MARCHEX INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the audited Consolidated Financial Statements and the notes to those statements which appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements. Please see page 1 on this Form 10-K “Forward-Looking Statements” and Item 1A of this Form 10-K under the caption “Risk Factors” for a discussion of the risks, uncertainties and assumptions associated with these statements. Overview Marchex harnesses the power of AI and conversation intelligence to provide actionable insights derived from prescriptive vertical market data analytics. Marchex enables organizations across business functions to optimize customer acquisitions and experiences, transforming conversations into meaningful business outcomes. Marchex provides AI-powered conversation intelligence solutions for market-leading companies in leading B2B2C vertical markets, including many 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 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 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. We serve large enterprises with a distributed footprint that interact with their customers across multiple communication paths. We were incorporated in Delaware on January 17, 2003. We have office space in Seattle, WA. Components of the Results of our Operations Revenue We generate the majority of our revenues from our conversational intelligence product offerings. Our 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. We generate revenue when our customers pay us a fee for each call/text or call/text related data element they receive from calls or texts or for each phone number tracked based on a pre-negotiated rate. 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. 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. Cost of Revenue Our cost of revenue represents the cost of providing our services to our customers. These costs primarily consist of cloud computing and hosting costs, telecommunication costs, including the use of phone numbers relating to our services; bandwidth and software license fees; network operations; and payroll and related expenses of personnel, including stock based compensation. 26 Table of Contents Sales and Marketing Sales and marketing expenses consist primarily of payroll and related expenses for personnel engaged in marketing and sales functions; advertising and promotional expenditures including online and outside marketing activities; and stock-based compensation of related personnel. Product Development Product development costs consist primarily of expenses incurred in the research and development ("R&D") of our products and services. These costs primarily consist of payroll and related expenses for personnel; costs of computer hardware and software; costs incurred for features and functionality of the services we offer; and stock-based compensation of related personnel. For the periods presented, substantially all of our product development expenses are R&D and are expensed as incurred or capitalized into property and equipment in accordance with the U.S. generally accepted accounting principles ("GAAP") once requirements have been met. See Note 1: Description of Business and Summary of Significant Accounting Policies for more information on software development capitalization. General and Administrative General and administrative expenses consist primarily of payroll and related expenses for executive and administrative personnel; professional services, including accounting, legal and insurance; bad debt provisions; facilities costs; other general corporate expenses; and stock-based compensation of related personnel. Stock-Based Compensation We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method. We account for forfeitures as they occur. Stock-based compensation expense is included in the same lines as compensation paid to the same employees in the Consolidated Statements of Operations. Amortization of Intangibles from Acquisitions Amortization of intangible assets excluding goodwill relates to intangible assets identified in connection with our acquisitions. The intangible assets have been identified as customer relationships; acquired technology; non-competition agreements; and trade names. These assets were fully amortized as of December 31, 2024. 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. 27 Table of Contents Results of Operations The following table presents revenue and certain operating results as a percentage of revenue: Year Ended December 31, % of revenue Year Ended December 31, % of revenue (In Thousands, Except Percentages) 2025 2024 Revenue $ 45,420 100 % $ 48,122 100 % Expenses: Cost of revenue 16,626 37 % 17,172 36 % Cost of revenue - amortization of capitalized software development costs 89 0 % — 0 % Total cost of revenue 16,715 37 % 17,172 36 % Sales and marketing 12,528 28 % 12,136 25 % Product development 9,747 21 % 12,414 26 % General and administrative 10,804 24 % 10,245 21 % Acquisition settlement 1,350 3 % — 0 % Amortization of intangible assets from acquisitions — 0 % 602 1 % Total operating expenses 51,144 113 % 52,569 109 % Loss from operations $ (5,724 ) -13 % $ (4,447 ) -9 % Stock-based compensation expense was included in the following operating expense categories as follows: Year Ended December 31, (In Thousands) 2025 2024 Cost of revenue $ 12 $ 24 Sales and marketing 433 308 Product development 259 54 General and administrative 1,683 1,321 Total stock-based compensation $ 2,387 $ 1,707 See Note 6: Stockholders' Equity of the Notes to the Consolidated Financial Statements, as well as our Critical Accounting Policies for additional information about stock-based compensation. Revenue Revenue decreased $2.7 million, or 6%, to $45.4 million for the year ended December 31, 2025 from $48.1 million for the year ended December 31, 2024. This decrease was impacted by lower call volumes in 2025 compared to 2024, customer corporate development activities, which consolidated customer contracts and customer migration revenue dilution resulting in decreased revenues. Expenses Cost of Revenue. Cost of revenue decreased $0.5 million, or 3%, to $16.7 million for the year ended December 31, 2025 from $17.2 million for the year ended December 31, 2024. As a percentage of revenue, cost of revenue was 37% and 36% for the years ended December 31, 2025 and 2024, respectively. The change from the prior year was primarily attributable to a decrease in costs from investment in cloud infrastructure and platform integration, and personnel and outside labor costs of $0.5 million, as we reorganized and realigned our personnel in 2025. Sales and Marketing. Sales and marketing expenses increased $0.4 million, or 3%, to $12.5 million for the year ended December 31, 2025 from $12.1 million for the year ended December 31, 2024. As a percentage of revenue, sales and marketing expenses were 28% and 25% for the years ended December 31, 2025 and 2024, respectively. The change from prior year was primarily attributable to an increase in contract asset amortization charges of $0.6 million. 28 Table of Contents Product Development. Product development expenses decreased $2.7 million, or 22%, to $9.7 million for the year ended December 31, 2025 from $12.4 million for the year ended December 31, 2024. As a percentage of revenue, product development expenses were 21% and 26% for the years ended December 31, 2025 and 2024, respectively. The change from the prior year was primarily attributable to $2.0 million in lower personnel and outside labor costs due to the reorganization and realignment of our personnel in 2025 and the capitalization of software development costs in 2025. Additionally, there were approximately $0.5 million less in cloud infrastructure costs in 2025 due to the completion of the certain development activities in 2024 which resulted in those costs being incorporated in cost of revenue upon completion of the development activities. General and Administrative. General and administrative expenses increased $0.6 million, or 6%, to $10.8 million for the year ended December 31, 2025 from $10.2 million for the year ended December 31, 2024. As a percentage of revenue, general and administrative expenses were 24% and 21% for the years ended December 31, 2025 and 2024, respectively. The change from prior year was primarily attributable to an increase in personnel costs and share-based compensation costs, which largely consist of one-time reorganization charges and associated impacts to share-based compensation as we reorganized and realigned our personnel throughout 2025. Acquisition settlement . Acquisition settlement expense was $1.4 million and for the year ended December 31, 2025. The amount represents the cost recorded in the period associated with the probable resolution of a historical acquisition related matter. Amortization of Intangible Assets from Acquisitions . Intangibles amortization expense was $0 and $0.6 million for the years ended December 31, 2025 and 2024, respectively. During 2024, the intangible assets acquired from acquisitions all reached the end of their useful lives and consequently there was no amortization expense in 2025. Income Tax. Income tax expense was $0.1 million and $0.4 million for the years ended December 31, 2025 and 2024, respectively, consisting primarily of deferred tax expense and U.S. state income taxes. We incurred federal taxable losses in both 2025 and 2024. The effective tax rate differed from the expected tax rate of 21% in both years primarily due to the valuation allowance, non-deductible stock-based compensation related to restricted stock units and incentive stock options recorded under the fair-value method, and other non-deductible amounts. At both December 31, 2025 and 2024, based on all the available evidence, both positive and negative, we determined that it is more likely than not that our deferred tax assets will not be realized and accordingly recorded a full valuation allowance. Liquidity and Capital Resources As of December 31, 2025 and 2024, we had cash and cash equivalents of $9.9 million and $12.8 million, respectively. As of December 31, 2025, we had current and non-current contractual obligations of $7.3 million, of which $0.8 million is for payments due under our facility lease. Cash used in operating activities was $1.4 million during the year ended December 31, 2025. The cash used in operating activities was primarily the result of a net loss of $5.2 million, adjusted for non-cash items of $4.6 million, which primarily included depreciation, amortization, and stock-based compensation, and the rest was attributed to changes in working capital and the acquisition settlement of $2.1 million and $1.4 million, respectively. The change in working capital was driven primarily by a decrease in accrued expenses, other current, and other liabilities. Cash used in operating activities was $1.1 million during the year ended December 31, 2024. 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, amortization, and stock-based compensation, and the rest was 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. Cash used in investing activities for the year ended December 31, 2025 was $1.3 million and was primarily attributable to cash paid for capitalized software development projects, partially offset by proceeds collected from the domain asset sale in the current year. Cash used in investing activities for the year ended December 31, 2024 was $0.4 million and was primarily attributable to cash paid for purchases of property and equipment for our technology infrastructure platform. 29 Table of Contents Cash used in financing activities for the years ended December 31, 2025 and 2024, was $0.1 million and $0.3 million, respectively. Cash used in financing activities for the year ended December 31, 2025 was primarily attributable to payments made related to equipment financing lease obligations, partially offset by proceeds from exercises of stock options, and issuances and vesting of restricted stock. Cash used in financing activities for the year ended December 31, 2024 was primarily attributable to payments made related to equipment financing lease obligations. Based on our operating plans we believe that our resources will be sufficient to fund our operations, including any investments in strategic initiatives, for at least twelve months, however macroeconomic factors could influence our operating plans and resources significantly. Additional equity and debt financing may be needed to support our acquisition strategy, long-term obligations, and other Company’s needs. There can be no assurance that, if we needed additional funds, financing arrangements would be available in amounts or on terms acceptable to us, if at all. Failure to generate sufficient revenue or raise additional capital could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives. Critical Accounting Policies Our Consolidated Financial Statements have been prepared in conformity with U.S. GAAP. 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 that require the most difficult, subjective, or complex judgments. In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of our results. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates during the year ended December 31, 2025. While our significant accounting policies are more fully described in Note 1: 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. Revenue We generate the majority of our revenues from our conversational intelligence product offerings. Our customers pay us a fee for each 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. As such, the majority of 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 of qualified phone calls). 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. 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. 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 we would sell a promised good or service separately to a customer or the estimated standalone selling price. 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. 30 Table of Contents Stock-Based Compensation 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 awards ("RSAs"), and restricted stock units ("RSUs") be based on estimated fair values. We account for forfeitures as they occur. We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method. We use the Black-Scholes option pricing model as our method of valuation for stock-based awards with time-based vesting. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of variables. 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, the assumptions used in calculating fair value of stock-based awards and the use of the Black-Scholes option pricing model is subjective, and other reasonable assumptions could provide differing results. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. See Note 6: Stockholders' Equity for additional information. 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. 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; significant changes in the use of the assets; and significant changes in competition and market dynamics. 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 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. 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. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a smaller reporting company under SEC Regulations, we are not required to provide this information. 31 Table of Contents