(6) Stockholders’ Equity

(a) Common Stock and Authorized Capital

The authorized capital stock of the Company consists of 1,000,000 shares of undesignated preferred stock and 125,000,000 shares of Class B common stock. The Company’s board of directors has the authority to issue up to 1,000,000 shares of preferred stock, $0.01 par value in one or more series and 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 Class A and the founding Class B 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 April 2014, the Company completed a follow-on public offering in which the Company sold an aggregate of 3.4 million shares of the Company’s Class B common stock, which includes the exercise of the underwriters’ option to purchase 514,100 additional shares, at a public offering price of $10.50 per share. In addition, another 3.2 million shares were sold by the selling stockholders, which include the exercise of the underwriter’s option to purchase 343,000 additional shares. The Company received aggregate net proceeds of $32.5 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company did not receive any of the proceeds from the sales of shares by the selling stockholders.

In November 2006, the Company’s board of directors authorized a share repurchase program (the “2006 Repurchase Program”) for the Company to repurchase up to 3 million shares of the Company’s Class B common stock as well as the initiation of a quarterly cash dividend for the holders of the Class A and Class B common stock. The Company’s board of directors had authorized increases to the 2006 Repurchase Program for the Company to repurchase up to 13 million shares in the aggregate (less shares previously repurchased under the 2006 Repurchase Program) of the Company’s Class B common stock. During the years ended December 31, 2012 and 2013, the Company repurchased approximately 387,000, and 31,000 shares, respectively, of Class B common stock for $1.7 million, and $119,000, respectively, under the 2006 repurchase program. During the year ended December 31, 2014, the Company did not repurchase any shares of Class B common stock as part of the 2006 Repurchase Program.

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 million 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. During the year ended December 31, 2014, the Company repurchased 669,000 shares of Class B common stock for $2.5 million as part of the 2014 Repurchase Program.

During the years ended December 31, 2013 and 2014, the Company’s board of directors authorized the retirement of 679,000 and 598,000 shares, respectively, of the Company’s Class B common stock, all of which had been repurchased by the Company and had been classified as treasury stock on the consolidated balance sheet before retirement.

The Company’s board of directors declared the following quarterly dividends on the Company’s Class A common stock and Class B common stock:

 

Approval Date		Per share dividend				Date of record		Total amount (in thousands)				Payment date
January 2012		$	0.02			February 3, 2012		$	751			February 15, 2012
April 2012		$	0.02			May 4, 2012		$	743			May 15, 2012
July 2012		$	0.02			August 3, 2012		$	755			August 15, 2012
August 2012		$	0.015			August 16, 2012		$	566			August 31, 2012
October 2012		$	0.035			November 2, 2012		$	1,300			November 15, 2012
December 2012		$	0.14			December 18, 2012		$	5,300			December 31, 2012
January 2014		$	0.02			February 7, 2014		$	771			February 18, 2014
April 2014		$	0.02			May 5, 2014		$	846			May 15, 2014
July 2014		$	0.02			August 5, 2014		$	856			August 15, 2014
October 2014		$	0.02			November 7, 2014		$	857			November 18, 2014

 

In August 2012, the Company’s board of directors approved an increase to the Company’s quarterly cash dividend on the Company’s Class A and Class B common stock from $0.02 per share to $0.035 per share. The Company paid the incremental $0.015 per share dividends on August 31, 2012 to Class A and Class B common stockholders of record as of the close of business on August 16, 2012. The Company paid approximately $566,000 for these incremental dividends.

In December 2012, the Company’s board of directors declared a quarterly dividend for the first, second, third and fourth quarters of 2013 totaling $0.14 per share on its Class A common stock and Class B common stock, which was paid on December 31, 2012 to the holders of record as of the close of business on December 18, 2012. The dividend paid totaled $5.3 million.

In January 2015, the Company’s board of directors declared a quarterly dividend in the amount of $0.02 per share on its Class A and Class B common stock, which was paid on February 17, 2015 to the holders of record as of the close of business on February 6, 2015. This quarterly dividend totaled approximately $839,000.

(b) Stock Option Plan

The Company’s stock incentive plan (the “2003 Plan”) allows for grants of both stock option and restricted stock awards to employees, officers, non-employee directors, and consultants and such options may be designated as incentive or non-qualified stock options at the discretion of the Plan’s Administrative Committee. In May 2010, the Company’s board of directors approved an amendment to the Company’s 2003 Amended and Restated Stock Incentive Plan (the “Plan”) which provides for the grant of restricted stock units to eligible participants under the Plan. The Plan authorizes grants of options to purchase up to 4,000,000 shares of authorized but unissued Class B common stock and provides for the total number of shares of Class B common stock for which options designated as incentive stock options may be granted shall not exceed 8,000,000 shares. Annual increases are to be added on the first day of each fiscal year beginning on January 1, 2004 equal to 5% 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).

In April 2012, the Company’s board of directors approved the establishment of the Marchex 2012 Stock Incentive Plan (the “2012 Plan”). After December 31, 2012, no further awards were made under the 2003 Plan. The 2012 Plan authorizes up to 3,500,000 shares of Class B common stock that may be issued with respect to awards granted under the 2012 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, 2013 equal to 5% 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, if lesser of 2,000,000 shares of Class B common stock or 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 2012 Plan was increased by 1,924,511 to 7,301,899 on January 1, 2014 and 2,102,493 to 9,404,392 on January 1, 2015. 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 not grant any options with exercise prices less than the then current market value during 2012, 2013, and 2014.

The Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award using the straight-line method. Stock-based compensation has been included in the same lines as compensation paid to the same employees in the consolidated statement of operations.

 

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

 

		Twelve months ended December 31,
		2012				2013				2014
Service costs		$	1,869			$	1,180			$	1,382
Sales and marketing			2,029				645				894
Product development			1,038				1,635				2,595
General and administrative			10,702				5,777				7,032
Total stock-based compensation		$	15,638			$	9,237			$	11,903

For the years ended December 31, 2012, 2013, and 2014, the income tax benefit related to stock-based compensation included in net income (loss) from continuing operations was $4.7 million, $2.6 million, and $0, respectively. FASB ASC 718 requires the benefits of tax deductions in excess of the stock-based compensation cost to be classified as financing cash inflows and is shown as “Excess tax benefit related to stock-based compensation” on the consolidated statement of cash flows. In addition, a tax benefit and a credit to additional paid-in capital for the excess deductions is not recognized until that deduction reduces taxes payable. For the years ended December 31, 2013 and 2014, we incurred excess tax benefits of $3.0 million and $6.6 million, which were not recorded because the Company is in a cumulative loss carryforward position for income taxes.

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, 2012, 2013 and 2014, the expected life of each award granted was determined based on historical experience with similar awards, giving consideration to contractual terms, anticipated exercise patterns, vesting schedules and forfeitures. Expected volatility is based on historical volatility levels of the 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.

The following weighted average assumptions were used in determining the fair value of time-vested stock options granted for the periods indicated:

 

		Years ended December 31,
		2012		2013		2014
Expected life (in years)		4.00 – 6.25		4.00 – 6.25		4.00
Risk-free interest rate		0.47% to 0.78%		0.57% to 2.10%		1.25% to 1.45%
Expected volatility		65% to 70%		54% to 64%		55% to 62%
Weighted average expected volatility		67%		57%		56%
Expected dividend yield		1.33% to 3.11%		0.87% to 2.33%		0.76% to 2.03%

The Company may issue equity awards which include stock options and restricted stock awards that have vesting based on a combination of certain service and market conditions. The compensation costs and derived service periods for stock option grants with vesting based on a combination of service and market conditions are estimated using the binomial lattice model to determine the fair value for each tranche and a Monte Carlo simulation to determine the derived service period for each tranche. The risk-free interest rate is based on the 10 year bond rate as of the valuation date based on the contractual life of the option.

 

The following weighted average assumptions were used in determining the fair value for options granted with vesting based on a combination of certain service and market conditions for the periods indicated:

 

		2012		2013
Expected life (in years)		1.50 – 5.74		1.18 – 2.28
Risk-free interest rate		1.81%		2.89%
Expected volatility		60%		61%
Weighted average expected volatility		60%		61%
Expected dividend yield		3.17%		0.89%

There were no options granted in 2014 with vesting based on a combination of certain service and market conditions.

Stock option, restricted stock award and restricted stock unit activity during the period is as follows:

 

		Options and Restricted Stock available for grant				Number of options outstanding				Weighted average exercise price of options				Weighted average remaining contractual term (in years)				Aggregate intrinsic value (in thousands)
Balance at December 31, 2013			1,702,174				7,707,713			$	7.48				6.99			$	17,148
Increase to option pool January 1, 2014			1,924,511				—
Options granted			(1,340,686	)			1,340,686				9.32
Restricted stock granted			(698,992	)			—
Restricted stock forfeited			117,354				—
Options exercised			—				(747,899	)			5.59
Options expired			186,823				(186,823	)			11.96
Options forfeited			316,449				(316,449	)			6.55
Balance at December 31, 2014			2,207,633				7,797,228			$	7.90				6.58			$	800
Options exercisable at December 31, 2014 (1)							4,811,469			$	8.29				5.33			$	308

 

(1)	Includes 1,199,400 stock options, which have vested based on meeting a combination of certain service and market conditions.

Information related to stock compensation activity during the period indicated is as follows:

 

		Years ended December 31,
		2012				2013				2014
Weighted average fair value of options granted		$	1.78			$	2.56			$	3.89
Intrinsic value of options exercised (in thousands)		$	7			$	1,463			$	4,016
Total grant date fair value of restricted stock vested (in thousands)		$	22,015			$	5,751			$	6,568

At December 31, 2014, there was $7.7 million of stock option compensation expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted average period of 2.0 years.

During the years ended December 31, 2012, 2013, and 2014 gross proceeds recognized from the exercise of stock options was $27,000, $2.9 million and $4.2 million, respectively. The net excess tax benefit (shortfall) on stock option exercises, restricted stock vesting, and dividends paid on unvested restricted stock during the years ended December 31, 2012, 2013 and 2014, of ($4.0) million, ($76,000) and ($1.2) million, respectively, was recorded to additional paid in capital.

 

Restricted stock awards and restricted stock unit activity during the period is as follows:

 

		Shares/ Units				Weighted Average Grant Date Fair Value
Unvested at December 31, 2013			2,709,443				5.41
Granted			698,992				9.30
Vested			(1,150,319	)			5.71
Forfeited			(117,354	)			4.77
Unvested at December 31, 2014			2,140,762				6.55

The Company issues restricted stock awards and restricted stock units to employees for future services and in connection with acquisitions. 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 accounted for under FASB ASC 718 using the straight-line method net of estimated forfeitures.

At December 31, 2014, there was $10.0 million of unrecognized restricted stock compensation expense related to non-vested awards, which is expected to be recognized over a weighted average period of 2.0 years.

During 2012, 2013 and 2014, the Company repurchased 391,000, 220,000 and 175,000 shares, respectively, from certain executives for minimum withholding taxes on 1,255,000, 1,031,000 and 527,000 restricted stock award vests, respectively. The number of shares repurchased was based on the value on the vesting date of the restricted stock awards equivalent to the value of the executives’ minimum withholding taxes of $1.6 million, $1.8 million and $1.1 million for 2012, 2013, and 2014, respectively. The Company then remitted cash to the appropriate taxing authorities. The payments are reflected as a financing activity within the consolidated statement of cash flows when paid. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid in capital.

In February 2015, vesting of approximately 139,000 stock options and 108,000 restricted stock awards were accelerated in light of certain terms in a certain executive’s employment agreement.

(c) Employee Stock Purchase Plan

On February 15, 2004, the Company’s board of directors and stockholders approved the 2004 Employee Stock Purchase Plan (“2004 ESPP”), which became effective on March 30, 2004. The Company authorized an aggregate of 300,000 shares of Class B common stock for issuance under the plan to participating employees.

In December 2005, the compensation committee of the Company’s board of directors amended the 2004 ESPP to provide that effective January 1, 2006 eligible participants may purchase the Company’s Class B common stock under the purchase plan at a price equal to 95% of the fair value on the last day of an offering period. During the year ended December 31, 2011, 3,637 shares were purchased at prices ranging from $5.94 to $8.44 per share. During the year ended December 31, 2012, 9,817 shares were purchased at prices ranging from $3.43 to $4.24 per share. During the year ended December 31, 2013, 11,511 shares were purchased at prices ranging from $4.00 to $8.22 per share. The 2004 ESPP, as amended, expired on December 31, 2013.

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 provides 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 periods. The 2014 ESPP permits eligible employees to purchase amounts up to 15% of their compensation in the purchase period, and no employee is permitted to purchase stock worth more than $25,000 in any calendar year, valued as of the first day of each purchase period. Under the 2014 ESPP plan, 11,944 shares were purchased at prices ranging from $3.94 to $11.42 per share for the year ended December 31, 2014.