Thryv Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2021

The following is a discussion and analysis of our financial condition and results of operations as of, and for, the periods presented and should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report. This discussion and analysis contains forward-looking statements, including statements regarding industry outlook, our expectations for the future of our business, and our liquidity and capital resources as well as other non-historical statements. These statements are based on current expectations and are subject to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by these forward-looking statements.

Overview

We are dedicated to supporting local, independent businesses and franchises by providing innovative marketing solutions and cloud-based tools to the entrepreneurs who run them.

We are one of the largest domestic providers of SaaS end-to-end customer experience tools and digital marketing solutions to small-to-medium sized businesses (“SMBs”). Our solutions enable our SMB clients to generate new business leads, manage their customer relationships and run their day-to-day business operations.

We serve more than 400,000 SMB clients globally through three business segments: Marketing Services, SaaS, and Thryv International.

Our Marketing Services segment provides both print and digital solutions and generated $227.9 million and $286.7 million of consolidated total revenues for the three months ended March 31, 2021 and 2020, respectively. Our Marketing Services offerings include our owned and operated Print Yellow Pages (“PYP”), which carry the “The Real Yellow Pages” tagline, our proprietary Internet Yellow Pages (“IYP”), known by the Yellowpages.com, Superpages.com, and Dexknows.com URLs, search engine marketing (“SEM”) solutions and other digital media solutions, which include online display and social advertising, online presence, and video and search engine optimization (“SEO”) tools.

Our SaaS segment generated $37.3 million and $31.8 million of consolidated total revenues for the three months ended March 31, 2021 and 2020, respectively. Our primary SaaS offerings include Thryv®, our flagship SMB end-to-end customer experience platform, and Thryv Add-ons, including automated lead generation service that integrates with our Thryv platform, website development, SEO tools, and Hub by Thryv. Additionally, we recently launched ThryvPaySM, our own branded payment solution that allows users to get paid via credit card and ACH and is tailored to service businesses that want to provide consumers safe, contactless, and fast online payment options.

Our Thryv International segment is comprised of Sensis, which the Company acquired on March 1, 2021 (the “Sensis Acquisition”). Sensis is Australia’s leading provider of marketing solutions serving SMBs. The Sensis Acquisition brings under the Thryv banner more than 100,000 existing Sensis clients, many of which we believe are ideal candidates for the Thryv platform. Our Thryv International segment generated $15.4 million of consolidated total revenues for the one month ended March 31, 2021.

Our expertise in delivering solutions for our client base is rooted in our deep history of serving SMBs. In 2021, SMB demand for integrated technology solutions continues to grow as SMBs adapt their business and service model to facilitate remote working and virtual interactions. We have seen this trend accelerate following the outbreak of the COVID-19 pandemic.

Change in Controlled Company Status

Prior to April 30, 2021, the Company met the definition of a “controlled company” as defined by Nasdaq as a company of which more than 50 percent of the voting power for the election of directors is held by an individual, group or another company. Though controlled companies are exempt from certain Nasdaq requirements relating to the composition of the board of directors, the Company has not availed itself of such exemptions. On April 30, 2021, the ownership of Mudrick Capital Management L.P. and associated funds, the Company’s largest shareholder, fell below 50 percent, which resulted in the Company no longer meeting the definition of a “controlled company”. The Company continues to be in compliance with the listing standards applicable to non-controlled companies.

Recent Developments - COVID-19

In March 2020, the World Health Organization categorized COVID-19 as a pandemic. The outbreak of COVID-19 and public and private sector measures to reduce its transmission, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, have significantly disrupted the global economy, resulting in an adverse effect to the business operations of certain SMBs. However, many of our SMB clients operate service-based businesses that can easily operate remotely, or that have been designated as “essential” by state and local authorities administering shelter-in-place orders, and have continued to operate without significant interruption during the COVID-19 pandemic. Therefore, the impact of COVID-19 and the related regulatory and private sector response on our financial and operating results in the three months ended March 31, 2021 was somewhat mitigated as many of our clients continue to operate during this pandemic.

In our Marketing Services segment, in March 2020 we began offering certain pandemic credit incentives to select clients, including free advertising or headings, and payment extensions of up to three months. Additionally, some clients elected to pause their online advertising programs which resulted in a $0.6 million reduction in revenue for the three months ended March 31, 2021 compared to $0.5 million reduction in revenue for the three months ended March 31, 2020. Marketing Services segment revenue decreased by $58.8 million, or 20.5%, during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily due to the continued decline in demand for print and digital services and increased competition in all areas of Marketing Services. This declining revenue trend in Marketing Services predated the COVID-19 pandemic. While the ongoing impact of the COVID-19 pandemic on our revenue depends upon the rate of continued spread of the virus as well as regulatory and private sector response, we expect Marketing Services revenue will continue to be impacted primarily by trends predating the COVID-19 pandemic.

In our SaaS segment, we have continued to experience an increase in demand as SMBs seek cloud-based solutions to facilitate virtual interactions with their customers instead of in person interactions. We have seen continued strength in demand during this period from many of our key categories such as home services and other professional services. Offsetting this growth is a decline in our legacy SaaS client base as we shift from lower-spend, less engaged clients that tend to have a higher churn rate, to higher spend, higher engaged clients. Additionally, in March 2020 we began offering certain pandemic credit incentives to select clients, including free digital and SaaS services for two to four months, and payment extensions of up to three months.

In our Thryv International segment, we continue to experience a limited negative impact to Australia in 2021 as a result of the COVID-19 pandemic. COVID-19 case numbers have remained relatively low in Australia since the initial outbreak and governmental authorities have adopted less severe lockdown requirements. This has resulted in our clients remaining open for business during the COVID-19 pandemic.

We have taken steps to mitigate the overall potential impact of the COVID-19 pandemic on our operating results by enhancing the capabilities of our inside and outside sales force while also actively managing costs. We minimized business disruptions by quickly and proactively transitioning our sales and client support teams into a remote working environment and providing increased training, technical capabilities and resources to enable virtual interactions with our clients. Additionally, in March 2020, we began offering certain pandemic credit incentives to select clients. These pandemic credit incentives resulted in a $2.2 million reduction in revenue for the three months ended March 31, 2021 compared to a reduction in revenue of $0.7 million for the three months ended March 31, 2020. Requests for incentives continued to decline in the first quarter of 2021 and the majority of clients who accepted incentives in 2020 have resumed contractual terms and pricing. However, due to a spike in COVID-19 cases during the three months ended December 31, 2020, we continued to offer pandemic credit incentives through the first quarter of 2021. As of April 1, 2021, we have virtually discontinued providing pandemic credits and accepting client requests to pause search campaigns due to the COVID-19 pandemic. All client requests for adjustments effective April 1, 2021 are now being handled as part of normal business operations consistent with historical practices.

Depending upon future development and spread of the virus, we expect the business environment to improve as more people are vaccinated. With respect to managing our costs, steps we have taken include reductions in force and cuts in non-essential spending. We believe the majority of these cost-saving measures to be temporary. During the three months ended March 31, 2021, we incurred total severance expense of $0.6 million, none of which was recorded as a result of the COVID-19 pandemic. During the three months ended March 31, 2020, we recognized severance expense of $1.0 million related to employee separations as a result of the COVID-19 pandemic. The economic downturn caused by COVID-19 resulted in an incremental amount of $3.1 million recorded to allowance for credit losses for the three months ended March 31, 2020. No incremental impact was recorded for the three months ended March 31, 2021. In addition, we remain committed to our variable cost structure and to limiting our capital expenditures, which will allow the Company to continue operating with relatively low working capital needs.

While the effects of the COVID-19 pandemic have impacted our financial results for the three months ended March 31, 2021, the overall impact was somewhat mitigated by the nature of our client base (SMBs offering services related to home, health and wellness, automotive, etc. and certain SMBs designated as “essential” by state and local authorities), the terms of our print agreements (typically 14 to 15 months), and the gradual increase in demand for our Thryv platform. The increase in demand for our Thryv platform and our decision to target higher spend and higher retention clients have also somewhat mitigated the impact of a reduction in the size of our salesforce on the Company’s ability to generate revenues.

During the three months ended March 31, 2021, we have continued to see trends similar to those experienced during the year ended December 31, 2020, including an increase in demand for our SaaS solutions and a continuing trend of decline in our Marketing Services business. The challenges we face in the future related to COVID-19 will depend largely, we believe, on the impact that the continuing spread of the virus and regulatory and private sector response have on our current and prospective clients, including their ability and willingness to purchase our solutions, the timing of their purchasing decisions and the willingness of existing clients to renew subscriptions for our solutions. Although, to date, the COVID-19 pandemic has not had a material impact on our operational performance, financial performance, or liquidity, it is difficult to predict what the ongoing impact of the pandemic will be on the economy, our clients and our business.

Factors Affecting Our Performance

Our operations can be impacted by, among other factors, general economic conditions and increased competition with the introduction of new technologies and market entrants. We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those listed below and those discussed in the section titled “Risk Factors.”

Ability to Attract and Retain Clients

Our revenue growth is driven by our ability to attract and retain SMB clients. To do so, we must deliver solutions that address the challenges currently faced by SMBs at a value-based price point that an SMB can afford.

Our strategy is to expand the use of our solutions by introducing our SaaS solutions to new SMB clients, as well as our current Marketing Services and Thryv International clients. This strategy includes capitalizing on the increased needs of SMBs for solutions that facilitate a remote working environment and virtual interactions. This strategy will require substantial sales and marketing capital.

Investment in Growth

We intend to continue to invest in the growth of our SaaS segment. We have selectively utilized a portion of the cash generated from our Marketing Services and Thryv International segments to support initiatives in our evolving SaaS segment, which has represented an increasing percentage of total revenue since launch. The SaaS segment became profitable during 2019. We will continue to improve our SaaS solutions by analyzing user behavior, expanding features, improving usability, enhancing our onboarding services and customer support and making version updates available to SMBs. We believe these initiatives will ultimately drive revenue growth; however, such improvements will also increase our operating expenses.

Ability to Grow Through Acquisition

Our growth prospects depend upon our ability to successfully develop new markets. We currently serve the United States and Australian SMB markets and plan to leverage strategic acquisitions to expand our client base domestically and enter new markets internationally. Identifying proper targets and executing strategic acquisitions may take substantial time and capital. In August 2020, we launched our first international SaaS reseller pilot, a joint initiative with the leading yellow pages player in the Caribbean, and we also signed a SaaS multi-location franchise client, a home services company with operations in the U.S. and Canada. On March 1, 2021, we completed the acquisition of Sensis, Australia’s leading provider of marketing solutions serving SMBs. We believe that acquisitions of marketing services companies will expand our client base and provide additional opportunities to offer our SaaS solutions. Our success largely depends on our ability to identify and execute acquisition opportunities and our ability to establish relationships with new SMBs.

Key Business Metrics

We review several operating metrics, including the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and they may be used by investors to help analyze the health of our business.

Total Clients

We define total clients as the number of SMB accounts with one or more revenue-generating solutions in a particular period. For quarter- and year-ending periods, total clients from the last month in the period are reported. A single client may have separate revenue-generating accounts for multiple Marketing Services solutions or SaaS offerings, but we count these as one client when the accounts are managed by the same business entity or individual. Although infrequent, where a single organization has multiple subsidiaries, divisions, or segments, each business entity that is invoiced by us is treated as a separate client. We believe that the number of total clients is an indicator of our market penetration and potential future business opportunities. We view the mix between Marketing Services clients and SaaS clients as an indicator of potential future opportunities to offer our SaaS solutions to our Marketing Services clients. Total clients does not include Thryv International clients, as we are still in the process of recalculating the Sensis data using our calculation methodology. We plan to include the total clients of Thryv International in our future filings.

Marketing Services Clients

Clients that purchase one or more of our Marketing Services solutions are included in this metric. These clients may or may not also purchase subscriptions to our SaaS offerings.

SaaS Clients

Clients that purchase subscriptions to our SaaS offerings are included in this metric. These clients may or may not also purchase one or more of our Marketing Services solutions.

(in thousands)

(1) Total clients is less than the sum of the Marketing Services and SaaS, since clients that purchase both Marketing Services and SaaS products are counted in each category, but only counted once in the Total. Thryv International clients are exclusive to that category. Total clients does not include Thryv International clients, as we are still in the process of recalculating the Sensis data using our calculation methodology. We plan to include the total clients of Thryv International in our future filings.

Marketing Services clients decreased by 70 thousand or 19% as of March 31, 2021 as compared to March 31, 2020. The decrease in Marketing Services clients was related to a secular decline in the print media industry. The decline in the digital portion of our Marketing Services business was due to significant competition in the consumer search and display space, particularly from large, well-capitalized businesses such as Google, Yelp and Facebook.

SaaS client decreased by 1 thousand or 2% as of March 31, 2021 as compared to March 31, 2020. This was the result of an intentional strategic move by us to target higher spend, higher retention clients in lieu of lower-spend, higher churn clients. As part of this strategy, we discontinued sale of lower-priced tiers of our Thryv platform, which led to higher monthly average revenue per unit (“ARPU”) for the three months ended March 31, 2021. In making this strategic shift, our SaaS client count has decreased while SaaS ARPU has increased. We expect a return to SaaS client growth in fiscal 2021 as well as a continued trend towards higher SaaS ARPU.

Total clients decreased by 68 thousand or 18% as of March 31, 2021 as compared to March 31, 2020. The primary driver of the decrease in total clients was the secular decline in the print media business combined with increasing competition in the digital media space.

Monthly ARPU

We define monthly ARPU as our total client billings for a particular month divided by the number of revenue-generating units during the same month. For each reporting period, the weighted-average monthly ARPU from all the months in the period are reported. We define units as SMB accounts with one or more revenue-generating solutions in a particular month. Units are synonymous with clients. As monthly ARPU varies based on the amounts we charge for our services, we believe it can serve as a measure by which investors can evaluate trends in the types and levels of services across our client base. Our measurement of ARPU helps us understand the rate at which we are monetizing our client base.

(1) During the three months ended March 31, 2020, the total monthly ARPU is higher than the individual monthly ARPUs for Marketing Services and SaaS due to clients that purchase both Marketing Services and SaaS solutions. During the three months ended March 31, 2021, SaaS ARPU is higher than the Total monthly ARPU as we shift to selling to more higher spend SaaS-only clients. The Total monthly ARPU does not include Thryv International, as we are still in the process of recalculating the Sensis data using our calculation methodology. We plan to include the monthly ARPU of Thryv International in our future filings.

Monthly ARPU for the Marketing Services segment decreased by $15 or 7% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease in ARPU for these periods was related to reduced spend by clients on our print media offerings due to the secular decline of the industry caused by the continuing shift of advertising spend to less expensive digital media. This decrease in ARPU was further driven by a reduction of our resale of high-spend, low margin third-party local search and display services that were not hosted on our owned and operated platforms.

Monthly ARPU for the SaaS segment increased by $64 or 27% during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase in ARPU for these periods was largely driven by our strategic shift to selling to higher spend clients and, at the same time, discontinuing our sale of the lower-priced tiers of our Thryv platform.

Monthly Active Users - SaaS

We define a monthly active user for SaaS offerings as a client with one or more users who log into our SaaS solutions at least once during the calendar month. It should be noted that the inherent challenge is that one individual may register for, and use, multiple accounts across computer and mobile devices which may overstate the number of unique users who actively use our Thryv platform within a month. Additionally, some of our original SaaS clients exclusively use the website features of their Thryv platform which does not require a login and those users are not included in our active users count. For each reporting period, active users from the last month in the period are reported. We believe that monthly active users best reflects our ability to engage, retain, and monetize our users, and thereby drive increases in revenue. We view monthly active users as a key measure of user engagement for our Thryv platform.

(in thousands)

Monthly active users increased by 5 thousand, or 19% during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The number of monthly active users increased period over period despite no change in the total number of SaaS clients as we undertook efforts such as enhancing the sales process, the client onboarding experience, and lifecycle management in order to increase engagement among our SaaS clients. The increase was also driven by the focus by our sales team on obtaining higher retention, higher spend clients as these clients are more engaged with our platform. Additionally, we experienced an increase in engagement from existing clients as SMBs increased virtual interactions with their customers in lieu of in-person interactions as a result of the COVID-19 pandemic.

Key Components of Our Results of Operations

Revenue

We generate revenue from our three business segments, Marketing Services, SaaS and Thryv International. Our primary sources of revenue in our Marketing Services and Thryv International segments are print and digital services. Our primary source of revenue in our SaaS segment is our Thryv platform.

Cost of Services

Cost of services consists of expenses related to delivering our solutions, such as publishing, printing, and distribution of our print directories and fulfillment of our digital and SaaS offerings, including traffic acquisition, managed hosting, and other third-party service providers. Additionally, it includes personnel-related expenses such as salaries, benefits, and stock-based compensation for our operations team, non-capitalizable software and hardware purchases, and allocated overhead costs which includes information technology expenses, depreciation of fixed assets, and amortization associated with capitalized software and intangible assets.

Operating Expenses

Sales and Marketing

Sales and marketing expense consists primarily of base salaries, stock-based compensation, and sales commissions paid to our inside and outside sales force and other expenses incurred by personnel within the sales, marketing, sales training, and client care departments. Additionally, Sales and marketing expense includes advertising costs such as media, promotional material, branding, online advertising, and allocated overhead costs which includes information technology expenses, depreciation of fixed assets, and amortization associated with capitalized software and intangible assets.

General and Administrative

General and administrative expense primarily consists of salaries, benefits and stock-based compensation incurred by corporate management and administrative functions such as finance and accounting, legal, internal audit, human resources, billing and receivables, and management personnel. In addition, general and administrative expense includes bad debt expense, non-recurring charges, and other corporate expenses such as professional fees, operating taxes, and insurance. General and administrative expense also includes allocated overhead costs which includes information technology expenses, depreciation of fixed assets, and amortization associated with capitalized software and intangible assets.

Other Income (Expense)

Other income (expense) consists of interest expense, other components of net periodic pension cost, (loss) on early extinguishment of debt, and other expense.

Results of Operations

Consolidated Results of Operations

The following table sets forth certain consolidated financial data for each of the periods indicated:

(i) Impairment charges, which was previously included as part of General and administrative expense, is presented as a separate line item for the three months ended March 31, 2021 and 2020.

(ii) The three months ended March 31, 2021 has been updated to include a Gross profit subtotal line item and the reclassification of depreciation and amortization from a single line in its condensed consolidated statements of operations to be reflected as a component of Gross profit, Sales and marketing expense, and General and administrative expense. See Note 1 to our condensed consolidated financial statements included in Part I, Item 1 in this Quarterly Report for more information.

Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020

Revenue

The following table summarizes revenues by business segment for the periods indicated:

Total revenues decreased by $38.0 million, or 11.9%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The decrease in total revenues was driven by a decrease in Marketing Services revenue of $58.8 million, partially offset by an increase in SaaS revenue of $5.4 million, and Thryv International revenue of $15.4 million recognized subsequent to the completion of the Sensis Acquisition.

Marketing Services Revenue

Marketing Services revenue decreased by $58.8 million, or 20.5%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Print revenue decreased by $24.5 million, or 17.8%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. Secular decline in industry demand for print services resulted in a 17% decline in revenue compared to the three months ended March 31, 2020, with the remaining decline primarily driven by publication timing differences caused by our print agreements having greater than 12 month terms. Print revenue is recognized upon delivery of the published directories. Individual directory titles have different lifecycles, which typically range from 14 to 15 months. The titles published during the three months ended March 31, 2021 are therefore different than the titles published during the three months ended March 31, 2020. This should be considered when comparing period over period.

Digital services revenue decreased by $34.3 million, or 23.0%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. IYP revenue decreased by $10.9 million, or 14.5%, driven by a continued trending decline in the Company’s Marketing Services client base. SEM revenue decreased by $15.3 million, or 30.7% which was consistent with expectations due to significant competition in the consumer search and display space, particularly from large, well-capitalized businesses such as Google, Yelp and Facebook. Other digital media solutions revenue decreased by $8.2 million, or 33.2%, as we shifted from selling these services on a standalone basis to only offering them as inclusions or add-ons to our Thryv platform for new clients.

SaaS Revenue

SaaS revenue increased by $5.4 million, or 17.0%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The increase was driven by increased demand for our Thryv platform as SMBs have increased their contact-less customer interactions and remote working capabilities due to the COVID-19 pandemic, and by our success in re-focusing our go-to-market and onboarding strategy to target higher spend and higher engaged clients. This is partially offset by a decline in our lower-spend and less engaged legacy SaaS clients that tend to have a higher churn rate and an increase in the provision for service credits due to COVID-19.

Thryv International Revenue

Thryv International revenue was $15.4 million for the one month ended March 31, 2021. Given that the Sensis acquisition was completed on March 1, 2021, no revenue was recognized for Thryv International during the three months ended March 31, 2020. Thryv International revenue included print revenue of $5.7 million, IYP revenue of $6.6 million, SEM revenue of $2.0 million, and other digital media solutions revenue of $1.1 million recognized subsequent to the completion of the Sensis Acquisition.

Cost of Services

Cost of services decreased by $19.8 million, or 16.8%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The decrease in cost of services was primarily driven by declining revenue and strategic cost savings initiatives. Cost of services as a percentage of revenue decreased to 35.0% for the three months ended March 31, 2021 from 37.0% for the three months ended March 31, 2020. This decline was largely the result of the Company’s continued efforts to reduce costs in order to maintain profitability, and reduced workforce due to the impacts of COVID-19. Specifically, we reduced printing, distribution and digital and fulfillment support costs by $10.3 million, employee related costs by $4.7 million and non-capitalized software and hardware purchases by $3.5 million. Additionally, allocated depreciation and amortization expense decreased by $13.0 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due to the accelerated amortization method used by the Company. Depreciation and amortization expense for the three months ended March 31, 2020. These decreases in expenses were partially offset by $12.3 million of Thryv International Cost of services recognized subsequent to the completion of the Sensis Acquisition.

Gross Profit

Gross profit decreased by $18.1 million, or 9.0% for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The decrease in gross profit was primarily due to the decline in total revenue, partially offset by decreases in printing, distribution, and digital and fulfillment support costs, and depreciation and amortization expense.

Our gross margin increased by 2.0 percentage points, to 65.0% for the three months ended March 31, 2021 as compared to 63.0% for the three months ended March 31, 2020. The increase in gross margin was primarily driven by a decrease in printing, distribution, and digital and fulfillment support costs, and depreciation and amortization expense, partially offset by a corresponding decrease in revenue.

Operating Expenses

Sales and Marketing

Sales and marketing expense decreased by $12.8 million, or 14.3%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. Sales and marketing expense as a percentage of revenue decreased to 27.3% for the three months ended March 31, 2021 from 28.0% for the three months ended March 31, 2020. The decrease in Sales and marketing expense was primarily due to the decline in total revenue and cost savings initiatives that were undertaken to mitigate the overall impact of the COVID-19 pandemic on our results of operations. Specifically, the decrease in Sales and marketing expense was due to lower employee related costs of $5.5 million, lower sales commissions of $2.4 million, primarily due to our reduction in workforce, and lower contract services of $2.4 million. Additionally, allocated depreciation and amortization expense decreased by $9.5 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due to the accelerated amortization method used by the Company. These decreases in expenses were partially offset by $5.1 million of Thryv International Sales and marketing expenses recognized subsequent to the completion of the Sensis Acquisition. Additionally, advertising and sales promotion expense increased by $3.1 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

General and Administrative

General and administrative expense decreased by $8.3 million, or 16.7%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This decrease was primarily driven by lower bad debt expense of $9.5 million, lower employee related costs of $2.7 million, a decrease in the loss on the remeasurement of our indemnification asset of $3.8 million, and a decrease in the loss on the sale of property of $3.0 million. Additionally, allocated depreciation and amortization expense decreased by $4.2 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due to the accelerated amortization method used by the Company. These decreases in expenses were partially offset by $3.5 million of Thryv International General and administrative expenses recognized subsequent to the completion of the Sensis Acquisition, and increases in stock-based compensation expense of $6.3 million and non-recurring transaction costs primarily related to the Sensis Acquisition of $4.0 million.

General and administrative expense as a percentage of revenue decreased to 14.7% for the three months ended March 31, 2021 from 15.6% for the three months ended March 31, 2020. This decrease was attributable to the decline in total revenue and lower expenses, including lower bad debt expense and employee related costs.

Impairment Charges

Impairment charges decreased by $0.1 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. No impairment charges were incurred during the three months ended March 31, 2021, while $0.1 million of impairment charges were recognized during the three months ended March 31, 2020.

Other Income (Expense)

Interest Expense

Interest expense decreased by $4.3 million, or 21.4%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due to overall lower indebtedness. The Company incurred interest expense from related parties of $4.1 million for the three months ended March 31, 2021 as compared to $5.2 million for the three months ended March 31, 2020.

Other Components of Net Periodic Pension Cost

Other components of net periodic pension cost decreased by $0.7 million, from an expense of $0.2 million during the three months ended March 31, 2020 to a benefit of $(0.5) million during for the three months ended March 31, 2021. This change was primarily due to lower interest expense of $1.6 million, and a remeasurement gain of $0.2 million recognized during the three months ended March 31, 2021, partially offset by a lower expected return on assets of $1.1 million.

Other Expense

During the three months ended March 31, 2021, the Company incurred other expense of $1.1 million, which included foreign currency related expense of $0.8 million and a loss on early extinguishment of debt of $0.3 million.

(Provision) for Income Taxes

(Provision) for income taxes decreased by $1.6 million, or 11.9%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The effective income tax rate was 24.4% and 32.3% for the three months ended March 31, 2021 and 2020, respectively. The ETR differs from the 21.0% U.S. Federal statutory rate primarily due to tax permanent differences and discrete items recorded in each of the respective periods.

Adjusted EBITDA

Adjusted EBITDA decreased by $7.8 million, or 7.0%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The decrease in Adjusted EBITDA was primarily driven by the decrease in total revenue, which was partially offset by declining costs as we continue to focus on cost reductions.

Non-GAAP Financial Measures

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. We also present Adjusted EBITDA, Adjusted Gross Profit, and Adjusted Gross Margin, as defined below, as non-GAAP financial measures in this Quarterly Report.

We have included Adjusted EBITDA in this report because management believes it provides useful information to investors in gaining an overall understanding of our current financial performance and provides consistency and comparability with past financial performance. Specifically, we believe Adjusted EBITDA provides useful information to management and investors by excluding certain non-operating items that we believe are not indicative of our core operating results. In addition, Adjusted EBITDA and Adjusted Gross Profit is used by management for budgeting and forecasting as well as measuring the Company’s performance. We believe Adjusted EBITDA, Adjusted Gross Profit, and Adjusted Gross Margin provide investors with the financial measures that closely align with our internal processes.

We define Adjusted EBITDA (“Adjusted EBITDA”) as Net income (loss) plus Interest expense, (Benefit) provision for income taxes, Depreciation and amortization expense, Loss on early extinguishment of debt, Restructuring and integration charges, Transaction costs, Stock-based compensation expense, Impairment charges and non-operating expenses, such as, Other components of net periodic pension cost, Non-cash (gain) loss from remeasurement of indemnification asset, and certain unusual and non-recurring charges that might have been incurred. Adjusted EBITDA should not be considered as an alternative to net income as a performance measure. We define Adjusted Gross Profit (“Adjusted Gross Profit”) and Adjusted Gross Margin (“Adjusted Gross Margin”) as Gross profit and Gross margin, respectively, adjusted to exclude the impact of depreciation and amortization expense and stock-based compensation expense (benefit).

Non-GAAP financial information has limitations as an analytical tool and is presented for supplemental informational purposes only. Such information should not be considered a substitute for financial information presented in accordance with U.S. GAAP and may be different from similarly-titled non-GAAP measures used by other companies.

The following is a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, Net income (in thousands):

(1) For the three months ended March 31, 2021 and 2020, expenses relate to periodic efforts to enhance efficiencies and reduce costs, and include severance benefits, loss on disposal of fixed assets and capitalized software, and costs associated with abandoned facilities and system consolidation.

(2) Expenses related to the Company's direct listing, Sensis Acquisition and other transaction costs.

(3) Company records stock-based compensation expense related to the amortization of grant date fair value of the Company’s stock-based compensation awards. Additionally, stock-based compensation expense includes the remeasurement of these awards at each period end. See “Note 4, Fair Value Measurements”, to our condensed consolidated financial statements included in Part I, Item 1 in this Quarterly Report for more information.

(4) Other components of net periodic pension cost is from our non-contributory defined benefit pension plans that are currently frozen and incur no additional service costs. The most significant component of other components of net periodic pension cost relates to the mark to market pension remeasurement.

(5) In connection with the YP Acquisition, the seller provided the Company indemnity for future potential losses associated with certain federal and state tax positions taken in tax returns filed by the seller prior to the Acquisition Date.

(6) Other primarily includes expenses related to potential non-income based tax liabilities. Additionally, during the three months ended March 31, 2021, other includes foreign exchange related expense of $0.8 million

The following is a reconciliation of Adjusted Gross Profit and Adjusted Gross Margin, to their most directly comparable GAAP measures, Gross profit and Gross margin (in thousands):

Liquidity and Capital Resources

Thryv Holdings, Inc. is a holding company that does not conduct any business operations of its own. We derive cash flows from cash transfers and other distributions from our operating subsidiary, Thryv Inc., who in turn generates cash flow from its own operations and operations of its subsidiaries, and has cash and cash equivalents on hand, funds provided under the New Term Loan and funds available under the ABL Facility. The agreements governing our credit facilities may restrict the ability of our subsidiaries to make loans or otherwise transfer assets to us. Further, our subsidiaries are permitted under the terms of our senior credit facilities and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions or the making of loans by such subsidiaries to us. Our and our subsidiaries’ ability to meet our debt service requirements is dependent on our ability to generate sufficient cash flows from operations.

We believe that expected cash flows from operations, available cash and cash equivalents, and funds available under our ABL Facility will be sufficient to meet our liquidity requirements, such as working capital requirements for our operations, business development and investment activities, and payments for our debt obligations, for the following 12 months. Any projections of future earnings and cash flows are subject to substantial uncertainty. Our future success and capital adequacy will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to address our annual cash obligations and reduce our outstanding debt, all of which are subject to general economic, financial, competitive, and other factors beyond our control. As a result of COVID-19, many SMBs may continue to experience a reduction in revenues and cash flows and may not have the ability to pay amounts owed to us. We are also assessing our business operations and the impact that COVID-19 may have on our financial results and liquidity. We continue to monitor our capital requirements to ensure our needs are in line with available capital resources.

In addition, our board of directors authorizes us to undertake share repurchases from time to time. The amount and timing of any share repurchases that we make will depend on a variety of factors, including available liquidity, cash flows, our capacity to make repurchases under our credit facility and market conditions.

Sources and Uses of Cash

The following table sets forth a summary of our cash flows from operating, investing and financing activities for the periods indicated (in thousands):

(unaudited)

37

Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020

Cash Flows from Operating Activities

Net cash provided by operating activities decreased by $31.4 million, or 68.9%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The decrease in net cash provided by operating activities of $31.4 million is primarily due to the timing of accounts receivable collections, the timing of billing of unbilled receivables in accordance with the terms of our print agreements, and the timing of payments against accounts payable and taxes payable, in addition to the overall decline of our sales. The change in cash flows from operating activities was also affected by higher income tax payments of $16.8 million and lower interest payments of $3.5 million.

Cash Flows from Investing Activities

Net cash used in investing activities increased by $170.2 million, or 2,234.1%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The increase in net cash used in investing activities of $170.2 million was primarily due to cash paid of approximately $174.2 million in connection with the Sensis Acquisition on March 1, 2021. This increase in cash used was partially offset by a decrease of $5.5 million in capitalized expenditures. Additionally, during the three months ended March 31, 2020, the Company received proceeds from the sales of buildings and other fixed assets of $1.5 million, while no proceeds were received during the three months ended March 31, 2021.

Cash Flows from Financing Activities

Net cash from financing activities increased by $230.5 million, or 595.2%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The increase in cash flow from financing activities is primarily related to the proceeds received from the New Term Loan that the Company entered into on March 1, 2021 and the timing of proceeds and payments on the Senior Term Loan and ABL Facility.

The increase in net cash from financing activities of $230.5 million was primarily driven by net proceeds received from the New Term Loan of $679.0 million, partially offset by cash used to repay the remaining outstanding principal balance of the Senior Term Loan of $449.6 million, compared to payments made on the Senior Term Loan of $34.0 million during the three months ended March 31, 2020. The increase in net cash from financing activities was further driven by lower payments of $27.1 million on the ABL Facility and $21.8 million for the repurchase of shares of our outstanding common stock. These increases in net cash from financing activities were partially offset by lower proceeds from the ABL Facility of $79.8 million.

Debt

Term Loan

On March 1, 2021, the Company entered into a New Term Loan. The proceeds of the New Term Loan were used to finance the Sensis Acquisition, refinance in full the Company's existing term loan facility (the “Senior Term Loan”) and pay fees and expenses related to the Sensis Acquisition and related financing.

The Term Loan Facility in an aggregate principal amount equal to $700.0 million, of which 38.4% was held by related parties who are equity holders of the Company, including GoldenTree Asset Management LP, Paulson & Co. Inc., and Mudrick Capital Management, LP, who held 25.0%, 7.1%, and 6.3% of the debt respectively. The Term Loan Facility matures on March 1, 2026 and borrowings under the Term Loan Facility will bear interest at a fluctuating rate per annum equal to, at the Company’s option, LIBOR or base rate, in each case, plus an applicable margin per annum equal to (i) 8.50% (for LIBOR loans) and (ii) 7.50% (for base rate loans). The Term Loan Facility requires mandatory amortization payments equal to $17.5 million per fiscal quarter commencing June 30, 2021.

ABL Facility

On March 1, 2021, the Company entered into the ABL Amendment. The ABL Amendment was entered into in order to permit the term loan refinancing, the Sensis Acquisition and make certain other changes to the ABL credit agreement, including, among others:

• revise the maximum revolver amount to $175.0 million;
• reduce the interest rate per annum to (i) 3-month LIBOR plus 3.00% for LIBOR loans and (ii) base rate plus 2.00% for base rate loans;
• reduce the commitment fee on undrawn amounts under the ABL Facility to 0.375%;
• extend the maturity date of the ABL Facility to the earlier of March 1, 2026 and 91 days prior to the stated maturity

date of the Term Loan Facility;

• add the Australian subsidiaries acquired pursuant to the Sensis Acquisition as borrowers and guarantors, and establish an Australian borrowing base; and
• make certain other conforming changes consistent with the Term Loan Agreement.

We maintain debt levels that we consider appropriate after evaluating a number of factors, including cash requirements for ongoing operations, investment and financing plans (including acquisitions and share repurchase activities), and overall cost of capital. Per the terms of the Term Loan Facility, payments of the New Term Loan balance are determined by the Company's Excess Cash Flow (as defined within the Term Loan Facility). We are in compliance with all covenants under the New Term Loan and ABL Facility as of March 31, 2021. We had total recorded debt outstanding of $720.2 million at March 31, 2021, which was comprised of amounts outstanding under our New Term Loan of $676.6 million and ABL Facility of $43.7 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are material to our results of operations, financial condition or liquidity.

Critical Accounting Policies

Foreign Currency

The functional currency of the Company’s foreign operating subsidiaries is the local currency. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at the weighted-average exchange rates during the period. Foreign currency transaction gains and losses are recorded in other expense.

Other than the foreign currency accounting policy referenced above, our critical accounting policies and estimates have not changed from those described in Form 10-K, under “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates.”

Recent Accounting Pronouncements

For a description of accounting pronouncements recently adopted and issued, see “Part I, Item 1. Note 1, Description of Business and Summary of Significant Accounting Policies.”

Interest Rate Risk

As of March 31, 2021, we had total recorded debt outstanding of $720.2 million, which was comprised of amounts outstanding under our New Term Loan of $676.6 million and ABL Facility of $43.7 million. Substantially all this debt bears interest at floating rates. Changes in interest rates affect the interest expense we pay on our floating rate debt. A hypothetical 100 basis point increase in interest rates would increase our interest expense by approximately $7.2 million annually, based on the debt outstanding at March 31, 2021.

Inflation Risk

We currently operate in the United States of America, and internationally in Australia. We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations, or financial condition.

Foreign Exchange Currency Risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Australian dollar. Since we translate foreign currencies into U.S. dollars for financial reporting purposes, currency fluctuations can have an impact on our financial results.

We have experienced and will continue to experience fluctuations in our net loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We have not engaged in the hedging of our foreign currency transactions to date, we are evaluating the costs and benefits of initiating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operation, and our risk grows.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to our risk factors disclosed in our 2020 Form 10-K, except as set forth below.

We may experience difficulties in integrating the operations, personnel and assets of Sensis which we acquired in March 2021.

We recently acquired Sensis. We may be unable to manage Sensis’s business or successfully integrate the business with our historic operations without substantial costs, delays or other operational or financial problems. In addition, we may not be able to maintain and grow the revenues and operating margins of the Sensis business, realize cost synergies with Sensis’s services and operations, retain all of Sensis existing customers and employees, and Sensis may not be able to effectively market our Thryv product to Australian customers. If we are unable to successfully manage the new business, we will not be able to generate sufficient revenue to offset the acquisition costs that we have incurred which could have a material adverse effect on our financial position and results of operations.

Recent or potential future acquisitions may subject us to significant risks, any of which could harm our business.

Our long-term strategy has included in the past, and may continue to include in the future, identifying and acquiring suitable candidates on acceptable terms. In particular, over time, we may acquire providers of product offerings that complement our business.

Acquisitions include a number of risks and present financial, managerial and operational challenges, including but not limited to:

• diversion of management attention from running our existing business;
• increased expenses, including, but not limited to, legal, administrative and compensation expenses;
• retaining key personnel of an acquired company;
• increased costs to integrate the technology, personnel, customer base and business practices of the acquired business;
• our ability to integrate the businesses successfully and efficiently and to obtain the expected benefits of the transactions;
• our ability to obtain financing for the acquisition;
• assuming the legal obligations of the acquired company, including potential exposure to material liabilities not discovered in the due diligence; and
• ineffective or inadequate control, procedures and policies at the acquired company may negatively impact our results of operations.

Any acquired business could significantly under-perform relative to our expectations and may not achieve the benefits we expect on a timely basis or at all. Given that our resources are limited, our decision to pursue a transaction has opportunity costs; accordingly, if we pursue a particular transaction, we may need to forgo the prospect of entering into other transactions that could help us achieve our strategic objectives.

Expansion of our operations to, and offering our services in, markets outside of the U.S. subjects us to political, economic, legal, operational and other risks that could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation.

We are continuing to expand our operations by offering our products and services in Australia, and may expand to additional markets outside of the U.S. in the future, which increases our exposure to the inherent risks of doing business in international markets. Depending on the market, these risks include those relating to:

• changes in local economic environment;
• political instability;
• trade regulations;
• intellectual property legal protections;
• procedures and actions affecting pricing, reimbursement and marketing of our products and services;
• fluctuations in foreign currency rates;
• additional U.S. and foreign taxes;
• changes in local laws or regulations, or interpretation or enforcement thereof;
• potentially longer ramp-up times for offering our services; and
• data and privacy regulations.

Issues relating to the failure to comply with applicable non-U.S. laws, requirements or restrictions may also impact our domestic business and/or raise scrutiny on our domestic practices.

Additionally, some factors that will be critical to the success of our international business and operations will be different than those affecting our domestic business and operations. For example, conducting international operations requires us to devote significant management resources to implement our controls and systems in new markets, to comply with local laws and regulations, including to fulfill financial reporting requirements, and to overcome the numerous new challenges inherent in managing international operations.

Any expansion of our international operations through acquisitions or through organic growth could increase these risks. Additionally, while we may invest material amounts of capital and incur significant costs in connection with the growth and development of our international operations, including to start up or acquire new businesses, we may not be able to operate them profitably on the anticipated timeline, or at all.

These risks could have a material adverse effect on our business, results of operations, financial condition, cash flows and could materially harm our reputation.