Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
Marchex, Inc.
Report of Independent Registered Public Accounting Firm , RSM US LLP (PCAOB ID: 49)
37
Consolidated Balance Sheets as of December 31, 2022 and 2023
39
Consolidated Statements of Operations for the years ended December 31, 2022 and 2023
40
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022 and 2023
41
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2023
42
Notes to Consolidated Financial Statements
43
36
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Marchex, Inc.
Opinion on the Financial Statements
We have audited the accompanying Company's Consolidated Balance Sheets of Marchex, Inc. and its subsidiaries (the Company) as of December 31, 2023 and December 31, 2022, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023 and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and December 31, 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee of the board of directors and that: (1) related to an account and disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Occurrence of Revenues
As described in Note 1 of the consolidated financial statements, the Company generates its revenues through a significant volume of low‑dollar transactions tracked and recorded in a highly automated process within the Company’s internally developed information technology systems. The Company recognizes revenue from its call analytics technology platform when customers pay a fee for each qualified transaction generated per the terms of the customer contract. Revenue is recognized over time as the service is performed.
We identified the occurrence of revenue as a critical audit matter as the processes to track and record revenues are highly automated. These internally developed systems are complex and require an increased audit effort around assessing the reliability of data.
37
Table of Contents
Our audit procedures related to the occurrence of revenue included performing the following audit procedures, among others:
• On a sample basis, we obtained the customer invoice, the supporting call log data from the Company’s internal tracking system relating to the invoiced period, and the underlying customer contracts. For each sample:
o We recalculated the invoiced amount based on the call and/or text volume, agreeing the terms and conditions to the customer contract;
o We evaluated performance obligations and the applicable billing period, and agreed to the customer billing and recorded revenue during the selected period;
o We verified the existence of call data by listening to a sample of recorded calls and of text message data by viewing a sample of text logs and traced to cash received for samples selected;
• We performed substantive analytical procedures over the Company’s revenue which included comparing our expected rate per call during the selected period to the rate per call derived from the Company’s call log data and recorded revenue for the selected period; and
• We verified reliability of system data by obtaining management's analysis of call minutes per the system and compared to third party vendor invoices for completeness and accuracy for a sample of months.
/s/ RSM US LLP
We have served as the Company's auditor since 2022.
Seattle, Washington
March 29, 2024
38
Table of Contents
MARCHEX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
(In Thousands, Except Per Share Amounts)
2022
2023
Assets
Current assets:
Cash and cash equivalents
$
20,474
$
14,607
Accounts receivable, net
8,396
7,394
Prepaid expenses and other current assets
2,015
1,805
Total current assets
30,885
23,806
Property and equipment, net
4,050
2,398
Other assets, net
973
1,482
Right-of-use lease asset
738
1,631
Goodwill
17,558
17,558
Intangible assets from acquisitions, net
2,590
602
Total assets
$
56,794
$
47,477
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
2,037
$
1,533
Accrued benefits and payroll
3,566
3,294
Other accrued expenses and current liabilities
3,825
3,217
Deferred revenue and deposits
1,384
1,214
Lease liability current
1,252
462
Total current liabilities
12,064
9,720
Deferred tax liabilities
233
249
Finance lease, non-current
—
421
Lease liability, non-current
385
1,217
Total liabilities
$
12,682
$
11,607
Commitments and contingencies - See Note 4
Stockholders’ equity:
Common stock, $ 0.01 par value. Authorized 137,500 shares
Class A: 12,500 shares authorized; 4,661 shares issued and
outstanding at December 31, 2022 and 2023
49
49
Class B: 125,000 shares authorized; 38,497 shares issued and
outstanding at December 31, 2022, including 1,105 shares
of restricted stock; and 38,662 shares issued and outstanding at December 31, 2023, including 720 shares of restricted stock
385
386
Additional paid-in capital
354,999
356,666
Accumulated deficit
( 311,321
)
( 321,231
)
Total stockholders’ equity
44,112
35,870
Total liabilities and stockholders’ equity
$
56,794
$
47,477
See accompanying Notes to Consolidated Financial Statements.
39
Table of Contents
MARCHEX, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31,
(In Thousands, Except Per Share Amounts)
2022
2023
Revenue
$ 52,170
$ 49,910
Expenses:
Service costs (1)(3)
20,462
20,582
Sales and marketing (1)(3)
13,517
11,412
Product development (3)
14,355
15,355
General and administrative (1)(3)
9,787
10,205
Amortization of intangible assets from acquisitions (2)
2,124
1,987
Acquisition and disposition related benefits
74
12
Total operating expenses
60,319
59,553
Loss from operations
( 8,149 )
( 9,643 )
Interest income (expense) and other, net
88
( 173 )
Loss before provision for income taxes
( 8,061 )
( 9,816 )
Income tax expense
184
94
Net loss applicable to common stockholders
$( 8,245 )
$( 9,910 )
Basic and diluted net loss per Class A share
applicable to common stockholders
$( 0.19 )
$( 0.23 )
Basic and diluted net loss per Class B share
applicable to common stockholders
$( 0.19 )
$( 0.23 )
Shares used to calculate basic net loss per share
applicable to common stockholders:
Class A
4,661
4,661
Class B
38,560
37,960
Shares used to calculate diluted net loss per share
applicable to common stockholders:
Class A
4,661
4,661
Class B
43,221
42,621
(1) Excludes amortization of intangibles from acquisitions
(2) Components of amortization of intangibles from acquisitions:
Service costs
$ 467
$ 467
Sales and marketing
1,657
1,520
Total
$ 2,124
$ 1,987
(3) Components of related party support services fee recovery
Service costs
$ 2,648
$ 1,115
Sales and marketing
742
90
Product development
1,612
172
General and administrative
1,396
147
Total
$ 6,398
$ 1,524
See accompanying Notes to Consolidated Financial Statements.
40
Table of Contents
MARCHEX, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Class A
Class B
Additional
Total
common stock
common stock
Treasury stock
paid-in
Accumulated
stockholders ’
(In Thousands)
Shares
Amount
Shares
Amount
Shares
Amount
capital
deficit
equity
Balance at December 31, 2021
4,661
$ 49
37,391
$ 374
( 23 )
—
$ 354,155
$( 303,076 )
$ 51,502
Issuance of common stock upon exercise of options, issuance and vesting of restricted stock and under employee stock purchase plan, net
—
—
654
6
—
—
33
—
39
Stock-based compensation from options and restricted stock, net of forfeitures
—
—
—
—
—
—
2,646
—
2,646
Repurchase and retirement of treasury stock
—
—
( 23 )
—
23
—
—
—
—
Issuance of Class B common stock in connection with prior deferred issuance from acquisition
—
—
475
5
—
—
( 5 )
—
—
Settlement of a contractual obligation
—
—
—
—
—
—
( 1,830 )
( 1,830 )
Net loss
—
—
—
—
—
—
—
( 8,245 )
( 8,245 )
Balance at December 31, 2022
4,661
$ 49
38,497
$ 385
—
—
$ 354,999
$( 311,321 )
$ 44,112
Issuance of common stock upon exercise of options, issuance and vesting of restricted stock and under employee stock purchase plan, net
—
—
398
3
—
—
24
—
27
Stock-based compensation from options and restricted stock, net of forfeitures
—
—
—
—
—
—
1,643
—
1,643
Repurchase and retirement of treasury stock
—
—
( 234 )
( 2 )
—
—
—
—
( 2 )
Net loss
—
—
—
—
—
—
—
( 9,910 )
( 9,910 )
Balance at December 31, 2023
4,661
$ 49
38,661
$ 386
—
—
$ 356,666
$( 321,231 )
$ 35,870
See accompanying Notes to Consolidated Financial Statements.
41
Table of Contents
MARCHEX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
(In Thousands)
2022
2023
Cash flows from operating activities:
Net loss applicable to common stockholders
$
( 8,245
)
$
( 9,910
)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation
4,033
3,873
Allowance for doubtful accounts and customer credits
906
641
Deferred income taxes
43
—
Stock-based compensation
2,646
2,393
Gain (or loss) on disposal of fixed assets
—
178
Change in certain assets and liabilities:
Accounts receivable, net
( 1,280
)
360
Prepaid expenses, other current assets, and other assets
73
1,152
Accounts payable
675
( 1,255
)
Accrued expenses and other current liabilities
( 510
)
( 1,658
)
Deferred revenue and deposits
( 633
)
( 169
)
Net cash used in operating activities
( 2,292
)
( 4,395
)
Cash flows from investing activities:
Purchases of property and equipment
( 2,865
)
( 1,377
)
Proceeds from sales of property and equipment
—
65
Net cash used in provided by investing activities
( 2,865
)
( 1,312
)
Cash flows from financing activities:
Settlement of a contractual obligation
( 1,495
)
—
Finance lease principal payments
—
( 185
)
Proceeds from exercises of stock options, issuance and vesting of restricted stock and employee stock purchase plan, net
40
25
Net cash used in financing activities
( 1,455
)
( 160
)
Net decrease in cash and cash equivalents
( 6,612
)
( 5,867
)
Cash and cash equivalents at beginning of period
27,086
20,474
Cash and cash equivalents at end of period
$
20,474
$
14,607
Supplemental disclosure of cash flow information:
Foreign government paycheck assistance and rent subsidies (operating activities)
$
10
$
—
Cash paid for operating leases (operating activities)
$
1,648
$
1,549
Cash paid during the period for income taxes, net of refunds
$
55
$
70
Supplemental disclosure of non-cash investing and financing activities:
Settlement of a contractual obligation
$
335
$
—
See accompanying Notes to Consolidated Financial Statements.
42
Table of Contents
MARCHEX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Description of Business and Summary of Significant Accounting Policies and Practices
(a) 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 conversation intelligence company that harnesses the power of AI and conversational intelligence to provide actionable insights aligned with prescriptive vertical market data analytics, driving operational excellence and revenue acceleration. Marchex enables executive, sales and marketing teams to optimize customer journey experiences across all communication channels. Through our prescriptive analytics solutions, we enable the alignment of enterprise strategy, empowering businesses to increase revenue through informed decision-making and strategic execution.
Divestiture
In October 2020, the Company sold its interests in certain assets related to its Local Leads Platform, Call Marketplace and other assets not related to core conversational analytics and sales engagement solutions. In connection with the divestiture, the Company entered into an administrative support services agreement with the related party purchaser pursuant to which the Company will provide services to the related party purchaser for a support service fee. See Note 10: Divestiture Support Services Agreement of the Notes to the Consolidated Financial Statements for additional information.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of our Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company has used estimates related to several financial statement amounts, including revenues, allowance for doubtful accounts, useful lives for property and equipment and intangible assets, valuation of intangible assets, the fair value of stock options awards, the impairment of goodwill, and the valuation allowance for deferred tax assets. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds.
(c) Fair Value of Financial Instruments
The Company had the following financial instruments as of December 31, 2022 and 2023 : cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities. The carrying value of these financial instruments approximates their fair value based on the liquidity of these financial instruments and their short-term nature. Further, these financial instruments are considered at Level 1 fair value with observable inputs that reflect quoted prices for identical assets or liabilities in active markets. The following table provides information about the fair value of our cash and cash equivalents balance:
Years Ended December 31,
(In Thousands)
2022
2023
Level 1 Assets:
Cash
$
9,020
$
9,510
Money market funds
11,454
5,097
Total cash and cash equivalents
$
20,474
$
14,607
43
Table of Contents
Assets, liabilities, and operations of foreign subsidiaries are recorded based on the functional currency of the entity. For a majority of our foreign operations, the functional currency is the U.S. dollar. Assets and liabilities denominated in other than the functional currency is remeasured each month with the remeasurement gain or loss recorded in Interest income (expense) and other, net in the Consolidated Statements of Operations.
(d) Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable balances are presented net of allowance for doubtful accounts.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is the Company’s best estimate of the amount of expected credit losses in existing accounts receivable. The Company determines the allowance based on analysis of historical bad debts, customer concentrations, customer creditworthiness and current economic trends. Past due balances over 90 days and specific other balances are reviewed individually for collectability. The Company reviews accounts for collectability and the allowance for adequacy quarterly. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
The allowance for doubtful accounts activity for the periods indicated is as follows:
(In Thousands)
Balance at
beginning
of period
Charged to
costs and
expenses
Write-offs,
net of
recoveries
Balance at
end of
period
December 31, 2022
$
266
$
26
$
125
$
167
December 31, 2023
$
167
$
284
$
331
$
120
Allowance for Customer Credits
The allowance for customer credits is the Company’s best estimate of the amount of expected future reductions in customers’ payment obligations related to delivered services. The Company determines the allowance for customer credits based on analysis of historical credits and expected revenue adjustments.
The allowance for customer credits activity for the periods indicated is as follows:
(In Thousands)
Balance at
beginning
of period
Additions
charged against
revenue
Credits
processed
and other
Balance at
end of
period
December 31, 2022
$
157
$
461
$
534
$
84
December 31, 2023
$
84
$
472
$
445
$
111
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation on computers and other related equipment, purchased and internally developed software, and furniture and fixtures are calculated on the straight-line method over the estimated useful lives of the assets, generally averaging three years . Leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful lives of the assets generally ranging from five to eight years .
We capitalize certain software development costs incurred in connection with developing or obtaining computer software for internal use when both the preliminary project stage is completed, and it is probable that the software will be used as intended. Capitalized software costs include (i) external direct costs of materials and services utilized in developing computer software, (ii) compensation and related benefits for employees who are directly associated with the software projects. Capitalized software costs are amortized on a straight-line basis when placed into service over the estimated useful life of the software, generally averaging three years . We capitalized software development costs of $ 1.4 million and $ 0.4 million for the year ended December 31, 2022 and 2023 , respectively.
44
Table of Contents
(f) Leases
The Company determines whether an arrangement is a lease or contains a lease at inception of the arrangement. For arrangements considered leases, the Company assesses the lease for finance or operating classification and records a right-of-use asset and lease liability as of the commencement date. Finance leases are recorded on the Company's Consolidated Balance Sheets and interest is recognized and presented separately in Interest income (expense) and other on the Company's Consolidated Statements of Operations. Operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Right-of-use assets which represent the Company’s right to use the underlying asset for the lease term are amortized over the shorter of the useful life of the asset and the lease term. Operating leases with an initial term of 12 months or less are not recorded on the Company's Consolidated Balance Sheets.
(g) 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, net of recognized impairment.
Goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment at least annually on November 30, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.
(h) Impairment or Disposal of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds fair value. Assets to be disposed of would be separately presented on the Company's Consolidated Balance Sheets and reported at the lower of their carrying amount or fair value less costs to sell, and no longer depreciated. No impairment was recognized in either 2022 or 2023.
(i) Revenue Recognition
We generate the majority of our revenues from conversational intelligence product offerings. Customers typically receive the benefit of the Company’s services as they are performed and substantially all the Company’s revenue is recognized over time as the services are performed.
Revenue is recognized when a customer obtains control of services in an amount that reflects the consideration the Company expects to receive in exchange for those services. The Company measures revenue based on the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service or product to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.
The Company’s AI-powered conversational analytics technology platform provides data and insights into the conversations our clients are having with their customers across phone, text and other communication channels. Our tools enable brands to personalize customer interactions in order to accelerate sales and capture more opportunities to grow their business. The Company generates revenue from the Company’s conversational analytics technology platform when customers pay the Company a fee for call, text, or other communication related data element they receive from calls or texts or for each phone number tracked based on a pre-negotiated rate. Revenue is recognized as services are provided over time, which is generally measured by the delivery of each call/text or call/text related data element or each phone number tracked.
45
Table of Contents
The majority of the Company’s customers are invoiced on a monthly basis following the month of the delivery of services and are required to make payments under standard credit terms. The Company establishes an allowance for customer credits, which is included in Accounts receivable, net in the Company's Consolidated Balance Sheets, using its best estimate of the amount of expected future reductions in customers’ payment obligations related to delivered services based on analysis of historical credits and expected revenue adjustments. The balance associated with the allowance for customer credits in the Company’s Consolidated Balance Sheet was $ 84.0 thousand and $ 111.0 thousand as of December 31, 2022 and 2023, respectively. The revenue recognized but not yet invoiced (unbilled AR) in the Company's Consolidated Balance Sheets was $ 2.1 million and $ 1.5 million as of December 31, 2022 and 2023. Customer payments received in advance of revenue recognition are considered contract liabilities and are recorded as deferred revenue. The deferred revenue balance in the Company’s Consolidated Balance Sheets as of December 31, 2022 and 2023, was $ 1.4 million and $ 1.2 million , respectively. During the year ended December 31, 2022 and 2023, revenue recognized that was included in the contract liabilities balances at the beginning of the period was $ 1.1 million and $ 1.3 million , respectively.
The majority of the Company’s total revenue is derived from contracts that include consideration that is variable in nature. The variable elements of these contracts primarily include the number of transactions (for example, the number qualified phone calls). For contracts with an effective term greater than one year, the Company applies the standard’s practical expedient that permits the exclusion of disclosure of the value of unsatisfied performance obligations for these contracts as the Company’s right to consideration corresponds directly to the value provided to the customer for services completed to date and all future variable consideration is allocated to wholly unsatisfied performance obligations. A term for purposes of these contracts has been estimated at 24 months. In addition, the Company applies the standard’s optional exemption to disclose information about performance obligations for contracts that have original expected terms of one year or less.
For arrangements that include multiple performance obligations, the transaction price from the arrangement is allocated to each respective performance obligation based on its relative standalone selling price and recognized when revenue recognition criteria for each performance obligation are met. The standalone selling price for each performance obligation is established based on the sales price at which the Company would sell a promised good or service separately to a customer or the estimated standalone selling price.
The Company’s incremental direct costs of obtaining a contract, which consist primarily of sales commissions, are generally deferred and amortized to sales and marketing expense over the estimated life of the relevant customer relationship of approximately 24 months and are subject to being monitored every period to reflect any significant change in assumptions. In addition, the deferred contract cost asset is assessed for impairment on a periodic basis. The Company’s contract acquisition costs are included in other assets, net in the Company's Consolidated Balance Sheets. The Company is applying the standard’s practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less, which typically results in expensing commissions paid to acquire certain contracts. As of December 31, 2022 and 2023, the Company had $ 0.2 million and $ 0.3 million of net deferred contract costs, respectively, and the accumulated amortization associated with these costs was $ 1.5 million and $ 1.6 million for the year ended December 31, 2022 and 2023 , respectively.
(j) Service Costs
Our service costs represent the cost of providing our services to our customers. These costs primarily consist of telecommunication costs, including the use of phone numbers relating to our services; colocation service charges of our network equipment; bandwidth and software license fees; network operations; and payroll and related expenses of personnel, including stock based compensation.
(k) Advertising Expenses
Advertising costs are expensed as incurred and include mobile and online advertising and related outside marketing activities, including sponsorships and trade shows. Such costs are included in sales and marketing. Advertising costs were approximately $ 0.9 million and $ 0.7 million for the years ended December 31, 2022 and 2023 respectively.
46
Table of Contents
(l) Product Development
Product development costs consist primarily of expenses incurred by the Company in the research and development, creation, and enhancement of the Company’s products and services. Research and development costs are expensed as incurred and include compensation and related expenses, costs of computer hardware and software, and costs incurred in developing features and functionality of the services. For the periods presented, substantially all of the 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 Topic 350, Intangibles – Goodwill and Other . FASB ASC Topic 350 requires that cost 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.
(m) Income Taxes
The Company utilizes 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.
(n) Stock-Based Compensation
The Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes it as expense, over the vesting or service period, as applicable, of the stock award using the straight-line method. The Company accounts for forfeitures as they occur.
(o) Concentrations
The Company maintains substantially all of its cash and cash equivalents with two financial institutions and are all considered at Level 1 fair value with observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
The Company has one customer that represents more than 10% of consolidated revenue for the year ended December 31, 2022 and 2023.
At December 31,
(In Percentages)
2022
2023
Customer A
10
%
11
%
The Company has one customer that represents more than 10% of consolidated accounts receivable for the year ended December 31, 2022 and 2023.
At December 31,
(In Percentages)
2022
2023
Customer A
28
%
21
%
(p) 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.
47
Table of Contents
In accordance with the two class method, the undistributed earnings (losses) for each year are allocated based on the contractual participation rights of the Class A and Class B common shares and the restricted shares as if the earnings for the year had been distributed. Considering the terms of the Company’s charter which provides that, if and when dividends are declared on its common stock in accordance with Delaware General Corporation Law, equivalent dividends shall be paid with respect to the shares of Class A common stock and Class B common stock and that both classes of common stock have identical dividend rights and would share equally in the Company’s net assets in the event of liquidation, the Company has allocated undistributed earnings (losses) on a proportionate basis. See Note 6: Stockholders' Equity of the Notes to Consolidated Financial Statements for additional information.
Instruments granted in unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities prior to vesting. As such, the Company’s restricted stock awards are considered participating securities for purposes of calculating earnings per share. 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 presents the computation of basic net loss per share for the periods ended:
Years Ended December 31,
2022
2023
(In Thousands, Except Per Share Amounts)
Class A
Class B
Class A
Class B
Basic net loss per share:
Numerator:
Net loss applicable to common stockholders
$
( 889
)
$
( 7,356
)
$
( 1,084
)
$
( 8,826
)
Denominator:
Weighted average number of shares outstanding used to calculate basic net loss per share
4,661
38,560
4,661
37,960
Basic net loss per share applicable to common stockholders
$
( 0.19
)
$
( 0.19
)
$
( 0.23
)
$
( 0.23
)
The following table presents the computation of diluted net loss per share for the periods ended:
Years Ended December 31,
2022
2023
(In Thousands, Except Per Share Amounts)
Class A
Class B
Class A
Class B
Diluted net loss per share:
Numerator:
Net loss applicable to common stockholders
$
( 889
)
$
( 7,356
)
$
( 1,084
)
$
( 8,826
)
Reallocation of net loss for Class A shares as a result of conversion of Class A to Class B shares
—
( 889
)
—
( 1,084
)
Diluted net loss applicable to common stockholders:
$
( 889
)
$
( 8,245
)
$
( 1,084
)
$
( 9,910
)
Denominator:
Weighted average number of shares outstanding used to calculate basic net loss per share
4,661
38,560
4,661
37,960
Conversion of Class A to Class B common shares outstanding
—
4,661
—
4,661
Weighted average number of shares outstanding used to calculate diluted net loss per share
4,661
43,221
4,661
42,621
Diluted net loss per share applicable to common stockholders
$
( 0.19
)
$
( 0.19
)
$
( 0.23
)
$
( 0.23
)
48
Table of Contents
The computation of diluted net loss per share excludes the following because their effect would be anti-dilutive (in thousands):
• For the years ended December 31, 2022 and 2023, outstanding options to acquire 3,766 and 5,367 shares, respectively, of Class B common stock.
• For the years ended December 31, 2022 and 2023, 1,105 and 720 shares of unvested Class B restricted common shares, respectively.
• For the years ended December 31, 2022 and 2023, 535 and 63 restricted stock units, respectively.
(q) Guarantees
FASB ASC Topic 460, Guarantees provides accounting guidance surrounding liability recognition and disclosure requirements related to guarantees. In the ordinary course of business, the Company is not subject to potential obligations under guarantees that fall within the scope of FASB ASC Topic 460 except for standard indemnification provisions that are contained within many of the Company’s agreements, and give rise only to the disclosure requirements prescribed by FASB ASC Topic 460.
In certain agreements, the Company has agreed to indemnification provisions of varying scope and terms with customers, vendors and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s 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 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 the Company could be required to make under these indemnification provisions could be material.
(r) Recent Accounting Pronouncement Not Yet Effective
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires public entities to disclose information about their reportable segments’ significant expenses on an interim and annual basis. In addition, the amendments clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment and contains other disclosure requirements. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently assessing the impact of this ASU on its Consolidated Financial Statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"), which requires public entities to disclose disaggregated information about their effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 and may be applied on a prospective basis , with early adoption permitted. The Company is currently assessing the impact of this ASU on its Consolidated Financial Statements.
49
Table of Contents
Note 2: Property and Equipment
Property and equipment consisted of the following:
Years Ended December 31,
(In Thousands)
2022 (1)
2023
Computer and other related equipment
$
14,939
$
1,012
Purchased and internally developed software
3,090
2,699
Furniture and fixtures
1,273
260
Leasehold improvements
1,732
—
Construction in progress
1,400
25
$
22,434
$
3,996
Less: accumulated depreciation and amortization
( 18,384
)
( 1,598
)
Property and equipment, net
$
4,050
$
2,398
(1) Includes the original cost of fully depreciated fixed assets which was $ 13.6 million at December 31, 2022 .
Depreciation and amortization expense related to property and equipment was approximately $ 1.6 million and $ 1.8 million for the years ended December 31, 2022 and 2023, respectively.
We procured $ 0.8 million of additional server equipment under new financing lease agreements during the year ended December 31, 2023, with current borrowing of $ 0.8 million .
Note 3: Leases
The Company has an operating lease for office space for its corporate headquarters in Seattle, Washington which expires on November 30, 2027 . The Company’s prior lease agreement with respect to office space in Seattle, Washington, as amended, was terminated by the Company effective on March 31, 2023. In the first quarter of 2023, we paid approximately $ 671.0 thousand as provided in the lease for the early termination. The Company also has an operating lease for office space in Wichita, Kansas, which continues until December 2025 with an option to extend the term for two additional periods of three years each. The Company has the option to terminate this lease pursuant to certain terms as specified in the lease without any termination fees if notice is provided. The Company recognizes our operating lease agreements in accordance with ASC 842 and recognizes rent expense on a straight-line basis over the lease term with any lease incentives amortized as a reduction of rent expense over the lease term.
Lease cost recognized in the Company’s Consolidated Statements of Operations and other information is summarized as follows:
Years Ended December 31,
(In Thousands)
2022
2023
Operating lease cost
$
1,943
$
1,067
Short-term operating lease cost
202
182
Total operating lease cost
2,145
1,249
Other information:
Weighted-average remaining lease term - operating leases
1.2 years
3.6 years
Weighted-average discount rate - operating leases (1)
4.6
%
6.7
%
(1) The discount rate used to compute the present value of the total lease liabilities as of December 31, 2022 and 2023 was based on the Company’s estimated incremental borrowing rate of similar secured borrowings available to the Company as of the commencement date of lease.
Assets under finance leases, which primarily represent computer equipment, are included in Other assets, net , with the related liabilities included in Lease liability current , and Finance lease, noncurrent on the Company's Consolidated Balance Sheets.
50
Table of Contents
As of December 31, 2023 the Company’s operating and financing lease liabilities were as follows:
(In Thousands)
Operating Leases
Finance Leases
Gross future lease payments
$
1,836
$
757
Less: imputed interest
( 157
)
( 95
)
Present value of total lease liabilities
1,679
662
Less: current portion of lease liabilities
( 462
)
( 210
)
Total long-term lease liabilities
$
1,217
$
452
In the fourth quarter of 2023, we entered into a rental agreement for utilization of our financed server equipment. We retain our primary obligation under the original financing terms.
Note 4: Commitments and Contingencies
(a) Commitments
The Company has commitments for future payments related to office facilities leases, as well as other contractual obligations primarily related to minimum payments due to outside service providers. The Company leases its office facilities under operating lease agreements in accordance with ASC 842 and recognizes rent expense on a straight-line basis over the lease term with any lease incentive amortized as a reduction of rent expense over the lease term.
Future minimum payments are approximately as follows:
(In Thousands)
Facilities
operating
leases (1)
Other
contractual
obligations
Total
2024
562
1,438
2,000
2025
566
1,235
1,801
2026
397
—
397
2027
311
—
311
2028 and thereafter
—
—
—
Total minimum payments
$
1,836
$
2,673
$
4,509
1) For additional information regarding the Company's facilities operating leases, see Note 3. Leases of the Notes to Consolidated Financial Statements for additional information.
(b) Contingencies
In the third quarter of 2021, the Company was legally released from our repayment obligation under CARES Act loans (the "Loans") administered by the U.S. Small Business Administration (“SBA”), as our application for loan forgiveness was approved by the SBA. It is possible that the SBA could subsequently audit the forgiven Loans. The Company believes it was eligible to receive the Loans, calculated the loan amounts correctly, spent loan proceeds on allowable uses and is entitled to loan forgiveness. The Company will retain its financial documents relating to the Loans for six years as required.
The Company from time to time is a party to disputes and legal and administrative proceedings arising from the ordinary course of business. We could become in the future subject to legal proceedings, governmental investigations, and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks, and other intellectual property rights. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources and could be material. See (p) Guarantees section of Note 1: Description of Business and Summary of Significant Accounting Policies and Practices of the Notes to Consolidated Financial Statements for additional information
51
Table of Contents
On October 21, 2022, the Shareholder Representatives for the former shareholders of Telmetrics, Inc. (an entity acquired by the Company in 2018) filed litigation against the Company in the U.S. District Court for the District of Delaware. The plaintiffs are asserting claims under a share purchase agreement and escrow agreement regarding entitlement to an earnout of up to $ 3.0 million and $ 1.0 million that was placed in escrow to secure indemnification obligations. On March 22, 2023, the plaintiffs filed an amended complaint also seeking substantial punitive damages, followed by a second amended complaint on May 9, 2023. On June 7, 2023, the Company filed a motion to compel arbitration and/or dismiss the second amended complaint. The plaintiffs filed a responsive brief on July 5, 2023, and the Company filed a reply brief on July 26, 2023. On February 2, 2024, the Magistrate Judge issued a report and recommendation advising the U.S. District Court Judge to dismiss certain claims from the second amended complaint and to allow other claims to proceed to discovery. The parties filed objections to the report and recommendation on February 16, 2024. While we believe we have meritorious defenses to this lawsuit and are vigorously defending against it, litigation is inherently uncertain and we cannot currently predict the ultimate outcome of this matter.
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 Company’s financial condition, results of operations or liquidity.
Note 5: Income Taxes
The components of loss before provision for income taxes consist of the following (in thousands):
Years Ended December 31,
(In Thousands)
2022
2023
United States
$
( 7,525
)
$
( 9,829
)
Foreign
( 536
)
13
Loss before provision for income taxes
$
( 8,061
)
$
( 9,816
)
The provision for income taxes consists of the following (in thousands):
Years Ended December 31,
(In Thousands)
2022
2023
Current federal provision
State
$
58
$
78
Foreign
39
—
Deferred provision (benefit)
Federal
67
25
State
20
( 9
)
Total income tax expense
$
184
$
94
52
Table of Contents
The Company’s income tax expense differed from the amounts computed by applying the U.S. federal statutory rate to loss before provision for income taxes as a result of the following:
Years Ended December 31,
(In Thousands)
2022
2023
.
Income tax benefit at U.S. statutory rate
$
( 1,693
)
$
( 2,061
)
State taxes, net of valuation allowance
79
( 339
)
Foreign tax differential
( 150
)
3
Non-deductible transaction costs
16
( 29
)
Stock-based compensation (1)
190
101
Gain on CARES Act loan
32
—
Valuation allowance
1,815
2,307
Tax credits
( 237
)
( 282
)
Other expenses
132
394
Total income tax expense
$
184
$
94
(1) Includes non-deductible stock-based compensation and excess tax benefits and shortfalls from stock-based compensation.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below and reflects the 21 % U.S. federal statutory rate for 2022 and 2023 (in thousands):
Years Ended December 31,
(In Thousands)
2022
2023
Deferred tax assets:
Accrued liabilities not currently deductible
$
434
$
559
Intangible assets- excess of financial statement
over tax amortization
3,341
2,096
Stock-based compensation
675
741
Federal net operating and capital losses
35,724
42,774
State, local and foreign net operating and capital loss carryforwards
5,326
—
Research & experimental tax and other credit carryforwards
5,421
5,612
Lease liability
426
416
Capitalized research and development
1,054
1,764
Other
460
337
Gross deferred tax assets
52,861
54,299
Valuation allowance
( 51,795
)
( 54,105
)
Net deferred tax assets
$
1,066
$
194
Deferred tax liabilities:
Intangible assets-excess of tax over financial statement amortization
( 1,107
)
—
Right-of-use lease asset
( 192
)
( 404
)
Other
—
( 39
)
Net deferred tax liabilities
$
( 233
)
$
( 249
)
As of December 31, 2023, the Company’s federal and state NOL carryforwards were approximately $ 175.9 million and $ 60.1 million , respectively. Of the total federal net operating losses reported, we have accumulated $ 44.2 million with an indefinite life as of December 31, 2023. The remaining federal net operating losses and the state net operating losses will begin to expire in 2027 and 2028 , respectively, for income tax purposes. As of December 31, 2023, the Company’s federal research and development credit carryforwards were $ 4.8 million , which will start expiring in 2029 .
53
Table of Contents
The Tax Reform Act of 1986 limits the use of NOL and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. The Company is not aware that any such change has occurred related to these specific tax attributes, or that the utilization of the carryforwards is limited such that these NOL or tax credit carryforwards will likely never be utilized. Accordingly, the Company has included these federal NOL and tax credit carryforwards in its deferred tax assets (subject to valuation allowance).
The Company has recorded a deferred tax asset for stock-based compensation recorded on unexercised non-qualified stock options and certain restricted shares and restricted share units. The ultimate realization of this asset is dependent upon the fair value of the Company’s stock when the options are exercised and when restricted shares or restricted share units vest, and generation of sufficient taxable income to realize the benefit of the related tax deduction.
The Tax Cuts and Jobs Act contained a provision which requires the capitalization of Section 174 costs incurred in years beginning on or after January 1, 2022. Section 174 costs are expenditures which represent research and development costs that are incident to the development or improvement of a product, process, formula, invention, computer software, or technique. This provision changes the treatment of Section 174 costs such that the expenditures are no longer allowed as an immediate deduction but rather must be capitalized and amortized. We have included the impact of this provision, which results in a deferred tax asset of approximately $ 1.1 million as of December 31, 2022 and $ 1.8 million as of December 31, 2023.
At December 31, 2022 and 2023, the Company recorded a valuation allowance of $ 51.8 million , and $ 54.1 million , respectively, against its federal, state, city and foreign net deferred tax assets, as it believes it is more likely than not that these benefits will not be realized. The net change in the total valuation allowance for each of the years ended December 31, 2022 and 2023 was $( 2.3 ) million and $ 2.2 million , respectively.
The Company regularly reviews deferred tax assets to assess whether it is more likely than not that the deferred tax assets will be realized and, if necessary, establishes a valuation allowance for portions of such assets to reduce the carrying value. In assessing whether it is more likely than not that the Company’s deferred tax assets will be realized, factors considered included: historical taxable income, historical trends related to customer usage rates, projected revenues and expenses, macroeconomic conditions, issues facing the industry, existing contracts, the Company’s ability to project future results and any appreciation of its other assets. The Company incurred taxable losses from 2016 through 2022. 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, with the exception of certain insignificant foreign deferred tax assets, 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 the Company’s effective tax rate when settled. The Company does not have any 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 following table summarizes activity related to tax contingencies from January 1, 2022 to December 31, 2023 which are recorded as an offset to deferred tax assets (in thousands):
(In Thousands)
Gross tax contingencies—January 1, 2022
$
1,382
Gross increases to current period tax positions
2
Gross decreases to tax positions associated with prior periods
—
Gross tax contingencies—December 31, 2022
1,384
Gross increases to current period tax positions
25
Gross tax contingencies—December 31, 2023
$
1,409
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 2013 are within the statute of limitations and are under examination or may be subject to examination.
54
Table of Contents
Note 6: Stockholders' Equity
(a) Common Stock and Authorized Capital
The total number of shares of all classes of capital stock which the Company has authority to issue is 138,500,000 shares, consisting of (i) 137,500,000 shares of common stock, par value $ .01 per share, of which 12,500,000 shares are designated Class A common stock and 125,000,000 shares are designated Class B common stock, and (ii) 1,000,000 shares of preferred stock, par value $ .01 per share. The Company’s board of directors has the authority to designate rights, privileges and restrictions of each such series, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series.
The Company has two classes of authorized common stock: Class A common stock and Class B common stock. Except with respect to voting rights, the Class A and Class B shares have identical rights. Each share of Class A common stock is entitled to twenty-five votes per share, and each share of Class B common stock is entitled to one vote per share. Each share of Class A common stock is convertible at the holder’s option into one share of Class B common stock.
In accordance with the stockholders’ agreement signed by the founding Class A common stockholders, the following provisions survived the Company’s initial public offering: Class A stockholders other than Russell C. Horowitz may only sell, assign or transfer their Class A stock to existing Class A stockholders or to the Company and in the event of transfers of Class A stock not expressly permitted by the stockholders’ agreement, such shares of Class A stock shall be converted into shares of Class B common stock.
In November 2014, the Company’s 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 3,000,000 shares of the Company’s Class B common stock in the aggregate through open market and privately negotiated transactions, at such times and in such amounts as the Company deems appropriate. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions. The 2014 Repurchase Program does not have an expiration date and may be expanded, limited or terminated at any time without prior notice. The Company has made no repurchases under the 2014 Repurchase Program for the years ended December 31, 2022 and 2023. Shares repurchased but not yet retired by the Company are classified as treasury stock on the Consolidated Balance Sheet before retirement. Retirement of treasury stock results in reductions to common stock and additional paid-in capital.
In November 2018, the Company acquired 100 % of the outstanding stock of Callcap for consideration of approximately $ 25.0 million in cash at closing and approximately 3,400,000 shares of Class B common stock to be issued over the four year period following the acquisition date. The issuance of the shares for 2021 and 2022 was deferred as a result of conditional events occurring as specified in terms of the acquisition. In 2022, we paid $ 1.5 million in cash and agreed to transfer $ 335.0 thousand in cash and/or equipment before November 2023 in exchange for settling our contractual obligation to issue 1,340,000 of such shares. The $ 1.5 million cash consideration was recognized as a financing activity on our Consolidated Statements of Cash Flow for the year ended December 31, 2022. In October 2023, the Company settled its $ 335.0 thousand obligation by transferring equipment with a book value of $ 593.0 thousand and receiving $ 65.0 thousand in cash, which resulted in a loss of approximately $ 193.0 thousand that was recognized within Interest income (expense) and other, net on the Consolidated Statements of Operations for the year ended December 31, 2023, and as a combination of non-cash activity and proceeds from sales of fixed assets on our Consolidated Statements of Cash Flow for the year ended December 31, 2023. The remaining shares issuable for the Callcap acquisition were issued in December 2023.
In December 2019, the Company acquired 100 % of the outstanding stock of Sonar for consideration of approximately $ 8.5 million in cash at closing and approximately 1,000,000 shares of Class B common stock to be issued over the three-year period following the acquisition date, which have been issued in their entirety. The Company also agreed to issue up to approximately 389,000 shares of Class B common stock based upon the achievement of certain financial target goals by Sonar in 2020 which were not achieved.
55
Table of Contents
(b) Stock Option Plan
The Company’s stock incentive plan (the “2021 Plan”), which was established in 2021, allows for grants of stock options, restricted stock units and restricted stock awards to eligible participants and such options may be designated as incentive or non-qualified stock options at the discretion of the 2021 Plan’s Administrative Committee. Prior to the 2021 Plan, the Company granted stock-based awards under its 2012 Stock Incentive Plan (the “2012 Plan”). No further awards were made under the 2012 Plan after December 31, 2021. The 2021 Plan authorizes up to 3,500,000 shares of Class B common stock that may be issued with respect to awards granted under the 2021 Plan, and provides that the total number of shares of Class B common stock for which options designated as incentive stock options may be granted shall not exceed 3,500,000 shares. Annual increases to each of these share limits are to be added on the first day of each fiscal year beginning on January 1, 2022 equal to 3 % of the outstanding common stock (including for this purpose any shares of common stock issuable upon conversion of any outstanding capital stock of the Company) or in the case of incentive stock options, the lesser of (i) 2,000,000 shares of Class B common stock, or (ii) 3 % of the outstanding common stock (including for this purpose any shares of common stock issuable upon conversion of any outstanding capital stock of the Company), or (iii) such number as determined by the Company’s board of directors. As a result of this provision, the authorized number of shares available under the 2021 Plan was increased by 1,261,566 and 1,294,725 on January 1, 2022 and 2023, respectively, bringing the aggregate authorized number of shares available under the 2021 Plan to 6,056,291 . The Company may issue new shares or reissue treasury shares for stock option exercises and restricted stock grants. Generally, stock options have 10 -year terms and vest 25 % each year either annually or quarterly, over a 4 -year period and restricted stock awards and units vest 25 % each year annually over a 4 -year period.
The Company did no t grant any options with exercise prices less than the then current market value during 2022 and 2023.
The Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes it as expense over the vesting or service period, as applicable, of the stock award using the straight-line method. The Company accounts for forfeitures as they occur. Stock-based compensation has been included in the same lines as compensation paid to the same employees in the Consolidated Statements of Operations.
Stock-based compensation expense was included in the following operating expense categories:
Years Ended December 31,
(In Thousands)
2022
2023
Service costs
$
171
$
2
Sales and marketing
796
663
Product development
293
114
General and administrative
1,386
1,613
Total stock-based compensation
$
2,646
$
2,392
Stock-based compensation expense as reported in the Consolidated Statements of Operations for the year ended December 31, 2023, varies from the reported Stock-based compensation from options and restricted stock, net of forfeitures in the Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2023, because of a reclassification of a $ 750.0 thousand payment owed to a former employee in connection with the Sonar acquisition. This payment was to be made, at the Company's election, in any mix of cash or restricted stock. The Company had previously determined its intent and ability to settle this obligation in restricted stock; however, in December 2023, the Company chose to settle in cash, resulting in a reclassification of this payment obligation from Additional paid-in capital to Other accrued expenses and current liabilities in the Consolidated Statements of Balance Sheets. This caused a decrease to Stock-based compensation from options and restricted stock, net of forfeitures in the Consolidated Statements of Stockholders’ Equity, with no corresponding decrease in stock-based compensation as reported in the Consolidated Statements of Operations, f or the year ended December 31, 2023.
For the years ended December 31, 2022 and 2023, the income tax benefit related to stock-based compensation included in net loss was $ – million for all periods due to the valuation allowance recorded on the deferred tax assets.
56
Table of Contents
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 years ended December 31, 2022 and 2023 , the expected life of each award granted was determined based on historical experience with similar awards, giving consideration to contractual terms, anticipated exercise patterns, and vesting schedules. Expected volatility is based on historical volatility levels of the Company’s Class B common stock and the expected volatility of companies in similar industries that have similar vesting and contractual terms. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. The Company uses an expected annual dividend yield in consideration of the Company’s common stock dividend payments, which we consider to be zero .
The following assumptions were used in determining the fair value of time-vested stock options granted for the periods indicated:
Years Ended December 31,
2022
2023
Expected life (in years)
4.00 - 6.25
4.00 - 6.25
Risk-free interest rate
2.41 % - 4.30 %
3.86 % - 3.93 %
Expected volatility
51 % - 63 %
57 % - 64 %
Weighted average expected volatility
55 %
57 %
Stock option, restricted stock award, and restricted stock unit activity during the period is as follows:
Options and
Restricted Stock available for grant
(in thousands)
Number of
options
outstanding
(in thousands)
Weighted
average
exercise price
of options
Weighted average
remaining
contractual term
(in years)
Aggregate
intrinsic
value
(in thousands)
Balance at December 31, 2022
16,599
3,796
$ 3.14
6.67
$ 10
Increase to pool January 1, 2023
1,300
Options granted
( 3,299 )
3,328
$ 1.67
Restricted stock granted
( 333 )
—
Restricted stock forfeited
656
—
Options exercised
—
—
Options expired
1,115
( 1,115 )
$ 3.62
Options forfeited
614
( 614 )
$ 2.49
Balance at December 31, 2023
16,652
5,395
$ 2.21
7.39
$ 1
Options exercisable at December 31, 2023
1,674
$ 3.31
5.40
$ 1
Information related to stock compensation activity during the period indicated is as follows:
Years Ended December 31,
2022
2023
Weighted average fair value of options granted
$
1.06
$
0.92
Intrinsic value of options exercised (in thousands)
$
—
Total grant date fair value of restricted stock vested (in thousands)
$
1,321
$
3,037
At December 31, 2023, there was $ 2.8 million of unrecognized stock option compensation expense related to non-vested awards, which is expected to be recognized over a weighted average period of 3.3 years.
57
Table of Contents
Restricted stock awards and restricted stock unit activity during the period is as follows:
Shares/
Units
(In Thousands)
Weighted Average
Grant Date
Fair Value
Unvested at December 31, 2022
1,640
$
2.27
Granted
333
1.84
Vested
( 535
)
2.33
Forfeited
( 656
)
2.61
Unvested at December 31, 2023
782
1.94
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 Company’s common stock. Restricted stock awards and restricted stock units are expensed on a straight-line basis over the vesting or service period, as applicable, and forfeitures are recognized as they occur. Restricted stock units entitle the holder to receive one share of the Company’s Class B common stock upon satisfaction of certain service conditions.
At December 31, 2023, there was $ 0.8 million of unrecognized restricted stock compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted average period of 2.0 years.
(c) Employee Stock Purchase Plan
On March 8, 2013, the Company’s board of directors adopted and in May 2013 the stockholders approved the 2014 Employee Stock Purchase Plan (“2014 ESPP”), which became effective on January 1, 2014. The Company authorized an aggregate of 225,000 shares of Class B common stock for issuance under the plan to participating employees. The 2014 ESPP, which expired on December 31, 2023, provided eligible employees the opportunity to purchase the Company’s Class B common stock at a price equal to 95 % of the closing price on the last business day of each purchase period. The 2014 ESPP permitted eligible employees to purchase amounts up to 15 % of their compensation in the purchase period, and no employee was permitted to purchase stock worth more than $ 25,000 in any calendar year, valued as of the first day of each purchase period. During the year ended December 31, 2022, 18,721 shares were purchased at prices ranging from $ 1.25 to $ 2.18 per share. During the year ended December 31, 2023, 15,174 shares were purchased at prices ranging from 1.29 to 2.01 per share.
Note 7: 401(k) Savings Plan
The Company maintains voluntary defined contribution plans, which are qualified, covering employees that meet eligibility requirements. Eligible employees may elect to defer and contribute a portion of their eligible compensation to the plans, not to exceed the dollar amounts set by applicable laws. In 2022 and 2023, cash contributions were made in the amount of $ 0.2 m illion and $ 0.2 million res pectively.
Note 8: Segment Reporting and Geographic Information
Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for the Company’s management. For the years ended December 31, 2022 and 2023 , the Company operated in a single segment comprised of its conversational analytics and related solutions.
Long-lived assets by geographical region are based on the location of the legal entity that owns the assets. As of December 31, 2022 and 2023, no significant long-lived assets were held by entities outside of the United States.
Revenues from customers by geographical areas are tracked on the basis of the location of the customer. The majority of the Company’s revenue and accounts receivable are derived from domestic sales to customers.
58
Table of Contents
Revenues by geographic region are as follows:
Years ended December 31,
(In Percentages)
2022
2023
United States
99
%
99
%
Canada and other countries
1
%
1
%
Total
100
%
100
%
Note 9: Identified Intangible Assets
Identifiable intangible assets from acquisitions consisted of the following:
As of December 31, 2022
(In Thousands)
Gross Carrying
Amount
Accumulated
Amortization
Impairment
Net Carrying
Amount
Customer relationships
$
13,018
$
( 8,202
)
$
( 3,430
)
$
1,386
Technologies
9,369
( 7,372
)
( 1,062
)
935
Non-compete agreements
3,409
( 2,794
)
( 346
)
269
Trade names
734
( 613
)
( 121
)
—
Total identifiable intangible assets from acquisitions
$
26,530
$
( 18,981
)
$
( 4,959
)
$
2,590
As of December 31, 2023
(In Thousands)
Gross Carrying
Amount
Accumulated
Amortization
Impairment
Net Carrying
Amount
Customer relationships
$
13,018
$
( 9,588
)
$
( 3,430
)
$
—
Technologies
9,369
( 7,839
)
( 1,062
)
468
Non-compete agreements
3,409
( 2,929
)
( 346
)
134
Trade names
734
( 613
)
( 121
)
—
Total identifiable intangible assets from acquisitions
$
26,530
$
( 20,969
)
$
( 4,959
)
$
602
Amortizable intangible assets are amortized on a straight-line basis over their useful lives. Customer relationships, acquired technologies, trade names, and non-compete agreements have a weighted average useful life from date of purchase of 5 years, 3 - 5 years, 2 years, 1 - 3 years, respectively. Aggregate amortization expense incurred by the Company for the year ended December 31, 2022 and 2023 was approximately $ 2.1 million and $ 2.0 million , respectively. The entire remaining net carrying amount of acquired identifiable intangible assets subject to amortization as of December 31, 2023, will be fully amortized within the next year, resulting in estimated amortization expense of $ 0.6 million in 2024 .
Note 10: Divestiture Support Services Agreement
In October 2020, the Company sold certain assets related to its Local Leads Platform, Call Marketplace and other assets not related to core conversational analytics. The purchaser was a related party controlled by a shareholder and officers of the Company. In connection with the closing, the Company also entered into an administrative support services agreement with the related party purchaser pursuant to which the Company was to provide services to the related party purchaser for a support ser vices fee, with certain guaranteed payments to the Company in the first year and in the second year following closing. Support services fees related to this arrangement totaled $ 6.4 million for the year ended December 31, 2022 and $ 1.5 million for the year ended December 31, 2023 are included in the Company’s Consolidated Statements of Operations, net of the related expenses, within Service costs , Sales and marketing , Product development , and General and administrative . As of December 31, 2022 and 2023, the net amount due from the purchaser of $ 0.7 million and $ 0.4 million respectively, is included in the Company’s Consolidated Balance Sheet within Prepaid expenses and other current assets .
59
Table of Contents
Note 11: Interest income (expense) and other, net
Interest income (expense) and other, net consists of the following (in thousands):
Years Ended December 31,
2022
2023
Interest Income
$
97
$
319
Interest Expense
—
( 282
)
Foreign Currency
2
( 11
)
Other
( 11
)
( 199
)
Total
$
88
$
( 173
)
60
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.