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Item 7. Management’s Discussion and Analysis

2025-03-14 compared with 2024-04-01 · 69 added, 170 removed, 113 unchanged (68% of the section changed)

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Please see page 1 on this Annual Report on Form 10-K “Forward-Looking Statements” and Item 1A of this Annual Report on Form 10-K under the caption “Risk Factors” for a discussion of the risks, uncertainties and assumptions associated with these statements.

Marchex harnesses the power of AI and omnichannel conversational intelligence to provide actionable insights aligned with prescriptive vertical market data analytics, driving operational excellence and revenue acceleration.

We enable executive, sales and marketing teams to optimize customer journey experiences across communications channels and align enterprise strategy, empowering businesses to increase revenue through informed decision-making and strategic execution.

Marchex provides conversational intelligence AI-powered solutions for market-leading companies in many leading B2B2C vertical markets, including several of the world’s most innovative and successful brands.

Marchex, Inc.

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 communications 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.

Marchex provides conversational intelligence AI-powered solutions for market-leading companies in leading B2B2C vertical markets, including several of the world’s most innovative and successful brands.

Our mission is to create intelligence around all types of business conversations.

We desire to be a leader in vertical market conversational intelligence leveraging generative artificial intelligence and data analytics.

We desire to be a leader in vertical market conversational intelligence leveraging generative AI and data analytics.

We seek to empower performance improvements for our customers by giving them actionable, real-time insights into the conversations they are having with their customers across phone, text, and other communication channels.

We have assembled a set of applications that incorporate artificial intelligence (“AI”) functionality for enterprises that depend on phone calls, texts and other communication channels to help convert prospects into customers, enabling compelling customer experiences during the sales process and helping maximize returns.

We have assembled a set of applications that incorporate AI functionality for enterprises that depend on phone calls, texts, and other communication channels to help convert prospects into customers, enabling compelling customer experiences during the sales process and helping maximize returns.

Our proprietary data and conversational insights help enable brands to personalize customer interactions in order to accelerate sales and capture more opportunities to grow their business.

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We were incorporated in Delaware on January 17, 2003.

We have offices in Seattle, Washington;

and Wichita, Kansas.

Recent Developments

New Product Launch

In November 2023, Marchex announced its launch of Call Summary and Sentiment Suite capabilities.

Powered by generative AI, these new features analyze and generate summaries of consumer-to-business calls, enabling businesses to identify customers who have had exceptionally good experiences, as well as dissatisfied customers.

This valuable data empowers companies to capitalize on positive interactions by advancing sales processes or encouraging positive online behaviors, including reviews, as well as take action to rectify concerns from dissatisfied customers.

The Call Summary feature offers two distinct types of summaries:

• Outcome Focused Summaries give concise, natural-language descriptions of what occurred during a consumer-to-business call.

• Agent Focused Summaries provide comprehensive assessments of customer service or sales agent performance during calls.

The Sentiment Suite feature combines structured and unstructured data to provide a holistic view of customer emotions during conversations, including:

• Customer Emotion gives a high-level assessment of whether conversations were positive, negative, or neutral.

• Emotion Categories assign specific sentiments such as satisfied, frustrated, or confused to callers, enabling tailored response strategies.

• View of Business combines emotion grading and call context to infer how the customer perceives your business:

positive, negative, or neutral.

These structured data pieces are then paired with natural language explanations of why callers are reacting the way they are, enhancing the understanding of emotional dynamics during conversations.

Call Summaries and Sentiment Suite are just the first in a series of AI enhancements in Marchex’s product pipeline, all designed to equip organizations with applications to proactively identify sales and growth opportunities, as well as address issues that may lead to negative experiences and reviews from dissatisfied customers.

Business Update

For our fiscal year ended December 31, 2023, our revenue was $49.9 million, which decreased by $2.3 million, or 5%, compared to $52.2 million for the fiscal year ended December 31, 2022.

The decrease is attributable primarily to lower conversational volumes in 2023 compared to 2022, particularly with our small business listing and solutions resellers.

While we do expect to see continued lower call volumes in the near term based on the continuation of certain volume trends from late 2023, we believe that previously won dealer channel and Auto OEM relationships ramping over the course of the year, extension of existing customers to multi-year arrangements, expansion of our go-to-market initiatives resulting in new customer relationships across our verticals, continued innovation in our AI capabilities and product offerings, and completion of the necessary infrastructure to accelerate product cross selling to existing and new customers may provide an opportunity for potential revenue growth.

We believe our operating expenses have prospective opportunity for further efficiencies as we continue to make advancements in our technology infrastructure and cloud initiatives, to "OneStack".

OneStack enables our technologies and clients to be more easily managed in a less costly operating environment.

It provides a streamlined product innovation and go to market approach, allowing our vertical market clients to potentially consume all our signals, data analytics and applied AI and also provides speed and scale for client onboarding while streamlining support and account management.

For additional information on the effects of our technology environment restructuring efforts on our business and operations, refer to “Results of Operations” within this discussion and analysis and Item 1 of Part I, “Business.”

Factors Affecting our Performance

We utilize phone numbers as part of a number of analytics services to our customers such as our call and text analytics and communications.

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, and our ability to grow, may be materially and adversely affected.

Our quarterly results have fluctuated in the past and may fluctuate in the future due to seasonality.

Our experience has shown that during the spring and summer months, call volumes in certain verticals such as home services are generally higher 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 volumes.

The extent to which call volumes may decrease during these off-peak periods is difficult to predict.

Prolonged or severe decreases in call volumes during these periods may adversely affect our growth rate and results and in turn the market price of our securities.

Historically, we have seen this trend generally reversing in the first quarter of the calendar year with increased call volumes and often new budgets at the beginning of the year for many of our customers with fiscal years ending December 31.

However, there can be no assurances such seasonal trends will consistently repeat each year.

We believe that our future revenue growth will depend on, among other factors, our ability to attract new customers, compete effectively, maximize our sales efforts, successfully improve existing analytics products and sales engagement solutions, and develop successful new products and solutions.

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.

Climate Change

We have considered specific risks associated as a result of climate change legislation or regulation and determined that in their current form, legislation or regulation is not reasonably likely to have a material effect on our financial condition or results of operations.

However, further iteration of the proposed legislation may yield different results.

We have offices in Seattle, Washington and Wichita, Kansas.

Components of the Results of our Operations

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Customers typically receive the benefit of our services as they are performed and substantially all of our revenue is recognized over time as services are performed.

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.

Service Costs

Our service costs represent the cost of providing our services to our customers.

Cost of Revenue

Our cost of revenue represents 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;

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and payroll and related expenses of personnel, including stock based compensation.

The Company has historically reported these costs under the caption "service costs" on the Consolidated Statement of Operations, but determined that the change to "cost of revenue" on a go-forward basis, beginning on December 31, 2024, better aligns the Company's financial reporting to its industry and competitors for comparison.

Sales and Marketing

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Product Development

Product development costs consist primarily of expenses incurred in the research and development, creation and enhancement of our products and services.

Our research and development expenses include payroll and related expenses for personnel;

Product development costs consist primarily of expenses incurred in the research and development, and creation and enhancement, of our products and services.

These costs primarily consist of payroll and related expenses for personnel;

costs of computer hardware and software;

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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 U.S.

Product development costs are expensed as incurred or capitalized into property and equipment in accordance with U.S.

generally accepted accounting principles ("GAAP").

General and Administrative

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non-competition agreements;

These assets are amortized over useful lives ranging from 12 to 60 months.

These assets are fully amortized as of December 31, 2024.

Provision for Income Taxes

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Results of Operations

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

(In Thousands, Except Percentages)

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

Year Ended December 31,

Service costs

(In Thousands, Except Percentages)

Cost of revenue

Sales and marketing

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Total operating expenses

Loss from operations

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

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(In Thousands)

Service costs

Cost of revenue

Sales and marketing

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Total stock-based compensation

Stockholders' Equity (b).

Stock Option Plan of the Notes to Consolidated Financial Statements, as well as our Critical Accounting Policies for additional information about stock-based compensation.

Revenue decreased $2.3 million, or 5%, from $52.2 million for the year ended December 31, 2022 to $49.9 million for the year ended December 31, 2023.

This decrease was impacted primarily by lower conversational volumes in 2023 as compared to 2022.

In the immediate near term, we expect our revenues to be somewhat lower compared to the most recent quarter as we continue to see macroeconomic pressures on certain customer segments to start the year in 2024, to include continued anticipated lower volumes from our small business reseller customers and lower volumes in our Home Services customers potentially due to moderate winter weather conditions.

In the longer term, we believe that previously won dealer channel and Auto OEM relationships ramping over the course of the year, extension of existing customers to multi-year arrangements, expansion of our go-to-market initiatives resulting in new customer relationships across our verticals, continued innovation in our AI capabilities and product offerings, and completion of the necessary infrastructure to accelerate product cross selling to existing and new customers may provide an opportunity for potential revenue growth.

For additional discussion of trends and other factors in our business, refer to Key Trends Driving our Industry and Business in Item 1 of this Annual Report on Form 10-K.

Service Costs.

Service costs increased $0.1 million from $20.5 million for the year ended December 31, 2022 to $20.6 million for the year ended December 31, 2023.

As a percentage of revenue, service costs were 39% and 41% for the year ended December 31, 2022 and 2023, respectively.

The change from the prior year was primarily due to $0.2 million higher cloud compute and storage costs to support our growing technology infrastructure and related conversational data assets, partially offset by $0.2 million lower stock-based compensation.

We expect in the near and intermediate term that service costs in absolute dollars will be similar to or modestly higher in relation to the most recent period.

There may be a positive impact on service costs as a percentage of revenue and further benefit in the event we generate contribution from new launches of analytics products and sales engagement solutions.

In the longer term, we believe that the successful completion of the OneStack initiative (refer to Business Update in Item 7 of this Annual Report on Form 10-K) and acceleration of our vertical market growth strategy may provide an opportunity for potential gross margin improvement.

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

Revenue decreased $1.8 million, or 4%, to $48.1 million for the year ended December 31, 2024 from $49.9 million for the year ended December 31, 2023.

This decrease was impacted primarily by lower conversational volumes in 2024 as compared to 2023, and certain non-recurring non-core analytics revenue in 2023.

The lower volumes primarily came from several of our small business listing and solution providers that mostly sell marketing services to local businesses.

Cost of Revenue.

Cost of revenue decreased $3.4 million, or 17%, to $17.2 million for the year ended December 31, 2024 from $20.6 million for the year ended December 31, 2023.

As a percentage of revenue, cost of revenue was 36% and 41% for the years ended December 31, 2024 and 2023, respectively.

The change from the prior year was primarily due to $1.8 million in lower conversational data processing and telecommunication costs due to a combination of lower conversational volumes, benefits from leveraging AI technology, and efficient vendor costs management.

In addition, personnel costs were $1.7 million lower as we reorganized and realigned our technology teams.

Sales and Marketing.

Sales and marketing expenses decreased $2.1 million, or 18%, from $13.5 million for the year ended December 31, 2022 to $11.4 million for the year ended December 31, 2023.

As a percentage of revenue, sales and marketing expenses were 26% and 23% for the year ended December 31, 2022 and 2023, respectively.

The change from the prior year was primarily attributable to lower personnel costs of $1.9 million as we realigned and focused our go-to-market initiatives.

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.

Sales and marketing expenses increased $0.7 million, or 6%, to $12.1 million for the year ended December 31, 2024 from $11.4 million for the year ended December 31, 2023.

As a percentage of revenue, sales and marketing expenses were 25% and 23% for the years ended December 31, 2024 and 2023, respectively.

The change from the prior year was primarily attributable to $1.0 million in higher personnel costs, primarily due to investments made in the sales and marketing function to increase the sales workforce and prioritize go-to-market initiatives.

This was partially offset by lower stock-based compensation costs of $0.3 million.

Product Development.

Product development expenses increased $1.0 million, or 7%, from $14.4 million for the year ended December 31, 2022 to $15.4 million for the year ended December 31, 2023.

As a percentage of revenue, product development expenses were 28% and 31% for the year ended December 31, 2022 and 2023, respectively.

The net increase in dollars and as a percentage of revenue was primarily attributable to a decrease in support services fee recovery of $1.4 million, partially offset by lower personnel costs totaling $0.6 million.

In the near and intermediate 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.

Product development expenses decreased $3.0 million, or 19%, to $12.4 million for the year ended December 31, 2024 from $15.4 million for the year ended December 31, 2023.

As a percentage of revenue, product development expenses were 26% and 31% for the years ended December 31, 2024 and 2023, respectively.

The change from the prior year was primarily attributable to $2.9 million in lower personnel and contractor costs, as we reorganized and realigned our research and development teams.

General and Administrative.

General and administrative expenses increased $0.4 million or 4%, from $9.8 million for the year ended December 31, 2022 to $10.2 million for the year ended December 31, 2023.

As a percentage of revenue, general and administrative expenses were 19% and 20% for the year ended December 31, 2022 and 2023, respectively.

The net increase in dollars was primarily attributable to a decrease in support services fee recovery of $0.8 million and an increase in our provision for bad debt of $0.3 million due to an increase in delinquent customer accounts in 2023, partially offset by lower personnel costs totaling $0.6 million.

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 and intermediate 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 longer term, to the extent that we expand our operations and issue additional stock-based compensation, general and administrative expenses, in absolute dollars and as a percentage of revenue, could increase.

General and administrative expenses was consistent at $10.2 million for both the years ended December 31, 2024 and 2023.

As a percentage of revenue, general and administrative expenses were 21% and 20% for the years ended December 31, 2024 and 2023, respectively.

Amortization of Intangible Assets from Acquisitions .

Intangible amortization expenses were $2.1 million and $2.0 million for the year ended December 31, 2022 and 2023, 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 Consolidated Statements of Operations based on the nature of the underlying intangible asset.

We expect intangible asset amortization to decrease in the near term, as a result of certain assets reaching the end of their useful lives.

Interest Income and Other, net .

The interest income and other, net for the year ended December 31, 2022 and 2023 was interest income of $88.0 thousand and interest expense of $173.0 thousand, respectively.

The change from the prior year was primarily due to an increase in interest expense on new equipment financing and a net loss recognized from equipment disposal transactions in 2023.

Income tax expense for the years ended December 31, 2022 and 2023 was $184.0 thousand and $94.0 thousand, respectively, consisting primarily of state income taxes in 2023 and a combination of state and international tax expense and in 2022.

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, changes in tax rates applied to ending deferred asset and liability balances, non-deductible stock-based compensation related to incentive stock options recorded under the fair-value method, and other non-deductible amounts.

At December 31, 2023, 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 $54.1 million against our net deferred tax assets ($54.3 million of deferred tax assets that are partially offset by $0.4 million in reversing deferred tax liabilities).

This compares to a full valuation allowance of $51.8 million at December 31, 2022 ($52.9 million of deferred tax assets that are partially offset by $1.3 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.

We have incurred federal taxable losses in 2022 and 2023.

Net loss increased $1.7 million, or 17%, from $8.2 million in 2022 compared to $9.9 million in 2023.

The increase in net loss for the year ended December 31, 2023 was primarily attributable to the $2.3 million decrease in revenue discussed above, partially offset by a net decrease in total operating expenses of $0.8 million, which was driven by the decrease in sales and marketing expenses discussed above.

Intangibles amortization expense was $0.6 million and $2.0 million for the years ended December 31, 2024 and 2023, respectively.

This expense was associated with amortization of intangible assets acquired from business acquisitions made in 2018 and 2019, and is further categorized as cost of revenue or sales and marketing expense in the Company's Consolidated Statements of Operations based on the nature of the underlying intangible asset.

The year over year decrease was driven by certain assets reaching the end of their useful life in the fourth quarter of the prior year.

Intangible asset amortization from these acquisitions was completed in 2024 as a result of the remainder of these assets reaching the end of their useful lives.

Income tax expense was $0.4 million and $0.1 million for the years ended December 31, 2024 and 2023, respectively, consisting primarily of deferred tax expense and U.S.

state income taxes.

We incurred federal taxable losses in both 2024 and 2023.

The effective tax rate differed from the expected tax rate of 21% in both years primarily due to a the 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 both December 31, 2024 and 2023, 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 recorded a full valuation allowance.

Net loss decreased $5.0 million, or 51%, to $4.9 million for the year ended December 31, 2024 from $9.9 million for the year ended December 31, 2023.

The decrease in net loss was primarily attributable to the $7.0 million decrease in operating expenses, driven by the decrease in cost of revenue and product development expenses discussed above, that was partially offset by the $1.8 million decrease in revenue also discussed above.

Liquidity and Capital Resources

As of December 31, 2024 and 2023, we had cash and cash equivalents of $12.8 million and $14.6 million, respectively.

As of December 31, 2023, we had current and non-current contractual obligations of $0.9 million, of which $0.2 million is for rent under our facility operating leases.

As of December 31, 2024, we had current and non-current contractual obligations of $11.4 million, of which $1.8 million is for payments due under our facilities and financed equipment leases.

Cash used in operating activities was $1.1 million during the year ended December 31, 2024.

The cash used in operating activities was primarily a result of a net loss of $9.9 million, adjusted for non-cash items of $7.1 million, which primarily included depreciation and amortization and stock-based compensation partially offset by changes in working capital of $1.6 million.

The change in working capital was driven primarily by a decrease in accrued expenses and other current liabilities as well as a decrease in accounts payable and deferred revenue partially offset by an increase in accounts receivable.

The cash used in operating activities was primarily the result of a net loss of $4.9 million, adjusted for non-cash items of $4.5 million, which primarily included depreciation and amortization and stock-based compensation, and the rest attributed to changes in working capital of $0.7 million.

The change in working capital was driven primarily by a decrease in accrued expenses and other current liabilities as well as a decrease in accounts payable, partially offset by an increase in accounts receivable and prepaid expenses and other assets.

Cash used in operating activities was $4.4 million during the year ended December 31, 2023.

The cash used in operating activities was primarily a result of a net loss of $8.2 million, adjusted for non-cash items of $7.6 million, which primarily included depreciation and amortization and stock-based compensation, offset by changes in working capital of $1.7 million.

The change in working capital was driven primarily by an increase in accounts receivable as well as a decrease in deferred revenue and accrued expenses partially offset by an increase in accounts payable.

Cash used in operating activities for the year ended December 31, 2023 included higher costs to assist in reorganizing and efforts to reduce our on-going operating costs.

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 years ended December 31, 2023 and December 31, 2022, was $1.3 million and $2.9 million, respectively, and was primarily attributable to cash paid for purchases of property and equipment for our technology infrastructure platform as well as capitalized software development costs in both years.

We procured $0.8 million of additional server and other equipment under new financing lease agreements during the year ended December 31, 2023 with current borrowing of $0.8 million.

In the near and intermediate term, we expect property and equipment purchases and capitalized software development costs to be similar to or modestly higher compared to our most recent periods, as we continue our OneStack infrastructure initiatives and accelerate product innovation with more AI-powered features and capabilities launched throughout the year.

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 was $0.2 million during the year ended December 31, 2023, which was primarily attributable to payments made related to equipment financing lease obligations.

Cash used in financing activities was $1.5 million during the year ended December 31, 2022, which was primarily attributable to the exchange of cash consideration for partial settlement of a contractual obligation partially offset by proceeds from stock options exercises and the employee stock purchase program.

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 3,000,000 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.

We have made no repurchases under the 2014 Repurchase Program for the years ended December 31, 2022 and 2023.

The cash used in operating activities was primarily the result of a net loss of $9.9 million, adjusted for non-cash items of $7.1 million, which primarily included depreciation and amortization and stock-based compensation, and the rest attributed to changes in working capital of $1.6 million.

The change in working capital was driven primarily by a decrease in accrued expenses and other current liabilities as well as a decrease in accounts payable, partially offset by an increase in prepaid expenses and other assets and accounts receivable.

Cash used in investing activities for the years ended December 31, 2024 and 2023, was $0.4 million and $1.3 million, respectively, and was primarily attributable to cash paid for purchases of property and equipment for our technology infrastructure platform as well as capitalized software development costs in both years.

Cash used in financing activities for the years ended December 31, 2024 and 2023, was $0.3 million and $0.2 million, respectively, and was primarily attributable to payments made related to equipment financing lease obligations for both years.

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.

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Critical Accounting Policies

Our Consolidated Financial Statements have been prepared using accounting principles generally accepted in the United States (U.S.

Our Consolidated Financial Statements have been prepared in accordance with U.S.

Our critical accounting policies are those that we believe have the most significant impact to reported amounts of assets, liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities and that require the most difficult, subjective, or complex judgments.

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While our significant accounting policies are more fully described in Note 1:

Description of Business and Summary of Significant Accounting Policies and Practices , we believe the following topics reflect our critical accounting policies and our more significant judgment and estimates used in the preparation of our Consolidated Financial Statements.

Principles of Consolidation

The Consolidated Financial Statements include the Company and its wholly owned subsidiaries.

All significant inter-company transactions and balances have been eliminated in consolidation.

Description of Business and Summary of Significant Accounting Policies , we believe the following topics reflect our critical accounting policies and our more significant judgment and estimates used in the preparation of our Consolidated Financial Statements.

We generate the majority of our revenues from our conversational intelligence product offerings.

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The standalone selling price for each performance obligation is established based on the sales price at which we would sell a promised good or service separately to a customer or the estimated standalone selling price.

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.

Stock-Based Compensation

FASB ASC Topic 718, Compensation – Stock Compensation (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.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 718, Compensation – Stock Compensation, 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.

We account for forfeitures as they occur.

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These variables include, but are not limited to, the expected life of the award, our expected stock price, and volatility over the term of the award.

Although the fair value of stock-based awards is determined in accordance with ASC 718, Compensation – Stock Compensation the assumptions used in calculating fair value of stock-based awards and the use of the Black-Scholes option pricing model is highly subjective, and other reasonable assumptions could provide differing results.

Although the fair value of stock-based awards is determined in accordance with ASC 718, the assumptions used in calculating fair value of stock-based awards and the use of the Black-Scholes option pricing model is 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.

Stockholders' Equity(b).

Stock Option Plan in the Notes to Consolidated Financial Statements for additional information.

Allowance for Doubtful Accounts and Customer Credits

Accounts receivable balances are presented net of allowance for doubtful accounts and customer 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, customer concentrations, customer 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 customers 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 customer credits based upon our analysis of historical credits and expected revenue adjustments.

Material differences may result in the amount and timing of our revenue for any period, stemming from differing management judgments and estimates.

Goodwill and Intangible Assets

Stockholders' Equity in the Notes to Consolidated Financial Statements for additional information.

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.

Intangible assets from acquisitions represent customer relationships, technologies, non-compete agreements, and trade names related to previous acquisitions.

These assets are determined to have definite lives and are amortized on a straight-line basis over the estimated period over which we expect to realize economic value related to the intangible asset.

The amortization periods range from one year to 5 years.

We apply the provisions of the FASB ASC Topic 350, “Intangibles - Goodwill and Other” (ASC 350) whereby assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead test for impairment at least annually.

According to FASB ASC 360, “Property Plant and Equipment” (ASC 360), intangible assets with definite useful lives should be amortized over the respective estimated lives to their estimated residual values and reviewed for impairment.

Intangible assets are "grouped" and evaluated for impairment at the lowest level of identifiable cash flows.

Goodwill is tested annually on November 30 for impairment.

Goodwill and intangible assets are also tested more frequently if events and circumstances indicate that the assets might be impaired.

The provisions of the accounting standard for goodwill and other intangible assets allow us to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test.

Events and circumstances considered in determining whether the carrying value of goodwill and intangible assets may not be recoverable include but are not limited to:

We apply the provisions of the FASB ASC 350, Intangibles - Goodwill and Other, whereby assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead test for impairment at least annually.

Goodwill is tested annually on November 30 for impairment or more frequently if events and circumstances indicate that it 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 a quantitative impairment test.

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;

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These estimates 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 or changes in the share price of common stock and market capitalization.

If our stock price were to trade below book value per share for an extended period of time and/or we experience adverse effects of a continued downward trend in the overall economic environment, changes in the business itself, including changes in projected earnings and cash flows, we may have to recognize an impairment of all or some portion of our goodwill and intangible assets.

An impairment loss is recognized to the extent that the carrying amount exceeds the asset or asset group’s fair value.

If the fair value is lower than the carrying value, a material impairment charge may be reported in our financial results.

We exercise judgment in the assessment of the related useful lives of intangible assets, the fair values, and the recoverability.

In certain instances, the fair value is determined in part based on cash flow forecasts and discount rate estimates.

We cannot accurately predict the amount and timing of any impairment of goodwill or intangible assets.

Should the value of goodwill or intangible assets become impaired, we would record the appropriate charge.

We cannot accurately predict the amount and timing of any impairment of goodwill.

Should the value of goodwill assets become impaired, we would record the appropriate charge.

Any future impairment charges could have a material adverse effect on our financial condition and results of operations.

Provision for Income Taxes

We are subject to income taxes in the U.S.

and certain international jurisdictions.

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.

We determined that it is not more likely than not that our deferred tax assets (excluding certain insignificant Canadian deferred tax assets) will be realized and accordingly recorded 100% valuation allowance against these deferred tax assets as of December 31, 2022 and 2023.

In assessing whether it is more likely than not that our deferred tax assets will be realized, factors considered included:

historical taxable income, 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 our 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.

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 Consolidated Financial Statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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What changed 10-K

Item 7. Management’s Discussion and Analysis