Item 1. Condensed Consolidated Financial Statements
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
June 30,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
109,155
|
|
|
$
|
105,777
|
|
Accounts receivable, net
|
|
|
24,621
|
|
|
|
25,301
|
|
Prepaid expenses and other current assets
|
|
|
1,784
|
|
|
|
2,393
|
|
Refundable taxes
|
|
|
127
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
135,687
|
|
|
|
133,595
|
|
Property and equipment, net
|
|
|
5,778
|
|
|
|
4,454
|
|
Intangible and other assets, net
|
|
|
222
|
|
|
|
222
|
|
Goodwill
|
|
|
63,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
204,992
|
|
|
$
|
138,271
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,460
|
|
|
$
|
9,614
|
|
Accrued expenses and other current liabilities
|
|
|
6,712
|
|
|
|
7,583
|
|
Deferred revenue
|
|
|
692
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
16,864
|
|
|
|
17,530
|
|
Other non-current liabilities
|
|
|
662
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,526
|
|
|
|
17,937
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
|
55
|
|
|
|
55
|
|
Class B common stock
|
|
|
368
|
|
|
|
381
|
|
Treasury stock
|
|
|
(238
|
)
|
|
|
(95
|
)
|
Additional paid-in capital
|
|
|
350,799
|
|
|
|
355,979
|
|
Accumulated deficit
|
|
|
(163,518
|
)
|
|
|
(235,986
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
187,466
|
|
|
|
120,334
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
204,992
|
|
|
$
|
138,271
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Three Months Ended
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Revenue
|
|
$
|
71,261
|
|
|
$
|
70,397
|
|
|
$
|
35,346
|
|
|
$
|
34,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs
|
|
|
39,163
|
|
|
|
42,459
|
|
|
|
19,797
|
|
|
|
20,477
|
|
Sales and marketing
|
|
|
7,703
|
|
|
|
11,171
|
|
|
|
4,245
|
|
|
|
5,649
|
|
Product development
|
|
|
15,839
|
|
|
|
15,027
|
|
|
|
8,147
|
|
|
|
7,555
|
|
General and administrative
|
|
|
10,204
|
|
|
|
10,495
|
|
|
|
4,505
|
|
|
|
5,833
|
|
Acquisition and disposition related costs
|
|
|
118
|
|
|
|
308
|
|
|
|
118
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
73,027
|
|
|
|
79,460
|
|
|
|
36,812
|
|
|
|
39,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
|
|
|
|
(63,305
|
)
|
|
|
|
|
|
|
(63,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,766
|
)
|
|
|
(72,368
|
)
|
|
|
(1,466
|
)
|
|
|
(68,711
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and line of credit expense
|
|
|
(37
|
)
|
|
|
(38
|
)
|
|
|
(18
|
)
|
|
|
(34
|
)
|
Other, net
|
|
|
(4
|
)
|
|
|
(37
|
)
|
|
|
2
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(41
|
)
|
|
|
(75
|
)
|
|
|
(16
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision for income taxes
|
|
|
(1,807
|
)
|
|
|
(72,443
|
)
|
|
|
(1,482
|
)
|
|
|
(68,779
|
)
|
Income tax expense (benefit)
|
|
|
(180
|
)
|
|
|
25
|
|
|
|
(185
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(1,627
|
)
|
|
|
(72,468
|
)
|
|
|
(1,297
|
)
|
|
|
(68,791
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
5,047
|
|
|
|
|
|
|
|
(92
|
)
|
|
|
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
22,032
|
|
|
|
|
|
|
|
22,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
|
27,079
|
|
|
|
|
|
|
|
22,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
25,452
|
|
|
|
(72,468
|
)
|
|
|
20,868
|
|
|
|
(68,791
|
)
|
Dividends paid to participating securities
|
|
|
(37
|
)
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
25,415
|
|
|
$
|
(72,468
|
)
|
|
$
|
20,849
|
|
|
$
|
(68,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per Class A and Class B share applicable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(1.75
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(1.65
|
)
|
Discontinued operations, net of tax
|
|
|
0.66
|
|
|
|
|
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per Class A and Class B share applicable to common
stockholders
|
|
$
|
0.62
|
|
|
$
|
(1.75
|
)
|
|
$
|
0.50
|
|
|
$
|
(1.65
|
)
|
Dividends paid per share
|
|
$
|
0.04
|
|
|
$
|
|
|
|
$
|
0.02
|
|
|
$
|
|
|
Shares used to calculate basic net income (loss) per share applicable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
5,233
|
|
|
|
5,233
|
|
|
|
5,233
|
|
|
|
5,233
|
|
Class B
|
|
|
35,919
|
|
|
|
36,238
|
|
|
|
36,072
|
|
|
|
36,499
|
|
Shares used to calculate diluted net income (loss) per share applicable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
5,233
|
|
|
|
5,233
|
|
|
|
5,233
|
|
|
|
5,233
|
|
Class B
|
|
|
41,152
|
|
|
|
41,471
|
|
|
|
41,305
|
|
|
|
41,732
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
4
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25,452
|
|
|
$
|
(72,468
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
1,831
|
|
|
|
1,690
|
|
Impairment of goodwill
|
|
|
|
|
|
|
63,305
|
|
Allowance for doubtful accounts and advertiser credits
|
|
|
235
|
|
|
|
627
|
|
Gain on sale of discontinued operations
|
|
|
(22,195
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
5,460
|
|
|
|
5,467
|
|
Change in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(4,807
|
)
|
|
|
(1,307
|
)
|
Refundable taxes
|
|
|
11
|
|
|
|
3
|
|
Prepaid expenses, other current assets and other assets
|
|
|
(131
|
)
|
|
|
(600
|
)
|
Accounts payable
|
|
|
(299
|
)
|
|
|
148
|
|
Accrued expenses and other current liabilities
|
|
|
(88
|
)
|
|
|
1,096
|
|
Deferred revenue
|
|
|
(812
|
)
|
|
|
(359
|
)
|
Other non-current liabilities
|
|
|
(220
|
)
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
4,437
|
|
|
|
(2,653
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations, net of costs
|
|
|
25,764
|
|
|
|
|
|
Cash paid for sale of Archeo assets
|
|
|
|
|
|
|
(224
|
)
|
Purchases of property and equipment
|
|
|
(2,885
|
)
|
|
|
(362
|
)
|
Purchases of intangible assets and changes in other non-current assets
|
|
|
(39
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
22,840
|
|
|
|
(594
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Tax withholding related to restricted stock awards
|
|
|
(74
|
)
|
|
|
(94
|
)
|
Common stock dividend payments
|
|
|
(1,685
|
)
|
|
|
|
|
Repurchase of Class B common stock
|
|
|
(1,285
|
)
|
|
|
(365
|
)
|
Proceeds from exercises of stock options, issuance and vesting of restricted stock and employee
stock purchase plan, net
|
|
|
166
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,878
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
24,399
|
|
|
|
(3,378
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
80,032
|
|
|
|
109,155
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
104,431
|
|
|
$
|
105,777
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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 mobile advertising analytics company that helps connect online behavior to real-world, offline actions. The Company provides products and services for businesses of all sizes that depend on consumer phone
calls to drive sales. The Companys technology can facilitate call quality, analyze calls in real time and measure the outcomes of calls while its technology platform 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 three and six months ended June 30, 2016 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2016, or for any other period. The balance sheet at December 31, 2015 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
Companys audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2015 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.
In April 2015, the Company sold certain assets related to Archeos
domain operations, including the bulk of its domain name portfolio. The operating results related to this April 2015 disposition are shown as discontinued operations in the condensed consolidated statements of operations in 2015. In December 2015,
the Company sold the remaining Archeo operations which did not meet the criteria for discontinued operations, and as a result the operating results are reflected in continuing operations in 2015. See
Note 12. Discontinued Operations and
Dispositions
of the Notes to Condensed Consolidated Financial Statements for further discussion. Unless otherwise indicated, information presented in the Notes to Condensed Consolidated Financial Statements relates only to the Companys
continuing operations.
(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 managements 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. ASU 2014-09 may be applied retrospectively to each prior period presented or retrospectively with the
cumulative effect recognized as of the date of adoption. In 2016, the FASB issued additional guidance to clarify the implementation guidance. The Company is currently in the process of evaluating the impact of adoption of ASU 2014-09 on its
consolidated financial statements.
6
In November 2015, the FASB issued Accounting Standards Update No. 2015-17,
Income Taxes
(Topic 740), Balance Sheet Classification of Deferred Taxes (ASU 2015-17)
, an ASU amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheet.
The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The ASU may be adopted either prospectively or retrospectively. The Company does not expect adoption to have a material impact on its
consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02
Leases (Topic
842)
, 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 ASU must be adopted retrospectively. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB amended the existing accounting standards for stock-based compensation, with Accounting Standards Update
No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
. The amendments impact several aspects of accounting for share-based payment transactions, including the
income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption
permitted. If early adoption is elected, all amendments must be adopted in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective
approach, while others are applied prospectively. The Company is currently evaluating the impact of these amendments and the transition alternatives 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 to have a material impact on its consolidated financial statements.
(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,
net of estimated forfeitures, over the vesting or service period, as applicable, of the stock-based award, using the straight-line method under FASB ASC 718. Stock-based compensation expense was included in the following operating expense categories
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
Three months ended
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Service costs
|
|
$
|
772
|
|
|
$
|
405
|
|
|
$
|
552
|
|
|
$
|
207
|
|
Sales and marketing
|
|
|
554
|
|
|
|
968
|
|
|
|
309
|
|
|
|
529
|
|
Product development
|
|
|
1,223
|
|
|
|
1,161
|
|
|
|
644
|
|
|
|
629
|
|
General and administrative
|
|
|
2,909
|
|
|
|
2,933
|
|
|
|
1,162
|
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
5,458
|
|
|
$
|
5,467
|
|
|
$
|
2,667
|
|
|
$
|
3,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes option pricing model to estimate the per share fair value of stock option
grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. For the quarters ended June 30, 2015 and 2016, 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 forfeitures. Expected volatility is based on historical volatility levels of the Companys 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 Company used an expected annual dividend yield in consideration of the Companys common stock dividend payments during the first half of 2015. The Company discontinued paying dividends on its common
stock after the second quarter of 2015.
7
The following weighted average assumptions were used in determining the fair value of time-vested
stock option grants for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
Three months ended
June 30,
|
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Expected life (in years)
|
|
4.0-6.25
|
|
4.0-6.25
|
|
4.0
|
|
4.0-6.25
|
Risk-free interest rate
|
|
1.13%-1.54%
|
|
0.86%-1.15%
|
|
1.32%
|
|
0.86%-1.15%
|
Expected volatility
|
|
62%-65%
|
|
57%-58%
|
|
62%
|
|
57%-58%
|
Expected dividend yield
|
|
0%-0.36%
|
|
0%
|
|
0%
|
|
0%
|
Stock option activity during the six months ended June 30, 2016 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted average
exercise price
|
|
|
Weighted average
remaining
contractual term
(in years)
|
|
Balance at December 31, 2015
|
|
|
8,937,281
|
|
|
$
|
6.97
|
|
|
|
6.33
|
|
Options granted
|
|
|
1,626,000
|
|
|
|
4.23
|
|
|
|
|
|
Options forfeited
|
|
|
(192,305
|
)
|
|
|
5.63
|
|
|
|
|
|
Options expired
|
|
|
(410,112
|
)
|
|
|
15.10
|
|
|
|
|
|
Options exercised
|
|
|
(60,303
|
)
|
|
|
4.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
|
9,900,561
|
|
|
$
|
6.23
|
|
|
|
6.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys common stock. Restricted stock units entitle the holder to receive one share of the Companys Class B common stock upon satisfaction of certain service conditions.
Restricted stock awards and restricted stock unit activity during the six months ended June 30, 2016 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares/
Units
|
|
|
Weighted average
grant date
fair value
|
|
Unvested balance at December 31, 2015
|
|
|
2,222,080
|
|
|
$
|
4.86
|
|
Granted
|
|
|
2,196,406
|
|
|
|
4.24
|
|
Vested
|
|
|
(722,467
|
)
|
|
|
5.32
|
|
Forfeited
|
|
|
(114,421
|
)
|
|
|
4.95
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at June 30, 2016
|
|
|
3,581,598
|
|
|
$
|
4.38
|
|
|
|
|
|
|
|
|
|
|
In the six months ended June 30, 2015 and 2016, the Company repurchased approximately 15,000 and 23,000
shares, respectively, from certain executives for minimum withholding taxes on approximately 55,000 and 80,000 restricted stock award vests, respectively. 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 executives minimum withholding taxes of $74,000 and $94,000, respectively, 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.
In February 2015, vesting of approximately 139,000 stock options and 108,000 restricted stock awards were
fully accelerated in connection with a certain executives employment agreement. In May 2016, approximately 27,000 stock options and 33,000 restricted stock awards were fully accelerated and the period to exercise any outstanding vested stock
options was extended through the 10-year anniversary of the respective grant dates in connection with an executives transition to a consulting arrangement.
8
(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 Companys 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 Companys net assets in the event of liquidation, the Company has allocated undistributed earnings (losses) on a proportionate basis. Additionally, the Company has paid dividends equally
to both classes of common stock and the unvested restricted shares for all cash dividends paid since November 2006.
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 Companys restricted stock awards are considered
participating securities for purposes of calculating earnings per share. Under the two class method, dividends paid on unvested restricted stock are allocated to these participating securities and therefore impact the calculation of amounts
allocated to common stock.
The following table calculates net loss from continuing operations to net income (loss) applicable to common
stockholders used to compute basic net income (loss) per share for the periods ended (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(212
|
)
|
|
$
|
(1,415
|
)
|
|
$
|
(9,144
|
)
|
|
$
|
(63,324
|
)
|
Dividends paid to participating securities
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations applicable to common stockholders
|
|
$
|
(212
|
)
|
|
$
|
(1,452
|
)
|
|
$
|
(9,144
|
)
|
|
$
|
(63,324
|
)
|
Discontinued operations, net of tax
|
|
|
3,443
|
|
|
|
23,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
3,231
|
|
|
$
|
22,184
|
|
|
$
|
(9,144
|
)
|
|
$
|
(63,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate basic net income (loss) per
share
|
|
|
5,233
|
|
|
|
35,919
|
|
|
|
5,233
|
|
|
|
36,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations applicable to common stockholders
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(1.75
|
)
|
|
$
|
(1.75
|
)
|
Discontinued operations, net of tax
|
|
|
0.66
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share applicable to common stockholders
|
|
$
|
0.62
|
|
|
$
|
0.62
|
|
|
$
|
(1.75
|
)
|
|
$
|
(1.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(168
|
)
|
|
$
|
(1,129
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(60,166
|
)
|
Dividends paid to participating securities
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations applicable to common stockholders
|
|
$
|
(168
|
)
|
|
$
|
(1,148
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(60,166
|
)
|
Discontinued operations, net of tax
|
|
|
2,808
|
|
|
|
19,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
2,640
|
|
|
$
|
18,209
|
|
|
$
|
(8,625
|
)
|
|
$
|
(60,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate basic net income (loss) per
share
|
|
|
5,233
|
|
|
|
36,072
|
|
|
|
5,233
|
|
|
|
36,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations applicable to common stockholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(1.65
|
)
|
|
$
|
(1.65
|
)
|
Discontinued operations, net of tax
|
|
|
0.53
|
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share applicable to common stockholders
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
(1.65
|
)
|
|
$
|
(1.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table calculates net income (loss) from continuing operations to net income (loss) applicable to
common stockholders used to compute diluted net income (loss) per share for the periods ended (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(212
|
)
|
|
$
|
(1,415
|
)
|
|
$
|
(9,144
|
)
|
|
$
|
(63,324
|
)
|
Dividends paid to participating securities
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
Reallocation of net loss for Class A shares as a result of conversion of Class A to
Class B shares
|
|
|
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
(9,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations applicable to common stockholders
|
|
$
|
(212
|
)
|
|
$
|
(1,664
|
)
|
|
$
|
(9,144
|
)
|
|
$
|
(72,468
|
)
|
Discontinued operations, net of tax
|
|
|
3,443
|
|
|
|
23,636
|
|
|
|
|
|
|
|
|
|
Reallocation of discontinued operations for Class A shares as a result of conversion of
Class A to Class B shares
|
|
|
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted discontinued operations, net of tax
|
|
$
|
3,443
|
|
|
$
|
27,079
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
3,231
|
|
|
$
|
25,415
|
|
|
$
|
(9,144
|
)
|
|
$
|
(72,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate basic net income (loss) per
share
|
|
|
5,233
|
|
|
|
35,919
|
|
|
|
5,233
|
|
|
|
36,238
|
|
Conversion of Class A to Class B common shares outstanding
|
|
|
|
|
|
|
5,233
|
|
|
|
|
|
|
|
5,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate diluted net income (loss) per
share
|
|
|
5,233
|
|
|
|
41,152
|
|
|
|
5,233
|
|
|
|
41,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations applicable to common stockholders
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(1.75
|
)
|
|
$
|
(1.75
|
)
|
Discontinued operations, net of tax
|
|
|
0.66
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share applicable to common stockholders
|
|
$
|
0.62
|
|
|
$
|
0.62
|
|
|
$
|
(1.75
|
)
|
|
$
|
(1.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(168
|
)
|
|
$
|
(1,129
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(60,166
|
)
|
Dividends paid to participating securities
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
Reallocation of net loss for Class A shares as a result of conversion of Class A to
Class B shares
|
|
|
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
(8,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations applicable to common stockholders
|
|
$
|
(168
|
)
|
|
$
|
(1,316
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(68,791
|
)
|
Discontinued operations, net of tax
|
|
|
2,808
|
|
|
|
19,357
|
|
|
|
|
|
|
|
|
|
Reallocation of discontinued operations for Class A shares as a result of conversion of
Class A to Class B shares
|
|
|
|
|
|
|
2,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
$
|
2,808
|
|
|
$
|
22,165
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
2,640
|
|
|
$
|
20,849
|
|
|
$
|
(8,625
|
)
|
|
$
|
(68,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate basic net income per
share
|
|
|
5,233
|
|
|
|
36,072
|
|
|
|
5,233
|
|
|
|
36,499
|
|
Conversion of Class A to Class B common shares outstanding
|
|
|
|
|
|
|
5,233
|
|
|
|
|
|
|
|
5,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate diluted net income (loss) per
share
|
|
|
5,233
|
|
|
|
41,305
|
|
|
|
5,233
|
|
|
|
41,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations applicable to common stockholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(1.65
|
)
|
|
$
|
(1.65
|
)
|
Discontinued operations, net of tax
|
|
|
0.53
|
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share applicable to common stockholders
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
(1.65
|
)
|
|
$
|
(1.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of diluted net income (loss) per share excludes the following because their effect would be
anti-dilutive (in thousands):
|
|
|
For both the three and six months ended June 30, 2015, outstanding options to acquire 9,028 shares of Class B common stock. For both the three and six months ended June 30, 2016, outstanding options to acquire
9,901 shares of outstanding Class B common stock.
|
|
|
|
For the three and six months ended June 30, 2015 and 2016, 839 and 1,467 shares of unvested Class B restricted common shares, respectively.
|
|
|
|
For the three and six months ended June 30, 2015 and 2016 1,467 and 2,115 restricted stock units, respectively.
|
(5) Concentrations
The Company maintains
substantially all of its cash and cash equivalents with one financial institution and are all considered at Level 1 fair value with observable inputs that reflect quoted prices for identical assets or liabilities in active markets. At various points
during the six months ended June 30, 2016, the Company held cash equivalents in a commercial paper sweep account with the same financial institution. These Level 2 assets were fully liquidated prior to June 30, 2016.
A significant majority of the Companys 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 consolidated revenue for the three
and six months ended June 30, 2015 and 2016.
11
The advertisers representing more than 10% of consolidated revenue are as follows (in
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
Three months ended
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Advertiser A
|
|
|
31
|
%
|
|
|
24
|
%
|
|
|
30
|
%
|
|
|
24
|
%
|
Advertiser B
|
|
|
19
|
%
|
|
|
24
|
%
|
|
|
20
|
%
|
|
|
22
|
%
|
Advertiser A is also a distribution partner.
The outstanding receivable balance for each advertiser representing more than 10% of accounts receivable is as follows (in percentages):
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2015
|
|
|
At June 30,
2016
|
|
Advertiser A
|
|
|
14
|
%
|
|
|
21
|
%
|
Advertiser B
|
|
|
28
|
%
|
|
|
25
|
%
|
Advertiser C
|
|
|
19
|
%
|
|
|
12
|
%
|
In certain cases, the Company may engage directly with one or more advertising agencies who act on an
advertisers behalf. In addition, an advertising agency may represent more than one advertiser that utilizes the Companys products and services. One advertising agency represented 19% and 20% of consolidated revenue for the three and six
months ended June 30, 2015, respectively, and 20% and 21% of consolidated revenue for the three and six months ended June 30, 2016, respectively. This same advertising agency represented 22% and 21% of consolidated accounts receivable as
of December 31, 2015 and June 30, 2016, respectively.
(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 Companys management. Historically, the Company operated under two segments: Call-driven and Archeo. Subsequent to the sale of the Companys remaining Archeo operations in December 2015, the Company operates primarily
under the Call-driven segment which is comprised of performance-based advertising business focused on driving phone calls.
The Archeo
segment historically comprised the Companys click-based advertising businesses. In April 2015, the Company sold certain assets related to Archeos domain operations, including the bulk of its domain name portfolio. This disposition is
shown as discontinued operations, net of tax, in the condensed consolidated statements of operations for all periods presented and is excluded from segment reporting. On December 31, 2015, the Company sold the remaining Archeo operations, which
did not meet the criteria for discontinued operations presentation and is included in segment reporting in 2015. See
Note 12. Discontinued Operations and Dispositions
for further discussion.
Call-driven segment expenses include both direct costs incurred by the segment as well as corporate overhead costs. Archeo segment expenses
only include direct costs incurred by the segment. Segment expenses exclude the following: stock-based compensation, acquisition and disposition related costs, and other expense.
For the three and six months ended June 30, 2016, the Companys operating results are primarily all Call-driven. There were other
operating activities related to transition activities of the Archeo operations in 2016, which were not significant.
Selected segment
information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2015
|
|
|
|
Call-driven
|
|
|
Archeo
|
|
|
Total
|
|
Revenue
|
|
$
|
69,486
|
|
|
$
|
1,775
|
|
|
$
|
71,261
|
|
Operating expenses
|
|
|
65,454
|
|
|
|
1,997
|
|
|
|
67,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
4,032
|
|
|
$
|
(222
|
)
|
|
$
|
3,810
|
|
Less reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
5,458
|
|
Acquisition and disposition related costs
|
|
|
|
|
|
|
|
|
|
|
118
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision for income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(1,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015
|
|
|
|
Call-driven
|
|
|
Archeo
|
|
|
Total
|
|
Revenue
|
|
$
|
34,458
|
|
|
$
|
888
|
|
|
$
|
35,346
|
|
Operating expenses
|
|
|
33,058
|
|
|
|
969
|
|
|
|
34,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
1,400
|
|
|
$
|
(81
|
)
|
|
$
|
1,319
|
|
Less reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,667
|
|
Acquisition and disposition related costs
|
|
|
|
|
|
|
|
|
|
|
118
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision for income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(1,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from advertisers by geographical areas are tracked on the basis of the location of the advertiser.
The vast majority of the Companys revenue and accounts receivable are derived from domestic sales to advertisers engaged in various mobile, online and other activities.
Revenues by geographic region are as follows (in percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
Three months ended
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
United States
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
96
|
%
|
Canada
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
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,
2015
|
|
|
At June 30,
2016
|
|
Computer and other related equipment
|
|
$
|
21,551
|
|
|
$
|
21,622
|
|
Purchased and internally developed software
|
|
|
7,893
|
|
|
|
7,893
|
|
Furniture and fixtures
|
|
|
1,778
|
|
|
|
1,827
|
|
Leasehold improvements
|
|
|
2,123
|
|
|
|
2,188
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,345
|
|
|
$
|
33,530
|
|
Less: Accumulated depreciation and amortization
|
|
|
(27,567
|
)
|
|
|
(29,076
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,778
|
|
|
$
|
4,454
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was approximately $929,000 and
$808,000 for the three months ended June 30, 2015 and 2016, respectively, and was approximately $1.7 million for both the six months ended June 30, 2015 and 2016.
(8) Commitments, Contingencies and Taxes
(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 expiring through 2018. The Company recognizes rent expense
13
under such agreements on a straight-line basis over the lease term with any lease incentive amortized as a reduction of rent expense over the lease term. The Company also has other contractual
obligations expiring over varying time periods through 2018. 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
|
|
2016
|
|
$
|
1,206
|
|
|
$
|
2,016
|
|
|
$
|
3,222
|
|
2017
|
|
|
2,400
|
|
|
|
2,275
|
|
|
|
4,675
|
|
2018
|
|
|
577
|
|
|
|
487
|
|
|
|
1,064
|
|
2019 and after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
4,183
|
|
|
$
|
4,778
|
|
|
$
|
8,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense incurred by the Company was approximately $476,000 and $494,000 for the three months ended
June 30, 2015 and 2016, respectively, and was $961,000 and $986,000 for the six months ended June 30, 2015 and 2016, respectively.
(b) Contingencies
On November 17, 2015, Steven Porter, a purported shareholder of the Company, filed a securities class action against the Company and
certain officers of the Company, alleging violations of the federal securities laws (the Complaint). Mr. Porter sought to represent all people who purchased or otherwise acquired the Companys Class B common stock during the
period from March 19, 2014 to September 18, 2014, and sought unspecified damages. The Complaint alleged that the Defendants made false and/or misleading statements and/or failed to disclose material adverse facts about the Companys
business, operations, and prospects. On April 1, 2016, Mr. Porter was appointed Lead Plaintiff in the action. On April 22, 2016, the case was dismissed without prejudice after the Lead Plaintiff filed a notice of voluntary
dismissal of the case.
In addition, 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 to, 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 Companys 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 Companys financial condition, results of operations or liquidity.
(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, 2015 and June 30, 2016. In
assessing whether it is more likely than not that the Companys 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 Companys 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.
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
14
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 2011 are within the statute of limitations and are under examination or may be subject to
examination.
(9) Credit Agreement
In April 2008, the Company entered into a Credit Agreement providing for a senior secured $30 million revolving credit
facility (Credit Agreement). In June 2016, the Company signed an amendment to the Credit Agreement that modifies the unused commitment fees, replaces certain financial covenants with a covenant limiting outstanding balances not to exceed
a defined ratio against the Companys unrestricted cash and cash equivalent balances and a covenant with certain earnings thresholds, and modifies the levels and types of indebtedness and payments the Company may make. The Credit Agreement has
a maturity date of April 1, 2017 and contains certain customary representations and warranties, financial covenants, events of default and is secured by substantially all of the assets of the Company. During the six months ended June 30,
2015 and 2016, the Company had no borrowings under the Credit Agreement.
(10) Goodwill
Changes in the carrying amount of goodwill for the six months ended June 30, 2016 are as follows (in thousands):
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
63,305
|
|
Impairment of goodwill
|
|
|
(63,305
|
)
|
|
|
|
|
|
Balance as of June 30, 2016
|
|
$
|
|
|
|
|
|
|
|
The Company reviews goodwill for impairment annually on November 30 and whenever events or changes in
circumstances indicate the carrying value of goodwill may not be recoverable. When evaluating goodwill for impairment, the Company may first perform a qualitative assessment and determine if the fair value of the reporting unit is more likely than
not greater than its carrying amount. For the three months ended June 30, 2016, the Companys 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, the Company tested its goodwill for impairment and concluded that the carrying value exceeded the estimated fair value of the Companys single reporting unit and recognized a preliminary estimated impairment loss during the second
quarter of 2016 of $63.3 million. The estimated fair value of the Companys single reporting unit was based on estimates of future operating results, discounted cash flows and other market-based factors, including the Companys stock
price. The preliminary estimated goodwill impairment loss resulted primarily from a sustained decline in the Companys 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 reflect 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 goodwill impairment analysis is not final as the Company has not completed the valuation of its identifiable assets and the implied fair value of goodwill. The final analysis is expected to be completed in the third
quarter of 2016. The Company believes that the preliminary estimate of goodwill impairment is reasonable and represents the Companys best estimate of the impairment loss to be incurred; however, it is possible that adjustments to the
preliminary estimate may be required as the calculations are finalized.
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 Companys stock price and
market capitalization; a significant decline in its expected future cash flows or a significant adverse change in the Companys 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 Companys
common stock and market capitalization.
(11) Common Stock
In November 2014, the Companys 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, the Company is authorized to repurchase up to 3 million shares of the Companys 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
15
doing so under insider trading laws. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital
availability, and other market conditions. The 2014 Repurchase Program does not have an expiration date and may be expanded, limited or terminated at any time without prior notice. During the six months ended June 30, 2015 and 2016, the Company
repurchased 304,000 shares of Class B common stock for $1.3 million and 89,000 shares of Class B common stock for $363,000, respectively.
During the six months ended June 30, 2015 and 2016, the Companys board of directors approved and the Company retired 741,000 and
210,000 shares of treasury stock, respectively.
(12) Discontinued Operations and Dispositions
In April 2015, the Company sold certain assets related to Archeos domain operations, including the bulk of its domain name portfolio.
This disposal met the requirements of Accounting Standards Codification 205-20,
Discontinued Operations
, for presentation as discontinued operations. As a result, the operating results related to this disposition are shown as discontinued
operations, net of tax. The operating results for the discontinued operations were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
Six months
ended June 30,
2015
|
|
|
Three months
ended June 30,
2015
|
|
Revenue
|
|
$
|
7,081
|
|
|
$
|
422
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Service costs
|
|
|
1,663
|
|
|
|
341
|
|
Sales and marketing
|
|
|
334
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, before provision for income taxes
|
|
|
5,084
|
|
|
|
(55
|
)
|
Income tax expense
|
|
|
37
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
5,047
|
|
|
$
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
The discontinued operations incurred amortization of $2,000 and $16,000 for the three and six months ended
June 30, 2015, respectively.
The net cash proceeds related to Archeos domain operations sold in April 2015 were approximately
$28.1 million. The sale includes a contingent earn-out consideration payment that depends upon the achievement of certain thresholds and will be recognized as income when received.
On December 31, 2015, the Company sold the remaining Archeo operations for cash proceeds of $750,000. The transaction costs were
approximately $244,000 and the net carrying value of the liabilities assumed were approximately $990,000, resulting in a net gain of $1.5 million from the sale. The Company evaluated this disposition and determined that it did not meet the criteria
for classification as a discontinued operation. As a result, operating results of these Archeo operations are reflected in the Companys continuing operations in the condensed consolidated statements of operations. For the three and six months
ended June 30, 2015, the loss before provision for income taxes for these Archeo operations included in the Companys continuing operations was $81,000 and $222,000, respectively.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as believes, intends, expects, anticipates, plans, may, will
and similar expressions to identify forward-looking statements. All forward-looking statements, including, but not limited to, statements regarding our future operating results, financial position, prospects, acquisitions, dispositions, and business
strategy, expectations regarding our growth and the growth of the industry in which we operate, and plans and objectives of management for future operations, are inherently uncertain as they are based on our expectations and assumptions concerning
future events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements we make. There are a number of important factors that could cause the actual results of Marchex to differ materially from
those indicated by such forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about
future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and
uncertainties, including but not limited to the risks, uncertainties and assumptions described in this report, in Part II, Item 1A. under the caption
16
Risk Factors and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2015 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, 2015.
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 mobile advertising analytics company that connects online behavior to
real-world, offline actions.
We provide products and services for enterprises that depend on consumer phone calls to drive sales. Our
media analytics products can connect call data to media channels including search and display down to the campaign, keyword and impression so marketers can maximize advertising returns. Our sales analytics products deliver actionable
intelligence on the offline consumer journey to help prospects become customers.
Our primary product offerings are:
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|
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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, keywords and creatives 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 and many 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.
|
Marchex Call Analytics for Search.
Marchex Call Analytics for Search is a product for search marketers that drive phone calls
from search campaigns. Marchex Call Analytics for Search 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.
Marchex Display Analytics
.
Marchex Display Analytics,
currently in beta, is a product for marketers that buy digital display advertising. Marchex Display 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.
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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 Marchex Call Analytics platform 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 contract
with Yellowpages.com
|
17
|
LLC (YP), we generate revenues from our local leads platform. We also have a separate pay-for-call services arrangement with YP. In 2015, we extended these agreements through
December 31, 2016. The primary local leads platform arrangement includes certain minimum fee commitments by YP through the first half of 2016 and provides YP additional flexibility to migrate active accounts to itself or a third-party provider
prior to the end of an advertiser contract. YP is our largest reseller partner and was responsible for 30% and 31% of our total revenues in the three and six months ended June 30, 2015, respectively, and 24% of our total revenues in both the
three and six months ended June 30, 2016. We also have a separate distribution partner agreement with YP.
|
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; Las Vegas, Nevada; New York, New York; San Francisco, California and Sydney, Australia. In May 2016,
we opened an office in London, England.
Consolidated Statements of Operations
All significant inter-company transactions and balances within Marchex have been eliminated in consolidation. Our purchase accounting resulted
in all assets and liabilities from our acquisitions being recorded at their estimated fair values on the respective acquisition dates. All goodwill, intangible assets, and liabilities resulting from the acquisitions have been recorded in our
condensed consolidated financial statements.
We primarily generate our revenues from our Call-driven products and services. Call-driven
revenue consists of payments from advertisers for pay-for-call marketing services and for use of our call analytics technology. Call-driven revenue also consists of payments from our reseller partners for use of our local leads technology platform
and marketing services, which they offer to their small business customers, as well as payments from advertisers for cost-per-action services. Historically, we also generated revenue from our Archeo operations, which included revenue generated from
our click based advertising and Internet domain operations. In 2015, we sold primarily all of our Archeo operations in two separate transactions. In April 2015, we sold the bulk of our domain name portfolio. The operating results related to this
disposition is shown as discontinued operations in the condensed consolidated statements of operations for all periods presented. In December 2015, we sold the remaining Archeo operations. This disposition did not meet the criteria for discontinued
operations, and as a result, the operating results are reflected in continuing operations in the condensed consolidated statements of operations. See
Note 12. Discontinued Operations and Dispositions
for further discussion regarding the
dispositions. For detail on revenue by segment, see
Note 6. Segment Reporting and Geographic Information
of the notes to our condensed consolidated financial statements.
Presentation of Financial Reporting Periods
The comparative periods presented are for the three and six months ended June 30, 2015 and 2016.
Revenue
We
generate revenue through our call advertising services and our local leads platform, which includes our call analytics and pay-for-call services. Historically, we also generated revenue through pay-per-click advertising services.
Our performance-based advertising services, which include call advertising, cost-per-action services, and pay-per-click 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.
We
recognize revenue upon the completion of our performance obligation, provided that: (1) evidence of an arrangement exists; (2) the arrangement fee is fixed and determinable; and (3) collection is reasonably assured.
In certain cases, we record revenue based on available and reported preliminary information from third parties. Collection on the related
receivables may vary from reported information based upon third party refinement of the estimated and reported amounts owed that occurs subsequent to period ends.
18
Performance-Based Advertising Services
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.
In providing pay-for call
marketing services, 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. The advertisement listings are displayed within our distribution network, which includes mobile and online search engines and applications, directories, destination
sites, shopping engines, third party Internet domains or web sites, and other targeted Web-based content, mobile carriers and offline sources. We also generate revenue from cost-per-action services, which occurs when a user makes a phone call from
our advertisers 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.
We generate revenue from reseller partners and publishers utilizing our Local Leads platform to sell call advertising, search marketing, and
other lead generation products. We are paid account fees and also agency fees for our products in the form of a percentage of the cost of every call or click delivered to advertisers. The reseller partners or publishers 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 advertisers 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 search 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 services and the amount these advertisers spend on our services.
We utilize phone numbers as part of our
pay-for-call and call analytics services to advertisers, which enables advertisers and other users of our services to help measure the effectiveness of mobile, online, and offline advertising campaigns. If we are not able to secure or retain
sufficient phone numbers needed for our services or we are limited in the number of available telecommunication carriers or vendors to provide such phone numbers to us in the event of any industry consolidation or if telecommunication carriers or
vendors were to experience system disruptions, our revenue and results of operations may be materially and adversely affected.
We have
revenue concentrations with certain large customers. Many of these customers are not subject to long term contracts with us and are able to reduce advertising spend at any time and for any reason. 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. 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 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 services. It is even more difficult to anticipate the average revenue per phone call or other performance-based action. It is also difficult to anticipate the impact of worldwide and domestic economic
conditions on advertising budgets.
19
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. In the first quarter of the calendar year, this trend generally reverses 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.
The seasonal purchasing cycles of some customers in certain industries may also be higher in the first half versus the latter half of the calendar year. Additionally, 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 changing such budgets throughout the year, 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, develop successful new products and services, and expand
internationally. 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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|
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user acquisition costs;
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|
amortization of intangible assets;
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license and content fees;
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credit card processing fees;
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serving our search results;
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telecommunication costs, including the use of phone numbers relating to our call products and services;
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maintaining our websites;
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domain name registration renewal fees;
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fees paid to outside service providers;
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delivering customer service;
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depreciation of network equipment and software;
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colocation service charges of our network website equipment;
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bandwidth and software license fees;
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payroll and related expenses of related personnel; 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.
20
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.
|
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.
|
Product Development
Product development costs consist primarily of expenses incurred in the research and development, creation and enhancement of our websites 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
.
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, net of estimated
forfeitures, over the vesting or service period, as applicable, of the stock award using the straight-line method. Stock-based compensation expense has been included in the same lines as compensation paid to the same employees in the consolidated
statements of operations.
21
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. Uncertain tax positions as June 30, 2016 amounted to $998,000.
At June 30, 2016, based upon both positive and negative evidence available, we determined that it is not more likely than not that our
deferred tax assets of $41.4 million will be realized and accordingly, we have recorded a 100% valuation allowance of $41.4 million against these deferred tax assets. This compares to a valuation allowance of $34.5 million at December 31, 2015.
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 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. We incurred taxable losses in 2013, 2014, and 2015 of $7.6 million, $10.9 million, and $13.6 million, respectively. As of
June 30, 2016, our federal NOL carryforwards were approximately $46.6 million for income tax purposes, which will begin to expire in 2026. As of June 30, 2016, our state, city, and other foreign jurisdiction NOL carryforwards were
approximately $6.3 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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Six Months Ended
June 30,
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Three Months Ended
June 30,
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2015
|
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2016
|
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2015
|
|
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2016
|
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Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
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|
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|
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Expenses:
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|
|
|
|
|
|
|
|
|
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Service costs
|
|
|
55
|
%
|
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|
60
|
%
|
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|
56
|
%
|
|
|
60
|
%
|
Sales and marketing
|
|
|
11
|
%
|
|
|
16
|
%
|
|
|
12
|
%
|
|
|
16
|
%
|
Product development
|
|
|
22
|
%
|
|
|
21
|
%
|
|
|
23
|
%
|
|
|
22
|
%
|
General and administrative
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
17
|
%
|
Acquisition and disposition related costs
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
102
|
%
|
|
|
113
|
%
|
|
|
104
|
%
|
|
|
116
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
|
|
|
|
(90
|
%)
|
|
|
|
|
|
|
(184
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2
|
%)
|
|
|
(103
|
%)
|
|
|
(4
|
%)
|
|
|
(200
|
%)
|
Other expense
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision for income taxes
|
|
|
(2
|
%)
|
|
|
(103
|
%)
|
|
|
(4
|
%)
|
|
|
(200
|
%)
|
Income tax expense (benefit)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
(0
|
%)
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(2
|
%)
|
|
|
(103
|
%)
|
|
|
(4
|
%)
|
|
|
(200
|
%)
|
Discontinued operations, net of tax
|
|
|
38
|
%
|
|
|
0
|
%
|
|
|
63
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
36
|
%
|
|
|
(103
|
%)
|
|
|
59
|
%
|
|
|
(200
|
%)
|
Dividends paid to participating securities
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stockholders
|
|
|
36
|
%
|
|
|
(103
|
%)
|
|
|
59
|
%
|
|
|
(200
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Segment Operating Results
We historically organized our operations into two segments: (1) the Call-driven segment which is comprised of our performance-based
advertising business focused on driving phone calls; and (2) the Archeo segment which included our click-based advertising and Internet domain name operations that were sold in 2015. For the three and six months ended June 30, 2016, our
operating results are primarily all Call-driven and other operating activities related to the transition activities of the Archeo operations were not significant. For the three and six months ended June 30, 2015, operating results by segment
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months
ended June 30,
2015
|
|
|
Three months
ended June 30,
2015
|
|
Call-driven
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
69,486
|
|
|
$
|
34,458
|
|
Operating Expenses
|
|
|
65,454
|
|
|
|
33,058
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
$
|
4,032
|
|
|
$
|
1,400
|
|
|
|
|
|
|
|
|
|
|
Archeo
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,775
|
|
|
$
|
888
|
|
Operating Expenses
|
|
|
1,997
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
Segment loss
|
|
$
|
(222
|
)
|
|
$
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
Reconciliation of segment profit from operations to loss from continuing operations before
provision for income taxes:
|
|
|
|
|
|
|
|
|
Total segment profit
|
|
$
|
3,810
|
|
|
$
|
1,319
|
|
Less reconciling items:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
5,458
|
|
|
|
2,667
|
|
Acquisition and disposition related costs
|
|
|
118
|
|
|
|
118
|
|
Other expense (income)
|
|
|
41
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision for income taxes
|
|
$
|
(1,807
|
)
|
|
$
|
(1,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months
ended June 30,
2015
|
|
|
Three months
ended June 30,
2015
|
|
Reconciliation of segment revenue to consolidated revenue
|
|
|
|
|
|
|
|
|
Call-driven
|
|
$
|
69,486
|
|
|
$
|
34,458
|
|
Archeo
|
|
|
1,775
|
|
|
|
888
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
71,261
|
|
|
$
|
35,346
|
|
|
|
|
|
|
|
|
|
|
Comparison of the three months ended June 30, 2015 to the three months ended June 30, 2016 and the six months
ended June 30, 2015 to the six months ended June 30, 2016.
Revenue
Revenue decreased 3% from $35.3 million for the three months ended June 30, 2015 to $34.4 million in the same period in 2016. The decrease
was primarily due to the Company generating no Archeo revenues in the three months ended June 30, 2016 as a result of the sale of the remaining Archeo operations in December 2015, compared to $888,000 in Archeo revenues in the same period in
2015. Revenue was $71.3 million for the six months ended June 30, 2015 and $70.4 million in the same period in 2016. The decrease was primarily due to $1.8 million in Archeo revenues in the six months ended June 30, 2015 with no
corresponding revenue in the same period in 2016. This decrease was partially offset by an increase in our Call-driven revenues.
Our
Call-driven revenues were $34.5 million for the three months ended June 30, 2015 and $34.4 million in the same period in 2016. Our Call-driven revenues were relatively flat due to an increase in larger advertiser budgets for our pay-for-call
services which was offset by fewer YP small business accounts and related revenues.
Our Call-Driven revenues were $69.5 million for the
six months ended June 30, 2015 and $70.4 million in the same period in 2016. This increase was due primarily to larger advertiser budgets for our pay-for-call and call analytic services, partially offset by fewer YP small business accounts and
related revenues.
23
Under our primary arrangement 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 within our Call Marketplace. We charge an agreed-upon price for qualified calls or leads from our network. In 2015, we extended
these agreements through December 31, 2016. The primary local leads platform arrangement includes certain minimum fee commitments by YP through the first half of 2016 and provides YP additional flexibility to migrate active accounts to itself
or a third-party provider prior to the end of an advertiser contract. To the extent our revenues from large national advertisers grow at a faster rate than from YP small business accounts, our revenues from YP as a percentage of our total revenue
may decrease. Additionally, YPs small business account base from their traditional business 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.
In addition, 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. We
expect YP will comprise a lower percentage of total revenues in near term and prospective periods than in recent periods. We also have a separate distribution partner agreement with YP. There can be no assurance that our business with them in the
future will continue at or near current revenue and contribution levels, that we will be able to renew and extend the contracts now set to expire in December 2016, 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 accounted for 30% and 24% of total revenues for the three months ended June 30, 2015 and 2016, respectively, and 31% and 24% for the six months ended June 30, 2015
and 2016, respectively.
We also have arrangements with advertising agencies, such as Resolution Media and OMD Digital, who act on an
advertisers 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% and 20% of total revenues for the three months ended June 30, 2015 and 2016, respectively, and 20% and 21% of total revenues for the six months ended
June 30, 2015 and 2016, respectively, of which the majority related to a single advertiser, State Farm. State Farm, who utilizes our services through Resolution Media and OMD Digital, accounted for 20% and 19% of total revenues for the three
and six months ended June 30, 2015, respectively, and 22% and 24% of total revenues for the three and six months ended June 30, 2016, respectively.
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 providers 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, other 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 their 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
advertisers 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. Other revenues include our call provisioning and call tracking
services, local leads platform for resellers, and campaign management services. Companies distributing advertising 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 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. We utilize phone numbers as part of our pay-for-call and call analytic services to advertisers, which enables
advertisers and other users of our services to help measure the effectiveness of mobile, online, and offline advertising campaigns. If we are not able to secure or retain sufficient phone numbers needed for our services or we are limited in the
number of available telecommunication carriers or vendors to provide such phone numbers to us in the event of any industry consolidation or if telecommunication carriers or vendors were to experience system disruptions, our revenue and results of
operations may be materially and adversely affected. In addition, if revenue grows and the volume of transactions and traffic increases, we will need to expand our network 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 growth rate 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 service, 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 services. It is even more difficult to anticipate the average revenue per phone call or other actions. It is also difficult to
anticipate the impact of worldwide 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
24
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. In the first quarter of the calendar year, this trend generally reverses 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. The seasonal purchasing cycles of some customers in certain industries may also be higher in the first half versus the latter half of the calendar year. Additionally, 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 changing such budgets throughout the year, 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, develop successful new products and services,
and expand internationally. 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.
Expenses
Expenses
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
Three months ended June 30,
|
|
|
|
2015
|
|
|
% of
revenue
|
|
|
2016
|
|
|
% of
revenue
|
|
|
2015
|
|
|
% of
revenue
|
|
|
2016
|
|
|
% of
revenue
|
|
Service costs
|
|
$
|
39,163
|
|
|
|
55
|
%
|
|
$
|
42,459
|
|
|
|
60
|
%
|
|
$
|
19,797
|
|
|
|
56
|
%
|
|
$
|
20,477
|
|
|
|
60
|
%
|
Sales and marketing
|
|
|
7,703
|
|
|
|
11
|
%
|
|
|
11,171
|
|
|
|
16
|
%
|
|
|
4,245
|
|
|
|
12
|
%
|
|
|
5,649
|
|
|
|
16
|
%
|
Product development
|
|
|
15,839
|
|
|
|
22
|
%
|
|
|
15,027
|
|
|
|
21
|
%
|
|
|
8,147
|
|
|
|
23
|
%
|
|
|
7,555
|
|
|
|
22
|
%
|
General and administrative
|
|
|
10,204
|
|
|
|
14
|
%
|
|
|
10,495
|
|
|
|
15
|
%
|
|
|
4,505
|
|
|
|
13
|
%
|
|
|
5,833
|
|
|
|
17
|
%
|
Acquisition and disposition related costs
|
|
|
118
|
|
|
|
0
|
%
|
|
|
308
|
|
|
|
0
|
%
|
|
|
118
|
|
|
|
0
|
%
|
|
|
304
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
73,027
|
|
|
|
102
|
%
|
|
$
|
79,460
|
|
|
|
113
|
%
|
|
$
|
36,812
|
|
|
|
104
|
%
|
|
$
|
39,818
|
|
|
|
116
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
Three months ended
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Service costs
|
|
$
|
772
|
|
|
$
|
405
|
|
|
$
|
552
|
|
|
$
|
207
|
|
Sales and marketing
|
|
|
554
|
|
|
|
968
|
|
|
|
309
|
|
|
|
529
|
|
Product development
|
|
|
1,223
|
|
|
|
1,161
|
|
|
|
644
|
|
|
|
629
|
|
General and administrative
|
|
|
2,909
|
|
|
|
2,933
|
|
|
|
1,162
|
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
5,458
|
|
|
$
|
5,467
|
|
|
$
|
2,667
|
|
|
$
|
3,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 increased 3% from $19.8 million in the three months ended June 30, 2015 to $20.5 million in the same period in 2016. The increase in dollars was primarily attributable to an increase in distribution partner payments of $2.4 million,
offset partially by decreases in personnel costs, stock-based compensation, travel costs, fees paid to outside service providers, and other operating costs totaling $1.7 million.
Service costs increased 8% from $39.2 million in the six months ended June 30, 2015 to $42.5 million in the same period in 2016. The
increase was primarily due to an increase in distribution partner payments and network and communication costs totaling $6.1 million, offset partially by decreases in personnel costs, stock-based compensation, travel costs, fees paid to outside
service providers and other operating costs totaling $2.8 million.
25
As a percentage of revenues, service costs were 56% and 60% for the three months ended
June 30, 2015 and 2016, respectively, and 55% and 60% in the six months ended June 30, 2015 and 2016, respectively. The increase as a percentage of revenue was primarily due to an increase in distribution partner payments and, to a lesser
extent, revenues from our local leads platform comprising a lower proportion of revenue compared to the 2015 periods. Our local leads platform revenues have a lower service cost as a percentage of revenue relative to our overall service cost
percentage.
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 service costs as a percentage of revenue in the near term to be stable to modestly higher
relative to the most recent quarterly period. We also expect that in the longer term service costs will increase in absolute dollars and as a percentage of revenue in connection with any revenue increase as a result of costs associated with the
expansion and additional investment in our communications and network infrastructure as we scale and adapt to increases in the volume of transactions, calls, and traffic and as we invest in our platforms.
Sales and Marketing
. Sales and marketing expenses increased 33% from $4.2 million for the three months ended June 30, 2015 to $5.7
million in the same period in 2016. As a percentage of revenue, sales and marketing expenses were 12% and 16% for the three months ended June 30, 2015 and 2016, respectively. The increase in dollars and percentage of revenue was primarily
attributable to an increase in personnel costs, stock-based compensation, travel costs, fees paid to outside service providers, and other operating costs totaling $1.7 million, offset partially by a decrease in outside marketing costs of $270,000.
Sales and marketing expenses increased 45% from $7.7 million for the six months ended June 30, 2015 to $11.2 million in the same
period in 2016. As a percentage of revenue, sales and marketing expenses were 11% and 16% for the six months ended June 30, 2015 and 2016, respectively. The increase in dollars and percentage of revenue was primarily attributable to an increase
in personnel costs, stock-based compensation, travel costs, fees paid to outside service providers and other operating costs totaling $3.6 million, offset partially by a decrease in outside marketing activities.
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 term to be relatively stable in absolute dollars and to increase in the longer term as we expand our sales force, marketing initiatives, and look to further our international initiatives. 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 7% from $8.1 million for the three months ended June 30, 2015 to $7.6
million in the same period in 2016. The net decrease in dollars was primarily due to a decrease in personnel costs, travel costs, and fees paid to outside service providers totaling $509,000. As a percentage of revenue, product development expenses
were relatively flat at 23% and 22% for the three months ended June 30, 2015 and 2016, respectively.
Product development expenses
decreased 5% from $15.8 million for the six months ended June 30, 2015 to $15.0 million in the same period in 2016. The net decrease in dollars was primarily due to a decrease in personnel costs, travel costs, and fees paid to outside service
providers totaling $680,000. As a percentage of revenue, product development expenses were relatively flat at 22% and 21% for the six months ended June 30, 2015 and 2016, respectively.
In the near term, we expect product development expenditures to be relatively stable to modestly lower in absolute dollars. In the longer
term, 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 increased 29% from $4.5 million in the three months ended June 30,
2015 to $5.8 million in the same period in 2016. As a percentage of revenue, general and administrative expenses were 13% and 17% for the three months ended June 30, 2015 and 2016, respectively. The increase in dollars and percentage of revenue
was primarily due to an increase in personnel costs, stock-based compensation, and fees paid to outside service providers, offset partially by a decrease in bad debt expense.
26
General and administrative expenses increased 3% from $10.2 million in the six months ended
June 30, 2015 to $10.5 million in the same period in 2016. As a percentage of revenue, general and administrative expenses were 14% and 15% for the six months ended June 30, 2015 and 2016, respectively. The increase in dollars was
primarily due to an increase in fees paid to outside service providers and other operating costs totaling $592,000, offset partially by a decrease in personnel costs and bad debt expense.
We expect our general and administrative expenses to be stable to modestly lower in the near term. We expect that our general and
administrative expenses will increase in the longer term to the extent that we expand our operations, including internationally, 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.
Impairment of goodwill.
We review goodwill for impairment annually on November 30 and whenever events or changes
in circumstances indicate the carrying value of goodwill may not be recoverable. When evaluating goodwill for impairment, we may first perform a qualitative assessment and determine if the fair value of the reporting unit is more likely than not
greater than its carrying amount. 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 a preliminary estimated impairment loss during the second quarter of 2016 of $63.3 million. 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 preliminary estimated 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 reflect 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 goodwill impairment analysis is not final as we have not completed the
valuation of our identifiable assets and the implied fair value of goodwill. The final analysis is expected to be completed in the third quarter of 2016. We believe that the preliminary estimate of goodwill impairment is reasonable and represents
our best estimate of the impairment loss to be incurred; however, it is possible that adjustments to the preliminary estimate may be required as the calculations are finalized.
The testing of goodwill for impairment requires us to make significant estimates about our 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 our stock price and market capitalization; a significant decline in its expected future cash flows or a significant
adverse change in our 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 our common stock and market capitalization.
Income Taxes
. The income tax benefit from continuing operations was $185,000 and $180,000 for the three and six months ended
June 30, 2015, respectively. This compares to income tax expense of $12,000 and $25,000 in the same periods in 2016, respectively, and was related to state income taxes. The effective tax rate differed from the expected effective tax rate of
34% due to 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 and other non-deductible amounts.
Discontinued Operations, net of tax.
In April 2015, we sold certain assets related to Archeos domain operations, including the
bulk of its domain name portfolio. The operating results related to this disposition are shown as discontinued operations as well as the gain on sale, net of tax, of $22.0 million in the three and six months ended June 30, 2015. In December
2015, we sold the remaining Archeo operations which did not meet the criteria for discontinued operations, and as a result the operating results are reflected in continuing operations. See
Note 12. Discontinued Operations and Dispositions
of
the Notes to Condensed Consolidated Financial Statements for further discussion.
Net Income (Loss)
. Net income was $20.9 million
and $25.5 million in the three and six months ended June 30, 2015 and was a net loss of ($68.8) million and ($72.5) million in the same periods in 2016, respectively. The decrease was primarily attributable to a preliminary estimated goodwill
impairment charge in the second quarter of 2016 in the amount of $63.3 million and the sale of Archeos domain operations in April 2015 which resulted in $22.2 million and $27.1 million in discontinued operations, net of tax, in the three and
six months ended June 30, 2015 with no corresponding amounts in 2016. In addition, during 2016, sales and marketing expenses increased as well as distribution partner payments.
27
Liquidity and Capital Resources
As of June 30, 2016, we had cash and cash equivalents of $105.8 million and we had current and long term contractual obligations of $9.0
million, of which $4.2 million is for rent under our facility leases.
Cash used in operating activities for the six months ended
June 30, 2016 of approximately $2.7 million consisted primarily of a net loss of $72.5 million, adjusted for non-cash items of $71.1 million, including preliminary estimated impairment of goodwill, depreciation and amortization, allowance for
doubtful accounts and advertiser credits, stock-based compensation, and approximately $1.3 million used in working capital and other activities. Cash provided by operating activities for the six months ended June 30, 2015 of approximately $4.4
million consisted primarily of net income of $25.5 million, adjusted for the gain on sale of discontinued operations of $22.2 million, non-cash items of $7.5 million, including depreciation and amortization, allowance for doubtful accounts and
advertiser credits, and stock-based compensation, and approximately $6.3 million used in working capital and other activities.
With
respect to a significant portion 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 the majority of revenues for the three and six months ended June 30, 2015 and 2016. 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 agencys 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 particularly related to our local leads and call advertising services, such as YP,
SuperMedia Inc., hibu, CDK Global, and Yellow Pages Ltd, whereby we receive payment 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 marketplace and call analytics services, whereby we receive payment when the agencys advertiser pays the agency, which is between 60 and 90 days following the delivery of services and in some instances may take longer.
For the six months ended and as of June 30, 2016, amounts from these partners and agencies totaled 62% of revenue and $15.4 million in
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 24% of total revenues and 25% of accounts receivable for the six months ended and as of June 30, 2016.
In 2015, we amended our arrangements with YP, extending them through December 31, 2016. The primary local leads platform arrangement
includes certain minimum fee commitments by YP through the first half of 2016 and provides YP additional flexibility to migrate active accounts to itself or a third-party provider prior to the end of an advertiser contract. We also have a separate
distribution partner agreement with YP. There can be no assurance that our business with them in the future will continue at or near current revenue and contribution levels, that we will be able to renew and extend the contracts set to expire in
December 2016, 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 at June 30, 2016 from YP totaled
$5.4 million.
We have revenue concentrations with certain large advertisers and advertising agencies and most of these customers are not
subject to long term contracts with us and are generally able to reduce or cease advertising spending at any time and for any reason. 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, delay payments or otherwise forfeit balances owed.
28
Cash used in investing activities for the six months ended June 30, 2016 of approximately
$594,000 was primarily attributable to purchases for property and equipment of approximately $362,000 and cash paid for costs incurred as a result of the sale of the remaining Archeo assets of $224,000. Cash provided by investing activities for the
six months ended June 30, 2015 of approximately $22.8 million was primarily attributable to cash from the sale of the bulk of Archeos domain operations, net of transaction costs, of $25.8 million. These amounts were partially offset by
purchases for property and equipment of $2.9 million and purchases of intangible and other noncurrent assets of $39,000.
We expect
property and equipment purchases will increase as we continue to invest in equipment and software. To the extent our operations increase, we expect to increase expenditures for our systems and personnel. We expect our expenditures for product
development initiatives and internally developed software will increase in the longer term in absolute dollars as our development activities accelerate and 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 used in financing activities for the six months ended June 30, 2016 of approximately $131,000 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 $459,000, which was partially offset by proceeds primarily from employee stock
option exercises and the employee stock purchase plan of $328,000. Cash used in financing activities for the six months ended June 30, 2015 of approximately $2.9 million was primarily attributable to the payment of common stock dividends and
repurchases of Class B common stock.
The following table summarizes our contractual obligations as of June 30, 2016, and the effect
these obligations are expected to have on our liquidity and cash flows in future periods (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
4,183
|
|
|
$
|
2,414
|
|
|
$
|
1,769
|
|
|
$
|
|
|
Other contractual obligations
|
|
|
4,778
|
|
|
|
3,505
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations (1)
|
|
$
|
8,961
|
|
|
$
|
5,919
|
|
|
$
|
3,042
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Our tax contingencies of $998,000 are not included due to their uncertainty.
|
We anticipate
that we will need to invest working capital towards the development and expansion of our overall operations. We may also make a significant number of acquisitions, which could result in the reduction of our cash balances or the incurrence of debt.
Furthermore, we expect that capital expenditures may increase in future periods, particularly if our operating activity increases.
As of
June 30, 2016, we have a Credit Agreement which provides us with a $30 million senior secured revolving credit line, which may be used for various corporate purposes including financing permitted acquisitions, subject to compliance with
applicable covenants. In June 2016, we signed an amendment to the Credit Agreement that modifies the unused commitment fees, replaces certain financial covenants under the Credit Agreement with a covenant limiting outstanding balances not to exceed
a defined ratio against our unrestricted cash and cash equivalent balances and a covenant with certain earnings thresholds, and modifies the levels and types of indebtedness and payments we may make. The Credit Agreement has a maturity date of
April 1, 2017 and contains certain customary representations and warranties, financial covenants, events of default and is secured by substantially all of the assets of the Company. During the six months ended June 30, 2015 and 2016, the
Company had no borrowings under the Credit Agreement.
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.
In
2015, quarterly dividends of $0.02 per share were paid on February 17 and May 18, 2015 to the holders of record as of the close of business on February 6 and May 7, 2015, respectively. The aggregate quarterly dividend paid in
February and May 2015 was $840,000 and $845,000, respectively. We discontinued paying dividends on our common stock after the second quarter of 2015, and we do not anticipate declaring or paying dividends in the foreseeable future.
29
Based on our operating plans we believe that our existing resources and cash flow provided by
ongoing operations, will be sufficient to fund our operations for at least twelve months. Additional equity and debt financing through our existing credit facility or other financing arrangements may be needed to support our acquisition strategy,
our long-term obligations and our companys needs. There can be no assurance that, if we needed additional funds, our existing credit facility or additional 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:
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Stock-based compensation;
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Allowance for doubtful accounts and advertiser credits; and
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Provision for income taxes.
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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 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 advertisers 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
,
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 advertisers 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.
30
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.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in business combinations accounted for under the purchase method.
Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset
might be impaired. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The testing of goodwill for
impairment requires us to make significant estimates about our 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 our stock
price and market capitalization; a significant decline in our expected future cash flows or a significant adverse change in our 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 our share price of our common stock and market
capitalization.
We review goodwill for impairment annually on November 30 and whenever events or changes in circumstances indicate
the carrying value of goodwill may not be recoverable. When evaluating goodwill for impairment, we may first perform a qualitative assessment and determine if the fair value of the reporting unit is more likely than not greater than its carrying
amount. 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 a preliminary estimated impairment loss during the second quarter of 2016 of $63.3 million. 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 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 reflect 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 goodwill impairment analysis is not final as we have not completed the valuation of its identifiable assets and the
implied fair value of goodwill. The final analysis is expected to be completed in the third quarter of 2016. We believe that the preliminary estimate of goodwill impairment is reasonable and represents our best estimate of the impairment loss to be
incurred; however, it is possible that adjustments to the preliminary estimate may be required as the calculations are finalized.
Stock-Based Compensation
FASB ASC 718 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. Under the fair value recognition provisions, we recognize stock-based compensation net of an estimated forfeiture rate, and therefore
only recognize compensation cost for those shares expected to vest over the requisite service period.
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. For stock-based awards with time-based vesting, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience
of our stock-based awards that are granted, exercised and cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the
current period.
We may issue equity awards of stock options and restricted stock awards that have vesting based on a combination of
certain service and market conditions. For equity awards with vesting based on a combination of certain service and market conditions, we factor an estimated probability of achieving certain service and market conditions and recognize compensation
cost over the requisite service period of the award. We use a binomial lattice model to determine the fair value for each tranche and a Monte Carlo simulation to determine the derived service period for each tranche.
31
Although the fair value of stock-based awards is determined in accordance with FASB ASC 718, the
assumptions used in calculating fair value of stock-based awards, the use of the Black-Scholes option pricing model, and the use of the binomial lattice model and a Monte Carlo simulation are 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, 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. Uncertain tax positions as of June 30, 2016 amounted to $998,000.
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, 2015 and June 30, 2016. 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 retrospectively to each prior period presented or retrospectively with the
cumulative effect recognized as of the date of adoption. In 2016, the FASB issued additional guidance to clarify the implementation guidance. We are currently in the process of evaluating the impact of adoption of ASU 2014-09 on our consolidated
financial statements.
32
In November 2015, the FASB issued Accounting Standards Update No. 2015-17,
Income Taxes
(Topic 740), Balance Sheet Classification of Deferred Taxes (ASU 2015-17)
, an ASU amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheet.
The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The ASU may be adopted either prospectively or retrospectively. We do not expect adoption to have a material impact on our consolidated
financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02
Leases (Topic 842)
, 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 ASU must be adopted retrospectively. We are currently in the process of evaluating the impact of adoption of ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB amended the existing accounting standards for stock-based compensation, with Accounting Standards Update
No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
. The amendments impact several aspects of accounting for share-based payment transactions, including the
income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption
permitted. If early adoption is elected, all amendments must be adopted in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective
approach, while others are applied prospectively. We are currently evaluating the impact of these amendments and the transition alternatives 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 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, 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:
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Marchex Twitter Account (https://twitter.com/marchex)
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Marchex Company Blog (http://www.marchex.com/blog)
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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.