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EX-32 - EX-32 - MARCHEX INCmchx-ex32_9.htm
EX-31.2 - EX-31.2 - MARCHEX INCmchx-ex312_10.htm
EX-31.1 - EX-31.1 - MARCHEX INCmchx-ex311_6.htm
EX-3.3 - EX-3.3 - MARCHEX INCmchx-ex33_477.htm

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     .

 

Commission File Number 000-50658

 

Marchex, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

35-2194038

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

520 Pike Street, Suite 2000

Seattle, Washington 98101

(Address of principal executive offices)

(206) 331-3300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class

 

Outstanding at November 3, 2017

Class A common stock, par value $.01 per share

 

5,056,136

Class B common stock, par value $.01 per share

 

38,613,134

 

 

 

 


 

Marchex, Inc.

Form 10-Q

Table of Contents

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,950

 

 

$

104,377

 

Accounts receivable, net

 

 

18,922

 

 

 

14,893

 

Prepaid expenses and other current assets

 

 

1,531

 

 

 

1,905

 

Refundable taxes

 

 

98

 

 

 

86

 

Total current assets

 

 

124,501

 

 

 

121,261

 

Property and equipment, net

 

 

3,557

 

 

 

2,538

 

Other assets, net

 

 

214

 

 

 

328

 

Total assets

 

$

128,272

 

 

$

124,127

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,811

 

 

$

5,265

 

Accrued expenses and other current liabilities

 

 

7,707

 

 

 

6,345

 

Deferred revenue

 

 

349

 

 

 

335

 

Total current liabilities

 

 

14,867

 

 

 

11,945

 

Other non-current liabilities

 

 

134

 

 

 

988

 

Total liabilities

 

 

15,001

 

 

 

12,933

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Class A common stock

 

 

53

 

 

 

53

 

Class B common stock

 

 

380

 

 

 

386

 

Additional paid-in capital

 

 

360,422

 

 

 

363,977

 

Accumulated deficit

 

 

(247,584

)

 

 

(253,222

)

Total stockholders’ equity

 

 

113,271

 

 

 

111,194

 

Total liabilities and stockholders’ equity

 

$

128,272

 

 

$

124,127

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

1

 


 

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

Three Months Ended

September 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Revenue

 

$

101,146

 

 

$

68,444

 

 

$

30,749

 

 

$

22,053

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service costs

 

 

60,964

 

 

 

37,690

 

 

 

18,505

 

 

 

11,917

 

Sales and marketing

 

 

16,733

 

 

 

12,075

 

 

 

5,562

 

 

 

3,612

 

Product development

 

 

21,859

 

 

 

13,809

 

 

 

6,832

 

 

 

4,256

 

General and administrative

 

 

15,815

 

 

 

10,568

 

 

 

5,320

 

 

 

3,144

 

Acquisition and disposition related costs

 

 

662

 

 

 

 

 

 

354

 

 

 

 

Total operating expenses

 

 

116,033

 

 

 

74,142

 

 

 

36,573

 

 

 

22,929

 

Impairment of goodwill

 

 

(63,305

)

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(78,192

)

 

 

(5,698

)

 

 

(5,824

)

 

 

(876

)

Other income (expense), net

 

 

(90

)

 

 

134

 

 

 

(15

)

 

 

77

 

Loss before provision for income taxes

 

 

(78,282

)

 

 

(5,564

)

 

 

(5,839

)

 

 

(799

)

Income tax expense

 

 

40

 

 

 

37

 

 

 

15

 

 

 

12

 

Net loss applicable to common stockholders

 

$

(78,322

)

 

$

(5,601

)

 

$

(5,854

)

 

$

(811

)

Basic and diluted net loss per Class A and Class B share applicable

   to common stockholders

 

$

(1.88

)

 

$

(0.13

)

 

$

(0.14

)

 

$

(0.02

)

Shares used to calculate basic net loss per share applicable to

   common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

5,233

 

 

 

5,056

 

 

 

5,233

 

 

 

5,056

 

Class B

 

 

36,372

 

 

 

37,565

 

 

 

36,639

 

 

 

37,820

 

Shares used to calculate diluted net loss per share applicable

   to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

5,233

 

 

 

5,056

 

 

 

5,233

 

 

 

5,056

 

Class B

 

 

41,605

 

 

 

42,621

 

 

 

41,872

 

 

 

42,876

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

2

 


 

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(78,322

)

 

$

(5,601

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Amortization and depreciation

 

 

2,457

 

 

 

2,266

 

Impairment of goodwill

 

 

63,305

 

 

 

 

Allowance for doubtful accounts and advertiser credits

 

 

1,429

 

 

 

673

 

Loss on disposal of fixed assets

 

 

3

 

 

 

 

Stock-based compensation

 

 

7,246

 

 

 

3,500

 

Change in certain assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

1,612

 

 

 

3,356

 

Refundable taxes

 

 

10

 

 

 

12

 

Prepaid expenses, other current assets and other assets

 

 

(223

)

 

 

51

 

Accounts payable

 

 

(1,477

)

 

 

(1,525

)

Accrued expenses and other current liabilities

 

 

1,812

 

 

 

(1,003

)

Deferred revenue

 

 

(329

)

 

 

(14

)

Other non-current liabilities

 

 

(396

)

 

 

(23

)

Net cash provided by (used in) operating activities

 

 

(2,873

)

 

 

1,692

 

Investing Activities:

 

 

 

 

 

 

 

 

Cash paid for sale of Archeo assets

 

 

(224

)

 

 

 

Purchases of property and equipment

 

 

(594

)

 

 

(1,274

)

Purchases of intangible assets

 

 

(11

)

 

 

(15

)

Net cash used in investing activities

 

 

(829

)

 

 

(1,289

)

Financing Activities:

 

 

 

 

 

 

 

 

Tax withholding related to restricted stock awards

 

 

(154

)

 

 

 

Repurchase of Class B common stock

 

 

(365

)

 

 

 

Proceeds from exercises of stock options, issuance and vesting of restricted

   stock and employee stock purchase plan, net

 

 

341

 

 

 

24

 

Net cash provided by (used in) financing activities

 

 

(178

)

 

 

24

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,880

)

 

 

427

 

Cash and cash equivalents at beginning of period

 

 

109,155

 

 

 

103,950

 

Cash and cash equivalents at end of period

 

$

105,275

 

 

$

104,377

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

3

 


 

MARCHEX, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

(1) Description of Business and Basis of Presentation

Marchex, Inc. (the “Company”) was incorporated in the state of Delaware on January 17, 2003. The Company is a call analytics company that helps businesses connect, drive, measure, and convert callers into customers. The Company provides products and services for businesses of all sizes that depend on calls to drive sales. The Company’s analytics technology can facilitate call quality, analyze calls and measure the outcomes of calls. The Company also delivers performance-based, pay-for-call advertising across numerous mobile and online publishers to connect consumers with businesses over the phone.

The accompanying unaudited condensed consolidated financial statements of Marchex, Inc. and its wholly-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or for any other period. The balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2016, as amended, and filed with the SEC.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.

 

 

(2) Significant Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from management’s estimates and assumptions.

Recent Accounting Pronouncement(s) Not Yet Effective

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled when products or services are transferred to customers. In July 2015, the FASB voted to approve a one-year delay of the effective date. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. In 2016, the FASB issued additional guidance to clarify the implementation guidance including ASU No. 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations. This ASU clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09 and provides indicators that assist in the assessment of control. ASU 2014-09 allows adoption using either (i) a full retrospective approach for all periods presented in the period of adoption, or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of adoption and providing certain additional disclosures. The Company will adopt the new standard on January 1, 2018 using the modified retrospective approach. The Company’s evaluation of the impact of the new standard is ongoing and while it has not yet completed its assessment of the effect that ASU 2014-09 and related standards will have on its consolidated financial statements and related disclosures, the Company will be required to include additional disclosures in the notes to its consolidated financial statements.

4

 


 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (Topic 842) (ASU 2016-02), an ASU requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company currently plans to adopt the new standard on January 1, 2019. The ASU must be adopted using a modified retrospective approach. The Company anticipates that adoption will affect its statement of financial position and will require changes to some of its processes. Most significant to the Company, the new guidance requires lessees to recognize operating building leases with a term of more than 12 months as lease assets and lease liabilities. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 will have on its consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13), an ASU amending the impairment model for most financial assets and certain other instruments. The ASU is effective for reporting periods beginning after December 15, 2019, with early adoption permitted after December 15, 2018. The ASU must be adopted using a modified-retrospective approach. The Company does not expect adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), an ASU which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The ASU must be adopted using retrospective approach. The Company does not expect adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets other than Inventory (ASU 2016-16), an ASU requiring the recognition of income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The ASU must be adopted using a modified retrospective approach. The Company does not expect adoption of ASU 2016-16 to have a material impact on its consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a Consensus of the FASB Emerging Issues Task Force) (ASU 2016-18), an ASU requiring entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The ASU must be adopted using retrospective approach. The Company does not expect adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business (ASU 2017-01), an ASU changing the definition of a business to assist with evaluating whether a set of transferred assets and activities is a business. The ASU is effective for reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The ASU must be adopted using a prospective approach on or after the effective date. The Company does not expect adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting, an ASU clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The ASU should be adopted using a prospective approach on or after the adoption date. The Company does not expect adoption of ASU 2017-09 to have a material impact on its consolidated financial statements.

 

5

 


 

(3) Stock-based Compensation Plans

The Company grants stock-based awards, including stock options, restricted stock awards, and restricted stock units. The Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method.

On January 1, 2017, the Company adopted Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). This ASU impacts several aspects of accounting for share-based payment transactions, including certain income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Upon adoption, the Company elected to account for forfeitures as they occur and no longer uses an estimated forfeiture rate in the calculation of stock-based compensation expense. The net cumulative effect of this election was recognized as a $37,000 increase to accumulated deficit on January 1, 2017. Also under ASU 2016-09, excess tax benefits generated when stock-based awards vest or are settled are no longer recognized in equity but are instead recognized as a reduction to the provision for income taxes. On January 1, 2017, the Company recorded unrecognized excess tax benefits of $3.7 million to accumulated deficit, with a corresponding increase to the valuation allowance on deferred tax assets. This resulted in no net impact to equity due to the Company’s full valuation allowance.

Stock-based compensation expense was included in the following operating expense categories as follows (in thousands):

 

 

 

Nine months ended

September 30,

 

 

Three months ended

September 30,

 

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

Service costs

 

$

565

 

 

$

385

 

 

$

160

 

 

$

130

 

 

Sales and marketing

 

 

1,321

 

 

 

768

 

 

 

353

 

 

 

299

 

 

Product development

 

 

1,367

 

 

 

497

 

 

 

206

 

 

 

199

 

 

General and administrative

 

 

3,993

 

 

 

1,850

 

 

 

1,060

 

 

 

534

 

 

Total stock-based compensation

 

$

7,246

 

 

$

3,500

 

 

$

1,779

 

 

$

1,162

 

 

 

The Company uses the Black-Scholes option pricing model to estimate the per share fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. For the quarters ended September 30, 2016 and 2017, the expected life of each award granted was determined based on historical experience with similar awards, giving consideration to contractual terms, anticipated exercise patterns, vesting schedules and expirations. Expected volatility is based on historical volatility levels of the Company’s Class B common stock and the expected volatility of companies in similar industries that have similar vesting and contractual terms. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option.

The following weighted average assumptions were used in determining the fair value of time-vested stock option grants for the periods presented:

 

 

 

Nine months ended

September 30,

 

Three months ended

September 30,

 

 

2016

 

2017

 

2016

 

2017

Expected life (in years)

 

4.0-6.25

 

4.0-6.25

 

4.0

 

4.0-6.25

Risk-free interest rate

 

0.86%-1.15%

 

1.68%-1.96%

 

1.01%

 

1.71%-1.96%

Expected volatility

 

57%-58%

 

55%-56%

 

57%

 

55%

Expected dividend yield

 

0%

 

0%

 

0%

 

0%

 

Stock option activity during the nine months ended September 30, 2017 is summarized as follows:

 

 

 

Shares

(in thousands)

 

 

Weighted average

exercise price

 

 

Weighted average

remaining

contractual term

(in years)

 

 

Balance at December 31, 2016

 

 

7,678

 

 

$

5.97

 

 

 

5.07

 

 

Options granted

 

 

1,226

 

 

 

2.73

 

 

 

 

 

 

Options forfeited

 

 

(794

)

 

 

4.17

 

 

 

 

 

 

Options expired

 

 

(1,833

)

 

 

6.00

 

 

 

 

 

 

Balance at September 30, 2017

 

 

6,277

 

 

$

5.55

 

 

 

5.98

 

 

 

6

 


 

Restricted stock awards and restricted stock units are generally measured at fair value on the date of grant based on the number of awards granted and the quoted price of the Company’s common stock. Restricted stock units entitle the holder to receive one share of the Company’s Class B common stock upon satisfaction of certain service conditions.

Restricted stock awards and restricted stock unit activity during the nine months ended September 30, 2017 is summarized as follows:

 

 

 

Shares/

Units

(in thousands)

 

 

Weighted average

grant date

fair value

 

Unvested balance at December 31, 2016

 

 

2,757

 

 

$

3.90

 

Granted

 

 

622

 

 

 

2.82

 

Vested

 

 

(687

)

 

 

4.60

 

Forfeited

 

 

(563

)

 

 

4.16

 

Unvested balance at September 30, 2017

 

 

2,129

 

 

$

3.29

 

 

In the nine months ended September 30, 2016, the Company repurchased approximately 45,000 shares from certain executives for minimum withholding taxes on approximately 146,000 restricted stock award vests. The number of shares repurchased was based on the value on the vesting date of the restricted stock awards equivalent to the value of the executive’s minimum withholding taxes of $154,000, which was remitted in cash to the appropriate taxing authorities. The payments are reflected as a financing activity within the consolidated statement of cash flows when paid. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.

 

(4) Net Income (Loss) Per Share

The Company computes net income (loss) per share of Class A and Class B common stock using the two class method. Under the provisions of the two class method, basic net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding during the period. The computation of the diluted net income (loss) per share of Class B common stock assumes the conversion of Class A common stock to Class B common stock, while the diluted net income (loss) per share of Class A common stock does not assume the conversion of those shares.

In accordance with the two class method, the undistributed earnings (losses) for each year are allocated based on the contractual participation rights of the Class A and Class B common shares and the restricted shares as if the earnings for the year had been distributed. Considering the terms of the Company’s charter which provides that, if and when dividends are declared on our common stock in accordance with Delaware General Corporation Law, equivalent dividends shall be paid with respect to the shares of Class A common stock and Class B common stock and that both classes of common stock have identical dividend rights and would share equally in the Company’s net assets in the event of liquidation, the Company has allocated undistributed earnings (losses) on a proportionate basis.

Instruments granted in unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities prior to vesting. As such, the Company’s restricted stock awards are considered participating securities for purposes of calculating earnings per share.

The following tables present the computation of basic net loss per share applicable to common stockholders for the periods ended (in thousands, except per share amounts):

 

7

 


 

 

 

Nine months ended September 30,

 

 

 

 

2016

 

 

2017

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Basic net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(9,850

)

 

$

(68,472

)

 

$

(665

)

 

$

(4,936

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used to calculate

   basic net loss per share

 

 

5,233

 

 

 

36,372

 

 

 

5,056

 

 

 

37,565

 

 

Basic net loss per share applicable to common stockholders

 

$

(1.88

)

 

$

(1.88

)

 

$

(0.13

)

 

$

(0.13

)

 

 

 

 

 

Three months ended September 30,

 

 

 

 

2016

 

 

2017

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Basic net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(732

)

 

$

(5,122

)

 

$

(96

)

 

$

(715

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used to calculate

   basic net loss per share

 

 

5,233

 

 

 

36,639

 

 

 

5,056

 

 

 

37,820

 

 

Basic net loss per share applicable to common stockholders

 

$

(0.14

)

 

$

(0.14

)

 

$

(0.02

)

 

$

(0.02

)

 

 

The following tables present the computation of diluted net loss per share applicable to common stockholders for the periods ended (in thousands, except per share amounts):

 

 

 

Nine months ended September 30,

 

 

 

 

2016

 

 

2017

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(9,850

)

 

$

(68,472

)

 

$

(665

)

 

$

(4,936

)

 

Reallocation of net loss for Class A shares as a result of conversion

   of Class A to Class B shares

 

 

 

 

 

(9,850

)

 

 

 

 

 

(665

)

 

Diluted net loss applicable to common stockholders

 

$

(9,850

)

 

$

(78,322

)

 

$

(665

)

 

$

(5,601

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used to calculate

   basic net loss per share

 

 

5,233

 

 

 

36,372

 

 

 

5,056

 

 

 

37,565

 

 

Conversion of Class A to Class B common shares outstanding

 

 

 

 

 

5,233

 

 

 

 

 

 

5,056

 

 

Weighted average number of shares outstanding used to calculate

   diluted net loss per share

 

 

5,233

 

 

 

41,605

 

 

 

5,056

 

 

 

42,621

 

 

Diluted net loss per share applicable to common stockholders

 

$

(1.88

)

 

$

(1.88

)

 

$

(0.13

)

 

$

(0.13

)

 

 

8

 


 

 

 

Three months ended September 30,

 

 

 

 

2016

 

 

2017

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(732

)

 

$

(5,122

)

 

$

(96

)

 

$

(715

)

 

Reallocation of net loss for Class A shares as a result of conversion

   of Class A to Class B shares

 

 

 

 

 

(732

)

 

 

 

 

 

(96

)

 

Diluted net loss applicable to common stockholders

 

$

(732

)

 

$

(5,854

)

 

$

(96

)

 

$

(811

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used to calculate

   basic net loss per share

 

 

5,233

 

 

 

36,639

 

 

 

5,056

 

 

 

37,820

 

 

Conversion of Class A to Class B common shares outstanding

 

 

 

 

 

5,233

 

 

 

 

 

 

5,056

 

 

Weighted average number of shares outstanding used to calculate

   diluted net loss per share

 

 

5,233

 

 

 

41,872

 

 

 

5,056

 

 

 

42,876

 

 

Diluted net loss per share applicable to common stockholders

 

$

(0.14

)

 

$

(0.14

)

 

$

(0.02

)

 

$

(0.02

)

 

 

The computation of diluted net loss per share excludes the following because their effect would be anti-dilutive (in thousands):

 

For the three and nine months ended September 30, 2016 and 2017, outstanding options to acquire 9,191 and 6,277 shares, respectively of Class B common stock.

 

For the three and nine months ended September 30, 2016 and 2017, 1,221 and 748 shares of unvested Class B restricted common shares, respectively.

 

For the three and nine months ended September 30, 2016 and 2017, 1,734 and 1,381 restricted stock units, respectively.

 

 

(5) Concentrations

The Company maintains substantially all of its cash and cash equivalents with two financial institutions and are all considered at Level 1 fair value with observable inputs that reflect quoted prices for identical assets or liabilities in active markets. At various points during the nine months ended September 30, 2016 and 2017, the Company held cash equivalents in deposit sweep and money market accounts with these same financial institutions. These Level 2 assets were fully liquidated prior to September 30, 2016 and 2017.

A significant amount of the Company’s revenue earned from advertisers is generated through arrangements with distribution partners. The Company may not be successful in renewing any of these agreements, or, if they are renewed, they may not be on terms as favorable as current arrangements. The Company may not be successful in entering into agreements with new distribution partners or advertisers on commercially acceptable terms. In addition, several of these distribution partners or advertisers may be considered potential competitors. There were no distribution partners paid more than 10% of revenue for the three and nine months ended September 30, 2016 and 2017.

The advertisers representing more than 10% of revenue are as follows (in percentages):

 

 

 

Nine months ended

September 30,

 

 

Three months ended

September 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Advertiser A

 

 

23

%

 

 

22

%

 

 

22

%

 

 

21

%

Advertiser B

 

 

24

%

 

 

16

%

 

 

22

%

 

 

15

%

 

Advertiser A is also a distribution partner.

9

 


 

The outstanding receivable balance for each advertiser representing more than 10% of accounts receivable is as follows (in percentages):

 

 

 

At December 31,

2016

 

 

At

September 30,

2017

 

Advertiser A

 

 

11

%

 

 

20

%

Advertiser B

 

 

30

%

 

 

22

%

Advertiser C

 

 

15

%

 

 

16

%

 

In certain cases, the Company may engage directly with one or more advertising agencies who act on an advertiser’s behalf. In addition, an advertising agency may represent more than one advertiser that utilizes the Company’s products and services. One advertising agency represented 19% and 21% of revenue for the three and nine months ended September 30, 2016, respectively, and less than 10% of revenue for the three and nine months ended September 30, 2017, respectively. This same advertising agency represented 26% and 11% of accounts receivable as of December 31, 2016 and September 30, 2017, respectively. One other advertising agency represented less than 10% of accounts receivable as of December 31, 2016, and 11% of accounts receivable as of September 30, 2017.

 

(6) Segment Reporting and Geographic Information

Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for the Company’s management. For the periods presented, we primarily operated as a single segment. In 2016, we had other operating activities related to the transition activities of the Archeo operations which were not significant.

 

Revenues from advertisers by geographical areas are tracked on the basis of the location of the advertiser. The vast majority of the Company’s revenue and accounts receivable are derived from domestic sales to advertisers engaged in various mobile, online and other activities.

Revenues by geographic region are as follows (in percentages):

 

 

 

Nine months ended

September 30,

 

 

Three months ended

September 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

United States

 

 

97

%

 

 

96

%

 

 

97

%

 

 

96

%

Canada

 

 

3

%

 

 

4

%

 

 

3

%

 

 

4

%

Other countries

 

*

 

 

*

 

 

*

 

 

*

 

 

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

*

Less than 1% of revenue.

 

 

(7) Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

 

At December 31,

2016

 

 

At September 30,

2017

 

Computer and other related equipment

 

$

18,467

 

 

$

18,930

 

Purchased and internally developed software

 

 

6,811

 

 

 

6,687

 

Furniture and fixtures

 

 

1,493

 

 

 

1,071

 

Leasehold improvements

 

 

2,371

 

 

 

1,133

 

 

 

$

29,142

 

 

$

27,821

 

Less: Accumulated depreciation and amortization

 

 

(25,585

)

 

 

(25,283

)

Property and equipment, net

 

$

3,557

 

 

$

2,538

 

 

Depreciation and amortization expense related to property and equipment was approximately $762,000 and $786,000 for the three months ended September 30, 2016 and 2017, respectively, and was approximately $2.4 million and $2.3 million for the for the nine months ended September 30, 2016 and 2017, respectively.

10

 


 

 

 

(8) Commitments, Contingencies, Taxes and Other

(a) Commitments

The Company has commitments for future payments related to office facilities leases and other contractual obligations. The Company leases its office facilities under operating lease agreements and recognizes rent expense on a straight-line basis over the lease term with any lease incentive amortized as a reduction of rent expense over the lease term. Other contractual obligations primarily relate to minimum contractual payments due to distribution partners and other outside service providers. Future minimum payments are approximately as follows (in thousands):

 

 

 

Facilities

operating

leases

 

 

Other

contractual

obligations

 

 

Total

 

2017

 

$

288

 

 

$

1,052

 

 

$

1,340

 

2018

 

 

1,370

 

 

 

2,433

 

 

 

3,803

 

2019

 

 

1,476

 

 

 

809

 

 

 

2,285

 

2020

 

 

1,520

 

 

 

1

 

 

 

1,521

 

2021 and after

 

 

7,414

 

 

 

 

 

 

7,414

 

Total minimum payments

 

$

12,068

 

 

$

4,295

 

 

$

16,363

 

 

In June 2017, the Company entered into an amendment to the lease agreement originally dated in June 2009 and as amended to date, with respect to office space in Seattle, Washington. The amendment extends the lease term for a period of 84 months expiring on March 31, 2025 and reduces the leased office space starting on September 1, 2017. The Company has the option to terminate the lease in March 2023, subject to satisfaction of certain conditions, including a payment of a termination fee of approximately $671,000. In addition, the lessor will pay towards the cost of certain leasehold improvements (“landlord contribution”) of which the Company may use up to approximately $180,000 of any unused landlord contribution as a credit against any payment obligation under the lease. In March 2018, the lessor will refund the previously provided security deposit and the Company will provide a letter of credit to the lessor in the amount of $575,000, which will be reduced by $100,000 each March starting in 2019.  

Rent expense incurred by the Company was approximately $559,000 and $651,000 for the three months ended September 30, 2016 and 2017, respectively, and was approximately $1.5 million and $1.6 for the nine months ended September 30, 2016 and 2017, respectively.

(b) Contingencies

The Company from time to time is a party to disputes and legal and administrative proceedings arising from the ordinary course of business. In some agreements to which the Company is a party, the Company has agreed to indemnification provisions of varying scope and terms with advertisers, vendors and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of agreements or representations and warranties made by the Company, services to be provided by the Company and intellectual property infringement claims made by third parties. As a result of these provisions, the Company may from time to time provide certain levels of financial support to our contract parties to seek to minimize the impact of any associated litigation in which they may be involved. To date, there have been no known events or circumstances that have resulted in any material costs related to these indemnification provisions and no liabilities therefore have been recorded in the accompanying consolidated financial statements. However, the maximum potential amount of the future payments we could be required to make under these indemnification provisions could be material.

While any litigation contains an element of uncertainty, the Company is not aware of any legal proceedings or claims which are pending that the Company believes, based on current knowledge, will have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or liquidity.

11

 


 

(c) Taxes

The Company determined that it is not more likely than not that its deferred tax assets will be realized and accordingly recorded 100% valuation allowance against these deferred tax assets as of December 31, 2016 and September 30, 2017. In assessing whether it is more likely than not that the Company’s deferred tax assets will be realized, factors considered included: historical taxable income, historical trends related to advertiser usage rates, projected revenues and expenses, macroeconomic conditions, issues facing the industry, existing contracts, the Company’s ability to project future results and any appreciation of its other assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considered the future reversal of deferred tax liabilities, carryback potential, projected taxable income, and tax planning strategies as well as its history of taxable income or losses in the relevant jurisdictions in making this assessment. Based on the level of historical taxable losses and the uncertainty of projections for future taxable income over the periods for which the deferred tax assets are deductible, the Company concluded that it is not more likely than not that the gross deferred tax assets will be realized.

The Company adopted ASU 2015-17 on January 1, 2017, which requires all deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet. The adoption of this standard did not have any impact on the Company’s financial statements due to the full valuation allowance recorded on our deferred taxes.

From time to time, various state, federal and other jurisdictional tax authorities undertake audits of the Company and its filings. In evaluating the exposure associated with various tax filing positions, the Company on occasion accrues charges for uncertain positions. Resolution of uncertain tax positions will impact our effective tax rate when settled. The Company does not have any significant interest or penalty accruals. The provision for income taxes includes the impact of contingency provisions and changes to contingencies that are considered appropriate. The Company files U.S. federal, certain U.S. states, and certain foreign tax returns. Generally, U.S. federal, U.S. state, and foreign tax returns filed for years after 2012 are within the statute of limitations and are under examination or may be subject to examination.

(d) Other

In the third quarter of 2016, the Company incurred approximately $1.6 million in employee separation and facility termination related costs. At December 31, 2016, $354,000 was accrued, of which substantially all was paid in the first half of 2017.

In the first quarter of 2017, the Company incurred approximately $700,000 of employee separation related costs as part of savings measures implemented in 2017, all of which were paid in the first half of 2017.

 

 

(9) Common Stock

In November 2014, the Company’s board of directors authorized a share repurchase program (the “2014 Repurchase Program”), which supersedes and replaces any prior repurchase programs. Under the 2014 Repurchase Program, the Company is authorized to repurchase up to 3 million shares of the Company’s Class B common stock in the aggregate through open market and privately negotiated transactions, at such times and in such amounts as the Company deems appropriate. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions. The 2014 Repurchase Program does not have an expiration date and may be expanded, limited or terminated at any time without prior notice. During the nine months ended September 30, 2016, the Company repurchased 89,000 shares of Class B common stock for $365,000. The Company did not repurchase any Class B common stock for the nine months ended September 30, 2017.

During the nine months ended September 30, 2016, and 2017, the Company’s board of directors approved and the Company retired approximately 250,000 and 239,000 shares of treasury stock, respectively.

 

12

 


 

 

(10) Goodwill

For the three months ended June 30, 2016, the Company’s stock price was impacted by volatility, among other factors, in the U.S. financial markets, and traded below the then book value for an extended period of time. Accordingly, the Company tested its goodwill for impairment and concluded that the carrying value exceeded the estimated fair value of the Company’s single reporting unit and recognized an impairment loss during the second quarter of 2016 of $63.3 million which reduced goodwill to $0 on the Company’s balance sheet. The fair value of the Company’s single reporting unit was based on estimates of future operating results, discounted cash flows and other market-based factors, including the Company’s stock price. The goodwill impairment loss resulted primarily from a sustained decline in the Company’s common stock share price and market capitalization as well as lower projected revenue growth rates and profitability levels compared to historical results. The lower projected operating results reflected changes in assumptions related to organic revenue growth rates, market trends, business mix, cost structure, and other expectations about the anticipated short-term and long-term operating results.

The testing of goodwill for impairment requires the Company to make significant estimates about its future performance and cash flows, as well as other assumptions. Events and circumstances considered in determining whether the carrying value of goodwill may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant changes in competition and market dynamics; significant and sustained declines in the Company’s stock price and market capitalization; a significant decline in its expected future cash flows or a significant adverse change in the Company’s business climate. These estimates and circumstances are inherently uncertain and can be affected by numerous factors, including changes in economic, industry or market conditions, changes in business operations, a loss of a significant customer, changes in competition, volatility in financial markets, or changes in the share price of the Company’s common stock and market capitalization.

 

13

 


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believes,” “intends,” “expects,” “anticipates,” “plans,” “may,” “will” and similar expressions to identify forward-looking statements. All forward-looking statements, including, but not limited to, statements regarding our future operating results, financial position, prospects, acquisitions, dispositions, and business strategy, expectations regarding our growth and the growth of the industry in which we operate, and plans and objectives of management for future operations, are inherently uncertain as they are based on our expectations and assumptions concerning future events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements we make. There are a number of important factors that could cause the actual results of Marchex to differ materially from those indicated by such forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including but not limited to the risks, uncertainties and assumptions described in this report, in Part II, Item 1A. under the caption “Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2016, as amended, and those described from time to time in our future reports filed with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur as contemplated and actual results could differ materially from those anticipated or implied by the forward-looking statements. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2016, as amended.

Overview

References herein to “we,” “us” or “our” refer to Marchex, Inc. and its wholly-owned subsidiaries unless the context specifically states or implies otherwise.

Marchex is a call analytics company that helps businesses connect, drive, measure and convert callers into customers.

We provide products and services for businesses of all sizes that depend on calls to drive sales. Our analytics products can provide actionable intelligence on the major media channels advertisers use to acquire customers over the phone.

Our primary product offerings are:

 

Marchex Call Analytics. Marchex Call Analytics is an analytics platform for enterprises that depend on inbound phone calls to drive sales, appointments and reservations. Marketers use this platform to understand which marketing channels, advertisements, and keywords are driving calls to their business, allowing them to optimize their advertising expenditures across media channels. Marchex Call Analytics also includes technology that can extract data and insights about what is happening during a call and measures the outcome of calls and return on investment. The platform also includes technology that blocks robocalls, telemarketers and spam calls to save businesses time. Marchex Call Analytics data can integrate directly into third-party marketer workflows such as Salesforce, Eloqua, Adobe, Kenshoo, DoubleClick Search, Marin Software, Facebook and Instagram, in addition to other marketing dashboards and tools. Advertisers pay us a fee for each call or call related data element they receive from calls including call-based ads we distribute through our sources of call distribution or for each phone number tracked based on pre-negotiated rates.

Leveraging the call analytics platform, Marchex Omnichannel Analytics Cloud provides a single source to marketers to see which media channels are driving phone calls across Search, Display and Video, and Social Media. Our Omnichannel Analytics Cloud products include:

Marchex Search Analytics. Marchex Search Analytics is a product for search marketers that drive phone calls from search campaigns. Marchex Search Analytics attributes inbound phone calls made directly from paid search ads and landing pages to a keyword. The platform can deliver this data as well as data about call outcomes directly into search management platforms like DoubleClick Search and Kenshoo.

14

 


 

Marchex Display and Video Analytics. Marchex Display and Video Analytics is a product for marketers that buy digital display advertising. Marchex Display and Video Analytics can measure the influence that display advertising has on inbound phone calls so that marketers can better attribute their return on advertising spend for inbound phone calls and delivers this data to marketers in a reporting dashboard.

Marchex Social Analytics. Launched in February 2017, Marchex Social Analytics is a product for marketers that buy social media advertising. Marchex Social Analytics can measure the influence that social advertising from select sources like Facebook or Instagram has on inbound phone calls so that marketers can better attribute their return on advertising spend for inbound phone calls and delivers this data to marketers in a reporting dashboard.

Marchex Speech Analytics. Launched in April 2017, Marchex Speech Analytics is a product that helps enable actionable insights for enterprise and mid-sized companies, helping them understand what is happening on in