Item 1. Condensed Consolidated Financial Statements
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
103,950
|
|
|
$
|
104,377
|
|
Accounts receivable, net
|
|
|
18,922
|
|
|
|
14,893
|
|
Prepaid expenses and other current assets
|
|
|
1,531
|
|
|
|
1,905
|
|
Refundable taxes
|
|
|
98
|
|
|
|
86
|
|
Total current assets
|
|
|
124,501
|
|
|
|
121,261
|
|
Property and equipment, net
|
|
|
3,557
|
|
|
|
2,538
|
|
Other assets, net
|
|
|
214
|
|
|
|
328
|
|
Total assets
|
|
$
|
128,272
|
|
|
$
|
124,127
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,811
|
|
|
$
|
5,265
|
|
Accrued expenses and other current liabilities
|
|
|
7,707
|
|
|
|
6,345
|
|
Deferred revenue
|
|
|
349
|
|
|
|
335
|
|
Total current liabilities
|
|
|
14,867
|
|
|
|
11,945
|
|
Other non-current liabilities
|
|
|
134
|
|
|
|
988
|
|
Total liabilities
|
|
|
15,001
|
|
|
|
12,933
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
|
53
|
|
|
|
53
|
|
Class B common stock
|
|
|
380
|
|
|
|
386
|
|
Additional paid-in capital
|
|
|
360,422
|
|
|
|
363,977
|
|
Accumulated deficit
|
|
|
(247,584
|
)
|
|
|
(253,222
|
)
|
Total stockholders’ equity
|
|
|
113,271
|
|
|
|
111,194
|
|
Total liabilities and stockholders’ equity
|
|
$
|
128,272
|
|
|
$
|
124,127
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
1
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Revenue
|
|
$
|
101,146
|
|
|
$
|
68,444
|
|
|
$
|
30,749
|
|
|
$
|
22,053
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs
|
|
|
60,964
|
|
|
|
37,690
|
|
|
|
18,505
|
|
|
|
11,917
|
|
Sales and marketing
|
|
|
16,733
|
|
|
|
12,075
|
|
|
|
5,562
|
|
|
|
3,612
|
|
Product development
|
|
|
21,859
|
|
|
|
13,809
|
|
|
|
6,832
|
|
|
|
4,256
|
|
General and administrative
|
|
|
15,815
|
|
|
|
10,568
|
|
|
|
5,320
|
|
|
|
3,144
|
|
Acquisition and disposition related costs
|
|
|
662
|
|
|
|
—
|
|
|
|
354
|
|
|
|
—
|
|
Total operating expenses
|
|
|
116,033
|
|
|
|
74,142
|
|
|
|
36,573
|
|
|
|
22,929
|
|
Impairment of goodwill
|
|
|
(63,305
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from operations
|
|
|
(78,192
|
)
|
|
|
(5,698
|
)
|
|
|
(5,824
|
)
|
|
|
(876
|
)
|
Other income (expense), net
|
|
|
(90
|
)
|
|
|
134
|
|
|
|
(15
|
)
|
|
|
77
|
|
Loss before provision for income taxes
|
|
|
(78,282
|
)
|
|
|
(5,564
|
)
|
|
|
(5,839
|
)
|
|
|
(799
|
)
|
Income tax expense
|
|
|
40
|
|
|
|
37
|
|
|
|
15
|
|
|
|
12
|
|
Net loss applicable to common stockholders
|
|
$
|
(78,322
|
)
|
|
$
|
(5,601
|
)
|
|
$
|
(5,854
|
)
|
|
$
|
(811
|
)
|
Basic and diluted net loss per Class A and Class B share applicable
to common stockholders
|
|
$
|
(1.88
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
Shares used to calculate basic net loss per share applicable to
common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
5,233
|
|
|
|
5,056
|
|
|
|
5,233
|
|
|
|
5,056
|
|
Class B
|
|
|
36,372
|
|
|
|
37,565
|
|
|
|
36,639
|
|
|
|
37,820
|
|
Shares used to calculate diluted net loss per share applicable
to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
5,233
|
|
|
|
5,056
|
|
|
|
5,233
|
|
|
|
5,056
|
|
Class B
|
|
|
41,605
|
|
|
|
42,621
|
|
|
|
41,872
|
|
|
|
42,876
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
2
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(78,322
|
)
|
|
$
|
(5,601
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
2,457
|
|
|
|
2,266
|
|
Impairment of goodwill
|
|
|
63,305
|
|
|
|
—
|
|
Allowance for doubtful accounts and advertiser credits
|
|
|
1,429
|
|
|
|
673
|
|
Loss on disposal of fixed assets
|
|
|
3
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
7,246
|
|
|
|
3,500
|
|
Change in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
1,612
|
|
|
|
3,356
|
|
Refundable taxes
|
|
|
10
|
|
|
|
12
|
|
Prepaid expenses, other current assets and other assets
|
|
|
(223
|
)
|
|
|
51
|
|
Accounts payable
|
|
|
(1,477
|
)
|
|
|
(1,525
|
)
|
Accrued expenses and other current liabilities
|
|
|
1,812
|
|
|
|
(1,003
|
)
|
Deferred revenue
|
|
|
(329
|
)
|
|
|
(14
|
)
|
Other non-current liabilities
|
|
|
(396
|
)
|
|
|
(23
|
)
|
Net cash provided by (used in) operating activities
|
|
|
(2,873
|
)
|
|
|
1,692
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Cash paid for sale of Archeo assets
|
|
|
(224
|
)
|
|
|
—
|
|
Purchases of property and equipment
|
|
|
(594
|
)
|
|
|
(1,274
|
)
|
Purchases of intangible assets
|
|
|
(11
|
)
|
|
|
(15
|
)
|
Net cash used in investing activities
|
|
|
(829
|
)
|
|
|
(1,289
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Tax withholding related to restricted stock awards
|
|
|
(154
|
)
|
|
|
—
|
|
Repurchase of Class B common stock
|
|
|
(365
|
)
|
|
|
—
|
|
Proceeds from exercises of stock options, issuance and vesting of restricted
stock and employee stock purchase plan, net
|
|
|
341
|
|
|
|
24
|
|
Net cash provided by (used in) financing activities
|
|
|
(178
|
)
|
|
|
24
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,880
|
)
|
|
|
427
|
|
Cash and cash equivalents at beginning of period
|
|
|
109,155
|
|
|
|
103,950
|
|
Cash and cash equivalents at end of period
|
|
$
|
105,275
|
|
|
$
|
104,377
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
MARCHEX, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Description of Business and Basis of Presentation
Marchex, Inc. (the “Company”) was incorporated in the state of Delaware on January 17, 2003. The Company is a call analytics company that helps businesses connect, drive, measure, and convert callers into customers. The Company provides products and services for businesses of all sizes that depend on calls to drive sales. The Company’s analytics technology can facilitate call quality, analyze calls and measure the outcomes of calls. The Company also delivers performance-based, pay-for-call advertising across numerous mobile and online publishers to connect consumers with businesses over the phone.
The accompanying unaudited condensed consolidated financial statements of Marchex, Inc. and its wholly-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or for any other period. The balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2016, as amended, and filed with the SEC.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
(2) Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from management’s estimates and assumptions.
Recent Accounting Pronouncement(s) Not Yet Effective
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606) (ASU 2014-09)
, which amends the existing accounting standards for revenue recognition. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled when products or services are transferred to customers. In July 2015, the FASB voted to approve a one-year delay of the effective date. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. In 2016, the FASB issued additional guidance to clarify the implementation guidance including ASU No. 2016-08,
Revenue from Contracts with Customers - Principal versus Agent Considerations
. This ASU clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09 and provides indicators that assist in the assessment of control. ASU 2014-09 allows adoption using either (i) a full retrospective approach for all periods presented in the period of adoption, or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of adoption and providing certain additional disclosures. The Company will adopt the new standard on January 1, 2018 using the modified retrospective approach. The Company’s evaluation of the impact of the new standard is ongoing and while it has not yet completed its assessment of the effect that ASU 2014-09 and related standards will have on its consolidated financial statements and related disclosures, the Company will be required to include additional disclosures in the notes to its consolidated financial statements.
4
In February 2016, the FASB issued Accounting Standards Update No. 2016-02
Leases (Topic 842) (ASU 2016-02)
, an ASU requiring the recognition of lease assets and lease liabilities on
the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted.
The Company currently plans to adopt the new standard on January 1, 2
019.
The ASU must be adopted using a modified retrospective approach. The Company anticipates that adoption will affect its statement of financial position and will require changes to some of its processes. Most significant to the Company, the new guidance
requires lessees to recognize operating building leases with a term of more than 12 months as lease assets and lease liabilities. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02
will have
on its consolidated
financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13),
an ASU amending the impairment model for most financial assets and certain other instruments. The ASU is effective for reporting periods beginning after December 15, 2019, with early adoption permitted after December 15, 2018. The ASU must be adopted using a modified-retrospective approach. The Company does not expect adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)
, an ASU which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The ASU must be adopted using retrospective approach. The Company does not expect adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16,
Income Taxes (Topic 740), Intra-Entity Transfers of Assets other than Inventory (ASU 2016-16)
, an ASU requiring the recognition of income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The ASU must be adopted using a modified retrospective approach. The Company does not expect adoption of ASU 2016-16 to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a Consensus of the FASB Emerging Issues Task Force) (ASU 2016-18)
, an ASU requiring entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The ASU must be adopted using retrospective approach. The Company does not expect adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01,
Business Combinations (Topic 805), Clarifying the Definition of a Business (ASU 2017-01),
an ASU changing the definition of a business to assist with evaluating whether a set of transferred assets and activities is a business. The ASU is effective for reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The ASU must be adopted using a prospective approach on or after the effective date. The Company does not expect adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09,
Compensation - Stock Compensation (Topic 718)
, Scope of Modification Accounting, an ASU clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The ASU should be adopted using a prospective approach on or after the adoption date. The Company does not expect adoption of ASU 2017-09 to have a material impact on its consolidated financial statements.
5
(3) Stock-based Compensation Plans
The Company grants stock-based awards, including stock options, restricted stock awards, and restricted stock units. The Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method.
On January 1, 2017, the Company adopted Accounting Standards Update No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
. This ASU impacts several aspects of accounting for share-based payment transactions, including certain income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Upon adoption, the Company elected to account for forfeitures as they occur and no longer uses an estimated forfeiture rate in the calculation of stock-based compensation expense. The net cumulative effect of this election was recognized as a $37,000 increase to accumulated deficit on January 1, 2017. Also under ASU 2016-09, excess tax benefits generated when stock-based awards vest or are settled are no longer recognized in equity but are instead recognized as a reduction to the provision for income taxes. On January 1, 2017, the Company recorded unrecognized excess tax benefits of $3.7 million to accumulated deficit, with a corresponding increase to the valuation allowance on deferred tax assets. This resulted in no net impact to equity due to the Company’s full valuation allowance.
Stock-based compensation expense was included in the following operating expense categories as follows (in thousands):
|
|
Nine months ended
September 30,
|
|
|
Three months ended
September 30,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
Service costs
|
|
$
|
565
|
|
|
$
|
385
|
|
|
$
|
160
|
|
|
$
|
130
|
|
|
Sales and marketing
|
|
|
1,321
|
|
|
|
768
|
|
|
|
353
|
|
|
|
299
|
|
|
Product development
|
|
|
1,367
|
|
|
|
497
|
|
|
|
206
|
|
|
|
199
|
|
|
General and administrative
|
|
|
3,993
|
|
|
|
1,850
|
|
|
|
1,060
|
|
|
|
534
|
|
|
Total stock-based compensation
|
|
$
|
7,246
|
|
|
$
|
3,500
|
|
|
$
|
1,779
|
|
|
$
|
1,162
|
|
|
The Company uses the Black-Scholes option pricing model to estimate the per share fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. For the quarters ended September 30, 2016 and 2017, the expected life of each award granted was determined based on historical experience with similar awards, giving consideration to contractual terms, anticipated exercise patterns, vesting schedules and expirations. Expected volatility is based on historical volatility levels of the Company’s Class B common stock and the expected volatility of companies in similar industries that have similar vesting and contractual terms. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option.
The following weighted average assumptions were used in determining the fair value of time-vested stock option grants for the periods presented:
|
|
Nine months ended
September 30,
|
|
Three months ended
September 30,
|
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Expected life (in years)
|
|
4.0-6.25
|
|
4.0-6.25
|
|
4.0
|
|
4.0-6.25
|
Risk-free interest rate
|
|
0.86%-1.15%
|
|
1.68%-1.96%
|
|
1.01%
|
|
1.71%-1.96%
|
Expected volatility
|
|
57%-58%
|
|
55%-56%
|
|
57%
|
|
55%
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Stock option activity during the nine months ended September 30, 2017 is summarized as follows:
|
|
Shares
(in thousands)
|
|
|
Weighted average
exercise price
|
|
|
Weighted average
remaining
contractual term
(in years)
|
|
|
Balance at December 31, 2016
|
|
|
7,678
|
|
|
$
|
5.97
|
|
|
|
5.07
|
|
|
Options granted
|
|
|
1,226
|
|
|
|
2.73
|
|
|
|
|
|
|
Options forfeited
|
|
|
(794
|
)
|
|
|
4.17
|
|
|
|
|
|
|
Options expired
|
|
|
(1,833
|
)
|
|
|
6.00
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
6,277
|
|
|
$
|
5.55
|
|
|
|
5.98
|
|
|
6
Restricted stock awards and restricted stock units are generally measured at fair value on the date of grant based on the number of awards granted and the quoted price of the Company’s common stock. Restricted stock units entitle the holder to
receive one share of the Company’s Class B common stock upon satisfaction of certain service conditions.
Restricted stock awards and restricted stock unit activity during the nine months ended September 30, 2017 is summarized as follows:
|
|
Shares/
Units
(in thousands)
|
|
|
Weighted
average
grant date
fair value
|
|
Unvested balance at December 31, 2016
|
|
|
2,757
|
|
|
$
|
3.90
|
|
Granted
|
|
|
622
|
|
|
|
2.82
|
|
Vested
|
|
|
(687
|
)
|
|
|
4.60
|
|
Forfeited
|
|
|
(563
|
)
|
|
|
4.16
|
|
Unvested balance at September 30, 2017
|
|
|
2,129
|
|
|
$
|
3.29
|
|
In the nine months ended September 30, 2016, the Company repurchased approximately 45,000 shares from certain executives for minimum withholding taxes on approximately 146,000 restricted stock award vests. The number of shares repurchased was based on the value on the vesting date of the restricted stock awards equivalent to the value of the executive’s minimum withholding taxes of $154,000, which was remitted in cash to the appropriate taxing authorities. The payments are reflected as a financing activity within the consolidated statement of cash flows when paid. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.
(4) Net Income (Loss) Per Share
The Company computes net income (loss) per share of Class A and Class B common stock using the two class method. Under the provisions of the two class method, basic net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding during the period. The computation of the diluted net income (loss) per share of Class B common stock assumes the conversion of Class A common stock to Class B common stock, while the diluted net income (loss) per share of Class A common stock does not assume the conversion of those shares.
In accordance with the two class method, the undistributed earnings (losses) for each year are allocated based on the contractual participation rights of the Class A and Class B common shares and the restricted shares as if the earnings for the year had been distributed. Considering the terms of the Company’s charter which provides that, if and when dividends are declared on our common stock in accordance with Delaware General Corporation Law, equivalent dividends shall be paid with respect to the shares of Class A common stock and Class B common stock and that both classes of common stock have identical dividend rights and would share equally in the Company’s net assets in the event of liquidation, the Company has allocated undistributed earnings (losses) on a proportionate basis.
Instruments granted in unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities prior to vesting. As such, the Company’s restricted stock awards are considered participating securities for purposes of calculating earnings per share.
The following tables present the computation of basic net loss per share applicable to common stockholders for the periods ended (in thousands, except per share amounts):
7
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Basic net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(9,850
|
)
|
|
$
|
(68,472
|
)
|
|
$
|
(665
|
)
|
|
$
|
(4,936
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate
basic net loss per share
|
|
|
5,233
|
|
|
|
36,372
|
|
|
|
5,056
|
|
|
|
37,565
|
|
|
Basic net loss per share applicable to common stockholders
|
|
$
|
(1.88
|
)
|
|
$
|
(1.88
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
Three months ended September 30,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Basic net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(732
|
)
|
|
$
|
(5,122
|
)
|
|
$
|
(96
|
)
|
|
$
|
(715
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate
basic net loss per share
|
|
|
5,233
|
|
|
|
36,639
|
|
|
|
5,056
|
|
|
|
37,820
|
|
|
Basic net loss per share applicable to common stockholders
|
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
The following tables present the computation of diluted net loss per share applicable to common stockholders for the periods ended (in thousands, except per share amounts):
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(9,850
|
)
|
|
$
|
(68,472
|
)
|
|
$
|
(665
|
)
|
|
$
|
(4,936
|
)
|
|
Reallocation of net loss for Class A shares as a result of conversion
of Class A to Class B shares
|
|
|
—
|
|
|
|
(9,850
|
)
|
|
|
—
|
|
|
|
(665
|
)
|
|
Diluted net loss applicable to common stockholders
|
|
$
|
(9,850
|
)
|
|
$
|
(78,322
|
)
|
|
$
|
(665
|
)
|
|
$
|
(5,601
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate
basic net loss per share
|
|
|
5,233
|
|
|
|
36,372
|
|
|
|
5,056
|
|
|
|
37,565
|
|
|
Conversion of Class A to Class B common shares outstanding
|
|
|
—
|
|
|
|
5,233
|
|
|
|
—
|
|
|
|
5,056
|
|
|
Weighted average number of shares outstanding used to calculate
diluted net loss per share
|
|
|
5,233
|
|
|
|
41,605
|
|
|
|
5,056
|
|
|
|
42,621
|
|
|
Diluted net loss per share applicable to common stockholders
|
|
$
|
(1.88
|
)
|
|
$
|
(1.88
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
8
|
|
Three months ended September 30,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(732
|
)
|
|
$
|
(5,122
|
)
|
|
$
|
(96
|
)
|
|
$
|
(715
|
)
|
|
Reallocation of net loss for Class A shares as a result of conversion
of Class A to Class B shares
|
|
|
—
|
|
|
|
(732
|
)
|
|
|
—
|
|
|
|
(96
|
)
|
|
Diluted net loss applicable to common stockholders
|
|
$
|
(732
|
)
|
|
$
|
(5,854
|
)
|
|
$
|
(96
|
)
|
|
$
|
(811
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate
basic net loss per share
|
|
|
5,233
|
|
|
|
36,639
|
|
|
|
5,056
|
|
|
|
37,820
|
|
|
Conversion of Class A to Class B common shares outstanding
|
|
|
—
|
|
|
|
5,233
|
|
|
|
—
|
|
|
|
5,056
|
|
|
Weighted average number of shares outstanding used to calculate
diluted net loss per share
|
|
|
5,233
|
|
|
|
41,872
|
|
|
|
5,056
|
|
|
|
42,876
|
|
|
Diluted net loss per share applicable to common stockholders
|
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
The computation of diluted net loss per share excludes the following because their effect would be anti-dilutive (in thousands):
|
•
|
For the three and nine months ended September 30, 2016 and 2017, outstanding options to acquire 9,191 and 6,277 shares, respectively of Class B common stock.
|
|
•
|
For the three and nine months ended September 30, 2016 and 2017, 1,221 and 748 shares of unvested Class B restricted common shares, respectively.
|
|
•
|
For the three and nine months ended September 30, 2016 and 2017, 1,734 and 1,381 restricted stock units, respectively.
|
(5) Concentrations
The Company maintains substantially all of its cash and cash equivalents with two financial institutions and are all considered at Level 1 fair value with observable inputs that reflect quoted prices for identical assets or liabilities in active markets. At various points during the nine months ended September 30, 2016 and 2017, the Company held cash equivalents in deposit sweep and money market accounts with these same financial institutions. These Level 2 assets were fully liquidated prior to September 30, 2016 and 2017.
A significant amount of the Company’s revenue earned from advertisers is generated through arrangements with distribution partners. The Company may not be successful in renewing any of these agreements, or, if they are renewed, they may not be on terms as favorable as current arrangements. The Company may not be successful in entering into agreements with new distribution partners or advertisers on commercially acceptable terms. In addition, several of these distribution partners or advertisers may be considered potential competitors. There were no distribution partners paid more than 10% of revenue for the three and nine months ended September 30, 2016 and 2017.
The advertisers representing more than 10% of revenue are as follows (in percentages):
|
|
Nine months ended
September 30,
|
|
|
Three months ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Advertiser A
|
|
|
23
|
%
|
|
|
22
|
%
|
|
|
22
|
%
|
|
|
21
|
%
|
Advertiser B
|
|
|
24
|
%
|
|
|
16
|
%
|
|
|
22
|
%
|
|
|
15
|
%
|
Advertiser A is also a distribution partner.
9
The outstanding receivable balance for each advertiser representing more than 10% of accounts receivable is as follows (in percentages):
|
|
At December
31,
2016
|
|
|
At
September 30,
2017
|
|
Advertiser A
|
|
|
11
|
%
|
|
|
20
|
%
|
Advertiser B
|
|
|
30
|
%
|
|
|
22
|
%
|
Advertiser C
|
|
|
15
|
%
|
|
|
16
|
%
|
In certain cases, the Company may engage directly with one or more advertising agencies who act on an advertiser’s behalf. In addition, an advertising agency may represent more than one advertiser that utilizes the Company’s products and services. One advertising agency represented 19% and 21% of revenue for the three and nine months ended September 30, 2016, respectively, and less than 10% of revenue for the three and nine months ended September 30, 2017, respectively. This same advertising agency represented 26% and 11% of accounts receivable as of December 31, 2016 and September 30, 2017, respectively. One other advertising agency represented less than 10% of accounts receivable as of December 31, 2016, and 11% of accounts receivable as of September 30, 2017.
(6) Segment Reporting and Geographic Information
Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for the Company’s management. For the periods presented, we primarily operated as a single segment. In 2016, we had other operating activities related to the transition activities of the Archeo operations which were not significant.
Revenues from advertisers by geographical areas are tracked on the basis of the location of the advertiser. The vast majority of the Company’s revenue and accounts receivable are derived from domestic sales to advertisers engaged in various mobile, online and other activities.
Revenues by geographic region are as follows (in percentages):
|
|
Nine months ended
September 30,
|
|
|
Three months ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
United States
|
|
|
97
|
%
|
|
|
96
|
%
|
|
|
97
|
%
|
|
|
96
|
%
|
Canada
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
4
|
%
|
Other countries
|
|
*
|
|
|
*
|
|
|
*
|
|
|
*
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
*
|
Less than 1% of revenue.
|
(7) Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
At December 31,
2016
|
|
|
At September 30,
2017
|
|
Computer and other related equipment
|
|
$
|
18,467
|
|
|
$
|
18,930
|
|
Purchased and internally developed software
|
|
|
6,811
|
|
|
|
6,687
|
|
Furniture and fixtures
|
|
|
1,493
|
|
|
|
1,071
|
|
Leasehold improvements
|
|
|
2,371
|
|
|
|
1,133
|
|
|
|
$
|
29,142
|
|
|
$
|
27,821
|
|
Less: Accumulated depreciation and amortization
|
|
|
(25,585
|
)
|
|
|
(25,283
|
)
|
Property and equipment, net
|
|
$
|
3,557
|
|
|
$
|
2,538
|
|
Depreciation and amortization expense related to property and equipment was approximately $762,000 and $786,000 for the three months ended September 30, 2016 and 2017, respectively, and was approximately $2.4 million and $2.3 million for the for the nine months ended September 30, 2016 and 2017, respectively.
10
(8) Commitments, Contingencies, Taxes and Other
(a) Commitments
The Company has commitments for future payments related to office facilities leases and other contractual obligations. The Company leases its office facilities under operating lease agreements and recognizes rent expense on a straight-line basis over the lease term with any lease incentive amortized as a reduction of rent expense over the lease term. Other contractual obligations primarily relate to minimum contractual payments due to distribution partners and other outside service providers. Future minimum payments are approximately as follows (in thousands):
|
|
Facilities
operating
leases
|
|
|
Other
contractual
obligations
|
|
|
Total
|
|
2017
|
|
$
|
288
|
|
|
$
|
1,052
|
|
|
$
|
1,340
|
|
2018
|
|
|
1,370
|
|
|
|
2,433
|
|
|
|
3,803
|
|
2019
|
|
|
1,476
|
|
|
|
809
|
|
|
|
2,285
|
|
2020
|
|
|
1,520
|
|
|
|
1
|
|
|
|
1,521
|
|
2021 and after
|
|
|
7,414
|
|
|
|
—
|
|
|
|
7,414
|
|
Total minimum payments
|
|
$
|
12,068
|
|
|
$
|
4,295
|
|
|
$
|
16,363
|
|
In June 2017, the Company entered into an amendment to the lease agreement originally dated in June 2009 and as amended to date, with respect to office space in Seattle, Washington. The amendment extends the lease term for a period of 84 months expiring on March 31, 2025 and reduces the leased office space starting on September 1, 2017. The Company has the option to terminate the lease in March 2023, subject to satisfaction of certain conditions, including a payment of a termination fee of approximately $671,000. In addition, the lessor will pay towards the cost of certain leasehold improvements (“landlord contribution”) of which the Company may use up to approximately $180,000 of any unused landlord contribution as a credit against any payment obligation under the lease. In March 2018, the lessor will refund the previously provided security deposit and the Company will provide a letter of credit to the lessor in the amount of $575,000, which will be reduced by $100,000 each March starting in 2019.
Rent expense incurred by the Company was approximately $559,000 and $651,000 for the three months ended September 30, 2016 and 2017, respectively, and was approximately $1.5 million and $1.6 for the nine months ended September 30, 2016 and 2017, respectively.
(b) Contingencies
The Company from time to time is a party to disputes and legal and administrative proceedings arising from the ordinary course of business. In some agreements to which the Company is a party, the Company has agreed to indemnification provisions of varying scope and terms with advertisers, vendors and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of agreements or representations and warranties made by the Company, services to be provided by the Company and intellectual property infringement claims made by third parties. As a result of these provisions, the Company may from time to time provide certain levels of financial support to our contract parties to seek to minimize the impact of any associated litigation in which they may be involved. To date, there have been no known events or circumstances that have resulted in any material costs related to these indemnification provisions and no liabilities therefore have been recorded in the accompanying consolidated financial statements. However, the maximum potential amount of the future payments we could be required to make under these indemnification provisions could be material.
While any litigation contains an element of uncertainty, the Company is not aware of any legal proceedings or claims which are pending that the Company believes, based on current knowledge, will have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or liquidity.
11
(c) Taxes
The Company determined that it is not more likely than not that its deferred tax assets will be realized and accordingly recorded 100% valuation allowance against these deferred tax assets as of December 31, 2016 and September 30, 2017. In assessing whether it is more likely than not that the Company’s deferred tax assets will be realized, factors considered included: historical taxable income, historical trends related to advertiser usage rates, projected revenues and expenses, macroeconomic conditions, issues facing the industry, existing contracts, the Company’s ability to project future results and any appreciation of its other assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considered the future reversal of deferred tax liabilities, carryback potential, projected taxable income, and tax planning strategies as well as its history of taxable income or losses in the relevant jurisdictions in making this assessment. Based on the level of historical taxable losses and the uncertainty of projections for future taxable income over the periods for which the deferred tax assets are deductible, the Company concluded that it is not more likely than not that the gross deferred tax assets will be realized.
The Company adopted ASU 2015-17 on January 1, 2017, which requires all deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet. The adoption of this standard did not have any impact on the Company’s financial statements due to the full valuation allowance recorded on our deferred taxes.
From time to time, various state, federal and other jurisdictional tax authorities undertake audits of the Company and its filings. In evaluating the exposure associated with various tax filing positions, the Company on occasion accrues charges for uncertain positions. Resolution of uncertain tax positions will impact our effective tax rate when settled. The Company does not have any significant interest or penalty accruals. The provision for income taxes includes the impact of contingency provisions and changes to contingencies that are considered appropriate. The Company files U.S. federal, certain U.S. states, and certain foreign tax returns. Generally, U.S. federal, U.S. state, and foreign tax returns filed for years after 2012 are within the statute of limitations and are under examination or may be subject to examination.
(d) Other
In the third quarter of 2016, the Company incurred approximately $1.6 million in employee separation and facility termination related costs. At December 31, 2016, $354,000 was accrued, of which substantially all was paid in the first half of 2017.
In the first quarter of 2017, the Company incurred approximately $700,000 of employee separation related costs as part of savings measures implemented in 2017, all of which were paid in the first half of 2017.
(9) Common Stock
In November 2014, the Company’s board of directors authorized a share repurchase program (the “2014 Repurchase Program”), which supersedes and replaces any prior repurchase programs. Under the 2014 Repurchase Program, the Company is authorized to repurchase up to 3 million shares of the Company’s Class B common stock in the aggregate through open market and privately negotiated transactions, at such times and in such amounts as the Company deems appropriate. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions. The 2014 Repurchase Program does not have an expiration date and may be expanded, limited or terminated at any time without prior notice. During the nine months ended September 30, 2016, the Company repurchased 89,000 shares of Class B common stock for $365,000. The Company did not repurchase any Class B common stock for the nine months ended September 30, 2017.
During the nine months ended September 30, 2016, and 2017, the Company’s board of directors approved and the Company retired approximately 250,000 and 239,000 shares of treasury stock, respectively.
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(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.
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Item 2. Management’s Discussion and Analysis of
Financial Con
dition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believes,” “intends,” “expects,” “anticipates,” “plans,” “may,” “will” and similar expressions to identify forward-looking statements. All forward-looking statements, including, but not limited to, statements regarding our future operating results, financial position, prospects, acquisitions, dispositions, and business strategy, expectations regarding our growth and the growth of the industry in which we operate, and plans and objectives of management for future operations, are inherently uncertain as they are based on our expectations and assumptions concerning future events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements we make. There are a number of important factors that could cause the actual results of Marchex to differ materially from those indicated by such forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including but not limited to the risks, uncertainties and assumptions described in this report, in Part II, Item 1A. under the caption “Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2016, as amended, and those described from time to time in our future reports filed with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur as contemplated and actual results could differ materially from those anticipated or implied by the forward-looking statements. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2016, as amended.
Overview
References herein to “we,” “us” or “our” refer to Marchex, Inc. and its wholly-owned subsidiaries unless the context specifically states or implies otherwise.
Marchex is a call analytics company that helps businesses connect, drive, measure and convert callers into customers.
We provide products and services for businesses of all sizes that depend on calls to drive sales. Our analytics products can provide actionable intelligence on the major media channels advertisers use to acquire customers over the phone.
Our primary product offerings are:
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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.
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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.
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Marchex Display and Video Analytics
. Marchex Display and Video Analytics is a pro
duct 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 Audience Targeting
.
Launched in July 2017, Marchex Audience Targeting leverages call data to automatically build audience segments for display and social media platforms. Marchex Audience Targeting helps marketers target high intent audiences with their display campaigns and fine-tune campaigns to specific audience segments that are most likely to convert to customers, or find new segments and opportunities that have not been targeted before.
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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.
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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 22% and 23% of our total revenues for the three and nine months ended September 30, 2016, respectively, and YP including Dex was 21% and 22% of our total revenues for the three and nine months ended September 30, 2017, respectively.
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Our Strategy
Key elements of our strategy include:
Innovating on Our Mobile Performance Advertising.
We plan to continue to expand our range of call-based advertising product capabilities and channel specific solutions by growing our call analytics offerings including number provisioning, call tracking, call mining, keyword-level tracking, display ad impression measurement and other products as part of our owned, end-to-end, call-based advertising solutions. To date in 2017, we launched several new products. These new products include: (1)
Display and Video Analytics
for general availability, which measures the impact of display and video advertising campaigns on inbound phone calls to call centers and stores; (2)
Marchex Omnichannel Analytics Cloud,
which can connect call data to media channels, including search, display and video, social and sites, to phone calls made to a business; (3)
Marchex Social Analytics,
which 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; (4)
Marchex Speech Analytics,
which helps companies understand what is happening on inbound calls from consumers; and (5)
Marchex Audience Targeting,
which leverages call data to automatically
15
build audience segments for disp
lay and social media platforms. Additional information regarding
our new product offerings in 2017 is included in the Overview section on page 15.
We are also focused on growing ou
r base of call distribution by bringing in new sources of the rapidly growing mobile advertising market as well as other online and offline sources of distribution.
Supporting and Growing the Number of Advertisers Using Our Products and Services.
We plan to continue to provide a consistently high level of service and support to our advertisers and we will continue to help them achieve their return on investment goals. We are focused on continuing to grow our advertiser base through our direct sales and marketing efforts, including strategic sales, inside sales, and additional partnerships with large local advertiser resellers.
Evolving Our Business Strategy.
Our industry is undergoing significant change and our business strategy is continuing to evolve to meet these changes. In order to profitably grow our business, we may need to expand into new lines of business beyond our current focus of providing mobile advertising analytics products and services, which may involve pursuing strategic transactions, including potential acquisitions of, or investments in, related or unrelated businesses. In addition, we may seek divestitures of existing businesses or assets.
Pursuing Selective Acquisition Opportunities.
We intend to pursue select acquisition opportunities and will apply rigorous evaluation criteria to any acquisitions we may pursue in order to enhance our strategic position, strengthen our financial profile, augment our points of defensibility and increase shareholder value. We will focus on acquisition opportunities that represent one or more of the following characteristics:
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revenue growth and expanding margins and operating profitability or the characteristics to achieve significant scale and profitability;
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opportunities for business model, product or service innovation, evolution or expansion;
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under-leveraged and under-commercialized assets in related or unrelated businesses;
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an opportunity to enhance efficiencies and provide incremental growth opportunities for our operating businesses; and
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business defensibility.
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Developing New Markets.
We intend to analyze opportunities and may seek to expand our technology-based products into new business areas where our services can be replicated on a cost-effective basis, or where the creation or development of a product or service may be appropriate. We have technology integration partnerships and referral agreements with Adobe, DoubleClick, and Salesforce and other third-party marketers; and in 2017, we signed an integration agreement with Facebook. We anticipate utilizing various strategies to enter new markets, including: developing strategic relationships; acquiring products that address a new category or opportunity; and creating joint venture relationships.
Building and Expanding Relationships with Advertising Agencies.
Advertising agencies are influential in determining how large national advertisers allocate their advertising budgets. We believe building deep relationships with leading global advertising agencies and creating awareness within these agencies about the benefits of our offerings is an important step in attracting new large advertising customers. We plan to continue building strong relationships with advertising agencies.
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 nine months ended September 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 or 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/or 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 telecom
munication 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 adv
ersely 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 this trend generally reversing in the first quarter of the calendar year 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.
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:
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user acquisition costs;
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telecommunication costs, including the use of phone numbers relating to our call products and services;
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colocation service charges of our network equipment;
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bandwidth, network and software license fees;
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serving our search results;
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payroll and related expenses of related personnel;
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fees paid to outside service providers;
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depreciation of our websites, network equipment and software;
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delivering customer service;
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license and content fees;
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amortization of intangible assets;
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maintaining our websites;
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domain name registration renewal fees;
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credit card processing fees; and
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stock-based compensation of related personnel.
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User Acquisition Costs
For the periods presented the largest component of our service costs consists of user acquisition costs that relate primarily to payments made to distribution partners for access to their mobile, online, offline, or other user traffic. We enter into agreements of varying durations with distribution partners that integrate our services into their web sites, indexes or other sources of user traffic. The primary economic structure of the distribution partner agreements is a variable payment based on a specified percentage of revenue.
These variable payments are often subject to minimum payment amounts per phone call or other action. Other payment structures that to a lesser degree exist include:
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variable payments based on a specified metric, such as number of paid phone calls or other actions;
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fixed payments, based on a guaranteed minimum amount of usage delivered; and
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a combination arrangement with both fixed and variable amounts that may be paid in advance.
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We expense user acquisition costs based on whether the agreement provides for variable or fixed payments. Agreements with variable payments based on a percentage of revenue, number of paid phone calls, or other metrics are expensed as incurred based on the volume of the underlying activity or revenue multiplied by the agreed-upon price or rate. Agreements with fixed payments with minimum guaranteed amounts of usage are expensed at the greater of the pro-rata amount over the term of arrangement or the actual usage delivered to date based on the contractual revenue share.
Sales and Marketing
Sales and marketing expenses consist primarily of:
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payroll and related expenses for personnel engaged in marketing and sales functions;
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advertising and promotional expenditures including online and outside marketing activities;
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cost of systems used to sell to and serve advertisers; and
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stock-based compensation of related personnel.
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Product Development
Product development costs consist primarily of expenses incurred in the research and development, creation and enhancement of our products and services.
Our research and development expenses include:
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payroll and related expenses for personnel;
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costs of computer hardware and software;
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costs incurred in developing features and functionality of the services we offer; and
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stock-based compensation of related personnel.
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For the periods presented, substantially all of our product development expenses are research and development. Product development costs are expensed as incurred or capitalized into property and equipment in accordance with FASB ASC 350,
Intangibles – Goodwill and Other
. This statement requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized.
General and Administrative
General and administrative expenses consist primarily of:
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payroll and related expenses for executive and administrative personnel;
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professional services, including accounting, legal and insurance;
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other general corporate expenses; and
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stock-based compensation of related personnel.
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Stock-Based Compensation
We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method. Beginning in the first quarter of 2017, we account for forfeitures as they occur, rather than estimate expected forfeitures. Stock-based compensation expense is included in the same lines as compensation paid to the same employees in the consolidated statements of operations.
Provision for Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in results of operations in the period that includes the enactment date. On January 1, 2017, previously unrecognized excess tax benefits of $3.7 million were recorded to accumulated deficit and an increase to our deferred tax assets with a corresponding change to the valuation allowance as a result of the adoption of ASU 2016-09. We also 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. Uncertain tax positions as of September 30, 2017 amounted to $1.1 million.
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At
September
30, 2017
, based upon both positive and negative evidence available, we determined that it is not more likely than not that
our deferred tax assets of $
4
7
.5
million will be realized and accordingly, we have recorded a 10
0% valuation allowance of $
4
7
.5
million against these deferred tax assets. This compares t
o a valuation allowance of $
4
4
.5
million at December 31, 2016. 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, we concluded that it is not more likely than not that the gross deferred tax assets will be realized. In assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some
or all of the deferred tax assets will be realized
.
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. We also considered the future re
versal 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.
We incurred taxable losses in 2014, 2
015, and 2016.
As of
September 30, 2017
, our federal NOL carry
forwards were approximately $
73.7
million for income tax purposes, which will begin to expire in 2026. As of
September 30, 2017
, our state, city, and other foreign jurisdiction NOL carry
forwards
were approximately $
5.4
million, which begin to expire in 2025.
From time to time, various state, federal, and other jurisdictional tax authorities undertake reviews of us and our filings. We believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to the financial statements.
Results of Operations
The following table presents certain of our operating results as a percentage of revenue for the periods indicated:
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Nine Months Ended
September 30,
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Three Months Ended
September 30,
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2016
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2017
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2016
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2017
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Revenue
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100
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%
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100
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%
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100
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%
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100
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%
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Expenses:
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Service costs
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60
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%
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55
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%
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60
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%
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54
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%
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Sales and marketing
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16
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%
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18
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%
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18
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%
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17
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%
|
Product development
|
|
|
22
|
%
|
|
|
20
|
%
|
|
|
22
|
%
|
|
|
19
|
%
|
General and administrative
|
|
|
16
|
%
|
|
|
15
|
%
|
|
|
18
|
%
|
|
|
14
|
%
|
Acquisition and disposition related costs
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
Total operating expenses
|
|
|
115
|
%
|
|
|
108
|
%
|
|
|
119
|
%
|
|
|
104
|
%
|
Impairment of goodwill
|
|
|
(63
|
%)
|
|
|
(—
|
%)
|
|
|
(—
|
%)
|
|
|
(—
|
%)
|
Loss from operations
|
|
|
(78
|
%)
|
|
|
(8
|
%)
|
|
|
(19
|
%)
|
|
|
(4
|
%)
|
Other expense
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Loss before provision for income taxes
|
|
|
(77
|
%)
|
|
|
(8
|
%)
|
|
|
(19
|
%)
|
|
|
(4
|
%)
|
Income tax expense
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Net loss applicable to common stockholders
|
|
|
(77
|
%)
|
|
|
(8
|
%)
|
|
|
(19
|
%)
|
|
|
(4
|
%)
|
Comparison of the three months ended September 30, 2016 to the three months ended September 30, 2017 and the nine months ended September 30, 2016 to the nine months ended September 30, 2017.
Revenue
Revenue decreased 28% from $30.7 million for the three months ended September 30, 2016 to $22.1 million in the same period in 2017. Revenue decreased 32% from $101.1 million for the for the nine months ended September 30, 2016 to $68.4 million in the same period in 2017. These decreases were due primarily to larger advertiser budget reductions for our pay-for-call services, and fewer accounts and related performance-based advertising and platform revenues from reseller partners like YP.
We expect our revenues to be lower in the near term compared to the most recent quarters with fewer small business accounts on our local leads platform and reduced demand for calls from our call advertising customers.
21
Under our primary contract with YP, we generate revenues from our local leads platform to sell call advertising
and/or search marketing packages through their existing sales channels, which are then fulfilled by us across our distribution network. We are paid account fees and agency fees for our products in the form of a percentage of the cost of every call or click
delivered to their advertisers. We also have a separate pay-for-call relationship with YP. We charge an agreed-upon price for qualified calls or leads from our network. In 2016, we extended these agreements through December 31, 2018. The primary local lea
ds 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 prior notic
e. We expect YP may decrease the number of new advertiser accounts with us and may elect to migrate certain active accounts to itself or a third-party provider which would result in fewer small business accounts and related revenues, as well as reduced con
tribution and profitability. YP’s small business account base utilizing our platform has declined, and to the extent declines occur in their business, their small business accounts may spend fewer dollars on our pay-for-call services. We expect YP and loca
l leads platform advertisers in future periods will comprise lower total revenues compared to previous periods and YP as a percentage of our total revenue may also comprise a smaller percentage of our total revenue with any revenue increase. We also have a
separate distribution partner agreement with YP.
Dex recently
acquired YP Holdings, which is the parent company of YP.
We
have a separate
partner reseller arrangement with Dex
for
call advertising
services
.
It is
possible
that this
acquisition
may result
in changes to our relationship and arrangement
s
with YP
and/or Dex
, including changes that may result in a significant reduction in the paid account fees and agency fees that we receive from YP.
There can be no assurance that our business with
YP and/or De
x
in the future will continue at or near current revenue and contribution levels, that we will be able to renew and extend the contracts, and if renewed, the contracts may be on less favorable terms to us, any of which could have a material adverse effect
on our future operating results.
YP
w
as
responsible for 2
2
%
and 23%
of our total revenues the three and
nine
months ended
September 30, 2016
, respectively,
and
YP including Dex was
21% and 22
%
for
the three and
nine
months ended
September 30, 2017
, respect
ively
.
We also have arrangements with advertising agencies, such as Resolution Media and OMD Digital, who act on an advertiser’s behalf and may represent more than one advertiser that utilizes our products and services. Our primary arrangement with Resolution Media is for pay-for-call services whereby we charge an agreed-upon price for qualified calls or leads from our network and call analytic services. Resolution Media accounted for 19% of total revenues and less than 10% of total revenues for the three months ended September 30, 2016 and 2017, respectively, and 21% and less than 10% of total revenues for the nine months ended September 30, 2016 and 2017, respectively, of which the majority of the revenues related to a single advertiser, State Farm. State Farm, who utilizes our services through Resolution Media and OMD Digital, accounted for 22% and 15% of total revenues for the three months ended September 30, 2016 and 2017, respectively, and 24% and 16% for the nine months ended September 30, 2016 and 2017, respectively. Resolution Media and OMD Digital place insertion orders for our services on behalf of State Farm for campaigns which are for a set period of time and/or budget level. We expect in the near to intermediate term campaign spend levels related to State Farm to be lower compared to previous quarters, which will result in lower total revenues and contribution.
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 may have contracts with near term expiration dates such as Yellow Pages Ltd (“YPG”), 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. We expect YPG local leads platform revenues to be lower prospectively compared to previous periods and to cease under the contractual arrangement by the end of 2017. 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, such as Resolution Media and OMD Digital, may place insertion orders with us on behalf of advertisers (including State Farm) 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, such as T-Mobile, 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 including T-Mobile 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.
22
Our ability to maintain and grow our revenues will depend in part on maintaining and increasing the number and volume of transactions with advertisers and advertising services provid
ers and maintaining and increasing the number of phone calls and the other actions performed by users of our services through our distribution partners. We believe this is dependent in part on delivering quality traffic that ultimately results in purchases
or conversions as well as providing through our call analytics platform quality data and insights that can measure the performance of advertising spend for our advertisers and advertising service providers. Our revenues are primarily generated using third
-party distribution networks to deliver the pay-for-call advertisers’ listings. The distribution network includes mobile and online search engine applications, directories, destination sites, shopping engines, third-party Internet domains or web sites, oth
er targeted Web-based content and offline sources. We generate revenue upon delivery of qualified and reported phone calls to our advertisers or to advertising services providers’ listings. We pay a revenue share to the distribution partners to access thei
r mobile, online, offline or other user traffic. We also generate revenue from cost-per-action services, 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 d
istribution network to an advertiser web site and completes the specified action. Other revenues include our call provisioning and call tracking services, local leads platform for resellers, and campaign management services. Companies distributing advertis
ing through mobile and internet based sources have experienced, and are likely to continue to experience consolidation. If we do not add new distribution partners or renew our existing distribution partner agreements and on terms as favorable as current ar
rangements, 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.
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 telecommunica
tion carriers or vendors were to experience system disruptions, our revenue and results of operations may be materially and adversely affected. In addition, if revenue grows and the volume of transactions and traffic increases, we will need to expand our n
etwork infrastructure. Inefficiencies in our network infrastructure to scale and adapt to higher call volumes could materially and adversely affect our revenue and results of operations.
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 this trend generally reversing in the first quarter of the calendar year 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.
23
Expenses
Expenses were as follows (in thousands):
|
|
Nine months ended September 30,
|
|
|
Three months ended September 30,
|
|
|
|
2016
|
|
|
% of
revenue
|
|
|
2017
|
|
|
% of
revenue
|
|
|
2016
|
|
|
% of
revenue
|
|
|
2017
|
|
|
% of
revenue
|
|
Service costs
|
|
$
|
60,964
|
|
|
|
60
|
%
|
|
$
|
37,690
|
|
|
|
55
|
%
|
|
$
|
18,505
|
|
|
|
60
|
%
|
|
$
|
11,917
|
|
|
|
54
|
%
|
Sales and marketing
|
|
|
16,733
|
|
|
|
16
|
%
|
|
|
12,075
|
|
|
|
18
|
%
|
|
|
5,562
|
|
|
|
18
|
%
|
|
|
3,612
|
|
|
|
17
|
%
|
Product development
|
|
|
21,859
|
|
|
|
22
|
%
|
|
|
13,809
|
|
|
|
20
|
%
|
|
|
6,832
|
|
|
|
22
|
%
|
|
|
4,256
|
|
|
|
19
|
%
|
General and administrative
|
|
|
15,815
|
|
|
|
16
|
%
|
|
|
10,568
|
|
|
|
15
|
%
|
|
|
5,320
|
|
|
|
18
|
%
|
|
|
3,144
|
|
|
|
14
|
%
|
Acquisition and disposition related costs
|
|
|
662
|
|
|
|
1
|
%
|
|
—
|
|
|
|
—
|
%
|
|
|
354
|
|
|
|
1
|
%
|
|
—
|
|
|
|
—
|
%
|
|
|
$
|
116,033
|
|
|
|
115
|
%
|
|
$
|
74,142
|
|
|
|
108
|
%
|
|
$
|
36,573
|
|
|
|
119
|
%
|
|
$
|
22,929
|
|
|
|
104
|
%
|
We record stock-based compensation expense under the fair value method. Stock-based compensation expense was included in the following operating expense categories as follows (in thousands):
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Service costs
|
|
$
|
565
|
|
|
$
|
385
|
|
|
$
|
160
|
|
|
$
|
130
|
|
Sales and marketing
|
|
|
1,321
|
|
|
|
768
|
|
|
|
353
|
|
|
|
299
|
|
Product development
|
|
|
1,367
|
|
|
|
497
|
|
|
|
206
|
|
|
|
199
|
|
General and administrative
|
|
|
3,993
|
|
|
|
1,850
|
|
|
|
1,060
|
|
|
|
534
|
|
Total stock-based compensation
|
|
$
|
7,246
|
|
|
$
|
3,500
|
|
|
$
|
1,779
|
|
|
$
|
1,162
|
|
See
Note 3. Stock-based Compensation Plans
of the Notes to Condensed Consolidated Financial Statements as well as our Critical Accounting Policies for additional information about stock-based compensation.
Service Costs
. Service costs decreased 36% from $18.5 million for the three months ended September 30, 2016 to $11.9 million in the same period in 2017. As a percentage of revenues, service costs were 60% and 54% for the three months ended September 30, 2016 and 2017, respectively. The decrease in dollars was primarily due to a decrease in distribution partner payments, personnel costs, and communication and network costs totaling $6.5 million. The decrease as a percentage of revenue was primarily a result of lower distribution partner payments and decreases in overall operating costs.
Service costs decreased 38% from $61.0 million for the nine months ended September 30, 2016 to $37.7 million in the same period in 2017. As a percentage of revenues, service costs were 60% and 55% for the nine months ended September 30, 2016 and 2017, respectively. The decrease in dollars was primarily due to a decrease in distribution partner payments, personnel and outside service provider costs, stock-based compensation, and communication and network costs totaling $23.0 million. The decrease as a percentage of revenue was primarily a result of lower distribution partner payments and decreases in overall operating costs.
We expect that user acquisition costs and revenue shares to distribution partners are likely to increase prospectively given the competitive landscape for distribution partners. To the extent that payments to pay-for-call, or cost-per-action distribution partners make up a larger percentage of future operations, or the addition or renewal of existing distribution partner agreements are on terms less favorable to us, we expect that service costs will increase as a percentage of revenue. To the extent of revenue declines in these areas, we expect revenue shares to distribution partners to decrease in absolute dollars. Our other sources of revenues, such as our local leads platform have no corresponding distribution partner payments and accordingly have a lower service cost as a percentage of revenue relative to our overall service cost percentage. In addition, advertisers from whom we generate a portion of our call advertising revenues through our local leads platform generally have lower service costs as a percentage of revenue relative to our overall service cost percentage. To the extent our local leads platform makes up a smaller percentage of our future operations, we expect that service costs will increase as a percentage of revenue. We expect in the near and intermediate term for service costs as a percentage of revenue and in absolute dollars to be relatively stable relative to the most recent quarterly periods. We also expect service costs in absolute dollars to increase over the longer term in connection with any revenue increase and expansion in our communication and network infrastructure.
Sales and Marketing
. Sales and marketing expenses decreased 35% from $5.6 million for the three months ended September 30, 2016 to $3.6 million in the same period in 2017. The decrease was primarily due to a decrease in personnel costs and travel costs totaling $1.9 million. As a percentage of revenue, sales and marketing expenses were relatively flat at 18% and 17% for the three months ended September 30, 2016 and 2017.
24
Sales an
d marketing expenses
decreased
28%
from
$16.7
million
for the nine months ended September 30, 2016
to
$12.1
mi
llion in the same peri
od in
2017
. The
net
decrease
in dollars was primarily attributable to a
de
crease in personnel costs
which included $307,000
of employee separation related costs
in the 2017 period
,
stock-based compensation,
and
travel costs
totaling
$
4.3
million
.
As a
percentage of revenue, sale
s and marketing expenses were
16%
and
18%
for the nine months ended September 30, 2016
and
2017
,
respectively.
The
increase as a
percentage of
revenue was
primarily
attributable to lower revenues in 2017.
We expect some volatility in sales and marketing expenses based on the timing of marketing initiatives but expect sales and marketing expenses in the near and intermediate term to be relatively stable to modestly lower in absolute dollars relative to the most recent quarterly periods. We expect that sales and marketing expenses will increase in connection with any revenue increase to the extent that we also increase our marketing activities and correspondingly could increase as a percentage of revenue.
Product Development
. Product development expenses decreased 38% from $6.8 million for the three months ended September 30, 2016 to $4.3 million in the same period in 2017. As a percentage of revenue, product development expenses were 22% and 19% for the three months ended September 30, 2016 and 2017, respectively. The net decrease in dollars and percentage was primarily due to a decrease in personnel and outside service provider costs and travel costs of $2.6 million.
Product development expenses decreased 37% from $21.9 million for the nine months ended September 30, 2016 to $13.8 million in the same period in 2017. As a percentage of revenue, product development expenses were 22% and 20% for the nine months ended September 30, 2016 and 2017, respectively. The net decrease in dollars and percentage was primarily due to a decrease in personnel costs, which included $358,000 of employee separation related costs in the 2017 period, stock-based compensation, and travel costs totaling $8.2 million.
We expect product development expenditures to be stable to modestly lower in the near and intermediate term in absolute dollars relative to our most recent quarterly periods. In the longer term, to the extent our revenues increase, we expect that product development expenses will increase in absolute dollars as we increase the number of personnel and consultants to enhance our service offerings and as a result of additional stock-based compensation expense.
General and Administrative
. General and administrative expenses decreased 41% from $5.3 million for the three months ended September 30, 2016 to $3.1 million in the same period in 2017. As a percentage of revenue, general and administrative expenses were 18% and 14% for the three months ended September 30, 2016 and 2017, respectively. The net decrease in dollars and percentage was primarily due to a decrease in personnel and outside service provider costs, stock-based compensation, and professional fees totaling $2.2 million.
General and administrative expenses decreased 33% from $15.8 million for the nine months ended September 30, 2016 to $10.6 million in the same period in 2017. The net decrease in dollars was primarily due to a decrease in personnel and outside service provider costs, stock-based compensation, and professional fees totaling $5.3 million. As a percentage of revenue, general and administrative expenses were relatively flat at 16% and 15% for the nine months ended September 30, 2016 and 2017, respectively.
We expect our general and administrative expenses to be stable in the near term relative to our most recent quarterly periods. We expect that our general and administrative expenses will increase in the longer term to the extent that we expand our operations, and incur additional costs in connection with being a public company, including expenses related to professional fees and insurance, and as a result of stock-based compensation expense. We also expect fluctuations in our general and administrative expenses to the extent the recognition timing of stock compensation is impacted by market conditions relating to our stock price and forfeitures.
Impairment of goodwill
. For the three months ended June 30, 2016, our stock price was impacted by volatility in the U.S. financial markets, and traded below the then book value for an extended period of time. Accordingly, we tested goodwill for impairment and concluded that the carrying value exceeded the estimated fair value of our single reporting unit and recognized an impairment loss during the second quarter of 2016 of $63.3 million reducing our goodwill to $0 on our balance sheet. The estimated fair value of our single reporting unit was based on estimates of future operating results, discounted cash flows and other market-based factors, including our stock price. The goodwill impairment loss resulted primarily from a sustained decline in our 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.
Income Taxes
. Income tax expense for the three months ended September 30, 2016 and 2017 was $15,000 and $12,000, respectively, and for the nine months ended September 30, 2016 and 2017 was $40,000 and $37,000, respectively. Income tax expense consisted of state income taxes for all periods. The effective tax rate differed from the expected tax rate of 34% due to a full valuation allowance and to a lesser extent due to state income taxes, non-deductible stock-based compensation related to incentive stock options recorded under the fair-value method, federal research and development credits, and other non-deductible amounts.
25
Net Loss.
Net
loss
was
(
$
5.9
)
million and
(
$
7
8.3
)
million in the three and
nine
months ended
September
30, 201
6
, respectively,
and was ($
811,000
) and ($
5.6
) mil
lion in the
same periods in 2017,
respectively.
The reduction in loss was primarily
attributable to a goodwill impairment charge in the second quarter of 2016 in the amount of $63.3 million. The
reduction in loss
to a lesser extent was
due to the effect of fewer perso
nnel, lower distribution partner payments and
lower
overall operating costs
in 2017,
which were partially offset by lower revenues and $700,000 of employee related separation costs.
Liquidity and Capital Resources
As of September 30, 2017, we had cash and cash equivalents of $104.4 million and we had current and long term contractual obligations of $16.4 million, of which $12.1 million is for rent under our facility leases.
Cash provided by operating activities for the nine months ended September 30, 2017 of approximately $1.7 million consisted primarily of a net loss of $5.6 million, adjusted for non-cash items of $6.4 million, which primarily includes depreciation and amortization, allowance for doubtful accounts and advertiser credits, and stock-based compensation, and approximately $854,000 provided by working capital and other activities.
Cash used in operating activities for the for the nine months ended September 30, 2016 of approximately $2.9 million consisted primarily of a net loss of $78.3 million, adjusted for non-cash items of $74.4 million, including impairment of goodwill of $63.3 million, depreciation and amortization, allowance for doubtful accounts and advertiser credits, stock-based compensation, and approximately $1.0 million provided by working capital and other activities.
With respect to a majority of our call-based advertising services, the amount payable to our distribution partners will be calculated at the end of a calendar month, with a payment period following the delivery of the phone calls or other actions. These services constituted a significant portion of revenues for the three and nine months ended September 30, 2016 and 2017. We generally receive payment from advertisers in close proximity to the timing of the corresponding payments to the distribution partners who provide calls, other delivery actions, or placement for the listings. In certain cases, payments to distribution partners are paid in advance or are fixed in advance based on a guaranteed minimum amount of usage delivered. We have no corresponding payments to distribution partners related to our local leads platform.
Nearly all of our reseller partner arrangements are billed on a monthly basis following the month of our phone call or other action delivery. This payment structure results in our advancement of monies to the distribution partners who have provided the corresponding calls, other delivery actions, or placements of the listings. For these services, reseller partner payments are generally received two to four weeks following payment to the distribution partners. We also have payment arrangements with advertising agencies whereby we receive payment after the agency’s advertiser pays the agency, which is generally between 60 and 120 days or longer, following the delivery of services. We expect that in the future periods, if the amounts from our reseller partner and agency arrangements account for a greater percentage of our operating activity, working capital requirements will increase as a result.
We have payment arrangements with reseller partners, such as YP and/or Dex, CDK Global, hibu Inc., and Web.com whereby we receive payment generally between 30 and 60 days following the delivery of services. We also have payment arrangements with Resolution Media and OMD Digital, advertising agencies related to our call advertising services, whereby we receive payment when the agency’s advertiser pays the agency, which is generally between 60 and 90 days following the delivery of services and in some instances may take longer. For the nine months ended and as of September 30, 2017, amounts from these partners and agencies totaled 46% of total revenue and $7.3 million in net accounts receivable. Based on the timing of payments, we generally have this level of amounts in outstanding accounts receivable at any given time from these partners and advertising agencies. A single advertiser, State Farm, who represented the majority of the revenue and accounts receivable generated by Resolution Media and OMD Digital, accounted for 16% of total revenues and 22% of accounts receivable for the nine months ended and as of September 30, 2017, respectively. We expect campaign spend levels related to State Farm to be lower compared to previous periods, which will result in lower total revenues and
contributions. For the nine months ended and as of September 30, 2017, amounts from these resellers and agencies along with T-Mobile accounted for 56% of total revenue and $9.7 million in net accounts receivable.
26
In 2016, we extended our
local leads platform and pay-for-call services agreements with YP 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 advertis
er contract and provides YP with certain termination rights beginning January 1, 2018 upon four-months prior notice. We also have a separate distribution partner agreement with YP.
We expect YP and local leads platform advertisers in future periods will co
mprise lower total revenues compared to previous periods.
Dex r
ecently acquired YP Holdings
, which is the parent company of YP.
We
have a separate
partner reseller arrangement with Dex
for
call advertising
services. It is
possible th
at this
acquisition
may
result in changes to our relationship and arrangement
s
with YP
and/or Dex
, including changes that may result in a significant reduction in the paid account fees and agency fees that we receive from YP.
There can be no assurance that our business with
YP a
nd/or Dex
in the future will continue at or near current revenue and contribution levels, that we will be able to renew and extend the contracts, and if renewed, the contracts may be on less favorable terms to us, any of which could have a material adverse
effect on our future operating results. Net accounts receivable balances outstanding as of
September 30, 2017
from YP
including Dex
totaled $
3.
0
million.
We have revenue concentrations with certain large advertisers 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 such as YPG, and are generally able to reduce or cease advertising spending at any time and for any reason. Reseller partners purchase various advertising and marketing services, as well as provide us with a large number of advertisers. We expect YPG local leads platform revenues to be lower prospectively compared to previous periods and to cease under the contractual arrangement by the end of 2017. 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, such as Resolution Media and OMD Digital, may place insertion orders with us on behalf of advertisers (including State Farm) 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, such as T-Mobile, 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 including T-Mobile 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 adversely affect revenues and profitability. This could have a material adverse effect on our results of operations and financial condition. There can be no assurances that these partners or other advertisers will not experience financial difficulty, curtail operations, reduce or eliminate spend budgets, change marketing strategies or agency affiliations, be acquired by parent companies with alternative media tactics, delay payments or otherwise forfeit balances
owed.
Cash used in investing activities for the nine months ended September 30, 2017 of approximately $1.3 million was primarily attributable to purchases for property and equipment. Cash used in investing activities for the nine months ended September 30, 2016 of approximately $829,000 was primarily attributable to purchases for property and equipment of approximately $594,000 and cash paid for costs incurred as a result of the sale of the remaining Archeo assets of $224,000.
We expect property and equipment purchases in the near and intermediate term to be stable to relatively higher compared to our most recent periods. We expect any increase to our operations to have a corresponding increase in expenditures for our systems and personnel. We expect our expenditures for product development initiatives and internally developed software will be stable to modestly higher in the near and intermediate term and increase in the longer term in absolute dollars with any acceleration in development activities and as we increase the number of personnel and consultants to enhance our service offerings. In the intermediate to long term, we also expect to increase the number of personnel supporting our sales, marketing and related growth
initiatives.
Cash provided by financing activities for the nine months ended September 30, 2017 of approximately $24,000 was primarily attributable to proceeds from the employee stock purchase plan. Cash used in financing activities for the nine months ended September 30, 2016 of approximately $178,000 was primarily attributable to repurchases of 89,000 shares of Class B common stock for treasury and minimum tax withholding payments related to certain executive restricted stock award vests totaling $519,000, which was partially offset by proceeds primarily from employee stock option exercises and the employee stock purchase plan of $341,000.
The following table summarizes our contractual obligations as of September 30, 2017, and the effect these obligations are expected to have on our liquidity and cash flows in future periods (in thousands).
27
|
|
Total
|
|
|
Less than
1
year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
12,068
|
|
|
$
|
1,297
|
|
|
$
|
2,974
|
|
|
$
|
7,797
|
|
Other contractual obligations
|
|
|
4,295
|
|
|
|
3,124
|
|
|
|
1,171
|
|
|
|
—
|
|
Total contractual obligations (1)
|
|
$
|
16,363
|
|
|
$
|
4,421
|
|
|
$
|
4,145
|
|
|
$
|
7,797
|
|
(
1)
|
Our tax contingencies of $1.1 million are not included due to their uncertainty.
|
We anticipate that we will need to invest working capital towards the development of our overall operations and to fund any losses from operations, and we expect that capital expenditures may increase in future periods, particularly with any increase in our operating activities. We may also pursue a significant number of acquisitions. As a result, we could experience a reduction of our cash balances or the incurrence of debt.
In November 2014, our board of directors authorized a new share repurchase program (the “2014 Repurchase Program”) which supersedes and replaces any prior repurchase programs. Under the 2014 Repurchase Program, we are authorized to repurchase up to 3 million shares of our Class B common stock in the aggregate through open market and privately negotiated transactions, at such times and in such amounts as we deem appropriate. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we 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. We have made no repurchases under the 2014 Repurchase Program for the for the nine months ended September 30, 2016 and 2017.
Based on our operating plans we believe that our resources will be sufficient to fund our operations for at least twelve months as well as potential strategic initiatives which could include acquisitions and/or a partial return of capital to our stockholders. Additional equity and debt financing may be needed to support our acquisition strategy, our long-term obligations and our company’s needs. There can be no assurance that, if we needed additional funds, financing arrangements would be available in amounts or on terms acceptable to us, if at all. Failure to generate sufficient revenue or raise additional capital could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives.
Critical Accounting Policies
The policies below are critical to our business operations and the understanding of our results of operations. In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of our results.
Our condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States for interim financial information. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies relate to the following matters and are described below:
|
•
|
Stock-based compensation;
|
|
•
|
Allowance for doubtful accounts and advertiser credits; and
|
|
•
|
Provision for income taxes.
|
Revenue
We currently generate revenue by delivering call advertising services that enable advertisers of all sizes to reach consumers across online, mobile and offline sources. Our primary source of revenue is performance-based advertising, which includes pay-for-call advertising and cost-per-action services. For pay-for-call advertising, revenue is recognized upon delivery of qualified and reported phone calls or other action to our advertisers or advertising service providers’ listing which occurs when a mobile, online or
28
offline user makes a phone call or clicks on any
of their advertisements after it has been placed by us or by our distribution partners. Each phone call or other action on an advertisement listing represents a completed transaction. For cost-per-action services, revenue is recognized when a user makes a
phone call from our advertiser’s listing or is redirected from one of our websites or a third-party website in our distribution network to an advertiser website and completes the specified action
.
We have entered into agreements with various distribution partners in order to expand our distribution network, which includes search engines, directories, product shopping engines, third-party vertical and branded websites, and mobile and offline sources. We generally pay distribution partners based on a specified percentage of revenue or a fixed amount per phone call or other action on these listings. We act as the primary obligor in these transactions, and we are responsible for providing customer and administrative services to the advertiser. In accordance with FASB ASC 605,
Revenue Recognition
the revenue derived from advertisers who receive paid introductions through us as supplied by distribution partners is reported gross based upon the amounts received from the advertiser. We also recognize revenue for certain agency contracts with advertisers under the net revenue recognition method. Under these specific agreements, we purchase listings on behalf of advertisers from search engines and directories. We are paid account fees and also agency fees based on the total amount of the purchase made on behalf of these advertisers. Under these agreements, our advertisers are primarily responsible for choosing the publisher and determining pricing, and we, in certain instances, are only financially liable to the publisher for the amount collected from our advertisers. This creates a sequential liability for media purchases made on behalf of advertisers. In certain instances, the web publishers engage the advertisers directly and we are paid an agency fee based on the total amount of the purchase made by the advertiser. 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.
When an arrangement involves multiple deliverables, the entire fee from the arrangement is allocated to each respective deliverable based on its relative selling price and recognized when revenue recognition criteria for each deliverable are met. The selling price for each deliverable is established based on the sales price charged when the same deliverable is sold separately, the price at which a third-party sells the same or similar and largely interchangeable deliverable on a standalone basis or the estimated selling price if the deliverable were to be sold separately.
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.
Stock-Based Compensation
FASB ASC 718,
Compensation – Stock Compensation
requires the measurement and recognition of compensation for all stock-based awards made to employees, non-employees and directors including stock options, restricted stock issuances, and restricted stock units be based on estimated fair values. Beginning January 1, 2017, we account for forfeitures as they occur, rather than estimating expected forfeitures. We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method.
We generally use the Black-Scholes option pricing model as our method of valuation for stock-based awards with time- based vesting. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected life of the award, our expected stock price, volatility over the term of the award and actual and projected exercise behaviors.
Although the fair value of stock-based awards is determined in accordance with FASB ASC 718,
Compensation – Stock Compensation
, the assumptions used in calculating fair value of stock-based awards and the use of the Black-Scholes option pricing model is highly subjective, and other reasonable assumptions could provide differing results. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. See Note 3 Stock-based Compensation Plans in the Condensed Notes to Consolidated Financial Statements for additional information.
Allowance for Doubtful Accounts and Advertiser Credits
Accounts receivable balances are presented net of allowance for doubtful accounts and advertiser credits. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable. We determine our allowance based on analysis of historical bad debts, advertiser concentrations, advertiser creditworthiness and current economic trends. We review the allowance for collectability on a quarterly basis. Account balances are written off against the allowance after all reasonable means of collection have been exhausted and the potential recovery is considered remote. If the financial condition of our advertisers were to deteriorate, resulting in an impairment of their ability to make payments, or if we underestimated the allowances required,
29
additional allowances may be required which would result in increased general and administrative expenses in the period such determination was made.
We determine our allowance for advertiser credits and adjustments based upon our analysis of historical credits. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments and estimates.
Provision for Income Taxes
We are subject to income taxes in the U.S. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in results of operations in the period that includes the enactment date. On January 1, 2017, previously unrecognized excess tax benefits of $3.7 million were recorded to accumulated deficit and an increase to our deferred tax assets with a corresponding change to the valuation allowance as a result of the adoption of ASU 2016-09. We also 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. Uncertain tax positions as of September 30, 2017 amounted to $1.1 million.
We determined that it is not more likely than not that its deferred tax assets will be realized and accordingly recorded 100% valuation allowance against these deferred tax assets as of December 31, 2016 and September 30, 2017. In assessing whether it is more likely than not that our 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, our 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. We 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, we concluded that it is not more likely than not that the gross deferred tax assets will be realized.
Recent Accounting Pronouncement 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. ASU 2014-09 may be applied 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. 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 No. 2014-09 and provides indicators that assist in the assessment of control. We will adopt the new standard on January 1, 2018 using the modified retrospective approach. Our evaluation of the impact of the new standard is ongoing and while we have not yet completed our assessment of the effect that ASU No. 2014-09 and related standards will have on our consolidated financial statements and related disclosures, we will be required to include additional disclosures in the notes to our consolidated financial statements.
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. We currently plan to adopt the new standard on January 1, 2019. The ASU must be adopted using a modified retrospective approach. We anticipate that adoption will affect our statement of financial position and will require changes to some of our processes. Most significant to us, the new guidance requires lessees to recognize operating building leases with a
30
term of more than 12 months as lease assets and lease liabilities. We are currentl
y in the process of evaluating the impact of adoption of ASU 2016-02
will have
on our 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. We do not expect adoption of ASU 2016-13 to have a material impact on our 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. We do 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. We do 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. We do 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. We do not expect adoption of ASU 2017-01 to have a material impact on our 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. We do not expect adoption of ASU 2017-09 to have a material impact on our consolidated financial statements.
Web site
Our web site, www.marchex.com, provides access, without charge, to our annual report on Form 10-K as amended, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such materials are electronically filed with the Securities and Exchange Commission. To view these filings, please go to our web site and click on “Investor Relations” and then click on “SEC Filings.” Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings, and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about us, our services, and other matters, and for complying with our disclosure obligations under Regulation FD:
|
•
|
Marchex Twitter Account (https://twitter.com/marchex)
|
|
•
|
Marchex Company Blog (
http://www.marchex.com/blog
)
|
|
•
|
Marchex LinkedIn Account (http://linkedin.com/company/marchex)
|
31
The information we post through these social media channels may be deemed material. Accordingly, investors should monitor the above account and the blog, in addition to following our investor
relations website, press releases, SEC filings, and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q.