-4-
j2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except share and per share data) |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Total revenues | $ | 273,616 |
| | $ | 210,116 |
| | $ | 801,458 |
| | $ | 622,418 |
|
| | | | | | | |
Cost of revenues (1) | 42,371 |
| | 36,992 |
| | 126,339 |
| | 106,870 |
|
Gross profit | 231,245 |
| | 173,124 |
| | 675,119 |
| | 515,548 |
|
Operating expenses: | | | |
| | | | |
|
Sales and marketing (1) | 79,432 |
| | 46,425 |
| | 237,772 |
| | 143,155 |
|
Research, development and engineering (1) | 12,431 |
| | 8,965 |
| | 35,737 |
| | 27,165 |
|
General and administrative (1) | 76,425 |
| | 55,612 |
| | 232,118 |
| | 170,823 |
|
Total operating expenses | 168,288 |
| | 111,002 |
| | 505,627 |
| | 341,143 |
|
Income from operations
| 62,957 |
| | 62,122 |
| | 169,492 |
| | 174,405 |
|
Interest expense, net | 25,326 |
| | 10,436 |
| | 51,406 |
| | 30,971 |
|
Other (income) expense, net | (3,890 | ) | | (9,718 | ) | | 660 |
| | (9,805 | ) |
Income before income taxes | 41,521 |
| | 61,404 |
| | 117,426 |
| | 153,239 |
|
Income tax expense | 9,163 |
| | 15,835 |
| | 27,872 |
| | 43,958 |
|
Net income | $ | 32,358 |
| | $ | 45,569 |
| | $ | 89,554 |
| | $ | 109,281 |
|
| | | | | | | |
Net income per common share: | | | |
| | |
| | |
|
Basic | $ | 0.67 |
| | $ | 0.95 |
| | $ | 1.86 |
| | $ | 2.25 |
|
Diluted | $ | 0.66 |
| | $ | 0.94 |
| | $ | 1.81 |
| | $ | 2.24 |
|
Weighted average shares outstanding: | | | |
| | |
| | |
|
Basic | 47,609,819 |
| | 47,310,011 |
| | 47,540,593 |
| | 47,775,798 |
|
Diluted | 48,521,082 |
| | 47,494,744 |
| | 48,745,680 |
| | 47,997,674 |
|
Cash dividends paid per common share | $ | 0.3850 |
| | $ | 0.3450 |
| | $ | 1.1250 |
| | $ | 1.0050 |
|
| | | | | | | |
| | | | | | | |
(1) Includes share-based compensation expense as follows: | | | | | | | |
Cost of revenues | $ | 120 |
| | $ | 116 |
| | $ | 357 |
| | $ | 314 |
|
Sales and marketing | 365 |
| | 423 |
| | 1,265 |
| | 1,388 |
|
Research, development and engineering | 296 |
| | 235 |
| | 815 |
| | 663 |
|
General and administrative | 3,782 |
| | 2,925 |
| | 11,303 |
| | 7,582 |
|
Total | $ | 4,563 |
| | $ | 3,699 |
| | $ | 13,740 |
| | $ | 9,947 |
|
See Notes to Condensed Consolidated Financial Statements
j2 GLOBAL,ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| | | | | | | | | | | |
Net (loss) income | $ | (46,436) | | | $ | 15,717 | | | $ | (21,899) | | | $ | 93,640 | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | | | |
Foreign currency translation adjustment | (24,265) | | | 3,256 | | | (30,530) | | | (5,168) | | | | | |
Consensus separation adjustment | — | | | — | | | 4,056 | | | — | | | | | |
| | | | | | | | | | | |
Other comprehensive (loss) income, net of tax | (24,265) | | | 3,256 | | | (26,474) | | | (5,168) | | | | | |
Comprehensive (loss) income | $ | (70,701) | | | $ | 18,973 | | | $ | (48,373) | | | $ | 88,472 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Net income | $ | 32,358 |
| | $ | 45,569 |
| | $ | 89,554 |
| | $ | 109,281 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustment | 7,703 |
| | (328 | ) | | 23,616 |
| | (9,566 | ) |
Change in fair value on available-for-sale investments, net of tax expense of zero for the three and nine months of 2017, respectively, and $1,378 and $1,440 for the three and nine months of 2016, respectively | — |
| | (2,249 | ) | | — |
| | (2,359 | ) |
Other comprehensive income (loss), net of tax | 7,703 |
| | (2,577 | ) | | 23,616 |
| | (11,925 | ) |
Comprehensive income | $ | 40,061 |
| | $ | 42,992 |
| | $ | 113,170 |
| | $ | 97,356 |
|
See Notes to Condensed Consolidated Financial Statements (Unaudited)
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands) | | | | | | | | | | | |
| Six Months Ended June 30, |
Cash flows from operating activities: | 2022 | | 2021 |
Net (loss) income | $ | (21,899) | | | $ | 93,640 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
Depreciation and amortization | 118,943 | | | 130,226 | |
| | | |
Amortization of financing costs and discounts | 1,398 | | | 14,058 | |
Non-cash operating lease costs | 5,913 | | | 6,714 | |
Share-based compensation | 14,420 | | | 12,363 | |
Provision for credit losses on accounts receivable | (1,376) | | | 4,329 | |
Deferred income taxes, net | (10,266) | | | (11,853) | |
Gain on extinguishment of debt, net | (1,393) | | | — | |
| | | |
Gain on sale of businesses | — | | | (2,802) | |
Lease asset impairments and other charges | 168 | | | 7,829 | |
Goodwill impairment on business | — | | | 32,629 | |
Changes in fair value of contingent consideration | (9) | | | 562 | |
Foreign currency remeasurement gain | 549 | | | 415 | |
Loss (income) from equity method investments | 6,886 | | | (18,519) | |
Unrealized loss on short-term investments | 18,366 | | | — | |
Loss on investments, net | 48,243 | | | 16,677 | |
Decrease (increase) in: | | | |
Accounts receivable (includes $8,351 and $0 with related parties) | 77,168 | | | 65,312 | |
Prepaid expenses and other current assets | 5,804 | | | (7,720) | |
Operating lease right-of-use assets | 2,260 | | | 689 | |
Other assets | (7,250) | | | (701) | |
Increase (decrease) in: | | | |
Accounts payable and accrued expenses | (45,329) | | | (23,438) | |
Income taxes payable | 8,825 | | | (15,123) | |
Deferred revenue | (11,882) | | | 2,499 | |
Operating lease liabilities | (13,721) | | | (14,218) | |
Liability for uncertain tax positions | 403 | | | (3,567) | |
Other long-term liabilities | (3,737) | | | 21 | |
| | | |
| | | |
Net cash provided by operating activities | 192,484 | | | 290,022 | |
Cash flows from investing activities: | | | |
Proceeds from sale of available-for-sale investments | — | | | 663 | |
Investment in available-for-sale securities | (15,000) | | | — | |
| | | |
Purchases of equity method investment | — | | | (11,053) | |
Purchases of equity investments | — | | | (999) | |
| | | |
Purchases of property and equipment | (53,876) | | | (57,766) | |
Proceeds from sale of assets | — | | | 6,033 | |
Acquisition of businesses, net of cash received | (92,425) | | | (89,489) | |
| | | |
| | | |
| | | |
| | | |
Net cash used in investing activities | (161,301) | | | (152,611) | |
Cash flows from financing activities: | | | |
| | | |
Payment of debt | (72,853) | | | (2,802) | |
| | | |
| | | |
Proceeds from term loan | 89,991 | | | 2,811 | |
Debt extinguishment costs | (756) | | | — | |
| | | |
Repurchase of common stock | (76,345) | | | (22,934) | |
Issuance of common stock under employee stock purchase plan | 5,235 | | | 4,232 | |
Exercise of stock options | 148 | | | 1,331 | |
| | | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 89,554 |
| | $ | 109,281 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
|
Depreciation and amortization | 118,597 |
| | 88,569 |
|
Amortization of financing costs and discounts | 9,094 |
| | 7,224 |
|
Share-based compensation | 13,740 |
| | 9,947 |
|
Provision for doubtful accounts | 9,099 |
| | 9,072 |
|
Deferred income taxes, net | 3,859 |
| | (2,328 | ) |
Loss on extinguishment of debt and related interest expense | 7,962 |
| | — |
|
Gain on sale of businesses | (4,715 | ) | | — |
|
Decrease (increase) in: | | | |
|
Accounts receivable | 4,711 |
| | (7,631 | ) |
Prepaid expenses and other current assets | (264 | ) | | (663 | ) |
Other assets | 134 |
| | (7,947 | ) |
Increase (decrease) in: | | | |
|
Accounts payable and accrued expenses | (49,324 | ) | | (4,601 | ) |
Income taxes payable | (26,359 | ) | | (927 | ) |
Deferred revenue | (75 | ) | | (4,134 | ) |
Liability for uncertain tax positions | 1,554 |
| | 8,502 |
|
Other long-term liabilities | 1,429 |
| | (11,824 | ) |
Net cash provided by operating activities | 178,996 |
| | 192,540 |
|
Cash flows from investing activities: | | | |
|
Maturity of available-for-sale investments | — |
| | 145,005 |
|
Purchase of available-for-sale investments | (5 | ) | | (75,834 | ) |
Purchases of property and equipment | (29,483 | ) | | (17,447 | ) |
Acquisition of businesses, net of cash received | (47,268 | ) | | (91,401 | ) |
Proceeds from sale of businesses, net of cash divested | 33,508 |
| | — |
|
Purchases of intangible assets | (1,320 | ) | | (2,014 | ) |
Net cash used in investing activities | (44,568 | ) | | (41,691 | ) |
Cash flows from financing activities: | | | |
|
Issuance of long-term debt, net | 636,598 |
| | — |
|
Payment of debt | (255,000 | ) | | — |
|
Proceeds from line of credit, net | 44,981 |
| | — |
|
Repayment of line of credit | (225,000 | ) | | — |
|
Repurchases of common stock and restricted stock | (7,862 | ) | | (56,083 | ) |
Issuance of common stock under employee stock purchase plan | 194 |
| | 191 |
|
Exercise of stock options | 1,108 |
| | 3,272 |
|
Dividends paid | (54,346 | ) | | (48,768 | ) |
Deferred payments for acquisitions | (5,062 | ) | | (18,939 | ) |
Other | (45 | ) | | 1,680 |
|
Net cash provided by (used in) financing activities | 135,566 |
| | (118,647 | ) |
Effect of exchange rate changes on cash and cash equivalents | 8,600 |
| | (2,169 | ) |
Net change in cash and cash equivalents | 278,594 |
| | 30,033 |
|
Cash and cash equivalents at beginning of period | 123,950 |
| | 255,530 |
|
Cash and cash equivalents at end of period | $ | 402,544 |
| | $ | 285,563 |
|
| | | | | | | | | | | |
Deferred payments for acquisitions | (7,094) | | | (12,934) | |
Other | (5) | | | (1,294) | |
| | | |
| | | |
Net cash used in financing activities | (61,679) | | | (31,590) | |
Effect of exchange rate changes on cash and cash equivalents | (16,056) | | | (616) | |
Net change in cash and cash equivalents | (46,552) | | | 105,205 | |
Cash and cash equivalents at beginning of period | 694,842 | | | 242,652 | |
Cash and cash equivalents at beginning of period associated with discontinued operations | — | | | 66,210 | |
Cash and cash equivalents at beginning of period associated with continuing operations | 694,842 | | | 176,442 | |
Cash and cash equivalents at end of period | 648,290 | | | 347,857 | |
Cash and cash equivalents at end of period associated with discontinued operations | — | | | 107,666 | |
Cash and cash equivalents at end of period associated with continuing operations | $ | 648,290 | | | $ | 240,191 | |
| | | |
| | | |
| | | |
| | | |
See Notes to Condensed Consolidated Financial Statements
(Unaudited)
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three and Six Months Ended June 30, 2021 and 2022
(Unaudited, in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| | | | | | | | | | | | | Accumulated | | | |
| Common stock | | | | | Additional paid-in | | Retained | other comprehensive | | | Total Stockholders’ |
| Shares | Amount | | | | | | | capital | | | earnings | loss | | | Equity |
Balance, April 1, 2021 | 44,489,399 | | $ | 445 | | | | | | | | $ | 455,625 | | | | $ | 882,071 | | $ | (63,230) | | | | $ | 1,274,911 | |
Net income | — | | — | | | | | | | | — | | | | 15,717 | | — | | | | 15,717 | |
Other comprehensive income, net of tax expense of zero | — | | — | | | | | | | | — | | | | — | | 3,256 | | | | 3,256 | |
Exercise of stock options | 30,234 | | — | | | | | | | | 887 | | | | — | | — | | | | 887 | |
Issuance of shares under employee stock purchase plan | 58,145 | | 1 | | | | | | | | 4,231 | | | | — | | — | | | | 4,232 | |
Exercise of 3.25% Convertible Note | 19,033 | | — | | | | | | | | — | | | | — | | — | | | | — | |
Issuance of restricted stock, net | 198,579 | | 2 | | | | | | | | (2) | | | | — | | — | | | | — | |
Repurchase and retirement of common stock | (87,155) | | (1) | | | | | | | | (5,570) | | | | (5,183) | | — | | | | (10,754) | |
Share based compensation | — | | — | | | | | | | | 6,251 | | | | — | | — | | | | 6,251 | |
Balance, June 30, 2021 | 44,708,235 | | $ | 447 | | | | | | | | $ | 461,422 | | | | $ | 892,605 | | $ | (59,974) | | | | $ | 1,294,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| | | | | | | | | | | | | Accumulated | | | |
| Common stock | | | | | Additional paid-in | | Retained | other comprehensive | | | Total Stockholders’ |
| Shares | Amount | | | | | | | capital | | | earnings | loss | | | Equity |
Balance, April 1, 2022 | 46,952,300 | | $ | 470 | | | | | | | | $ | 415,653 | | | | $ | 1,508,802 | | $ | (59,431) | | | | $ | 1,865,494 | |
| | | | | | | | | | | | | | | | |
Net loss | — | | — | | | | | | | | — | | | | (46,436) | | — | | | | (46,436) | |
Other comprehensive loss, net of tax expense of zero | — | | — | | | | | | | | — | | | | — | | (24,265) | | | | (24,265) | |
| | | | | | | | | | | | | | | | |
Issuance of shares under employee stock purchase plan | 76,741 | | 1 | | | | | | | | 5,234 | | | | — | | — | | | | 5,235 | |
| | | | | | | | | | | | | | | | |
Restricted stock issued, net | 354,407 | | 3 | | | | | | | | (3) | | | | — | | — | | | | — | |
Repurchase and retirement of common stock | (192,111) | | (2) | | | | | | | | (2,483) | | | | (11,050) | | — | | | | (13,535) | |
Share based compensation | — | | — | | | | | | | | 7,703 | | | | — | | — | | | | 7,703 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Balance, June 30, 2022 | 47,191,337 | | $ | 472 | | | | | | | | $ | 426,104 | | | | $ | 1,451,316 | | $ | (83,696) | | | | $ | 1,794,196 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021 |
| | | | | | | | | | | | | 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 | — | | — | | | | | | | | — | | | | 93,640 | | — | | | | 93,640 | |
Other comprehensive income, net of tax expense of zero | — | | — | | | | | | | | — | | | | — | | (5,168) | | | | (5,168) | |
| | | | | | | | | | | | | | | | |
Exercise of stock options | 45,351 | | 1 | | | | | | | | 1,330 | | | | — | | — | | | | 1,331 | |
Issuance of shares under employee stock purchase plan | 58,145 | | 1 | | | | | | | | 4,231 | | | | — | | — | | | | 4,232 | |
Exercise of 3.25% Convertible Note | 19,033 | | — | | | | | | | | — | | | | — | | — | | | | — | |
Vested restricted stock | 434,518 | | 4 | | | | | | | | (4) | | | | — | | — | | | | — | |
Repurchase and retirement of common stock | (195,442) | | (2) | | | | | | | | (12,790) | | | | (10,142) | | — | | | | (22,934) | |
Share based compensation | — | | — | | | | | | | | 12,363 | | | | — | | — | | | | 12,363 | |
Other, net | — | | — | | | | | | | | 18 | | | | — | | — | | | | 18 | |
Balance, June 30, 2021 | 44,708,235 | | 447 | | | | | | | | 461,422 | | | | 892,605 | | (59,974) | | | | 1,294,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| | | | | | | | | | | | | Accumulated | | | |
| Common stock | | | | | Additional paid-in | | Retained | other comprehensive | | | Total Stockholders’ |
| Shares | Amount | | | | | | | capital | | | earnings | loss | | | Equity |
Balance, January 1, 2022 | 47,440,137 | | $ | 474 | | | | | | | | $ | 509,122 | | | | $ | 1,515,358 | | $ | (57,222) | | | | $ | 1,967,732 | |
Reclassification of the equity component of 1.75% Convertible Notes to liability upon adoption of ASU 2020-06 | — | | — | | | | | | | | (88,137) | | | | 23,436 | | — | | | | (64,701) | |
Net loss | — | | — | | | | | | | | — | | | | (21,899) | | — | | | | (21,899) | |
Other comprehensive loss, net of tax expense of zero | — | | — | | | | | | | | — | | | | — | | (30,530) | | | | (30,530) | |
Exercise of stock options | 5,439 | | — | | | | | | | | 148 | | | | — | | — | | | | 148 | |
Issuance of shares under employee stock purchase plan | 76,741 | | 1 | | | | | | | | 5,234 | | | | — | | — | | | | 5,235 | |
| | | | | | | | | | | | | | | | |
Restricted stock issued, net | 455,792 | | 4 | | | | | | | | (4) | | | | — | | — | | | | — | |
Repurchase and retirement of common stock | (786,772) | | (7) | | | | | | | | (14,663) | | | | (61,675) | | — | | | | (76,345) | |
Share based compensation | — | | — | | | | | | | | 14,420 | | | | — | | — | | | | 14,420 | |
Consensus separation adjustment | — | | — | | | | | | | | — | | | | (3,915) | | 4,056 | | | | 141 | |
Other, net | — | | — | | | | | | | | (16) | | | | 11 | | — | | | | (5) | |
Balance, June 30, 2022 | 47,191,337 | | $ | 472 | | | | | | | | $ | 426,104 | | | | $ | 1,451,316 | | $ | (83,696) | | | | $ | 1,794,196 | |
See Notes to Condensed Consolidated Financial Statements (Unaudited)
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2017
(UNAUDITED)
1.Basis of Presentation and Overview
j2 Global,
The accompanying Condensed Consolidated Financial Statements of Ziff Davis, Inc., together with and its subsidiaries (“j2 Global”Ziff Davis”, the “Company”, “our”, “us”, or the “Company”“we”), iswhether directly or indirectly wholly-owned, were prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), and all adjustments considered necessary for a leading provider of Internet services. Through its Business Cloud Services Division, the Company provides cloud services to businesses of all sizes, from individuals to enterprises, and licenses its intellectual property (“IP”) to third parties. In addition, the Business Cloud Services Division includes j2 Cloud Connect, which primarily focuses on our voice and fax products. The Digital Media Division specializes in the technology, gaming, lifestyle markets and healthcare markets, reaching in-market buyers and influencers in both the consumer and business-to-business space.
The accompanying interim condensed consolidated financial statements include the accounts of j2 Global and its direct and indirect wholly-owned subsidiaries.fair presentation have been included. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements are unaudited andCondensed Consolidated Financial Statements have been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include allThe preparation of these Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the informationdate of the Condensed Consolidated Financial Statements, as well as the reported amounts of revenues and note disclosures required by GAAP for complete financial statements althoughexpenses during the Company believes that the disclosures made are adequate to make that information not misleading. In the opinion of management, all adjustments (consisting ofreporting periods. Actual results could differ from those estimates. All normal recurring adjustments) consideredadjustments necessary for a fair presentation have been reflected inof these interim financial statements. It is suggested that these financial statementsCondensed Consolidated Financial Statements were made.
This Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and the related notes theretoour Annual Report on Form 10-K for the year ended December 31, 2016 included in our Annual Report (Form 10-K)2021 filed with the SECSecurities and Exchange Commission ("SEC") on March 1, 2017. Accordingly, significant accounting policies15, 2022 and other disclosures normally provided have been omitted since such items are disclosed therein.
filings with the SEC.
The results of operations for this interim period are not necessarily indicative of the operating results for the full year or for any future period.
Description of Business
Use of Estimates
The preparation of consolidated financial statementsZiff Davis, Inc. is a vertically focused digital media and internet company whose portfolio includes leading brands in accordance with accounting principles generally acceptedtechnology, entertainment, shopping, health, cybersecurity, and martech. Our Digital Media business specializes in the United States of America (“GAAP”) requires managementtechnology, shopping, gaming, and healthcare markets, offering content, tools and services to make estimatesconsumers and assumptions that affect the reported amounts of assetsbusinesses. Our Cybersecurity and liabilities at the date of the financial statements,Martech business provides cloud-based subscription services to consumers and businesses including judgments about investment classifications,cybersecurity, privacy and the reported amounts of net revenue and expenses during the reporting period. We believe that our most significant estimates are those related to the valuation of assets acquired and liabilities assumedmarketing technology.
On October 7, 2021, in connection with the spin-off of its cloud fax business combinations, long-lived and intangible asset impairment, contingent consideration, income taxes and contingencies and allowances for doubtful accounts. On an ongoing basis, management evaluates its estimates based on historical experience and on various other factors thatdescribed further below, the Company believeschanged its name from J2 Global, Inc. to be reasonableZiff Davis, Inc. Additionally, starting October 8, 2021, the Company’s common stock began trading under the circumstances. Actualstock symbol “ZD.”
Discontinued Operations
On October 7, 2021, the Company completed the separation of its cloud fax business (the “Separation”) into an independent publicly traded company, Consensus Cloud Solutions, Inc. (“Consensus”). 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. Ziff Davis, Inc., formerly J2 Global, Inc., retained a 19.9% interest in Consensus following the Separation (the “Investment in Consensus”). The accounting requirements for reporting the Company’s cloud fax business as a discontinued operation were met when the Separation was completed. Accordingly, the Condensed Consolidated Financial Statements reflect the results could materially differof the cloud fax business as a discontinued operation for all periods presented.Ziff Davis did not retain a controlling interest in Consensus.
On June 9, 2022, certain selling shareholders of Consensus executed an underwritten public offering pursuant to a registration statement filed by Consensus with the SEC for 2,000,000 shares of its common stock (including a 30-day option for the underwriters to purchase from those estimates.the selling shareholders an additional 300,000 shares at the public offering price less the underwriting discount). On June 10, 2022, the Company entered into a Fifth Amendment to its existing Credit Agreement, providing for the issuance of a senior secured term loan under the Credit Agreement (the “Term Loan Facility”), in an aggregate principal amount of approximately $90.0 million. During the three months ended June 30, 2022, the Company completed an exchange of 2,300,000 shares of its common stock of Consensus (the “Disposed Consensus Shares”) with the selling shareholders to settle the Company’s obligation to repay the $90.0 million outstanding aggregate principal amount of the Term Loan Facility plus related interest (the “Debt-for-Equity Exchange”) and the corresponding underwriting fees. Refer to Note 8 -
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Debt for further discussion. As of June 30, 2022, the Company continues to hold 1.7 million shares of common stock of Consensus (the “Retained Consensus Shares”). The Investment in Consensus represents the investment into equity securities for which the Company elected the fair value option and subsequent fair value changes in the Consensus shares are included in the assets of and results from continuing operations. Refer to Note 4 - Investments and Note 5 - Discontinued Operations for additional information.
Allowances for Doubtful AccountsCredit Losses
j2 Global reservesThe Company maintains an allowance for receivablescredit losses on 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 may not be able to collect. These reservesidentifies specific customers with known disputes or collectability issues. In determining the amount of the allowance for credit losses, the Company’s Business Cloud Services segment are typically driven by the volume of credit card declines andCompany considers historical collectability based on past due invoices and are based on historical experience as well as an evaluation ofstatus. It also considers customer-specific information, current market conditions. These reserves for the Company’s Digital Media segment are typically driven by past due invoices based onconditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical experience.loss data. On an ongoing basis, management evaluates the adequacy of these reserves.
Revenue Recognition
Business Cloud Services
The Company’s Business Cloud Services revenues substantially consist of monthly recurring subscription and usage-based fees, which are primarily paid in advance. In accordance with GAAP, the Company recognizes revenue when persuasive evidence of an arrangement exists, services have been provided, the sales price is fixed and determinable and collection is probable. The Company defers the portions of monthly, quarterly, semi-annually and annually recurring subscription and usage-based fees collected in advance and recognizes them in the period earned. Additionally, the Company defers and recognizes subscriber activation fees and related direct incremental costs over a subscriber’s estimated useful life.
Along with our numerous proprietary Business Cloud Services solutions,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 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 Companyexpects to offer customers a variety of solutionsbe entitled in exchange for those goods or services. Refer to better meet their needs. Note 2 - Revenues for additional details.
Principal vs. Agent
The Company determines whether reseller 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 placescontrols the most weightspecified 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 three factors: whether or notand concurrent with a specific revenue-producing transaction and (ii) collected by the Company (i)from a customer.
Investments
We account for our investments in debt securities in accordance with ASC Topic 320, Investments - Debt Securities (“ASC 320”). Our debt investments are typically comprised of corporate debt securities, which are classified 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 on our Condensed Consolidated Balance Sheets. 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 on our Condensed Consolidated Balance Sheets.
We account for investments in equity securities in accordance with ASC Topic 321, Investments - Equity Securities (“ASC 321”), which requires the accounting for equity investments, other than those accounted for under the equity method of accounting, generally be measured at fair value for equity securities with readily determinable fair values. Equity securities without a readily determinable fair value, which are not accounted for under the equity method of accounting, are measured at
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
their cost, less impairment, if any, and adjusted for observable price changes arising from orderly transactions in the same or similar investment from the same issuer. Any unrealized gains or losses will be reported in current earnings.
We assess whether an other-than-temporary impairment loss on an investment has occurred due to declines in fair value or other market conditions. Refer to Note 4 - Investments for additional information.
The Retained Consensus Shares are equity securities accounted for at fair value under the fair value option, and the related fair value gains and losses are recognized in earnings. As the initial carrying value of the Retained Consensus Shares was negative immediately following the Separation, the Company elected the fair value option under ASC 825-10-25 to support the initial recognition of the Retained Consensus Shares at fair value and the negative book value was recorded as a gain at the date of Separation. The fair value of Consensus common stock is readily available as Consensus is a publicly traded company.
Variable Interest Entities (“VIEs”)
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 obligorbeneficiary. The Company has determined that it holds a variable interest in its investment as a limited partner in the arrangement, (ii)OCV Fund I, LP (“OCV Fund”, “OCV” or the “Fund”) and in Group Black, Inc. (“Group Black”). 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 latitudethe 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 obligations 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 4 - Investments).
OCV qualifies as an investment company under ASC Topic 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 determining pricing and (iii) bears credit risk.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 records revenuerecognizes its equity in the net earnings or losses relating to the investment in OCV on a gross basis with respectone-quarter lag due to reseller revenue asthe 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 primary obligatorloss will be recorded in the arrangement,period in which the Company identifies the decline.
Ziff Davis has latitudevariable interests in determining pricingGroup Black. Group Black is a limited partnership and bears all credit riskis managed by its Board of Directors. As of June 30, 2022, the Company does not have voting rights in the investee and lacks the power and the ability to control or direct the significant economic operations of the investee. Ziff Davis is not a primary beneficiary and does not consolidate the entity under either the VIE model or the voting interest (“VOE”) model. Refer to Note 4 - Investments for additional detail.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
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 ASC Topic. 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 assesses the impairment of identifiable definite-lived intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors it considers important which could individually or in combination trigger an impairment include the following:
•Significant underperformance relative to expected historical or projected future operating results;
•Significant changes in the manner of our use of the acquired assets or the strategy for the Company’s overall business;
•Significant negative industry or economic trends;
•Significant decline in the Company’s stock price for a sustained period; and
•The Company’s market capitalization relative to net book value.
If the Company determined that the carrying value of definite-lived intangibles and long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, it would record an impairment equal to the excess of the carrying amount of the asset over its estimated fair value.
The Company assessed whether events or changes in circumstances have occurred that potentially indicate the carrying amount of definite-lived assets may not be recoverable. During the six months ended June 30, 2022, the Company did not have any events or circumstances indicating impairment of long-lived assets. During the three and six months ended June 30, 2022, Ziff Davis recorded an impairment of certain operating right-of use assets in the amount of $0.2 million. During the six months ended June 30, 2021, the Company recorded impairments of $7.8 million associated with our resellerits 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.
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 partners.
j2 Global’s Business Cloud Services also include patent license revenues generated under license agreements that provide forto locate a buyer and other actions required to sell the payment of contractually determined fully paid-up or royalty-bearing license fees to j2 Global in exchange for the grant of non-exclusive, retroactive and future licenses to our intellectual property, including patented technology. Patent revenues may also consist of revenues generated fromasset have been initiated, (iv) the sale of patents. Patent license revenues arethe asset is probable and the transfer is expected to qualify for recognition as a sale within one year, (v) the asset is being 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 when earned over the term of the license agreements. With regard to fully paid-up license arrangements, the Company recognizes as revenue in the period in which the license agreementheld 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 executedno longer classified as held for sale.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Business Combinations and Valuation of Goodwill and Intangible Assets
The Company applies the portionacquisition 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 payment attributableassets, including identifiable intangible assets and liabilities acquired. Such estimates may be based on significant unobservable inputs and assumptions such as, but not limited to, past usefuture revenue growth rates, gross and operating 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 intellectual property and amortizesmeasurement period, any subsequent adjustments are recorded to earnings.
Goodwill represents the remaining portion of such payments on a straight-line basis, or pro-rata revenue basis, as appropriate over the life of the licensed patent(s). With regard to royalty-bearing license arrangements, the Company recognizes revenues of license fees earned during the applicable period. With regard to patent sales, the Company recognizes as revenue in the period of the sale the amountexcess 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 one to twenty 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 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 was more likely than not that the fair value of the reporting unit is less than its carrying amount, it then it performs an impairment test of 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 patent(s) sold.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. No impairments to goodwill or other intangible assets were recorded during the six months ended June 30, 2022.
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 Business Cloud Services business also generates revenues by licensing certain technology to third parties. These licensing revenuesfair values of these earn-out arrangements are recognized when earned in accordance with the termsincluded as part of the underlying agreement. Generally, revenue is recognizedpurchase 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 third party usesinitial purchase price and records the licensed technology overestimated fair value of contingent consideration as a liability on the period.
Digital Media
Condensed Consolidated Balance Sheets. The Company’s Digital Media revenues primarily consist of revenues generated from the sale of advertising campaignsCompany considers several factors when determining that are targeted to the Company’s proprietary websites and to those websites operated by third parties thatcontingent earn-out liabilities are part of the Digital Media business’s advertising network. Revenues for these advertising campaigns are recognizedpurchase 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 earned, either when an ad is placed for viewing bykey employees receive compensation other than contingent earn-out payments at a visitor to the appropriate web page or when the visitor “clicks through” on the ad, depending upon the termsreasonable level compared with the individual advertiser.
Revenues for Digital Media business-to-business operations consist of lead-generation campaigns for IT vendors and are recognized as earned when the Company delivers the qualified leads to the customer.
j2 Global also generates Digital Media revenues through the license of certain assets to clients, for the 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 when the assets are delivered to the client. Also, Digital Media revenues are generated through the license of certain speed testing technology which is recognized when delivered to the client through providing data services primarily to Internet Service Providers (“ISPs”) and wireless carriers which is recognized as earned over the term of the access period. The Digital Media business also generates other types of revenues, including business listing fees, subscriptions to online publications, and from other sources. Such other revenues are recognized as earned.
The Company determines whether Digital Media 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 for principal-agent considerations and the Company places the most weight on three factors: whether or not the Company (i) is the primary obligor in the arrangement, (ii) has latitude in determining pricing and (iii) bears credit risk.
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 Digital Media licensing program. 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.
Fair Value Measurements
j2 Global complies with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic No. 820, Fair Value Measurements and Disclosures (“ASC 820”), in measuring fair value and in disclosing fair value measurements. ASC 820 provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities.
As of September 30, 2017, the carrying value of cash and cash equivalents, short-term investments, accounts receivable, interest receivable, accounts payable, accrued expenses, interest payable, customer deposits and long-term debt are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value due to the short-term nature of such instruments. The fair valuecompensation of the Company’s outstanding debt was determined using the quoted market prices of debt instruments with similar terms and maturities, if available. As of the same dates, the carrying value of other long-term liabilities approximated fair value as the related interest rates approximate rates currently available to j2 Global.key employees. The contingent earn-out payments are not affected by employment termination.
-14-
Property and Equipment
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of the minimum lease payments. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property and equipment range from 1 to 10 years. Fixtures, which are comprised primarily of leasehold improvements and equipment under capital leases, are amortized on a straight-line basis over their estimated useful lives or for leasehold improvements, the related lease term, if less.
The Company has capitalized certain internal use software and website development costs which are included in property and equipment. The estimated useful life of costs capitalized is evaluated for each specific project and ranges from 1 to 5 years.
Debt Issuance Costs and Debt Discount
j2 Global capitalizes costs incurred with borrowing and issuance of debt securities and records debt issuance costs and discounts as a reduction to the debt amount. These costs and discounts are amortized and included in interest expense over the life of the borrowing or term of the credit facility using the effective interest method.
Contingent Consideration
j2 Global measures theits 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 6 - Fair Value Measurements)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 our consolidated statementsCondensed Consolidated Statements of cash flows.Cash Flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities.
j2 GlobalThe 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 ourits contingent earn-out liabilities are reported in operating income, except for the time component of the present value calculation which is reported in interest expense. Adjustmentsand adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.general and administrative expenses on the Condensed Consolidated Statements of Operations.
Income Taxes
Segment ReportingThe 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.
Accounting guidance establishes standardsThe Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the wayeffect of temporary differences between the book and tax basis of recorded assets and liabilities. ASC 740 also requires that public business enterprises report information aboutdeferred 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 segmentsresults 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 their annual consolidatedthe financial statements and requiresapplies 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 those enterprises report selected information about operating segments in interim financial reports. Accounting guidance also establishes standards forit is more likely than not that the position will be sustained on audit, including resolution of related disclosures about products and services, geographic areas and major customers.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 operates as two segments: (1) Business Cloud Servicesrecognizes accrued interest and (2) Digital Media.penalties related to uncertain income tax positions in income tax expense on its Condensed Consolidated Statements of Operations.
ReclassificationsShare-Based Compensation
Certain prior year reported amounts have been reclassifiedWe account for share-based awards to conformemployees and non-employees in accordance with the provisions of ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), which requirescompensation cost, measured at the grant date fair value, to be recognized 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 2017 presentation.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
ZIFF DAVIS, INC. AND SUBSIDIARIES
2.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
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, we may change the input factors used in determining future share-based compensation expense. Any such changes could materially impact the results of operations in the period in which the changes are made and in periods thereafter. We estimate the vesting term based upon the historical exercise behavior of our employees.
Earnings Per Common Share (“EPS”)
On January 1, 2022, the Company adopted ASU 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 (“ASU 2020-06”) using the modified retrospective method. Following this adoption, the Company applies the if-converted method for the diluted net income per share calculation of convertible debt instruments. Prior to the adoption, the Company used the treasury stock method when calculating the potential dilutive effect of convertible debt instruments.
Recent Accounting Pronouncements
Recently issued applicable accounting pronouncements not yet adopted
In May 2014,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards UpdateASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides for optional financial reporting alternatives to reduce cost and complexities associated with accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. This update applies only to contracts, hedging relationships, and other transactions that reference London Interbank Offer Rate (“ASU”LIBOR”) No. 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (“ASC”) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsanother reference rate expected to be entitled in exchangediscontinued because of reference rate reform. The accommodations are available for those goods or services. all entities through December 31, 2022, with early adoption permitted. We are currently evaluating the effect the adoption of this update will have on our condensed consolidated financial statements and related disclosures.
Recently adopted accounting pronouncements
In August 2015,2020, the FASB issued ASU No. 2015-14, Revenue2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The provisions of this update simplifies the accounting for convertible instruments by removing certain separation models in ASC 470-20, Debt - Debt with Conversion and Other Options, for convertible instruments. The convertible debt instruments will be accounted for as a single liability at the amortized cost if separation is no longer required unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change is expected to reduce reported noncash interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from Contracts with Customers: Deferralstockholders’ equity to liabilities. Similarly, the debt discount, that is equal to the carrying value of the Effective Date, which deferredembedded conversion feature upon issuance, will no longer be amortized into income as interest expense over the effective datelife of the new revenue standardinstrument. Additionally, ASU No. 2020-06 requires the use of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share and include the effect of share settlement for periods beginning after December 15, 2016 to December 15, 2017, with earlyinstruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards.
On January 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method. The cumulative effect of the changes made on the Condensed Consolidated Balance Sheet upon this adoption permitted but not earlier thanincreased the original effective date. carrying amount of the 1.75% Convertible Notes (as defined in Note 8 below) by approximately $85.9 million, increased retained earnings by approximately $23.4 million, reduced deferred tax liabilities by approximately $21.2 million and reduced additional paid-in capital by approximately $88.1 million.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
In March 2016,October 2021, the FASB issued Accounting Standards Update (“ASU 2016-08, Revenue from Contracts with Customers2021-08”), Business Combinations (Topic 606). This ASU is related to reporting revenue gross versus net, or principal versus agent considerations. This ASU is meant to clarify the guidance in ASU 2014-09, Revenue from Contracts with Customers, as it pertains to principal versus agent considerations. Specifically, the guidance addresses how entities should identify goods805): Accounting for Contract Assets and services being provided to a customer, the unit of account for a principal versus agent assessment, how to evaluate whether a good or service is controlled before being transferred to a customer, and how to assess whether an entity controls services performed by another party. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU is meant to clarify the guidance in FASB ASU 2014-09, RevenueContract Liabilities from Contracts with Customers. Specifically, the guidance addresses an entity’s identification of its performance obligationsThis update requires contract assets and contract liabilities acquired in a contract, as well as an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This ASU does not change the core principle of the guidance in Topic 606. Instead, the amendments provide clarifying guidance in a few narrow areas and add some practical expedients. In December 2016, the FASB issued 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this ASU represent changes to clarify the Codification or to correct unintended application of guidance. This ASU must be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company plans to adopt ASC 606 in the first quarter of 2018 using the modified retrospective method and will present the cumulative effect of applying the standard to all contracts not completed as of the adoption date. As of September 30, 2017, the Company is in the process of: (i) finalizing its review of customer contracts for its business segments and its assessment of the impact of the standard on these contracts; (ii) training internal stakeholders on the pending changes to revenue recognition policies; and (iii) assessing the need for appropriate changes to the Company’s business processes and controls to support revenue recognition and disclosures under the new standard. At this time, the Company anticipates that the primary change to its accounting policies for its customer contracts upon adopting ASC 606 will relate to the timing of when revenue is recognized. While revenue from certain contracts will continuecombination to be recognized at a point in time, revenue from other contracts may be required to be recognized over time. Currently,and measured by the Company expects changes in the revenue recognition for licensing and patents. The Company is still finalizing its assessment of customer contracts, including the specific dollar impact of any changes in recognition will haveacquirer on the Company’s consolidated financial statements. The Company expects to complete its implementation workacquisition date in time to adoptaccordance with ASC 606 for periods starting after December 31, 2017.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU modify how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such these investments may be measured at cost.606. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have a material impact on our financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of this ASU on our financial statements. The Company currently has both capital and operating leases, both domestically and internationally, with varying expiration dates through 2025 in the aggregate amount of $65.9 million for the period ended September 30, 2017.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on our financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. The amendments in this ASU reduce the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, the income tax consequence was not recognized until the asset was sold to an outside party. This ASUupdate is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. Early2022, with early adoption is permitted.permitted, including in interim periods. The Company does not expectearly adopted ASU 2021-08 during the second quarter of 2022. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. Therefore, the adoption of this ASU 2021-08 was applied retrospectively to January 1, 2022. The adoption of ASU 2021-08 did not have a material impact on our condensed consolidated financial statements and related disclosures.
In January 2017,Reclassifications
Certain prior year reported amounts have been reclassified to conform to the FASB issued 2017-01, Business Combinations (Topic 805): Clarifying2022 presentation (see Note 2).
2.Revenues
Digital Media
Digital Media revenues are earned primarily from the Definitiondelivery of advertising services and from subscriptions to services and information.
Revenue is earned from the delivery of advertising services on websites that are owned and operated by us and on those websites that are part of Digital Media’s advertising network. Depending on the individual contracts with the customer, revenue for these services is recognized over the contract period when any of the following performance obligations are satisfied: (i) when an advertisement is placed for viewing, (ii) when a Business. The amendments in this ASU providequalified sales lead is delivered, (iii) when a robust frameworkvisitor “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.
We also generate Digital Media subscription revenues through the license of certain assets to clients. Assets are licensed for clients’ use in determiningtheir own promotional materials or otherwise and may include logos, editorial reviews, or other copyrighted material. Revenues under such license agreements are recognized over the contract term for use of the asset. In instances when technology assets are licensed to our clients, revenues from the license of these assets are recognized over the term of the access period.
The Digital Media business also generates revenue from other sources which include marketing and production services. Such other revenues are generally recognized over the period in which the products or services are delivered.
We also generate Digital Media revenues from transactions involving the sale of perpetual software licenses, related software support and maintenance, hardware used in conjunction with its software, and other related services. Revenue is recognized for these software transactions with multiple performance obligations after (i) the contract has been approved and we are committed to perform the respective obligations and (ii) we can identify and quantify each obligation and its respective selling price. Once the respective performance obligations have been identified and quantified, revenue will be recognized when the obligations are met, either over time or at a setpoint in time depending on the nature of assetsthe obligation.
Revenues from software license performance obligations are generally recognized upfront at the point in time that the software is made available to the customer to download and activitiesuse. Revenues for related software support and maintenance performance obligations are related to technical support provided to customers as needed and unspecified software product upgrades, maintenance releases and patches during the term of the support period when they are available. We are obligated to make the support services available continuously throughout the contract period. Therefore, revenues for support contracts are generally recognized ratably over the contractual period the support services are provided. Hardware product and related software performance obligations, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a bundled performance obligation. The revenues for this bundled performance obligation are generally
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
recognized at the point in time that the hardware and software products are delivered and ownership is a business. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted andtransferred to the standard should be applied prospectively. customer. Other service revenues are generally recognized over time as the services are performed.
The Company does not expectrecords revenue on a gross basis with respect to revenue generated (i) by the adoptionCompany serving online display and video advertising across its owned and operated web properties, on third-party sites or on unaffiliated advertising networks; (ii) through the Company’s lead-generation business; and (iii) through the Company’s subscriptions. The Company records revenue on a net basis with respect to revenue paid to the Company by certain third-party advertising networks who serve online display and video advertising across the Company’s owned-and-operated web properties and certain third-party sites.
Cybersecurity and Martech
The Company’s Cybersecurity and Martech revenues substantially consist of this ASU to havesubscription revenues which include subscription, usage-based and licensing fees, a material impact on our financial statementssignificant portion of which are paid in advance. The Company defers the portions of monthly, quarterly, semi-annual and related disclosures.annual fees collected in advance of the satisfaction of performance obligations and recognizes them in the period earned.
In January 2017, the FASB issued 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminating the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Instead, under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unitAlong with its carrying amountnumerous proprietary Cybersecurity and would recognize an impairment changeMartech solutions, the Company also generates subscription revenues by reselling various third-party solutions, primarily through its email security line of business. These third-party solutions, along with the Company’s proprietary products, allow it to offer customers a variety of solutions to better meet the customer’s needs. The Company records revenue on a gross basis with respect to reseller revenue because the Company has control of the specified good or service prior to transferring control to the customer.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Revenues from external customers classified by revenue source are as follows (in thousands). See Note 14 - Segment Information for additional information.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Digital Media | | | | | | | |
Advertising(1) | $ | 189,198 | | | $ | 198,385 | | | $ | 359,265 | | | $ | 375,673 | |
Subscription(1) | 58,901 | | | 48,299 | | | 114,477 | | | 93,924 | |
Other(1) | 10,601 | | | 7,293 | | | 19,785 | | | 11,253 | |
Total Digital Media revenues | $ | 258,700 | | | $ | 253,977 | | | $ | 493,527 | | | $ | 480,850 | |
| | | | | | | |
Cybersecurity and Martech | | | | | | | |
Subscription | $ | 78,910 | | | $ | 87,608 | | | $ | 159,404 | | | $ | 172,510 | |
| | | | | | | |
Total Cybersecurity and Martech revenues | $ | 78,910 | | | $ | 87,608 | | | $ | 159,404 | | | $ | 172,510 | |
| | | | | | | |
| | | | | | | |
Elimination of inter-segment revenues | (254) | | | (292) | | | (507) | | | (410) | |
Total Revenues | $ | 337,356 | | | $ | 341,293 | | | $ | 652,424 | | | $ | 652,950 | |
| | | | | | | |
Timing of revenue recognition | | | | | | | |
Point in time | $ | 9,202 | | | $ | 11,097 | | | $ | 18,185 | | | $ | 17,062 | |
Over time | 328,154 | | | 330,196 | | | 634,239 | | | 635,888 | |
Total | $ | 337,356 | | | $ | 341,293 | | | $ | 652,424 | | | $ | 652,950 | |
(1) During the three and six months ended June 30, 2021, the Company reclassified approximately $1.5 million and $4.7 million of revenue from ‘Subscription’ to ‘Advertising’ and reclassified approximately $4.4 million and $6.5 million of revenue from ‘Subscription’ to ‘Other’ to conform with current period presentation. These reclassifications were made in order to separate games publishing revenue from traditional advertising revenue and to move job posting related revenue from subscriptions to advertising.
The Company has recorded $49.8 million and $46.2 million of revenue for the amount bythree months ended June 30, 2022 and 2021, respectively, and $122.7 million and $112.7 million of revenue for the six months ended June 30, 2022 and 2021, respectively, which was previously included in the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and should be adopted on a prospective basis. The Company does not expect the adoption of this ASU to have a material impact on our financial statements and related disclosures.
In February 2017, the FASB issued 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU provides guidance which clarifies the scope and accounting for financial assets that meet the definition of an “in-substance nonfinancial asset” and defines the term, “in-substance nonfinancial asset.” In addition, this ASU also adds guidance for partial sales of nonfinancial assets. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted and should be adopted retrospectively for all periods presented or retrospectively
with a cumulative-effect adjustment at the date of adoption. The Company does not expect the adoption of this ASU to have a material impact on our financial statements and related disclosures.
In March 2017, the FASB issued 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This ASU is effective for those fiscal years, beginning after December 15, 2018. Early adoption is permitted and should be adopted on a modified retrospective bases through a cumulative-effect directly to retained earningsdeferred revenue balance as of the beginning of each respective year.
As of June 30, 2022 and December 31, 2021, the periodCompany acquired $19.3 million and $9.5 million respectively, of adoption. deferred revenue in connection with the Company’s business acquisitions, which are subject to purchase accounting adjustments, as appropriate. Refer to Note 3 - Business Acquisitions for details.
Performance Obligations
We are often a party to multiple concurrent contracts with the same customer, or a party related to that customer. These situations require judgment to determine if those arrangements should be accounted for as a single contract. Consideration of both the form and the substance of the arrangement is required. The Company’s contracts with customers may include multiple performance obligations, including complex contracts when advertising and licensing services are sold together.
We determine the transaction price based on the amount to which we expect to be entitled in exchange for services provided. We include any fixed consideration within our contracts as part of the total transaction price. Our contracts occasionally contain some component of variable consideration, which is often immaterial and estimated. We do not include taxes assessed by a governmental authority that are (i) both imposed on and concurrent with a specific revenue-producing transaction and (ii) collected by us from the customer. The transaction price is allocated to each performance obligation based on its relative standalone selling price, which is determined at contract inception. In these instances, the Company determines its standalone selling prices based on the prices at which the Company separately sells each service.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The Company doessatisfies 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 Cybersecurity and Martech business upon delivery of services to its customers. Payment terms vary by type and location of our customers and the services offered. The time between invoicing and when payment is due is not expect the adoption of this ASU to have a material impact on our financial statements and related disclosures.
In May 2017, the FASB issued 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this ASU provide guidance about which changessignificant. Due to the terms or conditionsnature of share-based payment awardthe services provided, there are no obligations for returns.
Significant Judgments
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require an entitysignificant judgment. Judgment is also required to apply modification accountingdetermine the standalone selling price for each distinct performance obligation.
Performance Obligations Satisfied Over Time
Our 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 Topic 718. Specifically, an entity should account for the effects of a modification unless all 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 met: (1) The fair value (or calculated valueevidenced by either delivery reports from the Company’s internal lead management systems or intrinsic value, if such an alternative measurement methodthrough e-mail communication and/or other evidence of delivery showing acceptance of leads by the customer
•Commission is used)evidenced by direct site reporting from the affiliate or via direct confirmation from the customer
Subscription
•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
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. We believe that the methods described are a faithful depiction of the modified award istransfer of goods and services.
Our Cybersecurity and Martech business consists primarily of performance obligations that are satisfied over time. This has been determined based on the same asfact that the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used)nature of services offered are subscription based where the customer simultaneously receives and consumes the benefit of the original award immediately beforeservices provided regardless of whether the original award is modified. Ifcustomer uses the modification does not affectservices or not. Depending on the individual contracts with the customer, revenue for these services are recognized over the contract period when any of the inputsfollowing materially distinct performance obligations are satisfied:
•Faxing capabilities are provided (included in discontinued operations through October 7, 2021)
•Voice, email marketing and search engine optimization as services are delivered
•Consumer privacy services and data backup capabilities are provided
•Security solutions, including email and endpoint are provided
The Company has concluded 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, or as usage occurs, and believes that the method used is a faithful depiction of the transfer of goods and services.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
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 valuation technique thatcustomer. Once the entity useskey is delivered to value the award,customer, the entity is not required to estimate the value immediately before and after the modification; (2) The vesting conditionscustomer has full control of the modified award aretechnology and the same asCompany has no further performance obligations. The Company has concluded that revenue is recognized once the vesting conditionsdigital key is delivered. The Company believes that this method is a faithful depiction of the transfer of goods and services.
Transaction Price Allocation to Future Performance Obligations
As of June 30, 2022, the aggregate amount of transaction price that is allocated to our performance obligations was approximately $27.5 million and is expected to be recognized as follows: 34% by December 31, 2022, 65% by December 31, 2023 and the rest thereafter. The amount disclosed does not include revenues related to performance obligations that are part of a contract with original award immediately before the original award is modified; and (3) The classificationexpected duration of 12 months or less or portions of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This ASU is effective for those fiscal years, beginning after December 15, 2017. Early adoption is permitted and should be adopted on a prospective basis. The Company does not expect the adoption of this ASUcontract that remain subject to have a material impact on our financial statements and related disclosures.cancellations.
3.Business Acquisitions
The Company uses acquisitions as a strategy to grow its customer base by increasing its presence in new and existing markets, expand and diversify its service offerings, enhance its technology, and acquire skilled personnel and enter into other jurisdictions.personnel.
The Company completed the following acquisitions during the first ninesix months of fiscal 2017,ended June 30, 2022, paying the purchase price in cash in each transaction: (a) an asseta share purchase of sFax,Lifecycle Marketing Group Limited, acquired on March 31, 2017, an Austin-based providerJanuary 21, 2022, a United Kingdom-based portfolio of mobile cloud faxing for health care;pregnancy and parenting brands, including Emma’s Diary and Health Professional Academy, reported within our Digital Media segment; (b) a share purchase of the entire issued capital of WeCloud AB,FitNow, Inc, acquired on June 12, 2017,2, 2022, a Swedish-basedMassachusetts-based provider of cloud-based Internet security services;weight loss products and support, reported within our Digital Media segment; and (c) an asset purchase of MyPhoneFax.com, acquired on June 30, 2017, a provider of online fax services; (d) an asset purchase of EZ Publishing (dba “StreamSend”), acquired on August 22, 2017, a provider of email marketing solutions; and (e) other2 immaterial acquisitions of online data backup, email marketing and email security businesses.Digital Media acquisitions.
The condensed consolidated statementCondensed Consolidated Statement of income,Operations since the date of each acquisition and balance sheetthe Condensed Consolidated Balance Sheets as of SeptemberJune 30, 2017,2022, reflect the results of operations of all 20172022 acquisitions. For the ninesix months ended SeptemberJune 30, 2017,2022, these acquisitions contributed $9.4$7.4 million to the Company’s revenues. Net income contributed by these acquisitions was not separately identifiable due to j2 Global’sthe Company’s integration activities and is impracticable to provide. Total consideration for these transactions was $58.4$107.1 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.
The following table summarizes the preliminary allocation of the purchase consideration for theseall acquisitions as of June 30, 2022 (in thousands):
| | | | | | | | |
Assets and Liabilities | 2022 Acquisitions |
Accounts receivable | $ | 6,703 | |
Prepaid expenses and other current assets | | 897 | |
Property and equipment | | 370 | |
| | |
Trade names | | 11,902 | |
Customer relationship | | 22,170 | |
Goodwill | | 81,725 | |
| | |
Other intangibles | | 16,830 | |
Other long-term assets | | 11 | |
| | |
Accounts payable and accrued expenses | | (3,383) | |
| | |
Deferred revenue | | (19,274) | |
| | |
| | |
| | |
| | |
| | |
| | |
Deferred tax liability | | (10,485) | |
Other long-term liabilities | | (326) | |
| | |
Total | $ | 107,140 | |
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
|
| | | |
Assets and Liabilities | Valuation |
Accounts receivable | $ | 831 |
|
Property and equipment | 451 |
|
Trade names | 1,543 |
|
Customer relationships | 25,627 |
|
Other intangibles | 4,659 |
|
Goodwill | 31,253 |
|
Accounts payable and accrued expenses | (1,475 | ) |
Deferred revenue | (4,527 | ) |
Total | $ | 58,362 |
|
During the nine months ended September 30, 2017, the purchase price accounting has been finalized for the following acquisitions: (i) Fonebox; and (ii) other immaterial fax, online data backup, email security and email marketing businesses. The initial accounting for all other 2017of the 2022 acquisitions is incomplete due to timing of available information and is subject to change, which may be significant. j2 Globalchange. 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.
DuringThe fair value of the nine months ended September 30, 2017, theassets acquired includes accounts receivable of $6.7 million, of which none is expected to be uncollectible. The Company recorded adjustments to prior period acquisitions due to the finalizationdid not acquire any other classes of purchase accounting in the Business Cloud Services segment which resulted inreceivables as a net decrease in goodwillresult of its acquisitions.
$(0.8) million. In addition, the Company recorded adjustments to the initial working capital related to prior period acquisitions in the Digital Media segment, which resulted in a net decrease in goodwill of $(1.5) million. Such adjustments had an immaterial impact to the amortization expense within the condensed consolidated statement of income for the nine months ended September 30, 2017.
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 ninesix months ended SeptemberJune 30, 2017 is $31.32022 was $81.7 million, of which $23.6$1.2 million is expected to be deductible for income tax purposes.
During the six months ended June 30, 2022, the purchase price accounting has been finalized for the following 2021 acquisitions: DailyOM and SEOmoz. During the six months ended June 30, 2022, the Company also recorded adjustments to the initial working capital and to the purchase accounting of certain other prior period acquisitions due to the finalization of prior period acquisitions in the Digital Media business, which resulted in a net increase in goodwill of $1.8 million. In addition, the Company recorded adjustments to the initial working capital and to the purchase accounting of certain prior period acquisitions due to the finalization of prior period acquisitions in the Cybersecurity and Martech businesses which resulted in a net decrease in goodwill of $0.1 million. Such adjustments had an immaterial impact on the amortization expense within the Condensed Consolidated Statement of Operations for the six months ended June 30, 2022. Refer to Note 7 - Goodwill and Intangible Assets for additional information. 4.Investments
Unaudited Pro Forma Financial Information for All 2022 Acquisitions
Short-term investments consist
The following unaudited pro forma information is not necessarily indicative of certificatesthe Company’s consolidated results of deposits, which
operations in future periods or the results that actually would have been realized had the Company and the acquired businesses
been combined companies during the periods presented. These pro forma results are stated at fair market value. estimates and exclude any savings or synergies that would have resulted from these business acquisitions had they occurred on January 1, 2021. 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 2022 acquisitions as if each acquisition had occurred on January 1, 2021 (in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) |
Revenues | $ | 343,275 | | | $ | 353,283 | | | $ | 668,309 | | | $ | 676,929 | |
Net (loss) income from continuing operations | $ | (46,300) | | | $ | (22,941) | | | $ | (21,543) | | | $ | 15,778 | |
(Loss) income per common share from continuing operations - Basic | $ | (0.99) | | | $ | (0.51) | | | $ | (0.46) | | | $ | 0.35 | |
(Loss) income per common share from continuing operations - Diluted | $ | (0.99) | | | $ | (0.51) | | | $ | (0.46) | | | $ | 0.33 | |
2021
The Company classifies assets held for sale when management approvescompleted the following acquisitions during the six months ended June 30, 2021, paying the purchase price in cash in each transaction: (a) an asset purchase of DailyOM, acquired on April 30, 2021, a California-based provider of health and commits towellness digital media, content and learning business; (b) a formal planshare purchase of sale with the expectation the sale will be completed within one year. The net assetsSEOmoz, acquired on June 4, 2021, a Seattle-based provider of the business held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.
During the third quarter 2017, the Company committed to a plan to sell Tea Leaves Health, LLC (“Tea Leaves”), a subsidiary within thesearch engine optimization solutions; and (c) 1 immaterial Digital Media segment, as it was determined to be a non-core asset. This determination resulted in a reclassificationacquisition.
The Condensed Consolidated Statement of assets held for sale onOperations since the condensed consolidateddate of each acquisition and balance sheet with a net carrying value of $55.6 million as of SeptemberJune 30, 2017.2021, reflect the results of operations of all 2021 acquisitions. For the six months ended June 30, 2021, these acquisitions contributed $5.8 million to the Company’s revenues. Net income from continuing operations contributed by these acquisitions was not separately identifiable due to the Company’s integration activities and is impracticable to provide. Total
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
consideration for these transactions was $91.0 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.
The following table presents information related tosummarizes the assets and liabilities that were classifiedallocation of the purchase consideration for all acquisitions as held for sale in our condensed consolidated balance sheetsof June 30, 2021, including individually material acquisitions noted separately (in thousands):
| | | | | | | | |
Assets and Liabilities | Valuation |
Accounts receivable | $ | 3,278 | |
Prepaid expenses and other current assets | | 2,512 | |
Property and equipment | | 1,838 | |
Operating lease right-of-use assets, noncurrent | | 5,888 | |
Trade names | | 10,007 | |
Customer relationship | | 5,000 | |
Goodwill | | 55,439 |
| | |
Other intangibles | | 29,237 | |
Other long-term assets | | 62 | |
Deferred tax asset | | 231 | |
Accounts payable and accrued expenses | | (2,656) | |
| | |
Deferred revenue | | (7,048) | |
Operating lease liabilities, current | | (7,191) | |
| | |
Other current liabilities | | (14) | |
| | |
| | |
| | |
Deferred tax liability | | (4,122) | |
Other long-term liabilities | | (1,491) | |
Total | $ | 90,970 | |
Unaudited Pro Forma Financial Information for All 2021 Acquisitions
The following unaudited pro forma 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 are estimates and 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 acquisitions during the three months and six months ended as June 30, 2021 as if each acquisition had occurred on January 1, 2020 (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| | | | | |
| (unaudited) | | (unaudited) |
Revenues | $ | 351,172 | | | $ | 680,194 | | | |
Net (loss) income from continuing operations | $ | (22,156) | | | $ | 19,456 | | | |
(Loss) income per common share from continuing operations - Basic | $ | (0.50) | | | $ | 0.44 | | | |
(Loss) income per common share from continuing operations - Diluted | $ | (0.50) | | | $ | 0.41 | | | |
SEOmoz
On June 4, 2021, the Company acquired all the outstanding issued capital of SEOmoz at a purchase consideration of $67.0 million, net of cash acquired and assumed liabilities. SEOmoz is a provider of search engine optimization (“SEO”) solutions. The Consolidated Statement of Operations since the date of acquisition and balance sheet as of December 31, 2021, reflect the results of operations of SEOmoz. For both of the three and six months ended June 30, 2021, SEOmoz contributed
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
|
| | | | |
| | September 30, 2017 |
| | |
Accounts receivable, net | | $ | 5,568 |
|
Prepaid expenses and other current assets | | 3,957 |
|
Property and equipment, net | | 1,734 |
|
Goodwill | | 36,312 |
|
Other intangible assets, net | | 10,859 |
|
Deferred income taxes, non-current | | 6,305 |
|
Other assets | | 4 |
|
Total assets held for sale | | $ | 64,739 |
|
| | |
Accounts payable and accrued expenses | | $ | 2,200 |
|
Deferred revenue, current | | 2,236 |
|
Deferred income taxes, non-current | | 4,709 |
|
Other long-term liabilities | | 4 |
|
Total liabilities held for sale | | $ | 9,149 |
|
$3.3 million to the Company’s revenues. Net income from continuing operations contributed by SEOmoz since the acquisition date was not separately identifiable due to the Company’s integration activities and is impracticable to provide.
The following table summarizes the allocation of the purchase consideration for the SEOmoz acquisition (in thousands): | | | | | | | | |
Assets and Liabilities | Valuation |
| | |
Accounts receivable | $ | 3,278 | |
Prepaid expenses and other current assets | | 2,512 | |
Property and equipment | | 1,838 | |
Operating lease right of use asset | | 5,888 | |
Trade names | | 7,200 | |
Customer relationships | | 5,000 | |
Goodwill | | 41,192 | |
| | |
Other intangibles | | 21,607 | |
Other long-term assets | | 62 | |
Intercompany | | 235 | |
Accounts payables and accrued expenses | | (2,656) | |
Other current liabilities | | (14) | |
Deferred revenue | | (7,048) | |
| | |
Operating lease liabilities, current | | (7,191) | |
| | |
| | |
| | |
Deferred tax liability | | (4,122) | |
Other long-term liabilities | | (785) | |
Total | $ | 66,996 | |
The fair value of the assets acquired includes accounts receivable of $3.3 million. The gross amount due under contracts is $3.6 million, of which $0.3 million is expected to be uncollectible. The Company did not acquire any other classes of receivables as a result of its acquisitions.
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 in connection with this acquisition during the year ended December 31, 2021 is $41.2 million of which zero is expected to be deductible for income tax purposes.
Unaudited Pro Forma Financial Information for SEOmoz Acquisition
The following unaudited pro forma information is not necessarily indicative of the Company’s consolidated results of operations in future periods or the results that actually would have been realized had the Company and the acquired business been combined companies during the periods presented. These pro forma results are estimates and exclude any savings or synergies that would have resulted from this business acquisition had it occurred on January 1, 2020. This unaudited pro forma supplemental information includes incremental intangible asset amortization and other charges as a result of the SEOmoz acquisition, net of the related tax effects.
The supplemental information on an unaudited pro forma financial basis presents the combined results of the Company and SEOmoz as if the acquisition had occurred on January 1, 2020 (in thousands, except per share amounts):
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| | | | | |
| (unaudited) | | (unaudited) |
Revenues | $ | 349,473 | | | $ | 673,401 | | | |
Net (loss) income from continuing operations | $ | (22,247) | | | $ | 18,767 | | | |
(Loss) income per common share from continuing operations - Basic | $ | (0.50) | | | $ | 0.42 | | | |
(Loss) income per common share from continuing operations - Diluted | $ | (0.50) | | | $ | 0.40 | | | |
4.Investments
Investments consist of equity and debt securities. There were no investments in an unrealized loss position as of June 30, 2022 and December 31, 2021.
Investment in equity securities
The following table summarizes the cumulative gross unrealized gains and losses and fair values for short-term investments accounted for at fair value under the fair value option, with the unrealized gains and losses reported within earnings on the Condensed Consolidated Statements of Operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Initial Book Value | | | | | | Cumulative Gross Unrealized Gains | | Cumulative Gross Unrealized Losses | | Fair Value |
June 30, 2022 | | | | | | | | | | | |
Investment in Consensus (equity securities) | $ | (29,052) | | | | | | | $ | 101,587 | | | $ | — | | | $ | 72,535 | |
Total | $ | (29,052) | | | | | | | $ | 101,587 | | | $ | — | | | $ | 72,535 | |
| | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | |
Investment in Consensus (equity securities) | $ | (69,290) | | | | | | | $ | 298,490 | | | $ | — | | | $ | 229,200 | |
Total | $ | (69,290) | | | | | | | $ | 298,490 | | | $ | — | | | $ | 229,200 | |
During the three months ended June 30, 2022, the Company completed the non-cash Debt-For-Equity Exchange of 2,300,000 shares of its Investment in Consensus with a fair value as of March 31, 2022 of $138.3 million for the extinguishment of $90.0 million of the Company’s Term Loan Facility and related interest. During the three months ended June 30, 2022, the Company incurred the loss of $48.2 million, including underwriting costs, in connection with disposal of the Disposed Consensus Shares and, which is presented within ‘Loss on investment, net’ on our Condensed Consolidated Statements of Operations. As of June 30, 2022, the Company holds 1.7 million shares of the common stock of Consensus. During the three and six months ended June 30, 2022, the Company recognized an unrealized loss on the Retained Consensus Shares of $27.3 million and $18.4 million, respectively.
During the second quarter of 2021, the Company recorded a $16.7 million impairment loss on certain equity securities related to a decline in value due to a pending sales transaction of an investee. The Company was not expected to recover the recorded cost of these securities and thus reduced such amount to what the Company expected to receive as a result of the sale. The Company subsequently sold these equity securities during fiscal year 2021.
Investment in corporate debt securities
On April 12, 2022, the Company entered into an agreement to acquire 4% convertible notes with an aggregate value of $15.0 million, which upon conversion would represent an equity interest equal to at least 3%, on a fully converted basis.
This investment is included in ‘Long-term investments, net’ in our Condensed Consolidated Balance Sheets and is classified as available-for-sale and initially measured at its transaction price and subsequently remeasured at fair value, with unrealized gains and losses reported as a component of other comprehensive income.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The table below summarizes the carrying value and the maximum exposure of Company’s investment in corporate debt securities as of June 30, 2022 (in thousands):
| | | | | | | | | | | |
| June 30, 2022 |
| Carrying value | | Maximum exposure |
Investment in corporate debt securities | $ | 15,000 | | | $ | 15,000 | |
The Company’s maximum exposure to loss is limited to its proportional ownership in the investee. In addition, the Company is not required to contribute capital in an aggregate amount in excess of its capital commitment.
The following table summarizes the gross unrealized gains and losses and fair values for investments classified as available-for-sale, with the unrealized gains and losses reported as a component of other comprehensive income (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
June 30, 2022 | | | | | | | |
Investment in corporate debt securities | $ | 15,000 | | | $ | — | | | $ | — | | | $ | 15,000 | |
Total | $ | 15,000 | | | $ | — | | | $ | — | | | $ | 15,000 | |
The Company determined that these debt securities were 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.
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):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Due within 1 year | $ | — | | | $ | — | |
Due within more than 1 year but less than 5 years | 15,000 | | | — | |
Due within more than 5 years but less than 10 years | — | | | — | |
Due 10 years or after | — | | | — | |
Total | $ | 15,000 | | | $ | — | |
Equity method investment
On September 25, 2017, the Company committedentered into a commitment to invest $200 million (approximately 76.6% of equity) in an investment fund (the “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 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 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.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The manager, OCV Management, LLC, and general partner of the Fund are entities with respect to which Richard S. Ressler, former Chairman of the Board of Directors (the “Board”) of the Company, is indirectly the majority equity holder. Mr. Ressler’s tenure with the Board ended as of May 10, 2022. As a limited partner in the Fund, prior to the settlement of certain litigation generally related to the Company’s investment in the Fund in January 2022, the Company paid an annual management fee to the manager equal to 2.0% 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 plancarried interest equal to sell20%. The Fund has a six year investment period, subject to certain exceptions. The commitment was approved by the Cambridge BioMarketing Group, LLC (“Cambridge”Audit Committee of the Board in accordance with the Company’s related-party transaction approval policy. At the time of the settlement of the litigation (see Note 9 – Commitments and Contingencies), a subsidiary within the Digital Media segment, as it was determined to be a non-core asset. On July 12, 2017, in a cash transaction, the Company sold Cambridgehad invested approximately $128.8 million in the Fund. In connection with the settlement of the litigation, among other terms, no further capital calls will be made in connection with the Company’s investment in the Fund, nor will any management fees be paid by the Company to the manager.As such, during the six months ended June 30, 2022, the Company received no capital call notices from the manager of the Fund. During the six months ended June 30, 2021, the Company received capital call notices from the manager of the Fund for $11.1 million, inclusive of certain management fees. Approximately $10.1 million was paid for capital call notices during the six months ended June 30, 2021. During both the six months ended June 30, 2022 and 2021, the Company received no distributions from OCV.
The Company recognizes its equity in the net earnings or losses relating to the investment in OCV on a one-quarter lag (including management fees) due to the timing and availability of financial information from OCV. If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline. During the three months ended June 30, 2022 and 2021, the Company recognized an investment loss of $6.1 million and $5.8 million, net of tax benefit, respectively. During the six months ended June 30, 2022 and 2021, the Company recognized an investment (loss) gain of $3.2$(6.9) million whichand $18.5 million, net of tax benefit (expense), respectively. The gain in fiscal 2021 was recordedprimarily the result of gains in other (income) expense, net.
the underlying investments. During the third quarter 2017,three months ended June 30, 2022 and 2021, the Company committed to a plan to sell j2 Australia Hosting Pty Ltd (dba “Web24”), a subsidiary withinrecognized expense for management fees of $0.8 million and $0.8 million, net of tax benefit, respectively, and for the Business Cloud Services segment, as it was determined to be a non-core asset. On September 1, 2017, in a cash transaction,six months ended June 30, 2022 and 2021, the Company sold Web24recognized expense for management fees of $1.5 million and $1.5 million, net of tax benefit, respectively.
The following table discloses the carrying amount for the Company’s equity method investment (in thousands). These equity securities are included within ‘Long-term investments’ in the Condensed Consolidated Balance Sheets.
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Equity securities | $ | 113,460 | | | $ | 122,593 | |
Maximum exposure to loss | $ | 113,460 | | | $ | 122,593 | |
As a gainlimited 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 $1.6 millionits 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.
5.Discontinued Operations
Consensus Spin-Off
As further described in Note 1 - Basis of Presentation and Overview, on October 7, 2021, the Separation of the cloud fax business was recordedcompleted. The accounting requirements for reporting the Company’s cloud fax business as a discontinued operation were met when the Separation was completed as the Separation constituted a strategic shift that would have a major effect on the Company’s operations and financial results.Accordingly, the Condensed Consolidated Financial Statements reflect the results of the cloud fax business as a discontinued operation for the three and six months ended June 30, 2021. The Condensed Consolidated Statements of Operations report discontinued operations separate from continuing operations. The Condensed Consolidated Statements of Comprehensive (Loss) Income, Condensed Consolidated Statements of Cash Flows, and Condensed Consolidated Statements of Stockholders’ Equity combine continuing and discontinued operations.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The key components of cash flows from discontinued operations were as follows (in thousands):
| | | | | | | | | |
| | | Six Months Ended June 30, 2021 |
| | | |
Capital expenditures | | | $ | 8,010 | |
Depreciation and amortization | | | $ | 5,601 | |
| | | |
Deferred taxes | | | $ | (6,508) | |
| | | |
| | | |
In connection with the Separation, Ziff Davis and Consensus entered into several agreements that govern the relationship of the parties following the Separation, which are further discussed in other (income) expense, net.Note 16 - Related Party Transactions. Further, certain of the Company’s management and members of its board of directors resigned from the Company as of the date of distribution and joined Consensus. In addition, one of the Company’s members of senior management as of June 30, 2022 has served on the board of directors of Consensus since the date of distribution.
The key components of income from discontinued operations were as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
Revenues | $ | 87,751 | | | $ | 174,279 | |
Cost of revenues | (14,554) | | | (28,524) | |
Sales and marketing | (13,681) | | | (26,916) | |
Research, development and engineering | (1,940) | | | (3,616) | |
General and administrative | (5,977) | | | (12,025) | |
Interest expense and other | (351) | | | (199) | |
Income before income taxes | 51,248 | | | 102,999 | |
Income tax expense | 12,486 | | | 25,094 | |
Income from discontinued operations, net of income taxes | $ | 38,762 | | | 77,905 | |
6.Fair Value Measurements
j2 GlobalThe 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 the 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:
|
| | | | | | | |
| l§ | Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| | |
| l§ | 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. |
| | |
| l§ | 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 Company’s certificates of deposit are classified within Level 2. The Company values these Level 2 investments based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.
The fair value of the Convertible Notes (see Note 8 - Long-Term Debt)long-term debt is determined using recent quoted market prices or dealer quotes for such securities,each of the Company’s instruments, which are Level 1 inputs. The fair value of our senior notes (8.0% senior unsecured notes atthe Company’s debt instruments was approximately $1.0 billion and $1.3 billion, as of June 30, 2022 and December 31, 2016 and 6.0% senior unsecured notes at September 30, 2017)2021, respectively (see Note 8 - Long-Term Debt)Debt).
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The Retained Consensus Shares are equity securities for which the Company elected the fair value option, and the fair value of the Retained Consensus Shares and subsequent fair value changes are included in our assets of and results from continuing operations, respectively. As of June 30, 2022 and December 31, 2021, the Company’s investment in Consensus common stock was remeasured at fair value based on Consensus’ closing stock price with a balance of $72.5 million and $229.2 million included on the Condensed Consolidated Balance Sheets, respectively. Unrealized loss of $27.3 million and $18.4 million were recorded on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022, respectively. The fair value of the investment in Consensus is determined using quoted market prices, which is a Level 1 input.
The fair value of our 4.625% Senior Notes (as defined in Note 8 - Debt) was determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 21 inputs. The fair value of the Credit Facility (as defined in Note 8 - Debt) approximated its carrying amount due to its variable interest rate, which approximated a market interest rate, and was considered a Level 2 input.
The investment in corporate debt at September 30, 2017 and December 31, 2016 was $1.2 billion and $792.2 million, respectively.
In addition, the Convertible Notes contain terms that may require the Company to pay contingent interest on the Convertible Notes whichsecurities is accounted for as a derivative withmeasured at fair value adjustments being recordedon our Condensed Consolidated Balance Sheets. Unrealized gains and losses are reported in other comprehensive income until realized. Corporate debt securities do not have a readily determinable fair value because acquired securities are privately held, not traded on any public exchanges and not an investment in a mutual fund or similar investment. The investment in corporate debt securities is classified as available-for-sale and is initially measured at its transaction price. The fair value of the corporate debt securities is determined primarily based in significant estimates and assumptions, including Level 3 inputs. As of June 30, 2022, the fair value of our investment in corporate debt securities approximates its carrying value due to interest expense. This derivative is fair valued using a binomial lattice convertible bond pricing model using historical and implied market information, which are Level 2 inputs.close proximity of the date of the investment to the reporting date. Refer to Note 4 - Investments for additional information.
The Company classifies its contingent consideration liability in connection with its acquisitions within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. The fairvaluation approaches used to value ofLevel 3 investments considers unobservable inputs in the contingent consideration liability was determined using option based approaches. This methodology was utilized because the distribution of payments is not symmetricmarket such as time to liquidity, volatility, dividend yield, and amounts are only payable upon certain earnings before interest, tax, depreciation and amortization (“EBITDA”) thresholds being reached. Such valuation approach included the Monte-Carlo simulation for the contingency since the financial metric driving the payments is path dependent.breakpoints. Significant increases or decreases in either of the inputs noted above in isolation would result in a significantly lower or higher fair value of 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 June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Valuation Technique | | Unobservable Input | | Range | | Weighted Average |
Contingent Consideration | | Option-Based Model | | Risk free rate | | N/A | | 1.9 | % |
| | | | Debt spread | | 1.3% - 16.4% | | 9.4 | % |
| | | | | | | | |
| | | | Present value factor | | N/A | | 26.9 | % |
| | | | Discount rate | | N/A | | 27.3 | % |
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Carrying Value |
Assets: | | | | | | | | | |
Cash equivalents: | | | | | | | | | |
Money market and other funds | $ | 98,920 | | | $ | — | | | $ | — | | | $ | 98,920 | | | $ | 98,920 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Investment in corporate debt securities | — | | | — | | | 15,000 | | | 15,000 | | | 15,000 | |
Investment in Consensus | 72,535 | | | — | | | — | | | 72,535 | | | 72,535 | |
Total assets measured at fair value | $ | 171,455 | | | $ | — | | | $ | 15,000 | | | $ | 186,455 | | | $ | 186,455 | |
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 3,047 | | | $ | 3,047 | | | $ | 3,047 | |
Debt | 1,015,010 | | | — | | | — | | | 1,015,010 | | | 1,102,201 | |
Total liabilities measured at fair value | $ | 1,015,010 | | | $ | — | | | $ | 3,047 | | | $ | 1,018,057 | | | $ | 1,105,248 | |
| | | | | | | | | |
December 31, 2021 | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Carrying Value |
Assets: | | | | | | | | | |
Cash equivalents: | | | | | | | | | |
Money market and other funds | $ | 144,255 | | | $ | — | | | $ | — | | | $ | 144,255 | | | $ | 144,255 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Investment in Consensus | 229,200 | | | — | | | — | | | 229,200 | | | 229,200 | |
Total assets measured at fair value | $ | 373,455 | | | $ | — | | | $ | — | | | $ | 373,455 | | | $ | 373,455 | |
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 5,775 | | | $ | 5,775 | | | $ | 5,775 | |
Debt | 1,345,311 | | | — | | | — | | | 1,345,311 | | | 1,090,627 | |
Total liabilities measured at fair value | $ | 1,345,311 | | | $ | — | | | $ | 5,775 | | | $ | 1,351,086 | | | $ | 1,096,402 | |
|
| | | | | | | | | | | | | | | |
September 30, 2017 | Level 1 | | Level 2 | | Level 3 | | Fair Value |
Assets: | | | | | | | |
Cash equivalents: | | | | | | | |
Money market and other funds | $ | 127,751 |
| | $ | — |
| | $ | — |
| | $ | 127,751 |
|
Total assets measured at fair value | $ | 127,751 |
| | $ | — |
| | $ | — |
| | $ | 127,751 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Contingent interest derivative | $ | — |
| | $ | 958 |
| | $ | — |
| | $ | 958 |
|
Total liabilities measured at fair value | $ | — |
| | $ | 958 |
| | $ | — |
| | $ | 958 |
|
| | | | | | | |
December 31, 2016 | Level 1 | | Level 2 | | Level 3 | | Fair Value |
Assets: | | | | | | | |
Cash equivalents: | | | | | | | |
Money market and other funds | $ | 7,737 |
| | $ | — |
| | $ | — |
| | $ | 7,737 |
|
Certificates of deposit | — |
| | 60 |
| | — |
| | 60 |
|
Total assets measured at fair value | $ | 7,737 |
| | $ | 60 |
| | $ | — |
| | $ | 7,797 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Contingent consideration | $ | — |
| | $ | — |
| | $ | 17,450 |
| | $ | 17,450 |
|
Contingent interest derivative | — |
| | 958 |
| | — |
| | 958 |
|
Total liabilities measured at fair value | $ | — |
| | $ | 958 |
| | $ | 17,450 |
| | $ | 18,408 |
|
At the end of each reporting period, management reviews the inputs to the fair value measurements of financial and non-financial assets and liabilities to determine when transfers between levels are deemed to have occurred. For the ninesix months ended SeptemberJune 30, 2017,2022 and 2021, there were no transfers that have occurred between levels.
The following table presents a reconciliation of the Company’s Level 3 financial assets or liabilitiesrelated to our investment in corporate debt securities 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, 2022 | $ | — | | | |
Investment in corporate debt securities | 15,000 | | | Not applicable |
Balance as of June 30, 2022 | $ | 15,000 | | | |
|
| | | | | |
| Level 3 | | Affected line item in the Statement of Income |
Balance as of January 1, 2017 | $ | 17,450 |
| | |
Contingent consideration | — |
| | |
Total fair value adjustments reported in earnings | (600 | ) | | General and administrative |
Contingent consideration payments | (16,850 | ) | | Not applicable |
Balance as of September 30, 2017 | $ | — |
| | |
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
In connection with the acquisition of Salesify, on September 17, 2015, contingent consideration of up to an aggregate of $17.0 million may be payable upon achieving certain future income thresholds and had a fair value of zero and $0.6 million at September 30, 2017 and December 31, 2016, respectively.
During the nine months ended September 30, 2017, 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.
The following table presents a reconciliation of the Company’s derivative instrumentsLevel 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, 2022 | $ | 5,775 | | | |
Contingent consideration | 200 | | | |
Total fair value adjustments reported in earnings | (9) | | | General and administrative |
Contingent consideration payments | (2,919) | | | Not applicable |
Balance as of June 30, 2022 | $ | 3,047 | | | |
In connection with the Company’s other acquisition activity, contingent consideration of up to $3.0 million may be payable upon achieving certain future earnings before interest, taxes, depreciation and amortization (EBITDA), revenue, and/or unique visitor thresholds and had a combined fair value of $3.0 million and $5.8 million at June 30, 2022 and December 31, 2021, respectively. Due to the achievement of certain thresholds,$2.9 million and $5.8 million was paid during the six months ended June 30, 2022 and 2021, respectively.
|
| | | | | |
| Amount | | Affected line item in the Statement of Income |
Derivative Liabilities: | | | |
Level 2: | | | |
Balance as of January 1, 2017 | $ | 958 |
| | |
Total fair value adjustments reported in earnings | — |
| | |
Balance as of September 30, 2017 | $ | 958 |
| �� | |
Losses associated with other-than-temporary impairments are recorded as a component of other (income) expense. Gains and losses not associated with other-than-temporary impairments are recorded as a component of other comprehensive income.
7.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 one to 20twenty years.
The changes in carrying amounts of goodwill for the ninesix months ended SeptemberJune 30, 20172022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Digital Media | | Cybersecurity and Martech | | Consolidated |
Balance as of January 1, 2022 | $ | 996,659 | | | $ | 534,796 | | | $ | 1,531,455 | |
Goodwill acquired (Note 3) | 81,725 | | | — | | | 81,725 | |
| | | | | |
| | | | | |
Purchase accounting adjustments(1) | 1,773 | | | (137) | | | 1,636 | |
| | | | | |
Foreign exchange translation | (2,584) | | | (8,892) | | | (11,476) | |
Balance as of June 30, 2022 | $ | 1,077,573 | | | $ | 525,767 | | | $ | 1,603,340 | |
|
| | | | | | | | | | | |
| Business Cloud Services | | Digital Media | | Consolidated |
Balance as of January 1, 2017 | $ | 559,152 |
| | $ | 563,658 |
| | $ | 1,122,810 |
|
Goodwill acquired (Note 3) | 31,253 |
| | — |
| | 31,253 |
|
Goodwill reclassified to noncurrent assets held for sale (1) | — |
| | (36,312 | ) | | (36,312 | ) |
Goodwill written off related to sale of a business unit (2)(3) | (3,614 | ) | | (17,815 | ) | | (21,429 | ) |
Purchase accounting adjustments (4) | (766 | ) | | (1,464 | ) | | (2,230 | ) |
Foreign exchange translation | 13,811 |
| | 85 |
| | 13,896 |
|
Balance as of September 30, 2017 | $ | 599,836 |
| | $ | 508,152 |
| | $ | 1,107,988 |
|
(1)During the third quarter 2017, the Company reclassified $36.3 million of goodwill to noncurrent assets held for sale in connection with Tea Leaves (see Note 5 - Assets Held for Sale).
(2) On July 12, 2017, in a cash transaction, the Company sold Cambridge which resulted in $17.8 million of goodwill being written off in connection with this sale (see Note 5 - Assets Held for Sale).
(3) On September 1, 2017, in a cash transaction, the Company sold Web24 which resulted in $3.6 million of goodwill being written off in connection with this sale (see Note 5 - Assets Held for Sale).
(4) Purchase accounting adjustments relate to measurement period adjustments to goodwill in connection with prior year business acquisitions (seeacquisitions. Refer to Note 3 - Business Acquisitions)Acquisitions.
Intangible Assets with Indefinite Lives:
Intangible assets are summarized as of September 30, 2017 and December 31, 2016 as follows (in thousands):
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Trade name | $ | 27,379 |
| | $ | 27,379 |
|
Other | 5,432 |
| | 5,432 |
|
Total | $ | 32,811 |
| | $ | 32,811 |
|
Intangible Assets Subject to Amortization:
As of SeptemberJune 30, 2017,2022, intangible assets subject to amortization relate primarily to the following (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-Average Amortization Period | | Historical Cost | | Accumulated Amortization | | Net |
Trade names | 10.0 years | | $ | 260,802 | | | $ | 113,181 | | | $ | 147,621 | |
Customer relationships (1) | 8.0 years | | 690,343 | | | 441,821 | | | 248,522 | |
Other purchased intangibles | 8.8 years | | 480,781 | | | 340,184 | | | 140,597 | |
Total | | | $ | 1,431,926 | | | $ | 895,186 | | | $ | 536,740 | |
|
| | | | | | | | | | | | | |
| Weighted-Average Amortization Period | | Historical Cost | | Accumulated Amortization | | Net |
Trade names | 11.5 years | | $ | 127,525 |
| | $ | 48,191 |
| | $ | 79,334 |
|
Patent and patent licenses | 6.6 years | | 66,829 |
| | 55,597 |
| | 11,232 |
|
Customer relationships (1) | 9.4 years | | 414,996 |
| | 236,186 |
| | 178,810 |
|
Other purchased intangibles | 5.2 years | | 196,157 |
| | 56,411 |
| | 139,746 |
|
Total | | | $ | 805,507 |
| | $ | 396,385 |
| | $ | 409,122 |
|
(1) Historically, theThe Company has amortized itsamortizes customer relationship assets in a pattern that best reflects the pace inat 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, 2016,2021, 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 | | $ | 250,418 | | | $ | 102,657 | | | $ | 147,761 | |
Customer relationships (1) | 8.1 years | | 673,847 | | | 398,396 | | | 275,451 | |
Other purchased intangibles | 9.3 years | | 467,028 | | | 317,515 | | | 149,513 | |
Total | | | $ | 1,391,293 | | | $ | 818,568 | | | $ | 572,725 | |
|
| | | | | | | | | | | | | |
| Weighted-Average Amortization Period | | Historical Cost | | Accumulated Amortization | | Net |
Trade names | 11.5 years | | $ | 127,342 |
| | $ | 38,868 |
| | $ | 88,474 |
|
Patent and patent licenses | 6.6 years | | 65,605 |
| | 51,677 |
| | 13,928 |
|
Customer relationships (1) | 9.6 years | | 390,930 |
| | 182,775 |
| | 208,155 |
|
Other purchased intangibles | 6.0 years | | 195,913 |
| | 27,590 |
| | 168,323 |
|
Total | | | $ | 779,790 |
| | $ | 300,910 |
| | $ | 478,880 |
|
(1) Historically, theThe Company has amortized itsamortizes customer relationship assets in a pattern that best reflects the pace inat 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 55.0 years, despite the overall life of the asset.
Amortization expense, included in generalGeneral and administrative expense on our Condensed Consolidated Statements of Operations, approximated $31.7$41.8 million and $23.7$46.7 million for the three month periodmonths ended SeptemberJune 30, 20172022 and 2016,2021, respectively, and $94.3$83.0 million and $69.6$94.0 million for the nine month periodsix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. Amortization expense is estimated to approximate $174.8 million, $97.4 million, $53.3 million, $36.9 million
8. Debt
The Company’s debt as of June 30, 2022 and $29.7 million for fiscal years 2017 throughDecember 31, 2021 respectively, and $111.3 million thereafter through the durationconsists of the amortization period.
following (in thousands): | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
4.625% Senior Notes | $ | 565,173 | | | $ | 641,276 | |
| | | |
| | | |
1.75% Convertible Notes | 550,000 | | | 550,000 | |
Total Notes | 1,115,173 | | | 1,191,276 | |
| | | |
| | | |
| | | |
Less: Unamortized discount | (3,581) | | | (91,593) | |
Deferred issuance costs | (9,391) | | | (9,056) | |
Total debt | 1,102,201 | | | 1,090,627 | |
Less: current portion | (68,506) | | | (54,609) | |
Total long-term debt, less current portion | $ | 1,033,695 | | | $ | 1,036,018 | |
ZIFF DAVIS, INC. AND SUBSIDIARIES
6.0%NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
4.625% Senior Notes
On June 27, 2017, j2 Cloud Services, LLC (“j2 Cloud”) and j2 Cloud Co-Obligor (the “Co-Issuer” and together with j2 Cloud, the “Issuers”), wholly-owned subsidiaries ofOctober 7, 2020, the Company completed the issuance and sale of $650$750.0 million aggregate principal amount of their 6.0%its 4.625% senior notes due in 20252030 (the “6.0%“4.625% Senior Notes”) in a private placement offering exempt from the registration requirements of the Securities Act of 1933. j2 CloudThe Company received proceeds of $636.2$742.7 million after deducting the initial purchasers’ discounts, commissions and offering expenses and is presented as Long-term debt,expenses. The net of deferred issuance costs, on the condensed consolidated balance sheets as of September 30, 2017. The proceeds were used to redeem all of j2 Cloud’s 8.0% notesits outstanding 6.0% Senior Notes due in 2020,2025 and, to distribute sufficient net proceeds to j2 Global to pay off all amounts outstanding under its existing credit facility, with the remaining net proceeds to be usedwere available for general corporate purposes including acquisitions.which may include acquisitions and the repurchase or redemption of other outstanding indebtedness.
The 6.0% Senior NotesThese senior notes bear interest at a rate of 6.0%4.625% per annum, payable semi-annually in arrears on JanuaryApril 15 and JulyOctober 15 of each year, commencing on JanuaryApril 15, 2018.2021. The 6.0%4.625% Senior Notes mature on JulyOctober 15, 2025,2030, and are senior unsecured obligations of the IssuersCompany which are guaranteed, jointly and are guaranteedseverally, on an unsecured basis by certain of the Company’s existing and future domestic direct and indirect wholly-owned subsidiaries of j2 Cloud (as defined in(collectively, the Indenture agreement dated June 27, 2017, the “Indenture”“Guarantors”). If j2 Cloudthe Company or any of its restricted subsidiaries acquires or creates a domestic restricted subsidiary, other than an insignificant subsidiaryInsignificant Subsidiary (as defined in the Indenture)indenture pursuant to which the 4.625% Senior Notes were issued (the “Indenture”)), after the issue date, or any insignificant subsidiaryInsignificant Subsidiary ceases to fit within the definition of insignificant subsidiary,Insignificant Subsidiary, such restricted subsidiary is required to unconditionally guarantee, jointly and severally, on an unsecured basis, the Issuers’Company’s obligations under the 6.0%4.625% Senior Notes.
The IssuersCompany may redeem some or all of the 6.0%4.625% Senior Notes at any time on or after JulyOctober 15, 20202025 at specified redemption prices plus accrued and unpaid interest, if any, up to, but excluding the redemption date. Before JulyOctober 15, 2020, in connection with2023, and following certain equity offerings, the IssuersCompany also may redeem up to 35%40% of the 6.0%4.625% Senior Notes at a price equal to 106.000%104.625% of the principal amount, plus accrued and unpaid interest, if any, up to, but excluding the redemption date. The Company may make such redemption only if, after such redemption, at least 50% of the aggregate principal amount of the 4.625% Senior Notes remains outstanding. In addition, at any time prior to JulyOctober 15, 2020,2025, the IssuersCompany may redeem some or all of the 6.0%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 governingIndenture contains covenants that restrict the 6.0% Senior Notes contains certain restrictive and other covenants applicable to j2 Cloud and subsidiaries designated as restricted subsidiaries including, but not limitedCompany’s ability to (i) pay dividends or make distributions on j2 Cloud’s capitalthe Company’s common stock or repurchase j2 Cloud’sthe 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 includecontain certain exceptions. Violation of these covenants could result in a default which could result in the acceleration of outstanding amounts if such default is not cured or waived within the time periods outlined in the indenture. Restricted payments, specifically dividend payments are applicable only if j2 Cloudthe Company and subsidiaries designated as restricted subsidiaries hashave a net leverage ratio of greater than 3.03.5 to 1.0. In addition, if such net leverage ratio is in excess of 3.03.5 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 4 fiscal quarter period ended immediately prior to such date for which internal financial statements are permitted up to $75 million. These contractual provisions did not, as of September 30, 2017, restrict j2 Cloud’s ability to pay dividends to j2 Global, Inc.available. The companyCompany is in compliance with its debt covenants for the 4.625% Senior Notes as of SeptemberJune 30, 2017.2022.
During the three and six months ended June 30, 2022, the Company repurchased approximately $21.5 million and $76.1 million, respectively, in aggregate principal amount of the 4.625% Senior Notes for an aggregate purchase price of approximately $18.2 million and $73.6 million, respectively. For the three and six months ended June 30, 2022, the Company recognized a gain of approximately $3.1 million and gain of approximately $1.9 million, respectively, associated with the repurchase of the 4.625% Senior Notes, which is recorded within ‘Interest expense, net’ on our Condensed Consolidated Statements of Operations.
As of SeptemberJune 30, 2017,2022 and December 31, 2021, the estimated fair value of the 6.0%4.625% Senior Notes was approximately $680.1$482.5 million and $659.9 million, and was based on therecent quoted market prices of debt instruments with similar terms, credit rating and maturities offor the 6.0%4.625% Senior Notes which are Level 2 inputs (see1 inputs. Refer to Note 6 - Fair Value Measurements).Measurements.
8.0% Senior Notes
On August 1, 2017, j2 Cloud redeemed all of its outstanding $250 million 8.0% senior unsecured notes due in 2020 for $265 million, including a redemption premium and relevant accrued interest which resulted in a loss on extinguishment of $8.0 million recorded which was recorded in Interest expense, net. j2 Cloud has satisfactorily discharged its obligations to the holders of such notes.
3.25%1.75% Convertible Notes
On June 10, 2014, j2 GlobalNovember 15, 2019, the Company issued $402.5$550.0 million aggregate principal amount of 3.25%1.75% convertible senior notes due June 15, 2029November 1, 2026 (the “Convertible“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 3.25%1.75% per annum, payable semiannually in arrears on June 15May 1 and December 15November 1 of each year. Beginning with the six-month interest period commencingyear, beginning on June 15, 2021, the Company must pay contingent interest on the Convertible Notes during any six-month interest period if the trading price per $1,000 principal amount of the Convertible Notes for each of the five trading days immediately preceding the first day of such interest period equals or exceeds $1,300. Any contingent interest payable on theMay 1, 2020. The 1.75% Convertible Notes will be in addition to the regular interest payablemature on the Convertible Notes.November 1, 2026, unless earlier converted or repurchased.
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
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 the maturity dateJuly 1, 2026 only if one or more ofunder the following conditions is satisfied:circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014March 31, 2020 (and only during such calendar quarter), if the closinglast reported sale price of j2 Globalthe Company’s common stock for at least 20 trading days in(whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs is moregreater than 130% of the applicable conversion price of the 1.75% Convertible Notes on each such applicable trading day; (ii) during the five consecutive5 business day period following any ten10 consecutive trading day period in which the trading price for theper $1,000 principal amount of 1.75% Convertible Notes for each such trading day of the measurement period was less than 98% of the product of (a) the closinglast reported sale price of j2 Globalthe Company’s common stock on each such trading day and (b) the applicable conversion rate on each such trading day; or (iii) if j2 Global calls anyupon the occurrence of specified corporate events. On or all of the Convertible Notes for redemption, at any timeafter July 1, 2026, and prior to the close of business on the business day prior to the redemption date; (iv) upon the occurrence of specified corporate events; or (v) during either the period beginning on, and including, March 15, 2021 and ending on, but excluding, June 20, 2021 or the period beginning on, and including, March 15, 2029 and ending on, but excluding,immediately preceding the maturity date. j2 Globaldate, 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 j2 Globalthe Company common stock or a combination thereof at j2 Global’sthe Company’s election. The Company currently intends to satisfy its conversion obligation by paying and delivering a combination of cash and shares of the Company’s common stock, wherestock. Holders of the notes will have the right to require the Company to repurchase for cash will be usedall or any portion of their notes upon the occurrence of certain corporate events, subject to settle each $1,000certain conditions. As of principalJune 30, 2022 and December 31, 2021, the remainder, if any, will be settled viamarket trigger conditions did not meet the Company’s common stock.conversion requirements of the 1.75% Convertible Notes and, accordingly, the 1.75% Convertible Notes are classified as long-term debt on our Condensed Consolidated Balance Sheets.
For the three months ended SeptemberAs of June 30, 2017,2022, the conversion rate is 14.56459.3783 shares of j2 Globalthe Company’s common stock for each $1,000 principal amount of 1.75% Convertible Notes, which represents a conversion price of approximately $68.66$106.63 per share of j2 Globalthe 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, following certain corporate events that occur on or prior to June 20, 2021, j2 Globalupon 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.event in certain circumstances.
j2 GlobalThe Company may not redeem the 1.75% Convertible Notes prior to June 20, 2021. On or after June 20, 2021, j2 Global may redeem for cash all or part of the Convertible Notes at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accruedNovember 1, 2026, and unpaid interest to, but excluding, the redemption date. Nono sinking fund is provided for the 1.75% Convertible Notes.
Holders have the right to require j2 Global to repurchase for cash all or part of their Convertible Notes on each of June 15, 2021 and June 15, 2024 at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. In addition, if a fundamental change, as defined in the indenture governing the Convertible Notes, occurs prior to the maturity date, holders may require j2 Global to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
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 future 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 unsecured indebtedness that is not so subordinated; (iii) effectively junior in right of payment 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 (including trade payables)and other liabilities incurred by the Company’s subsidiaries.
Accounting for the 1.75% Convertible Notes
On January 1, 2022 the Company adopted ASU 2020-06using the modified retrospective method. As a result of this adoption, the Company de-recognized the remaining unamortized debt discount of $87.3 million on the 1.75% Convertible Notes and therefore no longer recognizes any amortization of debt discounts as interest expense. Refer to Note 1 - Basis of Presentation and Overview.
In accordanceconnection with ASC 470-20, Debt with Conversionthe 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 Options, convertible debt that can be settled for cash is required to be separated intoother professional service fees. Of the liability and equity component attotal deferred issuance with each component assigned a value. The value assignedcosts incurred, $10.1 million of such deferred issuance costs were attributable to the liability component is the estimated 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, isare recorded as a debt discount on the issuance date. This debt discount iswithin other assets and were being amortized to interest expense usingthrough the effective interest method overmaturity date. The remaining $2.8 million of the perioddeferred issuance costs were netted with the equity component in additional paid-in capital at the issuance date. Upon adoption of ASU 2020-06, the Company reclassified the $2.8 million from additional paid-in-capital to the long-term liability and recorded a cumulative adjustment to retained earnings for amortization from the issuance date through the first stated repurchase date on June 15, 2021.
j2 Global estimated the borrowing rates of similarJanuary 1, 2022 and will record amortization expense for these debt without the conversion feature at origination to be 5.79% for the Convertible Notes and determined the debt discount to be $59.0 million. As a result, a conversion premium after tax of $37.7 million was recorded in additional paid-in capital. The aggregate debt discount is amortized as interest expense over the period from the issuance datecosts through the first stated repurchase date on June 15, 2021, which management believes is the expected life of the Convertible Notes using an interest rate of 5.81%.maturity date. As of SeptemberJune 30, 2017,2022, the remaining period over which thetotal unamortized debt discount will be amortized is 3.7 years.deferred issuance costs were $8.3 million.
The 1.75% Convertible Notes are carried at face value less any unamortized debt discount (prior to adoption of ASU 2020-06) and debt 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 6 - Fair
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Value Measurements)Measurements). If such information is not available, the fair value is determined using cash-flowcash flow models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the estimated fair value of the 1.75% Convertible Notes was approximately $498.6$532.5 million and $516.8$685.4 million, respectively.
Long-term debtCredit Facility
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.
At the Company’s option, amounts borrowed under the Credit Agreement will bear interest at either (i) a base rate equal to the greater of (x) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus 0.5% per annum, (y) the rate of interest per annum most recently announced by the Agent (as defined in the Credit Agreement) as its U.S. Dollar “Reference Rate” and (z) one month LIBOR plus 1.00% or (ii) a rate per annum equal to LIBOR divided by 1.00 minus the LIBOR Reserve Requirements (as defined in the Credit Agreement), in each case, plus an applicable margin. The applicable margin relating to any base rate loan will range from 0.50% to 1.25% and the applicable margin relating to any LIBOR loan will range from 1.50% to 2.25%, in each case, depending on the total leverage ratio of Septemberthe Company. The Company is permitted to make voluntary prepayments of the Credit Facility at any time without payment of a premium or penalty. As of June 30, 20172022 and December 31, 2016 consists2021, there were no amounts outstanding under the Credit Agreement.
Debt-for-Equity Exchange
On June 10, 2022 (the “Term Loan Funding Date”), the Company entered into a Fifth Amendment to its Credit Agreement with MUFG Union Bank, N.A, as administrative agent and collateral agent and the lenders party thereto to effectuate the Debt-for-Equity Exchange. The Fifth Amendment to the Credit Agreement provided for the Term Loan Facility in an aggregate principal amount of $90.0 million and certain other changes to the Credit Agreement. The Term Loan had a maturity date that was 60 days after the Term Loan Funding Date. The Term Loan Facility bore interest at a base rate equal to the greater of (x) the Federal Funds Effective Rate, as defined in the Credit Agreement, in effect on such day plus 0.5% per annum, (y) the rate of interest per annum most recently announced by the Agent, as defined in the Credit Agreement, as its U.S. Dollar "Reference Rate" and (z) one month LIBOR plus 1%, provided that the base rate for any term loan made under the Credit Agreement shall be greater of clause (x) and (y) above in each case.
During the three months ended June 30, 2022, the Company borrowed approximately $90.0 million under the Term Loan Facility and completed the Debt-for-Equity Exchange of 2,300,000 shares of its common stock of Consensus to settle its obligation to repay the $90.0 million outstanding aggregate principal amount of the following (in thousands):Term Loan Facility plus an immaterial amount of interest. The Company recorded a loss on extinguishment of debt related to the Debt-for-Equity Exchange of approximately $0.5 million during the three months ended June 30, 2022 which is presented within ‘Interest expense, net’ on our Condensed Consolidated Statements of Operations.
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.
10.Income Taxes
The Company’s tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate.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. j2 Global’s annual effective tax rate is normally lower than the 35% U.S. federal statutory rate and applicable apportioned state tax rates primarily due to anticipated earnings of the Company’s subsidiaries outside of the U.S. in jurisdictions where the Company’s effective tax rate is lower than in the U.S. The Company’s effective tax rate was 22.1%(33.2)% and 25.8%37.4% for the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively and 23.7%12,760.8% and 28.7%86.1% for the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. j2 Global does not provideThe Company’s effective tax rate for U.S. income taxes on the undistributed earningsthree and six months ended June 30, 2022 have been disproportionately impacted due to the size of the Company’s foreign operations becausediscrete book loss related to the Disposed Consensus Shares and Retained Consensus Shares. The net loss recorded for book purposes for the Investment in Consensus, excluding transaction costs resulted in no tax benefit. The loss is not subject to tax since the Company intendshas the ability to permanently reinvest such earnings in foreign jurisdictions and any determinationdispose of the amountinvestment in a tax-free manner based on guidance and requirements set out by the Internal Revenue Service. In addition, during the three months and six months ended June 30, 2021 the Company recognized a tax benefit for the release of unrecognizeda valuation allowance on deferred tax liabilityassets related to these earnings is not practicable. the impairment of certain investments and the goodwill impairment with no similar events for the period ending June 30, 2022.
Certain taxes are prepaid during the year and, where appropriate, included within prepaid‘Prepaid expenses and other current assetsassets’ on the consolidated balance sheet.Condensed Consolidated Balance Sheet. The Company’s prepaid taxes were $9.2zero and $0.8 million and zero at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively.
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 j2 Globalthe 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 j2 Global’sthe Company’s common stock on the date of grant for incentive stock options and not less than 85% of the fair market value of j2 Global’sthe Company’s common stock on the date of grant for non-statutory stock options. As of SeptemberJune 30, 2017, 313,6752022, zero shares underlying options and 13,140zero shares of restricted stock 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 and is intended as a successor plan to the 2007 Stock Plan since no further grants will be made under the 2007 Stock Plan.awards. 4,200,000 shares of j2 Globalthe 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 j2 Global’sthe Company’s common stock subject to the option on the date the option is granted. As of SeptemberJune 30, 2017, 62,0002022, 435,135 shares underlying options and 29,660506,962 shares of restricted stock units were outstanding under the 2015 Plan.
The weighted-average fair values of market-based restricted stock awards granted have been estimated utilizing the following assumptions: