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mchx-10q_20230331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

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

For the transition period from to .

Commission File Number 000-50658

Marchex, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

35-2194038

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1200 5^th Ave, Suite 1300

Seattle, WA

(Address of Principal Executive Offices)

98101

(Zip Code)

Registrant’s telephone number, including area code: (206) 331-3300

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

Emerging growth company	☐

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Class B Common Stock

MCHX

The Nasdaq Global Select Market

As of May 1, 2023, the registrant had 4,660,927 shares of Class A common stock, $.01 par value per share, and 38,688,784 shares of Class B common stock, $.01 par value per share, outstanding, respectively.

Marchex, Inc.

Form 10-Q

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION	25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 4.	Mine Safety Disclosures	37
Item 6.	Exhibits	38
Signature		39

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

	December 31,			March 31,
	2022			2023
Assets
Current assets:
Cash and cash equivalents	$	20,474		$	15,710
Accounts receivable, net		8,396			8,047
Prepaid expenses and other current assets		2,015			2,397
Total current assets		30,885			26,154
Property and equipment, net		4,050			4,530
Right-of-use lease asset		738			495
Other assets, net		973			1,118
Goodwill		17,558			17,558
Intangible assets from acquisitions, net		2,590			2,059
Total assets	$	56,794		$	51,914
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,037		$	1,342
Accrued benefits and payroll		3,566			2,981
Other accrued expenses and current liabilities		3,825			4,261
Deferred revenue and deposits		1,384			1,676
Right of use liability, current		1,252			189
Finance lease, current		—			161
Total current liabilities		12,064			10,610
Deferred tax liabilities		233			232
Finance lease, non-current		-			290
Right of use liability non-current		385			336
Total liabilities		12,682			11,468
Commitments and contingencies - See Note 10
Stockholders’ equity:
Common stock, $0.01 par value, Authorized 137,500 shares
Class A: 12,500 shares authorized; 4,661 shares issued and outstanding at December 31, 2022 and March 31, 2023		49			49
Class B: 125,000 shares authorized; 38,497 shares issued and outstanding at December 31, 2022, including 1,105 shares of restricted stock; and 38,674 shares issued and outstanding at March 31, 2023, including 1,218 shares of restricted stock		385			387
Additional paid-in capital		354,999			355,807
Accumulated deficit		(311,321	)		(315,797	)
Total stockholders’ equity		44,112			40,446
Total liabilities and stockholders’ equity	$	56,794		$	51,914

See accompanying Notes to the Condensed Consolidated Financial Statements.

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended March 31,
	2022			2023
Revenue	$	13,171		$	12,216
Expenses:
Service costs⁽¹⁾⁽³⁾		4,935			5,424
Sales and marketing⁽¹⁾⁽³⁾		3,165			3,970
Product development⁽¹⁾⁽³⁾		3,460			4,164
General and administrative⁽¹⁾⁽³⁾		2,606			2,617
Amortization of intangible assets from acquisitions⁽²⁾		531			531
Acquisition and disposition-related costs		5			13
Total operating expenses		14,702			16,719
Loss from operations		(1,531	)		(4,503	)
Interest income and other, net		(21	)		57
Loss before provision for income taxes		(1,552	)		(4,446	)
Income tax expense		30			30
Net loss applicable to common stockholders	$	(1,582	)	$	(4,476	)
Basic and diluted net loss per Class A and Class B share applicable to common stockholders	$	(0.04	)	$	(0.11	)
Shares used to calculate basic net loss per share applicable to common stockholders:
Class A		4,661			4,661
Class B		38,666			37,835
Shares used to calculate diluted net loss per share applicable to common stockholders:
Class A		4,661			4,661
Class B		43,327			42,496
(1) Excludes amortization of intangibles from acquisitions
(2) Components of amortization of intangibles from acquisitions
Service costs		117			117
Sales and marketing		414			414
Total	$	531		$	531
(3) Components of related party support services fee recovery
Service costs	$	781		$	380
Sales and marketing		231			50
Product development		517			67
General and administrative		503			54
Total	$	2,032		$	551

See accompanying Notes to the Condensed Consolidated Financial Statements.

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

	Class A				Class B										Additional					Total
	common stock				common stock						Treasury stock				paid-in		Accumulated			stockholders’
	Shares		Amount		Shares			Amount			Shares		Amount		capital		deficit			equity
Balances at December 31, 2021		4,661	$	49		37,391		$	374			—	$	—	$	354,155	$	(303,076	)	$	51,502
Issuance of common stock upon exercise of options, issuance and vesting of restricted stock and under employee stock purchase plan, net		—		—		285			3			—		—		13		—			16
Retirement of treasury stock		—		—		(23	)		—			23		—		—		—			—
Stock compensation from options and restricted stock, net of forfeitures		—		—		—			—			—		—		695		—			695
Net loss		—		—		—			—			—		—		—		(4,542	)		(4,542	)
Balances at March 31, 2022		4,661	$	49		37,653		$	377			23	$	—	$	354,863	$	(307,618	)	$	47,671

	Class A				Class B										Additional					Total
	common stock				common stock						Treasury stock				paid-in		Accumulated			stockholders’
	Shares		Amount		Shares			Amount			Shares		Amount		capital		deficit			equity
Balances at December 31, 2022		4,661	$	49		38,497		$	385			—	$	—	$	354,999	$	(311,321	)		44,112
Issuance of common stock upon exercise of options, issuance and vesting of restricted stock and under employee stock purchase plan, net		—		—		282			3			—		—		9		—			12
Retirements of treasury stock		—		—		(105	)		(1	)		—		—		—		—			(1	)
Stock compensation from options and restricted stock, net of forfeitures		—		—		—			—			—		—		799		—			799
Net loss		—		—		—			—			—		—		—		(4,476	)		(4,476	)
Balances at March 31, 2023		4,661	$	49		38,674		$	387			—	$	-	$	355,807	$	(315,797	)		40,446

See accompanying Notes to the Condensed Consolidated Financial Statements.

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	March 31,
	2022			2023
Cash flows from operating activities:
Net loss applicable to common shareholders	$	(1,582	)	$	(4,476	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation		983			889
Allowance for doubtful accounts and advertiser credits		328			93
Stock-based compensation		695			799
Deferred income taxes		47			—
Change in certain assets and liabilities:
Accounts receivable, net		(1,254	)		255
Prepaid expenses, other current assets and other assets		(727	)		(42	)
Accounts payable		512			(1,196	)
Accrued expenses and other current liabilities		(77	)		(995	)
Deferred revenue and deposits		(331	)		292
Net cash used in operating activities		(1,406	)		(4,381	)
Investing Activities:
Purchases of property and equipment		(1,141	)		(392	)
Net cash used in investing activities		(1,141	)		(392	)
Financing Activities:
Proceeds from exercises of stock options, issuance and vesting of restricted stock and employee stock purchase plan, net		16			9
Net cash provided by financing activities		16			9
Net decrease in cash and cash equivalents		(2,531	)		(4,764	)
Cash and cash equivalents at beginning of period		27,086			20,474
Cash and cash equivalents at end of period	$	24,555		$	15,710
Supplemental disclosure of cash flow and non-cash information:
Cash paid for operating leases	$	498		$	1,184
Financing lease	$	-		$	451

See accompanying Notes to the Condensed Consolidated Financial Statements.

MARCHEX, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Description of Business and Basis of Presentation

Description of Business

Marchex, Inc. (the “Company”) was incorporated in the state of Delaware on January 17, 2003. The Company is a conversational analytics and solutions company that helps businesses connect, drive, measure, and convert callers into customers, and connects the voice of the customer to their business. We deliver data insights and incorporate artificial intelligence (AI)-powered functionality that drives insights and solutions to help companies find, engage and support their customers across voice and text-based communication channels.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

The preparation of our unaudited Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company has used estimates related to several financial statement amounts, including revenues, allowance for doubtful accounts, allowance for advertiser credits, useful lives for property and equipment and intangible assets, valuation of intangible assets, the fair value of stock option awards, the impairment of goodwill and the valuation allowance for deferred tax assets. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. Actual results could differ from those estimates.

Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or for any other period. The interim financial information is unaudited, and reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. The balance sheet at December 31, 2022 has been derived from the audited Consolidated Financial Statements at that date. This report should be read in conjunction with the Consolidated Financial Statements in our 2022 Form 10-K where we include additional information about our policies and the methods and assumptions used in our estimates.

Our Company consolidates all entities that we control by ownership of a majority voting interest. All inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the Condensed Consolidated Financial Statements in the prior periods to conform to the current period presentation.

Assets, liabilities and operations of foreign subsidiaries are recorded based on the functional currency of the entity. For a majority of our foreign operations, the functional currency is the U.S. dollar. Assets and liabilities denominated in other than the functional currency are remeasured each month with the remeasurement gain or loss recorded in other income and expense in the Condensed Consolidated Statements of Operations.

Recent Accounting Pronouncements Not Yet Effective

To date, there have been no recent accounting pronouncements not yet effective that are expected to have a material impact on our Condensed Consolidated Financial Statements.

(2) Revenue Recognition

We generate the majority of our revenues from core analytics and solutions services. Customers typically receive the benefit of the Company’s services as they are performed and substantially all the Company’s revenue is recognized over time as the services are performed.

Revenue is recognized when a customer obtains control of services in an amount that reflects the consideration the Company expects to receive in exchange for those services. The Company measures revenue based on the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service or product to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.

The Company’s call analytics technology platform provides data and insights that can measure the performance of mobile, online and offline advertising for customers and small business resellers. The Company generates revenue from the Company’s call analytics technology platform when advertisers pay the Company a fee for each call/text or call/text related data element they receive from calls or texts or for each phone number tracked based on a pre-negotiated rate. Revenue is recognized as services are provided over time, which is generally measured by the delivery of each call/text or call/text related data element or each phone number tracked.

The majority of the Company’s customers are invoiced on a monthly basis following the month of the delivery of services and are required to make payments under standard credit terms. 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. The Company establishes an allowance for advertiser credits, which is included in Other accrued expenses and current liabilities in the balance sheet, using its best estimate of the amount of expected future reductions in advertisers’ payment obligations related to delivered services based on analysis of historical credits. The balance associated with the allowance for advertiser credits in the Company’s Condensed Consolidated Balance Sheet was $84,000 and $132,000 as of December 31, 2022 and March 31, 2023, respectively. Customer payments received in advance of revenue recognition are also contract liabilities and are recorded as deferred revenue. The deferred revenue balance in the Company’s Condensed Consolidated Balance Sheet as of December 31, 2022 and March 31, 2023 was $1.4 million and $1.7 million, respectively. During the three months ended March 31, 2023 and 2022, revenue recognized that was included in the contract liabilities balances at the beginning of the period was $541,000 and $424,000, respectively.

The majority of the Company’s total revenue is derived from contracts that include consideration that is variable in nature. The variable elements of these contracts primarily include the number of transactions (for example, the number qualified phone calls). For contracts with an effective term greater than one year, the Company applies the standard’s practical expedient that permits the exclusion of disclosure of the value of unsatisfied performance obligations for these contracts as the Company’s right to consideration corresponds directly to the value provided to the customer for services completed to date and all future variable consideration is allocated to wholly unsatisfied performance obligations. A term for purposes of these contracts has been estimated at 24 months. In addition, the Company applies the standard’s optional exemption to disclose information about performance obligations for contracts that have original expected terms of one year or less.

For arrangements that include multiple performance obligations, the transaction price from the arrangement is allocated to each respective performance obligation based on its relative standalone selling price and recognized when revenue recognition criteria for each performance obligation are met. The standalone selling price for each performance obligation is established based on the sales price at which the Company would sell a promised good or service separately to a customer or the estimated standalone selling price.

The Company’s incremental direct costs of obtaining a contract, which consist primarily of sales commissions, are generally deferred and amortized to sales and marketing expense over the estimated life of the relevant customer relationship of approximately 24 months and are subject to being monitored every period to reflect any significant change in assumptions. In addition, the deferred contract cost asset is assessed for impairment on a periodic basis. The Company’s contract acquisition costs are included in other assets, net in the balance sheet. The Company is applying the standard’s practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less, which typically results in expensing commissions paid to acquire certain contracts. As of December 31, 2022 and March 31, 2023, the Company had $163,000 and $212,000 of net deferred contract costs, respectively, and the accumulated amortization associated with these costs was $1.5 million and $1.6 million for the periods ended December 31, 2022 and March 31, 2023, respectively.

(3) 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 three months ended March 31, 2023 and 2022, the Company operated in a single segment comprised of its core analytics and solutions services.

Long-lived assets by geographical region are based on the location of the legal entity that owns the assets. As of December 31, 2022 and March 31, 2023, no significant long-lived assets were held by entities outside of the United States.

Revenues from customers by geographical areas are tracked on the basis of the location of the customer. The majority of the Company’s revenue and accounts receivable are derived from domestic sales to customers.

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

	Three Months Ended March 31,
	2022			2023
United States		99	%		99	%
Canada and other countries		1	%		1	%
Total		100	%		100	%

(4) Concentrations

The Company maintains substantially all of its cash and cash equivalents with one high credit quality 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.

There was one customer that represented more than 10% of consolidated revenue for the three months ended March 31, 2023, which was 11%.

The Company has one customer that represents more than 10% of consolidated accounts receivable. The outstanding receivable balance for this customer is as follows (in percentages):


	December 31,			March 31,
	2022			2023
Customer A		28	%		20	%

(5) Fair Value of Financial Instruments

The Company had the following financial instruments as of December 31, 2022 and March 31, 2023: cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities. The carrying value of these financial instruments approximates their fair value based on the liquidity of these financial instruments and their short-term nature. Further, these financial instruments are considered at Level 1 fair value with observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

The following table provides information about the fair value of our cash and cash equivalents balance as of December 31, 2022 and March 31, 2023 (in thousands):

	December 31,		March 31,
	2022		2023
Level 1 Assets:
Cash	$	9,020	$	10,645
Money market funds		11,454		5,065
Total cash and cash equivalents	$	20,474	$	15,710

(6) Stockholder’s Equity

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 three months ended March 31, 2023 and 2022, the Company did not repurchase any Class B common stock.

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. The Company accounts for forfeitures as they occur.

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

	Three Months Ended March 31,
	2022		2023
Service costs	$	34	$	45
Sales and marketing		191		263
Product development		82		86
General and administrative		388		405
Total stock-based compensation	$	695	$	799

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 three months ended March 31, 2022 and 2023 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:

	Three Months Ended March 31,
	2022	2023
Expected life (in years)	4.0 - 6.25	4.0 - 6.25
Risk-free interest rate	2.41%-2.44%	3.58%-3.71%
Expected volatility	51%-60%	53%-64%

Stock option activity during the three months ended March 31, 2023 is summarized as follows:

	Shares (in thousands)			Weighted average exercise price		Weighted average remaining contractual term (in years)
Balance at December 31, 2022		3,766		$	3.14		6.67
Options granted		992			2.05
Options forfeited		(35	)		2.63
Options expired		(230	)		4.79
Options exercised		—			—
Balance at March 31, 2023		4,493		$	2.82		7.39

Restricted stock awards and restricted stock unit activity during the three months ended March 31, 2023 is summarized as follows:

	Shares/ Units (in thousands)			Weighted average grant date fair value
Unvested balance at December 31, 2022		1,640		$	2.53
Granted		258			1.97
Vested		(164	)		2.66
Forfeited		(12	)		3.59
Unvested balance at March 31, 2023		1,722		$	2.44

(7) Net Loss Per Share

The Company computes net 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 loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the year. Diluted net loss per share is computed by dividing net 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 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 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 the Company’s 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):

	Three Months Ended March 31,
	2022						2023
	Class A			Class B			Class A			Class B
Basic net loss per share:
Numerator:
Net loss applicable to common stockholders	$	(170	)	$	(1,412	)	$	(491	)	$	(3,985	)
Denominator: