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.
18
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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 theU.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
InFebruary 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]
InMarch 2020 , theWorld 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 lateFebruary 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 personnelwho are not critical to the immediate operating needs of a hospital, such as our implementation staff, to gain access. 19 -------------------------------------------------------------------------------- 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 overallU.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 inU.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 endedMarch 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 endedMarch 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 endedMarch 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). 20 --------------------------------------------------------------------------------
Operating results
The following table is a summary of our condensed consolidated statement of earnings for the three months ended
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) %
21
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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 endedMarch 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. 22 -------------------------------------------------------------------------------- ARPU was$7.24 and$7.34 for the three months endedMarch 31, 2022 , and 2021, respectively. Total units in service were 0.8 million and 0.9 million as ofMarch 31, 2022 , and 2021, respectively. Approximately half of the decline in ARPU was related to the decreases in Universal Service Fees ("USF") with the remainder coming primarily from lower variable revenue associated with overcall fees which are charged to customers when their service usage is greater than their allotted plan. USF fees are effectively pass-through items that have corresponding costs associated with them. Excluding these pass-through items, ARPU would have declined in-line with historical trends. We believe that demand will continue to decline for the foreseeable future in line with recent and historical trends, as our wireless products and services are replaced with other competing technologies, such as the shift from narrowband wireless service offerings to broadband technology services. The following reflects the impact of subscribers and ARPU on the change in paging revenue: For the Three Months Ended March 31, Change Due To: (in thousands) 2022 2021 Change ARPU Units Paging revenue$ 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 endedMarch 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 endedMarch 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. 23 --------------------------------------------------------------------------------
Maintenance income
Compared to the same period in 2021, maintenance revenue decreased for the three months endedMarch 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. 24 --------------------------------------------------------------------------------
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 inthe 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. 25
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The following is a review of our operating expense categories for the three months ended
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
As a result of our decision to discontinue Spok Go, for the three months endedMarch 31, 2022 , we did not capitalize any software development costs, as compared to$2.9 million in capitalized software development costs in the same period in 2021. 26 -------------------------------------------------------------------------------- Outside service costs tend to vary based on the timing of professional services, attributable to our full suite of products. Stock-based compensation decreased as we discontinued the cost savings measure to provide a portion of compensation for certain employees in the form of shares of the Company's common stock in lieu of cash. Additionally, there was a general decrease in employees compensated with stock-based compensation in 2022, attributable to the restructuring activities and related elimination of positions.Payroll and related costs declined largely due to the decrease in headcount, partially offset by increased payroll resulting from the discontinuation of reduced work schedules as of the third quarter of 2021. We will continue to focus on the development efforts of our software solutions and intend to maintain these efforts based on their importance to our continued success, however these efforts will be targeted to specific enhancements. We expect total research and development costs will continue to significantly decrease in 2022 as part of our new strategic business plan and our intent to eliminate all Spok Go related costs.
Technological operations
Expenses related to technology operations consisted mainly of the following items:
For the Three Months Ended
March 31 , Change
(Dollars in thousands) 2022
2021 Total % Payroll and related$ 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
The number of active transmitters, which directly affects our site rent expenses, declined 6.4% fromMarch 31, 2021 , toMarch 31, 2022 , a result of our network rationalization efforts. As we reach certain minimum frequency commitments, as outlined by theUnited 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) %
27
-------------------------------------------------------------------------------- For the three months endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2022 , and 2021, depreciation, amortization and accretion expenses were$0.9 million and$2.7 million , respectively. Expenses decreased for the three months endedMarch 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. 28 --------------------------------------------------------------------------------
Dismissal and restructuring
For the three months endedMarch 31, 2022 , severance and restructuring expenses were$4.5 million . Expenses increased for the three months endedMarch 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 endedMarch 31, 2022 , and 2021, respectively. Benefit from (provision for) income taxes changed for the three months endedMarch 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
AtMarch 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 inU.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 ofU.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. OnFebruary 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 theSEC 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. 29 -------------------------------------------------------------------------------- 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 atMarch 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 endedMarch 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. 30 --------------------------------------------------------------------------------
Fundraising activities
For the three months endedMarch 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. OnApril 27, 2022 , our Board of Directors declared a regular quarterly cash dividend of$0.3125 per share of common stock with a record date ofMay 25, 2022 , and a payment date ofJune 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 theUnited States Federal Communications Commission , we may be unable to continue our efforts to rationalize and consolidate our networks. InMarch 2021 , we relocated our corporate headquarters to office space located inAlexandria, Virginia , consisting of approximately 26,000 square feet of space under a lease that will expire onSeptember 30, 2026 . Over the life of this lease, cash payments are expected to total approximately$4.9 million . The Company evaluates contingencies on an ongoing basis and establishes loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated.
The following table presents the main commitments and contractual obligations of the Company as of
Payments due by period
Less than 1 More than 5 (Dollars in thousands) Total year 1 to 3 years 3 to 5 years years Operating lease obligations$ 14,444
4,559
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 theUnited States Federal Communications Commission , we may be unable to continue our efforts to rationalize and consolidate our networks. 31 -------------------------------------------------------------------------------- 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 inthe 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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