) $ 1,804,138 Three months ended September 30, 2022 Accumulated Common stock Additional paid-in Treasury stock Retained other comprehensive Total Stockholders’ Shares Amount capital Shares Amount earnings loss Equity Balance, July 1, 2022 47,191,337 $ 472 $ 426,104 — $ — $ 1,451,316 $ ( 83,696 ) $ 1,794,196 Net income — — — — — 18,185 — 18,185 Other comprehensive loss, net of tax expense of zero — — — — — — ( 24,922 ) ( 24,922 ) Issuance of restricted stock, net 1,171 — — — — — — — Retirement of common stock ( 2,601 ) — ( 218 ) — — 18 — ( 200 ) Share-based compensation — — 6,386 — — — — 6,386 Balance, September 30, 2022 47,189,907 $ 472 $ 432,272 — $ — $ 1,469,519 $ ( 108,618 ) $ 1,793,645 -7- Nine months ended September 30, 2023 Accumulated Common stock Additional paid-in Treasury stock Retained other comprehensive Total Stockholders’ Shares Amount capital Shares Amount earnings loss Equity Balance, January 1, 2023 47,269,446 $ 473 $ 439,681 — $ — $ 1,537,830 $ ( 85,373 ) $ 1,892,611 Net loss — — — — — ( 21,919 ) — ( 21,919 ) Other comprehensive loss, net of tax benefit of $ 37 — — — — — — ( 740 ) ( 740 ) Issuance of restricted stock, net 28,058 — ( 4,031 ) — — 569 — ( 3,462 ) Issuance of shares under employee stock purchase plan 87,098 1 4,724 — — — — 4,725 Issuance of common stock, net 186,102 2 13,420 — — — — 13,422 Repurchase of common stock — — — 1,585,846 ( 104,919 ) — — ( 104,919 ) Retirement of common stock ( 1,585,846 ) ( 16 ) ( 15,388 ) ( 1,585,846 ) 104,919 ( 89,515 ) — — Share-based compensation — — 24,393 — — — — 24,393 Other, net — — 13 — — 14 — 27 Balance, September 30, 2023 45,984,858 $ 460 $ 462,812 — $ — $ 1,426,979 $ ( 86,113 ) $ 1,804,138 Nine months ended September 30, 2022 Accumulated Common stock Additional paid-in Treasury stock Retained other comprehensive Total Stockholders’ Shares Amount capital Shares Amount earnings loss Equity Balance, January 1, 2022 47,440,137 $ 474 $ 509,122 $ — $ — $ 1,515,358 $ ( 57,222 ) $ 1,967,732 Reclassification of the equity component of 1.75 % Convertible Notes to liability upon adoption of ASU 2020-06 — — ( 88,137 ) — — 23,436 — ( 64,701 ) Net loss — — — — — ( 3,714 ) — ( 3,714 ) Other comprehensive loss, net of tax expense of zero — — — — — — ( 55,452 ) ( 55,452 ) Issuance of restricted stock, net 456,963 4 ( 4 ) — — — — — Issuance of shares under employee stock purchase plan 76,741 1 5,234 — — — — 5,235 Repurchase of common stock — — — 736.536 ( 71,337 ) — — ( 71,337 ) Retirement of common stock ( 789,373 ) ( 7 ) ( 14,881 ) ( 736.536 ) 71,337 ( 61,657 ) — ( 5,208 ) Share-based compensation — — 20,806 — — — — 20,806 Exercise of stock options 5,439 — 148 — — — — 148 Other, net — — ( 16 ) — — ( 3,904 ) 4,056 136 Balance, September 30, 2022 47,189,907 $ 472 $ 432,272 — $ — $ 1,469,519 $ ( 108,618 ) $ 1,793,645 See Notes to Condensed Consolidated Financial Statements (Unaudited) -8- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation and Overview The accompanying Condensed Consolidated Financial Statements of Ziff Davis, Inc. and its subsidiaries (“Ziff Davis”, the “Company”, “our”, “us”, or “we”), whether directly or indirectly wholly-owned, were prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), and all adjustments considered necessary for a fair presentation have been included. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim Condensed Consolidated Financial Statements have been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). The preparation of these Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. All normal recurring adjustments necessary for a fair presentation of these interim Condensed Consolidated Financial Statements were made. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission ("SEC") on March 1, 2023 and other filings with the SEC. The results of operations for this interim period are not necessarily indicative of the operating results for the full year or for any future period. Description of Business Ziff Davis, Inc. is a vertically focused digital media and internet company whose portfolio includes leading brands in technology, shopping, gaming and entertainment, connectivity, health, cybersecurity, and martech. The Company’s Digital Media business specializes in the technology, shopping, gaming and entertainment, connectivity, and healthcare markets, offering content, tools and services to consumers and businesses. The Company’s Cybersecurity and Martech business provides cloud-based subscription services to consumers and businesses including cybersecurity, privacy, and marketing technology. Impairment or Disposal of Long-Lived Assets The Company assesses whether events or changes in circumstances have occurred that potentially indicate the carrying amount of definite-lived assets may not be recoverable. During the three months ended September 30, 2023 and 2022, and the nine months ended September 30, 2023 and 2022, the Company recorded an impairment of approximately $ 0.7 million, $ 0.2 million, $ 2.7 million, and $ 0.4 million, respectively, related to certain operating lease right-of-use assets and other definite-lived intangibles. The Company regularly evaluates its office space requirements in light of more of its workforce working from home as part of a permanent “remote” or “partial remote” work model. The impairment is presented in general and administrative expense on the Condensed Consolidated Statement of Operations. Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This update provides for optional financial reporting alternatives to reduce cost and complexities associated with accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. This update applies only to contracts, hedging relationships, and other transactions that reference London Interbank Offer Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The accommodations were available for all entities through December 31, 2022, with early adoption permitted. This update was later amended by ASU 2022-06. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 . This update defers the expiration date of Accounting Standards Codification (“ASC”) Topic 848 from December 31, 2022 to December 31, 2024. We are currently evaluating the effect the adoption of this update will have on our condensed consolidated financial statements and related disclosures. Reclassifications Certain prior year reported amounts have been reclassified to conform with the 2023 presentation. -9- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 2. Revenues Digital Media Digital Media revenues are earned primarily from the delivery of advertising services and subscriptions to services and information. Revenue from the delivery of advertising services is earned on websites that are owned and operated by us and on those websites that are part of Digital Media’s advertising network. Depending on the individual contracts with the customer, revenue for these services is recognized over the contract period when any of the following performance obligations are satisfied: (i) when an advertisement is placed for viewing, (ii) when a qualified sales lead is delivered, (iii) when a visitor “clicks through” on an advertisement or (iv) when commissions are earned upon the sale of an advertised product. Revenue from subscriptions is earned through the granting of access to, or delivery of, data products or services to customers. Subscriptions cover video games and related content, health information, data, and other copyrighted material. Revenues under such agreements are recognized over the contract term for use of the service. Revenues are also earned from listing fees, subscriptions to online publications, and from other sources. Subscription revenues are primarily recognized over time. Revenues related to the provision of access to historical data for certain services are recorded at the time of delivery. We also generate Digital Media subscription revenues through the license of certain assets to clients. Assets are licensed for clients’ use in their own promotional materials or otherwise and may include logos, editorial reviews, or other copyrighted material. Revenues under such license agreements are recognized over the contract term for use of the asset. In instances when technology assets are licensed to our clients, revenues from the license of these assets are recognized over the term of the access period. The Digital Media business also generates revenue from other sources which include marketing and production services. Such other revenues are generally recognized over the period in which the products or services are delivered. We also generate Digital Media revenues from transactions involving the sale of perpetual software licenses, related software support, and maintenance, hardware used in conjunction with software, and other related services. Revenue is recognized for software transactions with multiple performance obligations after (i) the contract has been approved and we are committed to perform the respective obligations and (ii) we can identify and quantify each obligation and its respective selling price. Once the respective performance obligations have been identified and quantified, revenue will be recognized when the obligations are met, either over time or at a point in time depending on the nature of the obligation. Revenues from software license performance obligations are generally recognized upfront at the point in time that the software is made available to the customer to download and use. Revenues for related software support and maintenance performance obligations are related to technical support provided to customers as needed and unspecified software product upgrades, maintenance releases, and patches during the term of the support period when they are available. We are obligated to make the support services available continuously throughout the contract period. Therefore, revenues for support contracts are generally recognized ratably over the contractual period the support services are provided. Hardware product and related software performance obligations, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a bundled performance obligation. The revenues for this bundled performance obligation are generally recognized at the point in time that the hardware and software products are delivered and ownership is transferred to the customer. Other service revenues are generally recognized over time as the services are performed. The Company records revenue on a gross basis with respect to revenue generated (i) by the Company serving online display and video advertising across its owned and operated web properties, on third-party sites, or on unaffiliated advertising networks; (ii) through the Company’s lead-generation business; and (iii) through the Company’s subscriptions. The Company records revenue on a net basis with respect to revenue paid to the Company by certain third-party advertising networks who serve online display and video advertising across the Company’s owned-and-operated web properties and certain third-party sites. Cybersecurity and Martech The Company’s Cybersecurity and Martech revenues substantially consist of subscription revenues which include subscription and usage-based fees, a significant portion of which are paid in advance. The Company defers the portions of monthly, quarterly, semi-annual, and annual fees collected in advance of the satisfaction of performance obligations and recognizes them in the period earned. -10- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Along with its numerous proprietary Cybersecurity and Martech solutions, the Company also generates subscription revenues by reselling various third-party solutions, primarily through its email security line of business. These third-party solutions, along with the Company’s proprietary products, allow it to offer customers a variety of solutions to better meet the customer’s needs. The Company records revenue on a gross basis with respect to reseller revenue because the Company has control of the specified good or service prior to transferring control to the customer. Revenues from external customers classified by revenue source are as follows (in thousands). Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Digital Media Advertising $ 183,008 $ 186,921 $ 514,173 $ 546,186 Subscription 71,858 64,780 209,167 179,257 Other 13,085 12,195 31,692 31,980 Total Digital Media revenues $ 267,951 $ 263,896 $ 755,032 $ 757,423 Cybersecurity and Martech Subscription $ 73,051 $ 78,192 $ 219,263 $ 237,596 Total Cybersecurity and Martech revenues $ 73,051 $ 78,192 $ 219,263 $ 237,596 Elimination of inter-segment revenues ( 17 ) ( 215 ) ( 152 ) ( 722 ) Total Revenues $ 340,985 $ 341,873 $ 974,143 $ 994,297 Timing of revenue recognition Point in time $ 14,336 $ 14,417 $ 37,518 $ 32,602 Over time 326,649 327,456 936,625 961,695 Total $ 340,985 $ 341,873 $ 974,143 $ 994,297 The Company recorded $ 27.8 million and $ 32.2 million of revenue for the three months ended September 30, 2023 and 2022, respectively, and $ 140.9 million and $ 154.9 million of revenue for the nine months ended September 30, 2023 and 2022, respectively, which was previously included in the deferred revenue balance as of the beginning of each respective year. Transaction Price Allocation to Future Performance Obligations As of September 30, 2023, the aggregate amount of transaction price that is allocated to future performance obligations was approximately $ 32.5 million and is expected to be recognized as follows: 13 % by December 31, 2023, 84 % between January 1, 2024 and December 31, 2025, and 3 % thereafter. The amount disclosed does not include revenues related to performance obligations that are part of contracts with original expected durations of twelve months or less or portions of the contracts that remain subject to cancellations. 3. Business Acquisitions The Company uses acquisitions as a strategy to grow its customer base by increasing its presence in new and existing markets, expand and diversify its service offerings, enhance its technology, and acquire skilled personnel. 2023 Acquisitions The Company completed two immaterial Digital Media acquisitions during the nine months ended September 30, 2023, paying the purchase price in cash in each transaction. The Condensed Consolidated Statement of Operations since the date of each acquisition and the Condensed Consolidated Balance Sheets as of September 30, 2023, reflect the results of operations of the 2023 acquisitions. The initial accounting for the 2023 acquisitions is incomplete due to timing of available information and is subject to change. The Company has recorded provisional amounts which may be based upon past acquisitions with similar attributes for certain intangible assets (including trade names and customer relationships), preliminary acquisition date working capital, and related tax items. -11- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Goodwill recognized associated with these acquisitions during the nine months ended September 30, 2023 was $ 6.3 million, all of which is expected to be deductible for income tax purposes. Approximately $ 7.2 million of definite-lived intangibles were recorded in connection with the acquisitions during the nine months ended September 30, 2023. 2022 Acquisitions The Company completed the following acquisitions during the nine months ended September 30, 2022, paying the purchase price in cash in each transaction: (a) a purchase of 100 % of equity interests of Lifecycle Marketing Group Limited, acquired on January 21, 2022, a United Kingdom-based portfolio of pregnancy and parenting brands, including Emma’s Diary and Health Professional Academy, reported within our Digital Media segment; (b) a purchase of 100 % of equity interests of FitNow, Inc, acquired on June 2, 2022, a Massachusetts-based provider of weight loss products and support, reported within our Digital Media segment; and (c) four other immaterial Digital Media acquisitions. During the nine months ended September 30, 2023, the purchase price accounting was finalized for these acquisitions. The Condensed Consolidated Statement of Operations since the date of each acquisition reflects the results of operations of all 2022 acquisitions. For the nine months ended September 30, 2022, these acquisitions contributed $ 19.6 million to the Company’s revenues. Net income contributed by these acquisitions was not separately identifiable due to the Company’s integration activities and is impracticable to provide. Total consideration for these transactions was $ 121.7 million, net of cash acquired and assumed liabilities. The following table summarizes the allocation of the purchase consideration for all 2022 acquisitions as of September 30, 2022 (in thousands): Assets and Liabilities Valuation Accounts receivable $ 7,433 Prepaid expenses and other current assets 4,915 Property and equipment 369 Operating lease right-of-use assets, noncurrent 546 Trade names 12,838 Customer relationships 20,540 Other intangibles 18,165 Goodwill 93,827 Other long-term assets 11 Accounts payable and accrued expenses ( 4,656 ) Deferred revenue ( 21,332 ) Deferred tax liability ( 10,436 ) Other long-term liabilities ( 516 ) Total $ 121,704 The fair value of the assets acquired includes accounts receivable of $ 7.4 million, of which none is expected to be uncollectible. The Company did not acquire any other classes of receivables as a result of its acquisitions. Goodwill recognized associated with these acquisitions during the nine months ended September 30, 2022 was $ 93.8 million, of which $ 1.2 million is expected to be deductible for income tax purposes. Unaudited Pro Forma Financial Information for All 2022 Acquisitions The following unaudited pro forma information is not necessarily indicative of the Company’s consolidated results of operations in future periods or the results that actually would have been realized had the Company and the acquired businesses been combined companies during the periods presented. These pro forma results are estimates and exclude any savings or synergies that would have resulted from these business acquisitions had they occurred on January 1, 2022. This unaudited pro forma supplemental information includes incremental intangible asset amortization and other charges as a result of the acquisitions, net of the related tax effects. -12- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The supplemental information on an unaudited pro forma financial basis presents the combined results of the Company and its acquisitions during the three and nine months ended September 30, 2022 as if each acquisition had occurred on January 1, 2022 (in thousands, except per share amounts): Three months ended September 30, 2022 Nine months ended September 30, 2022 (unaudited) (unaudited) Revenues $ 342,173 $ 1,010,600 Net income (loss) $ 18,120 $ ( 3,801 ) Income (loss) per common share - Basic $ 0.39 $ ( 0.08 ) Income (loss) per common share - Diluted $ 0.39 $ ( 0.08 ) 4. Investments Investments consist primarily of equity and debt securities. Investments in equity securities On October 7, 2021, the Company completed the separation of its cloud fax business (the “Separation”) into an independent publicly traded company, Consensus Cloud Solutions, Inc. (“Consensus”). Following the Separation, the Company retained shares of Consensus common stock and as of September 30, 2023 and December 31, 2022, the Company held approximately 1.0 million and 1.1 million shares, respectively, of the common stock of Consensus. As of September 30, 2023 and December 31, 2022, the carrying value of the investment in Consensus was $ 26.0 million and $ 58.4 million respectively, and are included in ‘Short-term investments’ in the Condensed Consolidated Balance Sheets. The Company accounts for its investment in Consensus at fair value under the fair value option, and the related fair value gains and losses are recognized in earnings. During the three and nine months ended September 30, 2022, the Company completed the non-cash tax-free debt-for-equity exchanges of 500,000 and 2,800,000 shares, respectively, of its common stock of Consensus for the extinguishment of $ 22.3 million and $ 112.3 million, respectively of principal of the Company’s Term Loan Facilities (as defined in Note 7 - Debt ), and related interest. During the three and nine months ended September 30, 2023, the Company sold zero and 52,393 shares, respectively, of common stock of Consensus in the open market. Losses on equity securities were recorded in ‘Unrealized (loss) gain on short-term investments held at the reporting date, net’ in the Condensed Consolidated Statements of Operations consisted of the following (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Net (losses) gains during the period $ ( 6,019 ) $ 4,672 $ ( 29,203 ) $ ( 61,937 ) Less: gains (losses) on securities sold during the period — 471 357 ( 47,772 ) Unrealized (losses) gains recognized during the period on short-term investments held at the reporting date, net $ ( 6,019 ) $ 4,201 $ ( 29,560 ) $ ( 14,165 ) On July 31, 2023, the Company entered into an agreement to purchase $ 25.0 million of equity of Xyla, Inc. (“Xyla”) for a minority ownership stake. This minority investment was made in the form of cash and shares of the Company’s common stock. The Company accounts for its investment in Xyla as an equity investment without a readily determinable fair value measured under the measurement alternative in accordance with ASC Topic 321, Investments - Equity Securities . As of September 30, 2023, the investment in Xyla has a carrying value of $ 25.3 million, including transaction costs, and is included in ‘Long-term investments’ in the Condensed Consolidated Balance Sheets. -13- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Investment in corporate debt security On April 12, 2022, the Company entered into an agreement with an entity and acquired 4 % convertible notes with an aggregate value of $ 15.0 million. On May 19, 2023, the Company entered into the Note Amendment Agreement (the “Amendment”) with respect to the same entity. The Amendment increased the interest rate on the convertible notes to 6 %, extended the maturity date, and subordinated all existing and future obligations, liabilities, and indebtedness of the entity to the entity’s senior creditor, as defined in the Amendment. This investment is included in ‘Long-term investments, net’ in the Condensed Consolidated Balance Sheets and is classified as available-for-sale. The investment was initially measured at its transaction price and subsequently remeasured at fair value, with unrealized gains and losses reported as a component of other comprehensive income. As of September 30, 2023, both the carrying value and the maximum exposure of the Company’s investment in corporate debt securities was approximately $ 15.5 million, with a contractual maturity date that is more than one year but less than five years. As of December 31, 2022, both of the carrying value and the maximum exposure of the Company’s equity method investment in corporate debt securities was approximately $ 15.6 million. Cumulative gross unrealized gains on investment in corporate debt securities as of September 30, 2023 and December 31, 2022 was approximately $ 0.5 million and $ 0.6 million, respectively. There were no investments in an unrealized loss position as of September 30, 2023 and December 31, 2022. As of September 30, 2023 and December 31, 2022, the Company did not recognize any other-than-temporary impairment losses on its debt securities. Equity method investment On September 25, 2017, the Company entered into a commitment to invest in an investment fund (the “OCV Fund”). The primary purpose of the OCV Fund is to provide a limited number of select investors with the opportunity to realize long-term appreciation from public and private companies, with a particular focus on the technology and life science industries. The general activities of the OCV Fund is to buy, sell, hold, and otherwise invest in securities of every kind and nature and rights and options with respect thereto, including, without limitation, stock, notes, bonds, debentures, and evidence of indebtedness; to exercise all rights, powers, privileges, and other incidents of ownership or possession with respect to securities held or owned by the OCV Fund; to enter into, make, and perform all contracts and other undertakings; and to engage in all activities and transactions as may be necessary, advisable, or desirable to carry out the foregoing. During both the nine months ended September 30, 2023 and 2022, the Company received no distributions from OCV. The Company recognizes its equity in the net earnings or losses relating to the investment in OCV on a one-quarter lag (including management fees) due to the timing and availability of financial information from OCV. If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline. During the three months ended September 30, 2023 and 2022, the Company recognized a gain (loss) from equity method investment of $ 0.1 million and $( 3.2 ) million, net of tax benefit, respectively. During the nine months ended September 30, 2023 and 2022, the Company recognized a loss from equity method investment of $ 9.7 million and $ 10.1 million, net of tax benefit, respectively. The losses during the three months ended September 30, 2022 and during the nine months ended September 30, 2023 and 2022 were primarily the result of losses in the underlying investments and the loss during the three and nine months ended September 30, 2022 also included management fee expense. The Company did not recognize management fee expense in 2023 as a result of the settlement of certain litigation in 2022 whereby no further management fees would be paid by the Company to the manager of the OCV Fund. During the three and nine months ended September 30, 2022, the Company recognized expense for management fees of zero and $ 1.5 million, respectively, net of tax benefit. As of September 30, 2023, both of the carrying value and the maximum exposure of the Company’s equity method investment was $ 99.4 million. As of December 31, 2022, both of the carrying value and the maximum exposure of the Company’s equity method investment was $ 112.3 million. These equity securities are included within ‘Long-term investments’ in the Condensed Consolidated Balance Sheets. As a limited partner, the Company’s maximum exposure to loss is limited to its proportional ownership in the partnership. In addition, the Company is not required to contribute any future capital and any expected losses will not be in excess of the capital account. Finally, there are no call or put options, or other types of arrangements, which limit the Company’s ability to participate in losses and returns of the Fund. -14- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 5. Fair Value Measurements The Company complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value. § Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. § Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. § Level 3 – Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Recurring Fair Value Measurements The Company’s money market funds are classified within Level 1. The Company values these Level 1 investments using quoted market prices. The Company’s investment in Consensus’ common stock for which the Company elected the fair value option, and the fair value of the Company’s investment in Consensus and subsequent fair value changes, are included in our assets and changes in fair value are recognized in earnings. As the initial carrying value of the investment in Consensus was negative immediately following the Separation, the Company elected the fair value option under ASC 825-10-25 to support the initial recognition of the investment in Consensus at fair value and the negative book value was recorded as a gain at the date of Separation. The fair value of the investment in Consensus is determined using quoted market prices, which is a Level 1 input. The Company has investment in a corporate debt security that does not have a readily determinable fair value because acquired securities are privately held, not traded on any public exchanges and not an investment in a mutual fund or similar investment. The fair value of the corporate debt securities is determined primarily based on significant estimates and assumptions, including Level 3 inputs. As of September 30, 2023 and December 31, 2022, the fair value was determined based upon various probability-weighted scenarios which included discount rate assumptions between 12 % and 13 %, depending on the probability scenario. In addition, the determination of fair value included a conversion timeframe of one to three years , depending on probability scenario, as of September 30, 2023 and approximately one-year as of December 31, 2022. The Company classifies its contingent consideration liability in connection with acquisitions within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. The valuation approaches used to value Level 3 investments considers unobservable inputs in the market such as time to liquidity, volatility, dividend yield, and breakpoints. Significant increases or decreases in either of the inputs in isolation would result in a significantly lower or higher fair value measurement. As of September 30, 2023 and December 31, 2022, the contingent consideration was determined using a 100% probability of payout at the maximum amount, without any other estimates applied. -15- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands): September 30, 2023 Level 1 Level 2 Level 3 Fair Value Carrying Value Assets: Cash equivalents: Money market and other funds $ 288,610 $ — $ — $ 288,610 $ 288,610 Short-term investments: Certificates of deposit — 3,753 — 3,753 3,753 Consensus common stock 26,044 — — 26,044 26,044 Long-term investments: Investment in corporate debt securities — — 15,469 15,469 15,469 Total assets measured at fair value $ 314,654 $ 3,753 $ 15,469 $ 333,876 $ 333,876 Liabilities: Contingent consideration $ — $ — $ 3,389 $ 3,389 $ 3,389 Total liabilities measured at fair value $ — $ — $ 3,389 $ 3,389 $ 3,389 December 31, 2022 Level 1 Level 2 Level 3 Fair Value Carrying Value Assets: Cash equivalents: Money market and other funds $ 312,010 $ — $ — $ 312,010 $ 312,010 Short-term investments: Consensus common stock 58,421 — — 58,421 58,421 Long-term investments: Investment in corporate debt securities — — 15,586 15,586 15,586 Total assets measured at fair value $ 370,431 $ — $ 15,586 $ 386,017 $ 386,017 Liabilities: Contingent consideration $ — $ — $ 555 $ 555 $ 555 Total liabilities measured at fair value $ — $ — $ 555 $ 555 $ 555 At the end of each reporting period, management reviews the inputs to the fair value measurements of financial and non-financial assets and liabilities to determine when transfers between levels are deemed to have occurred. For the nine months ended September 30, 2023 and 2022, there were no transfers that occurred between levels. -16- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The following table presents a reconciliation of the Company’s Level 3 financial assets related to our contingent consideration arrangements and investment in corporate debt securities that are measured at fair value on a recurring basis (in thousands): Nine months ended September 30, 2023 2022 Contingent Consideration Arrangements Corporate Debt Securities Contingent Consideration Arrangements Corporate Debt Securities Balance as of January 1 $ 555 $ 15,586 $ 5,775 $ — Fair value at date of acquisition 2,834 — 555 15,000 Fair value adjustments (1) — ( 117 ) ( 2,305 ) — Payments — — ( 2,919 ) — Balance as of September 30 $ 3,389 $ 15,469 $ 1,106 $ 15,000 (1) The fair value adjustments to the contingent consideration arrangements in the table above were recorded within ‘General and administrative’ on the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2023 and 2022. The fair value adjustments to the corporate debt securities in the table above were recorded within ‘Change in fair value on available-for-sale investments, net’ on the Condensed Consolidated Statements of Comprehensive (Loss) Income during the three and nine months ended September 30, 2023 and 2022. Nonrecurring Fair Value Measurements The Company’s non-financial assets, such as goodwill, intangible assets, right-of-use assets, and property, plant and equipment, are adjusted to fair value only when an impairment is recognized. The Company’s financial assets, comprised of equity securities without readily determinable fair value, are adjusted to fair value when observable price changes are identified or due to impairment. Such fair value measurements are based predominately on Level 3 inputs. See Note 1 - Basis of Presentation for further information on intangible assets and right-of-use assets impairment charges recorded in the three and nine months ended September 30, 2023 and 2022. See Note 7 - Goodwill and Intangible Assets for further information on a goodwill impairment charge recorded in the three and nine months ended September 30, 2023 and 2022. Other Fair Value Disclosures The fair value of the Company’s 4.625 % Senior Notes and 1.75 % Convertible Notes (as defined in Note 7 - Debt ) was determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 1 inputs. If such information is not available for the 1.75 % Convertible Notes, the fair value is determined using cash-flow models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature. The following table presents the carrying value and the fair value of financial instruments measured at fair value only for disclosure purposes: September 30, 2023 December 31, 2022 Carrying Value Fair Value Carrying Value Fair Value 4.625 % Senior Notes $ 456,695 $ 389,022 $ 456,400 $ 390,908 1.75 % Convertible Notes $ 544,048 $ 508,832 $ 542,653 $ 548,411 -17- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 6. Goodwill and Intangible Assets Goodwill The changes in carrying amounts of goodwill for the nine months ended September 30, 2023 are as follows (in thousands): Digital Media Cybersecurity and Martech Consolidated Balance as of January 1, 2023 $ 1,065,989 $ 525,485 $ 1,591,474 Goodwill acquired (Note 3 ) 6,258 — 6,258 Goodwill impairment ( 56,850 ) — ( 56,850 ) Purchase accounting adjustments (1) ( 72 ) — ( 72 ) Foreign exchange translation ( 644 ) ( 503 ) ( 1,147 ) Balance as of September 30, 2023 $ 1,014,681 $ 524,982 $ 1,539,663 (1) Purchase accounting adjustments relate to measurement period adjustments to goodwill in connection with prior business acquisitions. During the three and nine months ended September 30, 2023 and 2022, the Company reassessed the fair value of certain reporting units within the Digital Media reportable segment as a result of a forecasted reduction in revenue and EBITDA in the reporting unit, as well as an increase in interest rates and market volatility that would affect the Company’s assumptions on its discount rate. Based on the quantitative fair value test in each period, the carrying value of the reporting unit exceeded its fair value, and the Company recorded an impairment of approximately $ 56.9 million during the three and nine months ended September 30, 2023, and approximately $ 27.4 million during the three and nine months ended September 30, 2022. Following the impairment during the three and nine months ended September 30, 2022, the reporting unit had goodwill of approximately $ 86.9 million and the carrying value approximated its fair value. Following the impairment during the three and nine months ended September 30, 2023, the reporting unit had goodwill of approximately $ 79.2 million and there is no excess of reporting unit fair value over the carrying amount, so any further decrease in estimated fair value would result in an additional impairment charge to goodwill. Changes in market conditions, and key assumptions made in future quantitative assessments, including expected cash flows, competitive factors and discount rates, could negatively impact the results of future impairment testing and could result in the recognition of an impairment charge. In each period, the fair value of the reporting unit was determined using an equal weighting of an income approach that was based on the discounted estimated future cash flows of the reporting unit and a market approach that uses the guideline public company approach. We believe the combination of these approaches provides an appropriate valuation because it incorporates the expected cash generation of the reporting unit in addition to how a third-party market participant would value the reporting unit. As the business is assumed to continue in perpetuity, the discounted future cash flows include a terminal value. Determining fair value using a discounted estimated future cash flow analysis requires the exercise of significant judgment with respect to several items, including the amount and timing of expected future cash flows and appropriate discount rates. The expected cash flows used in the discounted cash flow analyses were based on the most recent forecast for the reporting unit. For years beyond the forecast period, the estimates were based, in part, on forecasted growth rates. The discount rate the Company used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. Determining fair value using a market approach considers multiples of financial metrics based on trading multiples of a selected peer group of companies. From the comparable companies, a representative market multiple is determined, which is applied to financial metrics to estimate the fair value of the reporting unit. During the three months ended September 30, 2022, the Company realigned two reporting units within the Digital Media reportable segment. The Company re-allocated goodwill between the two identified reporting units based upon the relative fair value of the respective reporting units. Immediately before and immediately following this change in reporting units, the Company performed a quantitative fair value assessment using the income approach and market approach noted above, and each of these reporting units exceeded their respective carrying values and, therefore, there was no impairment to goodwill. Goodwill as of September 30, 2023 and December 31, 2022 reflects accumulated impairment losses of $ 84.2 million and $ 27.4 million, respectively, in the Digital Media reportable segment. -18- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Intangible Assets Subject to Amortization As of September 30, 2023, intangible assets subject to amortization relate primarily to the following (in thousands): Weighted-Average Amortization Period Historical Cost Accumulated Amortization Net Trade names 10 years $ 265,406 $ 142,201 $ 123,205 Customer relationships (1) 8 years 690,942 533,565 157,377 Other purchased intangibles 9 years 476,529 389,168 87,361 Total $ 1,432,877 $ 1,064,934 $ 367,943 (1) The Company amortizes customer relationship assets in a pattern that best reflects the pace at which the asset’s benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first 4 to 5 years, despite the overall life of the asset. As of December 31, 2022, intangible assets subject to amortization relate primarily to the following (in thousands): Weighted-Average Amortization Period Historical Cost Accumulated Amortization Net Trade names 10 years $ 261,614 $ 125,422 $ 136,192 Customer relationships (1) 8 years 687,798 479,741 208,057 Other purchased intangibles 8 years 481,973 363,407 118,566 Total $ 1,431,385 $ 968,570 $ 462,815 (1) The Company amortizes customer relationship assets in a pattern that best reflects the pace at which the asset’s benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first 4 to 5 years, despite the overall life of the asset. Amortization expense, included in General and administrative expense on the Condensed Consolidated Statements of Operations, was approximately $ 33.0 million and $ 36.3 million for the three months ended September 30, 2023 and 2022, respectively, and $ 100.0 million and $ 119.3 million for the nine months ended September 30, 2023 and 2022, respectively. -19- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 7. Debt Long-term debt consists of the following (in thousands): September 30, 2023 December 31, 2022 4.625 % Senior Notes $ 460,038 $ 460,038 1.75 % Convertible Notes 550,000 550,000 Total Notes 1,010,038 1,010,038 Credit Agreement — — Less: Unamortized discount ( 2,540 ) ( 2,764 ) Deferred issuance costs ( 6,755 ) ( 8,221 ) Total long-term debt $ 1,000,743 $ 999,053 As of September 30, 2023, $ 550.0 million of principal will mature in 2026 and $ 460.0 million of principal will mature in 2030. 4.625 % Senior Notes On October 7, 2020, the Company completed the issuance and sale of $ 750.0 million aggregate principal amount of its 4.625 % senior notes due 2030 (the “ 4.625 % Senior Notes”) in a private placement offering exempt from the registration requirements of the Securities Act of 1933. The Company received proceeds of $ 742.7 million after deducting the initial purchasers’ discounts, commissions and offering expenses. The net proceeds were used to redeem all of its outstanding 6.0 % Senior Notes due in 2025 and, the remaining net proceeds were available for general corporate purposes which may include acquisitions and the repurchase or redemption of other outstanding indebtedness. These senior notes bear interest at a rate of 4.625 % per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2021. The 4.625 % Senior Notes mature on October 15, 2030, and are senior unsecured obligations of the Company which are guaranteed, jointly and severally, on an unsecured basis by certain of the Company’s existing and future domestic direct and indirect wholly-owned subsidiaries (collectively, the “Guarantors”). If the Company or any of its restricted subsidiaries acquires or creates a domestic restricted subsidiary, other than an Insignificant Subsidiary (as defined in the indenture pursuant to which the 4.625 % Senior Notes were issued (the “Indenture”)), after the issue date, or any Insignificant Subsidiary ceases to fit within the definition of Insignificant Subsidiary, such restricted subsidiary is required to unconditionally guarantee, jointly and severally, on an unsecured basis, the Company’s obligations under the 4.625 % Senior Notes. The Company may redeem some or all of the 4.625 % Senior Notes at any time on or after October 15, 2025 at specified redemption prices plus accrued and unpaid interest, if any, up to, but excluding the redemption date. Before October 15, 2023, and following certain equity offerings, the Company also may redeem up to 40 % of the 4.625 % Senior Notes at a price equal to 104.625 % of the principal amount, plus accrued and unpaid interest, if any, up to, but excluding the redemption date. The Company may make such redemption only if, after such redemption, at least 50 % of the aggregate principal amount of the 4.625 % Senior Notes remains outstanding. In addition, at any time prior to October 15, 2025, the Company may redeem some or all of the 4.625 % Senior Notes at a price equal to 100 % of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, plus an applicable “make-whole” premium. The discount and deferred issuance costs are being amortized, at an effective interest rate of 4.7 %, to interest expense through the maturity date. The Indenture contains covenants that restrict the Company’s ability to (i) pay dividends or make distributions on the Company’s common stock or repurchase the Company’s capital stock; (ii) make certain restricted payments; (iii) create liens or enter into sale and leaseback transactions; (iv) enter into transactions with affiliates; (v) merge or consolidate with another company; and (vi) transfer and sell assets. These covenants contain certain exceptions. Restricted payments are applicable only if the Company and subsidiaries designated as restricted subsidiaries have a net leverage ratio of greater than 3.5 to 1.0. In addition, if such net leverage ratio is in excess of 3.5 to 1.0, the restriction on restricted payments is subject to various exceptions, including the total aggregate amount not exceeding the greater of (A) $ 250 million and (B) 50.0 % of EBITDA for the most recently ended four fiscal quarter period ended immediately prior to such date for which internal financial statements are available. The Company is in compliance with its debt covenants for the 4.625 % Senior Notes as of September 30, 2023. -20- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Repurchases of 4.625 % Senior Notes on the open market were as follows (in thousands): Three months ended September 30, 2022 Nine months ended September 30, 2022 Principal repurchased $ 105,135 $ 181,238 Aggregate purchase price $ 94,051 $ 167,661 Gain on repurchase (1) $ 10,211 $ 12,060 (1) Presented within ‘Gain on debt extinguishment, net” on the Condensed Consolidated Statements of Operations. Cumulatively as of September 30, 2023, the Company repurchased approximately $ 290 million in aggregate principal of its 4.625 % Senior Notes. 1.75 % Convertible Notes On November 15, 2019, the Company issued $ 550.0 million aggregate principal amount of 1.75 % convertible senior notes due November 1, 2026 (the “ 1.75 % Convertible Notes”). The Company received proceeds of $ 537.1 million in cash, net of purchasers’ discounts and commissions and other debt issuance costs. A portion of the net proceeds were used to pay off all amounts outstanding under the then-existing Credit Facility. The 1.75 % Convertible Notes bear interest at a rate of 1.75 % per annum, payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2020. The 1.75 % Convertible Notes will mature on November 1, 2026, unless earlier converted or repurchased. Under certain conditions set forth in the indenture, the 1.75 % Convertible Notes bear additional interest of 0.50 % per annum payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2021. During the three and nine months ended September 30, 2023, the Company recorded $ 0.3 million and $ 7.7 million of interest expense related to the 1.75 % Convertible Notes for such additional interest. In August 2023, $ 7.0 million of this interest obligation was paid by the Company to the trustee under the indenture for the 1.75 % Convertible Notes, which was paid to holders of record in August 2023. The Company paid its remaining obligation of approximately $ 0.7 million as of November 1, 2023. As of August 1, 2023, the Company has complied with the conditions set forth in the indenture. As such, the cumulative $ 7.7 million interest expense was non-recurring. Holders may surrender their 1.75 % Convertible Notes for conversion at any time prior to the close of business on the business day immediately preceding July 1, 2026 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on March 31, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding the calendar quarter is greater than 130 % of the applicable conversion price of the 1.75 % Convertible Notes on each such applicable trading day; (ii) during the five business day period following any 10 consecutive trading day period in which the trading price per $1,000 principal amount of 1.75 % Convertible Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after July 1, 2026, and prior to the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their notes at any time, regardless of the foregoing circumstances. The Company will settle conversions of the 1.75 % Convertible Notes by paying or delivering, as the case may be, cash, shares of the Company’s common stock or a combination thereof at the Company’s election. The Company currently intends to satisfy its conversion obligation by paying and delivering a combination of cash and shares of the Company’s common stock. Holders of the notes will have the right to require the Company to repurchase for cash all or any portion of their notes upon the occurrence of certain corporate events, subject to certain conditions. As of September 30, 2023 and December 31, 2022, the market trigger conditions did not meet the conversion requirements of the 1.75 % Convertible Notes and, accordingly, the 1.75 % Convertible Notes are classified as long-term debt on our Condensed Consolidated Balance Sheets. As of September 30, 2023, the conversion rate is 9.3783 shares of the Company’s common stock for each $1,000 principal amount of 1.75 % Convertible Notes (or 5,158,071 shares), which represents a conversion price of approximately $ 106.63 per share of the Company’s common stock. The conversion rate is subject to adjustment for certain events as set forth in the indenture governing the 1.75 % Convertible Notes, but will not be adjusted for accrued interest. In addition, upon the occurrence of a “Make-Whole Fundamental Change” (as defined in the 1.75 % Convertible Note Indenture), the Company will increase the conversion rate for a holder that elects to convert its 1.75 % Convertible Notes in connection with such a corporate event in certain circumstances. -21- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The Company may not redeem the 1.75 % Convertible Notes prior to November 1, 2026, and no sinking fund is provided for the 1.75 % Convertible Notes. The 1.75 % Convertible Notes are the Company’s general senior unsecured obligations and rank: (i) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 1.75 % Convertible Notes; (ii) equal in right of payment to the Company’s existing and future indebtedness that is not so subordinated; (iii) effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all existing and future indebtedness and other liabilities incurred by the Company’s subsidiaries. The following table provides additional information related to the 1.75 % Convertible Notes (in thousands): September 30, 2023 December 31, 2022 Principal amount of 1.75 % Convertible Notes $ 550,000 $ 550,000 Less: Carrying amount of debt issuance costs ( 5,952 ) ( 7,347 ) Net carrying amount of 1.75 % Convertible Notes $ 544,048 $ 542,653 The following table provides the components of interest expense related to the 1.75 % Convertible Notes (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Contractual interest expense $ 2,746 $ 2,407 $ 14,963 $ 7,370 Amortization of debt issuance costs 466 456 1,395 1,400 Total interest expense related to 1.75 % Convertible Notes $ 3,212 $ 2,863 $ 16,358 $ 8,770 Accounting for the 1.75 % Convertible Notes On January 1, 2022 the Company adopted ASU 2020-06 using the modified retrospective method. As a result of this adoption, the Company de-recognized the remaining unamortized debt discount of $ 87.3 million on the 1.75 % Convertible Notes and therefore no longer recognizes any amortization of debt discounts as interest expense. In connection with the issuance of the 1.75 % Convertible Notes, the Company incurred $ 12.9 million of deferred issuance costs, which primarily consisted of the underwriters’ discount, legal and other professional service fees. Of the total deferred issuance costs incurred, $ 10.1 million were attributable to the liability component and are being amortized at an effective interest rate of 5.5 %, to interest expense through the maturity date. The remaining $ 2.8 million of the deferred issuance costs were netted with the equity component in additional paid-in capital at the issuance date. Upon adoption of ASU 2020-06, the Company reclassified the $ 2.8 million from additional paid-in-capital to long-term liability and recorded a cumulative adjustment to retained earnings for amortization from the issuance date through January 1, 2022. Credit Agreement On April 7, 2021, the Company entered into a $ 100.0 million Credit Agreement (the “Credit Agreement”). Subject to certain conditions and approvals, the Company may, from time to time, request increases in the commitments under the Credit Agreement in an aggregate amount up to $ 250.0 million, for a total aggregate commitment of up to $ 350.0 million. The final maturity of the Credit Facility will occur on April 7, 2026. At the Company’s option, amounts borrowed under the Credit Agreement will bear interest at either (i) a base rate equal to the greater of (x) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus 0.5 % per annum, (y) the rate of interest per annum most recently announced by the Agent (as defined in the Credit Agreement) as its U.S. Dollar “Reference Rate” and (z) one month LIBOR plus 1.00 % or (ii) a rate per annum equal to LIBOR divided by 1.00 minus the LIBOR Reserve Requirements (as defined in the Credit Agreement), in each case, plus an applicable margin. The applicable margin relating to any base rate loan will range from 0.50 % to 1.25 % and the applicable margin relating to any LIBOR loan will range from 1.50 % to 2.25 %, in each case, depending on the total leverage ratio of the Company. The Company is permitted to make voluntary prepayments of the Credit Facility at any time without payment of a premium or penalty. The Credit Agreement is secured by an associated collateral agreement that provides for a lien on the majority of the Company’s assets and the assets of the guarantors, in each case, subject to customary exceptions. As of September 30, 2023, there were no amounts outstanding under the Credit Agreement. -22- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The Credit Agreement contains financial maintenance covenants, including (i) a maximum total leverage ratio as of the last date of any fiscal quarter not to exceed 4.00 :1.00 for the Company and its restricted subsidiaries and (ii) a minimum interest coverage ratio as of the last date of any fiscal quarter not less than 3.00 :1.00 for the Company and its restricted subsidiaries. The Credit Agreement also contains restrictive covenants that limit, among other things, the Company’s and its restricted subsidiaries’ ability to incur additional indebtedness, create, incur or assume liens, consolidate, merge, liquidate or dissolve, pay dividends or make other distributions or other restricted payments, make or hold any investments, enter into certain transactions with affiliates, sell assets other than on terms specified by the Credit Agreement, amend the terms of certain other indebtedness and organizational documents, and change their lines of business and fiscal years, in each case, subject to customary exceptions. The Credit Agreement also sets forth customary events of default, including, among other things, the failure to make timely payments under the Credit Facility, the failure to satisfy certain covenants, cross-default and cross-acceleration to other material debt for borrowed money, the occurrence of a change of control, and specified events of bankruptcy and insolvency. The Company is in compliance with its debt covenants for the Credit Agreement as of September 30, 2023. Debt-for-Equity Exchange On June 10, 2022 (the “Term Loan Funding Date”), the Company entered into a Fifth Amendment to its Credit Agreement with MUFG Union Bank, N.A, as administrative agent and collateral agent and the lenders party thereto to effectuate a debt-for-equity exchange. The Fifth Amendment to the Credit Agreement provided for the issuance of senior secured term loans under the Credit Agreement (the “Term Loan Facility”), in an aggregate principal amount of $ 90.0 million. The Term Loan Facility had a maturity date that was 60 days after the Term Loan Funding Date. The Term Loan Facility bore interest at a base rate equal to the greater of (x) the Federal Funds Effective Rate, as defined in the Credit Agreement, in effect on such day plus 0.5 % per annum, (y) the rate of interest per annum most recently announced by the Agent, as defined in the Credit Agreement, as its U.S. Dollar "Reference Rate" and (z) one month LIBOR plus 1 %, provided that the base rate for any term loan made under the Credit Agreement shall be greater of clause (x) and (y) above in each case. On September 15, 2022 (the “Term Loan Two Funding Date”), the Company entered into a Sixth Amendment to its Credit Agreement with MUFG Union Bank, N.A, as administrative agent and collateral agent and the lenders party thereto to effectuate a second debt-for-equity exchange. The Sixth Amendment to the Credit Agreement provided for the Term Loan Two Facility (together with the Term Loan Facility, the “Facilities”) in an aggregate principal amount of approximately $ 22.3 million and certain other changes to the Credit Agreement. The Term Loan Two Facility had a maturity date that was 60 days after the Term Loan Two Funding Date. The Term Loan Two Facility bore interest at a base rate equal to the greater of (x) the Federal Funds Effective Rate, as defined in the Credit Agreement, in effect on such day plus 0.5 % per annum, (y) the rate of interest per annum most recently announced by the Agent, as defined in the Credit Agreement, as its U.S. Dollar "Reference Rate" and (z) one month LIBOR plus 1.0 %, provided that the base rate for any term loan made under the Credit Agreement shall be greater of clause (x) and (y) above in each case. During the three and nine months ended September 30, 2022, the Company borrowed approximately $ 22.3 million and $ 112.3 million, respectively, under the Facilities and completed the non-cash debt-for-equity exchange of 500,000 shares and 2,800,000 shares, respectively, of its common stock of Consensus to settle its obligation of $ 22.3 million and $ 112.3 million, respectively, outstanding aggregate principal amount of the Term Loan Facility plus an immaterial amount of interest. During the three and nine months ended September 30, 2022, the Company recorded a loss on extinguishment of debt of approximately $ 0.1 million and $ 0.6 million, respectively, related to the debt-for-equity exchange, which is presented within ‘Gain on debt extinguishment, net’ on our Condensed Consolidated Statements of Operations. 8. Commitments and Contingencies Litigation From time to time, the Company and its affiliates are involved in litigation and other legal disputes or regulatory inquiries that arise in the ordinary course of business. Any claims or regulatory actions against the Company and its affiliates, whether meritorious or not, could be time consuming and costly, and could divert significant operational resources. The outcomes of such matters are subject to inherent uncertainties, carrying the potential for unfavorable rulings that could include monetary damages and injunctive relief. On July 8, 2020, Jeffrey Garcia filed a putative class action lawsuit against the Company in the Central District of California (20-cv-06096), alleging violations of federal securities laws. The court appointed a lead plaintiff. The Company moved to dismiss the consolidated class action complaint. The court granted the motion to dismiss and the plaintiff filed an amended complaint. The Company moved to dismiss the amended complaint. On August 8, 2022, the court granted the Company’s motion to dismiss the amended complaint without leave to amend. The lead plaintiff has filed a notice of appeal and the matter is pending on appeal. -23- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued On September 24, 2020, International Union of Operating Engineers of Eastern Pennsylvania and Delaware filed a lawsuit in the Delaware Court of Chancery (C.A. No. 2020-0819-VCL) asserting derivative claims for breach of fiduciary duty and related theories against directors of the Company and other third parties relating generally to the investment by the Company in OCV Fund I, L.P. (the “Chancery Court Derivative Action”). On November 17, 2020, the court entered an order allowing Orlando Police Pension Fund to intervene as a plaintiff in the case. The parties reached an agreement to settle the lawsuit, which required court approval. On July 29, 2021, the parties filed a stipulation of settlement that provided the terms of the settlement and began the settlement approval process with the Court. On January 20, 2022 the court approved the settlement. Among other terms of the settlement, no further management fees will be charged and no further capital calls will be made in connection with the Company’s investment in OCV Fund I, L.P. On December 11, 2020, Danning Huang filed a lawsuit in the District of Delaware (20-cv-01687-LPS) asserting derivative claims against directors of the Company and other third parties. The lawsuit alleges violations of Section 14(a), Section 10(b), Section 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as well as breach of fiduciary duty, unjust enrichment and abuse of control. On March 24, 2021, Fritz Ringling filed a lawsuit in the District of Delaware (21-cv-00421-UNA) asserting substantially similar derivative claims, and on April 8, 2021, the district court consolidated the two actions under the caption In re J2 Global Stockholder Derivative Litigation. No.: 20-cv-01687-LPS. As part of the settlement of the Chancery Court Derivative Action described above, the Company and its directors and officers intend to defend against the remaining claims in other actions. The Company does not believe, based on current knowledge, that the foregoing legal proceedings or claims, after giving effect to existing accrued liabilities, are likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could have a material effect on the Company’s consolidated financial position, results of operations, or cash flows in a particular period. The Company has not accrued for any material loss contingencies relating to these legal proceedings because materially unfavorable outcomes are not considered probable by management. It is the Company’s policy to expense as incurred legal fees related to various litigations. Non-Income Related Taxes The Company does not collect and remit sales and use, telecommunication, or similar taxes and fees in certain jurisdictions where the Company believes such taxes are not applicable or legally required. Several states and other taxing jurisdictions have presented or threatened the Company with assessments, alleging that the Company is required to collect and remit such taxes there. The Company is currently under audit or is subject to audit for indirect taxes in various states, municipalities, and foreign jurisdictions. The Company recognizes a liability for these matters when it is probable that an obligation exists and the amount can be reasonably estimated based on all relevant information that is available at each reporting period. The Company established reserves for these matters of $ 25.5 million and $ 25.5 million as of September 30, 2023 and December 31, 2022, respectively, which are included within ‘Accounts payable’ and ‘Other long-term liabilities’ on the Company’s Condensed Consolidated Balance Sheet. It is reasonably possible that additional liabilities could be incurred resulting in additional expense, which could have a material impact to our financial results. 9. Income Taxes The Company’s tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate adjusted for discrete interim period tax impacts. Each quarter the Company updates its estimated annual effective tax rate and, if the estimate changes, makes a cumulative adjustment. The Company’s effective tax rate was ( 20.7 )% and 45.9 % for the three months ended September 30, 2023 and 2022, respectively and ( 1,040.8 )% and 83.9 % for the nine months ended September 30, 2023 and 2022, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2023 was disproportionately impacted by the goodwill impairment of $ 56.9 million. No corresponding tax benefit was recorded on the impairment charge since it entirely related to excess financial statement goodwill with no tax basis. During the three and nine months ended September 30, 2022 the Company’s effective tax rate was impacted due to the Company recording a deferred tax liability and corresponding tax expense of $ 11.3 million related to its investment in Consensus since the Company did not dispose of the shares within the one-year anniversary of the Separation. The increase to -24- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued tax expense was partially offset by a tax benefit of $ 6.7 million for recording a deferred tax asset on the impairment of goodwill recorded during the three and nine months ended September 30, 2022. As of September 30, 2023 and December 31, 2022, the Company had $ 41.4 million and $ 40.4 million, respectively, in liabilities for uncertain income tax positions included within ‘Other long-term liabilities’ on the Condensed Consolidated Balance Sheets. Accrued interest and penalties related to unrecognized tax benefits are recognized in income tax expense on the Company’s Condensed Consolidated Statement of Operations. Certain taxes are prepaid during the year and, where appropriate, included within ‘Prepaid expenses and other current assets’ on the Condensed Consolidated Balance Sheets. The Company’s prepaid taxes were $ 0.2 million and $ 3.2 million as of September 30, 2023 and December 31, 2022, respectively. 10. Stockholders’ Equity On August 6, 2020, the Company’s Board of Directors approved a program authorizing the repurchase of up to ten million shares of our common stock through August 6, 2025 (the “2020 Program”). The Company entered into certain Rule 10b5-1 trading plans to execute repurchases under the 2020 Program. During the three months ended September 30, 2023 and 2022, the Company repurchased 605,428 and zero shares, respectively, under the 2020 Program, at an aggregate cost of approximately $ 41.0 million and zero , respectively (including excise tax). During the nine months ended September 30, 2023 and 2022, the Company repurchased 1,585,846 and 736,536 shares, respectively, under the 2020 Program, at an aggregate cost of approximately $ 104.9 million and $ 71.3 million, respectively (including excise tax). Cumulatively as of September 30, 2023, 5,258,692 shares were repurchased under the 2020 Program, at an aggregate cost of $ 401.8 million (including excise tax). As a result of the repurchases, the number of shares of the Company’s common stock available for purchase as of September 30, 2023 was 4,741,308 shares. The Company accounts for share repurchases on a trade date basis by allocating cost in excess of par value between retained earnings and additional paid-in capital. The repurchased shares are constructively retired and returned to an authorized but unissued status. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022, which imposed a 1.0% excise tax on share repurchases made after December 31, 2022. As a result, the Company accrued excise tax in connection with the share repurchases it completed during the three and nine months ended September 30, 2023. Periodically, participants in the Company’s stock plans surrender to the Company shares of stock to pay the exercise price or to satisfy tax withholding obligations arising upon the exercise of stock options or the vesting of restricted stock. During the three months ended September 30, 2023 and 2022, the Company purchased and retired 9,479 and 2,601 shares at an aggregate cost of approximately $ 0.2 million and $ 0.2 million, resp ectively, from plan participants for this purpose. During the nine months ended September 30, 2023 and 2022, the Company purchased and retired 51,354 and 52,837 shares at an aggregate cost of approximately $ 3.5 million and $ 5.2 million , respectively, from plan participants for this purpose. 11. Share-Based Compensation The Company’s share-based compensation plans include the 2015 Stock Option Plan (the “2015 Plan”) and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below. The 2015 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units, and other share-based awards. 4,200,000 shares of the Company’s common stock are authorized to be used for 2015 Plan purposes. Options under the 2015 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the higher of the par value or 100 % of the fair market value of the Company’s common stock subject to the option on the date the option is granted. As of September 30, 2023, 435,135 shares underlying options and 818,106 shares of restricted stock units were outstanding under the 2015 Plan. At September 30, 2023, there were 1,069,488 additional shares underlying options, shares of restricted stock and other share-based awards available for grant under the 2015 Plan. -25- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Share-Based Compensation Expense The following table presents the effects of share-based compensation expense in the Condensed Consolidated Statements of Operations during the periods presented (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Cost of revenues $ 76 $ 63 $ 246 $ 289 Sales and marketing 323 772 2,285 2,447 Research, development, and engineering 840 567 2,581 2,048 General and administrative 5,535 4,984 19,281 16,022 Total share-based compensation expense $ 6,774 $ 6,386 $ 24,393 $ 20,806 Restricted Stock The Company has awarded restricted stock and restricted stock units to its Board of Directors and senior staff pursuant to certain share-based compensation plans. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over the applicable vesting period. Vesting periods are approximately one year for awards to members of the Company’s Board of Directors, four or five years for senior staff (excluding market-based awards discussed below) and four to eight years for the Chief Executive Officer. The Company granted 296,705 and 152,982 shares of restricted stock and restricted units (excluding awards with market conditions below) during the nine months ended September 30, 2023 and 2022, respectively. The Company has awarded certain key employees market-based restricted stock and market-based restricted stock units pursuant to the 2015 Plan. The market-based awards have vesting conditions that are based on specified stock price targets of the Company’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets with a 20 -day and 30 -day lookback (trading days). Share-based compensation expense related to an award with a market condition will be recognized over the requisite service period using the graded-vesting method regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. During the nine months ended September 30, 2023, the Company awarded 167,606 market-based restricted stock units at stock price targets ranging from $ 83.61 to $ 103.76 per share. During the nine months ended September 30, 2022, the Company awarded 100,193 market-based restricted stock units at stock price targets ranging from $ 107.97 to $ 138.73 per share. The per share weighted average grant-date fair values of the market-based restricted stock units granted during the nine months ended September 30, 2023 and 2022 were $ 70.07 and $ 87.11 , respectively. The weighted-average fair values of market-based restricted stock units granted have been estimated utilizing the following assumptions: September 30, 2023 September 30, 2022 Underlying stock price at valuation date $ 77.80 $ 99.32 Expected volatility 32.0 % 36.7 % Risk-free interest rate 4.1 % 1.8 % Restricted stock award activity for the nine months ended September 30, 2023 is set forth below: Shares Weighted-Average Grant-Date Fair Value Nonvested at January 1, 2023 311,281 $ 52.73 Vested ( 51,154 ) $ 72.40 Canceled ( 322 ) $ 77.75 Nonvested at September 30, 2023 259,805 $ 48.82 -26- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Restricted stock unit activity for the nine months ended September 30, 2023 is set forth below: Number of Shares Aggregate Intrinsic Value Outstanding at January 1, 2023 464,354 Granted 464,311 Vested ( 73,701 ) Canceled ( 36,858 ) Outstanding at September 30, 2023 818,106 $ 52,105,171 Vested and expected to vest at September 30, 2023 749,680 $ 47,747,103 As of September 30, 2023, the Company had unrecognized share-based compensation cost of approximately $ 53.2 million associated with these restricted stock awards and restricted stock units. This cost is expected to be recognized over a weighted-average period of 2.1 years for restricted stock awards and 2.5 years for restricted stock units. Employee Stock Purchase Plan The Purchase Plan provides for the issuance of a maximum of two million shares of the Company’s common stock. Under the Purchase Plan, eligible employees can have up to 15 % of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company’s common stock at certain plan-defined dates. The price of the Company’s common stock purchased under the Purchase Plan for the offering periods is equal to 85 % of the lesser of the fair market value of a share of common stock of the Company on the beginning or the end of the offering period. The Company determined that a plan provision exists which allows for the more favorable of two exercise prices, commonly referred to as a “look-back” feature. The purchase price discount and the look-back feature cause the Purchase Plan to be compensatory and the Company to recognize compensation expense. The compensation cost is recognized on a straight-line basis over the requisite service period. The Company used the Black-Scholes option pricing model to calculate the estimated fair value of the purchase right issued under the Purchase Plan. The expected volatility is based on historical volatility of the Company’s common stock. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 12.7 % and 11.2 % as of September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, 87,098 and 76,741 shares were purchased under the Purchase Plan, respectively at a price of $ 54.25 and $ 68.22 per share, respectively. As of September 30, 2023, 1,068,601 shares were available under the Purchase Plan for future issuance. The shared-based compensation expense related to the Purchase Plan has been estimated utilizing the following weighted-average assumptions: September 30, 2023 September 30, 2022 Risk-free interest rate 4.7 % 1.5 % Expected term (in years) 0.5 0.5 Expected volatility 35.8 % 41.6 % -27- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 12. Earnings Per Share The components of basic and diluted earnings (loss) per share are as follows (in thousands, except share and per share data): Three months ended September 30, 2023 2022 Basic Diluted Basic Diluted Numerator for basic and diluted net (loss) income per common share: Net (loss) income $ ( 30,971 ) $ ( 30,971 ) $ 18,185 $ 18,185 Less: Net income available to participating securities (1) — — ( 4 ) ( 4 ) Plus: 1.75 % Convertible Notes interest expense (after-tax) — — — — Net (loss) income available to the Company’s common shareholders $ ( 30,971 ) $ ( 30,971 ) $ 18,181 $ 18,181 Denominator: Basic weighted-average outstanding shares of common stock 46,062,097 46,062,097 46,871,897 46,871,897 Diluted effect of: Equity incentive plans — — — — Convertible debt — — — — Diluted weighted-average outstanding shares of common stock 46,062,097 46,062,097 46,871,897 46,871,897 Net (loss) income per share $ ( 0.67 ) $ ( 0.67 ) $ 0.39 $ 0.39 (1) Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid). Nine months ended September 30, 2023 2022 Basic Diluted Basic Diluted Numerator for basic and diluted net loss per common share: Net loss $ ( 21,919 ) $ ( 21,919 ) $ ( 3,714 ) $ ( 3,714 ) Less: Net income available to participating securities (1) — — — — Plus: 1.75 % Convertible Notes interest expense (after-tax) — — — — Net loss available to the Company’s common shareholders $ ( 21,919 ) $ ( 21,919 ) $ ( 3,714 ) $ ( 3,714 ) Denominator: Basic weighted-average outstanding shares of common stock 46,612,660 46,612,660 46,967,671 46,967,671 Diluted effect of: Equity incentive plans — — — — Convertible debt — — — — Diluted weighted-average outstanding shares of common stock 46,612,660 46,612,660 46,967,671 46,967,671 Net loss per share $ ( 0.47 ) $ ( 0.47 ) $ ( 0.08 ) $ ( 0.08 ) (1) Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid). -28- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued For the three months ended September 30, 2023 and 2022, there were 1,512,611 and 1,278,330 shares, respectively, of stock options and restricted stock excluded from the calculation of diluted shares as they were anti-dilutive primarily due to the net loss during the 2023 period and the average stock price during the 2022 period. For the nine months ended September 30, 2023 and 2022, there were 1,512,611 and 1,278,330 shares, respectively, of stock options and restricted stock excluded from the calculation of diluted shares as they were anti-dilutive primarily due to the net loss during each period. For the three and nine months ended September 30, 2023 and 2022, 5,158,071 shares related to convertible debt were excluded from diluted shares because they were anti-dilutive under the if-converted method for the diluted net income per share calculation of convertible debt instruments. 13. Segment Information The Company’s businesses are based on the organizational structure used by the chief operating decision maker (“CODM”). The Company aggregates its operating segments into two reportable segments: Digital Media and Cybersecurity and Martech. The accounting policies of the businesses are the same as those described in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2023. The Company evaluates performance based on revenue and profit or loss from operations. Information on reportable segments and reconciliation to income from operations is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenue by reportable segment: Digital Media $ 267,951 $ 263,896 $ 755,032 $ 757,423 Cybersecurity and Martech 73,051 78,192 219,263 237,596 Elimination of inter-segment revenues ( 17 ) ( 215 ) ( 152 ) ( 722 ) Total revenues $ 340,985 $ 341,873 $ 974,143 $ 994,297 Operating costs and expenses by reportable segment (2) : Digital Media 280,856 236,579 702,752 653,363 Cybersecurity and Martech 60,541 64,362 181,633 198,861 Elimination of inter-segment operating expenses ( 17 ) ( 215 ) ( 152 ) ( 722 ) Total segment operating expenses 341,380 300,726 884,233 851,502 Corporate (1) 12,924 12,113 38,019 37,312 Total operating costs and expenses 354,304 312,839 922,252 888,814 Operating (loss) income by reportable segment: Digital Media operating (loss) income ( 12,905 ) 27,317 52,280 104,060 Cybersecurity and Martech operating income 12,510 13,830 37,630 38,735 Total segment operating (loss) income ( 395 ) 41,147 89,910 142,795 Corporate (1) ( 12,924 ) ( 12,113 ) ( 38,019 ) ( 37,312 ) (Loss) income from operations $ ( 13,319 ) $ 29,034 $ 51,891 $ 105,483 (1) Corporate includes costs associated with general and administrative and other expenses that are managed on a global basis and that are not directly attributable to any particular segment. (2) Operating expenses for each segment include cost of sales and other operating expenses that are directly attributable to the segment, such as employee compensation expense, local sales and marketing expenses, engineering and network operations expense, depreciation and amortization, and other administrative expenses. For the three and nine months ended September 30, 2023 and 2022, the Company had an impairment to goodwill within operating costs and expenses for Digital Media. -29- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 14. Supplemental Cash Flow Information Non-cash investing and financing activities were as follows (in thousands): Nine months ended September 30, 2023 2022 Non-cash investing activity: Property and equipment, accrued but unpaid $ 373 $ 184 Right-of-use assets acquired in exchange for operating lease obligations $ 1,282 $ 4,130 Purchase of equity investments with common stock $ 13,500 $ — Disposition of Consensus common stock (1) $ — $ 112,286 Non-cash financing activity: Debt principal settled in exchange for Consensus common stock (1) $ — $ 112,286 (1) During the nine months ended September 30, 2022, the Company disposed $ 160.1 million of its investment in Consensus common stock in exchange for $ 112.3 million of debt and recorded $ 47.8 million of Loss on investment, net. Supplemental data (in thousands): Nine months ended September 30, 2023 2022 Interest paid $ 22,395 $ 20,718 Income taxes paid, net of refunds $ 47,001 $ 31,632 15. Accumulated Other Comprehensive (Loss) Income The following table summarizes the changes in accumulated balances of other comprehensive loss, net of tax, for the three months ended September 30, 2023 (in thousands): Unrealized Gains (Losses) on Investments Foreign Currency Translation Total Balance as of July 1, 2023 $ 52 $ ( 79,633 ) $ ( 79,581 ) Other comprehensive income (loss), net of tax 309 ( 6,841 ) ( 6,532 ) Balance as of September 30, 2023 $ 361 $ ( 86,474 ) $ ( 86,113 ) The following table summarizes the changes in accumulated balances of other comprehensive loss, net of tax, for the nine months ended September 30, 2023 (in thousands): Unrealized Gains (Losses) on Investments Foreign Currency Translation Total Balance as of January 1, 2023 $ 441 $ ( 85,814 ) $ ( 85,373 ) Other comprehensive loss, net of tax ( 80 ) ( 660 ) ( 740 ) Balance as of September 30, 2023 $ 361 $ ( 86,474 ) $ ( 86,113 ) There were no reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2023 and 2022, respectively. -30- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 16. Related Party Transactions Consensus As of September 30, 2023 and December 31, 2022, the Company held approximately 1.0 million and 1.1 million shares of the common stock of Consensus, respectively, representing approximately 5 % of the Consensus outstanding common stock. The Company determined that Consensus was no longer a related party after September 30, 2022. Related party transactions with Consensus through September 30, 2022 are included within the disclosures below. In preparation for and in executing the Separation, the Company incurred transaction-related costs, some of which were, reimbursed by Consensus. These transaction costs primarily related to professional fees associated with preparation of regulatory filings and transaction execution and separation activities within finance, tax, and legal functions. In connection with the Separation, Ziff Davis and Consensus entered into several agreements that govern the relationship of the parties following the Separation, including a separation and distribution agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property license agreement, and a stockholder and registration rights agreement. The transition services agreement governs services including certain information technology services, finance and accounting services, and human resource and employee benefit services. The agreed-upon charges for such services are generally intended to allow the providing company to recover all costs and expenses of providing such services, and nearly all such services were terminated without extension twelve months after the Separation. During the three and nine months ended September 30, 2022, the Company recorded an offset to expense of approximately zero and $ 1.2 million, respectively, from Consensus related to the transition services agreement within ‘General and administrative expenses’ within the Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2022, Consensus paid the Company approximately $ 7.2 million and $ 18.7 million, respectively, related to reimbursement of the items described above. Further, the Company assigned its lease of office space in Los Angeles, California to Consensus. Ziff Davis remained the lessee under this lease and its obligations remained in place through October 7, 2022, after which time Consensus took over the lease in full. During the three and nine months ended September 30, 2022, the Company recorded an offset to lease expense of approximately $ 0.5 million and $ 1.5 million, respectively, related to this lease, however, Consensus paid the landlord directly (other than an immaterial amount of sublease payments from Ziff Davis to Consensus). OCV OCV is considered a related party because it is an investment that is accounted for by the equity method. On September 25, 2017, the Company entered into a commitment to invest in the OCV Fund. During both of the three months ended September 30, 2023 and 2022, the Company recognized expense for management fees of zero . During the nine months ended September 30, 2023 and 2022, the Company recognized expense for management fees of zero and $ 1.5 million, net of tax benefit, respectively. As a result of the settlement of certain litigation in 2022, no further management fees will be paid by the Company to the manager of the OCV Fund. During both the nine months ended September 30, 2023 and 2022, the Company received no distributions from OCV. -31-