mchx-10q_20210331.htm
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erf

 

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, 2021

OR

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

 

For the transition period from                      to                     .

 

Commission File Number 000-50658

 

Marchex, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

35-2194038

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

520 Pike Street, Suite 2000

 

Seattle, WA

(Address of Principal Executive Offices)

98101

(Zip Code)

Registrant’s telephone number, including area code: (206331-3300

 

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 10, 2021, the registrant had 4,660,927 shares of Class A common stock, $.01 par value per share, and 36,719,471 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

18

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4.

Controls and Procedures

31

 

 

 

PART II.

OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 4.

Mine Safety Disclosures

46

Item 6.

Exhibits

47

Signature

48

 

 


 

 

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,

 

 

 

2020

 

 

2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,851

 

 

$

28,169

 

Accounts receivable, net

 

 

6,331

 

 

 

6,869

 

Prepaid expenses and other current assets

 

 

2,160

 

 

 

2,514

 

Total current assets

 

 

42,342

 

 

 

37,552

 

Property and equipment, net

 

 

2,747

 

 

 

2,477

 

Right-of-use lease asset

 

 

3,744

 

 

 

3,358

 

Other assets, net

 

 

1,345

 

 

 

1,318

 

Goodwill

 

 

17,558

 

 

 

17,558

 

Intangible assets from acquisitions, net

 

 

9,196

 

 

 

8,015

 

Total assets

 

$

76,932

 

 

$

70,278

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,424

 

 

$

1,737

 

Accrued benefits and payroll

 

 

5,975

 

 

 

5,139

 

Other accrued expenses and current liabilities

 

 

4,210

 

 

 

4,054

 

Deferred revenue and deposits

 

 

1,393

 

 

 

1,309

 

Lease liability current

 

 

1,827

 

 

 

1,807

 

Loan obligations, current

 

 

5,123

 

 

 

5,135

 

Total current liabilities

 

 

20,952

 

 

 

19,181

 

Deferred tax liabilities

 

 

156

 

 

 

223

 

Lease liability non-current

 

 

3,136

 

 

 

2,742

 

Total liabilities

 

 

24,244

 

 

 

22,146

 

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, 2020 and March 31, 2021

 

 

49

 

 

 

49

 

Class B: 125,000 shares authorized; 36,462 shares issued and

   outstanding at December 31, 2020, including 1,007 shares

   of restricted stock; and 36,685 shares issued and outstanding at

   March 31, 2021, including 1,148 shares of restricted stock

 

 

365

 

 

 

367

 

Additional paid-in capital

 

 

350,960

 

 

 

351,734

 

Accumulated deficit

 

 

(298,686

)

 

 

(304,018

)

Total stockholders’ equity

 

 

52,688

 

 

 

48,132

 

Total liabilities and stockholders’ equity

 

$

76,932

 

 

$

70,278

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

 

1


 

 

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2021

 

Revenue

 

$

12,008

 

 

$

12,980

 

Expenses:

 

 

 

 

 

 

 

 

Service costs(1)(3)

 

 

4,828

 

 

 

5,422

 

Sales and marketing(1)

 

 

4,170

 

 

 

3,637

 

Product development(1)(3)

 

 

5,358

 

 

 

5,322

 

General and administrative(1)(3)

 

 

3,453

 

 

 

2,620

 

Amortization of intangible assets from acquisitions(2)(3)

 

 

1,763

 

 

 

1,181

 

Acquisition and disposition-related costs (benefit)

 

 

(635

)

 

 

45

 

Total operating expenses

 

 

18,937

 

 

 

18,227

 

Impairment of goodwill

 

 

(14,688

)

 

 

 

Impairment of intangible assets from acquisitions

 

 

(4,959

)

 

 

 

Loss from operations

 

 

(26,576

)

 

 

(5,247

)

Interest income (expense) and other, net

 

 

110

 

 

 

(12

)

Loss before provision for income taxes

 

 

(26,466

)

 

 

(5,259

)

Income tax expense (benefit)

 

 

(943

)

 

 

73

 

Loss from continuing operations

 

 

(25,523

)

 

 

(5,332

)

Income from discontinued operations, net of tax

 

 

648

 

 

 

 

Net loss applicable to common stockholders

 

$

(24,875

)

 

$

(5,332

)

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

   applicable to common stockholders:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.54

)

 

$

(0.12

)

Discontinued operations, net of tax

 

 

0.01

 

 

 

 

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

   to common stockholders

 

$

(0.53

)

 

$

(0.12

)

Shares used to calculate basic net loss per share applicable to

   common stockholders:

 

 

 

 

 

 

 

 

Class A

 

 

4,661

 

 

 

4,661

 

Class B

 

 

42,179

 

 

 

39,087

 

Shares used to calculate diluted net loss per share applicable

   to common stockholders:

 

 

 

 

 

 

 

 

Class A

 

 

4,661

 

 

 

4,661

 

Class B

 

 

46,840

 

 

 

43,748

 

(1) Excludes amortization of intangibles from acquisitions

 

 

 

 

 

 

 

 

(2) Components of amortization of intangibles from acquisitions

 

 

 

 

 

 

 

 

Service costs

 

$

756

 

 

$

623

 

Sales and marketing

 

 

742

 

 

 

530

 

General and administrative

 

 

265

 

 

 

28

 

Total

 

$

1,763

 

 

$

1,181

 

(3) Components of related party support services fee recovery

 

 

 

 

 

 

 

 

Service costs

 

 

 

 

 

$

763

 

Sales and marketing

 

 

 

 

 

 

60

 

Product development

 

 

 

 

 

 

275

 

General and administrative

 

 

 

 

 

 

133

 

Total

 

 

 

 

 

$

1,231

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

2


 

 

MARCHEX, INC. AND SUBSIDIARIES

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, 2019

 

 

4,661

 

 

$

49

 

 

 

39,610

 

 

$

396

 

 

 

 

 

$

 

 

$

359,633

 

 

$

(260,240

)

 

 

99,838

 

Issuance of common stock upon exercise

   of options, issuance and vesting of

   restricted stock and under employee

   stock purchase plan, net

 

 

 

 

 

 

 

 

158

 

 

 

2

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

8

 

Stock compensation from options and

   restricted stock, net of forfeitures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,057

 

 

 

 

 

 

1,057

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,875

)

 

 

(24,875

)

Balances at March 31, 2020

 

 

4,661

 

 

$

49

 

 

 

39,768

 

 

$

398

 

 

 

 

 

$

 

 

$

360,696

 

 

$

(285,115

)

 

$

76,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2020

 

$

4,661

 

 

$

49

 

 

$

36,462

 

 

$

365

 

 

$

 

 

$

 

 

$

350,960

 

 

$

(298,686

)

 

$

52,688

 

Issuance of common stock upon exercise

   of options, issuance and vesting of

   restricted stock and under employee

   stock purchase plan, net

 

 

 

 

 

 

 

 

223

 

 

 

2

 

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

32

 

Stock compensation from options and

   restricted stock, net of forfeitures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

744

 

 

 

 

 

 

744

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,332

)

 

 

(5,332

)

Balances at March 31, 2021

 

 

4,661

 

 

$

49

 

 

 

36,685

 

 

$

367

 

 

 

 

 

$

 

 

$

351,734

 

 

$

(304,018

)

 

$

48,132

 

 

3


 

 

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

For the three months ended March 31,

 

 

 

2020

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss applicable to common shareholders

 

$

(24,875

)

 

$

(5,332

)

Less:

 

 

 

 

 

 

 

 

Net income from discontinued operations, net of tax

 

$

648

 

 

$

-

 

Loss from continuing operations

 

$

(25,523

)

 

$

(5,332

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization and depreciation

 

 

2,269

 

 

 

1,608

 

Impairment of goodwill

 

 

14,688

 

 

 

 

Impairment of intangible assets from acquisitions

 

 

4,959

 

 

 

 

Allowance for doubtful accounts and advertiser credits

 

 

1,162

 

 

 

27

 

Acquisition-related benefit

 

 

(728

)

 

 

 

Stock-based compensation

 

 

1,056

 

 

 

744

 

Deferred income taxes

 

 

(800

)

 

 

63

 

Change in certain assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(263

)

 

 

(564

)

Prepaid expenses, other current assets and other assets

 

 

(863

)

 

 

(394

)

Accounts payable

 

 

793

 

 

 

(675

)

Accrued expenses and other current liabilities

 

 

521

 

 

 

(1,007

)

Deferred revenue and deposits

 

 

285

 

 

 

(85

)

Net cash (used in) continuing operating activities

 

 

(2,444

)

 

 

(5,615

)

Net cash provided by discontinued operating activities

 

 

730

 

 

 

 

Net cash (used in) operating activities

 

 

(1,714

)

 

 

(5,615

)

Investing Activities:

 

 

 

 

 

 

 

 

Cash paid for acquisitions

 

 

88

 

 

 

 

Purchases of property and equipment

 

 

(589

)

 

 

(100

)

Purchases of intangible assets and other assets

 

 

(4

)

 

 

 

Net cash used in continuing investing activities

 

 

(505

)

 

 

(100

)

Net cash used in discontinued investing activities

 

 

(4

)

 

 

 

Net cash used in investing activities

 

 

(509

)

 

 

(100

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from exercises of stock options, issuance and vesting of restricted stock and employee stock purchase plan, net

 

 

8

 

 

 

33

 

Net cash provided by continuing financing activities

 

 

8

 

 

 

33

 

Net decrease in cash and cash equivalents

 

 

(2,215

)

 

 

(5,682

)

Cash and cash equivalents at beginning of period

 

 

41,731

 

 

 

33,851

 

Less: Cash and cash equivalents of discontinued operations at the end of period

 

 

(79

)

 

 

 

Cash and cash equivalents of continuing operations at end of period

 

$

39,437

 

 

$

28,169

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

     Cash paid for operating leases

 

$

301

 

 

$

471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

4


 

 

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.

Divestiture

In October 2020, the Company sold its interests in certain assets related to its Local Leads Platform, Call Marketplace and other assets not related to core conversational analytics and sales engagement solutions. The purchaser is a related party controlled by a shareholder and officers of the Company. The assets met the definition of a business and represented a discontinued operation since the disposal enabled the Company to focus more wholly on its core conversational analytics and sales engagement solution activities, and it had a significant effect on the Company’s operations and financial results. The Company will have no further involvement in the key strategic decision making or operations of the business. As a result, the operating results related to these assets are shown as discontinued operations, net of tax, in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2020. See Note 14. Discontinued Operations and Related Party Investment of the Notes to the Condensed Consolidated Financial Statements for further discussion. Unless otherwise indicated, information presented in the Notes to the Financial Statements relates only to the Company’s continuing operations.

The Impact of COVID-19 on our Business

In late 2019, an outbreak of COVID-19 emerged and by March 2020, was declared a global pandemic by the World Health Organization. Across the United States and the world, governments and municipalities instituted measures in an effort to control the spread of COVID-19, including quarantines, shelter-in-place orders, school closings, travel restrictions and the closure of non-essential businesses. By the end of March, the macroeconomic impacts became significant, exhibited by, among other things, a rise in unemployment and market volatility.

For most of the quarter ended March 31, 2020, the Company’s results reflect historical trends and seasonality. However, beginning in March 2020, the Company experienced a decline in revenues due to the impact of COVID-19 and the related reductions in global economic activity and reduced spending by its customers in response to the macroeconomic impact. During the quarter ended March 31, 2020, the Company also assessed the realized and potential credit deterioration of its customers due to changes in the macroeconomic environment, which has been reflected in an increase in its allowance for credit losses for accounts receivable as of March 31, 2020 and December 31, 2020. Additionally, the Company determined that indicators of impairment had occurred during the first quarter of 2020, which resulted in the Company performing an interim impairment analysis during the first quarter of 2020. As a result of this interim impairment test, the Company recognized an impairment of its intangible long-lived assets and goodwill during the first quarter of 2020. See the Note 11. Identifiable Intangible Assets from Acquisitions and Note 12. Goodwill in these Notes to the Condensed Consolidated Financial Statements for additional information.

For additional information for the effects of the COVID-19 pandemic and resulting global disruptions on the Company’s business and operations, refer to Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1.A of Part II, “Risk Factors”.

 

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

5


 

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, valuation of contingent consideration transferred as a result of business combinations, the fair value of the Company’s common stock and 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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, 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, 2020 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 2020 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

 

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. Early adoption is permitted after December 15, 2018. The ASU must be adopted using a modified-retrospective approach. In November 2018, the FASB issued Accounting Standards Update No. 2018-19, Codification Improvements (Topic 326), Financial Instruments - Credit Losses (ASU 2018-19), an ASU intended to improve the Codification or correct its unintended application. The ASU is effective upon the adoption of the amendments in Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, with early adoption permitted after December 15, 2018. The Company does not expect adoption of ASU 2018-19 and ASU 2016-13 to have a material impact on its Condensed Consolidated Financial Statements. In addition, in May 2019, the FASB issued Accounting Standards Update No. 2019-05, Financial Instruments — Credit Losses (Topic 326), Targeted Transition Relief, (ASU 2019-05)), an ASU which provides ASU 2016-13 transition relief by providing entities with an alternative to irrevocably elect the fair value option for eligible financial assets measured at amortized cost upon adoption of the credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. The ASU is effective upon the adoption of the amendments in ASU 2016-13. In addition, in November 2019, the FASB issued Accounting Standards Update No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) - Effective Dates (ASU-2019-10), an ASU modifying the effective dates of various previous pronouncements. As the Company qualifies as a Smaller Reporting Company with the SEC, this ASU revised the effective date of ASU 2016-13 and ASU 2017-04 to fiscal years beginning after December 15, 2022. The Company does not expect adoption of ASU 2019-10 to have a material impact on our Consolidated Financial Statements. The Company does not expect adoption of ASU 2019-10, ASU 2019-05, ASU 2018-19 and ASU 2016-13 to have a material impact on its Consolidated Financial Statements.

 

In February 2020, the FASB issued Accounting Standards Update No. 2020-02, Financial Instruments — Credit Losses (Topic 326) and Leases (Topic 842). This ASU adds an SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119, which adds Topic 6M on Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326. It also adds a note in paragraph 842-10-S65-1 regarding the updated effective date for Leases pursuant to the issuance of ASU 2019-10. Additionally, in March 2020 Accounting Standards Update No. 2020-03, Codification Improvements to Financial Instruments (ASU 2020-03), an ASU which represent changes to clarify or improve the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The amendments and are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company does not expect adoption of ASU 2020-02 and of ASU 2020-03 to have a material impact on our Consolidated Financial Statements.

 

In November 2019, the FASB issued Accounting Standards Update No. 2019-11, Codification Improvement to Topic 326, Financial Instruments — Credit Losses, an ASU which makes several amendments to the new credit losses standard, including an

6


 

amendment requiring entities to include certain expected recoveries of the amortized cost basis previously written off, or expected to be written off, in the allowance for credit losses for purchased credit deteriorated assets. The amendments also provide transition relief related to troubled debt restructurings, allow entities to exclude accrued interest amounts from certain required disclosures and clarify the requirements for applying the collateral maintenance practical expedient. For entities that have not yet adopted the new credit losses standard, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted the new credit losses standard, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period, as long as the entity has adopted the new credit losses standard. The ASU must be adopted using a modified-retrospective approach. The Company does not expect adoption of ASU 2019-11 to have a material impact on its Consolidated Financial Statements.

 

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, an ASU which eliminates certain exceptions to the guidance in Accounting Standards Codification (ASC or Codification) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance also clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. The ASU is effective for reporting periods beginning after December 15, 2020, with early adoption permitted. The transition method related to the ASU amendments depend upon the nature of the guidance and vary depending upon the specific amendment being implemented. The Company does not expect adoption of ASU 2019-12 to have a material impact on its 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 $206,000 and $216,000 as of December 31, 2020 and March 31, 2021, 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, 2020 and March 31, 2021 was $1.4 million and $1.3 million, respectively. During the three months ended March 31, 2020 and 2021, revenue recognized that was included in the contract liabilities balances at the beginning of the period was $503,000 and $749,000, respectively.  

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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, 2020 and March 31, 2021, the Company had $167,000 and $140,000 of net deferred contract costs, respectively, and the accumulated amortization associated with these costs was $989,000 and $1.1 million for the periods ended December 31, 2020 and March 31, 2021, 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, 2020 and 2021, the Company operated in a single segment comprised of its core analytics and solutions services. In October 2020, the Company sold certain assets related to its Local Leads Platform, Call Marketplace and other assets not related to core conversational analytics. As a result, the operating results related to these assets are shown as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. See Note 14. Discontinued Operations and Related Party Investment for further discussion.

  

Long-lived assets by geographical region are based on the location of the legal entity that owns the assets.  As of December 31, 2020 and March 31, 2021, 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,

 

 

 

2020

 

 

2021

 

United States

 

 

97

%

 

 

98

%

Canada

 

 

2

%

 

 

2

%

Other countries

 

 

1

%

 

*

 

 

 

 

100

%

 

 

100

%

 

*

Less than 1% of revenue.

 

(4) 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.

There were no customers that represented more than 10% of consolidated revenue for the three months ended March 31, 2020 and 2021.

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):

 

 

 

At December 31,

2020

 

 

At March 31,

2021

 

Customer A

 

 

18

%

 

 

17

%

 

 

 

 

 

 

 

 

 

 

8


 

 

 

(5) Fair Value of Financial Instruments

The Company had the following financial instruments as of December 31, 2020 and March 31, 2021: 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, 2020 and March 31, 2021 (in thousands):

 

 

At

December 31,

 

 

At

March 31,

 

 

2020

 

 

2021

 

Level 1 Assets:

 

 

 

 

 

 

 

Cash

$

13,492

 

 

$

7,810

 

Money market funds

 

20,359

 

 

 

20,359

 

Total cash and cash equivalents

$

33,851

 

 

$

28,169

 

 

 

 

  

(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, 2020 and 2021, 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,

 

 

 

 

2020

 

 

2021

 

 

Service costs

 

$

16

 

 

$

8

 

 

Sales and marketing

 

 

261

 

 

 

229

 

 

Product development

 

 

81

 

 

 

97

 

 

General and administrative

 

 

604

 

 

 

410

 

 

Total stock-based compensation

 

$

962

 

 

$

744

 

 

 

9


 

 

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, 2020 and 2021 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,

 

 

2020

 

2021

Expected life (in years)

 

4.0 - 6.25

 

4.0 - 6.25

Risk-free interest rate

 

1.13%-1.22%

 

0.64%-1.16%

Expected volatility

 

46%-52%

 

50%-56%

 

Stock option activity during the three months ended March 31, 2021 is summarized as follows:

 

 

 

Shares

(in thousands)

 

 

Weighted average

exercise price

 

 

Weighted average

remaining

contractual term

(in years)

 

 

Balance at December 31, 2020

 

 

3,460

 

 

$

3.82

 

 

 

6.50

 

 

Options granted

 

 

288

 

 

 

2.11

 

 

 

 

 

 

Options forfeited

 

 

(36

)

 

 

3.28

 

 

 

 

 

 

Options expired

 

 

(76

)

 

 

6.41

 

 

 

 

 

 

Options exercised

 

 

(2

)

 

 

2.66

 

 

 

 

 

 

Balance at March 31, 2021

 

 

3,634

 

 

$