ZIFF DAVIS, INC. - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25965
![jcom-20210930_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001084048/000108404821000069/jcom-20210930_g1.jpg)
ZIFF DAVIS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 47-1053457 | ||||
(State or other jurisdiction | (I.R.S. Employer | ||||
of incorporation or organization) | Identification No.) |
114 5th Avenue
New York, New York 10011
(Address of principal executive offices)
(212) 503-3500
(Registrant’s telephone number, including area code)
J2 Global, Inc., 700 S. Flower Street, 15th Floor, Los Angeles, California 90017
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, $0.01 par value | ZD | Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | o | Non-Accelerated filer | o | Smaller reporting company | ☐ | ||||||||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
As of November 5, 2021, the registrant had 48,220,791 shares of common stock outstanding.
ZIFF DAVIS, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED SEPTEMBER 30, 2021
INDEX
PAGE | |||||||||||
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share and per share data)
September 30, 2021 | December 31, 2020 | ||||||||||
ASSETS | |||||||||||
Cash and cash equivalents | $ | 546,467 | $ | 242,652 | |||||||
Short-term investments | — | 663 | |||||||||
Accounts receivable, net of allowances of $14,417 and $16,018, respectively | 268,349 | 325,619 | |||||||||
Prepaid expenses and other current assets | 73,457 | 53,909 | |||||||||
Total current assets | 888,273 | 622,843 | |||||||||
Long-term investments | 110,718 | 97,495 | |||||||||
Property and equipment, net | 183,179 | 156,577 | |||||||||
Operating lease right-of-use assets | 88,331 | 105,845 | |||||||||
Trade names, net | 178,322 | 187,902 | |||||||||
Customer relationships, net | 301,897 | 377,194 | |||||||||
Goodwill | 1,861,332 | 1,867,430 | |||||||||
Other purchased intangibles, net | 160,943 | 176,473 | |||||||||
Deferred income taxes, noncurrent | 37,761 | 56,545 | |||||||||
Other assets | 19,901 | 17,027 | |||||||||
TOTAL ASSETS | $ | 3,830,657 | $ | 3,665,331 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Accounts payable and accrued expenses | $ | 228,977 | $ | 230,651 | |||||||
Income taxes payable, current | 1,793 | 31,753 | |||||||||
Deferred revenue, current | 197,901 | 190,644 | |||||||||
Operating lease liabilities, current | 31,636 | 32,211 | |||||||||
Current portion of long-term debt | 568,054 | 396,801 | |||||||||
Other current liabilities | 36 | 497 | |||||||||
Total current liabilities | 1,028,397 | 882,557 | |||||||||
Long-term debt | 1,110,699 | 1,182,220 | |||||||||
Deferred revenue, noncurrent | 15,189 | 14,440 | |||||||||
Operating lease liabilities, noncurrent | 84,519 | 99,177 | |||||||||
Income taxes payable, noncurrent | 11,675 | 11,675 | |||||||||
Liability for uncertain tax positions | 54,178 | 57,081 | |||||||||
Deferred income taxes, noncurrent | 112,482 | 162,700 | |||||||||
Other long-term liabilities | 44,259 | 44,463 | |||||||||
TOTAL LIABILITIES | 2,461,398 | 2,454,313 | |||||||||
Commitments and contingencies | — | — | |||||||||
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 47,825,827 and 44,346,630 shares at September 30, 2021 and December 31, 2020, respectively. | 478 | 443 | |||||||||
Additional paid-in capital | 508,493 | 456,274 | |||||||||
Retained earnings | 931,477 | 809,107 | |||||||||
Accumulated other comprehensive loss | (71,189) | (54,806) | |||||||||
TOTAL STOCKHOLDERS’ EQUITY | 1,369,259 | 1,211,018 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,830,657 | $ | 3,665,331 |
See Notes to Condensed Consolidated Financial Statements
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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, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Total revenues | $ | 444,252 | $ | 356,976 | $ | 1,271,480 | $ | 1,020,353 | |||||||||||||||
Cost of revenues (1) | 64,302 | 55,822 | 185,462 | 171,755 | |||||||||||||||||||
Gross profit | 379,950 | 301,154 | 1,086,018 | 848,598 | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Sales and marketing (1) | 139,693 | 95,074 | 394,981 | 287,317 | |||||||||||||||||||
Research, development and engineering (1) | 21,639 | 14,261 | 62,634 | 43,273 | |||||||||||||||||||
General and administrative (1) | 122,477 | 114,381 | 359,498 | 312,283 | |||||||||||||||||||
Goodwill impairment on business | — | — | 32,629 | — | |||||||||||||||||||
Total operating expenses | 283,809 | 223,716 | 849,742 | 642,873 | |||||||||||||||||||
Income from operations | 96,141 | 77,438 | 236,276 | 205,725 | |||||||||||||||||||
Interest expense, net | (19,862) | (22,712) | (62,832) | (65,879) | |||||||||||||||||||
(Loss) gain on sale of businesses | (24,600) | 17,122 | (21,798) | 17,122 | |||||||||||||||||||
Loss on investments, net | — | (156) | (16,677) | (20,991) | |||||||||||||||||||
Other income, net | 1,660 | 14,230 | 1,367 | 16,413 | |||||||||||||||||||
Income before income taxes and (loss) income from equity method investment, net | 53,339 | 85,922 | 136,336 | 152,390 | |||||||||||||||||||
Income tax expense | 8,847 | 24,330 | 16,723 | 49,011 | |||||||||||||||||||
(Loss) income from equity method investment, net | (1,923) | (709) | 16,596 | (10,799) | |||||||||||||||||||
Net income | $ | 42,569 | $ | 60,883 | $ | 136,209 | $ | 92,580 | |||||||||||||||
Net income per common share: | |||||||||||||||||||||||
Basic | $ | 0.91 | $ | 1.31 | $ | 3.01 | $ | 1.96 | |||||||||||||||
Diluted | $ | 0.88 | $ | 1.31 | $ | 2.86 | $ | 1.93 | |||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||
Basic | 46,738,073 | 46,279,515 | 45,258,819 | 46,914,750 | |||||||||||||||||||
Diluted | 48,582,585 | 46,309,072 | 47,565,062 | 47,620,308 | |||||||||||||||||||
(1) Includes share-based compensation expense as follows: | |||||||||||||||||||||||
Cost of revenues | $ | 108 | $ | 136 | $ | 357 | $ | 413 | |||||||||||||||
Sales and marketing | 427 | 321 | 1,160 | 1,135 | |||||||||||||||||||
Research, development and engineering | 613 | 425 | 1,690 | 1,340 | |||||||||||||||||||
General and administrative | 5,607 | 4,918 | 15,912 | 15,755 | |||||||||||||||||||
Total | $ | 6,755 | $ | 5,800 | $ | 19,119 | $ | 18,643 |
See Notes to Condensed Consolidated Financial Statements
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ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net income | $ | 42,569 | $ | 60,883 | $ | 136,209 | $ | 92,580 | |||||||||||||||
Other comprehensive loss, net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustment | (11,101) | (3,202) | (16,269) | (12,085) | |||||||||||||||||||
Change in fair value on available-for-sale investments, net of tax expense of $37 for the three and nine months ended September 30, 2021, respectively, and $141 and $314 for the three and nine months ended September 30, 2020, respectively. | (114) | 8 | (114) | 553 | |||||||||||||||||||
Other comprehensive loss, net of tax | (11,215) | (3,194) | (16,383) | (11,532) | |||||||||||||||||||
Comprehensive income | $ | 31,354 | $ | 57,689 | $ | 119,826 | $ | 81,048 |
See Notes to Condensed Consolidated Financial Statements
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ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended September 30, | |||||||||||
Cash flows from operating activities: | 2021 | 2020 | |||||||||
Net income | $ | 136,209 | $ | 92,580 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 196,443 | 163,680 | |||||||||
Amortization of financing costs and discounts | 21,295 | 21,393 | |||||||||
Non-cash operating lease costs | 8,366 | 15,686 | |||||||||
Share-based compensation | 19,119 | 18,643 | |||||||||
Provision for doubtful accounts | 7,934 | 9,508 | |||||||||
Deferred income taxes, net | 2,537 | 7,815 | |||||||||
Loss (gain) on sale of businesses | 21,798 | (17,122) | |||||||||
Lease asset impairments | 9,410 | 9,786 | |||||||||
Goodwill impairment on business | 32,629 | — | |||||||||
Changes in fair value of contingent consideration | (567) | (243) | |||||||||
Foreign currency remeasurement gain | 181 | (15,919) | |||||||||
(Income) loss from equity method investments | (16,596) | 10,799 | |||||||||
Loss on equity and debt investments | 16,677 | 20,826 | |||||||||
Decrease (increase) in: | |||||||||||
Accounts receivable | 49,888 | 57,560 | |||||||||
Prepaid expenses and other current assets | (10,610) | (3,279) | |||||||||
Other assets | (2,378) | 543 | |||||||||
Increase (decrease) in: | |||||||||||
Accounts payable and accrued expenses | (1,409) | (26,430) | |||||||||
Income taxes payable | (37,863) | (496) | |||||||||
Deferred revenue | 4,774 | (10,494) | |||||||||
Operating lease liabilities | (19,346) | (12,857) | |||||||||
Liability for uncertain tax positions | (2,903) | 7,746 | |||||||||
Other long-term liabilities | (5,336) | 6,284 | |||||||||
Net cash provided by operating activities | 430,252 | 356,009 | |||||||||
Cash flows from investing activities: | |||||||||||
Proceeds on sale of available-for-sale investments | 663 | — | |||||||||
Distribution from equity method investment | 15,327 | — | |||||||||
Purchases of equity method investment | (22,249) | (29,979) | |||||||||
Purchases of equity investments | (999) | (843) | |||||||||
Purchases of property and equipment | (87,495) | (71,266) | |||||||||
Proceeds from sale of assets | — | 507 | |||||||||
Acquisition of businesses, net of cash received | (112,444) | (27,156) | |||||||||
Proceeds from sale of businesses, net of cash divested | 48,876 | 24,353 | |||||||||
Purchases of intangible assets | (1,255) | (2,902) | |||||||||
Net cash used in investing activities | (159,576) | (107,286) | |||||||||
Cash flows from financing activities: | |||||||||||
Payment of debt | (402,414) | — | |||||||||
Payment of note payable | — | (400) | |||||||||
Proceeds from bridge loan | 485,000 | — | |||||||||
Repurchase of common stock | (29,855) | (238,905) | |||||||||
Issuance of common stock under employee stock purchase plan | 4,232 | 3,303 | |||||||||
Exercise of stock options | 2,880 | 952 | |||||||||
Deferred payments for acquisitions | (13,387) | (20,427) |
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Other | (6,619) | (1,377) | |||||||||
Net cash provided by (used in) financing activities | 39,837 | (256,854) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (6,698) | 446 | |||||||||
Net change in cash and cash equivalents | 303,815 | (7,685) | |||||||||
Cash and cash equivalents at beginning of period | 242,652 | 575,615 | |||||||||
Cash and cash equivalents at end of period | $ | 546,467 | $ | 567,930 |
See Notes to Condensed Consolidated Financial Statements
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ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three and Nine Months Ended September 30, 2020 and 2021
(unaudited, in thousands, except share amounts)
Accumulated | ||||||||||||||||||||
Common stock | Additional paid-in | Retained | other comprehensive | Total Stockholders’ | ||||||||||||||||
Shares | Amount | capital | earnings | loss | Equity | |||||||||||||||
Balance, July 1, 2020 | 46,892,691 | $ | 469 | $ | 467,267 | $ | 850,232 | $ | (54,800) | $ | 1,263,168 | |||||||||
Net income (loss) | — | — | — | 60,883 | — | 60,883 | ||||||||||||||
Other comprehensive income, net of tax expense of $141 | — | — | — | — | (3,194) | (3,194) | ||||||||||||||
Vested restricted stock | 19,893 | — | — | — | — | — | ||||||||||||||
Repurchase and retirement of common stock | (2,145,243) | (21) | (21,442) | (128,973) | — | (150,436) | ||||||||||||||
Share based compensation | — | — | 5,800 | — | — | 5,800 | ||||||||||||||
Other, net | — | — | 116 | — | — | 116 | ||||||||||||||
Balance, September 30, 2020 | 44,767,341 | $ | 448 | $ | 451,741 | $ | 782,142 | $ | (57,994) | $ | 1,176,337 |
Accumulated | ||||||||||||||||||||
Common stock | Additional paid-in | Retained | other comprehensive | Total Stockholders’ | ||||||||||||||||
Shares | Amount | capital | earnings | loss | Equity | |||||||||||||||
Balance, July 1, 2021 | 44,708,235 | $ | 447 | $ | 461,422 | $ | 892,605 | $ | (59,974) | $ | 1,294,500 | |||||||||
Net income | — | — | — | 42,569 | — | 42,569 | ||||||||||||||
Other comprehensive income, net of tax expense of $37 | — | — | — | — | (11,215) | (11,215) | ||||||||||||||
Exercise of stock options | 23,250 | — | 1,549 | — | — | 1,549 | ||||||||||||||
Redemption of 3.25% Convertible Note including tax impact | 3,031,817 | 31 | 44,192 | — | — | 44,223 | ||||||||||||||
Vested restricted stock | 112,166 | 1 | (1) | — | — | — | ||||||||||||||
Repurchase and retirement of common stock | (49,641) | (1) | (3,035) | (3,885) | — | (6,921) | ||||||||||||||
Share based compensation | — | — | 6,755 | — | — | 6,755 | ||||||||||||||
Other, net | — | — | (2,389) | 188 | — | (2,201) | ||||||||||||||
Balance, September 30, 2021 | 47,825,827 | $ | 478 | $ | 508,493 | $ | 931,477 | $ | (71,189) | $ | 1,369,259 |
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Accumulated | ||||||||||||||||||||
Common stock | Additional paid-in | Retained | other comprehensive | Total Stockholders’ | ||||||||||||||||
Shares | Amount | capital | earnings | loss | Equity | |||||||||||||||
Balance, January 1, 2020 | 47,654,929 | $ | 476 | $ | 465,652 | $ | 891,526 | $ | (46,462) | $ | 1,311,192 | |||||||||
Net income | — | — | — | 92,580 | — | 92,580 | ||||||||||||||
Other comprehensive income, net of tax expense of $314 | — | — | — | — | (11,532) | (11,532) | ||||||||||||||
Exercise of stock options | 41,530 | — | 1,583 | (631) | — | 952 | ||||||||||||||
Issuance of shares under employee stock purchase plan | 53,694 | — | 3,303 | — | — | 3,303 | ||||||||||||||
Vested restricted stock | 267,894 | 3 | (3) | — | — | — | ||||||||||||||
Redemption of 3.25% Convertible Note including tax impact | — | — | (12) | — | — | (12) | ||||||||||||||
Repurchase and retirement of common stock | (3,250,706) | (31) | (37,541) | (201,333) | — | (238,905) | ||||||||||||||
Share based compensation | — | — | 18,643 | — | — | 18,643 | ||||||||||||||
Other, net | — | $ | — | $ | 116 | $ | — | $ | — | $ | 116 | |||||||||
Balance, September 30, 2020 | 44,767,341 | $ | 448 | $ | 451,741 | $ | 782,142 | $ | (57,994) | $ | 1,176,337 |
Accumulated | ||||||||||||||||||||
Common stock | Additional paid-in | Retained | other comprehensive | Total Stockholders’ | ||||||||||||||||
Shares | Amount | capital | earnings | loss | Equity | |||||||||||||||
Balance, January 1, 2021 | 44,346,630 | $ | 443 | $ | 456,274 | $ | 809,107 | $ | (54,806) | $ | 1,211,018 | |||||||||
Net income | — | — | — | 136,209 | — | 136,209 | ||||||||||||||
Other comprehensive income, net of tax expense of $37 | — | — | — | — | (16,383) | (16,383) | ||||||||||||||
Exercise of stock options | 68,601 | 1 | 2,879 | — | — | 2,880 | ||||||||||||||
Issuance of shares under employee stock purchase plan | 58,145 | 1 | 4,231 | — | — | 4,232 | ||||||||||||||
Redemption of 3.25% Convertible Note including tax impact | 3,050,850 | 31 | 44,191 | — | — | 44,222 | ||||||||||||||
Vested restricted stock | 546,684 | 5 | (5) | — | — | — | ||||||||||||||
Repurchase and retirement of common stock | (245,083) | (3) | (15,825) | (14,027) | — | (29,855) | ||||||||||||||
Share based compensation | — | — | 19,119 | — | — | 19,119 | ||||||||||||||
Other, net | — | — | (2,371) | 188 | — | (2,183) | ||||||||||||||
Balance, September 30, 2021 | 47,825,827 | $ | 478 | $ | 508,493 | $ | 931,477 | $ | (71,189) | $ | 1,369,259 |
See Notes to Condensed Consolidated Financial Statements
-9-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
1.Basis of Presentation
Description of Business
As of September 30, 2021, J2 Global, Inc., together with its subsidiaries (“J2 Global”, the “Company”, “our”, “us”, or “we”), was a leading provider of internet information and services. The Digital Media business specialized in the technology, shopping, gaming, and healthcare markets offering content, tools and services to consumers and businesses. The Cloud Services business provided cloud-based subscription services to consumers and businesses including cloud fax, cybersecurity, privacy and marketing technology.
On October 7, 2021, in connection with the spin-off of its cloud fax business described further below, the Company changed its name from J2 Global, Inc. to Ziff Davis, Inc. (“Ziff Davis”). Additionally, starting October 8, 2021, the Company’s common stock began trading under the stock symbol “ZD.”
The accompanying interim Condensed Consolidated Financial Statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying interim Condensed Consolidated Financial Statements are unaudited and 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”). Accordingly, they do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements although the Company believes that the disclosures made are adequate to make that information not misleading. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. It is suggested that these financial statements be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2020, included in our Annual Report (Form 10-K) filed with the SEC on March 1, 2021. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.
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.
Consensus, Inc. Spin-Off
On September 21, 2021, the Company announced that its Board of Directors approved its previously announced separation of the cloud fax business (the “Separation”) into an independent publicly traded company, Consensus Cloud Solutions, Inc. (“Consensus”). On October 7, 2021 (the “Distribution Date”), the Separation was completed and the Company transferred J2 Cloud Services, LLC to Consensus, Inc. who in turn transferred non-fax assets and liabilities back to Ziff Davis such that Consensus was left with the cloud fax business. The Separation was achieved through the Company’s distribution of 80.1% of the shares of Consensus common stock to holders of J2 Global common stock as of the close of business on October 1, 2021, the record date for the distribution. The Company’s stockholders of record received one share of Consensus common stock for every three shares of J2 Global’s common stock. On October 8, 2021, Consensus began trading on Nasdaq under the stock symbol “CCSI”. Ziff Davis, Inc. (formerly J2 Global, Inc.) retained a 19.9% interest in Consensus following the Separation.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, including judgments about investment classifications and the reported amounts of net revenue and expenses during the reporting period. The Company believes that its most significant estimates are those related to revenue recognition, valuation and impairment of investments, its assessment of ownership interests as variable interest entities and the related determination of consolidation, share-based compensation expense, fair value of assets acquired and liabilities assumed in connection with business combinations, long-lived and intangible asset impairment, contingent consideration, income taxes and contingencies
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and allowances for doubtful accounts. On an ongoing basis, management evaluates its estimates based on historical experience and on various other factors that the Company believes to be reasonable under the circumstances. Actual results could materially differ from those estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the novel coronavirus pandemic (“COVID-19”).
Allowances for Doubtful Accounts
The Company maintains an allowance for credit losses for accounts receivable, which is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expenses in the Condensed Consolidated Statements of Operations. The Company assesses collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when it identifies specific customers with known disputes or collectability issues. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status. It also considers customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data. On an ongoing basis, management evaluates the adequacy of these reserves.
Revenue Recognition
The Company recognizes revenue when the Company satisfies its obligation by transferring control of the goods or services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services (see Note 3 - Revenues).
Principal vs. Agent
The Company determines whether revenue should be reported on a gross or net basis by assessing whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as the principal in a transaction, the Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports revenue on a net basis. In determining whether the Company acts as the principal or an agent, the Company follows the accounting guidance under Topic 606 for principal-agent considerations and assesses: (i) if another party is involved in providing goods or services to the customer and (ii) whether the Company controls the specified goods or services prior to transferring control to the customer.
Sales Taxes
The Company has made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are (i) both imposed on and concurrent with a specific revenue-producing transaction and (ii) collected by the Company from a customer.
Investments
The Company accounts for its investments in debt securities in accordance with ASC Topic No. 320, Investments - Debt Securities (“ASC 320”). Debt investments are typically comprised of corporate debt securities, which it classifies as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses included in other comprehensive income. All debt securities are accounted for on a specific identification basis.
The Company’s available-for-sale debt securities are carried at an estimated fair value with any unrealized gains or losses, net of taxes, included in accumulated other comprehensive loss in stockholders’ equity. Available-for-sale debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on available-for-sale debt securities are recognized in loss on investments, net on our Condensed Consolidated Statements of Operations, and any remaining unrealized losses, net of taxes, are included in accumulated comprehensive loss in stockholders’ equity.
The Company accounts for its investments in equity securities in accordance with ASC Topic No. 321, Investments - Equity Securities (“ASC 321”) which requires the accounting for equity investments (other than those accounted for using the equity method of accounting) generally be measured at fair value for equity securities with readily determinable fair values. For equity securities without a readily determinable fair value that are not accounted for by the equity method, the Company measures the equity security using cost, less impairment, if any, and plus or minus observable price changes arising from
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orderly transactions in the same or similar investment from the same issuer. Any unrealized gains or losses will be reported in current earnings (see Note 5 - Investments).
The Company assesses whether an other-than-temporary impairment loss on an investment has occurred due to declines in fair value or other market conditions (see Note 5 - Investments).
Variable Interest Entities (“VIE”)
A VIE requires consolidation by the entity’s primary beneficiary. The Company evaluates its investments in entities in which it is involved to determine if the entity is a VIE and if so, whether it holds a variable interest and is the primary beneficiary. The Company has determined that it holds a variable interest in its investment as a limited partner in the OCV Fund I, LP (“OCV Fund”, “OCV” or the “Fund”). In determining whether the Company is deemed to be the primary beneficiary of the VIE, both of the following characteristics must be present:
a) the Company has the power to direct the activities of the VIE that most significantly impacts the VIEs economic performance (the power criterion); and
b) the Company has the obligation to absorb losses of the VIE, or the right to receive benefits of the VIE, that could potentially be significant to the VIE (the economic criterion).
The Company has concluded that, as a limited partner, although the obligation to absorb losses or the right to benefit from the gains is not insignificant, the Company does not have “power” over OCV because it does not have the ability to direct the significant decisions which impact the economics of OCV. The Company believes that the OCV general partner, as a single decision maker, holds the ability to make the decisions about the activities that most significantly impact the OCV Fund’s economic performance. As a result, the Company has concluded that it will not consolidate OCV, as it is not the primary beneficiary of the OCV Fund, and will account for this investment under the equity-method of accounting. See Note 5, “Investments”.
OCV qualifies as an investment company under ASC 946 - Financial Services, Investment Companies (“ASC 946”). Under ASC Topic 323, Investments - Equity Method and Joint Ventures, an investor that holds investments that qualify for specialized industry accounting for investment companies in accordance with ASC 946 should record its share of the earnings or losses, realized or unrealized, as reported by its equity method investees in the Condensed Consolidated Statements of Operations.
The Company recognizes its equity in the net earnings or losses relating to the investment in OCV on a one-quarter lag 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.
Impairment or Disposal of Long-Lived Assets
The Company accounts for long-lived assets, which include property and equipment, operating lease right-of-use assets and identifiable intangible assets with finite useful lives (subject to amortization), in accordance with the provisions of FASB ASC Topic No. 360, Property, Plant, and Equipment (“ASC 360”), which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to the expected undiscounted future net cash flows generated by the asset. If it is determined that the asset may not be recoverable, and if the carrying amount of an asset exceeds its estimated fair value, an impairment charge is recognized to the extent of the difference.
The Company assessed whether events or changes in circumstances have occurred that potentially indicate the carrying amount of long-lived assets may not be recoverable. During the three and nine months ended September 30, 2021, the Company recorded an impairment of certain operating right-of-use assets (see Note 10 - Leases). In the third quarter of 2020, the Company recorded impairment of certain operating right-of-use assets and associated property and equipment. (see Note 10 - Leases).
The Company classifies its long-lived assets to be sold as held for sale in the period (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being
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actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation expense on the asset. The Company assesses the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale.
Business Combinations and Valuation of Goodwill and Intangible Assets
The Company applies the acquisition method of accounting for business combinations in accordance with GAAP and uses estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets, including identifiable intangible assets, and liabilities acquired. Such estimates may be based on significant unobservable inputs and assumptions such as, but not limited to, revenue growth rates, gross margins, customer attrition rates, royalty rates, discount rates and terminal growth rate assumptions. The Company uses established valuation techniques and may engage reputable valuation specialists to assist with the valuations. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the acquisition method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trademarks and trade names, developed technologies and other intangible assets. Intangible assets subject to amortization are amortized over the period of estimated economic benefit ranging from 1 to 20 years and are included in general and administrative expenses on the Condensed Consolidated Statements of Operations. The Company evaluates its goodwill and indefinite-lived intangible assets for impairment pursuant to FASB ASC Topic No. 350, Intangibles - Goodwill and Other (“ASC 350”), which provides that goodwill and other intangible assets with indefinite lives are not amortized but tested annually for impairment or more frequently if the Company believes indicators of impairment exist. In connection with the annual impairment test for goodwill, the Company has the option to perform a qualitative assessment in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then it performs the impairment test upon goodwill. The impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of valuation. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized for the difference. In the second quarter of 2021, the Company recorded an impairment to goodwill associated with the plan to sell the Company’s B2B Backup business. This sale closed during the third quarter of 2021 (see Note 6 – Dispositions). No impairment was recorded in the third quarter of 2020. In the first quarter of 2021, the Company changed the annual goodwill impairment assessment date for the Cloud Services business from September 30 to October 1, as it determined this date is preferable, and concluded this was not a material change in accounting principal.
Contingent Consideration
Certain of the Company’s acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future income thresholds or other metrics. The contingent earn-out arrangements are based upon the Company’s valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved.
The fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, the Company estimates the fair value of contingent earn-out payments as part of the initial purchase price and records the estimated fair value of contingent consideration as a liability on the Condensed Consolidated Balance Sheets. The Company considers several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former shareholders of acquired companies that remain as key employees receive
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compensation other than contingent earn-out payments at a reasonable level compared with the compensation of the Company’s other key employees. The contingent earn-out payments are not affected by employment termination.
The Company measures the contingent earn-out liabilities in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy (see Note 7 - Fair Value Measurements). The Company may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation. This simulation uses a probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. Significant increases or decreases to these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and the amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in its Condensed Consolidated Statements of Cash Flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities.
The Company reviews and re-assesses the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of its contingent earn-out liabilities are reported in general and administrative expenses on the Condensed Consolidated Statements of Operations.
Income Taxes
The Company’s income is subject to taxation in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves for tax contingencies are established when the Company believes that certain positions might be challenged despite the Company’s belief that its tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
The Company accounts for income taxes in accordance with FASB ASC Topic No. 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax assets will not be realized. The valuation allowance is reviewed quarterly based upon the facts and circumstances known at the time. In assessing this valuation allowance, the Company reviews historical and future expected operating results and other factors, including its recent cumulative earnings experience, expectations of future taxable income by taxing jurisdiction and the carryforward periods available for tax reporting purposes, to determine whether it is more likely than not that deferred tax assets are realizable.
ASC 740 provides guidance on the minimum threshold that an uncertain income tax benefit is required to meet before it can be recognized in the financial statements and applies to all income tax positions taken by a company. ASC 740 contains a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. Uncertain income tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. The Company recognized accrued interest and penalties related to uncertain income tax positions in income tax expense on its Condensed Consolidated Statements of Operations.
In addition, on March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was enacted into law and provides for changes to various tax laws that impact businesses. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased
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limitations on qualified charitable contributions and technical corrections to tax depreciation methods for qualified improvement property.
The CARES Act also appropriated funds for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company did not seek to borrow any funds under the program. However, as a result of an acquisition that closed during the quarter ended December 31, 2020, the Company assumed outstanding PPP loans that had started the process of being forgiven prior to the closing of the acquisition. During the second quarter of 2021, the Company received approval from the SBA to forgive the entire amount of the outstanding PPP Loan. The amount forgiven did not have a significant impact to the Company’s financial statements.
The Company does not believe these provisions have a significant impact to our current and deferred income tax balances. The Company will benefit from the technical correction to tax depreciation related to qualified improvement property and has elected to defer income tax payments and employer side social security payments where eligible.
Share-Based Compensation
The Company accounts for share-based awards to employees and non-employees in accordance with the provisions of FASB ASC Topic No. 718, Compensation - Stock Compensation (“ASC 718”). Accordingly, the Company measures share-based compensation expense at the grant date, based on the fair value of the award, and recognizes the expense over the employee’s requisite service period using the straight-line method. The measurement of share-based compensation expense is based on several criteria, including but not limited to the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate, dividend rate and award cancellation rate. These inputs are subjective and are determined using management’s judgment. If differences arise between the assumptions used in determining share-based compensation expense and the actual factors, which become known over time, the Company may change the input factors used in determining future share-based compensation expense. Any such changes could materially impact the Company’s results of operations in the period in which the changes are made and in periods thereafter. The Company estimates the expected term based upon the historical exercise behavior of its employees.
Reclassifications
Certain prior year reported amounts have been reclassified to conform to the 2021 presentation.
2. Recent Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted this ASU in the first quarter of 2021 and has identified no material effect on its financial statements or disclosures.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investment - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the accounting for certain forward contracts and purchased options under Topic 815. This ASU identifies two main areas for improvement: (1) accounting for certain equity securities upon the application or discontinuation of the equity method of accounting and (2) scope considerations for forward contracts and purchased options on certain securities. The amendment states, as it is related to the first area of improvement, that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendment also states, as it is relates to forward contracts and purchased options on certain securities, an entity should consider certain criteria to determine the accounting for those forward contracts and purchased options. The Company adopted this ASU in the first quarter of 2021 and has identified no effect on its financial statements or disclosures.
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In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. LIBOR is expected to phased out by 2021. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU reduce the number of accounting models for convertible debt instruments and convertible preferred stock in order to simplify the accounting for convertible instruments and reduce complexity. In addition, it amends the guidance for scope exception surrounding derivatives for contracts in an entity’s own equity. In each case, the related guidance surrounding EPS has also been amended. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures.
In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. The amendments in this ASU improve the consistency of the codification and reorganize the guidance into appropriate sections providing less opportunities for disclosures to be missed. The amendments in this update do not change GAAP and are not expected to result in a significant change in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. The Company adopted this ASU in the first quarter of 2021 and has identified no effect on its financial statements or disclosures.
3.Revenues
Digital Media
Digital Media revenues are earned primarily from the delivery of advertising services, from subscriptions to services and information.
Revenue is earned from the delivery of advertising services on the Company’s owned and operated websites 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 are 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 recognized over time.
The Company generates Digital Media revenues through the license of certain assets to clients. Assets are licensed for clients’ use in their own promotional materials or otherwise. Such assets 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. Technology assets are also licensed to clients. 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.
The Company also generates Digital Media revenues from transactions involving the sale of perpetual software licenses, related software support and maintenance, hardware used in conjunction with its software, and other related services. Revenue is recognized for these software transactions with multiple performance obligations after (i) the Company has had an approved contract and is committed to perform the respective obligations and (ii) the Company 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.
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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. The Company is 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.
Cloud Services
The Company’s Cloud Services revenues substantially consist of monthly recurring subscription and usage-based fees, which are primarily paid in advance by credit card. The Company defers the portions of monthly, quarterly, semi-annually and annually recurring subscription and usage-based fees collected in advance of the satisfaction of performance obligations and recognizes them in the period earned.
Along with our numerous proprietary Cloud Services solutions, the Company also generates revenues by reselling various third-party solutions, primarily through our email security and online backup lines of business. These third-party solutions, along with our proprietary products, allow the Company to offer customers a variety of solutions to better meet their 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.
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Revenues from external customers classified by revenue source are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
Digital Media | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
Advertising (a) | $ | 198,794 | $ | 138,441 | $ | 574,465 | $ | 380,188 | ||||||||||||||||||
Subscription and licensing (a) | 52,010 | 44,423 | 145,935 | 121,028 | ||||||||||||||||||||||
Other (a) | 11,625 | 3,920 | 22,880 | 12,246 | ||||||||||||||||||||||
Total Digital Media revenues | $ | 262,429 | $ | 186,784 | $ | 743,280 | $ | 513,462 | ||||||||||||||||||
Cloud Services | ||||||||||||||||||||||||||
Subscription and licensing | $ | 182,087 | $ | 170,233 | $ | 528,699 | $ | 507,021 | ||||||||||||||||||
Other | 92 | 15 | 267 | 69 | ||||||||||||||||||||||
Total Cloud Services revenues | $ | 182,179 | $ | 170,248 | $ | 528,966 | $ | 507,090 | ||||||||||||||||||
Corporate | $ | — | $ | — | $ | — | $ | 1 | ||||||||||||||||||
Elimination of inter-segment revenues | (356) | (56) | (766) | (200) | ||||||||||||||||||||||
Total Revenues | $ | 444,252 | $ | 356,976 | $ | 1,271,480 | $ | 1,020,353 | ||||||||||||||||||
Timing of revenue recognition | ||||||||||||||||||||||||||
Point in time | $ | 13,606 | $ | 8,396 | $ | 30,669 | $ | 19,366 | ||||||||||||||||||
Over time | 430,646 | 348,580 | 1,240,811 | 1,000,987 | ||||||||||||||||||||||
Total | $ | 444,252 | $ | 356,976 | $ | 1,271,480 | $ | 1,020,353 |
(a) The Company reclassified approximately $3.2 million and $8.8 million of revenue during the three and nine months ended September 30, 2020, respectively, from ‘Subscription and licensing’ to ‘Advertising’ and reclassified approximately $1.7 million and $6.7 million during the three and nine months ended September 30, 2020, respectively, from “Subscription and licensing’ to ‘Other’ to conform with current period presentation. These reclassifications were made in order to separate games publishing revenue from traditional advertising revenue.
The Company has recorded $31.8 million and $29.0 million of revenue for the three months ended September 30, 2021 and 2020, respectively, and $161.2 million and $142.5 million of revenue for the nine months ended September 30, 2021 and 2020, respectively, which was previously included in the deferred revenue balance as of the beginning of each respective year.
As of September 30, 2021, the Company acquired $7.2 million in deferred revenue in connection with the Company’s business acquisitions (see Note 4 - Business Acquisitions) which are subject to purchase accounting adjustments.
Performance Obligations
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, revenues are allocated to each performance obligation based on its relative standalone selling price.
The Company satisfies its performance obligations within the Digital Media business upon delivery of services to its customers. In addition, the Company provides content to its advertising partners which the Company sells to its partners’ customer base and receives a revenue share based on the terms of the agreement.
The Company satisfies its performance obligations within the Cloud Services business upon delivery of services to its customers. Payment terms vary by type and location of our customers and the services offered. The term between invoicing and when payment is due is not significant. Due to the nature of the services provided, there are no obligations for returns.
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Significant Judgments
In determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is also required to determine the standalone selling price for each distinct performance obligation.
Performance Obligations Satisfied Over Time
The Company’s Digital Media business consists primarily of performance obligations that are satisfied over time. This was determined based on a review of the contracts and the nature of the services offered, where the customer simultaneously receives and consumes the benefit of the services provided. Satisfaction of these performance obligations is evidenced in the following ways:
Advertising
•Website reporting by the Company, the customer, or a third-party contains the delivery evidence needed to satisfy the performance obligations within the advertising contract
•Successfully delivered leads are evidenced by either delivery reports from the Company’s internal lead management systems or through e-mail communication and/or other evidence of delivery showing acceptance of leads by the customer
•Commission is evidenced by direct site reporting from the affiliate or via direct confirmation from the customer
Subscription and Licensing
•Evidence of delivery is contained in the Company’s systems or from correspondence with the customer which tracks when a customer accepts delivery of any assets, digital keys or download links
The Company has concluded revenue is recognized based on delivery of services over the contract period for advertising and on a straight-line basis over the contract period for subscriptions. The Company believes that the methods described are a faithful depiction of the transfer of goods and services.
The Company’s Cloud Services business consists primarily of performance obligations that are satisfied over time. This has been determined based on the fact that the nature of services offered are subscription based and include fax, voice, backup, security, CPP, and email marketing products where the customer simultaneously receives and consumes the benefit of the services provided regardless of whether the customer uses the services or not. Depending on the individual contracts with the customer, revenue for these services are recognized over the contract period when any of the following materially distinct performance obligations are satisfied:
•Faxing capabilities are provided
•Voice services are provided
•Email marketing services are provided
•Consumer privacy services are provided
•Security solutions, including email and endpoint are provided
•Online data backup capabilities are provided
The Company has concluded that the best measure of progress toward the complete satisfaction of the performance obligation over time is a time-based measure. The Company recognizes revenue on a straight-line basis throughout the subscription period and believes that the method used is a faithful depiction of the transfer of goods and services.
Performance Obligations Satisfied at a Point in Time
The Company’s Digital Media business has technology subscriptions that have standalone functionality. As a result, they are considered to be functional intellectual property where the performance obligations are satisfied at a point in time. This is evidenced once a digital key is delivered to the customer. Once the key is delivered to the customer, the customer has full control of the technology and the Company has no further performance obligations. The Company has concluded that revenue is recognized once the digital key is delivered. The Company believes that this method is a faithful depiction of the transfer of goods and services.
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Practical Expedients
Existence of a Significant Financing Component in a Contract
As a practical expedient, the Company has not assessed whether a contract has a significant financing component because the Company expects at contract inception that the period between payment by the customer and the transfer of promised goods or services by the Company to the customer will be one year or less. In addition, the Company has determined that the payment terms that the Company provides to its customers are structured primarily for reasons other than the provision of finance to the Company. The Company typically charges a single upfront amount for the services because other payment terms would affect the nature of the risk assumed by the Company to provide service given the costs of the customer acquisition and the highly competitive and commoditized nature of the business we operate which allows customers to easily move from one provider to another. This additional risk may make it uneconomical to provide the service.
Costs to Fulfill a Contract
The Company’s revenues are primarily generated from customer contracts that are for one year or less. Costs primarily consist of incentive compensation paid based on the achievements of sales targets in a given period for related revenue streams and are recognized in the month when the revenue is earned. Incentive compensation is paid on the issuance or renewal of the customer contract. As a practical expedient, for amortization periods which are determined to be one year or less, the Company expenses any incremental costs of obtaining the contract with a customer when incurred. For those customers with amortization periods determined to be greater than one year, the Company capitalizes and amortizes the expenses over the period of benefit.
In addition, the Company partners with various affiliates in order to generate a portion of its revenue for certain lines of business. The commissions earned by the Company’s affiliates are incentive based and are paid on the acquisition of new customers in a given period. For those customers with amortization periods determined to be greater than one year, the Company capitalizes and amortizes the expenses over the period of benefit.
Revenues Invoiced
The Company has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.
4.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.
The Company completed the following acquisitions during the first nine months of fiscal 2021, paying the purchase price in cash in each transaction: (a) an asset purchase of DailyOM, acquired on April 30, 2021, a California-based-based provider of health and wellness digital media, content and learning business; (b) a share purchase of SEOmoz, acquired on June 4, 2021, a Seattle-based provider of search engine optimization (“SEO”) solutions; (c) an asset purchase of Solutelia, LLC, acquired on July 15, 2021, a Colorado-based on-demand wireless telecommunications network monitoring and analysis, testing and optimization software business and related wireless telecommunications engineering services business; (d) a stock purchase of Arthur L. Davis Publishing, acquired on September 23, 2021, an Iowa-based digital nursing publication; and (e) three immaterial Digital Media acquisitions.
The Condensed Consolidated Statement of Operations since the date of each acquisition and balance sheet as of September 30, 2021, reflect the results of operations of all 2021 acquisitions. For the nine months ended September 30, 2021, these acquisitions contributed $21.3 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 $135.1 million net of cash acquired and assumed liabilities and is subject to certain post-closing adjustments which may increase or decrease the final consideration paid.
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Assets and Liabilities | Valuation | |||||||
Accounts receivable | $ | 5,167 | ||||||
Prepaid expenses and other current assets | 1,639 | |||||||
Property and equipment | 1,838 | |||||||
Operating lease right-of-use assets, noncurrent | 5,888 | |||||||
Trade names | 11,843 | |||||||
Customer relationship | 11,521 | |||||||
Goodwill | 85,552 | |||||||
Other intangibles | 35,285 | |||||||
Deferred tax asset | 230 | |||||||
Accounts payable and accrued expenses | (2,800) | |||||||
Deferred revenue | (7,192) | |||||||
Operating lease liabilities, current | (7,191) | |||||||
Other current liabilities | (14) | |||||||
Deferred tax liability | (4,936) | |||||||
Other long-term liabilities | (1,726) | |||||||
Total | $ | 135,104 |
During the nine months ended September 30, 2021, the purchase price accounting has been finalized for EDC Systems Inc (operating under the name “SRFax”), Inspired eLearning and other immaterial Digital Media and Cloud Services businesses. The initial accounting for the 2021 acquisitions are incomplete and 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, software and customer relationships), preliminary acquisition date working capital and related tax items.
During the nine months ended September 30, 2021, the Company recorded adjustments to the initial working capital and to the purchase accounting due to the finalization of prior period acquisitions in the Digital Media business, which resulted in a net decrease in goodwill of $1.5 million. In addition, the Company recorded adjustments to the initial working capital and to the purchase accounting due to the finalization of prior period acquisitions in the Voice, Backup, Security and CPP businesses which resulted in a net increase in goodwill of $0.5 million. (see Note 8 - Goodwill and Intangible Assets). Such adjustments had an immaterial impact on the amortization expense within the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2021.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and represents intangible assets that do not qualify for separate recognition. Goodwill recognized associated with these acquisitions during the nine months ended September 30, 2021 is $85.6 million, of which $44.1 million is expected to be deductible for income tax purposes.
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Pro Forma Financial Information for All 2021 Acquisitions
The following unaudited pro forma supplemental information is based on estimates and assumptions that the Company believes to be reasonable. However, this information is not necessarily indicative of the Company’s consolidated results of income 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 exclude any savings or synergies that would have resulted from these business acquisitions had they occurred on January 1, 2020. 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.
The supplemental information on an unaudited pro forma financial basis presents the combined results of the Company and its 2021 acquisitions as if each acquisition had occurred on January 1, 2020 (in thousands, except per share amounts):
Nine Months Ended September 30, | |||||||||||
2021 | 2020 | ||||||||||
(unaudited) | (unaudited) | ||||||||||
Revenues | $ | 1,313,417 | $ | 1,084,967 | |||||||
Net income | $ | 143,420 | $ | 95,036 | |||||||
EPS - Basic | $ | 3.17 | $ | 2.02 | |||||||
EPS - Diluted | $ | 3.01 | $ | 1.99 |
5.Investments
Investments consist of equity and debt securities.
The Company determined the equity securities that were received as part of the consideration for the sale of Tea Leaves Health, LLC (“Tea Leaves”) in fiscal year 2017 are without a readily determinable fair value because these securities are privately held, not traded on any public exchanges and not an investment in a mutual fund or similar investment. As a result, management has elected to alternatively measure this investment at cost, less impairment, adjusted for subsequent observable price changes to estimate fair value. The Company will make a “reasonable effort” to identify any observable price changes for identical or similar investments with the issuer that are known are can be reasonably known. Any changes in the carrying value of the equity securities will be reported in current earnings as (gain) loss on investments, net. In addition, the Company determined that the shares of redeemable preferred stock that were also received as part of the consideration for the sale of Tea Leaves are corporate debt securities and are classified as available-for-sale securities. These debt securities were subsequently exchanged in a non-cash transaction in the first quarter of 2020.
Furthermore, the COVID-19 pandemic has had an adverse impact on the global financial markets. A prolonged adverse impact of the COVID-19 pandemic could result in a decline in the equity and debt securities estimated fair value and, thus, a resulting charge to earnings in a future period.
The following table summarizes the gross unrealized gains and losses and estimated fair values for the Company’s securities without a readily determinable fair value (in thousands):
Cost | Impairment | Adjustments | Reported Amount | ||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||
Equity securities | $ | 31,777 | $ | (16,677) | $ | (479) | $ | 14,621 | |||||||||||||||
Total | $ | 31,777 | $ | (16,677) | $ | (479) | $ | 14,621 | |||||||||||||||
December 31, 2020 | |||||||||||||||||||||||
Equity securities | $ | 50,384 | $ | (19,605) | $ | (479) | $ | 30,300 | |||||||||||||||
Total | $ | 50,384 | $ | (19,605) | $ | (479) | $ | 30,300 |
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During the second quarter of 2021, the Company recorded a $16.7 million impairment loss on investments related to a decline in value due to a pending sales transaction of an investee. The Company is not expected to recover the recorded cost of these securities and has reduced such amount to what the Company expects to receive as a result of the sale.
During the first nine months of 2020, the Company recorded a loss on investments of $21.0 million, which consists primarily of the following:
1.an impairment loss of $19.6 million due to changes in the investee’s capital structure and overall market volatility;
2.a loss on exchange of redeemable preferred stock, in the amount of $4.4 million, that that was previously classified as available-for-sale corporate debt securities for a new series of preferred stock classified as equity securities; partially offset by
3.a recognized gain of $3.2 million due to the Company’s purchase of preferred stock for $0.8 million.
Impairment losses, including gains and losses, are recorded in loss on investments, net on the Condensed Consolidated Statements of Operations.
At September 30, 2021, cumulative impairment losses on these securities were $40.5 million.
The following table summarizes the gross unrealized gains and losses and fair values for investments classified as available-for-sale investments (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||
Corporate debt securities | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
December 31, 2020 | |||||||||||||||||||||||
Corporate debt securities | $ | 511 | $ | 152 | $ | — | $ | 663 | |||||||||||||||
Total | $ | 511 | $ | 152 | $ | — | $ | 663 |
The Company’s available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive income.
The following table summarizes the Company’s corporate debt securities designated as available-for-sale, classified by the contractual maturity date of the security (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Due within 1 year | $ | — | $ | 663 | |||||||
Due within more than 1 year but less than 5 years | — | — | |||||||||
Due within more than 5 years but less than 10 years | — | — | |||||||||
Due 10 years or after | — | — | |||||||||
Total | $ | — | $ | 663 |
Recognition and Measurement of Credit Loss of Debt Securities
The Company adopted ASU 2016-13, Financial Instrument-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in the first quarter of 2020. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. This ASU also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded though an allowance for credit losses rather than a reduction in amortized cost basis of the securities. These changes will result in earlier recognition of credit losses, if any.
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The Company’s available-for-sale debt securities are carried at estimated fair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive loss in stockholders’ equity. Available- for-sale debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on available-for-sale debt securities are recognized in other (income) expense, net on our Condensed Consolidated Statements of Operations, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive loss in stockholders’ equity.
There were no investments in an unrealized loss position as of December 31, 2020.
As of December 31, 2020, the Company did not recognize any credit losses related to debt securities.
On September 25, 2017, the Company entered into a commitment to invest $200 million (approximately 76.6% of equity) in the OCV Fund. The primary purpose of the 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.
The manager, OCV Management, LLC, and general partner of the Fund are entities with respect to which Richard S. Ressler, Chairman of the Board of Directors (the “Board”) of the Company, is indirectly the majority equity holder and a related party. As a limited partner in the Fund, the Company will pay an annual management fee to the manager equal to 2.0% (reduced by 10% each year beginning with the sixth year) of capital commitments. In addition, subject to the terms and conditions of the Fund’s limited partnership agreement, once the Company has received distributions equal to its invested capital, the Fund’s general partner would be entitled to a carried interest equal to 20%. The Fund has a six year investment period, subject to certain exceptions. The commitment was approved by the Audit Committee of the Board in accordance with the Company’s related-party transaction approval policy.
In the first nine months of 2021, the Company received capital call notices from the management of OCV Management, LLC for $21.2 million, inclusive of certain management fees, of which $21.2 million has been paid for the nine months ended September 30, 2021. In the first nine months of 2020, the Company received capital call notices from the management of OCV Management, LLC for $31.0 million, inclusive of certain management fees, of which $30.0 million had been paid for the nine months ended September 30, 2020.
During the three and nine months ended September 30, 2021, the Company received distributions from OCV of $15.3 million and $15.3 million, respectively.
The Company recognizes its equity in the net earnings or losses relating to the investment in OCV on a one-quarter lag 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, 2021 and 2020, the Company recognized an investment loss of $(1.9) million and $(0.7) million, net of tax benefit, respectively, and during the nine months ended September 30, 2021 and 2020, the Company recognized an investment gain (loss) of $16.6 million and $(10.8) million, net of tax (benefit) expense, respectively. The fiscal 2021 gain was primarily the result of gains in the underlying investments. The fiscal 2020 loss was primarily a result of the impairment of two of its investments as a result of COVID-19 in the amount of $7.0 million, net of tax benefit. In addition, The Company recognized an investment loss in the amount of $3.8 million, net of tax benefit. The loss is presented in the Company’s Condensed Consolidated Statement of Operations as income (loss) from equity method investment, net.
During the three months ended September 30, 2021 and 2020, the Company recognized management fees of $0.8 million and $0.8 million, net of tax benefit, respectively, and for the nine months ended September 30, 2021 and 2020, the Company recognized management fees of $2.3 million and $2.3 million, net of tax benefit, respectively.
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The following table discloses the carrying amount for the Company’s equity method investment (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Equity method investment | $ | 96,097 | $ | 67,195 | |||||||
Maximum exposure to loss | $ | 96,097 | $ | 67,195 |
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 capital in an aggregate amount in excess of its capital commitment 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.
6.Dispositions
During the first quarter of 2021, the Company committed to a plan to sell certain Voice assets in the United Kingdom as they were determined to be non-core assets. Such assets were recorded within the Voice, Backup, Security, and CPP reportable segment. On February 9, 2021, in a cash transaction, the Company sold the Voice assets. As of September 30, 2021, the total gain recognized on the sale was $2.8 million which was recorded in (loss) gain on sale of businesses on the Condensed Consolidated Statement of Operations.
During the first quarter of 2021, the Company committed to a plan to sell its B2B Backup business as it was determined to be a non-core business. The B2B Backup business met the held for sale criteria, and accordingly, the assets and liabilities were presented as held for sale on the Condensed Consolidated Statement of Operations at March 31, 2021 and June 30, 2021. The business is recorded within the Voice, Backup, Security, and CPP reportable segment. During the second quarter of 2021, the Company received an offer to purchase the B2B Backup business and management determined that the fair value of the business less cost to sell was lower than its carrying amount. As a result, the Company recorded an impairment to goodwill of $32.6 million during the second quarter of 2021, which was recorded in impairment of business on the Condensed Consolidated Statement of Operations (see Note 8 - Goodwill and Intangible Assets). On September 17, 2021, in a cash transaction, the Company sold the B2B Backup business. As of September 30, 2021, the total loss recognized on the sale was $24.6 million which was recorded in loss on sale of business on the Condensed Consolidated Statement of Operations.
7.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.
The Company’s money market funds are classified within Level 1. The Company values these Level 1 investments using quoted market prices. The fair value of long-term debt is determined using recent quoted market prices or dealer quotes for each of the Company’s instruments, which are Level 1 inputs. The fair value of the Company’s debt instruments at September 30, 2021 and December 31, 2020 was $2.0 billion and $2.0 billion, respectively (see Note 9 - Debt).
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Certain of the Company’s debt securities are classified within Level 2. The Company values these Level 2 investments based on model-driven valuations using significant inputs derived from or corroborated by observable market data.
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. For similar reasons, certain of the Company’s available-for-sale debt securities are classified within Level 3. The valuation approaches used to value the Level 3 investments consider 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.
The following table presents the fair values, valuation techniques, unobservable inputs, and ranges of the Company’s financial liabilities categorized within Level 3. The weighted averages below are a product of the unobservable input and fair value of the contingent consideration arrangement as of September 30, 2021.
Valuation Technique | Unobservable Input | Range | Weighted Average | |||||||||||||||||||||||
Contingent Consideration | Option-Based Model | Risk free rate | 1.9% - 2.2% | 2.0 | % | |||||||||||||||||||||
Debt spread | 0.0% - 74.7% | 13.6 | % | |||||||||||||||||||||||
Probabilities | 100.0% | 100.0 | % | |||||||||||||||||||||||
Present value factor | 2.2% - 26.9% | 15.4 | % | |||||||||||||||||||||||
Discount rate | 27.3% - 38.0% | 32.3 | % |
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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, 2021 | Level 1 | Level 2 | Level 3 | Fair Value | Carrying Value | ||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||
Cash equivalents: | |||||||||||||||||||||||||||||
Money market and other funds | $ | 10,391 | $ | — | $ | — | $ | 10,391 | $ | 10,391 | |||||||||||||||||||
Corporate debt securities | — | — | — | — | — | ||||||||||||||||||||||||
Total assets measured at fair value | $ | 10,391 | $ | — | $ | — | $ | 10,391 | $ | 10,391 | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 9,296 | $ | 9,296 | $ | 9,296 | |||||||||||||||||||
Debt | 1,975,779 | — | — | 1,975,779 | 1,678,753 | ||||||||||||||||||||||||
Total liabilities measured at fair value | $ | 1,975,779 | $ | — | $ | 9,296 | $ | 1,985,075 | $ | 1,688,049 | |||||||||||||||||||
December 31, 2020 | Level 1 | Level 2 | Level 3 | Fair Value | Carrying Value | ||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||
Cash equivalents: | |||||||||||||||||||||||||||||
Money market and other funds | $ | 10,413 | $ | — | $ | — | $ | 10,413 | $ | 10,413 | |||||||||||||||||||
Corporate debt securities | — | 663 | — | 663 | 663 | ||||||||||||||||||||||||
Total assets measured at fair value | $ | 10,413 | $ | 663 | $ | — | $ | 11,076 | $ | 11,076 | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 9,094 | $ | 9,094 | $ | 9,094 | |||||||||||||||||||
Debt | 1,960,527 | — | — | 1,960,527 | 1,579,021 | ||||||||||||||||||||||||
Total liabilities measured at fair value | $ | 1,960,527 | $ | — | $ | 9,094 | $ | 1,969,621 | $ | 1,588,115 |
The following table presents a reconciliation of the Company’s Level 3 financial liabilities related to contingent consideration that are measured at fair value on a recurring basis (in thousands):
Level 3 | Affected line item in the Statement of Operations | ||||||||||
Balance as of January 1, 2021 | $ | 9,094 | |||||||||
Contingent consideration | 6,600 | ||||||||||
Total fair value adjustments reported in earnings | (567) | General and administrative | |||||||||
Contingent consideration payments | (5,831) | Not applicable | |||||||||
Balance as of September 30, 2021 | $ | 9,296 |
In connection with the Company’s acquisition activity, contingent consideration of up to $14.9 million may be payable upon achieving certain revenue, and/or unique visitor thresholds and had a combined fair value of $9.3 million and $9.1 million at September 30, 2021 and December 31, 2020, respectively. Due to the achievement of certain thresholds, $5.8 million was paid in the first nine months of 2021.
During the nine months ended September 30, 2021, the Company recorded a decrease in the fair value of the contingent consideration of $0.6 million and reported such decrease in general and administrative expenses.
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8.Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination and is assigned to the reporting unit that is expected to benefit from the synergies of the combination. Intangible assets resulting from the acquisitions of entities accounted for using the acquisition method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trademarks and trade names, developed technologies and other intangible assets. The fair values of these identified intangible assets are based upon expected future cash flows or income, which take into consideration certain assumptions such as customer turnover, trade names and patent lives. These determinations are primarily based upon the Company’s historical experience and expected benefit of each intangible asset. If it is determined that such assumptions are not accurate, then the resulting change will impact the fair value of the intangible asset. Identifiable intangible assets are amortized over the period of estimated economic benefit, which ranges from to 20 years.
The changes in carrying amounts of goodwill for the nine months ended September 30, 2021 are as follows (in thousands):
Fax and Martech | Voice, Backup, Security and CPP | Total Cloud Services | Digital Media | Consolidated | |||||||||||||||||||||||||
Balance as of January 1, 2021 | $ | 425,471 | $ | 499,025 | $ | 924,496 | $ | 942,934 | $ | 1,867,430 | |||||||||||||||||||
Goodwill acquired (Note 4) | 41,152 | — | 41,152 | 44,400 | 85,552 | ||||||||||||||||||||||||
Goodwill removed due to sale of businesses (1) | — | (50,276) | (50,276) | — | (50,276) | ||||||||||||||||||||||||
Goodwill impairment (2) | — | (32,629) | (32,629) | — | (32,629) | ||||||||||||||||||||||||
Purchase accounting adjustments (3) | — | 505 | 505 | (1,468) | (963) | ||||||||||||||||||||||||
Foreign exchange translation | (3,462) | (3,890) | (7,352) | (430) | (7,782) | ||||||||||||||||||||||||
Balance as of September 30, 2021 | $ | 463,161 | $ | 412,735 | $ | 875,896 | $ | 985,436 | $ | 1,861,332 |
(1) On February 9, 2021, in a cash transaction, the Company sold certain of its Voice assets in the United Kingdom which resulted in $1.3 million of goodwill being removed in connection with this sale and on September 17, 2021, the Company sold certain of its B2B Backup assets which resulted in $49.0 million of goodwill being removed in connection with the sale (see Note 6 - Dispositions).
(2) During the nine months ended September 30, 2021, the Company had an impairment to goodwill of $32.6 million in connection with certain B2B Backup assets.
(3) Purchase accounting adjustments relate to measurement period adjustments to goodwill in connection with prior business acquisitions (see Note 4 - Business Acquisitions).
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Intangible Assets with Indefinite Lives:
Intangible assets are summarized as of September 30, 2021 and December 31, 2020 as follows (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Trade names | $ | 27,412 | $ | 27,460 | |||||||
Other | 4,317 | 4,329 | |||||||||
Total | $ | 31,729 | $ | 31,789 |
Intangible Assets Subject to Amortization:
As of September 30, 2021, intangible assets subject to amortization relate primarily to the following (in thousands):
Weighted-Average Amortization Period | Historical Cost | Accumulated Amortization | Net | ||||||||||||||||||||
Trade names | 9.7 years | $ | 258,382 | $ | 107,472 | $ | 150,910 | ||||||||||||||||
Patent and patent licenses | 5.4 years | 67,962 | 67,250 | 712 | |||||||||||||||||||
Customer relationships (1) | 8.6 years | 764,852 | 462,955 | 301,897 | |||||||||||||||||||
Other purchased intangibles | 4.2 years | 468,934 | 313,020 | 155,914 | |||||||||||||||||||
Total | $ | 1,560,130 | $ | 950,697 | $ | 609,433 |
(1) Historically, the Company has amortized its 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, 2020, intangible assets subject to amortization relate primarily to the following (in thousands):
Weighted-Average Amortization Period | Historical Cost | Accumulated Amortization | Net | ||||||||||||||||||||
Trade names | 10.0 years | $ | 260,715 | $ | 100,273 | $ | 160,442 | ||||||||||||||||
Patent and patent licenses | 5.5 years | 67,980 | 66,964 | 1,016 | |||||||||||||||||||
Customer relationships (1) | 8.0 years | 848,875 | 471,681 | 377,194 | |||||||||||||||||||
Other purchased intangibles | 4.3 years | 436,352 | 265,224 | 171,128 | |||||||||||||||||||
Total | $ | 1,613,922 | $ | 904,142 | $ | 709,780 |
(1) Historically, the Company has amortized its 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, approximated $47.8 million and $41.2 million for the three months ended September 30, 2021 and 2020, respectively, and $144.3 million and $115.6 million for the nine months ended September 30, 2021 and 2020, respectively. Amortization expense is estimated to approximate $43.8 million, $143.5 million, $123.2 million, $80.2 million and $75.1 million for the remaining three months of fiscal year 2021 through fiscal year 2025, respectively, and $143.6 million thereafter through the duration of the amortization period.
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9. Debt
The Company’s debt as of September 30, 2021 and December 31, 2020 consists of the following (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
4.625% Senior Notes | $ | 750,000 | $ | 750,000 | |||||||
Convertible Notes: | |||||||||||
3.25% Convertible Notes | — | 402,414 | |||||||||
1.75% Convertible Notes | 550,000 | 550,000 | |||||||||
Total Notes | 1,300,000 | 1,702,414 | |||||||||
Paycheck Protection Program Loan | — | 910 | |||||||||
Bridge Loan | 485,000 | — | |||||||||
Less: Unamortized discount | (96,429) | (112,798) | |||||||||
Deferred issuance costs | (9,818) | (11,505) | |||||||||
Total debt | 1,678,753 | 1,579,021 | |||||||||
Less: current portion | (568,054) | (396,801) | |||||||||
Total long-term debt, less current portion | $ | 1,110,699 | $ | 1,182,220 |
4.625% Senior Notes
On October 7, 2020, the Company completed the issuance and sale of $750 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, remaining net proceeds were available for general corporate purposes which may include acquisitions and the repurchase or redemption of other outstanding indebtedness.
The 4.625% 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, 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, 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 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 as of September 30, 2021.
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On September 24, 2021, the Company announced the commencement of a cash tender offer for up to a maximum aggregate amount of $90.0 million of its 4.625% Senior Notes. Accordingly, as of September 30, 2021, the Company has classified $83.3 million of its 4.625% Senior Notes as short-term on its Condensed Consolidated Balance Sheet as of September 30, 2021.The remainder of the 4.625% Senior Notes are presented as long-term debt, net of deferred issuance costs, on the Condensed Consolidated Balance Sheet as of September 30, 2021.
As of September 30, 2021 and December 31, 2020, the estimated fair value of the 4.625% Senior Notes was approximately $797.9 million and $796.9 million, and was based on recent quoted market prices or dealer quotes for the 4.625% Senior Notes which are Level 1 inputs (see Note 7 - Fair Value Measurements).
3.25% Convertible Notes
On June 10, 2014, the Company issued $402.5 million aggregate principal amount of 3.25% convertible senior notes due June 15, 2029 (the “3.25% Convertible Notes”). The 3.25% Convertible Notes bore interest at a rate of 3.25% per annum, payable semiannually in arrears on June 15 and December 15 of each year. Beginning with the six-month interest period commencing on June 15, 2021, the Company had to pay contingent interest on the 3.25% Convertible Notes during any six-month interest period if the trading price per $1,000 principal amount of the 3.25% Convertible Notes for each of the trading days immediately preceding the first day of such interest period equaled or exceeded $1,300. Any contingent interest payable on the 3.25% Convertible Notes would have been in addition to the regular interest payable on the 3.25% Convertible Notes.
In connection with the spin-off of Consensus, the Company called its 3.25% Convertible Notes for redemption and on August 2, 2021, the Company redeemed in full all of its outstanding 3.25% Convertible Notes. During the three and nine months ended September 30, 2021, the Company satisfied its conversion obligation by paying the principal of $399.6 million and $402.4 million, respectively, in cash and issued 3,031,817 and 3,050,850 shares of the Company’s common stock. respectively (see Note 13 - Stockholders’ Equity).
The 3.25% Convertible Notes were carried at face value less any unamortized debt discount and debt issuance costs. The fair value of the 3.25% Convertible Notes at each balance sheet date was determined based on recent quoted market prices or dealer quotes for the 3.25% Convertible Notes, which are Level 1 inputs (see Note 7 - Fair Value Measurements). If such information was not available, the fair value was determined using cash-flow models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature. As of September 30, 2021 and December 31, 2020, the estimated fair value of the 3.25% Convertible Notes was approximately zero and $593.1 million, respectively.
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.
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
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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. During the third quarter of 2021 and the fourth quarter of 2020, the last reported sale price of the Company’s common stock did not meet the conversion price threshold requirements of the 1.75% Convertible Notes. Therefore, the net carrying amount of the 1.75% Convertible Notes is classified as long-term debt on the Condensed Consolidated Balance Sheets.
As of September 30, 2021, the conversion rate is 7.9864 shares of the Company’s common stock for each $1,000 principal amount of 1.75% Convertible Notes, which represents an conversion price of approximately $125.21 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.
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, including its existing 3.25% Convertible Notes due 2029; (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, including the then-existing 6.0% Senior Notes due 2025.
Accounting for the 1.75% Convertible Notes
In accordance with ASC 470-20, Debt with Conversion and Other Options, convertible debt that can be settled for cash is required to be separated into the liability and equity component at issuance, with each component assigned a value. The value assigned to the liability component is the effective fair value, as of the issuance date, of similar debt without the conversion feature. The difference between the cash proceeds and estimated fair value of the liability component, representing the value of the conversion premium assigned to the equity component, is recorded as a debt discount on the issuance date. This debt discount is amortized to interest expense using the effective interest method over the period from the issuance date through the maturity date of November 1, 2026.
The Company estimated the borrowing rates of similar debt without the conversion feature at origination to be 5.5% for the 1.75% Convertible Notes and determined the debt discount to be $118.9 million. As a result, a conversion premium after tax of $88.1 million (net of $2.8 million of the deferred issuance costs) are recorded in additional paid-in capital. The aggregate debt discount is amortized as interest expense over the period from the issuance date through the maturity date of November 1, 2026, which management believes is the expected life of the 1.75% Convertible Notes using an interest rate of 5.5%. As of September 30, 2021, the remaining period over which the unamortized debt discount will be amortized is 5.1 years.
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 of such deferred issuance costs were attributable to the liability component and are recorded within other assets and are being amortized 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. As of September 30, 2021, the unamortized deferred issuance costs were $8.0 million.
The 1.75% Convertible Notes are carried at face value less any unamortized debt discount and issuance costs. The fair value of the 1.75% Convertible Notes at each balance sheet date is determined based on recent quoted market prices or dealer quotes for the 1.75% Convertible Notes, which are Level 1 inputs (see Note 7 - Fair Value Measurements). If such information is not available, 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. As of September 30, 2021 and December 31, 2020, the estimated fair value of the 1.75% Convertible Notes was approximately $692.9 million and $569.7 million, respectively.
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Credit Facility and Bridge Loan
On April 7, 2021, the Company entered into a $100.0 million Credit Agreement (the “Credit Agreement”). Subject to customary conditions, 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.
On June 2, 2021, June 21, 2021, August 20, 2021 and September 16, 2021, the Company entered into First, Second, Third and Fourth Amendments (together the “Amendments”) to the Credit Agreement. The Amendments (i) provided for the issuance of a senior secured term loan under the Credit Agreement, in an aggregate principal amount of $485.0 million (the “Bridge Loan Facility”), (ii) permitted the spin-off of the Company’s cloud fax business into a new publicly traded company, and (iii) provided for certain other changes to the Credit Agreement.
The Bridge Loan Facility bore interest at a rate per annum equal to (i) initially upon funding of the loan, either a base rate plus 2.00%, or a LIBOR rate plus 3.00%, (ii) from six months after the funding date of the Bridge Loan Facility until twelve months after the funding date of the Bridge Loan Facility, either a base rate plus 2.50%, or a LIBOR rate plus 3.50%, and (iii) from twelve months after the funding date of the Bridge Loan Facility until repayment of the Bridge Loan Facility, either a base rate plus 3.00% or a LIBOR rate plus 4.00%. The Bridge Loan Facility was to mature on the date that is 364 days after the funding date of the Bridge Loan Facility, with two automatic extensions, each for an additional three months, if SEC approval of the spin-off transaction was still outstanding. As of September 30, 2021, the Company had drawn on the full amount of the Bridge Loan Facility with $485.0 million outstanding. The proceeds of the Bridge Loan Facility were used to redeem the Company’s 3.25% Convertible Notes. As of September 30, 2021, the estimated fair value of the Bridge Loan Facility was $485.0 million. Refer to Note 18 - Subsequent Events for information on the extinguishment of the Bridge Loan subsequent to September 30, 2021 in connection with the spin-off of the cloud fax business.
The Company was required to pay a funding fee of 0.50% of the aggregate principal amount of Bridge Loan Facility made on the funding date thereof, as well as a duration fee of 0.25% of the aggregate principal amount of outstanding Bridge Loans on the sixth month anniversary of the funding of the Bridge Loans, and a fee of 0.50% of the aggregate principal amount of outstanding Bridge Loans on each of the nine-month, twelve-month and fifteen-month anniversaries of the funding of the Bridge Loans.
Paycheck Protection Program Loan
Through the acquisition of certain businesses in 2020, the Company acquired $0.9 million of outstanding debt originating from the Paycheck Protection Program. During the second quarter of 2021, the Company received approval from the SBA to forgive the entire amount of the outstanding PPP loans, which was subsequently forgiven in full.
10.Leases
The Company leases certain facilities and equipment under non-cancelable operating and finance leases which expire at various dates through 2031. Office and equipment leases are typically for terms of to five years and generally provide renewal options for terms up to an additional five years. Some of the Company’s leases include options to terminate within one year.
For the first nine months of 2021, the Company recorded impairments of $9.4 million on its operating lease right of use assets primarily related to exiting certain lease space as the Company regularly evaluates its office space requirements in light more of its workforce working from home as part of a permanent “remote” or “partial remote” work model. During the third quarter of 2020, the Company had also decided to exit and seek subleases for certain leased facilities in the Digital Media reportable segment primarily also due to work from home models. The Company recorded a non-cash impairment charge of $9.8 million related to operating lease right-of-use assets for the affected facilities and an impairment charge of $3.6 million for associated property and equipment. The impairments were determined by comparing the fair value of the impacted right-of-use asset to the carrying value of the asset as of the impairment measurement date, as required under ASC Topic 360, Property, Plant, and Equipment. The fair value of the right-of-use asset was based on the estimated sublease income for the affected facilities taking into consideration the time it will take to obtain a sublease tenant, the applicable discount rate and the sublease rate which represent Level 3 unobservable inputs. The impairments are presented in general and administrative expenses on the Condensed Consolidated Statements of Operations.
In certain agreements in which the Company leases office space where the Company is the tenant, it subleases the site to various other companies through a sublease agreement.
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Finance leases are not material to the Company’s Condensed Consolidated Financial Statements and are therefore not included in the disclosures below.
The components of lease expense were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Operating lease cost | $ | 6,173 | $ | 16,888 | $ | 23,976 | $ | 33,106 | |||||||||||||||
Short-term lease cost | 712 | 264 | 2,653 | 1,357 | |||||||||||||||||||
Total lease cost | $ | 6,885 | $ | 17,152 | $ | 26,629 | $ | 34,463 |
Supplemental balance sheet information related to leases was as follows (in thousands):
September 30, 2021 | December 31, 2020 | ||||||||||
Operating leases | |||||||||||
Operating lease right-of-use assets | $ | 88,331 | $ | 105,845 | |||||||
Total operating lease right-of-use assets | $ | 88,331 | $ | 105,845 | |||||||
Operating lease liabilities, current | $ | 31,636 | $ | 32,211 | |||||||
Operating lease liabilities, noncurrent | 84,519 | 99,177 | |||||||||
Total operating lease liabilities | $ | 116,155 | $ | 131,388 |
Supplemental cash flow information related to leases was as follows (in thousands):
Nine Months Ended September 30, | |||||||||||
2021 | 2020 | ||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash flows from operating leases | $ | 21,869 | $ | 21,764 | |||||||
Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
Operating leases | $ | 9,274 | $ | 7,968 |
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Other supplemental operating lease information consists of the following:
September 30, 2021 | December 31, 2020 | ||||||||||
Operating leases: | |||||||||||
Weighted average remaining lease term | 5.1 years | 5.2 years | |||||||||
Weighted average discount rate | 3.83 | % | 3.93 | % | |||||||
Maturities of operating lease liabilities as of September 30, 2021 were as follows (in thousands):
Operating Leases | |||||
Fiscal Year: | |||||
2021 (remainder) | $ | 8,507 | |||
2022 | 31,926 | ||||
2023 | 26,494 | ||||
2024 | 18,840 | ||||
2025 | 10,496 | ||||
Thereafter | 35,250 | ||||
Total lease payments | $ | 131,513 | |||
Less: Imputed interest | 15,358 | ||||
Present value of operating lease liabilities | $ | 116,155 |
Total sublease income for the three months ended September 30, 2021 and 2020 was $0.5 million and $0.4 million, respectively, and was $1.4 million and $2.2 million for the nine months ended September 30, 2021 and 2020, respectively. Total estimated aggregate sublease income to be received in the future is $5.2 million.
For the first nine months of 2020, the Company recorded $2.1 million associated with its sublease tenants in default as a result of the economic effects of COVID-19. The impairment is presented in general and administrative expense on the Condensed Consolidated Statement of Operations.
Significant Judgments
Discount Rate
The majority of the Company’s leases are discounted using the Company’s incremental borrowing rate as the rate implicit in the lease is not readily determinable. Rates are obtained from various large banks to determine the appropriate incremental borrowing rate each quarter for collateralized loans with a maturity similar to the lease term.
Options
The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determined it is reasonably certain of exercising the option at inception or when a triggering event occurs.
Practical Expedients
As a practical expedient, the Company has not separated lease components from nonlease components for its real property operating leases. Certain of the Company’s leases contain nonlease components such as maintenance and certain utility costs.
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In addition, the Company elected and applied the available transition practical expedients upon adoption. By electing these practical expedients, the Company did:
•not reassess whether expired or existing contracts contain leases under the new definition of a lease;
•not reassess lease classification for expired or existing leases; and
•not reassess whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.
11.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 January 21, 2016, Davis Neurology, P.A. filed a putative class action lawsuit against two Company affiliates in the Circuit Court for the County of Pope, State of Arkansas (58-cv-2016-40), alleging violations of the TCPA. The case was removed to the U.S. District Court for the Eastern District of Arkansas (No. 4:16-cv-00682). On March 20, 2017, the District Court granted a motion for judgment on the pleadings filed by the Company affiliates and dismissed all claims against the Company affiliates. On July 23, 2018, the Eighth Circuit Court of Appeals vacated the judgment and remanded to district court with instructions to return the case to state court. On January 29, 2019, after further appeals were exhausted, the case was remanded to the Arkansas state court. On April 1, 2019, the state court granted a motion for class certification filed by the plaintiff in 2016. Because the prior removal to federal court had deprived the state court of jurisdiction, the Company affiliates had not yet filed an opposition brief to the 2016 motion when the state court granted the motion. The Company affiliates appealed the order. On July 15, 2019, the Company affiliates removed the case to federal court pursuant to the Class Action Fairness Act of 2005. On November 26, 2019 the court denied the Plaintiff’s motion to remand. On December 20, 2019, the court granted the Plaintiff’s motion for leave to amend its complaint. On May 21, 2020, the court denied the Company affiliates’ motion to dismiss. On February 18, 2021, the parties filed a motion for preliminary approval of the class settlement, certification of a settlement class and for permission to disseminate notice, which was granted on May 11, 2021. On September 3, 2021, the court granted final approval of the class settlement.
On July 8, 2020, Jeffrey Garcia filed a putative class action lawsuit against the Company in the Central District of California (20-cv-06906), alleging violations of federal securities laws. The Company has moved to dismiss the consolidated class action complaint. The court granted the motion to dismiss and the plaintiff has filed an amended complaint. The Company has moved to dismiss the amended complaint.
On September 24, 2020, International Union of Operating Engineers of Eastern Pennsylvania and Delaware filed an action 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 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 have reached an agreement to settle the lawsuit, which requires court approval. On July 29, 2021, the parties filed a stipulation of settlement that provides the terms of the settlement and begins the settlement approval process with the Court.
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.
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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 has a $24.4 million reserve established for these matters. It is reasonably possible that additional liabilities could be incurred resulting in additional expense, which could have a material impact to our financial results.
12.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 16.6% and 28.3% for the three months ended September 30, 2021 and 2020, respectively and 12.3% and 32.2% for the nine months ended September 30, 2021 and 2020, respectively. The Company’s decreased rate during the three and nine months ended September 30, 2021 is primarily due to the recognition of a tax benefit from the disposition and impairment of the backup business to business unit and a reduction in our net reserve for uncertain tax positions with no similar events for the period ending September 30, 2020. During the nine months ended September 30, 2020 the Company recognized an increase in tax expense related to establishing a valuation allowance on deferred tax assets related to the impairment of certain investments with no similar events for the period ending September 30, 2021. During the three and nine months ended September 30, 2021, in connection with the redemption of the 3.25% Convertible Notes, the Company recorded a reduction in its deferred tax liabilities and an increase in additional paid-in capital of approximately $44.2 million. As the redemption of the 3.25% Convertible Notes were settled in cash and equity for an amount in excess of the Company’s tax basis in the 3.25% Convertible Notes, the deferred tax liability was reversed with an adjustment to additional-paid-in capital. Prior to the redemption, the Company had a deferred tax liability on the 3.25% Convertible Notes for cumulative book-tax temporary differences related to interest expense that resulted in the tax basis exceeding the financial statement carrying amount of the 3.25% Convertible Notes.
Income (loss) before income taxes included income from domestic operations of $29.2 million and $32.2 million for the nine months ended September 30, 2021 and 2020, respectively, and income from foreign operations of $107.1 million and $120.2 million for the nine months ended September 30, 2021 and 2020, respectively.
As of September 30, 2021 and December 31, 2020, the Company had $54.2 million and $57.1 million, respectively, in liabilities for uncertain income tax positions. Accrued interest and penalties related to unrecognized tax benefits are recognized in income tax expense on the Company’s consolidated statement of operations.
Cash paid for income taxes net of refunds received was $51.8 million and $33.5 million for the nine months ended September 30, 2021 and 2020, respectively.
Certain taxes are prepaid during the year and, where appropriate, included within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet. The Company’s prepaid taxes were $12.6 million and $3.0 million at September 30, 2021 and December 31, 2020, respectively.
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Income Tax Audits:
The Company is in various stages of audit by the U.S. Internal Revenue Service (“IRS”) for its 2012 through 2016 tax years. On February 24, 2021, the Company received a Notice of Deficiency for tax years 2012 through 2014 which disallowed certain deductions for domestic production. The Company disagrees with the Notice and filed a petition to appeal on May 24, 2021. As of September 30, 2021, the audits are ongoing.
The Company is under income tax audit by the California Franchise Tax Board (the “FTB”) for its tax years 2012 and 2013. The FTB, however, has suspended its audit for 2012 and 2013 pending the outcome of the IRS audit for such tax years. In August 2018, the FTB notified the Company that it will commence an audit of tax years 2015 and 2016. As of September 30, 2021, the audits are ongoing.
In June 2019, the New York State Department of Taxation and Finance (“NYS”) notified the Company that it will commence an audit for tax year 2015. In April 2020, the NYS notified the Company that it will also commence an audit for tax years 2016 and 2017. As of September 30, 2021, the audits are ongoing.
It is reasonably possible that these audits may conclude in the next 12 months and that the uncertain tax positions the Company has recorded in relation to these tax years may change compared to the liabilities recorded for these periods. If the recorded uncertain tax positions are inadequate to cover the associated tax liabilities, the Company would be required to record additional tax expense in the relevant period, which could be material. If the recorded uncertain tax positions are adequate to cover the associated tax liabilities, the Company would be required to record any excess as a reduction in tax expense in the relevant period, which could be material. However, it is not currently possible to estimate the amount, if any, of such change.
13.Stockholders’ Equity
Common Stock Repurchase Program
In February 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of the Company’s common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 20, 2021.
In November 2018 and May 2019, the Company entered into Rule 10b5-1 trading plans with a broker to facilitate the repurchase program. 600,000 shares were repurchased under the share repurchase program in 2018 at an aggregate cost of $42.5 million and were subsequently retired in March 2019. During the year ended December 31, 2019, the Company repurchased 197,870 shares at an aggregate cost of $16.0 million which were subsequently retired in the same year. During the year ended December 31, 2020, the Company repurchased 1,140,819 shares under this program at an aggregate cost of $87.5 million, which were subsequently retired in the same year. As of December 31, 2020, all the available shares were repurchased under the 2012 Program at an aggregate cost of $204.6 million (including an immaterial amount of commission fees).
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”) in addition to the five million shares repurchased under the 2012 Program. The Company entered into a Rule 10b5-1 trading plan and during the nine month period ended September 30, 2021, the Company repurchased no shares under this program. Cumulatively at September 30, 2021, 2,490,599 shares were repurchased at an aggregate cost of $177.8 million (including an immaterial amount of commission fees) under the 2020 Program, which were subsequently retired.
In connection with the Consensus spin-off, the Company called its 3.25% Convertible Notes for redemption and during the three and nine months ended September 30, 2021, the Company issued 3,031,817 and 3,050,850 shares of the Company’s common stock, respectively, in connection with that redemption (see Note 9 - Debt).
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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 month period ended September 30, 2021, the Company purchased 49,641 shares from plan participants for this purpose.
Dividends
No dividends were declared in during fiscal year 2021 and 2020. Future dividends are subject to Board approval. Based on the significant number of current investment opportunities within the Company’s portfolio of businesses and the historic returns from prior investments, the Board of Directors suspended dividend payments for the foreseeable future.
14.Stock Options and Employee Stock Purchase Plan
The Company’s share-based compensation plans include the 2007 Stock Plan (the “2007 Plan”), 2015 Stock Option Plan (the “2015 Plan”) and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below.
The 2007 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other share-based awards. 4,500,000 shares of the Company’s common stock are authorized to be used for 2007 Plan purposes. Options under the 2007 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the fair market value of the Company’s common stock on the date of grant for incentive stock options and not less than 85% of the fair market value of the Company’s common stock on the date of grant for non-statutory stock options. As of September 30, 2021, 7,000 shares underlying options and zero shares of restricted units were outstanding under the 2007 Plan. The 2007 Plan terminated on February 14, 2017.
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, 2021, 400,000 shares underlying options and 246,018 shares of restricted stock units were outstanding under the 2015 Plan.
All stock option grants are approved by “outside directors” within the meaning of Internal Revenue Code Section 162(m).
Stock Options
The following table represents stock option activity for the nine months ended September 30, 2021:
Number of Shares | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||
Outstanding at January 1, 2021 | 475,601 | $ | 69.61 | ||||||||||||||||||||
Granted | — | — | |||||||||||||||||||||
Exercised | (68,601) | 42.08 | |||||||||||||||||||||
Canceled | — | — | |||||||||||||||||||||
Outstanding at September 30, 2021 | 407,000 | $ | 74.25 | 6.2 | $ | 25,385,630 | |||||||||||||||||
Exercisable at September 30, 2021 | 157,000 | $ | 73.00 | 6.0 | $ | 9,988,130 | |||||||||||||||||
Vested and expected to vest at September 30, 2021 | 346,640 | $ | 74.11 | 6.1 | $ | 21,668,058 |
The total intrinsic values of options exercised during the nine months ended September 30, 2021 and 2020 were $5.6 million and $3.0 million, respectively.
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The Company recognized $0.2 million and $0.2 million of compensation expense related to stock options for the three months ended September 30, 2021 and 2020, respectively, and $0.6 million and $0.7 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, unrecognized stock compensation related to non-vested stock options granted under each of the share-based compensation plans approximated $5.1 million and $5.8 million, respectively. Unrecognized stock compensation expense related to non-vested stock options granted under these plans is expected to be recognized ratably over a weighted-average period of 4.3 (i.e., the remaining requisite service period).
Fair Value Disclosure
The Company uses the Black-Scholes option pricing model to calculate the fair value of each option grant. The expected volatility is based on historical volatility of the Company’s common stock. The Company estimates the expected term based upon the historical exercise behavior of its employees. 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 12.4% and 11.8% as of September 30, 2021 and 2020, respectively.
Restricted Stock and Restricted Stock Units
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, or five years for senior staff (excluding market-based awards discussed below) and eight years for the Chief Executive Officer.
Restricted Stock and Restricted Stock Units with Market Conditions
The Company has awarded certain key employees market-based restricted stock and restricted stock units pursuant to the 2015 Plan. The market-based shares 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). Stock-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, 2021 and 2020, the Company awarded 73,094 and 82,112 market-based shares, respectively. The per share weighted average grant-date fair values of the market-based shares granted during the nine months ended September 30, 2021 and 2020 were $94.40 and $70.99, respectively.
The weighted-average fair values of market-based shares granted have been estimated utilizing the following assumptions:
September 30, 2021 | September 30, 2020 | ||||||||||
Underlying stock price at valuation date | $ | 113.27 | $ | 91.17 | |||||||
Expected volatility | 30.3 | % | 27.0 | % | |||||||
Risk-free interest rate | 1.3 | % | 0.7 | % |
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Restricted stock award activity for the nine months ended September 30, 2021 is set forth below:
Shares | Weighted-Average Grant-Date Fair Value | ||||||||||
Nonvested at January 1, 2021 | 820,566 | $ | 62.66 | ||||||||
Granted | — | — | |||||||||
Vested | (421,923) | 62.47 | |||||||||
Canceled | (3,277) | 82.96 | |||||||||
Nonvested at September 30, 2021 | 395,366 | $ | 61.62 |
Restricted stock unit award activity for the nine months ended September 30, 2021 is set forth below:
Number of Shares | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||||
Outstanding at January 1, 2021 | 209,784 | ||||||||||||||||
Granted | 164,257 | ||||||||||||||||
Vested | (124,761) | ||||||||||||||||
Canceled | (3,262) | ||||||||||||||||
Outstanding at September 30, 2021 | 246,018 | 3.2 | $ | 33,610,979 | |||||||||||||
Vested and expected to vest at September 30, 2021 | 170,143 | 2.5 | $ | 23,244,890 |
The Company recognized $5.7 million and $5.1 million of compensation expense related to restricted stock, restricted stock units and market-based awards for the three months ended September 30, 2021 and 2020, respectively, and $16.4 million and $16.4 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company had unrecognized share-based compensation cost of approximately $37.3 million and $38.6 million, respectively, associated with these awards. This cost is expected to be recognized over a weighted-average period of 3.6 for awards and 4.1 for 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 ESPP. 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 11.15% and 16.50% as of September 30, 2021 and 2020, respectively. The increase in forfeiture rate comes as a result of the Purchase Plan being offered to all employees regardless of employment location.
For the nine months ended September 30, 2021 and 2020, 58,145 and 53,694 shares were purchased under the Purchase Plan, respectively. Cash received upon the issuance of the Company’s common stock under the Purchase Plan was $4.2 million and $3.3 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, 1,346,794 shares were available under the Purchase Plan for future issuance.
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The Company recognized $0.8 million and $0.5 million of compensation expense related to the Purchase Plan for the three months ended September 30, 2021 and 2020, respectively, and $2.1 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively.
The compensation expense related to the Purchase Plan has been estimated utilizing the following assumptions:
September 30, 2021 | September 30, 2020 | ||||||||||
Risk-free interest rate | 0.06% | 0.13% | |||||||||
Expected term (in years) | 0.5 | 0.5 | |||||||||
Dividend yield | 0.00% | 0.00% | |||||||||
Expected volatility | 35.62% | 23.95% | |||||||||
Weighted average volatility | 35.62% | 23.95% |
15.Earnings Per Share
The components of basic and diluted earnings per share are as follows (in thousands, except share and per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Numerator for basic and diluted net income per common share: | |||||||||||||||||||||||
Net income | $ | 42,569 | $ | 60,883 | $ | 136,209 | $ | 92,580 | |||||||||||||||
Net income available to participating securities (a) | (28) | (89) | (143) | (477) | |||||||||||||||||||
Net income available to the Company’s common shareholders | $ | 42,541 | $ | 60,794 | $ | 136,066 | $ | 92,103 | |||||||||||||||
Denominator: | |||||||||||||||||||||||
Weighted-average outstanding shares of common stock | 46,738,073 | 46,279,515 | 45,258,819 | 46,914,750 | |||||||||||||||||||
Dilutive effect of: | |||||||||||||||||||||||
Equity incentive plans | 332,532 | 29,557 | 272,178 | 23,211 | |||||||||||||||||||
Convertible debt (b) | 1,511,980 | — | 2,034,065 | 682,347 | |||||||||||||||||||
Common stock and common stock equivalents | 48,582,585 | 46,309,072 | 47,565,062 | 47,620,308 | |||||||||||||||||||
Net income per share: | |||||||||||||||||||||||
Basic | $ | 0.91 | $ | 1.31 | $ | 3.01 | $ | 1.96 | |||||||||||||||
Diluted | $ | 0.88 | $ | 1.31 | $ | 2.86 | $ | 1.93 |
(a)Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).
(b)Represents the incremental shares issuable upon conversion of the 3.25% Convertible Notes due June 15, 2029 (subsequently redeemed in full) and 1.75% Convertible Notes due November 1, 2026 by applying the treasury stock method when the average stock price exceeds the conversion price of the Convertible Notes (see Note 9 - Debt).
For the three months ended September 30, 2021 and 2020, there were zero and 423,000 options outstanding, respectively, and for the nine months ended September 30, 2021 and 2020, there were zero options outstanding, respectively, which were excluded from the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common stock.
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16.Segment Information
The Company’s businesses are based on the organizational structure used by the chief operating decision maker (“CODM”) for making operating and investment decisions and for assessing performance. The CODM views the Company as two businesses: Digital Media and Cloud Services. However, in accordance with the aggregation criteria within ASC Topic 280, the Company’s operating segments have been aggregated into three reportable segments: (i) Digital Media; (ii) Voice, Backup, Security, and Consumer Privacy and Protection; and (iii) Fax and Martech.
The Company’s Digital Media business is driven primarily by advertising and subscription revenues, has relatively higher sales and marketing expense and has seasonal strength in the fourth quarter. The Company’s Cloud Services business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with minor seasonal weakness in the fourth quarter.
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, 2021. The Company evaluates performance based on revenue, gross margin and profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses.
Information on reportable segments and reconciliation to consolidated income from operations is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenue by reportable segment: | |||||||||||||||||||||||
Digital Media | $ | 262,429 | $ | 186,784 | $ | 743,280 | $ | 513,462 | |||||||||||||||
Cloud Services | |||||||||||||||||||||||
Fax and Martech | 114,648 | 98,044 | 320,829 | 286,687 | |||||||||||||||||||
Voice, Backup, Security, and CPP | 67,531 | 72,204 | 208,137 | 220,403 | |||||||||||||||||||
Cloud Services Total | 182,179 | 170,248 | 528,966 | 507,090 | |||||||||||||||||||
Elimination of inter-segment revenues | (356) | (56) | (766) | (200) | |||||||||||||||||||
Total segment revenues | 444,252 | 356,976 | 1,271,480 | 1,020,352 | |||||||||||||||||||
Corporate (1) | — | — | — | 1 | |||||||||||||||||||
Total revenues | $ | 444,252 | $ | 356,976 | $ | 1,271,480 | $ | 1,020,353 | |||||||||||||||
Gross profit by reportable segment: | |||||||||||||||||||||||
Digital Media | $ | 238,650 | $ | 169,394 | $ | 673,409 | $ | 457,963 | |||||||||||||||
Cloud Services | |||||||||||||||||||||||
Fax and Martech | 91,993 | 81,435 | 261,742 | 238,149 | |||||||||||||||||||
Voice, Backup, Security, and CPP | 49,395 | 50,392 | 151,155 | 152,733 | |||||||||||||||||||
Cloud Services Total | 141,388 | 131,827 | 412,897 | 390,882 | |||||||||||||||||||
Elimination of inter-segment gross profit | (88) | (56) | (214) | (200) | |||||||||||||||||||
Total segment gross profit | 379,950 | 301,165 | 1,086,092 | 848,645 | |||||||||||||||||||
Corporate (1) | — | (11) | (74) | (47) | |||||||||||||||||||
Total gross profit | $ | 379,950 | $ | 301,154 | $ | 1,086,018 | $ | 848,598 | |||||||||||||||
Direct costs by reportable segment (2): | |||||||||||||||||||||||
Digital Media (3) | $ | 188,950 | $ | 143,312 | $ | 548,960 | $ | 410,109 | |||||||||||||||
Cloud Services | |||||||||||||||||||||||
Fax and Martech (3) | 42,057 | 28,614 | 107,109 | 89,121 | |||||||||||||||||||
Voice, Backup, Security, and CPP (3) | 37,524 | 37,456 | 150,102 | 118,291 | |||||||||||||||||||
Cloud Services Total | 79,581 | 66,070 | 257,211 | 207,412 | |||||||||||||||||||
Elimination of inter-segment direct costs | (88) | (56) | (214) | (200) | |||||||||||||||||||
Total segment direct costs | 268,443 | 209,326 | 805,957 | 617,321 |
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Corporate (1) | 15,366 | 14,390 | 43,785 | 25,552 | |||||||||||||||||||
Total direct costs (2) | $ | 283,809 | $ | 223,716 | $ | 849,742 | $ | 642,873 | |||||||||||||||
Operating income by reportable segment: | |||||||||||||||||||||||
Digital Media | $ | 49,700 | $ | 26,082 | $ | 124,449 | $ | 47,854 | |||||||||||||||
Cloud Services | |||||||||||||||||||||||
Fax and Martech | 49,936 | 52,821 | 154,633 | 149,028 | |||||||||||||||||||
Voice, Backup, Security, and CPP | 11,871 | 12,936 | 1,053 | 34,442 | |||||||||||||||||||
Cloud Services Total | 61,807 | 65,757 | 155,686 | 183,470 | |||||||||||||||||||
Total segment operating income | 111,507 | 91,839 | 280,135 | 231,324 | |||||||||||||||||||
Corporate (1) | (15,366) | (14,401) | (43,859) | (25,599) | |||||||||||||||||||
Total income from operations | $ | 96,141 | $ | 77,438 | $ | 236,276 | $ | 205,725 | |||||||||||||||
(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) Direct costs for each segment include 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. | |||||||||||||||||||||||
(3) Beginning in the third quarter of 2020, certain expenses associated with Corporate that were previously allocated to the Cloud Services business and the Digital Media business for shared costs incurred by Corporate were no longer allocated. Table above has been recast to remove the impact of certain expenses associated with Corporate that were previously allocated to the Cloud Services and Digital Media businesses. |
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The CODM does not use Balance Sheet and Cash Flow information in connection with operating and investment decisions other than as presented for Digital Media and Cloud Services. Accordingly, the following segment information is presented for Digital Media and Cloud Services.
September 30, 2021 | December 31, 2020 | ||||||||||
Assets: | |||||||||||
Digital Media | $ | 1,978,252 | $ | 2,088,397 | |||||||
Cloud Services | 1,567,119 | 1,473,398 | |||||||||
Total assets from Digital Media and Cloud Services | 3,545,371 | 3,561,795 | |||||||||
Corporate | 285,286 | 103,536 | |||||||||
Total assets | $ | 3,830,657 | $ | 3,665,331 | |||||||
Nine Months Ended September 30, | |||||||||||
2021 | 2020 | ||||||||||
Capital expenditures: | |||||||||||
Digital Media | $ | 51,995 | $ | 43,593 | |||||||
Cloud Services | 35,500 | 27,673 | |||||||||
Total capital expenditures from Digital Media and Cloud Services | 87,495 | 71,266 | |||||||||
Corporate | — | — | |||||||||
Total capital expenditures | $ | 87,495 | $ | 71,266 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Depreciation and amortization: | |||||||||||||||||||||||
Digital Media | $ | 50,056 | $ | 36,651 | $ | 147,482 | $ | 101,771 | |||||||||||||||
Cloud Services | 16,082 | 20,524 | 48,744 | 58,355 | |||||||||||||||||||
Total depreciation and amortization from Digital Media and Cloud Services | 66,138 | 57,175 | 196,226 | 160,126 | |||||||||||||||||||
Corporate | 79 | 2,437 | 217 | 3,554 | |||||||||||||||||||
Total depreciation and amortization | $ | 66,217 | $ | 59,612 | $ | 196,443 | $ | 163,680 |
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The Company maintains operations in the U.S., Canada, Ireland, Japan and other countries. Geographic information about the U.S. and all other countries for the reporting periods is presented below. Such information attributes revenues based on jurisdictions where revenues are reported (in thousands).
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
United States | $ | 366,778 | $ | 296,054 | $ | 1,018,277 | $ | 827,520 | |||||||||||||||
Canada | 19,574 | 17,728 | 59,957 | 51,298 | |||||||||||||||||||
Ireland | 13,980 | 14,947 | 59,227 | 40,520 | |||||||||||||||||||
All other countries | 43,920 | 28,247 | 134,019 | 101,015 | |||||||||||||||||||
$ | 444,252 | $ | 356,976 | $ | 1,271,480 | $ | 1,020,353 | ||||||||||||||||
September 30, 2021 | December 31, 2020 | ||||||||||
Long-lived assets: | |||||||||||
United States | $ | 834,129 | $ | 918,125 | |||||||
All other countries | 46,815 | 54,073 | |||||||||
Total | $ | 880,944 | $ | 972,198 |
17.Accumulated Other Comprehensive Income
The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of tax, for the three months ended September 30, 2021 (in thousands):
Unrealized Gains (Losses) on Investments | Foreign Currency Translation | Total | |||||||||||||||
Beginning balance | $ | 283 | $ | (60,257) | $ | (59,974) | |||||||||||
Other comprehensive income | (114) | (11,101) | (11,215) | ||||||||||||||
Net current period other comprehensive income | (114) | (11,101) | (11,215) | ||||||||||||||
Ending balance | $ | 169 | $ | (71,358) | $ | (71,189) |
The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of tax, for the nine months ended September 30, 2021 (in thousands):
Unrealized Gains (Losses) on Investments | Foreign Currency Translation | Total | |||||||||||||||
Beginning balance | $ | 283 | $ | (55,089) | $ | (54,806) | |||||||||||
Other comprehensive loss | (114) | (16,269) | (16,383) | ||||||||||||||
Net current period other comprehensive loss | (114) | (16,269) | (16,383) | ||||||||||||||
Ending balance | $ | 169 | $ | (71,358) | $ | (71,189) |
There were no reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2021.
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18.Subsequent Events
Consensus, Inc. Spin-Off
On October 7, 2021, the Separation of Consensus into an independent publicly traded company was completed and the Company transferred J2 Cloud Service, LLC to Consensus, Inc. who in turn transferred non-fax assets and liabilities back to Ziff Davis such that Consensus was left with the cloud fax business. The Separation was achieved through the Company’s distribution of 80.1% of the shares of Consensus common stock to holders of J2 Global common stock as of the close of business on October 1, 2021, the record date for the distribution. The Company’s stockholders of record received one share of Consensus common stock for every three shares of J2 Global’s common stock. On October 8, 2021, Consensus began trading on Nasdaq under the stock symbol “CCSI”. Ziff Davis, Inc. (“Ziff Davis”) (formerly J2 Global, Inc.) retained a 19.9% interest in Consensus following the Separation.
On October 7, 2021, in exchange for the equity interest in Consensus, Consensus paid Ziff Davis approximately $269.6 million of cash and issued $500.0 million of senior notes due 2028 to Ziff Davis and Ziff Davis exchanged such notes with the lenders under the Credit Agreement and Credit Agreement Amendments by and among the subsidiaries of Ziff Davis party thereto as guarantors, Citicorp North America Inc. and MUFG Union Bank, N.A. and MUFG Union Bank, N.A., as administrative agent for the lenders, in exchange for extinguishment of the $485.0 million of indebtedness outstanding under the Bridge Loan Facility (Refer to Note 9 - Debt). Such lenders or their affiliates agreed to resell the 2028 notes to qualified institutional buyers in the United States pursuant to Rule 144A.
On October 8, 2021, Ziff Davis announced that it had accepted tender offers to purchase $83.3 million in aggregate principal of its 4.625% Senior Notes for an aggregate purchase price of $90.0 million. The tender offer expired on October 22, 2021.
Corporate Name Change
On October 7, 2021, in connection with the spin-off of its cloud fax business discussed above, the Company changed its name from J2 Global, Inc. to Ziff Davis, Inc. Starting October 8, 2021, the Company’s common stock began trading under the stock symbol “ZD.”
Leadership Changes
In connection with the Separation, each of Doug Bech, Stephen Ross and Pamela Sutton-Wallace resigned as members of the Company’s board of directors, effective as of immediately prior to the Separation, to serve as directors of Consensus. Additionally, Scott Turicchi resigned as President and Chief Financial Officer, effective as of immediately prior to the effectiveness of the Separation. Mr. Turicchi serves as Chief Executive Officer of Consensus. On October 7, 2021, Steve Dunn was appointed the interim principal financial officer of Ziff Davis while Ziff Davis is engaging in a search process for a new chief financial officer.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
In addition to historical information, we have also made forward-looking statements in this report. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the risk factors discussed in Part II, Item 1A - “Risk Factors” of this Quarterly Report on Form 10-Q (if any) and in Part I, Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 (together, the “Risk Factors”), and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures About Market Risk.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with the SEC.
Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability and intention to:
◦Sustain growth or profitability, particularly in light of an uncertain U.S. or worldwide economy and the related impact on customer acquisition and retention rates, customer usage levels, and credit and debit card payment declines;
◦Maintain and increase our customer base and average revenue per user;
◦Generate sufficient cash flow to make interest and debt payments, reinvest in our business, and pursue desired activities and businesses plans while satisfying restrictive covenants relating to debt obligations;
◦Acquire businesses on acceptable terms and successfully integrate and realize anticipated synergies from such acquisitions;
◦Continue to expand our businesses and operations internationally in the wake of numerous risks, including adverse currency fluctuations, difficulty in staffing and managing international operations, higher operating costs as a percentage of revenues, or the implementation of adverse regulations;
◦Maintain our financial position, operating results and cash flows in the event that we incur new or unanticipated costs or tax liabilities, including those relating to federal and state income tax and indirect taxes, such as sales, value-added and telecommunication taxes;
◦Accurately estimate the assumptions underlying our effective worldwide tax rate;
◦Maintain favorable relationships with critical third-party vendors whose financial condition will not negatively impact the services they provide;
◦Create compelling digital media content causing increased traffic and advertising levels; additional advertisers or an increase in advertising spend; and effectively target digital media advertisements to desired audiences;
◦Manage certain risks inherent to our business, such as costs associated with fraudulent activity, system failure or security breach; effectively maintaining and managing our billing systems; time and resources required to manage our legal proceedings; liability for legal and other claims; or adhering to our internal controls and procedures;
◦Compete with other similar providers with regard to price, service, and functionality;
◦Cost-effectively procure, retain and deploy large quantities of telephone numbers in desired locations in the United States and abroad;
◦Achieve business and financial objectives in light of burdensome domestic and international telecommunications, internet or other regulations, including regulations related to data privacy, access, security, retention, and sharing;
◦Successfully manage our growth, including but not limited to our operational and personnel-related resources, and integration of newly acquired businesses;
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◦Successfully adapt to technological changes and diversify services and related revenues at acceptable levels of financial return;
◦Successfully develop and protect our intellectual property, both domestically and internationally, including our brands, patents, trademarks and domain names, and avoid infringing upon the proprietary rights of others;
◦Recruit and retain key personnel; and
◦Realize the expected benefits of the cloud fax spin-off transaction or the sale of the B2B Backup business.
In addition, other factors that could cause actual results to differ materially from those anticipated in these forward-looking statements or materially impact our financial results include the risks associated with new accounting pronouncements, as well as those associated with natural disasters, public health crises, pandemics including the COVID-19 outbreak and other catastrophic events outside of our control, including as to COVID-19 the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.
Overview
As of September 30, 2021, Ziff Davis, Inc., together with its subsidiaries (“Ziff Davis”, “our”, “us” or “we”), was a leading provider of internet information and services. The Digital Media business specialized in the technology, shopping, gaming, and healthcare markets, offering content, tools and services to consumers and businesses. The Cloud Services business provided cloud-based subscription services to consumers and businesses including cloud fax, cybersecurity, privacy and marketing technology.
In February 2021, we sold certain Voice assets in the United Kingdom and in September 2021, we sold our B2B Backup business. On October 7, 2021 subsequent to the end of the third quarter of 2021, the spin-off of the cloud fax business into an independent public company (Consensus) was completed. We believe the spin-off will enable the independent companies to create value with distinct management teams, capital structures and strategic focus.
Our Digital Media business generates revenues from advertising and sponsorships, subscription and usage fees, performance marketing and licensing fees. Our Cloud Services business generates revenues primarily from customer subscription and usage fees.
In addition to growing our business organically, on a regular basis we acquire businesses to grow our customer bases, expand and diversify our service offerings, enhance our technologies, acquire skilled personnel and enter into new markets.
Our consolidated revenues are currently generated from three basic business models, each with different financial profiles and variability. Our Digital Media business is driven primarily by advertising revenues, has relatively higher sales and marketing expense and has seasonal strength in the fourth quarter. Our Cloud Services business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with some minor seasonal weakness in the fourth quarter. We continue to pursue additional acquisitions, which may include companies operating under business models that differ from those we operate under today. Such acquisitions could impact our consolidated profit margins and the variability of our revenues.
Ziff Davis, Inc. (formerly J2 Global, Inc.) was incorporated in 2014 as a Delaware corporation through the creation of a holding company structure, and our Cloud Services business, operated by our wholly owned subsidiary, J2 Cloud Services, LLC (formerly J2 Cloud Services, Inc.), and its subsidiaries, was founded in 1995.
Digital Media Performance Metrics
We use certain metrics to generally assess the operational and financial performance of our Digital Media business. The number of visits is an important metric because it is an indicator of consumers’ level of engagement with our mobile applications, websites and other services. We believe highly engaged consumers are more likely to participate in advertising programs and other activities that derive our multiple revenue streams.
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We define a visit as a group of interactions by users with our mobile and desktop applications and websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. We measure visits with Google Analytics and through partner platform measures. Page views are measured each time a page on our websites is loaded in a browser.
The following table sets forth certain key operating metrics for our Digital Media business for the three and nine months ended September 30, 2021 and 2020 (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 (1) | 2021 (1) | 2020 (1) | ||||||||||||||||||||
Visits | 2,047 | 2,197 | 6,454 | 6,701 | |||||||||||||||||||
Page views | 7,006 | 7,167 | 22,038 | 21,887 |
Sources: Google Analytics and Partner Platforms and test results in connection with Ookla
(1) To more accurately reflect customer activity at Ookla, we have shifted to using tests as the basis instead of Google Analytics, resulting in pro-forma adjustments to data in 2020 and Q1 2021.
Cloud Services Performance Metrics
We use certain metrics to generally assess the operational and financial performance of our Cloud Services business; these metrics also serve as a baseline for (a) internal trends and (b) benchmarking against competitors. The average monthly revenue per customer can be used as an analytical tool in determining the marginal economics of customer acquisition, which is particularly useful as we continue to focus on growing our higher-margin businesses. We also use this metric, in conjunction with the cancel rate, to help provide a directional indicator of Cloud Services revenue and calculate the lifetime value of customers within each of our business units.
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The following table sets forth certain key operating metrics for our Cloud Services business as of and for the three and nine months ended September 30, 2021 and 2020 (in thousands, except for percentages):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Subscriber revenues: | |||||||||||||||||||||||
Fixed (1) | $ | 152,359 | $ | 144,525 | $ | 444,397 | $ | 426,766 | |||||||||||||||
Variable (1) | 29,639 | 25,708 | 84,079 | 80,255 | |||||||||||||||||||
Total subscriber revenues | $ | 181,998 | $ | 170,233 | $ | 528,476 | $ | 507,021 | |||||||||||||||
Other license revenues | 92 | 15 | 275 | 69 | |||||||||||||||||||
Total revenues | $ | 182,090 | $ | 170,248 | $ | 528,751 | $ | 507,090 | |||||||||||||||
Percentage of total subscriber revenues: | |||||||||||||||||||||||
Fixed | 83.7 | % | 84.9 | % | 84.1 | % | 84.2 | % | |||||||||||||||
Variable | 16.3 | % | 15.1 | % | 15.9 | % | 15.8 | % | |||||||||||||||
Total revenues: | |||||||||||||||||||||||
Number-based | $ | 98,652 | $ | 98,000 | $ | 293,167 | $ | 289,502 | |||||||||||||||
Non-number-based | 83,438 | 72,248 | 235,584 | 217,588 | |||||||||||||||||||
Total revenues | $ | 182,090 | $ | 170,248 | $ | 528,751 | $ | 507,090 | |||||||||||||||
Average monthly revenue per Cloud Business Customer (ARPU) (2)(3) | $ | 15.53 | $ | 13.98 | |||||||||||||||||||
Cancel Rate (4) | 2.1 | % | 2.1 | % |
(1)The first quarter 2020 disclosure of $144.8 million in fixed subscriber revenue included $3.3 million of revenue which was subsequently determined to be variable subscriber revenue. As a result, the fixed and variable subscriber revenue have been corrected in the table above.
(2)Quarterly ARPU is calculated using our standard convention of applying the average of the quarter’s beginning and ending base to the total revenue for the quarter. We believe ARPU provides investors an understanding of the average monthly revenues we recognize associated with each Cloud Services customer. As ARPU varies based on fixed subscription fee and variable usage components, we believe it can serve as a measure by which investors can evaluate trends in the types of services, levels of services and the usage levels of those services across our Cloud Services customer base.
(3)Cloud Services customers are defined as paying direct inward dialing numbers for fax and voice services, and direct and resellers’ accounts for other services.
(4)Cancel Rate is defined as cancels of small and medium business and individual Cloud Services customers with greater than four months of continuous service (continuous service includes Cloud Services customers administratively canceled and reactivated within the same calendar month), and enterprise Cloud Services customers beginning with their first day of service. Calculated monthly and expressed as an average over the three months of the quarter.
Critical Accounting Policies and Estimates
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our critical accounting policies are described in our 2020 Annual Report on Form 10-K filed with the SEC on March 1, 2021. During the three months ended September 30, 2021, there were no significant changes in our critical accounting policies and estimates.
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Results of Operations for the Three and Nine Months Ended September 30, 2021
Digital Media
We expect the revenue for the remainder of fiscal year 2021 to be higher compared to the prior-year comparable period due to the acquisition of RetailMeNot and organic growth, subject to the continued risk of the COVID-19 pandemic. We expect the Digital Media business to improve as we integrate our recent acquisitions and over the longer term as advertising transactions continue to shift from offline to online, but these initiatives will be offset by the impact of COVID-19 in the near term. The main focus of our advertising programs is to provide relevant and useful advertising to visitors to our websites and those included within our advertising networks, reflecting our commitment to constantly improve their overall web experience. As a result, we expect to continue to take steps to improve the relevance of the ads displayed on our websites and those included within our advertising networks.
The operating margin we realize on revenues generated from ads placed on our websites is significantly higher than the operating margin we realize from revenues generated from those placed on third-party websites. Growth in advertising revenues from our websites has generally exceeded that from third-party websites. This trend has had a positive impact on our operating margins, and we expect that this will continue for the foreseeable future. However, the trend in advertising spend is shifting to mobile devices and other newer advertising formats which generally experience lower margins than those from desktop computers and tablets. We expect this trend to continue to put pressure on our margins.
We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current macroeconomic conditions. In a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses within this space but with different business models may impact Digital Media’s overall profit margins.
Cloud Services
Excluding the impact of the spin-off of our cloud fax business, the sale of our backup business and assuming a stable or improving economic environment, and, subject to our risk factors, we expect 2021 revenue to be higher compared to the prior year. The main strategic focus of our Cloud Services offerings is to reduce or eliminate costs, increase sales and enhance productivity, mobility, business continuity and security of our customers as the technologies and devices they use evolve over time. As a result, we expect to continue to take steps to enhance our existing offerings and offer new services to continue to satisfy the evolving needs of our customers.
On October 7, 2021, the Company completed the spin-off of its cloud fax business into an independent publicly traded company. This cloud fax business represented approximately 50% of our total Cloud revenues and approximately 31% of our total Cloud operating costs for the nine months ended September 30, 2021. As a result, we anticipate a reduction in our operating margins as the cloud fax business will not recur going forward.
We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current macroeconomic conditions. In a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses within this space but with different business models may impact Cloud Services’ overall profit margins.
Consolidated
Excluding the impact of the spin-off of our fax business and based on the trends discussed above with respect to our Cloud Services and Digital Media businesses, we anticipate our consolidated revenue for fiscal year 2021 to be higher compared to the prior-year comparable period.
We expect operating profit as a percentage of revenues to generally decrease in the future primarily due to the fact that revenue with respect to our Digital Media business (i) is increasing as a percentage of our revenue on a consolidated basis and has historically operated at a lower operating margin; and (ii) the completion of the spin-off of our cloud fax business which historically operated at a higher operating margin than our remaining businesses.
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Revenues
(in thousands, except percentages)
Three Months Ended September 30, | Percentage Change | Nine Months Ended September 30, | Percentage Change | ||||||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
Revenues | $444,252 | $356,976 | 24% | $1,271,480 | $1,020,353 | 25% |
Our revenues consist of revenues from our Digital Media and Cloud Services businesses. Digital Media revenues primarily consist of advertising revenues, subscriptions earned through the granting of access to, or delivery of, certain data products or services to customers, fees paid for generating business leads, and licensing and sale of editorial content and trademarks. Cloud Services revenues primarily consist of revenues from “fixed” customer subscription revenues and “variable” revenues generated from actual usage of our services.
Our revenues in 2021 have increased over the comparable three and nine month periods of 2020 primarily due to a combination of acquisitions and organic growth; partially offset by declines in certain areas of both the Digital Media and Cloud Services businesses.
Cost of Revenues
(in thousands, except percentages)
Three Months Ended September 30, | Percentage Change | Nine Months Ended September 30, | Percentage Change | ||||||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
Cost of revenue | $64,302 | $55,822 | 15% | $185,462 | $171,755 | 8% | |||||||||||||||||||||||||||||
As a percent of revenue | 14% | 16% | 15% | 17% |
Cost of revenues is primarily comprised of costs associated with content fees, editorial and production costs and hosting costs. The increase in cost of revenues for the three months ended September 30, 2021 was primarily due to higher content fees, campaign fulfillment and other editorial and production costs and increased hosting and other computer related costs. The increase in cost of revenues for the nine months ended September 30, 2021 was primarily due to higher content fees, editorial and production costs, hosting and computer related costs and increased depreciation.
Operating Expenses
Sales and Marketing.
(in thousands, except percentages)
Three Months Ended September 30, | Percentage Change | Nine Months Ended September 30, | Percentage Change | ||||||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
Sales and Marketing | $139,693 | $95,074 | 47% | $394,981 | $287,317 | 37% | |||||||||||||||||||||||||||||
As a percent of revenue | 31% | 27% | 31% | 28% |
Our sales and marketing costs consist primarily of internet-based advertising, sales and marketing, personnel costs and other business development-related expenses. Our internet-based advertising relationships consist primarily of fixed cost and performance-based (cost-per-impression, cost-per-click and cost-per-acquisition) advertising relationships with an array of online service providers. Advertising cost for the three months ended September 30, 2021 was $72.8 million (primarily consists of $44.3 million of third-party advertising costs and $22.1 million of personnel costs) compared to the third quarter of 2020 of $35.4 million (primarily consists of $19.8 million of third-party advertising costs and $12.8 million of personnel costs. Advertising cost for the nine months ended September 30, 2021 was $205.2 million (primarily consists of $119.7 million of third-party advertising costs and $67.5 million of personnel costs) compared to 2020 of $108.0 million (primarily consists of $57.8 million of third-party advertising costs and $39.4 million of personnel costs). The increase in sales and marketing
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expenses for the three and nine months ended September 30, 2021 versus the prior comparable period was primarily due to increased creative services, sales, advertising operations, advertising and product development costs associated with the acquisition of businesses acquired in and subsequent to the third quarter 2020 within the Digital Media and Cloud Services businesses.
Research, Development and Engineering.
(in thousands, except percentages)
Three Months Ended September 30, | Percentage Change | Nine Months Ended September 30, | Percentage Change | ||||||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
Research, Development and Engineering | $21,639 | $14,261 | 52% | $62,634 | $43,273 | 45% | |||||||||||||||||||||||||||||
As a percent of revenue | 5% | 4% | 5% | 4% |
Our research, development and engineering costs consist primarily of personnel-related expenses. The increase in research, development and engineering costs for the three and nine months ended September 30, 2021 versus the prior comparable period was primarily due to an increase in costs associated with businesses acquired in and subsequent to the third quarter 2020.
General and Administrative.
(in thousands, except percentages)
Three Months Ended September 30, | Percentage Change | Nine Months Ended September 30, | Percentage Change | ||||||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
General and Administrative | $122,477 | $114,381 | 7% | $359,498 | $312,283 | 15% | |||||||||||||||||||||||||||||
As a percent of revenue | 28% | 32% | 28% | 31% |
Our general and administrative costs consist primarily of personnel-related expenses, depreciation and amortization, changes in the fair value associated with contingent consideration, share-based compensation expense, bad debt expense, professional fees, severance and insurance costs. The increase in general and administrative expense for the three and nine months ended September 30, 2021 versus the prior comparable period was primarily due to increased amortization of intangible assets, salary and related costs and professional fees.
Goodwill impairment on business. Our goodwill impairment on business is generated from the impairment of the B2B Backup business in the second quarter of 2021. Goodwill impairment on business was $32.6 million for the nine months ended September 30, 2021. See Note 6 - Dispositions from the footnotes to our Condensed Consolidated Financial Statements for additional information.
Share-Based Compensation
The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Cost of revenues | $ | 108 | $ | 136 | $ | 357 | $ | 413 | |||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Sales and marketing | 427 | 321 | 1,160 | 1,135 | |||||||||||||||||||
Research, development and engineering | 613 | 425 | 1,690 | 1,340 | |||||||||||||||||||
General and administrative | 5,607 | 4,918 | 15,912 | 15,755 | |||||||||||||||||||
Total | $ | 6,755 | $ | 5,800 | $ | 19,119 | $ | 18,643 |
Non-Operating Income and Expenses
Interest expense, net. Our interest expense, net is generated primarily from interest expense due to outstanding debt, partially offset by interest income earned on cash, cash equivalents and investments. Interest expense, net was $19.9 million and $22.7 million for the three months ended September 30, 2021 and 2020, respectively, and $62.8 million and $65.9 million for the nine months ended September 30, 2021 and 2020, respectively. Interest expense, net was lower due to the redemption of our 3.25% Convertible Notes on August 2, 2021.
Loss (gain) on sale of businesses. Loss on sale of businesses was $24.6 million during the three months ended September 30, 2021 and a gain of $17.1 million for the three months ended September 30, 2020. Loss on sale of businesses was $21.8 million during the nine months ended September 30, 2021 and a gain of $17.1 million for the nine months ended September 30, 2020. Our loss on the sale of business during the third quarter of 2021 was related to the sale of our B2B Back-up business. The loss on the sale of businesses during the nine months ended September 30, 2021 was due to the loss on the sale of the B2B Back-up business, partially offset by a gain on the sale of certain Voice assets in the United Kingdom in the first quarter of 2021 with a subsequent adjustment in the second quarter of 2021. See Note 6 - Dispositions from the footnotes to our Condensed Consolidated Financial Statements for additional information.
Loss on investments, net. Our loss on investments, net is generated from gains or losses from investments in equity and debt securities. Our loss on investments, net was zero and $0.2 million for the three months ended September 30, 2021 and 2020 and $16.7 million and $21.0 million for the nine months ended September 30, 2021 and 2020, respectively. Our loss on investments, net for the three months ended September 30, 2021 versus the prior comparable period was consistent. Our loss on investments, net decreased for the nine months ended September 30, 2021 versus the prior comparable period due to lower net losses realized on certain investments as a result of an impairment recognized in the current period and changes in the investee’s capital structure and overall market volatility recognized in the prior comparable period.
Other income (expense), net. Our other income (expense), net is generated primarily from miscellaneous items and gain or losses on currency exchange. Other income (expense), net was $1.7 million and $14.2 million for the three months ended September 30, 2021 and 2020, respectively and $1.4 million and $16.4 million for the nine months ended September 30, 2021 and 2020, respectively. Other income (expense), net changed for the three and nine months ended September 30, 2021 versus the prior comparable periods primarily due to changes in gain or losses on currency exchange.
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those related to transfer pricing) and different tax rates in the various jurisdictions in which we operate. The tax bases of our assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.
Provision for income taxes amounted to $8.8 million and $24.3 million for the three months ended September 30, 2021 and 2020, respectively, and $16.7 million and $49.0 million for the nine months ended September 30, 2021 and 2020, respectively. Our effective tax rate was 16.6% and 28.3% for the three months ended September 30, 2021 and 2020, respectively, and 12.3% and 32.2% for the nine months ended September 30, 2021 and 2020, respectively.
The decrease in our effective income tax rate for the three months ended September 30, 2021 was primarily attributable to the following:
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1.a decrease in tax expense during 2021 due to recognizing a current tax benefit related to the sale of the business-to-business backup business units; and
2.a decrease in tax expense due to increased tax benefits related to tax deductions for the vesting of restricted stock units and exercises of stock options; partially offset by
3.an increase in our effective income tax rate during 2021 for U.S. state and local taxes due to a greater portion of our income being subject to tax in the U.S.
The decrease in our effective income tax rate for the nine months ended September 30, 2021 was primarily attributable to the following:
1.a decrease in tax expense during 2021 due to recognizing a tax benefit related to the disposition of certain business units; and
2.a decrease in tax expense due to discrete tax benefits related to a reduction in our net reserve for uncertain tax positions with no similar events for the nine months ended September 30, 2020; partially offset by
3.an increase in our effective income tax rate during 2021 for U.S. state and local taxes due to a greater portion of our income being subject to tax in the U.S.
Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. Certain of these tax positions have in the past been, and are currently being, challenged, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient.
Equity Method Investment
Income (loss) from equity method investment, net. Income (loss) from equity method investment, net is generated from our investment in the OCV Fund for which we receive annual audited financial statements. The investment in the OCV Fund is presented net of tax and on a one-quarter lag 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.
The income (loss) from equity method investment, net was $(1.9) million and $(0.7) million net of tax benefit (expense) for the three months ended September 30, 2021 and 2020, respectively, and $16.6 million and $(10.8) million, for the nine months ended September 30, 2021 and 2020, respectively. The nine months ended September 30, 2021 gain was primarily a result of a gain on the underlying investments. During the three months ended September 30, 2021 and 2020, the Company recognized management fees of $0.8 million and $0.8 million, net of tax benefit, respectively, and for the nine months ended September 30, 2021 and 2020, the Company recognized management fees of $2.3 million and $2.3 million, net of tax benefit, respectively.
Digital Media and Cloud Services Results
Our businesses are based on the organization structure used by management for making operating and investment decisions and for assessing performance and have been aggregated into two businesses: (i) Digital Media; and (ii) Cloud Services.
We evaluate the performance of our businesses based on revenues, including both external and interbusiness net sales, and operating income. We account for interbusiness sales and transfers based primarily on standard costs with reasonable mark-ups established between the businesses. Identifiable assets by business are those assets used in the respective business’ operations. Corporate assets consist of cash and cash equivalents, deferred income taxes and certain other assets. All significant interbusiness amounts are eliminated to arrive at our consolidated financial results.
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Digital Media
The following results are presented for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
External net sales | $ | 262,162 | $ | 186,728 | $ | 742,729 | $ | 513,262 | |||||||||||||||
Inter-business net sales | 267 | 56 | 551 | 200 | |||||||||||||||||||
Net sales | 262,429 | 186,784 | 743,280 | 513,462 | |||||||||||||||||||
Cost of revenues | 23,779 | 17,390 | 69,871 | 55,499 | |||||||||||||||||||
Gross profit | 238,650 | 169,394 | 673,409 | 457,963 | |||||||||||||||||||
Operating expenses | 188,950 | 143,312 | 548,960 | 410,109 | |||||||||||||||||||
Operating income | $ | 49,700 | $ | 26,082 | $ | 124,449 | $ | 47,854 |
Digital Media’s net sales of $262.4 million for the three months ended September 30, 2021 increased $75.6 million, or 40.5%, from the prior comparable period primarily due to business acquisitions. Digital Media’s net sales of $743.3 million for the nine months ended September 30, 2021 increased $229.8 million, or 44.8%, from the prior comparable period primarily due to business acquisitions.
Digital Media’s gross profit of $238.7 million for the three months ended September 30, 2021 increased $69.3 million, or 40.9%, from the prior comparable period primarily due to business acquisitions. Digital Media’s gross profit of $673.4 million for the nine months ended September 30, 2021 increased $215.4 million, or 47.0%, from the prior comparable period primarily due to business acquisitions. Digital Media’s operating expenses of $189.0 million for the three months ended September 30, 2021 increased $45.6 million from the prior comparable period. Digital Media’s operating expenses of $549.0 million for the nine months ended September 30, 2021 increased $138.9 million from the prior comparable period. The increase in the three and nine months ended September 30, 2021 is primarily due to additional expense associated with businesses acquired in and subsequent to the prior comparable period including (a) additional salary and related costs including severance; (b) creative and selling costs; and (c) increased amortization of intangible assets.
As a result of these factors, Digital Media’s operating income of $49.7 million for the three months ended September 30, 2021 increased $23.6 million, or 90.6%, from the prior comparable period. Digital Media’s operating income of $124.4 million for the nine months ended September 30, 2021 increased $76.6 million, or 160.1%, from the prior comparable period.
Cloud Services
The following results are presented for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
External net sales | $ | 182,090 | $ | 170,248 | $ | 528,751 | $ | 507,090 | |||||||||||||||
Inter-business net sales | 89 | — | 215 | — | |||||||||||||||||||
Net sales | 182,179 | 170,248 | 528,966 | 507,090 | |||||||||||||||||||
Cost of revenues | 40,791 | 38,421 | 116,069 | 116,208 | |||||||||||||||||||
Gross profit | 141,388 | 131,827 | 412,897 | 390,882 | |||||||||||||||||||
Operating expenses | 79,581 | 66,070 | 257,211 | 207,412 | |||||||||||||||||||
Operating income | $ | 61,807 | $ | 65,757 | $ | 155,686 | $ | 183,470 |
Cloud Services’ net sales of $182.2 million for the three months ended September 30, 2021 increased $11.9 million, or 7.0%, from the prior comparable period primarily due to business acquisitions acquired, partially offset by businesses sold subsequent to the third quarter 2020. Cloud Services’ net sales of $529.0 million for the nine months ended September 30, 2021
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increased $21.9 million, or 4.3%, from the prior comparable period primarily due to business acquisitions acquired, partially offset by businesses sold subsequent to the third quarter 2020.
Cloud Services’ gross profit of $141.4 million for the three months ended September 30, 2021 increased $9.6 million, or 7.3%, from the prior comparable period primarily due to business acquisitions; partially offset by businesses sold subsequent to the third quarter 2020. Cloud Services’ gross profit of $412.9 million for the nine months ended September 30, 2021 increased $22.0 million, or 5.6%, from the prior comparable period primarily due to business acquisitions; partially offset by businesses sold subsequent to the third quarter 2020.
Cloud Services’ operating expenses of $79.6 million for the three months ended September 30, 2021 increased $13.5 million from the prior comparable period primarily due to expense associated with businesses acquired in and subsequent to the third quarter 2020 and increased marketing and advertising costs; partially offset by businesses sold subsequent to the prior comparable period. Cloud Services’ operating expenses of $257.2 million for the nine months ended September 30, 2021 increased $49.8 million from the prior comparable period primarily due to expense associated with businesses acquired in and subsequent to the third quarter 2020, increased marketing and advertising costs and the recognition of a goodwill impairment on business; partially offset by businesses sold subsequent to the prior comparable period.
As a result of these factors, Cloud Services’ operating income of $61.8 million for the three months ended September 30, 2021 decreased $(4.0) million, or (6.0)%, from the prior comparable period. Cloud Services’ operating income of $155.7 million for the nine months ended September 30, 2021 decreased $(27.8) million, or (15.1)%, from the prior comparable period.
Liquidity and Capital Resources
Cash and Cash Equivalents and Investments
At September 30, 2021, we had cash, cash equivalents and investments of $657.2 million compared to $340.8 million at December 31, 2020. The increase in cash and investments resulted primarily from cash provided from operations and proceeds from the Bridge Loan Facility (defined below); partially offset by the repayment of debt and cash used in business acquisitions, purchases of property and equipment (including capitalized labor), repurchase of common stock and investments. At September 30, 2021, cash and investments consisted of cash and cash equivalents of $546.5 million, short-term investments of zero and long-term investments of $110.7 million. Our investments consist of equity and debt securities. For financial statement presentation, we classify our debt securities primarily as short- and long-term based upon their maturity dates. Short-term investments mature within one year of the date of the financial statements and long-term investments mature one year or more from the date of the financial statements. As of September 30, 2021, cash and investments held within domestic and foreign jurisdictions were $491.0 million and $166.2 million, respectively.
On April 7, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as administrative agent, collateral agent and sole lead arranger for the Lenders (the “Agent”). Pursuant to the Credit Agreement, the Lenders have provided the Company with a revolving credit facility of $100 million (the “Credit Facility”). Subject to customary conditions, the Company may, from time to time, request increases in the commitments under the Credit Agreement in an aggregate amount up to $250 million, for a total aggregate commitment of up to $350 million. The proceeds of the Credit Facility are intended to be used for working capital and general corporate purposes of the Company and its subsidiaries, including to finance certain permitted acquisitions and capital expenditures in accordance with the terms of the Credit Agreement. The final maturity of the Credit Facility will occur on April 7, 2026.
On June 2, 2021, June 21, 2021, August 20, 2021 and September 16, 2021, we entered into First, Second, Third and Fourth Amendments (together the “Amendments”) to Credit Agreement. The Amendments (i) provided for the issuance of a senior secured term loan under the Credit Agreement, in an aggregate principal amount of $485.0 million (the “Bridge Loan Facility”), (ii) permitted the spin-off of our cloud fax business into a new publicly traded company, and (iii) provided for certain other changes to the Credit Agreement.
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On October 7, 2021, in exchange for the equity interest in Consensus, Consensus paid Ziff Davis approximately $269.6 million of cash and issued $500.0 million of senior notes due 2028 to Ziff Davis and Ziff Davis exchanged such notes with the lenders under the Credit Agreement and Credit Agreement Amendments by and among the subsidiaries of Ziff Davis party thereto as guarantors, Citicorp North America Inc. and MUFG Union Bank, N.A. and MUFG Union Bank, N.A., as administrative agent for the lenders, in exchange for extinguishment of a similar amount indebtedness under the Bridge Loan Facility. Such lenders or their affiliates agreed to resell the 2028 notes to qualified institutional buyers in the United States pursuant to Rule 144A.
On September 25, 2017, the Board of Directors of the Company authorized the Company’s entry into a commitment to invest $200 million in an investment fund (the “Fund”) over several years at a fairly ratable rate. The manager, OCV Management, LLC (“OCV”), and general partner of the Fund are entities with respect to which Richard S. Ressler, Chairman of the Board of Directors (the “Board”) of the Company, is indirectly the majority equity holder. As a limited partner in the Fund, the Company will pay an annual management fee to the manager equal to 2.0% (reduced by 10% each year beginning with the sixth year) of capital commitments. In addition, subject to the terms and conditions of the Fund’s limited partnership agreement, once the Company has received distributions equal to its invested capital, the Fund’s general partner will be entitled to a carried interest equal to 20%. The Fund has a six year investment period, subject to certain exceptions. The commitment was approved by the Audit Committee of the Board in accordance with the Company’s related-party transaction approval policy.
In the first nine months of 2021, the Company received capital call notices from the management of OCV Management, LLC for $21.2 million, inclusive of certain management fees. Of the outstanding balance, $21.2 million has been paid for the nine months ended September 30, 2021.
We currently anticipate that our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our anticipated needs for working capital, capital expenditures and stock repurchases, if any, for at least the next 12 months.
Cash Flows
Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents. Net cash provided by operating activities was $430.3 million and $356.0 million for the nine months ended September 30, 2021 and 2020, respectively. Our operating cash flows resulted primarily from cash received from our customers offset by cash payments we made to third parties for their services, employee compensation and interest payments associated with our debt. The increase in our net cash provided by operating activities in 2021 compared to 2020 was attributable to additional income after considering noncash items, less cash outflow associated with accounts payable and accrued expenses and increased cash inflow associated with deferred revenue; partially offset by higher income tax payments, cash outflow associated with long-term liabilities and higher accounts receivable and prepaid expenses. Our cash and cash equivalents were $546.5 million and $242.7 million at September 30, 2021 and December 31, 2020, respectively.
Net cash used in investing activities was $159.6 million and $107.3 million for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, net cash used in investing activities was primarily due to business acquisitions and capital expenditures associated with the purchase of property and equipment (including capitalized labor) and the purchase of investments; partially offset by proceeds from the sale of businesses and distributions from an equity method investment. The increase in our net cash used in investing activities in 2021 compared to 2020 was primarily due to additional cash used for business acquisitions.
Net cash provided by (used in) financing activities was $39.8 million and $(256.9) million for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, net cash provided by financing activities was primarily due to the proceeds from the Bridge Loan Facility, issuance of common stock under the employee stock purchase plan and the exercise of options, partially offset by the repayment of debt, repurchase of common stock and business acquisitions. The change in net cash provided by financing activities in 2021 compared to 2020 was primarily attributable to proceeds from a bridge loan in 2021.
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Stock Repurchase Program
In February 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of our common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 20, 2021.
In November 2018 and May 2019, the Company entered into Rule 10b5-1 trading plans with a broker to facilitate the repurchase program. 600,000 shares were repurchased under the share repurchase program in 2018 at an aggregate cost of $42.5 million and were subsequently retired in March 2019.
During the year ended December 31, 2019, the Company repurchased 197,870 shares at an aggregate cost of $16.0 million which were subsequently retired in the same year.
During the year ended December 31, 2020, the Company repurchased 1,140,819 shares under this program at an aggregate cost of $87.5 million, which were subsequently retired in the same year. As of December 31, 2020, all the available shares were repurchased under the 2012 Program at an aggregate cost of $204.6 million (including an immaterial amount of commission fees).
On August 6, 2020, the Company’s Board of Directors approved a program authorizing the repurchase of up to 10 million shares of our common stock through August 6, 2025 (the “2020 Program”) in addition to the five million shares repurchased under the 2012 Program. During the three month period ended September 30, 2021, we repurchased no shares under this program. Cumulatively at September 30, 2021, 2,490,599 shares were repurchased at an aggregate cost of $177.8 million (including an immaterial amount of commission fees) under the 2020 Program, which were subsequently retired.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of September 30, 2021
Payments Due in (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Contractual Obligations | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
Long-term debt - principal (a) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,300,000 | $ | 1,300,000 | ||||||||||||||||||||||||||||||
Long-term debt - interest (b) | 24,559 | 44,313 | 44,313 | 44,313 | 44,313 | 183,061 | 384,872 | |||||||||||||||||||||||||||||||||||||
Bridge loan (c) | 485,000 | — | — | — | — | — | 485,000 | |||||||||||||||||||||||||||||||||||||
Operating leases (d) | 8,507 | 31,926 | 26,494 | 18,839 | 10,497 | 35,250 | 131,513 | |||||||||||||||||||||||||||||||||||||
Telecom services and co-location facilities (f) | 2,539 | 1,712 | 456 | 42 | — | — | 4,749 | |||||||||||||||||||||||||||||||||||||
Holdback payments (g) | 3,693 | 16,944 | 950 | — | — | — | 21,587 | |||||||||||||||||||||||||||||||||||||
Transition tax (h) | — | — | — | 3,189 | 8,486 | — | 11,675 | |||||||||||||||||||||||||||||||||||||
Self-Insurance (i) | 8,861 | 13,532 | 3,001 | — | — | — | 25,394 | |||||||||||||||||||||||||||||||||||||
Other (j) | 381 | 598 | — | — | — | — | 979 | |||||||||||||||||||||||||||||||||||||
Total | $ | 533,540 | $ | 109,025 | $ | 75,214 | $ | 66,383 | $ | 63,296 | $ | 1,518,311 | $ | 2,365,769 |
(a)These amounts represent principal on long-term debt.
(b)These amounts represent interest on long-term debt.
(c)These amounts represent principal on short-term debt.
(d)These amounts represent undiscounted future minimum rental commitments under noncancellable operating leases.
(e)These amounts represent undiscounted future minimum rental commitments under noncancellable finance leases.
(f)These amounts represent service commitments to various telecommunication providers.
(g)These amounts represent the holdback amounts in connection with certain business acquisitions.
(h)These amounts represent commitments related to the transition tax on unrepatriated foreign earnings reduced by the 2017 overpayment of US Federal Income Tax.
(i)These amounts represent health and dental insurance plans in connection to self-insurance.
(j)These amounts represent certain consulting and Board of Directors fee arrangements, software license and implementation commitments and others.
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As of September 30, 2021, our liability for uncertain tax positions was $54.2 million. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlement with such authorities.
We have not presented contingent consideration associated with acquisitions (other than contingent consideration which we have deemed as certain in terms of amount and timing) in the table above due to the uncertainty of the amounts and the timing of cash settlements. We have also not presented our remaining commitment to OCV Management, LLC of approximately $72.5 million due to the uncertainty of timing of funding requests.
Off-Balance Sheet Arrangements
We are not party to any material off-balance sheet arrangements.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk
The following discussion of the market risks we face contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. Ziff Davis undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document and in the other documents incorporated by reference herein, including our Annual Report on Form 10-K for the year ended December 31, 2020 as well as in other documents we file from time to time with the SEC, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K filed or to be filed by us in 2021.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and borrowings under our Credit Facility that bear variable market interest rates. The primary objectives of our investment activities are to preserve our principal while at the same time maximizing yields without significantly increasing risk. To achieve these objectives, we maintain our portfolio of cash equivalents and investments in a mix of instruments that meet high credit quality standards, as specified in our investment policy or otherwise approved by the Board of Directors. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of September 30, 2021, the carrying value of our cash and cash equivalents approximated fair value. Our return on these investments is subject to interest rate fluctuations.
As of September 30, 2021, we had investments in debt securities with effective maturities greater than one year of approximately zero. As of September 30, 2021 and December 31, 2020, we had cash and cash equivalent investments primarily in money market funds with maturities of 90 days or less of $546.5 million and $242.7 million, respectively.
On April 7, 2021, the Company entered into a Credit Agreement (“Credit Agreement”) with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as administrative agent, collateral agent and sole lead arranger for the Lenders (the “Agent”). Pursuant to the Credit Agreement, the Lenders provided the Company with a revolving credit facility of $100 million (the “Credit Facility”). Subject to customary conditions, the Company may, from time to time, request increases in the commitments under the Credit Agreement in an aggregate amount up to $250 million, for a total aggregate commitment of up to $350 million. The proceeds of the Credit Facility are intended to be used for working capital and general corporate purposes of the Company and its subsidiaries, including to finance certain permitted acquisitions and capital expenditures in accordance with the terms of the Credit Agreement.
At the Company’s option, amounts borrowed under the Credit Agreement will bear interest at either (i) a base rate equal to the greatest of (x) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus ½ of 1% per annum, (y) the rate of interest per annum most recently announced by the Agent 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 final maturity of the Credit Facility will occur on April 7, 2026. The Company is permitted to make voluntary prepayments of the Credit Facility at any time without payment of a premium or penalty.
On June 2, 2021, June 21, 2021, August 20, 2021 and September 16, 2021, the Company entered into First, Second, Third and Fourth Amendments (together the “Amendments”) to the Credit Agreement. The Amendments (i) provided for the issuance of a senior secured term loan under the Credit Agreement, in an aggregate principal amount of $485.0 million (the “Bridge Loan Facility”), (ii) permitted the spin-off of the Company’s cloud fax business into a new publicly traded company, and (iii) provided for certain other changes to the Credit Agreement. As of September 30, 2021, the Company had drawn on the full amount of the Bridge Loan Facility with $485.0 million outstanding (later extinguished as described below). The proceeds of the Bridge Loan Facility were used to redeem the Company’s 3.25% Convertible Notes.
The loans under the Bridge Loan Facility (the “Bridge Loans”) bore interest at a rate per annum equal to (i) initially upon funding of the Bridge Loans, either a base rate plus 2.00%, or a LIBOR rate plus 3.00%, (ii) from six months after the funding date of the Bridge Loans until twelve months after the funding date of the Bridge Loans, either a base rate plus 2.50%, or a LIBOR rate plus 3.50%, and (iii) from twelve months after the funding date of the Bridge Loans until repayment of the
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Bridge Loans, either a base rate plus 3.00% or a LIBOR rate plus 4.00%. The Bridge Loan Facility were to mature on the date that is 364 days after the funding date of the Bridge Loans, with two automatic extensions, each for an additional three months, if the spin-off transaction has not been declared effective.
On October 7, 2021, in exchange for the equity interest in Consensus, Consensus paid Ziff Davis approximately $269.6 million of cash and issued $500.0 million of senior notes due 2028 to Ziff Davis and Ziff Davis exchanged such notes with the lenders under the Credit Agreement and Credit Agreement Amendments by and among the subsidiaries of Ziff Davis party thereto as guarantors, Citicorp North America Inc. and MUFG Union Bank, N.A. and MUFG Union Bank, N.A., as administrative agent for the lenders, in exchange for extinguishment of a similar amount indebtedness under the Bridge Loan Facility. Such lenders or their affiliates agreed to resell the 2028 notes to qualified institutional buyers in the United States pursuant to Rule 144A.
We cannot ensure that future interest rate movements will not have a material adverse effect on our future business, prospects, financial condition, operating results and cash flows. To date, we have not entered into interest rate hedging transactions to control or minimize certain of these risks.
Foreign Currency Risk
We conduct business in certain foreign markets, primarily in Canada, Australia and the European Union. Our principal exposure to foreign currency risk relates to investment and inter-company debt in foreign subsidiaries that transact business in functional currencies other than the U.S. Dollar, primarily the Australian Dollar, the Canadian Dollar, the Euro, the Hong Kong Dollar, the Japanese Yen, the New Zealand Dollar, the Norwegian Kroner and the British Pound Sterling. If we are unable to settle our short-term inter-company debts in a timely manner, we remain exposed to foreign currency fluctuations.
As we expand our international presence, we become further exposed to foreign currency risk by entering new markets with additional foreign currencies. The economic impact of currency exchange rate movements is often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies.
As currency exchange rates change, translation of the income statements of the international businesses into U.S. Dollars affects year-over-year comparability of operating results, the impact of which is immaterial to the comparisons set forth in this Quarterly Report on Form 10-Q.
Historically, we have not hedged translation risks because cash flows from international operations were generally reinvested locally; however, we may do so in the future. Our objective in managing foreign exchange risk is to minimize the potential exposure to changes that exchange rates might have on earnings, cash flows and financial position.
Foreign exchange gain (losses) for the three months ended September 30, 2021 and 2020 were $1.9 million and $13.9 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $1.6 million and $15.0 million, respectively. The decrease in gains to our earnings in the three months ended September 30, 2021 were attributable to lower inter-company balances between periods in foreign subsidiaries that were in functional currencies other than the U.S. Dollar and exchange rate fluctuations.
Cumulative translation adjustments, net of tax, included in other comprehensive income for the three months ended September 30, 2021 and 2020 were $11.1 million and $3.2 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $16.3 million and $12.1 million, respectively.
We currently do not have derivative financial instruments for hedging, speculative or trading purposes and therefore are not subject to such hedging risk. However, we may in the future engage in hedging transactions to manage our exposure to fluctuations in foreign currency exchange rates.
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Item 4.Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Company’s management, with the participation of Vivek Shah, our principal executive officer, and Steve P. Dunn, our interim principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, Mr. Shah and Mr. Dunn concluded that these disclosure controls and procedures were effective as of the end of the period covered in this Quarterly Report on Form 10-Q.
(b) Changes in Internal Controls
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) which occurred during the third quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.Legal Proceedings
See Note 11 – Commitments and Contingencies of the Notes to Financial Statements (Part I, Item 1) for information regarding certain legal proceedings in which we are involved.
Item 1A. Risk Factors
In addition to the other information set forth in this report, before deciding to invest in the Company or to maintain or increase your investment, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and in Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (the “10-K/10-Q Risk Factors”) as well as in other documents we file from time to time with the SEC, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K filed or to be filed by us in 2021. If any of these risks occur, our business, prospects, financial condition, operating results and cash flows could be materially adversely affected. The 10-K/10-Q Risk Factors are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. There have been no material changes from the 10-K/10-Q Risk Factors.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(a)Unregistered Sales of Equity Securities
None.
(b)Issuer Purchases of Equity Securities
Effective February 15, 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of our common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 20, 2021.
In November 2018 and May 2019, the Company entered into Rule 10b5-1 trading plans with a broker to facilitate the repurchase program. 600,000 shares were repurchased under the share repurchase program in 2018 at an aggregate cost of $42.5 million and were subsequently retired in March 2019. During the year ended December 31, 2019, the Company repurchased 197,870 shares at an aggregate cost of $16.0 million which were subsequently retired in the same year. During the year ended December 31, 2020, the Company repurchased 1,140,819 shares under this program at an aggregate cost of $87.5 million, which were subsequently retired in the same year. As of December 31, 2020, all the available shares were repurchased under the 2012 Program at an aggregate cost of $204.6 million (including an immaterial amount of commission fees).
On August 6, 2020, the Company’s Board of Directors approved a program authorizing the repurchase of up to 10 million shares of our common stock through August 6, 2025 (the “2020 Program”) in addition to the five million shares repurchased under the 2012 Program. During the nine month period ended September 30, 2021, the Company repurchased no shares under this program. Cumulatively at September 30, 2021, 2,490,599 shares were repurchased at an aggregate cost of $177.8 million (including an immaterial amount of commission fees) under the 2020 Program, which were subsequently retired. See Note 13, “Stockholders’ Equity” of the Notes to the Condensed Consolidated Financial Statements.
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The following table details the repurchases that were made under and outside the 2020 Program during the three months ended September 30, 2021:
Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Program | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program | |||||||||||||||||||
July 1, 2021 - July 31, 2021 | 45,243 | $ | 139.97 | — | 7,509,401 | ||||||||||||||||||
August 1, 2021 - August 31, 2021 | 2,140 | $ | 141.13 | — | 7,509,401 | ||||||||||||||||||
September 1, 2021 - September 30, 2021 | 2,258 | $ | 136.32 | — | 7,509,401 | ||||||||||||||||||
Total | 49,641 | — | 7,509,401 |
(1)Includes shares surrendered to the Company to pay the exercise price and/or to satisfy tax withholding obligations in connection with employee stock options and/or the vesting of restricted stock issued to employees.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not Applicable.
Item 5.Other Information
None.
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Item 6.Exhibits
Separation and Distribution Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Amended and Restated Certificate of Incorporation of J2 Global, Inc., dated as of June 10, 2014 (2) | |||||
Amendment to Amended and Restated Certificate of Incorporation of J2 Global, Inc. dated as of September 5, 2019 (3) | |||||
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Ziff Davis, Inc. dated as of October 7, 2021 (1) | |||||
Fifth Amended and Restated Bylaws of Ziff Davis, Inc. | |||||
Second, Third and Fourth Amendments to Credit Agreement by and among J2 Global, Inc., the subsidiaries of J2 Global, Inc. party thereto as guarantors, Citicorp North America Inc. and MUFG Union Bank, N.A., as lenders, and MUFG Union Bank, N.A., as administrative agent for the lenders. (4) | |||||
Transition Services Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Tax Matters Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Employee Matters Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Intellectual Property License Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Stockholder and Registration Rights Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Rule 13a-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
Rule 13a-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
101 | The following financial information from Ziff Davis, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020, and (vi) the Notes to Condensed Consolidated Financial Statements. | ||||
104 | Cover Page Interactive Data File - the cover page from Ziff Davis, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 is formatted in Inline XBRL |
(1) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on October 8, 2021.
(2) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on June 10, 2014.
(3) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on November 1, 2019.
(4) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on September 22, 2021.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Ziff Davis, Inc. | ||||||||||||||
Date: | November 9, 2021 | By: | /s/ VIVEK SHAH | |||||||||||
Vivek Shah | ||||||||||||||
Chief Executive Officer and a Director | ||||||||||||||
(Principal Executive Officer) |
Date: | November 9, 2021 | By: | /s/ STEVE P. DUNN | |||||||||||
Steve P. Dunn | ||||||||||||||
Chief Accounting Officer | ||||||||||||||
(Interim Principal Financial Officer and | ||||||||||||||
Principal Accounting Officer) |
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INDEX TO EXHIBITS
Exhibit Number | Description | ||||
Separation and Distribution Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Amended and Restated Certificate of Incorporation of J2 Global, Inc., dated as of June 10, 2014 (2) | |||||
Amendment to Amended and Restated Certificate of Incorporation of J2 Global, Inc. dated as of September 5, 2019 (3) | |||||
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Ziff Davis, Inc. dated as of October 7, 2021 (1) | |||||
Fifth Amended and Restated Bylaws of Ziff Davis, Inc. | |||||
Second, Third and Fourth Amendments to Credit Agreement by and among J2 Global, Inc., the subsidiaries of J2 Global, Inc. party thereto as guarantors, Citicorp North America Inc. and MUFG Union Bank, N.A., as lenders, and MUFG Union Bank, N.A., as administrative agent for the lenders. (4) | |||||
Transition Services Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Tax Matters Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Employee Matters Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Intellectual Property License Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Stockholder and Registration Rights Agreement, dated as of October 7, 2021, by and between Ziff Davis, Inc. and Consensus Cloud Solutions, Inc. (1) | |||||
Rule 13a-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
Rule 13a-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
101 | The following financial information from Ziff Davis, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020, and (vi) the Notes to Condensed Consolidated Financial Statements. | ||||
104 | Cover Page Interactive Data File - the cover page from Ziff Davis, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 is formatted in Inline XBRL |
(1) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on October 8, 2021.
(2) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on June 10, 2014.
(3) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on November 1, 2019.
(4) Incorporated by reference to Ziff Davis’ Current Report on Form 8-K filed with the Commission on September 22, 2021.
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