mchx-10q_20170630.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 June 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 August 2, 2017

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

 

5,056,136

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

 

38,286,479

 

 

 

 


 

Marchex, Inc.

Form 10-Q

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Cash Flows

3

 

Notes to Condensed Consolidated Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

29

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 4.

Mine Safety Disclosures

49

Item 6.

Exhibits

50

Signature

51

Exhibit Index

52

 

 


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,950

 

 

$

102,429

 

Accounts receivable, net

 

 

18,922

 

 

 

15,461

 

Prepaid expenses and other current assets

 

 

1,531

 

 

 

2,004

 

Refundable taxes

 

 

98

 

 

 

94

 

Total current assets

 

 

124,501

 

 

 

119,988

 

Property and equipment, net

 

 

3,557

 

 

 

2,962

 

Other assets, net

 

 

214

 

 

 

329

 

Total assets

 

$

128,272

 

 

$

123,279

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,811

 

 

$

5,098

 

Accrued expenses and other current liabilities

 

 

7,707

 

 

 

6,469

 

Deferred revenue

 

 

349

 

 

 

337

 

Total current liabilities

 

 

14,867

 

 

 

11,904

 

Other non-current liabilities

 

 

134

 

 

 

540

 

Total liabilities

 

 

15,001

 

 

 

12,444

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Class A common stock

 

 

53

 

 

 

53

 

Class B common stock

 

 

380

 

 

 

385

 

Treasury stock

 

 

 

 

 

(2

)

Additional paid-in capital

 

 

360,422

 

 

 

362,810

 

Accumulated deficit

 

 

(247,584

)

 

 

(252,411

)

Total stockholders’ equity

 

 

113,271

 

 

 

110,835

 

Total liabilities and stockholders’ equity

 

$

128,272

 

 

$

123,279

 

 

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)

 

 

 

Six Months Ended

June 30,

 

 

Three Months Ended

June 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Revenue

 

$

70,397

 

 

$

46,391

 

 

$

34,412

 

 

$

22,016

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service costs

 

 

42,459

 

 

 

25,773

 

 

 

20,477

 

 

 

12,175

 

Sales and marketing

 

 

11,171

 

 

 

8,463

 

 

 

5,649

 

 

 

3,471

 

Product development

 

 

15,027

 

 

 

9,553

 

 

 

7,555

 

 

 

4,283

 

General and administrative

 

 

10,495

 

 

 

7,424

 

 

 

5,833

 

 

 

3,394

 

Acquisition and disposition related costs

 

 

308

 

 

 

 

 

 

304

 

 

 

 

Total operating expenses

 

 

79,460

 

 

 

51,213

 

 

 

39,818

 

 

 

23,323

 

Impairment of goodwill

 

 

(63,305

)

 

 

 

 

 

(63,305

)

 

 

 

Loss from operations

 

 

(72,368

)

 

 

(4,822

)

 

 

(68,711

)

 

 

(1,307

)

Other income (expense), net

 

 

(75

)

 

 

57

 

 

 

(68

)

 

 

40

 

Loss before provision for income taxes

 

 

(72,443

)

 

 

(4,765

)

 

 

(68,779

)

 

 

(1,267

)

Income tax expense

 

 

25

 

 

 

25

 

 

 

12

 

 

 

13

 

Net loss applicable to common stockholders

 

$

(72,468

)

 

$

(4,790

)

 

$

(68,791

)

 

$

(1,280

)

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

   to common stockholders

 

$

(1.75

)

 

$

(0.11

)

 

$

(1.65

)

 

$

(0.03

)

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

 

 

36,238

 

 

 

37,435

 

 

 

36,499

 

 

 

37,698

 

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

 

 

41,471

 

 

 

42,491

 

 

 

41,732

 

 

 

42,754

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

2

 


 

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

For the Six Months Ended June 30,

 

 

 

2016

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(72,468

)

 

$

(4,790

)

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

 

 

 

 

 

 

 

 

Amortization and depreciation

 

 

1,690

 

 

 

1,477

 

Impairment of goodwill

 

 

63,305

 

 

 

 

Allowance for doubtful accounts and advertiser credits

 

 

627

 

 

 

506

 

Stock-based compensation

 

 

5,467

 

 

 

2,338

 

Change in certain assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,307

)

 

 

2,955

 

Refundable taxes

 

 

3

 

 

 

4

 

Prepaid expenses, other current assets and other assets

 

 

(600

)

 

 

(391

)

Accounts payable

 

 

148

 

 

 

(1,702

)

Accrued expenses and other current liabilities

 

 

1,096

 

 

 

(875

)

Deferred revenue

 

 

(359

)

 

 

(12

)

Other non-current liabilities

 

 

(255

)

 

 

(134

)

Net cash used in operating activities

 

 

(2,653

)

 

 

(624

)

Investing Activities:

 

 

 

 

 

 

 

 

Cash paid for sale of Archeo assets

 

 

(224

)

 

 

 

Purchases of property and equipment

 

 

(362

)

 

 

(906

)

Purchases of intangible assets

 

 

(8

)

 

 

(6

)

Net cash used in investing activities

 

 

(594

)

 

 

(912

)

Financing Activities:

 

 

 

 

 

 

 

 

Tax withholding related to restricted stock awards

 

 

(94

)

 

 

 

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

 

 

328

 

 

 

15

 

Net cash provided by (used in) financing activities

 

 

(131

)

 

 

15

 

Net decrease in cash and cash equivalents

 

 

(3,378

)

 

 

(1,521

)

Cash and cash equivalents at beginning of period

 

 

109,155

 

 

 

103,950

 

Cash and cash equivalents at end of period

 

$

105,777

 

 

$

102,429

 

 

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 six months ended June 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, 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 has initiated an assessment of its revenue streams and a project plan for implementing these standards. The Company’s evaluation of the impact of the new standard is ongoing and 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.

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 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 use 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):

 

 

Six months ended

June 30,

 

 

Three months ended

June 30,

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Service costs

$

405

 

 

$

255

 

 

$

207

 

 

$

130

 

Sales and marketing

 

968

 

 

 

469

 

 

 

529

 

 

 

63

 

Product development

 

1,161

 

 

 

298

 

 

 

629

 

 

 

207

 

General and administrative

 

2,933

 

 

 

1,316

 

 

 

2,136

 

 

 

581

 

Total stock-based compensation

$

5,467

 

 

$

2,338

 

 

$

3,501

 

 

$

981

 

 

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 June 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:

 

 

Six months ended

June 30,

 

Three months ended

June 30,

 

2016

 

2017

 

2016

 

2017

Expected life (in years)

4.0-6.25

 

4.0-6.25

 

4.0-6.25

 

4.0-6.25

Risk-free interest rate

0.86%-1.15%

 

1.68%-1.94%

 

0.86%-1.15%

 

1.68-1.94%

Expected volatility

57%-58%

 

56-57%

 

57%-58%

 

56%

Expected dividend yield

0%

 

0%

 

0%

 

0%

 

Stock option activity during the six months ended June 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

 

 

1,097

 

 

 

2.71

 

 

 

 

 

 

Options forfeited

 

 

(698

)

 

 

4.21

 

 

 

 

 

 

Options expired

 

 

(1,609

)

 

 

6.07

 

 

 

 

 

 

Balance at June 30, 2017

 

 

6,468

 

 

$

5.78

 

 

 

6.09

 

 

 

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 six months ended June 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

 

 

341

 

 

 

2.73

 

Vested

 

 

(686

)

 

 

4.60

 

Forfeited

 

 

(531

)

 

 

4.20

 

Unvested balance at June 30, 2017

 

 

1,881

 

 

$

3.35

 

 

In the six months ended June 30, 2016, the Company repurchased approximately 23,000 shares from certain executives for minimum withholding taxes on approximately 80,000 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 $94,000, 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 table calculates net loss applicable to common stockholders used to compute basic loss per share for the periods ended (in thousands, except per share amounts):

 

7

 


 

 

 

Six months ended June 30,

 

 

 

 

2016

 

 

2017

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Basic net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(9,144

)

 

$

(63,324

)

 

$

(570

)

 

$

(4,220

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used to calculate

   basic net loss per share

 

 

5,233

 

 

 

36,238

 

 

 

5,056

 

 

 

37,435

 

 

Basic net loss per share applicable to common stockholders

 

$

(1.75

)

 

$

(1.75

)

 

$

(0.11

)

 

$

(0.11

)

 

 

 

 

 

Three months ended June 30,

 

 

 

 

2016

 

 

2017

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Basic net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(8,625

)

 

$

(60,166

)

 

$

(151

)

 

$

(1,129

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used to calculate

   basic net loss per share

 

 

5,233

 

 

 

36,499

 

 

 

5,056

 

 

 

37,698

 

 

Basic net loss per share applicable to common stockholders

 

$

(1.65

)

 

$

(1.65

)

 

$

(0.03

)

 

$

(0.03

)

 

 

The following table calculates net loss to net loss applicable to common stockholders used to compute diluted net loss per share for the periods ended (in thousands, except per share amounts):

 

 

 

Six months ended June 30,

 

 

 

 

2016

 

 

2017

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,144

)

 

$

(63,324

)

 

$

(570

)

 

$

(4,220

)

 

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

   of Class A to Class B shares

 

 

 

 

 

(9,144

)

 

 

 

 

 

(570

)

 

Net loss applicable to common stockholders

 

$

(9,144

)

 

$

(72,468

)

 

$

(570

)

 

$

(4,790

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used to calculate

   basic net loss per share

 

 

5,233

 

 

 

36,238

 

 

 

5,056

 

 

 

37,435

 

 

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

 

 

 

41,471

 

 

 

5,056

 

 

 

42,491

 

 

Diluted net loss per share applicable to common stockholders

 

$

(1.75

)

 

$

(1.75

)

 

$

(0.11

)

 

$

(0.11

)

 

 

8

 


 

 

 

Three months ended June 30,

 

 

 

 

2016

 

 

2017

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,625

)

 

$

(60,166

)

 

$

(151

)

 

$

(1,129

)

 

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

   of Class A to Class B shares

 

 

 

 

 

(8,625

)

 

 

 

 

 

(151

)

 

Net loss applicable to common stockholders

 

$

(8,625

)

 

$

(68,791

)

 

$

(151

)

 

$

(1,280

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used to calculate

   basic net loss per share

 

 

5,233

 

 

 

36,499

 

 

 

5,056

 

 

 

37,698

 

 

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

 

 

 

41,732

 

 

 

5,056

 

 

 

42,754

 

 

Diluted net loss per share applicable to common stockholders

 

$

(1.65

)

 

$

(1.65

)

 

$

(0.03

)

 

$

(0.03

)

 

 

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

 

For the three and six months ended June 30, 2016 and 2017, outstanding options to acquire 9,901 and 6,468 shares, respectively of Class B common stock.

 

For the three and six months ended June 30, 2016 and 2017, 1,467 and 467 shares of unvested Class B restricted common shares, respectively.

 

For the three and six months ended June 30, 2016 and 2017 2,115 and 1,414 restricted stock units, respectively.

 

 

(5) Concentrations

The Company maintains substantially all of its cash and cash equivalents with one financial institution 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 six months ended June 30, 2016 and 2017, the Company held cash equivalents in a commercial paper sweep account with the same financial institution. These Level 2 assets were fully liquidated prior to June 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 six months ended June 30, 2016 and 2017.

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

 

 

 

Six months ended

June 30,

 

 

Three months ended

June 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Advertiser A

 

 

24

%

 

 

22

%

 

 

24

%

 

 

22

%

Advertiser B

 

 

24

%

 

 

17

%

 

 

22

%

 

 

16

%

 

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 June 30,

2017

 

Advertiser A

 

 

11

%

 

 

21

%

Advertiser B

 

 

30

%

 

 

27

%

Advertiser C

 

 

15

%

 

 

11

%

 

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 20% and 21% of revenue for the three and six months ended June 30, 2016, respectively, and less than 10% and 10% of revenue for the three and six months ended June 30, 2017, respectively. This same advertising agency represented 26% and 14% of accounts receivable as of December 31, 2016 and June 30, 2017, respectively. One other advertising agency represented less than 10% of accounts receivable as of December 31, 2016, and 16% of accounts receivable as of June 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):

 

 

 

Six months ended

June 30,

 

 

Three months ended

June 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

United States

 

 

97

%

 

 

96

%

 

 

96

%

 

 

95

%

Canada

 

 

3

%

 

 

4

%

 

 

4

%

 

 

5

%

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 June 30,

2017

 

Computer and other related equipment

 

$

18,467

 

 

$

19,338

 

Purchased and internally developed software

 

 

6,811

 

 

 

6,811

 

Furniture and fixtures

 

 

1,493

 

 

 

1,493

 

Leasehold improvements

 

 

2,371

 

 

 

2,095

 

 

 

$

29,142

 

 

$

29,737

 

Less: Accumulated depreciation and amortization

 

 

(25,585

)

 

 

(26,775

)

Property and equipment, net

 

$

3,557

 

 

$

2,962

 

 

Depreciation and amortization expense related to property and equipment was approximately $808,000 and $724,000 for the three months ended June 30, 2016 and 2017, respectively, and was approximately $1.7 million and $1.5 million for the six months ended June 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

 

$

880

 

 

$

1,968

 

 

$

2,848

 

2018

 

 

1,438

 

 

 

1,940

 

 

 

3,378

 

2019

 

 

1,296

 

 

 

615

 

 

 

1,911

 

2020

 

 

1,520

 

 

 

1

 

 

 

1,521

 

2021 and after

 

 

6,983

 

 

 

 

 

 

6,983

 

Total minimum payments

 

$

12,117

 

 

$

4,524

 

 

$

16,641

 

 

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 $494,000 and $464,000 for the three months ended June 30, 2016 and 2017, respectively, and was approximately $986,000 and $953,000 for the six months ended June 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 June 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, which was 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 six months ended June 30, 2016, the Company repurchased 89,000 shares of Class B common stock for $363,000. The Company did not repurchase any Class B common stock for the six months ended June 30, 2017.

During the six months ended June 30, 2016, the Company’s board of directors approved and the Company retired approximately 210,000 shares of treasury stock.

 

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 media 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 inbound calls from consumers. Leveraging Marchex’s proprietary Call DNA® technology to aggregate and analyze call data, Marchex Speech Analytics includes dashboards and visual analytics to make it easier for marketers and call center teams to discern actionable insights.

 

Marchex Call Marketplace. Marchex Call Marketplace is a mobile advertising network for businesses that depend on inbound phone calls to drive sales. We offer advertisers ad placements across numerous mobile and online media sources to deliver qualified calls to their businesses. It leverages analytics for tracking, reporting and optimization. Advertisers are charged on a pay-per-call or cost per action basis.

 

Local Leads. Our local leads platform is a white-labeled, full service advertising solution for small business resellers, such as Yellow Pages providers and vertical marketing service providers, to sell call advertising, search marketing and other lead generation products through their existing sales channels to their small business advertisers. These calls and leads are then fulfilled by us across our distribution network, including mobile sources, and search engines. The lead services we offer to small business advertisers through our local leads platform include pay-for-call, search marketing and ad creation and include advanced features such as call tracking, geo-targeting, campaign management, reporting and analytics. The local leads platform is highly scalable and has the capacity to support hundreds of thousands of advertiser accounts. Reseller partners and publishers generally pay us account fees and agency fees for our products in the form of a percentage of the cost of every click or call delivered to their advertisers. Through our primary contract with Yellowpages.com LLC (“YP”), we generate revenues from our local leads platform. We also have a separate pay-for-call services arrangement with YP. In 2016, we extended these agreements through December 31, 2018. The primary local leads platform arrangement provides YP flexibility to migrate active accounts to itself or a third-party provider prior to the end of an advertiser contract and provides YP with certain termination rights beginning January 1, 2018 upon four months of notice. We also have a separate distribution partner agreement with YP. Dex Media, Inc. (“Dex”) recently acquired YP Holdings LLC (“YP Holdings”), which is the parent company of YP. We have a separate reseller partner arrangement with Dex for call advertising services. YP is our largest reseller partner and was responsible for 24% of our total revenues for both the three and six months ended June 30, 2016, respectively, and YP including Dex was 22% of our total revenues for both three and six months ended June 30, 2017.

We were incorporated in Delaware on January 17, 2003. Acquisition initiatives have played an important part in our corporate history to date.

We have offices in Seattle, Washington and New York, New York.

Consolidated Statements of Operations

All significant inter-company transactions and balances within Marchex have been eliminated in consolidation.

Presentation of Financial Reporting Periods

The comparative periods presented are for the three and six months ended June 30, 2016 and 2017.

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Revenue

We primarily generate our revenues from advertisers for use of our call analytics technology and pay-for-call advertising products and services. Our revenue also consists of payments from our reseller partners for use of our local leads platform and marketing services, which they offer to their small business customers, as well as payments from advertisers for cost-per-action services.

We recognize revenue upon the completion of our performance obligation, provided that: (1) evidence of an arrangement exists; (2) the arrangement fee is fixed and determinable; and (3) collection is reasonably assured.

In certain cases, we record revenue based on available and reported preliminary information from third parties. Collection on the related receivables may vary from reported information based upon third-party refinement of the estimated and reported amounts owed that occurs subsequent to period ends.

Performance-Based Advertising and Other Services

Our performance-based advertising services, which includes our call analytics technology and call marketplace services, amounted to greater than 80% of revenues in all periods presented. In addition, we generate revenue through our local leads platform, which enables partner resellers to sell call advertising and/or search marketing products, and campaign management services. These secondary sources accounted for less than 20% of our revenues in all periods presented. We have no barter transactions.

Our call analytics technology platform provides data and insights that can measure the performance of mobile, online and offline advertising for advertisers and small business resellers. We generate revenue from our call analytics technology platform when 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 a pre-negotiated rate.

Our call marketplace offers advertisers and adverting service providers’ ad placements across our distribution network. Advertisers or advertising service providers are charged on a pay-per-call or cost-per-action basis. We generate revenue upon delivery of qualified and reported phone calls to advertisers or advertising service providers’ listings. These advertisers and advertising service providers pay us a designated transaction fee for each qualified phone call, which occurs when a user makes a phone call, clicks, or completes a specified action on any of their advertisement listings after it has been placed by us or by our distribution partners. Each qualified phone call or specified action on an advertisement listing represents a completed transaction. We also generate revenue from cost-per-action, which occurs when a user makes a phone call from our advertiser’s listing or is redirected from one of our web sites or a third-party web site in our distribution network to an advertiser web site and completes the specified action.

Our local leads platform allows reseller partners to sell call advertising, search marketing, and other lead generation products through their existing sales channels to small business advertisers. We generate revenue from reseller partners utilizing our local leads platform and are paid account fees and also agency fees for our products in the form of a percentage of the cost of every call or click delivered to advertisers. The reseller partners engage the advertisers and are the primary obligor, and we, in certain instances, are only financially liable to the publishers in our capacity as a collection agency for the amount collected from the advertisers. We recognize revenue for these fees under the net revenue recognition method. In limited arrangements resellers pay us a fee for fulfilling an advertiser’s campaign in our distribution network and we act as the primary obligor. We recognize revenue for these fees under the gross revenue recognition method.

Industry and Market Factors

We enter into agreements with various mobile, online and offline distribution partners to provide distribution for pay-for- call advertisement listings which contain call tracking numbers and/or URL strings of our advertisers. We generally pay distribution partners based on a percentage of revenue or a fixed amount for each phone call on these listings. The level of phone calls contributed by our distribution partners has varied, and we expect it will continue to vary, from quarter to quarter and year to year, sometimes significantly. If we do not add new distribution partners or renew our existing distribution partner agreements and on terms as favorable as current arrangements, replace traffic lost from terminated distribution agreements with other sources, or if our distribution partners’ businesses do not grow or are adversely affected, our revenue and results of operations may be materially and adversely affected. Our ability to grow will be impacted by our ability to increase our distribution, which impacts the number of mobile and Internet users who have access to our advertisers’ listings and the rate at which our advertisers are able to convert calls from these mobile and Internet users into completed transactions, such as a purchase or sign up. Our ability to grow also depends on our ability to continue to increase the number of advertisers who use our products and services, the amount these advertisers spend on our products and services, advertiser adoption of new products and services and the amount these advertisers are willing to pay for these new products and services.

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We utilize phone numbers as part of our call analytics and pay-for-call services to advertisers, which enables advertisers and other users of our services to help measure the effectiveness of mobile, online, and offline advertising campaigns. If we are not able to secure or retain sufficient phone numbers needed for our services or we are limited in the number of available telecommunication carriers or vendors to provide such phone numbers to us in the event of any industry consolidation or if telecommunication carriers or vendors were to experience system disruptions, our revenue and results of operations may be materially and adversely affected.

We have revenue concentrations with certain large customers including reseller partners and advertising agencies. Many of these customers are not subject to long term contracts with us or have contracts with near term expiration dates, and are able to reduce or cease advertising spend at any time and for any reason. Reseller partners purchase various advertising and marketing services from us, as well as provide us with a large number of advertisers. A loss of certain reseller partners or a decrease in revenue from these resellers could adversely affect our business. In some cases, we engage with advertisers through advertising agencies, who act on behalf of the advertisers. Advertising agencies may place insertion orders with us for particular advertising campaigns for a set period of time and are not obligated to commit beyond the campaign governed by a particular insertion order and may also cancel the campaign prior to completion. Advertising agencies also have relationships with many different providers, each of whom may be running portions of the advertising campaign. We have call advertising arrangements with certain large customers, which provide flexibility around financial commitments, termination rights, indemnification, and security obligations. Our large customers may vary spend levels and there can be no assurances that our large customers will continue to spend at levels similar to prior quarters. If any of our largest customers are acquired, such acquisition may impact its advertising spending or budget with us, including due to rebranding, change in advertising agency, or change in media tactics. A significant reduction in advertising spending or budgets by our largest customers, or the loss of one or more of these customers, if not replaced by new customers or an increase in business from existing customers, would have a material adverse effect on our future operating results.

We anticipate that these variables will fluctuate in the future, affecting our ability to grow and our financial results. In particular, it is difficult to project phone call usage, the number of phone calls or other actions performed by users of our products and services, which will be delivered to our advertisers, and how much advertisers will spend with us and the amount they are willing to pay for our products and services. It is even more difficult to anticipate the average revenue per phone call or other performance-based actions. It is also difficult to anticipate the impact of worldwide and domestic economic conditions on advertising budgets.

In addition, we believe we will experience seasonality. Our quarterly results have fluctuated in the past and may fluctuate in the future due to seasonal fluctuations in levels of mobile and internet usage and seasonal purchasing cycles of many advertisers. Our experience has shown that during the spring and summer months, mobile and Internet usage is lower than during other times of the year and during the latter part of the fourth quarter of the calendar year we generally experience lower call volume and reduced demand for calls from our call advertising customers. The extent to which usage and call volume may decrease during these off-peak periods is difficult to predict. Prolonged or severe decreases in usage and call volume during these periods may adversely affect our growth rate and results and in turn the market price of our securities. Historically, we have seen in the first quarter of the calendar year, this trend generally reversing with increased mobile and internet usage and often new budgets at the beginning of the year for many of our customers with fiscal years ending December 31. However, there can be no assurances such seasonal trends will consistently repeat each year. The current business environment and our industry has generally both resulted in, and we may continue to see, many advertisers and reseller partners reducing advertising and marketing services budgets or adjusting such budgets throughout the year, changing marketing strategies or agency affiliations, or advertisers being acquired by parent companies with alternative media initiatives, which we expect will impact our quarterly results of operations in addition to the typical seasonality seen in our industry.

We believe that our future revenue growth will depend on, among other factors, our ability to attract new advertisers, compete effectively, maximize our sales efforts, demonstrate a positive return on investment for advertisers, successfully improve existing products and services, and develop successful new products and services. If we are unable to generate adequate revenue growth and to manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.

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Service Costs

Our service costs represent the cost of providing our performance-based advertising services and our search marketing services. The service costs that we have incurred in the periods presented primarily include:

 

user acquisition costs;

 

telecommunication costs, including the use of phone numbers relating to our call products and services;

 

colocation service charges of our network equipment;

 

bandwidth, network and software license fees;

 

network operations;

 

serving our search results;

 

payroll and related expenses of related personnel;

 

fees paid to outside service providers;

 

depreciation of our websites, network equipment and software;

 

delivering customer service;

 

license and content fees;

 

amortization of intangible assets;

 

maintaining our websites;

 

domain name registration renewal fees;

 

domain name costs;