Forward-looking statements
This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking
statements and information relating to Spok Holdings, Inc. and its subsidiaries
(collectively, "we,""us,", "Spok," "our" or the "Company") that set forth
anticipated results based on management's current plans, known trends and
assumptions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Statements that are
predictive in nature, that depend upon or refer to future events or conditions,
or that include words such as "anticipate," "believe," "estimate," "expect,"
"intend," "will," "target," "forecast" and similar expressions, as they relate
to Spok are forward-looking statements.
Although these statements are based upon current plans, known trends and
assumptions that management considers reasonable, they are subject to certain
risks, uncertainties and assumptions, including, but not limited to, those
discussed in this section and "Risk Factors" below and under the captions
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A")," and "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2021 ("2021 Annual Report"). Should known
or unknown risks or uncertainties materialize, known trends change, or
underlying assumptions prove inaccurate, actual results or outcomes may differ
materially from past results and those described herein as anticipated,
believed, estimated, expected, intended, targeted or forecasted. Investors are
cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to update forward-looking statements.
Investors are advised to consult all further disclosures the Company makes in
its subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K
that it will file with the SEC. Also note that, in the 2021 Annual Report, the
Company provides a cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to its business. These are factors that,
individually or in the aggregate, could cause the Company's actual results to
differ materially from past results as well as those results that may be
anticipated, believed, estimated, expected, intended, targeted or forecasted. It
is not possible to predict or identify all such risk factors. Consequently,
investors should not consider the risk factor discussion to be a complete
discussion of all of the potential risks or uncertainties that could affect
Spok's business, statement of operations or financial condition, subsequent to
the filing of this Quarterly Report.
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Insight
The following MD&A is intended to help the reader understand the results of
operations and financial condition of Spok. This MD&A is provided as a
supplement to, and should be read in conjunction with, our 2021 Annual Report
and our unaudited Condensed Consolidated Financial Statements and accompanying
notes. A reference to a "Note" in this section refers to the accompanying
Unaudited Notes to Condensed Consolidated Financial Statements.
Spok, acting through its indirect wholly owned operating subsidiary, Spok, Inc.,
delivers smart, reliable clinical communication and collaboration solutions to
organizations, primarily in the U.S. healthcare industry, to help protect the
health, well-being and safety of individuals. Organizations rely on Spok for
workflow improvement, secure messaging, paging services, contact center
optimization and public safety response.
Business
See Note 1, "Organization and Significant Accounting Policies" in Item 1 of Part
I of this Quarterly Report and Item 1. "Business" of Part I of the 2021 Annual
Report, which describe our business in further detail.
New strategic business plan
In February 2022, our Board of Directors announced a new strategic business plan
that includes a restructuring of our business to discontinue Spok Go®, eliminate
all associated costs and optimize the Company's existing structure to drive
continued cost improvement. The strategic business plan includes a renewed focus
on our existing and established business, including the Spok Care Connect Suite
and our wireless service offerings. While there are numerous factors that went
into this decision, the ongoing challenge of the COVID-19 pandemic made it
difficult for the Spok Go platform to gain sufficient traction with customers or
for our business to continue operating with our current level of costs and
personnel. This shift in focus will allow us to prioritize cash flow generation
and the return of capital to stockholders. As a result of this new strategic
business plan, our Board of Directors has increased the regular quarterly
dividend from $0.125 to $0.3125 and has authorized a share repurchase program of
up to $10 million of our common stock.
As part of the restructuring program, we have begun the process of eliminating
approximately 175 positions, primarily in research and development, but also in
professional services, selling and marketing, and back-office support functions.
We expect to record one-time pre-tax restructuring charges of approximately
$6.2 million to $7.5 million, comprised of approximately $5.7 million to $6.6
million in severance and personnel related costs and approximately $0.5 million
to $0.9 million in contractual terminations. Future cash payments related to
these charges are expected to generally be within the same range. The
restructuring actions associated with these charges are expected to be
substantially complete in 2022. Further details can be found in Note 5
"Restructuring" in the Notes to Condensed Consolidated Financial Statements.
COVID-19[feminine]
In March 2020, the World Health Organization declared COVID-19 a global
pandemic, and the virus significantly impacted the global economy. Although
federal and state restrictions were not widely adopted until late in the first
quarter of 2020, we began to experience a direct impact on our sales cycle in
late February 2020 as hospitals, our largest customer segment, began to delay
purchasing decisions and address staff reductions. These delays continued to
affect our software bookings, which directly impacted license and equipment
revenues during 2021.
We also experienced delays in our ability to deliver on-site implementation
services, which has impacted our services revenue since the onset of the
pandemic. While much of our implementation process can be performed remotely,
the on-premise nature of certain of our solutions requires some level of on-site
presence to completely implement. These impacts primarily resulted in delays in
the timing of revenue recognition during 2021, as associated revenue corresponds
to our backlog of performance obligations ready for delivery at some point in
the future.
While many hospitals relaxed their initial capacity and social distancing
guidelines in the second half of 2020, some of our customers continued such
restrictions into 2021 and 2022 to ensure the safety of their personnel and
patients. Such restrictions, which have varied considerably depending on the
size of an organization, geographical location and local regulations, can make
it difficult for external personnel who are not critical to the immediate
operating needs of a hospital, such as our implementation staff, to gain access.
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Furthermore, hospital have continued to struggle with significant burnout and
resource constraints due to the pandemic. The U.S. Healthcare system has lost
between one in five and one in six healthcare workers since the pandemic began,
and nursing staffs have been significantly depleted. On average it takes four to
five years to train a nurse, and we expect these resource constraints to last
well into the future.
As we return to pre-pandemic operating levels, much of our business continues to
be driven by our customers and their ability to resume operations beyond
providing just critical needs and emergency services. Many hospitals initially
reduced the number of elective surgeries as a result of government restrictions,
as well as patients delaying or canceling elective procedures during the
pandemic. While most organizations began to see improved operating levels during
the second half of 2020 and into 2021 and 2022 as the number of overall U.S.
virus cases declined, some of our customers in certain geographic areas
continued to experience periodic capacity constraints due to the emergence of
new COVID-19 variants.
The length and severity of pandemic-related challenges affecting our customer
base remain uncertain, and we continue to monitor new COVID-19 variants of
concern that may indicate risks of increased transmission and more severe
disease. Any significant spikes in U.S. virus cases could delay or reverse
progress towards returning to pre-pandemic operational levels. With the
continued distribution of effective vaccines, however, we are optimistic that
spikes in virus cases will be mitigated and that our customers' operating levels
will continue to improve as pandemic-related restrictions are lifted.
While we are likely to see some lingering and continued effects from COVID-19,
barring the emergence of a severe COVID-19 variant of concern, which might have
significant negative effects on the overall economy and our customer base
specifically, we have largely returned to pre-pandemic operations in 2022.
During 2021, we continued to prudently manage operating expenses and liquidity,
with the goal of neutralizing the impact of the pandemic on our cash flows. Each
of these measures is described in further detail below:
•Reduced work schedules: We enacted a Company-wide plan that reduced work
schedules, resulting in a temporary reduction in compensation expenses during
the second, third and fourth quarters of 2020 and continuing through the first
half of 2021, whereby each of our employees, including our executive officers,
was subject to one to two weeks of a reduced work schedule per quarter. For the
three months ended March 31, 2021, these reduced work schedules resulted in
realized savings of $1.0 million in compensation expense.
•Equity in Lieu of Cash Compensation: We also enacted a plan for the first three
quarters of 2021 whereby qualified employees received a portion of their
compensation in the form of shares of the Company's common stock in lieu of
cash. These awards, which affected approximately 450 of our employees, were made
in advance on a quarterly basis and vested immediately. For the three months
ended March 31, 2021, we achieved cash savings of $0.6 million.
•Non-Employee Director Alternative DSU or Restricted Stock Plan: Under this
alternative payment plan, which was in effect from the third quarter of 2020
through the third quarter of 2021, all non-employee directors voluntarily
elected to receive either DSUs or restricted stock in lieu of the entire cash
portion of their compensation. For the three months ended March 31, 2021, we
achieved cash savings of $0.1 million. (Refer to Note 11, "Stockholder's Equity"
in the Notes to Condensed Consolidated Financial Statements for further detail
related to the alternative DSU or restricted stock plan).
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Operating results
The following table is a summary of our condensed consolidated statement of earnings for the three months ended March 31, 2022and 2021:
For the
Three months completed
March 31, Change
(Dollars in thousands) 2022 2021 Total %
Revenue:
Wireless revenue $ 18,846 $ 20,120 $ (1,274) (6.3) %
Software revenue 14,979 15,916 (937) (5.9) %
Total revenue 33,825 36,036 (2,211) (6.1) %
Operating expenses:
Cost of revenue (exclusive of items shown separately below) 7,804 7,982 (178) (2.2) %
Research and development 6,497 4,444 2,053 46.2 %
Technology operations 7,013 7,204 (191) (2.7) %
Selling and marketing 5,315 5,139 176 3.4 %
General and administrative 10,435 10,280 155 1.5 %
Depreciation, amortization and accretion 934 2,727 (1,793) (65.7) %
Severance and restructuring 4,495 - 4,495 - %
Total operating expenses 42,493 37,776 4,717 12.5 %
Operating loss (8,668) (1,740) (6,928) 398.2 %
Interest income 67 61 6 9.8 %
Other expense (13) (27) 14 (51.9) %
Loss before income taxes (8,614) (1,706) (6,908) 404.9 %
Benefit from (provision for) income taxes 1,400 (591) 1,991 (336.9) %
Net loss $ (7,214) $ (2,297) $ (4,917) 214.1 %
Supplemental Information
Full-Time Equivalent ("FTE") Employees 548 603 (55) (9.1) %
Active transmitters 3,399 3,631 (232) (6.4) %
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Revenue
We offer a focused suite of unified clinical communications and collaboration
solutions that include call center applications, clinical alerting and
notifications, one-way and advanced two-way wireless messaging services, mobile
communications and public safety solutions.
We develop, sell and support enterprise-wide systems for healthcare, government,
large enterprise and other organizations needing to automate, centralize and
standardize their approach to clinical communications and collaboration. Our
solutions can be found in prominent hospitals, large government agencies,
leading public safety institutions, colleges and universities, large hotels,
resorts and casinos, and well-known manufacturers. Our primary market is the
healthcare provider industry, particularly hospitals. While we have historically
identified hospitals with 200 or more beds as the primary targets for our
software solutions, as well as our paging services, we have expanded our focus
to include smaller hospitals with shorter sales cycles, including academic
medical centers.
Revenue generated by wireless messaging services (including voice mail,
personalized greeting, message storage and retrieval), equipment, maintenance
plans and/or equipment loss protection for both one-way and two-way messaging
subscribers is presented as wireless revenue in our Statement of Operations.
Revenue generated by the sale of our software solutions, which includes software
license, professional services (installation, consulting and training),
equipment (to be used in conjunction with the software), and post-contract
support (ongoing maintenance), is presented as software revenue in our Condensed
Consolidated Statement of Operations. Our software is licensed to end users
under an industry standard software license agreement.
Refer to Note 6, “Revenues, Deferred Revenues and Prepaid Commissions” of the Notes to the Summary Consolidated Financial Statements for additional information on our wireless and software revenue streams.
The table below details the revenues for the periods indicated:
For the Three Months Ended
March 31, Change
(Dollars in thousands) 2022
2021 Total %
Revenue - wireless:
Paging revenue $ 18,313 $ 19,353 $ (1,040) (5.4) %
Product and other revenue 533 767 (234) (30.5) %
Total wireless revenue 18,846 20,120 (1,274) (6.3) %
Revenue - software:
License 1,824 1,552 272 17.5 %
Professional services 3,336 4,354 (1,018) (23.4) %
Hardware 589 616 (27) (4.4) %
Operations revenue 5,749 6,522 (773) (11.9) %
Maintenance revenue 9,230 9,394 (164) (1.7) %
Total software revenue 14,979 15,916 (937) (5.9) %
Total revenue $ 33,825 $ 36,036 $ (2,211) (6.1) %
Wireless Revenue
The decrease in wireless revenue for the three months ended March 31, 2022,
compared to the same period in 2021, reflects the secular decrease in demand for
our wireless services. Wireless revenue is generally reflective of the number of
units in service and measured monthly as Average Revenue Per User ("ARPU"). On a
consolidated basis, ARPU is affected by several factors, including the mix of
units in service and the pricing of the various components of our services. The
number of units in service changes based on subscribers added, referred to as
gross placements, less subscriber cancellations, or disconnects.
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ARPU was $7.24 and $7.34 for the three months ended March 31, 2022, and 2021,
respectively. Total units in service were 0.8 million and 0.9 million as of
March 31, 2022, and 2021, respectively. Approximately half of the decline in
ARPU was related to the decreases in Universal Service Fees ("USF") with the
remainder coming primarily from lower variable revenue associated with overcall
fees which are charged to customers when their service usage is greater than
their allotted plan. USF fees are effectively pass-through items that have
corresponding costs associated with them. Excluding these pass-through items,
ARPU would have declined in-line with historical trends.
We believe that demand will continue to decline for the foreseeable future in
line with recent and historical trends, as our wireless products and services
are replaced with other competing technologies, such as the shift from
narrowband wireless service offerings to broadband technology services.
The following reflects the impact of subscribers and ARPU on the change in
paging revenue:
For the Three Months Ended March 31, Change Due To:
(in thousands) 2022 2021 Change ARPU Units
Paging revenue $ 18,313 $ 19,353 $ (1,040) $ (232) $ (808)
As demand for one-way and two-way messaging has declined, we have developed or
added service offerings such as encrypted paging and Spok Mobile with a pager
number to increase our revenue potential and mitigate the decline in our
wireless revenue. We will continue to explore ways to innovate and provide
customers the highest value possible.
In late 2021, we began offering our newest pager, GenA. This one-way
alphanumeric pager features a high resolution ePaper display, intuitive modern
user interface, advanced encryption and security features, over-the-air remote
programming, and an antimicrobial housing. Users can select from various font
sizes, and the large GenA display also leverages proportional fonts to maximize
key information on a single screen.
The GenA pager is the only product available on the market with these
capabilities, and we maintain an exclusive arrangement with the product's
manufacturer. Given the product differentiation of the GenA pager, its
development is a key initiative providing a competitive advantage, and we expect
this new technology will be popular with our customers in clinical environments
and may help slow our wireless revenue attrition.
Software revenue
Software revenue consists of two components: operations revenue and maintenance
revenue. Operations revenue consists primarily of license revenues for our
healthcare communications solutions, revenue from the sale of equipment that
facilitates the use of our software solutions, and professional services revenue
related to the implementation of our solutions. Maintenance revenue is generated
from our ongoing support of our software solutions or related equipment,
typically for a period of one year after project completion.
To a large degree, software revenue corresponds to our backlog of performance
obligations ready to deliver at some point in the future, and any delays in
implementation may affect the timing of revenue recognition. Our software
projects generally originate from fixed-bid contracts, although many involve a
protracted sales cycle and may result in unforeseen complexity and deviation
from original scope. The time needed to complete projects, therefore, may not
align with our original expectations, which affects our backlog. As a result,
software revenue may fluctuate on a short-term basis, and we generally evaluate
longer-term trends when managing this business.
Operating income
Software operations revenue decreased during the three months ended March 31,
2022, when compared to the same period in 2021. Services revenue decreased due
to a number of factors, including a decrease in billable personnel and an
underutilization of resources, during the three months ended March 31, 2022. The
underutilization of resources can largely be attributed to the announcement of
our new strategic business plan and related restructuring efforts whereby
certain services personnel were notified of termination 60 days in advance in
accordance with Federal law. The decline in services revenue was partially
offset by an increase in license revenue, given an improving economy and selling
environment when compared to the period in 2021.
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Maintenance income
Compared to the same period in 2021, maintenance revenue decreased for the three
months ended March 31, 2022. Current trends in revenue churn rates remain
relatively stable and are in line with historical trends. However, the
deterioration of maintenance revenue from new license bookings has created an
environment where churn is greater than the inflow of new revenue. Historically,
this revenue churn had been offset by the growth in our license sales.
While we have not seen a meaningful increase in our normal customer churn, our
ability to replace this churn with new revenues will not likely replicate what
we have accomplished historically nor do we expect to fully offset this with
annual increases of our existing base. Given these dynamics, we believe annual
maintenance revenue is likely to be relatively flat or slightly down until such
time that we are able to enhance our existing software solutions, which would
provide an avenue for additional maintenance revenue.
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Functionnary costs
Our operating expenses are presented in functional categories. Certain of our
functional categories are especially important to overall expense control and
management. These operating expenses are categorized as follows:
•Cost of Revenue. These are expenses we incur for the delivery of products and
services to our customers and consist primarily of hardware, third-party
software, outside services expenses and payroll and related expenses for our
professional services, logistics, customer support and maintenance staff.
•Research and Development. These expenses relate primarily to the development of
new software products and the ongoing maintenance and enhancement of existing
products. This classification consists primarily of employee payroll and related
expenses, outside services related to the design, development, testing and
enhancement of our solutions and to a lesser extent hardware equipment. Research
and development expenses exclude any development costs that qualify for
capitalization.
•Technology Operations. These are expenses associated with the operation of our
paging networks. Expenses consist largely of site rent expenses for transmitter
locations, telecommunication expenses to deliver messages over our paging
networks, and payroll and related expenses for our engineering and pager repair
functions. We actively pursue opportunities to consolidate transmitters and
other service, rental and maintenance expenses in order to maintain an efficient
network while simultaneously ensuring adequate service for our customers. We
believe continued reductions in these expenses will occur for the foreseeable
future as we continue to consolidate our networks, although the benefits of such
network rationalization efforts and resulting costs savings will continue to
decline.
•Selling and Marketing. The sales and marketing staff are involved in selling
our communication solutions primarily in the United States. These expenses
support our efforts to maintain gross placements of units in service, which
mitigated the impact of disconnects on our wireless revenue base, and to
identify business opportunities for additional or future software sales. We
maintain a centralized marketing function that is focused on supporting our
products and vertical sales efforts by strengthening our brand, generating sales
leads and facilitating the sales process. These marketing functions are
accomplished through targeted email campaigns, webinars, regional and national
user conferences, monthly newsletters and participation at industry trade shows.
Expenses consist largely of payroll and related expenses, commissions and other
costs such as travel and advertising costs.
•General and Administrative. These are expenses associated with information
technology and administrative functions, including finance and accounting, human
resources and executive management. This classification consists primarily of
payroll and related expenses, outside services expenses, taxes, licenses and
permit expenses, and facility rent expenses.
•Depreciation, Amortization and Accretion. These are expenses that may be
associated with one or more of the aforementioned functional categories. This
classification generally consists of depreciation from capital expenditures or
other assets that are core to our ongoing operations, amortization of intangible
assets, amortization of capitalized software development costs, and accretion of
asset retirement obligations.
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The following is a review of our operating expense categories for the three months ended March 31, 2022and 2021. Certain prior period amounts have been reclassified to conform to the current period presentation.
Revenue cost
The cost of sales mainly includes the following items:
For the Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 Total %
Payroll and related $ 5,110 $ 5,139 $ (29) (0.6) %
Cost of sales 1,557 1,386 171 12.3 %
Recoverable taxes and fees 712 867 (155) (17.9) %
Stock-based compensation 109 291 (182) (62.5) %
Other 316 299 17 5.7 %
Total cost of revenue $ 7,804 $ 7,982 $ (178) (2.2) %
FTE Employees 177 186 (9) (4.8) %
For the three months ended March 31, 2022, cost of revenue decreased compared to
the same period in 2021, driven by a decrease in stock-based compensation and
recoverable taxes and fees, partially offset by an increase in cost of sales.
Stock-based compensation decreased as we discontinued the cost savings measure
to provide a portion of compensation for certain employees in the form of shares
of the Company's common stock in lieu of cash. Additionally, there was a general
decrease in employees compensated with stock-based compensation in 2022,
attributable to the restructuring activities and related elimination of
positions. Recoverable taxes and fees declined due to general decreases in USF
fees, which are essentially pass-through items. Cost of sales expenses grew
primarily due to greater use of third-party professional services that we
utilize to augment Company resources when short-term capacity constraints exist.
Research and development
Research and development expenses consist of the following items:
For the Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 Total %
Payroll and related $ 4,305 $ 4,475 $ (170) (3.8) %
Outside services 1,899 2,277 (378) (16.6) %
Capitalized software development - (2,920) 2,920 (100.0) %
Stock-based compensation 130 475 (345) (72.6) %
Other 163 137 26 19.0 %
Total research and development $ 6,497 $ 4,444 $ 2,053 46.2 %
FTE Employees 101 122 (21) (17.2) %
For the three months ended March 31, 2022, research and development spending increased compared to the same period in 2021, due to a decline in capitalized software development. This was partially offset by decreases in external services, stock-based compensation and payroll and related costs.
As a result of our decision to discontinue Spok Go, for the three months ended
March 31, 2022, we did not capitalize any software development costs, as
compared to $2.9 million in capitalized software development costs in the same
period in 2021.
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Outside service costs tend to vary based on the timing of professional services,
attributable to our full suite of products. Stock-based compensation decreased
as we discontinued the cost savings measure to provide a portion of compensation
for certain employees in the form of shares of the Company's common stock in
lieu of cash. Additionally, there was a general decrease in employees
compensated with stock-based compensation in 2022, attributable to the
restructuring activities and related elimination of positions.Payroll and
related costs declined largely due to the decrease in headcount, partially
offset by increased payroll resulting from the discontinuation of reduced work
schedules as of the third quarter of 2021.
We will continue to focus on the development efforts of our software solutions
and intend to maintain these efforts based on their importance to our continued
success, however these efforts will be targeted to specific enhancements. We
expect total research and development costs will continue to significantly
decrease in 2022 as part of our new strategic business plan and our intent to
eliminate all Spok Go related costs.
Technological operations
Expenses related to technology operations consisted mainly of the following items:
For the Three Months Ended
March 31, Change
(Dollars in thousands) 2022
2021 Total %
Payroll and related $ 2,509 $ 2,467 $ 42 1.7 %
Site rent 3,067 3,196 (129) (4.0) %
Telecommunications 771 837 (66) (7.9) %
Stock-based compensation 55 137 (82) (59.9) %
Other 611 567 44 7.8 %
Technology Operations $ 7,013 $ 7,204 $ (191) (2.7) %
FTE Employees 85 89 (4) (4.5) %
For the three months ended March 31, 2022technology operating expenses decreased slightly compared to the same period in 2021, mainly due to lower site rent and stock-based compensation, offset by a slight increase in payroll and expenses related.
The number of active transmitters, which directly affects our site rent
expenses, declined 6.4% from March 31, 2021, to March 31, 2022, a result of our
network rationalization efforts. As we reach certain minimum frequency
commitments, as outlined by the United States Federal Communications Commission,
we may be unable to continue our efforts to rationalize and consolidate our
networks. Stock-based compensation decreased as a result of discontinuing our
plan to provide a portion of compensation for certain employees in the form of
shares of the Company's common stock in lieu of cash. Payroll and related
expenses increased primarily due to increased payroll resulting from the
discontinuation of reduced work schedules as of the third quarter of 2021
Sales and marketing
Sales and marketing expenses consist of the following items:
For the Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 Total %
Payroll and related $ 3,468 $ 3,365 $ 103 3.1 %
Commissions 1,024 1,105 (81) (7.3) %
Stock-based compensation 79 350 (271) (77.4) %
Advertising and events 568 161 407 252.8 %
Other 176 158 18 11.4 %
Total selling and marketing $ 5,315 $ 5,139 $ 176 3.4 %
FTE Employees 91 104 (13) (12.5) %
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For the three months ended March 31, 2022, selling and marketing expenses
increased compared to the same period in 2021, driven primarily by increases in
advertising and events and payroll and related expenses, partially offset by a
reduction in stock-based compensation.
The increase in advertising and events largely reflects an increase in trade
show participation compared to the same period last year which was still in peak
months of the pandemic. Nationwide travel and in-person participation in larger
marketing events has improved but continued to remain below pre-pandemic levels.
Payroll and related expenses were lower during the three months ended March 31,
2021 as a result of cost savings measures, including reduced work schedules and
equity in lieu of cash compensation that were not in place for the three months
ended March 31, 2022. This was partially offset by the decrease in headcount.
Stock-based compensation decreased due to the discontinuation of the cost
savings measure to provide a portion of compensation for certain employees in
the form of shares of the Company's common stock in lieu of cash. Additionally,
there was a general decrease in employees compensated with stock-based
compensation in 2022, attributable to the restructuring activities and related
elimination of positions.
General and Administrative
General and administrative expenses consisted of the following items:
For the Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 Total %
Payroll and related $ 4,051 $ 3,818 $ 233 6.1 %
Stock-based compensation 742 986 (244) (24.7) %
Facility rent, office and technology costs 2,680 2,480 200 8.1 %
Outside services 1,900 1,825 75 4.1 %
Taxes, licenses and permits 265 214 51 23.8 %
Bad debt (14) 106 (120) (113.2) %
Other 811 851 (40) (4.7) %
Total general and administrative $ 10,435 $ 10,280 $ 155 1.5 %
FTE Employees 94 102 (8) (7.8) %
For the three months ended March 31, 2022, general and administrative expenses
increased compared to the same period in 2021, driven by increases in payroll
and related costs and facility rent, office and technology costs. These were
partially offset by decreases in stock-based compensation and bad debt expenses.
Payroll and related expenses increased as we exited the cost-saving measure of reducing working hours beginning in the third quarter of 2021. The increase in facility rent, office costs and technology was primarily due to higher spending on software, hardware and IT-related costs.
Stock-based compensation decreased as we discontinued the cost savings measure
to provide a portion of compensation for certain employees in the form of shares
of the Company's common stock in lieu of cash, which ended as of the fourth
quarter of 2021. Additionally, there was a general decrease in employees
compensated with stock-based compensation in 2022, attributable to the
restructuring activities and related elimination of positions. Bad debt expense
was lower resulting from improvements in collection efforts with a corresponding
reduction in the amount reserved for credit losses.
Depreciation, amortization and accretion
For the three months ended March 31, 2022, and 2021, depreciation, amortization
and accretion expenses were $0.9 million and $2.7 million, respectively.
Expenses decreased for the three months ended March 31, 2022, compared to the
same period in 2021, primarily due to amortization of software development costs
ending in the fourth quarter of 2021 as a result of discontinuation of Spok Go.
Expenses also decreased due to lower depreciation for certain computer hardware
and software assets that became fully depreciated in 2021.
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Dismissal and restructuring
For the three months ended March 31, 2022, severance and restructuring expenses
were $4.5 million. Expenses increased for the three months ended March 31, 2022,
primarily due to an increase in severance and personnel related costs of $4.0
million and costs related to contractual terminations of $0.5 million, resulting
from the implementation of the new strategic business plan. Further details can
be found in Note 5 "Restructuring" in the Notes to Condensed Consolidated
Financial Statements.
Income taxes
Benefit from (provision for) income taxes from income taxes was $1.4 million and
$(0.6) million for the three months ended March 31, 2022, and 2021,
respectively. Benefit from (provision for) income taxes changed for the three
months ended March 31, 2022, compared to the same period in 2021 due to the
difference in the anticipated annual effective tax rate as a result of certain
permanent tax differences, estimated research and development tax credits and
related valuation allowance, and certain discrete items. Further details can be
found in Note 12, "Income Taxes" in the Notes to Condensed Consolidated
Financial Statements.
Cash and capital resources
Cash and cash equivalents
At March 31, 2022, we held cash, cash equivalents and short-term investments of
$46.3 million. The available cash and cash equivalents consist of cash in our
operating accounts and cash invested in interest-bearing funds managed by
third-party financial institutions. These funds invest in U.S. Treasury
securities and are therefore classified as held-to-maturity and are reported at
amortized cost in our Condensed Consolidated Balance Sheets. To date, we have
experienced no loss or lack of access to our invested cash or cash equivalents;
however, we can provide no assurance that access to our invested cash and cash
equivalents will not be impacted by adverse market conditions. Our short-term
investments consist entirely of U.S. Treasury securities, which are classified
as held-to-maturity and are measured at amortized cost on our Condensed
Consolidated Balance Sheets.
Sources of cash
Our primary sources of liquidity have been our cash flows generated from
operations and existing cash and cash equivalents. We maintain a level of
liquidity sufficient to allow us to meet our cash needs in both the short term
(next 12 months) and long term (beyond 12 months). At any point in time, we
maintain approximately $5.0 million to $10.0 million in our operating accounts
that are with third-party financial institutions. While we monitor daily the
cash balances in our operating accounts and adjust the cash balances as
appropriate, these cash balances could be impacted if the underlying financial
institutions fail or are subject to other adverse conditions in the financial
markets. To date, we have experienced no loss or lack of access to cash in our
operating accounts.
Cash Uses
We intend to use our cash on hand to provide working capital, to support
operations, to invest in our business, and to return value to stockholders
through cash dividends and repurchases of our common stock. We may also consider
using cash to fund or complete opportunistic investments and acquisitions that
we believe will provide a measure of growth or revenue stability while
supporting our existing operations. As a result of our discontinuation of Spok
Go, we will no longer invest heavily in its development, and, as a result, we
anticipate that we will have more cash available for other uses than in prior
years.
On February 16, 2022, the Board authorized a share repurchase program for up to
$10 million of the Company's common stock. Under the repurchase program,
repurchases can be made from time to time using a variety of methods, which may
include open market purchases, privately negotiated transactions or otherwise,
all in accordance with the rules of the SEC and other applicable legal
requirements. The specific timing, price and size of purchases will depend on
prevailing stock prices, general economic and market conditions, legal
requirements and other considerations. The repurchase program does not obligate
the Company to acquire any particular amount of common stock, and the repurchase
program may be suspended or discontinued at any time at the Company's
discretion.
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As part of the restructuring program in connection with our new strategic
business plan, we expect to record one-time pre-tax restructuring charges of
approximately $6.2 million to $7.5 million, comprised of approximately
$5.7 million to $6.6 million in severance and personnel related costs and
approximately $0.5 million to $0.9 million in contractual terminations. Future
cash payments related to these charges are expected to generally be within the
same range. The restructuring actions associated with these charges are expected
to be substantially complete in 2022. Because of these cash payments related to
the restructuring program, we anticipate that our cash on hand will decrease
during 2022. However, our restructuring efforts are meant to refocus our
operational efforts towards cash flow generation and the return of capital to
our stockholders. Should our restructuring efforts be successful, we anticipate
future operating periods will return to historically positive cash flow
generation.
Cash flow overview
In response to COVID-19, management enacted certain temporary cost mitigation
measures in 2020 and 2021, as previously discussed. While we have previously
discussed the impact on our revenues from the pandemic, we do not expect
COVID-19 will have a material impact on our liquidity given our ability to
reduce costs further, if necessary. In the event that net cash provided by
operating activities and cash on hand are not sufficient to meet future cash
requirements, we may be required to reduce planned capital expenses, reduce or
eliminate our cash dividends to stockholders, not repurchase shares of our
common stock under the share repurchase program, sell assets or seek additional
financing. We can provide no assurance that reductions in planned capital
expenses or proceeds from asset sales would be sufficient to cover shortfalls in
available cash or that outside financing would be available on acceptable terms.
Based on current and anticipated levels of operations, we anticipate that net
cash provided by operating activities, together with the available cash on hand
at March 31, 2022, should be adequate to meet our anticipated cash requirements
for the short term (next 12 months) and long term (beyond 12 months).
The following table presents information about our net cash flows from operating, investing and financing activities for the periods indicated:
Three Months Ended March 31,
(Dollars in thousands) 2022 2021 Change
Net cash (used in) provided by operating
activities $ (4,879) $ 719 $ (5,598)
Net cash used in investing activities (646) (3,642) 2,996
Net cash used in financing activities (7,733) (4,174) (3,559)
Operating Activities
As discussed above, we are dependent on cash flows from operating activities to
meet our cash requirements. Cash from operations varies depending on changes in
various working capital items, including deferred revenues, accounts payable,
accounts receivable, prepaid expenses and various accrued expenses.
For the three months ended March 31, 2022, net cash used by operating activities
was $4.9 million due primarily to the net loss of $7.2 million, changes in
deferred revenue of $(1.6) million and in prepaid expenses and other assets of
$(1.4) million, and a deferred income tax benefit of $1.0 million. This was
partially offset by changes in accounts receivable of $3.0 million, stock-based
compensation of $1.1 million, depreciation, amortization and accretion of
$0.9 million, and changes in accounts payable, accrued liabilities and other of
$0.9 million.
For the three months ended March 31, 2021, net cash provided by operating
activities was $0.7 million due primarily to non-cash items such as
depreciation, amortization and accretion of $2.7 million, stock-based
compensation of $2.2 million, and other non-cash items of $0.7 million. This was
partially offset by a net loss of $2.3 million, a change in accounts payable,
accrued liabilities and other of $3.0 million and deferred revenue of $1.4
million, partially offset by changes in account receivable of $1.0 million,
change in prepaid expenses, inventory, and other assets of $0.5 million and
changes in lease liability of $0.3 million.
Investing activities
For the three months ended March 31, 2022, and 2021, net cash used in investing
activities was $0.6 million and $3.6 million. Our 2021 investing activities
reflected the capitalization of software development costs, however with the
discontinuation of Spok Go, we did not incur such costs in 2022. Net cash used
in investing activities also reflects purchases of property and equipment, and
the purchase and maturity of short-term investments in both periods.
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Fundraising activities
For the three months ended March 31, 2022, and 2021, net cash used in financing
activities was $7.7 million and $4.2 million, respectively, due primarily to
cash distributions to stockholders and the purchase of common stock for tax
withholding purposes on vested equity awards.
On April 27, 2022, our Board of Directors declared a regular quarterly cash
dividend of $0.3125 per share of common stock with a record date of May 25,
2022, and a payment date of June 24, 2022. This cash dividend of approximately
$6.1 million, applicable to our common stock outstanding, will be paid from
available cash on hand. We expect to continue paying dividends of $0.3125 per
share of common stock each quarter for the remainder of 2022, subject to
declaration by the Board of Directors.
Commitments and contingencies
In the normal course of our business, we enter into certain contractual obligations. These obligations include data processing services, operating leases for premises and equipment, agreements regarding borrowed funds and deposits.
Purchase obligations are defined as agreements to purchase goods or services
that are enforceable, legally binding, non-cancelable, have a remaining term in
excess of one year and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable pricing
provisions; and the approximate timing of transactions. The amounts of such
obligations are based on our contractual commitments, however, it is possible
that we may be able to negotiate lower payments if we choose to exit these
contracts before their expiration date.
Our contractual payment obligations for operating leases apply to leases for
office space and transmitter locations. Substantially all of these leases have
lease terms ranging from one month to five years. We continue to review our
office and transmitter locations and intend to replace, reduce or consolidate
leases where possible. As we reach certain minimum frequency commitments, as
outlined by the United States Federal Communications Commission, we may be
unable to continue our efforts to rationalize and consolidate our networks. In
March 2021, we relocated our corporate headquarters to office space located in
Alexandria, Virginia, consisting of approximately 26,000 square feet of space
under a lease that will expire on September 30, 2026. Over the life of this
lease, cash payments are expected to total approximately $4.9 million.
The Company evaluates contingencies on an ongoing basis and establishes loss
provisions for matters in which losses are probable and the amount of loss can
be reasonably estimated.
The following table presents the main commitments and contractual obligations of the Company as of March 31, 2022:
Payments due by period
Less than 1 More than 5
(Dollars in thousands) Total year 1 to 3 years 3 to 5 years years
Operating lease obligations $ 14,444
4,559 $6,961 $2,695 $229
Unconditional purchase obligations
6,441 3,256 3,116 69 -
Total contractual obligations $ 20,885 $ 7,815 $ 10,077 $ 2,764 $ 229
We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
We have operating leases for office and transmitter locations. Substantially all
of these leases have lease terms ranging from one month to five years. We
continue to review our office and transmitter locations and intend to replace,
reduce or consolidate leases where possible. As we reach certain minimum
frequency commitments, as outlined by the United States Federal Communications
Commission, we may be unable to continue our efforts to rationalize and
consolidate our networks.
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We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, that would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
Refer to Note 7, "Leases," and Note 13, "Commitments and Contingencies" in the
Notes to Condensed Consolidated Financial Statements for further discussion on
our commitments and contingencies.
Related party transactions
See Note 14, “Related parties” in the notes to the condensed consolidated financial statements for a discussion regarding our related party transactions.
Significant Accounting Policies and Estimates
The preceding discussion and analysis of financial condition and operations is
based on our Condensed Consolidated Financial Statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of our Condensed Consolidated
Financial Statements requires management to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenue,
expenses, and related disclosures. On an ongoing basis, we evaluate estimates
and assumptions, including, but not limited to, those related to the impairment
of long-lived assets and intangible assets subject to amortization and goodwill,
accounts receivable, revenue recognition, asset retirement obligations, and
income taxes. We base our estimates on historical experience and various other
assumptions that are believed 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 changes to the critical accounting policies reported in the
2021 Annual Report that affect our significant judgments and estimates used in
the preparation of our Condensed Consolidated Financial Statements.
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LegalZoom.com, Inc. operates an online legal and compliance solutions platform in the United States. The Company’s platform offers products and services, including business training, creation of estate planning documents, intellectual property protection, completion of certain forms and agreements, access to attorney advice freelancers and connecting clients with experts for tax preparation and accounting services. It serves small businesses and individuals. LegalZoom.com, Inc. was incorporated in 1999 and is headquartered in Glendale, California.
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