Marchex(MCHX) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents unaudited condensed consolidated financial statements, management's discussion, market risk, and internal controls Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, revenue recognition, stock-based compensation, per-share data, concentrations, segment reporting, property and equipment, leases, commitments, acquisitions, intangible assets, goodwill, common stock, and subsequent events Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheets (in thousands) | Metric | Dec 31, 2018 | Mar 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $45,230 | $50,906 | | Total current assets | $64,085 | $68,541 | | Right-of-use lease asset | — | $7,065 | | Total assets | $113,062 | $122,799 | | Total current liabilities | $14,772 | $19,563 | | Lease liability current | — | $1,517 | | Lease liability non-current | — | $6,787 | | Total liabilities | $18,036 | $28,333 | | Total stockholders' equity | $95,026 | $94,466 | Condensed Consolidated Statements of Operations This section outlines the company's financial performance, detailing revenue, expenses, and net loss Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Three Months Ended Mar 31, 2018 | Three Months Ended Mar 31, 2019 | | :----------------------------------- | :------------------------------ | :------------------------------ | | Revenue | $21,896 | $26,406 | | Total operating expenses | $23,051 | $28,009 | | Loss from operations | $(1,155) | $(1,603) | | Net loss applicable to common stockholders | $(926) | $(1,299) | | Basic and diluted net loss per share | $(0.02) | $(0.03) | | Amortization of intangible assets from acquisitions | $0 | $1,568 | Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, including accumulated deficit and additional paid-in capital Total Stockholders' Equity (in thousands) | Metric | Dec 31, 2018 | Mar 31, 2019 | | :--------------------------- | :----------- | :----------- | | Total stockholders' equity | $95,026 | $94,466 | | Accumulated deficit | $(256,198) | $(257,497) | | Additional paid-in capital | $350,801 | $351,540 | - Issuance of common stock upon exercise of options, vesting of restricted stock, and employee stock purchase plan, net, contributed $194,000 to additional paid-in capital and total stockholders' equity for the three months ended March 31, 2019[15] - Stock compensation from options and restricted stock, net of forfeitures, added $545,000 to additional paid-in capital and total stockholders' equity for the three months ended March 31, 2019[15] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Three Months Ended Mar 31, 2018 | Three Months Ended Mar 31, 2019 | | :----------------------------------- | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $3,021 | $5,624 | | Net cash used in investing activities | $(769) | $(143) | | Net cash provided by (used in) financing activities | $(21,880) | $195 | | Net increase (decrease) in cash and cash equivalents | $(19,628) | $5,676 | | Cash and cash equivalents at end of period | $84,562 | $50,906 | - The significant decrease in cash and cash equivalents at the end of the period from 2018 to 2019 is primarily due to a large common stock cash dividend paid in Q1 2018 ($21.9 million)[17] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the financial statements, covering accounting policies and key transactions (1) Description of Business and Basis of Presentation This note describes Marchex's core business as a call analytics company and the basis for its financial statement presentation - Marchex is a call analytics company that helps businesses connect, drive, measure, and convert callers into customers, offering products and services for businesses relying on consumer phone calls or texts[20] - The company acquired Telmetrics Inc. and SITA Laboratories, Inc. (d/b/a Callcap) in November 2018, both specializing in call and text tracking/analytics[23] (2) Significant Accounting Policies This note outlines key accounting principles and methods applied in financial statements, including new lease accounting standards - The company adopted FASB ASC Topic 842, Leases, on January 1, 2019, using a modified retrospective approach[26] - Upon adoption of ASC 842, the company recognized approximately $8.7 million in additional operating lease liabilities and $7.4 million in right-of-use (ROU) assets[27] - The company elected the 'package of practical expedients' for transition and the short-term lease recognition exemption and the practical expedient to not separate lease and non-lease components for ongoing accounting[26][28] (3) Revenue Recognition This note details the company's policies for recognizing revenue from performance-based advertising and local leads services - The majority of revenue is generated from performance-based advertising services, including call analytics technology and pay-for-call advertising products[34] - Revenue from performance-based advertising services increased from $19.9 million in Q1 2018 to $25.2 million in Q1 2019, while local leads services revenue decreased from $2.0 million to $1.2 million in the same periods[40] - Incremental direct costs of obtaining a contract (sales commissions) are generally deferred and amortized to sales and marketing expense over an estimated 24-month customer relationship life[45] (4) Stock-based Compensation Plans This note describes the company's stock-based compensation plans and the methods used to calculate related expenses Stock-based Compensation Expense by Category (in thousands) | Expense Category | Three Months Ended Mar 31, 2018 | Three Months Ended Mar 31, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | | Service costs | $128 | $59 | | Sales and marketing | $214 | $177 | | Product development | $91 | $76 | | General and administrative | $518 | $233 | | Total stock-based compensation | $951 | $545 | - The Black-Scholes option pricing model is used for time-vested stock option grants, with key assumptions including expected life (4.0 years), risk-free interest rate (2.54% in 2018, 2.22% in 2019), and expected volatility (53% in 2018, 40% in 2019)[48][49] (5) Net Income (Loss) Per Share This note explains the calculation of basic and diluted net income (loss) per share, including anti-dilutive securities Basic and Diluted Net Loss Per Share | Metric | Three Months Ended Mar 31, 2018 | Three Months Ended Mar 31, 2019 | | :---------------------------------------------------------------- | :------------------------------ | :------------------------------ | | Basic net loss per Class A and Class B share | $(0.02) | $(0.03) | | Diluted net loss per Class A and Class B share | $(0.02) | $(0.03) | - The computation of diluted net loss per share excludes outstanding options (5,486k in 2018, 5,283k in 2019), unvested restricted shares (710k in 2018, 524k in 2019), and restricted stock units (921k in 2018, 732k in 2019) because their effect would be anti-dilutive[54][55] (6) Concentrations This note discloses significant concentrations of revenue and accounts receivable from major advertisers and agencies Advertiser Concentrations (Percentages) | Advertiser | Revenue (Q1 2018) | Revenue (Q1 2019) | Accounts Receivable (Dec 31, 2018) | Accounts Receivable (Mar 31, 2019) | | :----------- | :------------------ | :------------------ | :--------------------------------- | :--------------------------------- | | Advertiser A | 18% | 27% | 15% | <10% | | Advertiser B | 27% | 15% | 31% | 35% | - One advertising agency represented 20% of revenue in Q1 2018 and 14% in Q1 2019, and 23% of accounts receivable at Dec 31, 2018, and 29% at Mar 31, 2019[58] (7) Segment Reporting and Geographic Information This note provides information on the company's operating segments and the geographic distribution of its revenues - The company operates as a single segment, encompassing its performance-based advertising business focused on phone calls and its local leads platform[60] Revenues by Geographic Region (Percentages) | Geographic Region | Revenue (Q1 2018) | Revenue (Q1 2019) | | :---------------- | :------------------ | :------------------ | | United States | 99% | 99% | | Canada | 1% | 1% | | Other countries | <1% | <1% | (8) Property and Equipment This note details the company's property and equipment, net of accumulated depreciation and amortization Property and Equipment, Net (in thousands) | Asset Category | Dec 31, 2018 | Mar 31, 2019 | | :----------------------------- | :----------- | :----------- | | Computer and other related equipment | $18,839 | $18,857 | | Purchased and internally developed software | $6,878 | $6,896 | | Furniture and fixtures | $1,023 | $1,023 | | Leasehold improvements | $1,275 | $1,285 | | Less: Accumulated depreciation and amortization | $(25,094) | $(25,287) | | Property and equipment, net | $2,921 | $2,774 | - Depreciation and amortization expense related to property and equipment was approximately $455,000 for Q1 2018 and $357,000 for Q1 2019[63] (9) Leases This note provides information on the company's lease arrangements, including lease costs, terms, and liabilities - The company leases office space in Seattle, WA (expires March 31, 2025), Mississauga, Canada (expires November 30, 2021), and Wichita, Kansas (month-to-month, classified as short-term)[64][65][66][67] Lease Information (as of March 31, 2019, in thousands) | Lease Metric | Value | | :------------------------------------ | :---------- | | Operating lease cost | $434 | | Short-term operating lease cost | $30 | | Total operating lease cost | $464 | | Weighted-average remaining lease term | 5.9 years | | Weighted-average discount rate | 5.0% | | Present value of total operating lease liabilities | $8,304 | (10) Commitments, Contingencies, and Taxes This note outlines the company's contractual obligations, potential liabilities, and income tax positions Future Minimum Payments (in thousands) | Year | Facilities Operating Leases | Other Contractual Obligations | Total Minimum Payments | | :--- | :-------------------------- | :---------------------------- | :--------------------- | | 2019 | $1,064 | $2,231 | $3,295 | | 2020 | $1,616 | $437 | $2,053 | | 2021 | $1,653 | $248 | $1,901 | | 2022 | $1,613 | $4 | $1,617 | | 2023 and after | $3,804 | — | $3,804 | | Total | $9,750 | $2,920 | $12,670 | - The company has an earnout arrangement for the Telmetrics acquisition, requiring up to $3.0 million in cash based on financial goals, with an estimated fair value of $1.6 million as of March 31, 2019[72][80] - The company committed $2.5 million in funding for a strategic technology initiative over the next 12 months during Q1 2019[73] - A 100% valuation allowance is recorded against deferred tax assets due to historical taxable losses and uncertainty of future taxable income[76] (11) Acquisitions This note details the acquisitions of Telmetrics Inc. and Callcap, including their financial impact and strategic rationale - In November 2018, Marchex acquired Telmetrics Inc. for $10.1 million cash at closing and up to $3.0 million in contingent earnout, enhancing call analytics and text communications[79][80][83] - In November 2018, Marchex acquired Callcap for approximately $25.0 million cash and 3.4 million shares of Class B common stock (valued at $10.0 million), expanding its customer base and growth opportunities[85][86][88] Unaudited Pro Forma Financial Information (in thousands) | Metric | Three Months Ended Mar 31, 2018 | | :--------------------------------- | :------------------------------ | | Revenue | $26,680 | | Net loss applicable to common stockholders | $(1,308) | (12) Identifiable Intangible Assets from Acquisitions This note provides a breakdown of identifiable intangible assets acquired, their carrying amounts, and amortization schedules Identifiable Intangible Assets from Acquisitions (as of March 31, 2019, in thousands) | Intangible Asset Category | Gross Carrying Amount | Accumulated Amortization | Net | Weighted Average Useful Life (from purchase date) | | :-------------------------- | :-------------------- | :----------------------- | :-- | :---------------------------------------------- | | Customer relationships | $12,368 | $913 | $11,455 | 5 years | | Technologies | $5,879 | $748 | $5,131 | 3 years | | Non-compete agreements | $2,559 | $560 | $1,999 | 1-2 years | | Tradenames | $672 | $128 | $544 | 2 years | | Total | $21,478 | $2,349 | $19,129 | | - Aggregate amortization expense for identifiable intangible assets was approximately $1.6 million for the three months ended March 31, 2019[91] - Estimated remaining amortization expense for the next five years is $4.6 million in 2019, $5.7 million in 2020, $4.2 million in 2021, $2.5 million in 2022, and $2.1 million in 2023[91] (13) Goodwill This note discusses the company's goodwill balance and its annual impairment testing - No change in goodwill for the three months ended March 31, 2019[92] - Annual goodwill impairment testing is performed on November 30, and no impairment has been identified in 2019[93] (14) Common Stock This note provides information on the company's common stock, including share repurchase programs and dividend payments - The 2014 Share Repurchase Program authorizes repurchases of up to 3 million shares of Class B common stock; 1,319,128 shares may yet be purchased[94][313] - In Q1 2019, the company repurchased 90,000 shares of Class B common stock for approximately $900 (employee restricted equity upon termination), not under the 2014 Repurchase Program[95][313] - A special cash dividend of $21.9 million was paid in Q1 2018[96] - Approximately 3.4 million shares of Class B common stock are to be issued over four years for the Callcap acquisition[97] (15) Subsequent Event This note discloses a significant event that occurred after the balance sheet date but before financial statements were issued - In May 2019, a Class A common stockholder converted 395,209 shares into Class B common shares[98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business, product offerings, and strategic initiatives. It details the comparison of financial performance between Q1 2018 and Q1 2019, focusing on revenue, expenses, income taxes, and net loss. Additionally, it discusses liquidity, capital resources, and critical accounting policies, highlighting key factors influencing the company's financial health and future outlook Overview This section provides a high-level introduction to the company's business, product offerings, and strategic direction Product Offerings This section details the company's core products and services, including call analytics, speech analytics, and recent acquisitions - Marchex Call Analytics helps marketers optimize advertising expenditures by understanding which channels drive calls and provides data integration with third-party platforms like Salesforce and Facebook[105] - Marchex Speech Analytics, launched in 2017, leverages proprietary speech recognition and AI to provide real-time insights into customer interactions, with the market expected to grow from $941 million in 2017 to $2.2 billion by 2022[105][106] - Acquisitions of Callcap and Telmetrics in November 2018 expanded the company's Text Analytics and Communications and Call Monitoring capabilities[107] Strategy This section outlines the company's key strategic initiatives, focusing on technology investment, market expansion, and acquisitions - Key strategic focus areas include expanding and investing in speech analytics, AI, data science, and machine learning capabilities to grow conversation analytics offerings[109] - The company plans to increase its advertiser base through direct sales, inside sales, and partnerships with large local advertiser resellers[110] - Marchex intends to pursue selective acquisition opportunities that enhance strategic position, strengthen financial profile, and increase shareholder value, citing Telmetrics and Callcap acquisitions in November 2018[111][112] Consolidated Statements of Operations This section provides a detailed analysis of the company's revenue, expenses, income taxes, and net loss Revenue Discussion This section analyzes factors influencing the company's revenue performance, including growth drivers and key customer contributions - Revenue increased 21% from $21.9 million in Q1 2018 to $26.4 million in Q1 2019[145] - The increase was primarily due to growth in call analytics services (including Telmetrics and Callcap contributions) and larger advertiser budget increases for pay-for-call services, partially offset by lower local leads platform revenues[145] - DexYP was the largest reseller partner, responsible for 18% of total revenues in Q1 2018 and 27% in Q1 2019[108][147] - State Farm, through Resolution Media and OMD Digital, accounted for 27% of total revenues in Q1 2018 and 15% in Q1 2019, with expected modestly lower campaign spend levels in the near term[148] Expenses Discussion This section discusses trends and changes in operating expenses, including service costs, sales and marketing, and product development Operating Expenses (in thousands and as % of revenue) | Expense Category | Q1 2018 | % of Revenue (Q1 2018) | Q1 2019 | % of Revenue (Q1 2019) | Change (YoY) | | :----------------------------------- | :------ | :----------------------- | :------ | :----------------------- | :----------- | | Service costs | $12,823 | 59% | $14,258 | 54% | +$1,435 | | Sales and marketing | $3,610 | 16% | $4,113 | 16% | +$503 | | Product development | $3,648 | 17% | $4,568 | 17% | +$920 | | General and administrative | $2,970 | 13% | $3,320 | 13% | +$350 | | Amortization of intangible assets from acquisitions | $0 | 0% | $1,568 | 6% | +$1,568 | | Acquisition-related costs | $0 | 0% | $182 | 0% | +$182 | | Total operating expenses | $23,051 | 105% | $28,009 | 106% | +$4,958 | - The increase in service costs was primarily due to higher distribution partner payments and communication/network costs, partly from Telmetrics and Callcap acquisitions. The decrease as a percentage of revenue was due to a higher proportion of call analytics platform revenues[153] - Sales and marketing expenses increased due to personnel and outside service provider costs from acquisitions, while product development expenses rose due to increased personnel costs from acquisitions[155][157] Income Taxes Discussion This section explains the company's income tax expense or benefit and the factors affecting its effective tax rate - Income tax expense (benefit) was $11,000 in Q1 2018 and ($119,000) in Q1 2019[165] - The effective tax rate differed from 21% due to a full valuation allowance against deferred tax assets and other factors like state income taxes and non-deductible stock-based compensation[165] Net Loss Discussion This section analyzes the company's net loss, attributing changes to revenue, expense, and acquisition-related factors - Net loss increased from ($926,000) in Q1 2018 to ($1.3 million) in Q1 2019[166] - The increased loss was mainly due to higher amortization of intangible assets from acquisitions in 2019, partially offset by higher revenues and lower operating costs[166] Liquidity and Capital Resources This section assesses the company's ability to meet financial obligations, including cash position and operating cash flows Liquidity Snapshot (as of March 31, 2019, in thousands) | Metric | Value | | :------------------------------------ | :------ | | Cash and cash equivalents | $50,906 | | Current and long term contractual obligations | $12,670 | - Net cash provided by operating activities was $5.6 million for Q1 2019, a significant increase from $3.0 million in Q1 2018[168][169] - The company expects working capital requirements to increase if reseller partner and agency arrangements account for a greater percentage of operating activity due to longer payment cycles[172] - The company committed $2.5 million in funding for a strategic technology initiative over the next 12 months during Q1 2019[178] Critical Accounting Policies This section highlights accounting policies requiring significant judgment and estimates, such as revenue recognition and goodwill impairment - Revenue recognition involves estimates for performance-based advertising and local leads, with revenue recognized over time as services are performed[186] - Stock-based compensation is measured at fair value using the Black-Scholes model, requiring subjective assumptions about expected life, volatility, and exercise patterns[193][194] - Goodwill and intangible assets are tested annually for impairment (November 30), requiring significant estimates about future performance and cash flows[200][201] - A 100% valuation allowance is recorded against deferred tax assets due to historical taxable losses and uncertainty of future taxable income[142][203] Web site This section provides information on where to access the company's public filings and investor relations communications - The company's website (www.marchex.com) provides access to SEC filings (10-K, 10-Q, 8-K) and investor relations information[206] - Marchex uses social media channels (Twitter, blog, LinkedIn) to disclose information, which may be deemed material, and advises investors to monitor these channels[206] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company under SEC Regulations, Marchex is not required to provide quantitative and qualitative disclosures about market risk - Marchex is exempt from providing quantitative and qualitative disclosures about market risk as a smaller reporting company[207] Item 4. Controls and Procedures The principal executive and financial officers concluded that the company's disclosure controls and procedures were effective as of March 31, 2019. No material changes to internal control over financial reporting occurred during the quarter, but management acknowledges inherent limitations in the effectiveness of controls Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures as assessed by management - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2019[208] Changes in Internal Control over Financial Reporting This section addresses any material changes in the company's internal control over financial reporting during the quarter - No material changes to internal control over financial reporting occurred during Q1 2019[209] Limitations on the Effectiveness of Controls This section acknowledges the inherent limitations that prevent any control system from providing absolute assurance of effectiveness - Controls and procedures, regardless of design, cannot provide absolute assurance of achieving control objectives due to inherent limitations[210] PART II. OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, equity sales, mine safety, and a list of exhibits Item 1. Legal Proceedings The company is not a party to any material legal proceedings but may be subject to ordinary course disputes, including intellectual property infringement claims. Management believes no pending claims will have a material adverse effect - Marchex is not a party to any material legal proceedings[213] - The company may face ordinary course legal proceedings and claims, including intellectual property infringement, but management does not expect a material adverse effect[213][75] Item 1A. Risk Factors This section outlines various risks that could materially affect the company's business, financial condition, results of operations, and stock value. These risks are categorized into those relating to the company itself, its business and industry, and ownership of its Class B common stock Risks Relating to Our Company This section details specific risks inherent to the company's operations, financial health, and strategic initiatives - The company has an accumulated deficit of $257.5 million as of March 31, 2019, and may incur future net losses due to increased expenses for sales, marketing, personnel, public company costs, and acquisitions[216] - Dependence on a small number of distribution partners and large customers (e.g., DexYP, State Farm) poses a significant risk, as loss or reduced revenue from these relationships could materially affect the business[219][221][227][228] - Acquisitions (like Telmetrics and Callcap) involve risks such as diversion of management attention, ownership dilution, integration difficulties, and potential unknown liabilities[244][245] - International operations (Canada, Ireland, UK) expose the company to complex foreign laws, currency exchange risks, and the need for localization, which could adversely affect business[248][250] - Failure to protect intellectual property rights (41 US patents, 9 pending; 1 Canadian patent, 1 pending; 16 US trademarks, 3 pending; 18 foreign trademarks, 1 pending) could allow competitors to use proprietary technology[281][282][285] Risks Relating to Our Business and Our Industry This section outlines risks stemming from the competitive landscape, technological vulnerabilities, and regulatory environment - The company operates in a highly competitive environment, competing with major search engines (Google, Microsoft, Verizon Media), digital advertising networks, and call analytics providers (Twilio, Invoca, DialogTech)[268][269] - Technical systems are vulnerable to damage or interruption from various disasters, network failures, and cyber-attacks, which could disrupt services, lead to data loss, and harm reputation[275][276] - Reliance on third-party technology, platforms, carriers, and server providers means a failure of service by these providers could adversely affect business and reputation[277][278] - Evolving regulations in e-commerce, online tracking, data collection (e.g., COPPA, CAN-SPAM, GDPR), and telecommunications (e.g., Wiretap Act, TCPA) pose risks of increased costs, liabilities, and restrictions on business operations[293][294][296][299][300][304] - Quarterly results are subject to seasonality, with lower mobile and Internet usage during spring/summer and reduced call volume in late Q4, which could adversely affect growth and stock price[287][288] Risks Relating to Ownership of our Class B common stock This section addresses risks associated with holding the company's Class B common stock, including price volatility and corporate governance - Class B common stock prices have been and are likely to remain highly volatile, influenced by operating results, competitive developments, acquisitions, and broader market conditions[303][305] - The primary founder beneficially owned 100% of Class A common stock, representing 76% of total voting power as of May 3, 2019, allowing control over corporate actions and potentially affecting Class B stock price[309] - Anti-takeover provisions in the company's charter and Delaware law could limit the ability of another party to acquire the company, potentially causing the stock price to decline[311] - There is no assurance that the company will pay dividends in the future, as dividend payments depend on financial results, liquidity, and capital requirements[312] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has a 2014 share repurchase program authorizing up to 3 million Class B common shares, with 1,319,128 shares remaining. In Q1 2019, 90,000 restricted shares were repurchased from an employee upon termination, not under the program - The 2014 Repurchase Program authorizes repurchases of up to 3 million Class B common shares, with 1,319,128 shares remaining[313] - In Q1 2019, 90,000 restricted Class B common shares were repurchased from an employee for $0.01 per share upon termination, outside of the 2014 Repurchase Program[313] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to Marchex[314] Item 6. Exhibits Lists the exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and XBRL instance and taxonomy documents - Exhibits include certifications (31.1, 32) from the Principal Executive Officer and Principal Financial Officer, and XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[316] Signature The report is signed by Michael A. Arends, Chief Financial Officer and member of the Office of the CEO, on May 10, 2019 - The report was signed by Michael A. Arends, Chief Financial Officer and member of the Office of the CEO, on May 10, 2019[322]