MCHX 10-Q

Marchex Inc (MCHX)

10-Q 2022-11-04 For: 2022-09-30

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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)

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

Emerging growth company	☐

		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	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 4.	Mine Safety Disclosures	42
Item 6.	Exhibits	43
Signature		44

	December 31,			September 30,
	2021			2022
Assets
Current assets:
Cash and cash equivalents	$	27,086		$	23,329
Accounts receivable, net		8,021			8,437
Prepaid expenses and other current assets		2,407			2,554
Total current assets		37,514			34,320
Property and equipment, net		2,817			3,839
Right-of-use lease asset		2,238			1,119
Other assets, net		986			1,009
Goodwill		17,558			17,558
Intangible assets from acquisitions, net		4,714			3,121
Total assets	$	65,827		$	60,966
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,363		$	1,315
Accrued benefits and payroll		3,631			4,228
Other accrued expenses and current liabilities		3,869			3,480
Deferred revenue and deposits		2,016			878
Lease liability, current		1,794			1,520
Total current liabilities		12,673			11,421
Deferred tax liabilities		186			217
Lease liability non-current		1,466			433
Total liabilities		14,325			12,071
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, 2021 and September 30, 2022		49			49
Class B: 125,000 shares authorized; 37,391 shares issued and outstanding at December 31, 2021, including 965 shares of restricted stock; and 37,740 shares issued and outstanding at September 30, 2022, including 1,022 shares of restricted stock		374			378
Additional paid-in capital		354,155			356,215
Accumulated deficit		(303,076	)		(307,747	)
Total stockholders’ equity		51,502			48,895
Total liabilities and stockholders’ equity	$	65,827		$	60,966

	Nine Months Ended September 30,						Three Months Ended September 30,
	2021			2022			2021			2022
Revenue	$	40,686		$	39,878		$	13,700		$	13,197
Expenses:
Service costs⁽¹⁾⁽³⁾		16,389			14,791			5,507			4,992
Sales and marketing⁽¹⁾⁽³⁾		10,245			10,172			3,906			3,388
Product development⁽¹⁾⁽³⁾		13,289			10,515			3,178			3,524
General and administrative⁽¹⁾⁽³⁾		6,960			7,397			1,875			2,351
Amortization of intangible assets from acquisitions⁽²⁾		3,708			1,593			1,149			531
Acquisition and disposition-related costs		103			37			(18	)		10
Total operating expenses		50,694			44,505			15,597			14,796
Loss from operations		(10,008	)		(4,627	)		(1,897	)		(1,599	)
Gain on loan extinguishment		5,185			—			5,185			—
Interest income and other, net		2,453			33			(21	)		37
Income (loss) before provision for income taxes		(2,370	)		(4,594	)		3,267			(1,562	)
Income tax expense (benefit)		(15	)		77			(43	)		(4	)
Net income (loss) applicable to common stockholders	$	(2,355	)	$	(4,671	)	$	3,310		$	(1,558	)
Basic and diluted net income (loss) per Class A and Class B share applicable to common stockholders	$	(0.05	)	$	(0.11	)	$	0.07		$	(0.04	)
Shares used to calculate basic net income (loss) per share applicable to common stockholders:
Class A		4,661			4,661			4,661			4,661
Class B		39,213			38,735			39,246			38,861
Shares used to calculate diluted net income (loss) per share applicable to common stockholders:
Class A		4,661			4,661			4,661			4,661
Class B		43,874			43,396			44,385			43,522
(1) Excludes amortization of intangibles from acquisitions
(2) Components of amortization of intangibles from acquisitions
Service costs	$	1,885			351		$	610			117
Sales and marketing		1,711			1,242			539			414
General and administrative		112			—			—			—
Total	$	3,708		$	1,593		$	1,149		$	531
(3) Components of related party support services fee recovery
Service costs	$	2,151		$	2,208		$	825			772
Sales and marketing		447			572			281			200
Product development		1,501			1,439			550			521
General and administrative		1,065			1,168			584			304
Total	$	5,164		$	5,387		$	2,240		$	1,797

	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
Issuance of common stock upon exercise of options, issuance and vesting of restricted stock and under employee stock purchase plan, net		—		—		56			—		—			—		67		—			67
Stock compensation from options and restricted stock, net of forfeitures		—		—		—			—		—			—		655		—			655
Net loss		—		—		—			—		—			—		—		(333	)		(333	)
Balances at June 30, 2021		4,661	$	49		36,741		$	367		—			—	$	352,456	$	(304,351	)	$	48,521
Issuance of common stock upon exercise of options, issuance and vesting of restricted stock and under employee stock purchase plan, net		—		—		63			1		—			—		153		—			154
Stock compensation from options and restricted stock, net of forfeitures		—		—		—			—		—			—		607		—			607
Net income		—		—		—			—		—			—		—		3,310			3,310
Balances at September 30, 2021		4,661	$	49		36,804		$	368		—			—	$	353,216	$	(301,041	)	$	52,592

	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		(23	)	$	—	$	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
Retirements of restricted stock		—		—		(23	)		—		23			—		—		—			—
Stock compensation from options and restricted stock, net of forfeitures		—		—		—			—		—			—		695		—			695
Net loss		—		—		—			—		—			—		—		(1,582	)		(1,582	)
Balances at March 31, 2022		4,661	$	49		37,653		$	377		—		$	-	$	354,863	$	(304,658	)		50,631
Issuance of common stock upon exercise of options, issuance and vesting of restricted stock and under employee stock purchase plan, net		—		—		5			—		—			—		7		—			7
Stock compensation from options and restricted stock, net of forfeitures		—		—		—			—		—			—		714		—			714
Net loss		—		—		—			—		—			—		—		(1,531	)		(1,531	)
Balances at June 30, 2022		4,661	$	49		37,658		$	377		—		$	-	$	355,584	$	(306,189	)	$	49,821
Issuance of common stock upon exercise of options, issuance and vesting of restricted stock and under employee stock purchase plan, net		—		—		82			1		—			—		—		—			1
Stock compensation from options and restricted stock, net of forfeitures		—		—		—			—		—			—		631		—			631
Net loss		—		—		—			—		—			—		—		(1,558	)		(1,558	)
Balances at September 30, 2022		4,661	$	49		37,740		$	378		—			—	$	356,215	$	(307,747	)	$	48,895

	Nine Months Ended September 30,						Three Months Ended September 30,
	2021			2022			2021			2022
United States		99	%		99	%		99	%		99	%
Canada		1	%		1	%		1	%		1	%
Total		100	%		100	%		100	%		100	%

	Shares (in thousands)			Weighted average exercise price		Weighted average remaining contractual term (in years)
Balance at December 31, 2021		3,601		$	3.43		6.46
Options granted		518			2.29
Options forfeited		(126	)		3.14
Options expired		(419	)		3.70
Options exercised		(2	)		1.66
Balance at September 30, 2022		3,572		$	3.24		6.87

	Shares/ Units (in thousands)			Weighted average grant date fair value
Unvested balance at December 31, 2021		1,518		$	2.80
Granted		405			2.32
Vested		(298	)		2.39
Forfeited		(22	)		3.66
Unvested balance at September 30, 2022		1,603		$	2.78

	For the Nine Months Ended						For the Three Months Ended
	2021			2022			2021			2022
Interest Income	$	8		$	42		$	7		$	30
Interest Expense & Foreign Currency		(45	)		-			(14	)		8
Other		2,490			(9	)		(14	)		(1	)
Total	$	2,453		$	33		$	(21	)	$	37

	For the Nine Months Ended			For the Three Months Ended
	September 30, 2022			September 30, 2022
Operating lease cost	$	1,345		$	464
Short-term operating lease cost		181			73
Total operating lease cost	$	1,526		$	537
Other information:
Weighted-average remaining lease term - operating leases	1.4 years
Weighted-average discount rate - operating leases (1)		4.7	%

	Total
Gross future operating lease payments	$	2,030
Less: imputed interest		(77	)
Present value of total operating lease liabilities		1,953
Less: current portion of operating lease liabilities		(1,520	)
Total long-term operating lease liabilities	$	433

	Facilities and other operating leases (1)		Other contractual obligations		Total
2022		470		870		1,340
2023		1,160		1,853		3,013
2024		209		196		405
2025		191				191
Total minimum payments	$	2,030	$	2,919	$	4,949
(1) For additional information regarding the Company's operating leases, see Note 9, Leases of the Notes to the Condensed Financial Statements.

	As of December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Impairment			Net Carrying Amount
Customer relationships	$	13,018	$	(6,679	)	$	(3,430	)	$	2,909
Technologies		9,369		(6,905	)		(1,062	)		1,402
Non-compete agreements		3,409		(2,660	)		(346	)		403
Tradenames		734		(613	)		(121	)	-
Total identifiable intangible assets from acquisition	$	26,530	$	(16,857	)	$	(4,959	)	$	4,714

	As of September 30, 2022
	Gross Carrying Amount		Accumulated Amortization			Impairment			Net Carrying Amount
Customer relationships	$	13,018	$	(7,821	)	$	(3,430	)	$	1,767
Technologies		9,369		(7,255	)		(1,062	)		1,052
Non-compete agreements		3,409		(2,761	)		(346	)		302
Tradenames		734		(613	)		(121	)	-
Total identifiable intangible assets from acquisition	$	26,530	$	(18,450	)	$	(4,959	)	$	3,121

	Nine Months Ended September 30,		Three Months Ended September 30,
	2021	2022	2021	2022
Expected life (in years)	4.0 - 6.25	4.0 - 6.25	4.0 - 6.25	4.0 - 6.25
Risk-free interest rate	0.64% - 1.16%	2.41% - 4.30%	0.76% - 1.15%	4.18% - 4.30%
Expected volatility	50% - 58%	51% - 63%	50% - 58%	52% - 63%

	December 31,			September 30,
	2021			2022
Computer and other related equipment	$	13,373		$	14,624
Purchased and internally developed software		2,483			3,090
Furniture and fixtures		1,271			1,271
Leasehold improvements		1,732			1,732
Construction in progress		769			968
	$	19,628		$	21,685
Less: Accumulated depreciation and amortization		(16,811	)		(17,846	)
Property and equipment, net	$	2,817		$	3,839

	Nine Months Ended September 30, 2021			% of revenue			Nine Months Ended September 30, 2022			% of revenue			Three Months Ended September 30, 2021			% of revenue			Three Months Ended September 30, 2022			% of revenue
Revenue	$	40,686			100	%	$	39,878			100	%	$	13,700			100	%	$	13,197			100	%
Expenses:
Service costs		16,389			40	%		14,791			37	%		5,507			40	%		4,992			38	%
Sales and marketing		10,245			25	%		10,172			26	%		3,906			29	%		3,388			26	%
Product development		13,289			33	%		10,515			26	%		3,178			23	%		3,524			27	%
General and administrative		6,960			18	%		7,397			19	%		1,875			14	%		2,351			18	%
Amortization of intangible assets from acquisitions		3,708			9	%		1,593			4	%		1,149			8	%		531			4	%
Acquisition and disposition-related costs (benefit)		103			0	%		37			0	%		(18	)		0	%		10			0	%
Total operating expenses		50,694			125	%		44,505			112	%		15,597			114	%		14,796			112	%
Loss from operations		(10,008	)		-25	%		(4,627	)		-12	%		(1,897	)		-14	%		(1,599	)		-12	%


Exhibit Number		Description
†31		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
††32		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
†101.SCH		Inline XBRL Taxonomy Extension Schema Document.
†101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
†101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
†101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document.
†101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
†104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

	MARCHEX, INC.

Date: November 4, 2022	By:	/s/ MICHAEL A. ARENDS
	Name:	Michael A. Arends
	Title:	Co-CEO (Principal Executive Officer for SEC reporting purposes)