MARCHEX INC

The following table presents revenue and certain of our operating results as a percentage of revenue:

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

See Note 6. Stockholders' Equity of the Notes to Condensed Consolidated Financial Statements, as well as our Critical Accounting Policies for additional information about stock-based compensation.

Revenue

Revenue decreased $0.6 million, or 5%, from $12.2 million for the three months ended March 31, 2023 to $11.6 million for the three months ended March 31, 2024. The three months ended March 31, 2024 was impacted from certain non-recurring non-core analytics revenue in the first quarter of 2023, as well as lower call volumes in the 2023 period as compared to the 2024 period. The lower volumes primarily came from several of our small business listing and solution providers that mostly sell marketing services to local businesses. For additional information on our Revenue results, refer to “Recent Developments - Business Update” within this discussion and analysis above.

Expenses

Service Costs. Service costs decreased $1.0 million, or 19%, from $5.4 million for the three months ended March 31, 2023, to $4.4 million for the three months ended March 31, 2024. As a percentage of revenue, service costs were 44% and 38% for the three months ended March 31, 2023 and 2024, respectively. The change from the prior year was primarily due to $0.5 million lower conversational data processing and telecommunication costs due to a combination of lower conversational volumes, benefits from leveraging AI technology, and efficient vendor cost management. In addition, personnel costs were $0.4 million lower as we reorganized and realigned our technology teams.

We expect in the near term that service costs in absolute dollars will be similar to or modestly higher in relation to the most recent quarter. In the intermediate to longer term, we believe that the successful completion of the OneStack initiative (refer to “Recent Developments - Business Update” within this discussion and analysis above) and acceleration of our vertical market growth strategy may provide an opportunity for potential gross margin improvement. Further, there may be a positive impact on service costs as a percentage of revenue in the event we generate contribution from new launches of analytics products and sales engagement solutions.

Sales and Marketing. Sales and marketing expenses decreased $1.2 million, or 30%, from $4.0 million for the three months ended March 31, 2023 to $2.8 million for the three months ended March 31, 2024. As a percentage of revenue, sales and marketing expenses were 33% and 24% for the three months ended March 31, 2023 and 2024, respectively. The change from the prior year was primarily attributable to $0.7 million in lower personnel costs and $0.3 million in lower costs from contractors engaged in marketing and sales functions, as we realigned and focused our go-to-market initiatives. In addition, stock-based compensation was $0.2 million lower.

We expect some volatility in sales and marketing expenses based on the timing of marketing and customer engagement initiatives, but in the near term, we expect these costs to be similar to or modestly higher than the most recent quarter or increase modestly as revenues increase. We also expect, to the extent that we increase our marketing activities, this could correspondingly also cause an increase in sales and marketing expenses as a percentage of revenue. In the intermediate to longer term, we expect to increase marketing activities and personnel supporting our sales and marketing and related growth initiatives.

Product Development. Product development expenses decreased $0.9 million, or 22% from $4.2 million for the three months ended March 31, 2023 to $3.2 million for the three months ended March 31, 2024. As a percentage of revenue, product development expenses were 34% and 28% for the three months ended March 31, 2023 and 2024, respectively. The change from the prior year was primarily attributable to $0.6 million in lower personnel costs, as we reorganized and realigned our research and development teams. In addition, allocated facility rent was $0.2 million lower due to the reduction in our corporate headquarters office space lease in Seattle, Washington during the first quarter of 2023, and stock-based compensation was $0.1 million lower.

In the near term, we expect that product development expenses, in absolute dollars and as a percentage of revenue, will be similar to or modestly higher than the most recent quarter, as we continue to invest in our products and in building AI to expand our conversational intelligence capabilities. In the longer term, we expect to increase investment in AI technology to enhance our service offerings.

General and Administrative. General and administrative expenses decreased $0.3 million, or 13% from $2.6 million for the three months ended March 31, 2023 to $2.3 million for the three months ended March 31, 2024. As a percentage of revenue, general and administrative expenses were 21% and 20% for the three months ended March 31, 2023 and 2024, respectively. The change from the prior year was primarily attributable to a $0.3 million non-recurring payment made to terminate a software agreement in the first quarter of 2023.

We expect some volatility in general and administrative expenses, primarily related to professional fees and insurance, based on the timing of regulatory updates in connection with our being a public company. We also expect fluctuations in our general and administrative expenses related to stock-based compensation, as the recognition of stock-based compensation expense is impacted by market conditions relating to our stock price.

In the near term, we expect our general and administrative expenses to be similar to or modestly lower than the most recent quarter, as we focus on cost management and enhancing overall operational efficiency. In the intermediate to longer term, to the extent that we undertake internal technology improvement initiatives or expand our operations and issue additional stock-based compensation, general and administrative expenses, in absolute dollars and as a percentage of revenue, could increase.

Amortization of Intangible Assets from Acquisitions. Intangible amortization expense was $0.5 million and $0.2 million for the three months ended March 31, 2023 and 2024, respectively. This expense was associated with amortization of intangible assets acquired from business acquisitions made in 2018 and 2019, and is further categorized as service costs or sales and marketing expense in the Company's Condensed Consolidated Statements of Operations based on the nature of the underlying intangible asset. We expect intangible asset amortization for all remaining quarterly periods in 2024 to remain the same as the most recent quarter, at which point all intangible assets will reach the end of their useful lives and be fully amortized.

Income Tax. Income tax expense for the three months ended March 31, 2023 and 2024 was $30.0 thousand and $59.0 thousand, respectively, consisting primarily of U.S. state income tax expense in both periods. The effective tax rate differed from the expected tax rate of 21% in both years primarily due to a full valuation allowance and, to a lesser extent, state income taxes, foreign branch income and rate differential, non-deductible stock-based compensation related to incentive stock options recorded under the fair-value method, and other non-deductible amounts.

At March 31, 2024, based on all the available evidence, both positive and negative, we determined that it is more likely than not that our deferred tax assets will not be realized and accordingly, we have recorded a full valuation allowance of $54.8 million against our net deferred tax assets ($55.0 million of deferred tax assets that are partially offset by $0.5 million in reversing deferred tax liabilities). This compares to a full valuation allowance of $54.1 million at December 31, 2023 ($55.0 million of deferred tax assets that are partially offset by $0.4 million in reversing deferred tax liabilities). In assessing the realizability of deferred tax assets, based on all the available evidence, both positive and negative, 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 considered the future reversal of deferred tax liabilities, carryback potential, projected taxable income, and tax planning strategies as well as the Company’s history of taxable income or losses in the relevant jurisdictions in making this assessment.

Net Loss. Net loss was $4.5 million for the three months ended March 31, 2023 as compared to a net loss of $1.5 million for the three months ended March 31, 2024. The decrease in net loss was primarily attributable to the $3.8 million decrease in total operating expenses, which was driven by the decrease in sales and marketing expenses and service costs discussed above, partially offset by the $0.6 million decrease in revenue discussed above.

Liquidity and Capital Resources

As of December 31, 2023, and March 31, 2024, we had cash and cash equivalents of $14.6 million and $12.0 million, respectively. As of March 31, 2024, we had current and non-current contractual obligations of $4.4 million, of which $0.4 million is for rent under our facility operating leases.

Cash used in operating activities was $2.5 million during the year ended March 31, 2024. The cash used in operating activities was primarily a result of a net loss of $1.5 million, adjusted for an increase in cash due to non-cash items of $1.0 million, which primarily included depreciation and amortization and stock-based compensation, and a decrease in cash due to changes in working capital of $2.0 million. The change in working capital was driven primarily by a decrease in accrued expenses and other current liabilities as well as an increase in prepaid expenses, other current assets, and other assets. Cash used in operating activities was $4.4 million for the three months ended March 31, 2023. The cash used in operating activities was primarily a result of a net loss of $4.5 million adjusted for an increase in cash due to non-cash items of $1.8 million, which primarily included depreciation and amortization and stock-based compensation, and a decrease in cash due to changes in working capital of $1.7 million, which primarily included a decrease in accounts payable and accrued expenses and other current liabilities, offset by a decrease in accounts receivable account balances.

Cash used in operating activities for the year ended March 31, 2024 included costs related to certain reorganization activities and our OneStack initiative (refer to “Recent Developments - Business Update” within this discussion and analysis above) . We believe that those initiatives should benefit us through lower operating expenses in the near and intermediate term. To the extent we are unable to effectively execute these operational initiatives or our revenue growth initiatives, our revenues could be lower, and our costs could be consistent with or higher, than current levels, which would have an adverse impact on our future operating cash flows, liquidity, and profitability.

Cash used in investing activities for the three months ended March 31, 2023 and March 31, 2024, was $392.0 thousand and $4.0 thousand, respectively, and was primarily attributable to cash paid for purchases of property and equipment for our technology infrastructure platform in both years, as well as capitalized software development costs in 2023.

In the near term, we expect property and equipment purchases and capitalized software development costs to be similar to or modestly higher compared to our most recent period, as we invest in equipment for our personnel and other systems enhancements. In the intermediate to longer term, we expect our capitalized expenditures to increase, as we continue our OneStack infrastructure initiatives and accelerate product innovation with more AI-powered features and capabilities launched throughout the year. Further, in the longer term, we expect any increase in our operations to have a corresponding increase in capital expenditures required to support our systems and personnel.

Cash used in financing activities for the three months ended March 31, 2024 was $93.0 thousand, which was attributable to payments made related to equipment financing lease obligations. Cash provided by financing activities for the three months ended March 31, 2023 was $9.0 thousand, which was primarily attributable to proceeds from the employee stock purchase program.

Based on our operating plans we believe that our resources will be sufficient to fund our operations, including any investments in strategic initiatives, for at least twelve months, however macroeconomic factors could influence our operating plans and resources significantly. Additional equity and debt financing may be needed to support our acquisition strategy, our long-term obligations, and our company’s needs. There can be no assurance that, if we needed additional funds, financing arrangements would be available in amounts or on terms acceptable to us, if at all. Failure to generate sufficient revenue or raise additional capital could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives.

Critical Accounting Policies

Our Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). As such, we are required to make certain estimates, judgments and assumptions that management believes are reasonable based upon the information available. We base these estimates on our historical experience, future expectations and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments that may not be readily apparent from other sources.

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2024 , as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023, as amended, filed with the SEC on April 1, 2024.

Recent Accounting Pronouncements Not Yet Effective

For discussion regarding recent accounting pronouncements not yet effective, see Note 1. Description of Business and Basis of Presentationof the Notes to our Condensed 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 X (formally known as Twitter) Account (https://twitter.com/marchex)

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Marchex Company Blog (https://www.marchex.com/blog/)

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Marchex LinkedIn Account (https://linkedin.com/company/marchex)

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.